Orbital Engine Corp Ltd Reports 1997/98 Financial Results
31 August 1998
Orbital Engine Corporation Limited Reports 1997/98 Financial Results
PERTH, Australia, Aug. 31 -- In 1997/98 Orbital
successfully delivered the two key financial objectives
set in last years Annual Report. The goals of becoming cash positive and
achieving a modest operating profit before tax and abnormal items are key
indicators of the transition of Orbital's technology into the
commercialisation and production phase.
During the 1997/98 financial year Orbital's cash balance increased by
$6.463 million and the group achieved an operating profit before interest, tax
and abnormal items of $6.279 million. We believe this is an excellent result
and is a credit to all employees in the group.
AUS GAAP US GAAP
(expressed in AUD) (expressed in USD)
1998 1997 1998 1997
$000's $000's $000's $000's
Operating revenue 62,093 25,303 37,094 17,149
Operating expenditure (55,814) (51,482) (33,249) (36,762)
Operating profit/(loss)
before abnormals 6,279 (26,179) 3,845 (19,613)
Abnormals - amortisation
of intangibles (85,426) (112,252) (1,747) (1,101)
Operating profit/(loss)
before tax (79,147) (138,431) 2,098 (20,714)
Income tax expense (9,603) (5,663) 92 (3,309)
Operating profit/(loss)
after tax (88,750) (144,094) 2,190 (24,023)
The full year profit before abnormals of $6.279 million builds upon the
result achieved for the December 1997 half year of $2.618 million. Operating
revenue during the last six months also increased substantially from $27.011
million for the first half to $62.093 million for the full year.
Across the Corporation the focus has clearly moved to the application in
production of our patented OCP technology. A culture of commerciality and
cost consciousness has further developed inside the group. In addition to the
financial achievements, a number of important milestones were achieved by our
four business units in 1997/98.
The Automotive Direct Injection Four-Stroke business unit was able to
exploit the continually growing global interest in greenhouse gases, fuel
economy and emissions control that is driving the introduction of direct fuel
injection technology. Orbital's unique reservoir of know-how, experience and
patents that has built up over 25 years of work in direct injection has been
combined with the injector manufacturing capability of Siemens. This places
Orbital in a market leadership position with this technology. Led by
Daimler-Benz, OCP technology is under evaluation throughout the automotive
world.
As announced in June this year, we have been working with Daimler-Benz in
conjunction with Siemens Automotive for over two years to apply our fuel
system to Mercedes engines. Direct injection allows manufacturers to preserve
their enormous investments in four-stroke gasoline engine plants while
evolving this engine to the next level of efficiency.
The Siemens relationship was expanded in February 1998 to create an
alliance that facilitates the supply of complete integrated systems
incorporating OCP technology to automotive customers. This expansion is an
essential pre-requisite for and primary indicator of, commercial volume
production. The Orbital/Siemens joint venture, Synerject is now fully
operational at Siemens high volume manufacturing facility at Newport News,
Virginia and is manufacturing fuel rail assemblies for Orbital's marine
customers.
The Marine and Recreational business unit concluded two landmark supply
agreements with the two largest and most important manufacturers in this
segment. In April 1998 an agreement was signed with Bombardier-Rotax covering
their "Sea-Doo" personal watercraft range, while a similar agreement was
signed in June 1998 with Mercury Marine regarding outboard engines. These
supply agreements establish OCP technology as the industry's low emissions
solution well into the next millennium.
The Motorcycle business unit advanced significantly the production
programs they have in place with manufacturers in both Europe and Asia. The
successful conclusion of these programs will see production scooters
incorporating OCP technology entering this huge global market during 1999.
The Automotive Two-Stroke business unit's Maleo project was an unfortunate
casualty of the Asian economic crisis. A comprehensive marketing effort has
demonstrated that significant potential remains for this technology in
emerging markets, city cars and electric hybrids. Orbital's Genesis program
has ensured that this technology is now fully mature and requires no further
development expenditure. This group is now fully focused on establishing and
building a market for this powerplant.
Results
For the twelve months ended 30 June 1998, Orbital recorded an operating
profit before abnormal items and income tax of $6.279 million, compared to a
loss of $26.179 million for the 1997 financial year.
Consolidated operating revenue for the twelve months to 30 June 1998
increased by 145% to $62.093 million from $25.303 million in 1997. The
substantial increase in revenue from trading operations (1998: $52.592
million; 1997: $22.376 million) is attributed to income earned from automotive
four-stroke customers, growth in earnings from the supply of fuel systems to
marine and recreation production customers, and income associated with the
Deutsche Morgan Grenfell (DMG) Technology transactions discussed below.
Consolidated operating expenditure increased by 8% to $55.814 million from
$51.482 million in 1997. The 1998 expenditure includes $5.294 million in
relation to the written down value of assets sold. Excluding this item, 1998
operating expenditure is $50.520 million, a reduction of $0.962 million
compared to 1997. The reduction in expenditure is noteworthy given the
substantial increase in revenue from trading operations.
Orbital's result after abnormal items continues to be impacted by
significant amortisation charges as we progress the alignment of our financial
reporting under Australian and United States Generally Accepted Accounting
Principles (AUS GAAP and US GAAP). These intangibles are not recognised under
US GAAP.
Abnormal expenses totalling $85.426 million were recorded in relation to
amortisation of cash expenditures on Patents, Licenses and Technologies
($32.974 million) and Patents, Licenses and Technologies arising from
corporate restructurings ($52.452 million).
Orbital's intangibles balance at 30 June 1998 is $84.069 million. This
balance will be fully eliminated through amortisation charges over the course
of the 1999 financial year.
Orbital recorded an income tax expense of $9.603 million incorporating an
income tax credit of $21.952 million and abnormal tax expenses of $16.114
million arising from the DMG Technology transactions and $1.584 million from
withholding tax payable. This was offset by the recoupment of foreign tax
credits of $5.060 million which would have expired in June 1998. In addition,
an abnormal tax expense of $18.883 million was recorded in relation to the
non-deductible amortisation of Patents, Licenses and Technologies arising from
corporate restructurings.
The operating loss after abnormal items and income tax was $88.750 million
for the twelve months ended 30 June 1998 (1997: $144.094 million).
Cash Position
Orbital's consolidated cash position improved over the last twelve months
following operating receipts from a number of customers and the DMG
transactions. As at 30 June 1998, Orbital's cash balance was $27.789 million
compared to $21.326 million at 30 June 1997.
Orbital's cash and receivables total for 1998 improved by 49% from $32.385
million to $48.276 million.
Orbital's cash balance as at the date of this release is in excess of
$50 million.
Convertible Debenture
In July 1998, Orbital announced it had signed an agreement with an
institutional investor to raise US$20 million for the provision of working
capital. These funds will be raised through the issue of a 3% redeemable
subordinated convertible debenture. This debenture will be issued in two
tranches of US$10 million each and is convertible into shares at any time
within three years. The first tranche was received in August 1998.
The conversion price of the first tranche, if converted within the first
six months of issue, is $0.94 if converted into ordinary shares and US$4.50 if
converted into American Depositary Receipts (ADRs). If converted after six
months, the conversion price is at market prices.
The second tranche will be issued when a pre-determined share price has
been achieved, or by mutual agreement of both parties. The conversion price
of the second tranche, if converted within the first six months of issue, is
$1.38 if converted into ordinary shares and US$6.60 if converted into ADRs.
If converted after six months, the conversion price is at market prices.
The provision of these funds will ensure that Orbital can respond to all
the opportunities that have recently emerged and provide funding for future
expansion as production increases.
Deutsche Morgan Grenfell Transactions
Orbital's working capital reserves received a $14.817 million injection
during the year as a result of a strategic investment program undertaken by
Deutsche Morgan Grenfell (DMG), part of the global Deutsche Bank group. Under
the terms of these transactions, DMG will provide a further $3.680 million
during the 1999 financial year. The funds will be directed at increasing the
prospect, rate and timing of widespread adoption of OCP technology in the non-
automotive sectors. The net impact of these transactions on Orbital's 1998
profit before tax and abnormals is approximately $12 million.
Investor Relations
The developments in our relationships with Siemens Automotive and Daimler-
Benz created enormous interest in the German financial markets. The interest
led local market makers to list Orbital on German "over the counter" markets.
Orbital's ordinary shares are now traded on the Frankfurt Stock Exchange and
ADRs traded on the Berlin Stock Exchange.
On 21 July 1998, Orbital's largest shareholder, BHP sold a significant
portion of their holding as part of their $3 billion sale of non-core assets.
BHP remain Orbital's largest shareholder with approximately 9.5% of
outstanding share capital.