Turbo Power Systems Inc. (TPS) Announces Results for the Second Quarter and Six Months Ended 30 June 2009

LONDON, UNITED KINGDOM--(Marketwire - Aug. 14, 2009) - Turbo Power Systems Inc. (TSX:TPS) (AIM:TPS) -

Highlights

- Production and development income for the quarter of Pounds Sterling 1.9 million (2008: Pounds Sterling 2.0 million)

- EBITDA profit for the quarter of Pounds Sterling 0.08 million (2008: EBITDA loss Pounds Sterling 2.04 million)

- EBITDA profit for the six months ended 30 June 2009 of Pounds Sterling 0.02 million (2008: EBITDA loss Pounds Sterling 4.06 million)

- Net losses for the quarter reduced to Pounds Sterling 0.23 million (2008: Pounds Sterling 2.27 million loss)

- Cash inflow in Quarter 2 of Pounds Sterling 0.06 million (2008: Outflow of Pounds Sterling 1.03 million)

- Order book increased in the quarter by 12% to Pounds Sterling 28 million.

Paul Summers, CEO, said:

"Overall a positive set of results which demonstrate the benefits from the changes implemented over the last twelve month.

It is very encouraging to see a positive EBITDA figure for the quarter, a figure we are determined to seek to further improve going forward.

Cash balances continue to be tightly managed as we prepare for production deliveries in the second half of the year and we anticipate that our cash balances will improve further towards the end of the year as these deliveries are completed.

Order intake has continued to be strong with confirmation of the start of production for the US Industrial Motors and Drives OEM (US$4.4m) and further Bombardier Rail orders (US$4.6m) being awarded during the quarter. Interest in our products and services remains high and we are optimistic that our order book will be further increased during the remainder of the year."

Graham Thornton, Chairman, said:

"The results for the first half show that for the first time, the business is positioned for organic growth using cash generated from operations. The executive team has achieved a significant turn round in the Company's performance, and there is further improvement to come."

NOTES TO EDITORS

About Turbo Power Systems

Turbo Power Systems Inc (TSX:TPS) (AIM:TPS) is a leading UK based designer and manufacturer of innovative power solutions. The Company's products are all based on its core technologies of power electronics and high speed motors and generators and are sold into a number of market sectors including aerospace, rail, and various industrial sectors. The Company's products provide improved efficiency and reduced energy consumption compared to existing technologies.

Turbo Power System's existing customers include blue chip companies such as Bombardier Transportation and Eaton Aerospace.

Forward looking statements

This MD&A contains forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance, and underlying assumptions and other statements that are other than statement of historical fact. These statements are subject to uncertainties and risks including, but not limited to, the ability to meet ongoing capital needs, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition, the need to protect proprietary rights to technology, government regulation, and other risks defined in this document and in statements filed from time to time with the applicable securities regulatory authorities.

Definition of Non-GAAP financial measures

EBITDA is calculated as the net loss for the period less financial interest income and charges, taxation, foreign exchange gains and losses, depreciation, amortisation, and stock compensation charges. The Company believes that EBITDA is useful supplemental information as it provides an indication of the operational results generated by its business activities prior to taking into account how those activities are financed and taxed and also prior to taking into consideration asset amortisation. EBITDA is not a recognised measure under GAAP and, accordingly, should not be construed as an alternative to operating income or net loss determined in accordance with GAAP as an indicator of financial performance or of liquidity and cash flows. EBITDA does not take into account the impact of working capital changes, capital expenditures and other sources and uses of cash which are disclosed in the consolidated statement of cash flows. The Company's method of calculating EBITDA may differ from other issuers and may not be comparable to similar measures provided by other companies.

OPERATIONAL REVIEW

This review has been prepared as at 14 August 2009.

Business of the Company

Turbo Power Systems:

- designs and manufactures high-speed permanent magnet based motors and generators for industrial, transport, power generation and military applications, where technical performance, energy efficiency and power density requirements cannot be met by conventional technology.

- designs and manufactures power electronics products which include variable frequency drives and inverters, which combine with our electrical machines to create an integrated solution, and a range of rugged power conversion products for rail and industrial applications.

Business Summary

Strategic Direction

TPS primary business focus is on the following markets:

- Transport

-- Power Electronics for the Rail Industry

- Energy

-- Grid Link Inverters

-- Motors & Generators

- Industrial Equipment

-- Motors & Generators

-- Power Supplies

- Defence

-- Power Electronics

-- Motors & Generators

Whilst the business will continue to service existing programmes in other areas (e.g. aerospace and automotive) it will behave in a reactive manner to these markets and only engage in new programmes that meet the requirements of the business in terms of risk, cash flow and profitability.

The vision for the business can be summarised as follows:

"Be a world class provider of specialist Power Electronics and Electrical Machines maximising stakeholder benefit"

The business will achieve this through:

- Market leading technologies and programme delivery

- Long term partnerships with our customers

- Strong year on year organic growth

- A culture of continuous improvement of individual and business performance and capability

- Accelerating business growth by acquisitions

In terms of the development of the business this means we intend to:

- Structure the business to achieve the projected turnover without outside investment or acquisitions

- Develop technological advantage and customer partnerships in the following business sectors :

-- Transport

-- Energy

-- Industrial

-- Defence

- Be a preferred supplier to a limited number of key customers

- Balance business activities across development, production and after sales

Current Operating Climate

The majority of our customers and markets are still proving to be resilient to the current economic conditions. Additionally the spread of markets provides some degree of resilience to downturns in any one sector.

Governments are continuing to invest in their economies' infrastructure and, indeed, see transport initiatives such as new rail programmes as a way of helping to sustain their industries whilst providing necessary public transportation and having a positive effect on the environment.

The defence spend in both the US & UK appears relatively stable and the future opportunities for TPS technology appear favourable. We will be investigating this market more over the course of this year and hope to see increased activity during the coming years.

As a result of the many Green Initiatives the energy sector is still seeing significant growth and we will be looking to strengthen our position during the course of this year.

The industrial sector is the most vulnerable to the economic downturn and although there is continued activity and interest we are experiencing some delays in new orders being placed with us and a reduction in the call off rate on some of our existing contracts.

Many of our current contracts are U.S. Dollar based. We are therefore currently benefiting from the stronger US Dollar to weaker Sterling exchange rate compared with the previous year. The exposure to exchange rate fluctuations is something that the business is very conscious of and management take measures in our contracting, purchasing and financial arrangements to seek to mitigate against exchange rate risk. At 30 June 2009 the Company did not have any exchange rate contracts.

Current Programmes

- Transport

Rail

Deliveries continue on the major programmes (Bombardier Chicago Transit Authority and Bombardier Toronto). Deliveries have also commenced on some of our smaller programmes (TurboStar, Delta Rail). Procurement has commenced on the Bombardier KL Programme and deliveries are anticipated to begin during the last few weeks of Quarter 3 and complete in 2010.

Aerospace

The Jettison Fuel Pump motor drives for Eaton Aerospace continue to be delivered in line with the customer's reduced call-off rate.

The RAM Fan motor drive contract with Hamilton Sundstrand is still in the process of completing the transition of this contract back to Hamilton Sundstrand, delayed by technical difficulties with the product. Our planned activities under the transition agreement, albeit at a very low level compared to historic levels, are now envisaged to continue until the first few weeks of Quarter 4.

- Energy

Oil

We have now concluded that at the relatively low volumes predicted, the price we need to charge for the down hole pump does not meet our customers needs. Our customer has therefore indicated that they will not be placing further orders for this motor.

Renewable Energy

There has been continued European funded R&D work in this area relating to Grid linked inverters, which is being used as the basis for our business development activities for our future in the energy sector.

- Industrial

Laser Power Supplies

Our customer has been suffering a significant downturn in demand for their product during the first half of 2009. Consequently no units are currently being delivered. They have indicated that they hope for an improvement in demand towards the end of 2009.

Industrial Motors and Drives

Our Industrial Motors and Drives OEM has now confirmed their requirement for the next 150 units in preparation for a formal product launch of their product towards the end of 2009, and we currently expect to deliver these during Quarter 4 2009 and Quarter 1 2010.

Our other major industrial equipment providers, including a North American industrial and process gas company, a Far Eastern steel manufacturer and a European industrial research company, are continuing to evaluating our products (and their own systems) with a view to developing their overall systems into a commercial offering.

- Defence

1MW High-Speed Generator

The contract awarded during 2008 by a US defence contractor has progressed into their systems integration and test phase and we are supporting this testing.

Financial Performance

Total revenues for the first six months were Pounds Sterling 4.57 million, an increase of 13% over the same period in 2008 (2008: Pounds Sterling 4.06 million), primarily due to significant development income during the six months of Pounds Sterling 1.95 million (2008: Pounds Sterling 0.39 million). During the first quarter of the year our major rail production programmes commenced initial production, but throughout the first six months some of our industrial customers have reduced their demand as the weakened world economy impacted their business volumes. This resulted in a decrease in production revenues to Pounds Sterling 2.62 million during the first six months of 2009 (2008: Pounds Sterling 3.67 million).

Both Research and product development costs and General and administrative costs have remained at the reduced levels established in the latter part of 2008 following significant cost reduction initiatives, and the Company recorded an increase in UK Research & Development Tax credits relating to prior years during the second quarter, which offset current spending by a further Pounds Sterling 0.46 million. R&D tax credits in total for the first six months were Pounds Sterling 0.56 million (2008: Pounds Sterling 0.04 million).

The Company has generated a profit before interest, tax, depreciation, amortisation and stock compensation (EBITDA) for the quarter of Pounds Sterling 0.08 million (2008: Loss of Pounds Sterling 2.04 million), principally as a result of the improvement actions initiated during the latter part of 2008.

Operating cash outflows before tax were further reduced during the second quarter to Pounds Sterling 0.15 million (2008: Pounds Sterling 2.52 million), with the Company generating a net Pounds Sterling 0.06 overall cash inflow for the second quarter. As a result the Company finished the six months with an unrestricted cash balance of Pounds Sterling 0.64 million and held further cash of Pounds Sterling 1.12 million associated with performance bonds.

During the six months ended 30 June 2009 the Company has had no transactions with related parties and there are no further proposed transactions to disclose.

Going Concern

These consolidated financial statements have been prepared on the basis of Canadian generally accepted accounting principles ("Canadian GAAP") applicable to a 'going concern', which assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 30 June 2009 the Company had incurred net cash outflows from operations therefore may require additional funding which, if not raised, may result in the curtailment of activities. The Company has incurred cumulative losses including a loss of Pounds Sterling 0.60 million in the first six months of 2009 and has a cumulative deficit of Pounds Sterling 72.84 million as at 30 June 2009.

On 23 June 2009 the 2008 Loan Note Holders agreed to amend the terms of the 19 June 2008 loan agreement, as detailed in the Convertible notes disclosure within this MD&A, to temporarily remove the requirement to maintain a cash balance in excess of Pounds Sterling 750,000 until 31 December 2009, in order to allow more flexibility in working capital. As part of this agreement the Company has undertaken, within 2009, to address its plans for repayment of all existing Loan Notes.

At 30 June 2009 the Company had an unrestricted cash balance of Pounds Sterling 0.64 million and held restricted cash of Pounds Sterling 1.12 million associated with performance bonds. The Company's ability to continue as a going concern depends on its ability to generate positive cash flow from operations or secure additional debt or equity financing.

Management regularly reviews and considers the current and forecast activities of the Company in order to satisfy itself as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure, loan repayments and forecast cash requirements and balances. Based on these evaluations management consider that the Company is able to continue as a going concern.

There can be no assurances that the Company's activities will be successful or sufficient and as a result there is doubt regarding the "going concern" assumption and, accordingly, the use of accounting principles applicable to a going concern. These consolidated financial statements do not reflect adjustments that would be necessary if the "going concern" assumption were not appropriate. If the "going concern" assumption were not appropriate for these consolidated financial statements, then adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, would be necessary.

Summary of quarterly results

The following table sets forth selected quarterly consolidated financial information of the Company for the last eight quarters;

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All amounts in Pounds Production Research and General and
Sterling '000 revenue product administrative
development
September 2007 2,700 1,736 1,083
December 2007 2,750 1,580 831

March 2008 1,962 1,591 1,059
June 2008 1,711 1,470 1,048
September 2008 1,246 1,363 1,025
December 2008 1,862 841 816

March 2009 1,383 881 916
June 2009 1,235 199 812

All amounts in Pounds Net loss Loss per Net cash flow Net cash flow
Sterling '000 share from operating from capital
investment
September 2007 (1,666) (0.5) (2,024) (123)
December 2007 (1,578) (0.5) (1,379) (37)

March 2008 (2,287) (0.7) (1,844) (96)
June 2008 (2,276) (0.7) (2,479) (57)
September 2008 (1,849) (0.6) (1,527) (10)
December 2008 (3,151) (1.0) 195 (8)

March 2009 (368) (0.1) (458) (14)
June 2009 (234) (0.1) (151) 207

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Production revenues decreased during the first six months of 2009 reflecting the completion of the initial volumes on the Industrial Motor and Drive contract at the end of 2008, and the depressed industrial product market. Research and development expenditure has remained at a decreased level compared with previous years reflecting the reduction in development activities on the Bombardier Chicago and Toronto rail programmes which are now completing their development phases, together with the reduced development requirement as a result of the transition agreement on the Hamilton Sundstrand contract for the Boeing 787. Increased R&D tax credits recognized during the second quarter of 2009 further reduced the net Research and product development spend. General and administrative costs reduced in the second quarter and remain lower than in previous years following initiatives to reduce such overheads.

Diluted earnings per share figures have not been provided as the loss in each period would be anti-dilutive.

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Reconciliation of net loss to EBITDA result

Quarter ended Six months ended
30 June 30 June

2009 2008 2009 2008
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Net loss (234) (2,276) (602) (4,563)

Add back:
Interest income (1) (29) (2) (65)
Interest expense 156 44 357 88
Finance (income)/charge 7 38 24 42
Foreign exchange (gain)/loss (76) 53 (201) 22
Amortisation 169 147 337 335
Stock Compensation 63 (17) 107 81
-----------------------------------------------
EBITDA profit/(loss) 84 (2,040) 20 (4,060)
-----------------------------------------------

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Copies of Quarterly and Annual Results

The Company's full Financial Results and Managements' Discussion and Analysis are available on www.sedar.com and full financial statements were mailed to shareholders during May 2009.

Copies of the quarterly and annual results are available from the Company's office at Unit 3 Summit Centre, Hatch Lane, West Drayton, Middlesex, UB7 0LJ, United Kingdom or available to view from the Company's website at www.turbopowersystems.com

Review of the six months ended 30 June 2009

Production revenue

Production revenue in the six months ended 30 June 2009 was Pounds Sterling 2.62 million compared with Pounds Sterling 3.67 million in 2008

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2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Power electronics 2,379 3,563
Electrical machines 239 110
---------------------------------
2,618 3,673
---------------------------------
---------------------------------

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Revenues from the Power electronics division decreased compared with 2008 due to a smaller volume of rail programmes in full production during the six months and a reduction in the call off rate on some of our industrial sector contracts.

Revenue in the Electrical machines division during the first six months of 2009 arose on completion of the down hole motor contract for Artificial Lift Company, and motor units for our Industrial OEM.

Development income

Development income in the six months was Pounds Sterling 1.95 million compared with Pounds Sterling 0.39 million in 2008, and was principally related to the Industrial motor and drive contract and the sale of access rights to certain engineering design and methods in relation to that product.

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2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Development income 1,952 387
---------------------------------
---------------------------------

Production costs

The cost of production revenues in the six months amounted to Pounds
Sterling 1.85 million (2008: Pounds Sterling 3.03 million).

2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Power electronics 1,538 2,737
Electrical machines 311 296
--------------------------------
1,849 3,033
--------------------------------
--------------------------------

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Production costs reduced in the Power electronics division as production volumes reduced, together with an increase in overall production gross margin.

Production costs at the Electrical machines division increased marginally as production increased, offset by a decrease in attributable facilities costs.

Research and product development

Research and product development expenditure in the six months was Pounds Sterling 1.08 million compared with Pounds Sterling 3.06 million in 2008, and comprised

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2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Research and product development expenditure 1,642 3,105
Accrued R&D tax credits (562) (44)
------------------------------
Total expenditure 1,080 3,061
------------------------------
------------------------------

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Research and product development expenditure decreased sharply following the agreement to transition the Hamilton Sundstrand aerospace development programme and the completion of development activities on the Bombardier Toronto rail programme. The redundancy programmes effected during the second half of 2008 have also resulted in reduced employment costs in the first six months of 2009.

Accrued R&D tax credits recognised during 2009 are made up of Pounds Sterling 0.10 million of accrued credits in respect of expenditure incurred during 2009, and Pounds Sterling 0.46 million of additional tax credit claimed for the year ended 31 December 2008.

General and administrative

General and administrative costs in the six months of Pounds Sterling 1.73 million (2008: Pounds Sterling 2.11 million), which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, have fallen following the redundancy programmes effected in the second half of 2008.

Amortisation

Amortisation was consistent with the previous period at Pounds Sterling 0.34 million compared with Pounds Sterling 0.34 million in 2008.

Interest income

Interest income in the six months was Pounds Sterling 0.002 million compared with Pounds Sterling 0.07 million in 2008, as a result of lower maintained cash balances and reduced interest rates.

Interest expense and finance charges

Interest expenses arise from the issue of convertible bonds in March 2005 and June and August 2008 and comprise

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2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Interest payable 301 58
Accretion of debt 56 30
------------------------------
357 88
------------------------------
------------------------------

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Cash flows for the six months ended 30 June 2009

Cash outflow from operating activities

Operating cash outflow before movements in working capital was Pounds Sterling 0.18 million for the six months (2008: Pounds Sterling 4.06 million).

Movements in stocks, work in progress, and debtors and creditors produced a net cash outflow of Pounds Sterling 0.43 million during the six months (2008: Pounds Sterling 0.31 million), as debtor balances increased due to the increased R&D tax credit claimed, and creditor balances increased as advance payments from customers were received.

Investing activities

Cash outflows on capital investments in the six months were Pounds Sterling 0.04 million compared with Pounds Sterling 0.15 million in 2008. Receipts from reduced performance bonds held as restricted funds generated Pounds Sterling 0.23 million in the six months (2008: Pounds Sterling 0.08 million).

Overall cash outflow for the six months

Overall the cash outflow during the six months was Pounds Sterling 0.42 million. This compares with an overall cash outflow of Pounds Sterling 2.89 million for the first six months of 2008.

Review of the quarter ended 30 June 2009

Production revenue

Production revenue in the quarter ended 30 June 2009 was Pounds Sterling 1.24 million compared with Pounds Sterling 1.71 million in 2008

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2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Power electronics 996 1,608
Electrical machines 239 103
------------------------------
1,235 1,711
------------------------------
------------------------------

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Revenues from the Power electronics division decreased compared with 2008 due to a smaller volume of rail programmes in full production during the quarter and continued lower demand from our industrial equipment customers following the weakened global economic environment.

Revenue in the Electrical machines division during the quarter arose on completion of the down hole motor contract for Artificial Lift Company, and motor units for our Industrial OEM.

Development income

Development income in the quarter was Pounds Sterling 0.64 million compared with Pounds Sterling 0.32 million in 2008, and related to stage payments on motor and generator programmes and the sale of manufacturing IP rights to Artificial Lift Company for the down hole pump motor technology.

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2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Development income 640 317
------------------------------
------------------------------

Production costs

The cost of production revenues in the quarter amounted to Pounds Sterling
0.84 million (2008: Pounds Sterling 1.53 million).

2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Power electronics 678 1,389
Electrical machines 165 144
------------------------------
843 1,533
------------------------------
------------------------------

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Production costs reduced in the Power electronics division as production volumes reduced, together with an increase in overall production gross margin.

Production costs at the Electrical machines division increased marginally as production increased, offset by a decrease in attributable facilities costs.

Research and product development

Research and product development expenditure in the quarter was Pounds Sterling 0.20 million compared with Pounds Sterling 1.47 million in 2008, and comprised

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2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Research and product development expenditure 761 1,514
Accrued R&D tax credits (562) (44)
------------------------------
Total expenditure 199 1,470
------------------------------
------------------------------

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Accrued R&D tax credits recognised during 2009 are made up of Pounds Sterling 0.1 million of accrued credits in respect of expenditure incurred during 2009, and Pounds Sterling 0.46 million of additional tax credit claimed for the year ended 31 December 2008.

General and administrative

General and administrative costs in the quarter of Pounds Sterling 0.81 million (2008: Pounds Sterling 1.05 million) consist mainly of staff