Orbital Engine Reports Half Year Results And Review of Operations
28 February 2000
Orbital Engine Corporation Limited Reports Half Year Results And Review of Operations
PERTH, Western Australia, Feb. 28 -- Orbital Engine
Corporation's financial results for the six months to 31 December
1999 reflect a continued trend towards sustainable revenue streams and
effective cost control. The group recorded an operating profit before tax and
abnormal items of A$0.170 million, a 102% improvement over the A$8.490 million
loss recorded for the previous corresponding period.
Revenue includes continued growth in the sustainable areas of license fees
and royalties, engineering fees and systems sales. Collectively, these
revenue items increased by 23% to A$23.630 million and importantly represented
94% of total revenue for the six months. These items are directly linked to
the level of customer activity and are a strong indicator of the continued
commercial progress made with the direct fuel injection technology. The 1998
revenue figure included two significant non recurring items, namely research
and development syndication revenue and foreign exchange gains, which amounted
to A$4.829 million (US$2.957 million).
The expenditure side of the income statement shows a significant reduction
in the operating costs of the group. This reduction was foreshadowed in
January 1999 when Orbital rationalised its US operations into the Synerject
facility in Newport News, Virginia. This move is a key contributor to the
tangible cost savings demonstrated in this result. Costs of A$0.667 million
have been incurred in relation to an ongoing marketing agreement with lead
motorcycle customer, Aprilia. Aprilia are actively promoting their use of
Orbital technology, including displaying the corporate logo on the 500cc grand
prix race bike. This promotion is of tremendous strategic value in the
motorcycle industry.
Treatment of certain license revenue and marketing expenses included in
the above result, differs under Australian and US accounting standards. Under
Australian standards revenue of A$6.860 million and expenses of A$0.667
million have been included in the half year result. Under US accounting
standard EITF 99-17, Accounting for Advertising Barter Transactions, these
amounts have been excluded from the US accounts. This mandatory accounting
standard primarily discusses the treatment of advertising costs for Internet
companies. The directors believe application of this US standard is not a
true and fair reflection of Orbital's operations. Over the next three years
the recognition of additional expenses under Australian accounting standards
will align the US and Australian accounts.
The following table summarises the December 1999 results under Australian
and United States accounting standards.
AUSGAAP AUSGAAP USGAAP USGAAP
Dec 1999 Dec 1998 Dec 1999 Dec 1998
A$000's A$000's US$000's US$000's
OPERATING REVENUE
Licencing & royalties 9,367 7,079 1,645 4,334
System sales 5,737 5,734 3,764 3,511
Manufacturing 151 1,079 99 661
Engineering 8,526 6,340 4,671 3,882
R&D Income - 2,707 - 1,658
Other 1,258 3,989 825 2,442
25,039 26,928 11,004 16,488
OPERATING EXPENDITURE
Cost of System Sales 5,533 5,224 3,630 3,199
Share of Synerject JV Loss 579 1,771 380 1,084
Additional investment
in Meteor JV - 4,315 - 2,642
Redemption of
Convertible Note - 2,244 - 1,374
Operating Costs 18,757 21,864 11,274 13,432
24,869 35,418 15,284 21,731
Operating profit/(loss)
before tax and abnormals 170 (8,490) (4,280) (5,243)
Abnormals - (46,373) - (3,107)
Operating profit/(loss)
before tax 170 (54,863) (4,280) (8,350)
Income tax credit 123 5,083 230 177
Operating profit/(loss)
after tax 293 (49,780) (4,050) (8,173)
FINANCIAL RESULTS
NOTE: Comparative US$ figures are compiled in accordance with US GAAP.
As discussed above, under those standards Licensing and Royalty Revenue and
Operating Costs reflect the differing accounting treatment stipulated by
EITF 99-17. The directors believe the Australian GAAP treatment is a true and
fair reflection of the company's performance.
Results
Consolidated revenue for the six months to 31 December 1999 decreased by
7% to A$25.039 million (US$11.004 million) from A$26.928 million (US$ 16.488
million) in the six months to 31 December 1998. Both license fees and
royalties, and engineering revenues have shown strong increases, reflecting
the level of customer activity currently underway. Collectively, these
categories have increased 33% from A$13.419 million (US$8.216 million) in 1998
to A$17.893 million (US$6.316 million) in 1999.
The 1998 revenue included significant non-recurring items including income
from Research and Development Syndication arrangements which have now been
concluded (A$2.707 million (US$1.658 million)) and foreign exchange gains
primarily on funds previously drawn down under the convertible debenture
(A$2.129 million (US$1.304 million)).
Operating expenditure for the 1999 half year decreased by 30% to A$24.869
million (US$15.284 million) from A$35.418 million (US$21.731 million) for the
1998 half year. This decrease can primarily be attributed to general cost and
efficiency improvements and savings made from the closure of the Tecumseh
facilities. These general operating costs amounted to A$18.757 million
(US$11.274 million) for the 1999 half year compared to A$21.864 million
(US$13.432 million) for the 1998 half year, a decrease of 14%. In addition,
included in the 1999 half year operating expenditure is A$0.579 million
(US$0.380 million) in relation to Orbital's share of Synerject's operating
costs compared to an amount of A$1.771 million (US$1.084 million) in the 1998
half year.
Also included in the prior year operating expenditure were costs
associated with the Meteor joint venture of A$4.315 million (US$2.642 million)
and the redemption of the convertible debenture of A$2.244 million (US$1.374
million). Both of these matters have now been concluded and no further
expenditure is expected to be incurred in these areas.
No abnormal expenses were recorded for the 1999 half year. Abnormal
expenses totaling A$42.583 million (US$0.787 million) were recorded in
relation to amortisation of cash expenditures on Patents, Licences and
Technologies (A$16.357 million (US$0.787 million)) and Patents, Licences and
Technologies arising from corporate restructurings (A$26.226 million (US$nil))
for the 1998 half year. This process, of the elimination of all intangibles
arising from cash and non-cash transactions by amortisation was completed on
30 June 1999. An abnormal expense of A$3.790 million (US$2.320million) was
also recorded for the 1998 half year for the rationalisation of the US
operations.
Orbital recorded an income tax benefit of A$0.123 million incorporating an
income tax expense of A$0.318 million, and abnormal tax benefits of A$0.099
million arising from the DMG Technology investment and A$0.342 million arising
from restatement of deferred tax balances due to changes in tax rates. Under
US GAAP Orbital recorded an income tax credit of US$0.230 million.
The operating profit after abnormal items and income tax was A$0.293
million (US$4.050 million loss) for the six months ended 31 December 1999
(1998: A$49.780 million loss (US$8.173 million loss)).
Cash Position
As at 31 December 1999, Orbital's cash balance was A$23.488 million
(US$15.408 million) compared to A$32.186 million (US$21.278 million) at 30
June 1999. As in the previous year, cash has been utilised in the first half,
with the main cash in flows occurring in the second half of the year. This
trend is expected to continue in this financial year.
REVIEW OF OPERATIONS
Across all business units, Orbital continues to make excellent progress
toward the very real objective of high volume application of its clean fuel
efficient engine technology. The non automotive business units continue to
lead this process with product sales imminent from Aprilia and Bombardier, and
Tohatsu following closely. Orbital's standing in the automotive industry has
increased markedly with impressive fuel economy and emissions results of the
demonstrator vehicle. Orbital's production and engineering programs continue
to be supported by Synerject, through its operations in the US and Europe.
Automotive Four-Stroke
A number of major European automotive companies have, over the past
several months, seen first-hand the world-leading performance of Orbital
technology. They have been evaluating a test vehicle with a conventional
four-stroke engine incorporating Orbital's direct fuel injection technology.
The test vehicle has achieved a new benchmark for emissions reduction and
fuel economy. Tests conducted by RWTUV Fahrzeug GmbH, the technical body
responsible for exhaust emissions in Germany, confirmed that the vehicle had
achieved the strict European Stage 4 emissions limit levels for the year 2005.
These results were also replicated in customer laboratories. It also achieved
a 10% improvement in fuel economy over an identical vehicle fitted with a
standard port fuel injection system.
Importantly these results were achieved with a catalyst using conventional
technology, in contrast to alternative direct fuel injection systems which
require expensive, new technology catalysts to control NOx emissions.
The vehicle achieved the Stage 4 limits in two rounds of tests, first with
a fresh catalyst and, more significantly, after they had been aged for
6500km. The second round of tests confirmed the capacity of Orbital
technology to sustain its performance with a stabilised catalyst.
The Euro 4 standards are part of the progressively stricter emissions
standards being introduced in Europe. The Euro 3 standards are due to take
effect in the year 2000 and Euro 4 in 2005. They will apply to all vehicles
produced and sold in Europe from those dates. The Euro 4 regulations are
generally considered to be comparable to California's stringent ULEV
standards.
This technical performance has accelerated interest amongst the US and
European customers currently involved in engineering contracts with Orbital.
Orbital continues to dedicate more than two thirds of its resources towards
converting the fully funded engineering programs to a production commitment in
this critical sector.
Automotive 2-stroke
Texmaco is progressing extremely well towards producing its first sample
3-cylinder engines. It has recently produced from its own tooling all the
major castings for the engine, comprising the engine block, cylinder head,
crankcase, inlet manifold, exhaust manifold, exhaust cover and flywheel.
Texmaco is currently completing the conrod and crankshaft forging tools,
conducting machining trials, and sourcing the remaining parts from vendors
around the globe.
Texmaco's extensive manufacturing operations in Indonesia in 1997
generated annual turnover of about US$1 billion and employed around 30,000
people. In spite of the economic and political changes since that time,
Texmaco have continued to invest in their infrastructure and future projects,
confident of prosperous times ahead. Orbital has received many inquiries for
possible engine supply from Texmaco and is jointly pursuing these
opportunities.
The Genesis 100-vehicle fleet trial is drawing to a close, with final
testing to confirm the impressive results already recorded. The fleet of 100
Ford Festiva's, fitted with Orbital 2-stroke engines, has accumulated in
excess of 5.5 million km, with individual vehicles clocking more than
150,000 km. Up to 20 vehicles will be retained, so that current and potential
customers can conveniently evaluate the performance of the engines.
The remainder of the vehicles are being decommissioned. A key number have
had their exhaust emissions carefully measured and specific engines have been
thoroughly stripped and put through detailed measurements to confirm engine
durability. The final results will be presented in March at the Society of
Automotive Engineers annual conference in Detroit. Preliminary results were
presented in June last year at the Hamburg Engine Expo, and generated a large
number of inquiries from around the globe.
Motorcycles
Europe's Aprilia Group will very soon become the first motorcycle
manufacturer to mass produce scooter engines incorporating Orbital technology.
Aprilia displayed a pre-production 50cc scooter equipped with DITECH (Direct
Injection Technology) at the Bologna Motor Show in December 1999. As a
precursor to production, it signed licence and marketing agreements with
Orbital in September 1999.
Aprilia is Europe's second largest and fastest growing motorcycle and
scooter manufacturer, and is seen as an industry leader in technology and
innovation. In their most recent annual report, Aprilia stated that the
DITECH solution will: "make a significant contribution to improving air
quality in the city. It maintains the high performance of the engine, while
reducing petrol and oil consumption by 30%. It also reduces the combined
emissions of hydrocarbon and nitrogen oxides by 80% and carbon dioxide
emissions are practically eliminated."
As the Aprilia program continues to move forward, interest in Orbital
technology from manufacturers throughout the world has escalated. The
motorcycle business unit has experienced a steady growth in customers seeking
supply of systems within short timeframes (1-2 years) and for large volumes.
Synerject's facility in Pisa, Italy now acts as the base for the
motorcycle group's support of European customer programs and supply of
production systems. Synerject now employs 20 people on the doorstep of the
important European market. It has responsibility for all component and system
manufacture and procurement, in addition to management of the European
customer programs. Synerject has leveraged the direct injection and
manufacturing expertise of its parents, and expanded into supply of
conventional port injection systems for four stroke motorcycle and scooters.
This effectively doubles the world motorcycle market immediately available to
Orbital. Synerject is actively involved with customers in this application
area.
Marine and Recreation
Bombardier has received a very positive reaction from its dealer network
to its new Sea-Doo models incorporating Orbital technology. The 2000 RX(TM)
DI and GTX* DI models are the first watercraft to come equipped with Orbital
Direct Injection, which reduces emissions by up to 75% and fuel economy by up
to 30% during a typical day of use. As well as making cleaner, more efficient
engines, Bombardier is leading the industry with a range of initiatives
designed to improve rider safety and reduce noise levels.
The outstanding performance of these PWC's has been acknowledged by US
magazine, Watercraft World which has named the Orbital equipped Sea-Doo RX(TM)
DI "Watercraft of the Year" for 2000. The prestigious award was created in
1991 and has been awarded annually since. The magazine stated the RX(TM) DI
"is the future of personal watercraft and will be the benchmark for the new
millennium ... with several key innovative features borne from brilliant and
environmentally sensitive engineering, it is no understatement to call the
RX(TM) DI the most important craft in the award's history."
Mercury Marine has announced plans to expand its Optimax product range,
with a consumer version of the 200XS Performance Outboard. The new model, to
be released later this year, will feature high performance components proven
in the 24 Hours of Rouen endurance race in France. This will increase to six
the number of Optimax models, all of which incorporate Orbital technology.
Later this year, Japanese company Tohatsu will become the second outboard
manufacturer to incorporate Orbital technology in production models. The
company has moved from engineering prototypes to production proofing initially
for its 50 horsepower and then 90 horsepower models, which will be marketed
under the Tohatsu and Nissan brand names.