Orbital Engine June 2000 Annual Results and Review of Operations
28 August 2000
Orbital Engine Corporation June 2000 Annual Results and Review of Operations
PERTH, Australia, Aug. 28 Overview. During the 2000
financial year Orbital Engine Corporation achieved significant
further commercialisation of its clean and efficient direct fuel injection
technology. This was reflected in the group's financial results, which
featured substantial growth in sustainable revenue streams.
The number of licencees in commercial production increased to four, and
the number of products in the market incorporating Orbital's direct injection
technology increased to 10. New products are as follows:
* European motorcycle manufacturer Aprilia launched its SR 50 DITECHTM
scooter.
* Bombardier, the world's leading personal watercraft company, released
its Sea-Doo(TM) GTX DI and the award-winning Sea-Doo RX DI models.
* Japanese outboard maker Tohatsu released its MD50A model, the smallest
2-stroke direct injection outboard engine in the market.
* Mercury Marine, which has been in commercial production since 1996,
released a 6th OptiMax(TM) outboard model.
The number of licencees in production, and the number of products in the
market, are both expected to increase in the current financial year.
The expanded production activity led to a 9% increase in revenue from the
three key customer-driven areas -- licencing & royalties, system sales and
engineering -- to A$48.978 million. Collectively these areas accounted for
95% of total revenue, up from 68% in 1999 and just 53% in 1998, highlighting
the improved quality of Orbital's earnings.
The strongest increase in revenue was in sales of integrated fuel systems
and components to licencees. The increased production activity also resulted
in higher royalties while licencing income, which is characterised by large
one-off payments, declined. Engineering income increased, mainly as a result
of work performed by Orbital on behalf of major manufacturers in the
automotive 4-stroke market.
Approximately two-thirds of Orbital's resources are devoted to the
automotive 4-stroke market, which offers the greatest potential for increased
earnings. Orbital is working with about 10 of the world's major automotive
companies, which have been encouraged by the market-leading performance
achieved by an Orbital test vehicle.
A major development during the year was the forming of a technology
alliance with Saab Automobiles directed at the commercial release of Saab
engines using Orbital technology. Orbital also established a co-development
agreement with Delphi Automotive Systems, a global leader in automotive
components and systems technology.
A concerted effort to minimise costs across the organisation achieved
sound results, with a 22% reduction in operating costs to A$41.552 million.
This reduction reflects the rationalisation of US operations in 1999,
including the closure of the Tecumseh manufacturing facility and general
efficiency improvements across the group.
Financial Results
Orbital's operating loss after tax attributable to members has improved by
89% to A$9.929 million for the year ended 30 June 2000, compared to A$87.214
million for the corresponding period last year. A loss of this magnitude was
foreshadowed by Orbital in a statement released on 14 June 2000. The
following table summarises the 2000 financial year results.
AUS GAAP AUS GAAP
FY 2000 FY 1999
A$000's A$000's
REVENUE
Licencing, sales & service income
Royalties & licencing 13,747 16,505
System sales 17,537 11,200
Manufacturing 243 1,906
Engineering 17,694 17,121
49,221 46,732
R&D income --- 4,519
Revenue from outside operating activities
Foreign exchange gain --- 4,033
Proceeds on sale of fixed assets 626 7,341
Other 1,500 3,330
2,126 14,704
51,347 65,955
EXPENDITURE
Cost of System sales 17,342 10,610
Redemption of Convertible note --- 2,419
Operating costs 41,552 53,139
58,894 66,168
(Loss) before Share of Synerject (7,547) (213)
Share of Synerject Net Loss (5,335) (3,365)
Operating (loss) before abnormals (12,882) (3,578)
ABNORMAL EXPENSES
Rationalisation of US operations --- 6,948
Amortisation of intangibles --- 84,069
--- 91,017
Operating (loss) before tax (12,882) (94,595)
Income tax credit 2,998 7,381
Operating (loss) after tax (9,884) (87,214)
Outside equity interest in operating loss (45) ---
Operating (loss) after tax attributable
to members (9,929) (87,214)
Consolidated operating revenue for the 2000 financial year decreased by
22% to A$51.347 million from A$65.955 million in the prior year.
Revenue for the 1999 financial year included non-recurring contracted R&D
and other income of A$19.223 million. Other income was principally comprised
of proceeds from the disposal of assets and favourable foreign exchange
fluctuations. Excluding these amounts revenue for the year to 30 June 2000
increased by 5% to A$49.221 million from A$46.732 million in the prior year.
Revenue from Orbital's three key customer driven areas of licencing and
royalties, system sales and engineering increased from A$44.826 million to
A$48.978 million, an increase of 9%.
Expenditure for the financial year decreased from A$66.168 million in 1999
to A$58.894 million in 2000. This total comprises three items:
* Operating costs have decreased by 22% from A$53.139 million in 1999 to
A$41.552 million in 2000.
* The 1999 result included a one off charge of A$2.419 million for the
redemption of the convertible note. All costs associated with this
note have now concluded.
* The cost of system sales increased by 63% from A$10.610 million in 1999
to A$17.342 million in 2000. This increase is in line with the
increase in system sales revenue.
The Share of Synerject Net Loss relates to Orbital's 50% share of the
joint venture with Siemens Automotive, Synerject. This charge increased by
58% to A$5.335 million in 2000 from A$3.365 million in 1999. This amount
reflects the start up nature of Synerject's operations. The rapid growth in
the motorcycle sector driven by emissions regulations will continue to drive
further investment in Synerject as the company fully exploits this
opportunity.
A notable feature of the latest result was the absence of any abnormal
items. The process of amortising intangibles, which had resulted in large
abnormal losses in prior years, was completed during 1999.
Orbital recorded an income tax benefit of A$2.998 million incorporating a
prima facie income tax credit of A$2.512 million and an abnormal tax benefit
of A$0.255 million arising from the DMG technology investment. This benefit
was further increased by an overprovision of tax in the prior year of A$0.231
million.
The operating loss after abnormal items and income tax attributable to
members under Australian GAAP was A$9.929 million (1999: A$87.214 million).
Orbital's consolidated cash balance increased over the 2000 financial year
from A$32.186 million as at 30 June 1999 to A$52.855 million as at 30 June
2000. Orbital's cash balance is A$44.789 million as at the date of this
release.
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$6.956 million and expenses of A$1.835
million have been included in the annual result. Under US accounting standard
EITF 99-17, Accounting for Advertising Barter Transactions, these amounts have
been excluded from the US accounts. 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. Under US
GAAP, Orbital's 2000 loss after income tax was US$11.902 million (1999:
US$8.947 million).
The following table summarises the 2000 financial year results under
United States Generally Accepted Accounting Principles (GAAP).
US GAAP US GAAP
FY 2000 FY 1999
US$000's US$000's
REVENUE
Licencing, sales & service income
Royalties & licencing 4,055 10,911
System sales 10,471 7,404
Manufacturing 145 1,260
Engineering 8,895 10,484
23,566 30,059
R&D income --- 2,988
Revenue from outside operating activities
Foreign exchange gain --- 2,666
Proceeds on sale of fixed assets 374 4,853
Other 895 2,203
1,269 9,722
24,835 42,769
EXPENDITURE
Cost of System sales 10,355 7,014
Redemption of Convertible note --- 1,599
Operating costs 24,328 39,988
34,683 48,601
(Loss) before Share of Synerject (9,848) (5,832)
Share of Synerject Net Loss (3,186) (2,225)
Operating (loss) before tax (13,034) (8,057)
Income tax credit/(expense) 1,159 (890)
Operating (loss) after tax (11,875) (8,947)
Outside equity interest in operating loss (27) ---
Operating (loss) after tax attributable
to members (11,902) (8,947)
Review of Operations
Automotive 4-Stroke
Orbital achieved substantial progress during the year in demonstrating the
superior performance of its air-assisted low-pressure direct injection system.
As well as producing improved emissions levels and fuel economy, the Orbital
system is substantially cheaper than alternative high pressure direct
injection technologies. This makes the Orbital system a compelling choice for
the industry, as it moves to direct fuel injection.
The establishment of a technology alliance with Saab Automobiles and a
co-development agreement with Delphi Automotive Systems illustrated the
increased acceptance of Orbital technology.
Orbital and Delphi plan to jointly develop a spark plug injector that
integrates the spark plug and fuel injector into a single device. The spark
plug injector is an extension of Orbital's core air-assisted direct fuel
injection technology, and will be refined for commercial application in
conjunction with Delphi.
The agreement with Delphi is additional to Orbital's existing close
relationship with Siemens Automotive, and means that Orbital is now working
with two of the leading systems integration and component suppliers in the
global automotive industry.
The Saab alliance is directed at the industrialisation and commercial
release of Saab engines using Orbital's core direct fuel injection technology.
The real world performance of Orbital technology has been demonstrated on
a test vehicle, which has been in Europe for the past year for evaluation by a
number of manufacturers and engine technology companies including Johnson
Matthey. Recent testing has demonstrated that the vehicle achieved:
* the European Stage 4 emissions limits due to take effect in the year
2005; and
* a 13 per cent improvement in fuel economy over an identical vehicle
fitted with a conventional fuel injection system.
Importantly, it achieved these results with a catalyst system that is
significantly lower in cost than that required by High Pressure Direct
Injection (HPDI) systems. Continued development during the current year is
targeting the further improvement in fuel economy to a 20% advantage.
Automotive 2-Stroke
The Automotive 2-stroke business unit continued to develop a range of
opportunities around the globe. Orbital has been able to promote its
technology based on the success of its Genesis fleet trial, which demonstrated
the substantial and sustainable benefits of using Orbital-equipped 2-stroke
engines in a real-world environment.
The 100-vehicle Genesis trial drew to a close during the year, after the
fleet had accumulated in excess of 5.6 million kilometres, with individual
vehicles clocking more than 160,000 kilometres. The final results were
presented in March 2000 at the Society of Automotive Engineers conference in
Detroit, one of the largest and most influential gatherings for the automotive
industry. The measured benefits included improved fuel efficiency and reduced
emissions. The mechanical durability and reliability of the 2-stroke engines
was found to be excellent. Also market feedback was very positive.
Orbital has distributed a number of the Genesis vehicles to specific
companies around the world so they can experience first-hand their real world
performance. In addition, refurbished Genesis engines are being sent to
interested customers so they can install the engines in their own production
vehicles.
The most advanced customer program is with Texmaco, a large and
diversified industrial company based in Indonesia. Texmaco plans to use
Orbital-equipped 2-stroke engines in a range of automotive and agricultural
applications. As well as supplying its own needs, Texmaco intends to
manufacture engines for external customers and is supporting Orbital's
marketing efforts in this regard.
Motorcycles and Scooters
A major milestone during the year was the launch of the Aprilia SR 50
DITECH, the first commercial motorcycle or scooter using Orbital's direct
injection (DI) technology. In addition, among Orbital's many other customers
Chinese manufacturer Sundiro and Peugeot Motorcycles have both publicly
announced that they are well advanced in their plans to launch 2-stroke
scooters using Orbital's DI technology.
The benefits of employing Orbital technology were clearly outlined by
Aprilia, Europe's second largest and fastest growing motorcycle manufacturer,
at the launch of the SR 50 DITECH. It stated that its DITECH (Direct
Injection Technology) system is "a revolutionary technology bringing
performance, record consumption and ultra-low emissions together in one
engine."
The specific benefits of DITECH include a 40% reduction in fuel
consumption and an 80% improvement in pollutant exhaust emissions compared to
a traditional 2-stroke 50cc engine, while maintaining performance equal to or
better than best-in-class engines.
Peugeot is the third largest motorcycle manufacturer in Europe, and is
planning to show its DI scooter at the Munich motorcycle exhibition in
September.
Sundiro is one of China's largest motorcycle manufacturers, with annual
output of approximately 600,000 units. Like Aprilia in Europe, Sundiro is a
leader in technology and innovation in its own market and the rest of the
industry in Asia will monitor its progress closely. Its first DI scooters are
expected to be on the streets before the end of year 2000.
The demand for Orbital technology is being driven by two main factors --
increasingly stringent emissions regulations around the world and the enhanced
performance and fuel economy of scooters using Orbital technology.
Orbital is at the forefront of developing electronics and computer
software for motorcycles and scooters. This technology has played a crucial
role in taking direct fuel injection from a concept to reality. It delivers
the highly refined control needed to make direct injection systems work
efficiently.
Through the Synerject joint venture, Orbital is well placed to supply key
components and fully integrated fuel systems for the 4-stroke scooter market
where manufacturers are progressively introducing automotive-style port-
injection systems. Synerject's competitive advantage in the 4-stroke market
stems from its successful track record and the ability to use common
components such as the ECU from the 2-stroke DI system.
Synerject now has the ability to service the entire motorcycle market,
encompassing direct injection and port injection fuel systems for 2-stroke and
4-stroke models.
Marine and Recreation
The growing range of highly successful products in the marine and
recreation markets has comprehensively demonstrated the maturity of Orbital
technology. Mercury Marine's OptiMax outboard engines are now clearly
established as the premium product in their class. Their performance and
reliability is unsurpassed, and this is reflected in the very strong demand
for these engines. Orbital deliveries of fuel systems for OptiMax engines
rose by approximately 40% in the year to June 2000.
Bombardier joined Mercury as the second manufacturer to use Orbital
technology in production models with the launch of the Sea-Doo GTX DI and
Sea-Doo RX models. These personal watercraft have already won high praise.
The premier US magazine Watercraft World named the Sea-Doo RX DI the
"Watercraft of the Year" for 2000. It described the RX DI as the most
important craft in the award's history and the benchmark for the new
millennium. Specifically, it praised the unique direct fuel injection system,
which "provides benefits such as computer-controlled throttle response and
no-choke starts, but its true genius is found in overall efficiency."
The Sea-Doo watercraft includes a number of value-added features made
possible by Orbital's development of electronics and computer software
applications. One example is the DI-exclusive "Learning Key", a specially
encoded lanyard key designed for beginners and other inexperienced riders
which restricts vehicle speed. A second innovation on the Sea-Doo is the
detonation sensor, where Orbital software protects the engine from damage if,
for example, incorrect fuel is used.
Japanese outboard manufacturer Tohatsu launched its first direct injection
model during the year, the 3-cylinder 50 horsepower "TLDI" or 2-stroke Low-
pressure Direct Injection engine. A 90 horsepower version is due to be
launched in the current financial year. Tohatsu is Japan's second largest
outboard manufacturer with annual output of about 90,000 engines.