Orbital Engine Half Year Financial Results and Review of Operations
24 February 1998
Orbital Engine Half Year Financial Results and Review of Operations
DETROIT, Feb. 24 --
HIGHLIGHTS
During the six months to 31 December 1997, Orbital Engine Corporation
Limited (Orbital) has continued to record progress on the path
towards expanded use of the patented Orbital Combustion Process (OCP)
technology by building on the initial market entry in the marine market.
Following on the formation early last year of the Synerject manufacturing
joint venture, earlier this month Siemens Automotive and Orbital signed a
Letter of Intent to form a strategic alliance to deliver complete
Orbital-based engine management systems and associated systems integration
expertise to automotive companies that license OCP technology. This further
strengthening of the relationship will ensure that Orbital has in place the
structures and relationships to fully meet future customer requirements.
Also this month, Orbital signed a Memorandum of Understanding with
English-based Lotus Engineering which enables Orbital and Lotus to capitalise
on the geographic location and extensive facilities of each company to fully
exploit their complementary engineering and technology expertise.
Importantly, Lotus will assist Orbital in the marketing and engineering
support of Orbital Customers. The additional resources made available will be
most valuable to Orbital in addressing the expected heavy level of customer
development requirements in the next few years; and brings a highly regarded
partner to Orbital.
The Directors are pleased with the Company's progress towards achieving
the goals of becoming cash positive and achieving a modest operating profit
before abnormal items and income tax for 1997/98.
As at 31 December 1997, Orbital's cash balance was $25.303 million
compared to $21.350 million at 30 June 1997. Orbital recorded an operating
profit before abnormal items and income tax of $2.618 million for the six
months ended 31 December 1997, compared to a loss of $12.306 million for the
corresponding period last year.
The Company's result after abnormal items continues to be impacted by
significant amortization charges as Orbital continues the process of aligning
its financial reporting under Australian and United States Generally Accepted
Accounting Principles (AUS GAAP and US GAAP). These intangibles are not
recognized under US GAAP.
The following table summarizes the December 1997 results and highlights
the differences under Australian and United States standards.
FINANCIAL
US GAAP AUS GAAP AUS GAAP
Dec. 1997 Dec. 1997 Dec. 1996
A$000's A$000's A$000's
Operating revenue 25,754 27,011 17,043
Operating expenditure 24,463 24,393 29,249
Operating profit/(loss) before abnormals 1,291 2,618 (12,306)
Abnormals - 42,549 69,041
Operating profit/(loss) before tax 1,291 (39,931) (81,347)
Income tax expense 3,941 13,797 12,573
Operating profit/(loss) after tax (2,650) (53,728) (93,920)
Results
Consolidated operating revenue for the six months to 31 December 1997
increased by 59% to $27.011 million from $17.043 million in the six months to
31 December 1996. Orbital recorded an operating profit before abnormal items
and income tax of $2.618 million for the six months ended 31 December 1997,
compared to a loss of $12,306 million for the corresponding period last year.
The operating profit is attributed to income earned from automotive
four-stroke customers, Orbital's continued cost reduction, and income
associated with the Deutsche Morgan Grenfell (DMG) Technology Investment
discussed below.
Abnormal expenses totaling $42.549 million were recorded in relation to
amortisation of cash expenditures on Patents, Licences and Technologies
($16,323 million) and Patents, Licences and Technologies arising from
corporate restructurings ($26.226 million). As shareholders will be aware,
over the last two years Orbital has sought to more closely align Australian
accounting treatments with the treatments provided under United States
Generally Accepted Accounting Principles. As a result of this process,
Orbital is continuing the elimination of all intangibles arising from cash and
non-cash transactions by amortising these amounts over the period 1 January
1996 to 30 June 1999.
Orbital recorded an income tax expense of $13.797 million incorporating an
income tax credit of $10.020 million and an abnormal tax expense of $15.512
million arising from the DMG Technology investment. This was offset by the
recoupment of foreign tax credits having a finite life of $1.575 million. In
addition, an abnormal tax expense of $9.441 million was recorded in relation
to the non-deductible amortization of Patents, Licences and Technologies
arising from corporate restructurings.
The operating loss after abnormal items and income tax was $53.728 million
for the six months ended 31 December 1997 (1996: $93.920 million).
Cash Position
Orbital's consolidated cash position improved over the last six months
following operating receipts from a number of customers, continued cost
reduction efforts, and the DMG investment. As at 31 December 1997, Orbital's
cash balance was $25.303 million compared to $21.350 million at 30 June 1997.
FINANCIAL
Deutsche Morgan Grenfell Investment in Orbital
Orbital's working capital reserves received a A$12 million injection as a
result of a strategic investment program undertaken by the global investment
bank, Deutsche Morgan Grenfell (DMG). Under the terms of these Investments,
DMG will invest a further A$6 million over the next two years. The funds will
be directed at increasing the prospect, rate and timing of widespread adoption
of OCP technology in the non-automotive sectors.
Under the terms of this arrangement, Orbital was not required to establish
or increase loan facilities or issue any new equities. DMG will earn a return
on its investment through partial access to non-automotive royalty streams and
profits generated from the sale of fuel systems to these markets. Management
believes the ultimate return to shareholders will be enhanced via this
investment as injection of funds at the current stage of the development
process will not only bring forward revenue streams but also increase the
prospect of total revenue to be earned in these markets.
STRATEGIC ALLIANCES
Siemens Automotive
On 19 February 1998, Orbital Engine Corporation and Siemens Automotive
announced the signing of a Letter of Intent to form a strategic alliance.
This alliance will ensure that total systems are available to meet the
requirements of automotive vehicle manufacturers that wish to release
Orbital/Siemens direct fuel injection systems in the very near term.
Under this arrangement a key component of the system, the fuel rail
assembly, will be sourced from the Synerject joint venture established by
Orbital and Siemens in February 1997. Synerject is now fully operational and
shipping product from Siemens plant in Newport News, Virginia.
Lotus Engineering
Orbital has also announced the signing of a Memorandum of Understanding
with Lotus Engineering (the world leading automotive consultancy engineering
division of the British company Group Lotus Limited). Through this alliance,
Orbital and Lotus will be offering a complete turn-key package comprising the
unique Orbital Combustion Process gasoline Direct Injection (OCP DI) System
along with the world class engineering capability of Lotus.
REVIEW OF OPERATIONS
Automotive Four-Stroke
Orbital's ability to meet the year 2000 European Stage 3 emissions
regulations combined with a demonstrated 15% fuel economy improvement has
created extensive European Interest in the application of OCP technology to
the conventional four-stroke automotive engine. Orbital is involved in
engineering programs to demonstrate the technical capability of the technology
with six high profile automotive customers. Several customers are well
advanced with technical programs and have progressed to the discussion of
commercial terms. The recent Letter of Intent combined with the existing
Synerject alliance (with Siemens Automotive) is a critical factor in the
development of this market.
Automotive Two-Stroke
Orbital's 2.0 litre, six cylinder, two-stroke automotive engine has been
used as the powerplant for the aXcess Australia show car recently unveiled in
Canberra, Australia. The car is a cooperative effort between the premier
automotive component manufacturers in Australia, and will be shown world wide
at events such as the Society of Automotive Engineers Congress in Detroit.
Full details of the vehicle are available on its website.
(http://www.axcessaustralia.accp.net.au).
Shareholders will be aware that Orbital's 1.2 litre, three cylinder
two-stroke engine was selected as the powerplant for the Indonesian national
car project, named Maleo. As a direct result of the Asian economic crisis,
the Indonesian government has placed the Maleo program on hold. Consequently,
Orbital has ceased the allocation of resources to this program. Regardless of
the future of Maleo, the project has yielded significant engineering services
revenue to date.
As a result of the successful Genesis program, the automotive two-stroke
engine is now a mature production ready powerplant. The marketing efforts of
this business unit will continue to focus on these emerging manufacturers,
with opportunities currently existing in China, South-East Asia, and Europe.
Renewed possibilities also exist in the flourishing European minicar market
and the emerging electric hybrid market.
Motorcycles
Orbital has programs underway and has made deliveries to two European and
three Asian manufacturers. Our lead customer (an Asian manufacturer) has been
licensed by Orbital and has a well advanced production program running. To
date all technical targets have been met.
Orbital anticipates that the 1999 introduction of emissions regulations in
both Europe and Asia will accelerate the rate of acquisition of motorcycle
licensees in the near future. These markets, particularly the high growth
regions of India and China, represent significant volume potential for
Orbital. Increased volume will facilitate the use of common componentry
across business units and allow Orbital to manage the costs of development and
production.
Marine and Recreation
Marine and recreational products have lead the way in the
commercialisation of OCP technology. Mercury Marine now utilise the
technology on their 225, 200, 150 and 135 horsepower models. Bombardier-Rotax,
the world's largest manufacturer of personal watercraft, and Tohatsu
Corporation, Japan's second largest manufacturer of marine outboard engines,
are also well advanced with production intent programs. Emission regulations
imposed by the Environmental Protection Agency in the United States, calling
for a 75% reduction by the year 2006, are the primary drivers in the adoption
of direct injection technology.
Production in this business unit is anticipated to be the first to achieve
mature volumes. The production requirements of Mercury Marine are already
being met by Synedect. Negotiations are underway to obtain long term supply
contracts from our customers for use of OCP products in these markets.
SOURCE Orbital Engine Company