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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 amortisation 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 recognised
under US GAAP.
The following table summarises the December 1997 results and highlights
the differences under Australian and United States standards.
FINANCIAL
Table
1
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 4-stroke customers,
Orbital's continued cost reduction, and income associated with the
Deutsche Morgan Grenfell (DMG) Technology investment discussed below.
Abnormal expenses totalling $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 amortisation 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.
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 4-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 4-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 2-stroke
Orbital's 2.0 litre, six cylinder, 2-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 2-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 2-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 Authority
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 Synerject. Negotiations
are underway to obtain long term supply contracts from our customers
for use of OCP products in these markets.
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