(TRBO) Turbotec Products

Turbotec Products Plc

 ("Turbotec" or "the Company")

Half Yearly Report

Turbotec Products Plc (TRBO.L), the designer and manufacturer of high performance heat exchangers and Tru-Twist® heat transfer tubing, today announces its interim results for the six months ended 30 September 2011.

Highlights

Overview

First half sales of $11.7 million were below the $12.2 million achieved in the comparable period last year, with shipments to major market segments at decreased levels and unit volumes down by approximately 5% overall.  The Company generated profit before tax of $0.4 million for the first half, (2011: $1.2 million) which includes the final payment of costs of $336,000  (£210,000 ) in relation to the Company's successful defence of the litigation brought against it by its major shareholder, Thermodynetics Inc.  The aggregate cost recovery from this litigation totaled $837,000 (£560,000), which includes a payment on account in the prior year.

 While the Company had benefited in previous years from a robust housing market and more flexible lending practices, current operations are now negatively impacted by reverse trends.  The continuing weak economy, coupled with tight credit markets, has prolonged the weak housing market for both new construction and resale properties. Other markets served by the Company have been similarly impacted by the economy. The residential geothermal heat pump market trails previous year's shipments, despite the continuing 30% tax credit incentive in the United States towards the installation of such systems.  The demand for swimming pool heat pump applications continues to be depressed and with no outside stimulus package anticipated, shipments to this market are expected to remain at reduced levels through the foreseeable future.  The product mix has shifted to components used in commercial heating and cooling applications which typically are of lower efficiency when compared to the high efficiency residential applications; these products are priced at points resulting in lower gross margins.  

The Company has also been experiencing increased competition in certain of its markets and while taking action to protect its position, recent inroads made by domestic and overseas manufacturers into the Company's core business markets have become more frequent.  The Company has vigorously worked to recover lost market share through some aggressive contract negotiations and has recently secured long term agreements with some of its major customers which are expected to positively impact the business outlook for the long term.

In April 2010 the Company acquired a new facility in Hickory, North Carolina, and has now completed the majority of the building structural upgrades to accommodate its manufacturing requirements.  Operations at the nearby rental facility were moved into the new building.  Upgraded machinery and newly acquired production equipment is being transferred from Connecticut to Hickory; this process is expected to continue over the next 12 months.  Although the Company has extended its previously announced timetable for the move to Hickory, certain actions were taken this past summer, including personnel changes, to address the situation.  These moves have resulted in a positive effect on the transition process. 

Competitive pressures in the marketplace have affected customer pricing, which combined with increased operating costs reflecting expenses related to the transition of operations to Hickory, including delays created by the changes in senior staff, resulted in a 9% decrease in gross margin as a percentage of sales compared to the same period of the prior year. 

The Company is now in a position to offer some of the same products from both facilities;  the testing and qualification programs for the initial production runs from the new facility have started and are expected to accelerate every month as we proceed with the shift of product shipments from Windsor, Connecticut to Hickory, North Carolina.

The additions of senior staff in sales and engineering are starting to significantly enhance the Company's selling and technical expertise and we are now able to respond to the continuous higher efficiency product requirements from our existing customer base while also preparing to target new product applications which will expand our business prospects in future years.

Commenting on the interim results, Sunil Raina, Managing Director of Turbotec Products, said: "The Company is pleased to continue its performance record of generating profits in each reporting period since joining the AIM market.  In these extremely turbulent economic times; we continue to focus our efforts in protecting our market share in an extremely competitive environment for heating, ventilation and air conditioning components while at the same time developing our new manufacturing facility which is expected to help improve the Company's growth prospects. "

-Ends-

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Electronic copies of this announcement can be obtained from the Company's website www.turbotecproducts.com.

Chairman's Statement           

We continue to face a challenging business landscape driven by weak global economic conditions and softness in our core markets.  The housing market in particular remains extremely weak and there has been no recovery in the swimming pool and marine markets.

Fluctuating metal prices have continued to challenge us but we are taking opportunities to purchase forward as prices allow, keeping our costs as low and consistent as possible.

Competition, both domestic and foreign, continues in our market segments and we have moved aggressively to combat this by entering into longer term supply deals with our major customers.  We are continuing to maintain a dual manufacturing capability in Windsor and Hickory and transfer operations to Hickory only when our customers have fully tested the items produced there.  This process has taken longer than we had first estimated and consequently we have extended our lease in Windsor to December 31 2012, at very favourable rates.

Our turnover for the period dropped to $11.7 million from $ 12.2 million for the comparable period in 2010.  Gross margins fell from 25% to 16% as a result of increased raw material costs and our multi-plant transitional operating structure, resulting in an operating profit of $0.4 million. (2010: $1.2million)

I am pleased to report that the long running legal matter with our former parent company, Thermodynetics Inc. has finally been settled with a final payment of £210,000 ($336,000) received during July 2011.  The Company has received a total of £560,000 ($837,000) as a full and final settlement of our bill of costs, which totaled £683,000.

I would like to thank Sunil Raina and his team for working extremely hard to deliver these results in a very challenging environment.  Hard decisions were made that reduced profit margin in the short term, but protected the Company and the customer base.  We should see the benefits in FY 2013 as production moves to our lower cost manufacturing facility in Hickory.

The Board would also like to thank our many dedicated employees, without whose effort all our goals and aspirations would not be possible.

Rob Lowe

Chairman

9 December 2011   

TURBOTEC PRODUCTS PLC

UNAUDITED CONSOLIDATED STATEMENT OF TOTAL COMPREHENSIVE INCOME

TURBOTEC PRODUCTS PLC

UNAUDITED CONSOLIDATED statement of changes in equity

TURBOTEC PRODUCTS PLC

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

TURBOTEC PRODUCTS PLC

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

1.      BASIS OF PREPARATION

The AIM Rules for Companies require that the annual consolidated financial statements of the company for the 52 week period ending 31 March 2012 be prepared in accordance with International Financial Reporting Standards adopted for use in the EU ("IFRS"). This half year financial statement has been prepared on a consistent basis in accordance with the accounting policies adopted in the accounts for the year ended 31 March 2011 and on the basis of the recognition and measurement requirements of IFRS in issue that are either endorsed by the EU and effective (or available for early adoption) at 9 December 2011 and hence on the basis of IFRS that are expected to apply in preparation of the accounts for the year ending 31 March 2012. The preparation of the interim financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses.  Actual results may differ from these estimates.  These interim financial statements have neither been audited nor reviewed pursuant to guidelines issued by the Auditing Practices Board. 

The comparatives for the full year ended 31 March 2011 are not the Company's full statutory accounts for that year.  A copy of the statutory accounts for that year has been delivered to the Registrar of Companies.  The auditors' report on those accounts was unqualified and did not contain a statement under 498(2) or 498 (3) of the Companies Act 2006.

2.     TAXATION

Analysis of charge in period:

Tax reconciliation:

The effective tax rates for the periods are different than the standard rate of corporate tax in the UK (28% for all periods presented). The differences are attributable to the following:

3.      BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE

The calculations of basic and diluted earnings per ordinary share are based on the profit for the financial year and the weighted average number of equity voting shares in issue and dilutive shares during the period.

4.         INTANGIBLE ASSETS

Goodwill relates to the acquisition of a technology company acquired by the US parent company in 1985.  The operations of that company were subsequently integrated into the company's primary manufacturing facility.  The technology acquired continues to be used by the group as an integral part of the engineering and manufacturing of its current product line. 

In accordance with IAS 36, the Group regularly monitors the carrying value of intangible assets. A review was undertaken at 31 March 2011 to assess whether the carrying value of assets was supported by the net present value of cash flows derived from those assets using future cash flow projections.   Further to the review, there have been no impairments to the carrying amount of goodwill in any period.  The deferred development costs will be amortized over the expected lives of the related products once sales of these products commence on a commercial level. 

5. CASH AND CASH EQUIVALENTS

The Company has an overdraft facility in place. Approximately $2,122,000, $3,250,000 and $2,860,000 was available for borrowing against the Company's revolving line of credit at 30 September 2011, 30 September 2010, and 30 March 2011, respectively.

6. LONG TERM BORROWINGS

The bank loans and overdraft are secured by a fixed charge over the assets of the Group.  In addition, the Group must comply with certain non-financial covenants, non-compliance with which would be considered an event of default and provide the bank with the right to demand repayment prior to the loan's maturity date.

In April 2010 the Group entered into a mortgage agreement with its bank as the primary source of funding for the Hickory, North Carolina facility. The mortgage was in the amount of $2,215,000, repayable under a 25 year amortization schedule with a maturity date of April 2015. Interest for the first three years has been fixed at a rate of 5.4% with a floating rate thereafter. In June 2011 the Group's bank waived non-compliance with a covenant that existed at 31 March 2011. Therefore, although the entire balance of the mortgage is shown above as a current liability at 31 March 2011, the loan remains repayable under its original terms, as reflected in the debt maturity table below.

During the current year the Company received funding of approximately $532,000 for manufacturing equipment purchases under a line of credit arrangement with its bank that provided for a total of $1,000,000 to be advanced for qualified purchases. Under the terms of the agreement, interest only is payable at a floating rate on advances made through April 2012, with the aggregate principal amount repayable in 48 successive equal monthly installments.

The interest rate on floating rate financial liabilities is linked to the bank's prime rate.  The interest rates charged at the balance sheet date are as follows:

Maturities of long term borrowings over the next five years are as follows (including interest payments at current rates):

At 30 September 2010 the balloon maturity of the mortgage was not included in the above table as the payment date was beyond five years.   

    7. LITIGATION JUDGMENT

In May 2010 the Company was notified that it was successful in its defence of the claim brought by Thermodynetics Inc. in relation to the payment of administration fees under the Relationship Agreement. The company was awarded substantial costs, including an order of interim payment on account of 350,000 pounds sterling ($501,000) that was received by the Company in fiscal year 2011.  In July 2011 an additional 210,000 pounds sterling ($336,000) was paid by Thermodynetics, representing the balance of the cost award.

8. APPROVAL

This interim report was approved by the Directors of the Company on 9 December 2011.  Copies may be obtained on the Company's website, www.turbotecproducts.com, or from the Company Secretary.