Orbital's Half Year Results and Review of
Operations
PERTH, Australia, Feb. 23 On 19 December 2000, Orbital
Engine Corporation announced a forecast loss for the half-year
ended 31 December 2000 of A$3 million subject to the successful completion of
a number of negotiations.
This forecast was based on the presumption that income arising as a result
of these negotiations would be recognised in the first half-year. In order
for such income to be recognised, accounting standards dictate that
negotiations must be finalised prior to completion of the Company's Statutory
Accounts. It is now clear that these conditions will not be met, hence
Orbital now reports a loss of A$16.2 million for the half year.
Overview
Orbital Engine Corporation's financial results for the six months to
31 December 2000 reflect a continued trend towards sustainable revenue streams
and effective cost control. However as outlined above, negotiations that were
anticipated for completion prior to the signing of the Statutory Accounts have
not been finalised. This has significantly impacted the revenue recognised in
the half year result and highlights the difficulty in predicting, and the
lumpy nature of, license fee revenue. Orbital is continuing its commercial
discussions with various customers and working towards the finalisation of
these in a timely manner and in a way that maximises both short and long term
income of Orbital.
On 22 December 2000 the US based Outboard Marine Corporation (OMC) filed
for protection under Chapter 11 of the US Bankruptcy Code. This has affected
our result for the half year by A$2.4 million, being provision in full for
non-trade receivables from OMC.
Notwithstanding the disappointing result, total operating revenue from
Orbital's three key customer driven areas -- licensing and royalties, system
sales and engineering -- increased by 2% from $23.8 million to A$24.3 million
despite licence fee revenue being well down on last year.
System sales revenue in our Marine and Recreation division has almost
tripled with increasing margins earned. Orbital expects this sales trend to
continue with increasing demand and product launches from both new and current
customers. Tightening of emissions controls and positive in-field response
assist in driving this growth.
As outlined at the last AGM, the rapid increase in the number of
commercial products using Orbital technology required the Company to invest in
product development and an expansion of Synerject's engineering facilities,
specifically in the motorcycle business. As a result, Orbital's share of
Synerject's net loss increased to A$6.6 million. While this loss is not
unexpected, the company continues to review its cost structure. In this
regard as volumes increase, Synerject is renegotiating their contracts with
suppliers whilst also addressing price with customers. The positive impact of
these initiatives will begin to crystallise over the next six months.
From a commercial perspective, the number of new products using Orbital's
direct fuel injection technology increased during the first half-year and
significant progress was made with key customers and partners. Engineering
revenue remained steady compared to last year, however activity has increased
in the automotive 4-stroke area, and our programs are providing outstanding
results to our customers.
The signing of a Memorandum of Understanding (MOU) with Delphi Automotive
Systems and the unveiling by Saab Automobiles of its new engine control system
reveal the continuing progress made in the 4-stroke automotive market. A
significant breakthrough was also achieved with the signing of an MOU with
Sundiro to manufacture automotive 2-stroke engines for third party customers
in China.
The Motorcycle division continues to experience solid results with
Sundiro's production launch of Orbital-equipped scooters in China during
December and Peugeot displaying a clean scooter at the Munich motorcycle show
in September. Aprilia DITECH scooter production continues to grow and the
increasing media coverage is extremely complimentary of both the product and
technology. The increasing attention being paid to Orbital's technology from
non-licensed motorcycle two-stroke and four-stroke customers is being driven
by the technical and commercial success of the Aprilia product.
Bombardier-Rotax introduced the Utopia(TM) 185 and the Challenger 2000
sports boats this half, employing OptiMax(TM) engines from Mercury Marine.
This brought to 11 the total number of Orbital-equipped products in the marine
and recreation sector. The bankruptcy of OMC, which had been promoting an
alternative direct injection system, presents new opportunities for Orbital.
These are now being actively pursued.
Orbital continues to work with the CarbonBank Group to finalise
documentation and strategy for carbon credits trading. Orbital remains
confident that carbon credits generated by its technology will provide future
benefits to its shareholders.
Financial Results
Orbital's operating loss after tax attributable to members for the
half-year ended 31 December 2000 is A$16.2 million. This compares to a profit
of A$0.3 million for the corresponding period last year. The following table
summarises the half-year results.
AUS GAAP AUS GAAP
DEC 2000 DEC 1999
A$000's A$000's
Revenue from Operating Activities
Royalties & licensing 2,379 9,367
System sales 14,078 5,737
Engineering 7,834 8,677
24,291 23,781
Other Revenue
Proceeds on sale of fixed assets 247 532
Other 185 136
432 668
Total Revenue (Excluding Interest) 24,723 24,449
Cost of System sales (13,125) (5,533)
Gross Contribution 11,598 18,916
Overhead Expenses (19,915) (16,568)
Earnings before interest, tax,
depreciation, amortisation
& Synerject (8,317) 2,348
Depreciation & Amortisation (1,455) (1,479)
Prepaid Marketing Expense (1,159) (667)
Share of Synerject Net Loss (6,606) (579)
Net Interest Income 1,331 547
Operating profit (loss) before tax (16,206) 170
Income tax credit 251 123
Operating profit (loss) after tax (15,955) 293
Outside equity interest (268) --
Operating profit (loss)
after tax attributable
to members (16,223) 293
Total revenue for the half year to 31 December 2000 increased by 1% from
A$24.4 million to $A24.7 million. Operating revenue from Orbital's three key
customer driven areas of licensing and royalties, system sales and engineering
increased by 2% from $23.8 million to A$24.3 million despite a significant
fall in license fees.
The gross contribution, defined as total revenue less the cost of system
sales, decreased by 39% from A$18.9 million to A$11.6 million due to the
decline in license fees. It is noteworthy that as our range of commercial
products has expanded, we have seen not only a marked increase in total system
sales revenue (+145%) but also an improvement in sales margins from 4% to 7%.
Cash overhead expenses have decreased due to a cost control regime
implemented throughout the company. However the total overhead expenses for
the period increased from A$16.6 million in 1999 to A$19.9 million, primarily
due to two significant non-cash items:
* With the weakness of the Australian dollar, the Company incurred foreign
exchange losses of A$1.1 million on translation of certain balance sheet
items.
* A$2.4 million provision for doubtful debts in respect of an amount owing
from OMC, as discussed earlier.
The Share of Synerject Net Loss relates to Orbital's 50% share of the
joint venture with Siemens Automotive, Synerject. This charge increased to
A$6.6 million in 2000 from A$0.6 million in 1999. This amount reflects the
significant industrialisation and engineering expenses required to introduce
new products in the market place. Continuing implementation of worldwide
emissions regulations will drive further investment in Synerject as the
company fully exploits this opportunity.
Orbital recorded an income tax benefit of A$0.3 million. This excludes
future income tax benefits of A$4.2 million being losses incurred in Australia
during the half-year which have not been booked as recoverability is not
virtually certain. Unbooked tax losses in the US amount to US$50 million
(30 June 2000: US$48 million).
Treatment of certain licence revenue and marketing expenses included in
the above result, differs under Australian and US accounting standards.
Under Australian standards revenue of A$7.0 million and expenses of A$0.7
million was included in the 1999 half-year result. Under US accounting
standard EITF 99-17, Accounting for Advertising Barter Transactions, these
amounts were excluded from the US accounts. Over the following three years
the recognition of additional expenses under Australian accounting standards
will align the US and Australian accounts. In the half-year ended 31 December
2000 an expense of A$1.2 million was recognised with respect to this
transaction.
Under US GAAP, Orbital's December 2000 half year loss after income tax was
US$9.0 million (1999: US$4.1 million). The following table summarises the
2000 financial year results under United States Generally Accepted Accounting
Principles (GAAP).
US GAAP US GAAP
DEC 2000 DEC 1999
US$000's US$000's
Revenue from Operating Activities
Royalties & licensing 1,323 1,645
System sales 7,827 3,763
Engineering 3,572 4,770
12,722 10,178
Other Revenue
Proceeds on sale of fixed assets 137 349
Other 104 90
241 439
Total Revenue (Excluding Interest) 12,963 10,617
Cost of System sales (7,298) (3,630)
Gross Contribution 5,665 6,987
Overhead Expenses (11,073) (10,869)
Earnings before interest, tax, depreciation,
amortisation & Synerject (5,408) (3,882)
Depreciation & Amortisation (809) (970)
Share of Synerject Net Loss (2,890) 542
Stock Compensation (318) (329)
Net Interest Income 740 359
Operating profit (loss) before tax (8,685) (4,280)
Income tax credit/(expense) (177) 230
Operating profit (loss) after tax (8,862) (4,050)
Outside equity interest (149) --
Operating profit (loss) after tax attributable
to members (9,011) (4,050)
Review of Operations
Automotive Four-Stroke
The signing of the MOU with Delphi Automotive Systems and the unveiling by
Saab Automobiles of its new engine control system reveal the significant
progress the Automotive Four-Stroke business unit has made. These
developments follow the impressive results achieved by Orbital's four-stroke
test vehicles which have demonstrated a unique combination of fuel economy and
exhaust emissions reduction.
Saab was the first major automotive producer to publicly display its own
product incorporating Orbital's four-stroke direct fuel injection technology.
The Saab Combustion Control (SCC) system was unveiled at the prestigious Paris
Motor Show in September, and subsequently brought to Australia for the Sydney
Motor Show in November. Saab's motivation in developing SCC was a desire to
lower fuel consumption and radically reduce exhaust emissions without
impairing engine performance.
Throughout the half-year, the group completed a series of vehicle
demonstrations in the USA and Europe to major automotive companies so that
engineers and managers alike could witness first-hand the capability and
benefits of Orbital's four-stroke direct fuel injection technology.
Automotive Two-Stroke
The Automotive Two-Stroke business unit achieved a significant
breakthrough with the signing of an MOU with Hainan Sundiro Motorcycle to
manufacture automotive two-stroke engines for third party customers in China.
The implementation of this agreement is conditional on securing customer
commitments to purchase engines from Sundiro, however, this overcomes a major
hurdle Orbital faces in commercialising its technology. Consequently Orbital
has been very active in China with engine evaluations actively underway with
two lead customers.
Complementing the recent Sundiro announcement, Texmaco continues to make
good progress in establishing a manufacturing plant for automotive two-stroke
engines in Indonesia. This is taking a longer period of time than originally
anticipated due to the on-going effects of the Asian economic crisis in 1997,
and the restructuring of the Texmaco group under the guidance of the
Indonesian Bank Reconstruction Agency. However, Texmaco's three-cylinder and
two-cylinder test vehicles continue to accumulate good mileage while
specialised manufacturing processes are being simultaneously developed
in-house. Following completion of these manufacturing activities, the first
prototype three-cylinder engines are expected in the future.
The primary focus of Orbital's business development activities continues
to be the emerging markets of the Asia-Pacific region, China and Eastern
Europe, with both engine manufacturers and buyers being targeted. In addition
to the activities previously noted, engine and vehicle evaluations were also
recently completed in Russia and related opportunities are being actively
pursued.
Marine and Recreation
During the first half-year, the Marine and Recreation group saw the market
introduction of two new products from Bombardier-Rotax; the Utopia(TM) 185 and
the Challenger 2000 sports boats employing OptiMax(TM) engines from Mercury
Marine.
Two of our customers received awards during the half year, due in a large
part to their use of Orbital's leading edge direct fuel injection systems. US
marine industry publication Motor Boating awarded the Tohatsu 50hp two-stroke
engine and a Nissan-branded engine employing the same technology an Editor's
Choice Award for their "innovation, ingenuity and imagination."
The Bluewater Network in California announced in November that Mercury
Marine had won its first ever "Excellence in Environmental Engineering Award"
recognising its recent commitment to cease traditional two-stroke engine
production by 2006. Mercury's OptiMax engines, which are fitted with Orbital
technology, reduce emissions by up to 75% while improving fuel economy by up
to 60%.
From a strategic point of view, OMC's financial difficulties generate new
opportunities for Orbital in terms of future licensees who may have previously
considered the competing FICHT high-pressure direct injection (HPDI)
technology system. Mercury is already experiencing a significant lift in
demand with a number of OMC dealers switching camps.
The Marine and Recreation group is also actively looking into the
snowmobile sector as emissions from today's products are a significant
concern. Snowmobiles represent a further opportunity for Orbital technology
to have a positive impact on the environment.
Motorcycle and Scooter
A major achievement for the Motorcycle group during the first half was the
production launch of Hainan Sundiro Motorcycle's HI-JETOR(TM) scooter, which
uses Orbital direct fuel injection technology supplied by Synerject in the
USA. The HI-JETOR(TM) engine reduces pollutant emissions by 80% without the
use of a catalytic converter while at the same time reducing fuel consumption
by up to 40%. Sundiro is the first motorcycle company to launch
environmentally clean direct fuel injection technology in China.
Earlier in the year Peugeot Motorcycles, Europe's third largest motorcycle
manufacturer, announced its intention to develop clean scooters for the
European market. Peugeot scooters fitted with Orbital technology will give
customers significant fuel economy improvement and emissions capability for
present and proposed regulatory requirements while retaining the desirable
power-to-displacement ratio of a two-stroke engine. Peugeot Motorcycles
displayed a direct injected product at the motorcycle exhibition in Munich in
September.
Production of the Aprilia SR 50 DITECH(TM) scooter -- the first scooter to
be launched with Orbital technology -- continues to grow and the increasing
media coverage is extremely complimentary of both the product and the
technology. Reflecting the success and satisfaction of this first launch,
Aprilia is continuing to develop further DITECH(TM) products for release in
the future. The successful Aprilia product launch has created much interest
from motorcycle manufacturers and component suppliers worldwide.
Orbital is a leading international developer of engine technologies using
direct in-cylinder fuel injection and lean-burn systems for enhanced fuel
economy and lower emissions. The company serves the worldwide automotive,
marine, recreational and motorcycle markets. Headquartered in Perth, Western
Australia, Orbital stock is traded on the Australian Stock Exchange (OEC), the
New York Stock Exchange (OE) as well as the Berlin (ORE) and Frankfurt (OREA)
Exchanges.
For further information:
ORBITAL: Email - info@orbeng.com.au
Australia: Mr. David Southam
Tel: +61-8-9441-2311
USA: Ms. Roberta Saling
Tel: 517-423-6623
Website - http://www.orbeng.com.au
