27 May 2009 07:00
NEWS RELEASE
27 May 2009
Torotrak PLC
("Torotrak" or "the Company")
Preliminary results announcement for the year ended 31 March 2009
Financial Highlights
£4.9m of upfront licence and exclusivity fees received in the year (2008: £5.4m)
Second successive year of positive cash generation from operations - ahead of target
25% increase in revenues to £4.6m
Cash resources increased by £3.5m to £15.0m at year end
£2.4m equity raised as a result of new strategic shareholding by Allison Transmission, Inc.
Operational Highlights
Transformational licensing agreement secured with Allison Transmission, Inc - the world's largest manufacturer of automatic transmissions for commercial vehicles
Second, successive major agreement secured in this sector
Infinitrak Joint Venture continues its commercial development
Second product line now at prototype testing stage
Robust position at year end
Strong, committed licensing and engineering order book
Substantial progress made on the path to volume commercialisation
Dick Elsy, Chief Executive said:
"Torotrak has this year moved onto a very strong commercial footing - strong in terms of the year's achievements and strong in terms of our platform for the future. Whilst the economic environment has been extremely challenging, Torotrak has succeeded in three key areas: in gaining more customers; in strengthening our financial resources; and in delivering a strong forward order book to continue our business growth towards full commercialisation."
For further information contact:
Torotrak:
| Dick Elsy, Chief Executive | 01772 900938 or 020 7920 3150 |
| Jeremy Deering, Finance Director |
Tavistock Communications:
| Simon Hudson | 020 7920 3150 |
| Lulu Bridges | 020 7920 3150 |
Chairman's Review
I am pleased to report another year of significant progress towards full commercialisation of our technology and business - a success for British technology and engineering at a time when good news in these industries has been in short supply.
Results
For the second successive year, as our portfolio of licensees develops, Torotrak has delivered positive operating cash flow whilst continuing to increase revenues and reduce operating losses. We have ended the year in a robust condition, financially strong and well positioned with a growing range of applications. These are encouraging signals of progress in what is an extraordinarily tough climate for our current and potential customers.
Revenues increased by 25% to £4.6m (2008: £3.7m), with a growth in operating cash flow to £1.0m (2008: £0.5m) and with a reduction in operating loss to £2.4m (2008: £2.8m). Cash at year-end increased by 30% to £15.0m (2008: £11.5m). Further explanation of these results is contained in the Financial Review.
At this stage of the Company's development, Torotrak's financial results are heavily influenced by our continuing success in securing major new licensees. We are delighted that after many months of commercial exploration and negotiation, Allison decided to make a significant commitment to Torotrak. To underpin the important licensing agreement signed in March, Allison made a strategic investment in the Company, becoming Torotrak's largest single shareholder. These arrangements with such a renowned industry player clearly demonstrate the value of the benefits that Torotrak's technology provides. They also reflect the hard work and commitment of our executive, engineering and support teams in securing another world class licensee and, on behalf of our shareholders, I congratulate and thank them.
Commercial progress
With the addition of Allison as a licensee, alongside the European truck and bus manufacturer announced last year (with whom we make good progress but remain unable to name for reasons of confidentiality) and Tata Motors Ltd (whose licence secured in 2007 includes the field of commercial vehicles), Torotrak has now achieved an enviably strong position in one of its four key target global markets - commercial vehicles.
Infinitrak, our US-based Joint Venture, continues to develop, manufacture and market transmissions for Outdoor Power Equipment (OPE) applications. Although Infinitrak's first commercial product, the Twin Toroidal Transmission (TTT), has been a technical success and is now being manufactured in limited volumes, it has been installed in premium customer grass-cutting products which have proved difficult to sell in the North American market due to the recent unprecedented decline in demand. In rapid response to the changed market environment, Infinitrak has developed a new, complementary and lower cost transmission, the Single Toroidal Transmission (STT), which is now being tested in prototype form for intended market introduction in time for next year's grass-cutting season - an extremely challenging timetable. Early test results have been very encouraging.
Developments in the off-highway market have continued to take longer to come to fruition than we would wish. To a large extent, this reflects licensees' development timescales, which inevitably have been affected by their current economic constraints. This in turn has led to less certainty about specific launch dates. Nonetheless, we are continuing to work with an expanding list of potential licensees and customers, and have made significant progress in developing products for newer sectors such as forklift trucks.
Despite the automotive industry's worldwide difficulties, there remains strong interest in developing solutions to increase efficiency and reduce fuel consumption. The growing credibility of Torotrak's technology, which has been shown to deliver significant benefits from light (lawn tractor) to heavy duty (truck and bus) applications, has opened up new opportunities away from main drive transmissions in areas such as variable drives for auxiliary equipment. In addition, the development of a Kinetic Energy Recovery System (KERS) for Formula 1 (F1), reported last year, although not currently adopted in F1, has generated increased awareness of the benefits of this technology in other automotive applications.
All of these developments reflect the strength of Torotrak's diversification strategy. The greater certainty that we have secured over our route to market in some sectors - with other sectors having softened - illustrates the resilience of our plan. This strategy has enabled us to secure both short and long term earnings from new customers whilst also pursuing those markets with significant future value, even though progress in some of these markets has slowed in the past year.
Strategy
We are maintaining our strategy of focusing on our identified core markets of commercial vehicles, outdoor power equipment, off-highway and automotive. Although progress has not been, and is unlikely to be, smooth and continuous in each of these areas, this strategy has enabled us to pursue a diverse range of markets and customers whilst concentrating our resources on those opportunities that we believe to have the strongest commercial potential.
We are now working to build on the Company's current momentum, by continuing to develop our intellectual property portfolio, securing additional licensees in core markets and by ensuring that development programmes with our partners are delivered successfully and on time.
Non-exclusive licensing of our technology remains a key part of Torotrak's business proposition. However, where licensees and partners have significant market presence and a demonstrable financial commitment to our technology, it may be more appropriate to secure the route to market via exclusivity or joint venture arrangements. Our Infinitrak Joint Venture is one example of this strategy, as is the recent exclusive licence with Allison. We have shown that significant value can be crystallised from this approach and we will continue to focus our efforts on leveraging these relationships to bring our technology to the wider market.
Outlook
The adoption of our technology by an increasing number of major partners is undoubtedly enhancing our ability to open doors elsewhere.
Whilst it is difficult to predict precisely when future agreements with new customers may be reached, I am confident that our discussions with other prospective customers will, in time, result in further opportunities to build value for Torotrak shareholders.
Torotrak is well positioned and resourced, both financially and operationally. This, together with the strength of our licensing and engineering order book, gives us confidence that we can continue to deliver both revenue growth and bottom-line improvement in the financial year ending 31 March 2010.
Chief Executive's Review
Trading environment
The challenges facing the markets in which Torotrak operates are almost unprecedented. No sector has been untouched by the events surrounding the current global economic turmoil.
In OPE, the trading position is extremely difficult with sales volumes in the USA reported to be down by 50%. Torotrak's strength here benefits from being partnered with MTD Holdings Inc (MTD), a major OPE manufacturer with substantial market presence. MTD demonstrates continued confidence in our technology and an appetite to invest further alongside us to grow the Infinitrak business.
At the other extreme of our range of current applications, in commercial vehicles, we have established our route to market with licensees who between them have global reach, geographic diversity and market dominance. Although it is well reported that sales are currently severely depressed across this market, we have nevertheless recently signed the biggest licensing agreement in our corporate history. At the same time, our other licensees in this sector continue to invest their resources in developing new products based on our technology which will create future competitive advantage for them.
The challenges in the off-highway and automotive markets resulting from the global recession have also been widely reported in the media. Although these difficulties have impacted a number of our programmes, we have been able to extract commercially valuable know-how from these projects and have used this as a platform to engage with new prospective customers.
In the face of these challenging circumstances, Torotrak continues to make progress for three key reasons:
the relentless pressure towards greater efficiency and lower environmental impact in all of our target markets is forcing companies to consider the adoption of more radical technologies and solutions;
the fact that Torotrak's technology is thoroughly developed and validated places us well ahead in the queue for attention. In the push to implement new solutions to achieve efficiency and fuel economy, many new ideas and concepts spring up to hold transient headline attention. However, real differentiation and competitive advantage is found in the depth and integrity of the underlying technology and this is where Torotrak wins. Our technology benefits from extensive development as well as endorsement from major international companies. Furthermore, whilst our target markets are littered with many new ideas and new technologies, many of these concepts are not supported by either the financial or technical resources necessary for them to succeed commercially; and
finally, our recent licence agreements underline a level of momentum at Torotrak which encourages a sense of urgency amongst prospective licensees for them to also commit to our technology.
In this current trading environment, it is highly advantageous to Torotrak's business development process that the Company is well funded and free from debt. This gives us strong credentials as a technology business that has the technical resources and financial resilience necessary to support customers in their development programmes as well as our own continued Intellectual Property (IP) creation. This position has enabled us to secure business with clients of the highest quality, as demonstrated by our recent licence agreements.
Commercial vehicles
The application of Torotrak's technology in trucks, buses, truck and bus derived vehicles, heavy military vehicles and heavy commercial off-road or on-road vehicles
Progress
We were delighted to announce, in March 2009, that we had secured Torotrak's most significant licensing and exclusivity deal to date, by entering into an agreement with Allison. We understand that our current licensees have viewed the news positively.
As a consequence of this agreement, we have effectively completed our acquisition of clients in the commercial vehicle sector which covers all key worldwide markets and spans both OEM and tier-1 routes to market. This powerful group of companies represents a capacity for significant volume take-up of our technology. Each of our licensees in this market is independently pursuing its own development programme towards the goal of production; collectively they provide a valuable level of resilience to underpin the introduction of our technology into the commercial vehicle market.
The size and global presence of Allison and its significance to us as Torotrak's largest single shareholder and newest licensee is self-evident. Allison, formerly owned by General Motors but acquired by The Carlyle Group and Onex Corporation in August 2007, has headquarters in Indianapolis, USA, employs approximately 2,700 people and has a global presence in 80 countries. The company is recognised as being the world leader in the design, manufacture and sale of commercial duty automatic transmissions and related systems for on-highway trucks and buses, off-highway equipment and for military vehicles. Allison's products are specified by more than 250 of the world's leading vehicle manufacturers and are used in many market sectors including bus, refuse, fire, construction, distribution, mining, energy, military and specialist applications. We are delighted to have secured a strong, strategic relationship with such a prestigious partner.
The commercial terms of the deal are covered in detail in the Financial Review. The agreements include substantial upfront payments and committed fees, a 9.1% equity stake in Torotrak and a series of options which, if exercised by Allison, will provide them with broad-ranging exclusivity in the commercial vehicle market (with allowance for those other rights already granted to our existing licensees) and will generate further, significant licence fee income for Torotrak over the next four years.
Allison's equity stake in Torotrak has great significance beyond its financing benefits; it represents a commitment to Torotrak from a global manufacturer at the highest level. We are already beginning to see the benefits of this relationship in terms of our other clients and target customers.
In summary, the licence and exclusivity deal with Allison has a potentially transformational impact on Torotrak's future because the agreement:
effectively creates a broad-based portfolio of commercial vehicle licensees, giving us global coverage and a diversity of both route to market and product development;
brings a high level of resilience to our short, medium and long term financial plan in relation to visibility of earnings;
through the licence and exclusivity arrangement, provides greater surety of our route to market through our involvement with the largest global manufacturer in this sector; and
provides a further and substantial expression of appetite for our technology in this market, backed by a significant financial commitment that lends great weight to the strength of our product proposition.
Technology advantages
Our ability to compete successfully as a compelling new technology for main drive transmissions in the commercial vehicles sector illustrates powerfully the unique scalability of Torotrak's full-toroidal traction drive systems. Where other variable drive technologies struggle to cope with the high engine power and torque levels demanded in this sector, Torotrak's technology can handle some of the largest and most demanding heavy duty applications.
The benefits 'in vehicle' are also very strong. Fuel economy is a major challenge in the truck and bus sector which now faces the additional pressures of delivering substantial improvements in emissions performance. Whereas most engineering innovation in this sector has so far focused on engine development, the benefits of variable drive transmission technology are now beginning to be realised.
The complete independence of engine speed from road speed provided by our Infinitely Variable Transmission (IVT) gives benefits in emissions control performance. These come mainly from the ability to operate the engine at more consistent speeds, irrespective of vehicle load, and not having to cycle up and down 'in speed' which is normal when used in combination with a fixed ratio gearbox. Not only does this characteristic produce emissions benefits, but it also delivers increased performance and driver comfort. Take, for example, a truck driving up an incline - as the vehicle speed drops, the driver will have to change gear. Gear changing further reduces momentum and engine speed. This combination of reduced vehicle speed and engine speed causes the engine to 'lug down' and to move away from its optimum operating conditions; with a modern turbo-diesel, the engine will also have lost boost. Regaining speed and stable operating conditions is wasteful in fuel, emissions and in time.
In contrast, with Torotrak's IVT technology, a continuous supply of torque (pulling power) will be delivered under these same conditions, without any of the driveline interruption normally associated with gear changing. This seamless supply of torque not only provides exceptional levels of comfort for the driver but also leads to high levels of efficient, steady-state engine operation.
The high levels of control available at low speed are also an attraction in this sector. Crawler ratio, hill-hold and parking distance control are all additional benefits of Torotrak's technology. The scope for commercially valuable brand distinction and configurability for specific clients is also significant.
One of our first commercial vehicle clients to have recognised these benefits is our European truck and bus licensee. The significant engineering programme being undertaken by Torotrak with this customer is progressing to plan and is now moving from the design stage into the procurement phase which will, in turn, lead to prototype transmission build. We are into the second year of this three to four year programme, during which time Torotrak will continue to earn contract income. We are pleased to report that this customer maintains a very strong commitment to the programme, demonstrating the strength of our product proposition.
In parallel with this programme, a separate team at Torotrak has been formed to support Allison with the development of its first prototype transmission. This activity, which is based in, and led from, the USA has already commenced and will be a source of further contract revenue on the way to expected longer term royalty income arising from series-production units.
Outdoor Power Equipment (OPE)
The application of Torotrak's technology in lawn tractors and mowers, small utility vehicles, outdoor powered tools and equipment
The recent build season for Infinitrak saw our Joint Venture manufacture and sell around 2,800 twin transmission units (TTTs) to MTD for fitment to ride-on mowers manufactured and distributed by MTD's subsidiary, MTD Products Inc. These TTTs were included in the build of a specific range of lawn tractors for the large US retailer Sears, to be marketed under their proprietary Craftsman brand.
We were pleased to see the TTT form an important part of this supply deal from MTD. Sears carries out their own exhaustive test and evaluation regime for all new Craftsman branded products. Infinitrak's TTT effectively received a strong independent endorsement as a result of passing these tests and being adopted by this prominent retailer. Sears also places great importance on the customer sales experience and on after-sales support, making this supply contract an ideal platform to establish Infinitrak's technology in the OPE market.
Our business partner, MTD, is continuing to invest with Torotrak in the Joint Venture and, in particular, in support of the commercial introduction of the company's second transmission product, the lower cost STT (Single Toroidal Transmission).
Unlike the TTT, which is a bespoke unit specifically designed for MTD Products, the STT is a standardised unit which is intended for widespread OPE application. During the product development process of the STT, Infinitrak has created new and patentable technology which is showing very strong competitive advantages with high levels of product appeal.
The Joint Venture partners are determined to incorporate this new technology in the production build of the STT, which is planned to be on sale in ride-on mowers in the Spring of 2010. This ambition is driven by the striking benefits that this latest technology provides when compared to currently available hydrostatic transmissions in terms of torque, refinement and noise levels. The intended early introduction for the new transmission with the latest technology development represents a highly aggressive target in terms of completing the required testing and pre-production programme in order to achieve the required level of product quality. Should this programme take longer, there will clearly be a risk in relation to launch timing and hence to order levels for the 2010 mowing season. Notwithstanding this, the Joint Venture partners have taken the decision that it represents the best commercial platform for a successful launch of Infinitrak's second product.
The sales drive of the STT to third party OEMs and tier-1 transmission suppliers in the OPE sector, beyond MTD, is pressing ahead with interest being expressed by a number of potential clients.
Off-highway
The application of Torotrak's technology in tractors, agricultural and construction vehicles, materials handling vehicles (e.g. forklift trucks)
The project to develop a forklift truck IVT with a major global manufacturer has delivered exceptional results. Substantial fuel economy benefits over a conventional torque convertor equipped forklift truck were realised, in addition to extraordinary levels of driver control and comfort. Regrettably, however, and as a reflection of current economic circumstances, our client has mandated that all advanced programmes (across its group) be frozen in the short term to preserve cash.
Whilst this has been frustrating, given the strong product benefits, we are very encouraged by our discussions with other forklift truck manufacturers about potential application of this technology. We are now in a good position to further develop this target business sector having had first-hand experience of the benefits that Torotrak's technology can deliver in this market.
In the agriculture sector, our existing licensees, Carraro and Iseki, both continue development of our technology but their programmes are still taking longer than we would wish, driven by customer-specific product launch plans as well as by economic conditions.
To compensate for this, the off-highway sector has been a major focus of business development activity for Torotrak during the second half of the year as we have pursued our objective of securing greater resilience and commercial opportunity in this market, backed by our belief that we have a highly competitive product to offer. While the licensing model has many advantages, it is not without its limitations - although we may be insulated from the often substantial investment, manufacturing and product development costs, we are, on the other hand, heavily exposed to a lack of control over those decisions taken by our customers which can impact upon both timing and implementation.
We have, therefore, focused our business development activity in this market towards securing licensees and partners with significant presence and global reach. Our focus is very selective and, as a result, we are currently engaged only with recognised, major players in the industry. Some of these discussions are at an advanced stage and include demonstrations and field trial programmes.
We have also been encouraged by the energy shown by some of the more progressive businesses which are new to Torotrak. We continue to consider partnering as a route to market with these prospective customers, for example via a joint venture approach, and we are well funded to be able to explore such opportunities.
Automotive
The application of Torotrak's technology in cars, light commercial vehicles, light utility vehicles and auxiliary devices
Automotive has almost certainly been the hardest hit of our target sectors during the current economic downturn. Virtually all car manufacturers and their tier-1 suppliers have been forced to make major cutbacks in expenditure. No part of the market has been immune and our automotive clients in Japan have been no exception.
Our study programme to develop a small car transmission with a new Japanese client produced a competitive result - a toroidal continuously variable transmission concept design that could compete on cost with current low cost variable transmissions and which also delivered performance and fuel economy benefits. Whilst it was beneficial to work with this tier-1 manufacturer on a paid-for programme, market conditions have generally curtailed further investment and this project is therefore currently without external sponsorship. Nonetheless, as a result of the work undertaken we have secured a valuable research and development benefit which offers potential for future business development opportunities as and when market conditions improve.
The reduced appetite to invest is further evident in the large car market, where there is little motivation amongst the car manufacturers to invest in new transmissions technology. As a consequence, we have scaled back our business development and concept engineering activity in main drive transmissions for cars and have refocused our resources into more speculative but, in the current environment, more fertile automotive opportunities.
Variable auxiliary drives represent one such area of opportunity for us, with growing interest being evident across the automotive market. We have utilised some of the results from the small car transmission project to further develop our thinking and our future product offering in this new area which we are calling TVADs (Toroidal Variable Auxiliary Drives).
The purpose of a TVAD is to allow engine auxiliaries such as air-conditioning compressors, alternators and superchargers (to name but a few of many possible applications), to operate more efficiently, at speeds and loads which can be decoupled from the engine. The principal commercial and technical requisites for being able to compete effectively in the market for variable auxiliary drives are very low cost and high mechanical efficiency. Our planned research work in this coming year will establish the strength (or otherwise) of Torotrak's proposition for this sector.
Despite the challenging market conditions across the automotive sector, our consortium-based programme to develop a mechanical hybrid and to demonstrate the benefits of this technology in a premium car application, continues to make good progress. In this programme, part-funded by the UK Government's Technology Strategy Board, work is progressing to plan to create and prove-out a toroidal CVT and flywheel hybrid system (KERS) with Jaguar Land Rover as the end customer.
Tata, whose licence covers a range of potential applications, in the automotive market through to commercial vehicles, has continued to make progress as a licensee in accordance with its own plan. We are not in a position to disclose the detail of these activities which remain confidential to the client.
Summary
Throughout the year under review, Torotrak's strategy has remained focused on realising value from the company's four target markets - in the short term, through securing licensing agreements and carrying out engineering programmes and, in the long term, through the realisation of royalties or other forms of recurring income streams.
The Company has now entered into substantial exclusivity arrangements in two of these principal target markets, both of which provide access to significant volume potential - in OPE, through the Joint Venture with MTD Holdings, and in commercial vehicles through Allison and our European truck and bus manufacturer.
The engineering development programmes with our two key customers in commercial vehicles will be central to our activities in the coming year to 31 March 2010 as we seek to support the all-important progress towards production commitment.
Having established these important bridgeheads, Torotrak is able to focus its business development strategy on maximising potential in its two remaining established target markets, off-highway and automotive. Although current market conditions are very difficult in the automotive sector, we plan to commit resources to exploring the commercial potential of new developments such as TVADs and KERS.
The growing credibility and stature of Torotrak is helping us to win new business with high quality clients who have global reach. We plan to continue to develop these opportunities throughout the coming year and to seek further exclusive agreements, joint ventures or other appropriate partnering arrangements with new customers.
We enter the year ahead with optimism, energy and confidence that we will continue to build the value of our business from this stronger position.
Financial Review
Overview
Torotrak ended the year in good financial shape with a substantially enhanced customer list and order book position, strengthened considerably by the Allison agreement signed in March 2009. In addition, we have a robust level of cash resources with £14,975k held in cash and bank deposits at year end - up from £11,549k at 31 March 2008.
Given the difficult economic conditions and poor funding climate, this is a very satisfactory position to be in and leaves us well funded to exploit our growth plan.
Revenues grew by 25% to £4,617k, underpinned by strong licensing activity and including for the first time, our share of sales by Infinitrak (£470k). This continues our year on year revenue growth over a five year period.
The achievement of upfront, substantial licence fees is strong evidence of the value seen by significant tier-1 and OEM customers. Encouragingly, we can see the opportunity to repeat this pattern of significant licence agreements, which is a key objective going forward. These upfront payments are not at the expense of future, long term, recurring income and all of our agreements contain per unit royalty payments based on our customers' ultimate production of transmission units utilising Torotrak's technology. These royalties are generally based on a percentage of the entire transmission's transaction value with royalty rates set to incentivise higher volumes of transmissions produced each year.
For the second year running, operating cash flow has been positive as a result of strong licensing cash inflows. This position is considerably ahead of our targets and indeed ahead of our expectations as set out when raising new equity funds in August 2007.
We continue to maintain a strong capability in engineering and business development. A relatively high proportion of our operating resources is devoted to technical and business development, being 75% of our operating costs in 2009 (2008: 71%) with development expenses increasing by £700k to £5,270k. This increase relates largely to product development at Infinitrak aimed at the introduction of a competitive low cost transmission unit. In addition, an increasingly high proportion of engineering time provides support for business development, which often requires initial engineering commitment to explore the application of our technology to specific customers. The pay back on our development costs is clear to see in the achievement of our significant licence agreements over the last two to three years.
The consequence of continuing investment in such development is that we are still in an operating loss position, albeit the operating loss after development expenses in the year has reduced by 11% to £2,449k (2008: £2,758k).
Licence and exclusivity agreement with Allison
On 17 March 2009 we announced the Licence and Exclusivity Agreement with Allison, the impact of which is highly material to Torotrak's future and which has been described earlier in this report.
The agreement provides for initial payments of £8,438k of which £4,688k has already been received and a further £3,750k is due to be received in March 2010. Of the initial payments of £8,438k, £2,750k allows Allison a non-exclusive licence for main drive transmissions primarily for truck and bus applications (defined as "commercial vehicles") which are below 14,000 kilograms in gross vehicle weight (GVW). The remaining initial payments secure exclusivity rights for up to two years and three months which require Torotrak not to grant any further rights in the commercial vehicle sector (whether below or above 14,000 kilograms of GVW). This commitment does not impact on rights already granted at the date of the agreement with Allison, such as the licence rights granted to Tata and the European truck and bus manufacturer (the terms of which were described in the 2008 Annual Report).
The licence granted in the sub 14,000 kilogram sector relies upon a one to two year programme of technology transfer to allow the realisation of those rights. Consequently, the £2,750k of payments received in March 2009 has been deferred and will be recognised in revenues in future years when the intellectual property rights have been practically transferred for Allison's benefit. Payments not yet received under the agreement are not included within revenue and will be recognised in future years in accordance with our revenue accounting policy - namely, when the relevant rights have been granted under the agreement and we are certain of the recovery of any amounts due.
Additionally, under the agreement, Allison has secured options to purchase, at a future date, a non-exclusive licence of Torotrak's technology for applications in commercial vehicles above 14,000 kilograms and a further option to continue with, or secure for a longer period, worldwide exclusivity (except for Torotrak's existing licensees in this field) across the commercial vehicle market. One option would allow Allison to commit to a further two years of exclusivity rights together with the option to acquire at a future date, a non-exclusive licence in the above 14,000 kilogram GVW commercial vehicle sector. This option would result in a further £6,750k of payments over a two year period. Further options allow Allison to purchase exclusivity for up to twenty years with licence rights for the whole commercial vehicle sector, subject to existing licensees' rights, for payments of between £10,620k and £14,000k depending upon the timing of Allison's decision.
Total fees payable to Torotrak under the agreement could therefore amount to between £8,438k and £25,808k over broadly a four year period.
Should Allison choose not to exercise these further options, then Torotrak will be free to market the technology to other key commercial duty transmission suppliers and commercial vehicle manufacturers, thereby being able to secure further licensing opportunities in substitution for those payments.
The agreement also provides for per unit royalty payments based on transmission values incorporating Torotrak's technology when production commences. Given Allison's substantial presence in this market, and the relatively high value of a typical commercial vehicle's automated transmission, this part of the agreement could potentially provide very considerable medium to long term returns to Torotrak and its shareholders.
Strategic investment in new ordinary shares by Allison
The grant of exclusivity rights represents a key strategic commitment in terms of future exploitation of Torotrak's technology in one of its key markets. Accordingly, the closer alignment of interests through a strategic shareholding by Allison in Torotrak represents a valuable, new approach to cementing a closer and transparent relationship with a key licensee, with business risks and rewards closely aligned. The potential for this sort of relationship is something that we have envisaged in our planning and the Company received shareholder approval to issue up to 10% of its existing ordinary share capital, as part of such arrangements for closer commercial collaboration, at our last Annual General Meeting in July 2008.
Accordingly, we issued 14.6 million new ordinary shares to Allison at 16.51 pence per share being equivalent to a 30% premium to the volume weighted average share price over the 60 trading days preceding the date of subscription. This equated to a premium of approximately 40% to the closing mid-price on 13 March 2009, being the business day prior to the issue. The subscription shares issued to Allison are subject to lock-up arrangements which will expire on 16 March 2011.
Allison is now Torotrak's largest single investor with a shareholding of 9.1% of our enlarged share capital.
Path to commercialisation
In our 2008 Annual Report we commented that our commercial objective was to seek further licensing activity to bolster cash generation and to maintain our operating cash flow targets. We also commented at the half-year in November 2008 that the economic outlook was having a material effect on the OPE market outlook, leading to an increased target to achieve licence income to offset a reduced build of sales expected at Infinitrak.
The substantial licensing activity in the year to 31 March 2009 has therefore been a successful achievement of those objectives and an effective response to the shifting demand pattern across our various markets. It has also underlined the growing resilience of Torotrak's business model as a result of the increasing diversification of customers, markets and income streams.
As also highlighted in the 2008 Annual Report, the uncertain timing of closure of licence deals, and resulting cash payments, can mean that the progress towards our target of achieving sustainable, positive operating cash flow may not be linear and may need to be viewed on an averaged basis. The results for this year, and those of last year, emphasise this point, as we have generated positive operating cash flow earlier than planned due to successfully negotiated upfront payments from licensees.
Whilst our order book position is strong, and we have a range of prospects for new licence agreements, it is possible that we will see, over the next two to three years, some 'lumpiness' in cash flow, resulting from the uncertain timing of licence payments. Despite this, our target for the year to 31 March 2010 is to achieve very close to break-even in profit after tax whilst maintaining cash balances well above the levels envisaged at the time of the Placing and Open Offer in 2007.
Infinitrak remains an important part of our revenue growth plans, although the expected slower take-up of new product due to current general economic conditions and the sharp decline in OPE demand, means that it is not likely to generate positive operating cash flow for at least two to three years. We therefore expect to continue our investment into Infinitrak to support both initial market launch and new product development, as we continue to see strong potential for substantial sales and to build enterprise value as economic conditions improve.
We will also continue to assess and review all options for achieving value in our market sectors that are currently non-exclusive (i.e. markets other than OPE and commercial vehicles) through models other than straightforward licensing, if that is likely to generate better value for shareholders. This includes joint ventures but also closer collaboration with major companies with strategic interests in those sectors.
Revenue
| Year ended 31 March 2009 £000 | Year ended 31 March 2008 £000 | Year on year change £000 | |
| Engineering services | 1,214 | 698 | 516 |
| Licence and option fees | 2,933 | 2,978 | (45) |
| Share of Infinitrak revenue | 470 | - | 470 |
| Royalties | - | 9 | (9) |
| 4,617 | 3,685 | 932 |
Engineering services
Engineering income rose by £516k mainly as a result of the commencement of the three to four year engineering programme with the major European truck and bus manufacturer. Other engineering activities during the year included work with eleven other customers in the OPE, off-highway and automotive markets.
The order book for engineering services is robust and we would expect to maintain or build on these levels of income in the year to 31 March 2010.
Licence and option fees
Licence revenues during the year included fees in relation to the Allison agreement, a further payment from Tata and income in relation to the licence agreement with the major European truck and bus manufacturer. Maintaining the licence income at broadly last year's levels has been an excellent result for the year and a position on which we should be able to build for the year to 31 March 2010.
Share of Infinitrak revenue
In the year to 31 March 2009, we are for the first time reporting product sales at Infinitrak with modest sales of c. 2,800 TTT units sold during the year. Volume growth is now most likely from our second product (the STT) which can be substituted directly for current hydrostatic units, albeit the sale of these STT units in the year to 31 March 2010 will depend upon a combination of launch timing and market conditions, including stocking levels from selected major distributors and retailers, who are currently experiencing very low demand, particularly for higher end products.
Royalties
Whilst considerable development work continues in the KERS sector, take-up of our technology in Formula 1 has not yet occurred, hence the small royalty contribution from last year has not been repeated.
Cash and cash inflows
Positive operating cash flow of £1,011k (2008: £526k) combined with the £2,412k gross proceeds from the share issue to Allison, together substantially strengthened our cash reserves which increased by £3,426k to £14,975k at year end.
Surplus cash is invested in UK Sterling in financial institutions that carry a minimum long term rating of 'AA' (defined as the capacity to meet financial commitments being very strong) and a minimum short term rating of 'A-1' (being the highest category) as evaluated by Standard and Poor (S & P), with equivalent ratings by Moodys also being monitored. Both these ratings give a high degree of security for funds invested. Cash resources at 31 March 2009 were invested as follows:
| Counterparty | S & P rating (Long term / short term) | 31 March 2009 £000 | 31 March 2008 £000 |
| Barclays Bank plc | AA- / A-1+ | 6,547 | 7,362 |
| Clydesdale Bank plc | AA- / A-1+ | 4,954 | 4,095 |
| Svenska Handelsbanken AB (publ) | AA- / A-1+ | 3,303 | - |
| Share of JV cash | - | 171 | 92 |
| Total | 14,975 | 11,549 |
Financial Information 2009
Consolidated Income Statement
| For the year ended 31 March 2009 | Notes | Group 2009 £000 | Group 2008 £000 |
| Revenue |
| 4,617 | 3,685 |
|
|
|
|
|
| Development expenses |
| (5,270) | (4,570) |
|
|
|
|
|
| Administrative expenses |
| (1,796) | (1,873) |
|
|
|
|
|
| Operating loss | 5 | (2,449) | (2,758) |
|
|
|
|
|
| Finance income |
| 462 | 361 |
|
|
|
|
|
| Loss before income tax |
| (1,987) | (2,397) |
| Income tax credit | 6 | 199 | 267 |
|
|
|
|
|
| Loss for the year attributable to equity holders of the Parent |
| (1,788) | (2,130) |
|
|
|
|
|
| Basic and diluted loss per share (pence) | 7 | (1.22) | (1.57) |
The results above derive from continuing operations.
Consolidated Statement of Recognised Income and Expense
|
| Group 2009 £000 | Group 2008 £000 |
| Currency translation differences in JV | 136 | (2) |
| Net income/(expense) recognised directly in equity | 136 | (2) |
|
|
|
|
| Loss for the year | (1,788) | (2,130) |
| Total recognised expenses for the year attributable to equity holders of the Parent | (1,652) | (2,132) |
Balance Sheet
| As at 31 March 2009 | Notes | Group | Group |
|
|
| 2009 | 2008 |
|
|
| £000 | £000 |
| Non-current assets |
|
|
|
| Intangible assets |
| 1,220 | 1,154 |
| Property, plant and equipment |
| 929 | 1,102 |
| Total non-current assets |
| 2,149 | 2,256 |
| Current assets |
|
|
|
| Inventories |
| 54 | 32 |
| Trade and other receivables |
| 818 | 517 |
| Current tax |
| 330 | 514 |
| Cash and cash equivalents |
| 14,975 | 11,549 |
| Total current assets |
| 16,177 | 12,612 |
| Total assets |
| 18,326 | 14,868 |
| Current liabilities |
|
|
|
| Trade and other payables |
| (4,833) | (2,525) |
| Total current liabilities |
| (4,833) | (2,525) |
| Net assets |
| 13,493 | 12,343 |
| Capital and reserves |
|
|
|
| Issued share capital | 8 | 16,069 | 14,608 |
| Share premium |
| 53,646 | 52,766 |
| Other reserves |
| (31) | (202) |
| Retained earnings |
| (56,191) | (54,829) |
| Total equity attributable to equity holders of the Parent |
| 13,493 | 12,343 |
Cash Flow Statement
| For the year ended 31 March 2009 | Group | Group |
|
| 2009 | 2008 |
|
| £000 | £000 |
|
|
|
|
| Cash flows from operating activities |
|
|
| Loss for the year | (1,788) | (2,130) |
| Adjustments for: |
|
|
| Depreciation | 333 | 159 |
| Amortisation | 104 | 68 |
| Finance income receivable | (462) | (361) |
| Loss on disposal of plant and equipment | 13 | - |
| Loss on disposal of intangible assets | 167 | 40 |
| Taxation | (199) | (267) |
| (Increase)/decrease in inventories | (22) | 14 |
| (Increase)/decrease in trade and other receivables | (119) | 780 |
| Increase in trade and other payables | 2,141 | 1,795 |
| Cost of equity-settled employee share schemes and bonuses | 461 | 428 |
| Cash generated/(used) in operations | 629 | 526 |
| Income tax received | 382 | - |
| Net cash generated/(used) in operating activities | 1,011 | 526 |
| Cash flows from investing activities |
|
|
| Acquisition of property, plant and equipment | (52) | (174) |
| Acquisition of patents | (347) | (230) |
| Finance income received | 458 | 381 |
| Net cash generated/(used) in investing activities | 59 | (23) |
|
|
|
|
| Cash flows from financing activities |
|
|
| Net proceeds from the issue of share capital | 2,341 | 6,741 |
| Net cash generated in financing activities | 2,341 | 6,741 |
|
|
|
|
| Net increase in cash and cash equivalents | 3,411 | 7,244 |
| Cash and cash equivalents at start of year | 11,549 | 4,307 |
| Exchange gain/(loss) on currency translation | 15 | (2) |
| Cash and cash equivalents at end of year | 14,975 | 11,549 |
| Cash and cash equivalents held in the JV not under direct control of the Group | 171 | 92 |
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 2008 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 2009 will be posted to shareholders and made available on Torotrak's website in June 2009.
The auditors have reported under section 235 of the Companies Act 1985 on the Group's statutory accounts for the years ended 31 March 2009 and 31 March 2008 and the auditors' reports were unqualified and did not contain any emphasis of matter paragraphs or statements under Section 237 of the Companies Act 1985.
2. Basis of Preparation
This preliminary announcement does not comprise statutory accounts within the meaning of section 240 of the Companies Act 1985 . The financial information for the year ended 31 March 2009 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 1985 applicable to companies reporting under IFRS and is consistent with the accounting policies outlined in the Annual Report and Financial Statements for the year ended 31 March 2008.
3. New standards, amendments to standards or interpretations
a) Standards, amendment and interpretations effective in 2009
IFRIC 11, 'IFRS 2 - Group and treasury share transactions'. IFRIC 11 provides guidance on whether share-based transactions involving treasury shares or involving Group entities (for example, options over a parent's shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the Parent and Group companies. This interpretation does not have an impact on the Group or Company's financial statements.
b) Standards, amendments and interpretations effective in 2009 but not relevant
The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2008 but they are not relevant to the Group or Company's operations:
IFRIC 12, 'Service concession arrangements';
IFRIC 13, 'Customer loyalty programmes'; and
IFRIC 14, 'IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction'.
c) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group and Company
The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2009 or later periods, but the Group and Company have not early adopted them:
IFRS 8, 'Operating segments' (effective from 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, 'Disclosures about segments of an enterprise and related information'. The new standard requires a 'Management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The group will apply IFRS 8 for the year ending 31 March 2010 onwards. The impact on future Group financial reporting is still being assessed by Management. As the financial report contains both the Group consolidated and parent Company financial statements prepared under IFRS, the Company will not be required to present segment information.
IAS 1 (Revised), 'Presentation of financial statements' (effective from 1 January 2009). The revised standard will prohibit the presentation of items of income and expenses (that is, 'non-owner changes in equity') in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the Statement of Comprehensive Income) or two statements (the Income Statement and Statement of Comprehensive Income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Group will apply IAS 1 (Revised) from 1 January 2009. It is likely that both the Income Statement and Statement of Comprehensive Income will be presented as performance statements.
IFRS 2 (Amendment), 'Share-based payment' (effective from 1 January 2009). The amended standard deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services; they would not impact the number of awards expected to vest or valuation there of subsequent to grant date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group will apply IFRS 2 (Amendment) from 1 January 2009. It is not expected to have a material impact on the Group's financial statements.
4. Segmental analysis
In the opinion of the directors, the Group operates in one primary segment being the business of the design and development of traction drive Infinitely Variable Transmission (IVT) systems. In the opinion of the directors, and given the early stage of commercialisation of the Group's intellectual property, the Group does not currently operate in markets or geographical segments that are materially distinguishable in terms of risks and returns.
5. Operating loss
| Operating loss is stated after charging/(crediting) the following: | Group 2009 £000 | Group 2008 £000 | |
| Amortisation of intangible assets - patents |
| 104 | 68 |
| Abandonment and disposal of patents |
| 167 | 40 |
| Loss on disposal of plant and equipment |
| 13 | - |
| Depreciation |
| 333 | 159 |
| Operating lease payments | - land and buildings | 280 | 280 |
|
| - office equipment | 7 | 3 |
| Operating lease income | - land and buildings | (92) | (92) |
| Research and development costs expensed as incurred | 5,270 | 4,570 | |
| Foreign exchange gain |
| (2) | (2) |
| Auditors' remuneration |
|
|
|
| Audit services | - audit (Group) | 47 | 49 |
|
| - audit (Company) | 5 | 4 |
| Non-audit services | - tax services | 25 | 21 |
|
| - corporate finance (i) | - | 171 |
|
|
|
|
|
| Administrative expenses |
|
|
|
|
|
| Group | Group |
|
|
| 2009 | 2008 |
| Administrative expenses - normal (ii) |
| 1,796 | 1,702 |
| Non-recurring administrative expenses: |
|
|
|
| Additional costs paid to PwC relating to the refinancing | - | 171 | |
| Total administrative expenses |
| 1,796 | 1,873 |
Notes (i) Corporate finance in year to 31 March 2008. In addition £328k was paid to PwC for the role as sponsor, financial advisor and reporting accountant in respect of the share placing. (ii) Normal administrative costs represent gross central service salaries and the administrative portion of directors' salaries (including pension and share-based charge), central services' administrative costs, legal, audit and patent renewal costs.
6. Income tax credit
|
| Group 2009 £000 | Group 2008 £000 |
| UK Corporation Tax |
|
|
| Current tax for the year | 235 | 246 |
| Prior year tax | (14) | - |
| Total UK Corporation Tax | 221 | 246 |
| Overseas tax |
|
|
| Current tax for the year | (22) | 21 |
| Total tax credit | 199 | 267 |
7. Loss per ordinary share
Basic and diluted loss per share of -1.22 pence (2008: -1.57 pence) is based on the loss after tax of £1,788k (2008: loss £2,130k) and 146.4 million ordinary shares (2008: 136.0 million) being the weighted average number of shares in issue during the year.
|
| 31 March 2009 Number | 31 March 2008 Number |
| Shares issued and used in calculating basic and diluted loss per share | 146,389,092 | 135,929,977 |
In accordance with IAS 33 the number of shares used in the calculation excludes the weighted average number of shares held by the Employee Share Trust of 294,222 (2008: 495,664).
8. Share capital
| Group | Number | 31 March 2009 £000 | Number | 31 March 2008 £000 |
| Authorised |
|
|
|
|
| Ordinary shares of 10 pence each | 250,000,000 | 25,000 | 250,000,000 | 25,000 |
| Allotted and fully paid |
|
|
|
|
| Ordinary shares of 10 pence each | 160,691,263 | 16,069 | 146,082,973 | 14,608 |
| Group | Number | Group 31 March 2009 £000 | Group 31 March 2008 £000 |
| Ordinary shares of 10 pence each |
|
|
|
| At beginning of year | 146,082,973 | 14,608 | 11,990 |
| Shares issued as a result of Firm Placing | - | - | 2,033 |
| Shares issued as a result of Open Offer | - | - | 585 |
| Shares issued to Allison Transmission, Inc | 14,608,290 | 1,461 | - |
| At end of year | 160,691,263 | 16,069 | 14,608 |
9. Financial Record
For the years ended 31 March
|
| 2009 £000 | 2008 £000 | 2007 £000 | 2006 (ii) £000 | 2005 (i) £000 |
| Revenue | 4,617 | 3,685 | 2,691 | 2,054 | 534 |
| Loss on ordinary activities before taxation | (1,987) | (2,397) | (3,227) | (6,196) | (6,057) |
| Loss on ordinary activities after taxation |
|
|
|
|
|
| for the financial year | (1,788) | (2,130) | (2,899) | (5,762) | (5,271) |
| Basic and diluted loss per share | (1.22p) | (1.57p) | (2.43p) | (4.91p) | (4.55p) |
| Equity shareholders' funds | 13,352 | 12,343 | 7,306 | 9,832 | 14,560 |
| Net cash inflow/(outflow) from operating activities | 1,011 | 526 | (3,515) | (4,269) | (4,645) |
Notes (i) As restated under IFRS. (ii) As restated for proportionate consolidation of Infinitrak.