The six months to 31 December 1998 has seen Orbital Engine Corporation
Limited (Orbital) realise significant results from a number of strategic
initiatives that have been put in place to commercially exploit
its patented Orbital Combustion Process (OCP) technology. Developments
during the last six months include:
- Aprilia, Europe's fastest growing motorcycle manufacturer, plans
to launch motorcycles incorporating OCP technology within a year.
Aprilia currently produce more than 300,000 motorcycles per year
which has grown at more than 25% per year over the last five years.
- Orbital continues to work with major European and United States
automotive manufacturers on 4-stroke engineering programs,
including Daimler Chrysler. Current customer programs are expected
to produce engineering revenues in excess of $13 million.
- Sundiro, one of China's largest motorcycle manufacturers, have
scheduled the commencement of volume production in the first half
of the year 2000. Sundiro sold 682,000 motorcycles in 1998.
- Mercury Marine, the world's largest manufacturer of outboard
engines, continues to embrace OCP technology, expanding application
down their horsepower range to the 115 horsepower model;
- The Synerject joint venture with Siemens Automotive has expanded
to encompass supply of integrated fuel systems to the non automotive
markets; and
- Texmaco, an established Asian automotive component supplier,
is to commence volume production of the OCP 3 cylinder 2-stroke
automotive engine within 2 years.
The worldwide automotive engine management
systems business is dominated by several key players such as Siemens,
Bosch and Denso. By contrast, the non-automotive systems business
has a very fragmented supplier base. Orbital's involvement in Synerject
is a significant step towards becoming the dominant player in this
multi-million dollar business.
Orbital recorded an operating loss before
abnormal items and income tax of $8.490 million for the six months
ended 31 December 1998, compared to a profit of $2.688 million for
the corresponding period last year.
Consolidated operating revenue for the six
months to 31 December 1998 was A$26.928 million, compared to A$27.081
million for the six months to 31 December 1997. Significant revenue
growth was achieved in all areas (refer table below), most notably
licensing and royalties, system sales, and engineering. Operating
revenue for the previous half year included $12.198 million in relation
to the strategic investment by Deutsche Morgan Grenfell.
Operating expenditure for the 1998 half year
increased from $24.393 million in 1997 to $35.418 million in 1998.
This was due to cost of sales in relation to the growth in Mercury
Marine system sales, expenditure associated with the acquisition
of 50% of the Meteor I joint venture from Brunswick Corporation,
Orbital's share of Synerject's operating costs, and costs associated
with the redemption of the convertible debenture. The redemption
costs were almost completely off set by foreign exchange gains arising
from the strengthening of the Australian dollar against the US dollar
during the time Orbital held the debenture funds. Excluding the
items noted above, operating costs were in line with the previous
half year.
As at 31 December 1998, Orbital's cash balance
was $46.860 million compared to $27.789 million at 30 June 1998.
The following table summarises the December
1998 results and highlights the differences under Australian and
United States standards.
Table
1
REVIEW OF OPERATIONS
Orbital's board and management have initially
targeted the non automotive markets of marine, recreational and
motorcycle products, as these markets are currently subject to ever
tightening emissions requirements. Successful commercial release
of OCP technology in any market sector, increases the confidence
of customers across all our markets. A key element of the commercial
exploitation strategy has been the alignment of Orbital with an
established fuel systems vendor, to ensure hardware supply to customers.
Product in the market place and an experienced high volume manufacturer
for hardware supply have been, and continue to be, the most important
commercial levers for our company.
Automotive 4-Stroke
Orbital is recognised as a key player in the
automotive industry's shift to gasoline direct injection on 4-stroke engines. Orbital's air assisted injection process produces
engine out emissions levels that allow the next level of European
emissions standards to be achieved with the use of existing catalytic
converter technology. These emissions levels can be achieved while
producing up to 20% fuel economy improvements over existing MPI
fuel injection systems. These compelling results have brought nine
of the world's leading automotive companies to Orbital to undertake
direct fuel injection application programs which, if successful,
will result in production programs being initiated. Engineering
revenues from this source are likely to be in excess of $13 million.
Automotive 2-Stroke
The relationship with Texmaco has progressed
since its announcement in December 1998. Texmaco plan to commence
manufacturing of the OCP 3 cylinder 2-stroke engine within two
years at initial volumes of 30,000 units annually. They intend to
follow with 1 and 2 cylinder variants shortly thereafter. Since
committing to production, both Orbital and Texmaco have received
several inquires from further customers to source engines from Texmaco.
It is envisioned the Texmaco facility will supply not only their
own requirements and the Asian vehicle market, but ultimately those
of independent vehicle manufacturers worldwide.
With the Synerject joint venture operating
in Newport News, Virginia producing fuel systems for all business
units and Texmaco gearing up for 2-stroke engine production, Orbital's
low volume manufacturing facility in Tecumseh, Michigan is being
closed down. As a result of the closure, Orbital is expected to
generate cash in excess of US$6 million and ongoing annual savings
of US$5 million, while retaining all necessary capability.
The Genesis program continues to be a success
with more than five million kilometres accumulated without a fundamental
engine failure. The data accumulated under this program has been
of value in marketing the maturity and durability of OCP technology.
Motorcycle
Following Aprilia's December 1998 announcement
of plans to release OCP equipped motorcycles within a year, the
reigning 125cc and 250cc Grand Prix champions have continued to
aggressively promote the product. Marketed under the "DiTech" brand
name, the 50cc and 250 cc motorcycles are being displayed at motor
shows covered throughout the industry's press. Reaction to the production
plans has been very favourable and has created momentum amongst
other European manufacturers. Orbital is extremely pleased to be
an integral part of the future plans of such a dynamic company.
Aprilia has increased production volumes 25% annually for the last
four years to reach their current 300,000 unit level. They are perceived
as a technical leader within the 1.6 million unit European motorcycle
industry.
Orbital's Chinese customer, Sundiro, holds
a similar position to Aprilia in their domestic market place. Like
Aprilia, Sundiro has aggressively increased volumes by 25% annually
over recent years, and sold 682,000 motorcycles in 1998. Sundiro
are a respected participant in China's 9.6 million unit motorcycle
market, and a 2000 release of OCP motorcycles will be a market leading
event for them.
Orbital continues to work on active engineering
programs with four internationally recognised motorcycle manufacturers,
including the Asian manufacturer that signed a license agreement
in June 1997.
Marine & Recreation
Key legislative bodies in the United States,
the Environmental Protection Authority (EPA) and California Air
Resources Board (CARB) continue to consider tightening emissions
requirements. This includes earlier introduction of legislation
as well as reductions in the levels of emissions permissible. This
trend augers well for direct fuel injection in the marine industry
and is a testament to the success achieved to date.
Mercury Marine continues to do an outstanding
job introducing OCP equipped engines to the market place. During
the last six months, Mercury added the 115 horsepower model to the
225, 200, 150 and 135 models already available. The engines, marketed
under the "Optimax" brand name have been extremely popular with
consumers and achieved outstanding reliability in the field.
Orbital has approached Outboard Marine Corporation
(OMC) regarding Orbital's belief that OMC have infringed (and continue
to infringe) a number of our patents in their Ficht outboard engines.
We have ongoing discussions with OMC to achieve a mutually satisfactory
outcome but reserve the right to seek legal redress if a fair commercial
settlement cannot be negotiated in a timely manner. Orbital has
invested a significant amount to develop its intellectual property
portfolio and will take all necessary action to protect its rights.
Production programs are continuing to an advanced
stage with licensees Bombardier-Rotax and Tohatsu.
FINANCIAL RESULTS
Consolidated operating revenue for the six
months to 31 December 1998 decreased by 0.3% to $26.928 million
from $27.011 million in the six months to 31 December 1997. Orbital
recorded an operating loss before abnormal items and income tax
of $8.490 million for the six months ended 31 December 1998, compared
to a profit of $2.618 million for the corresponding period last
year.
Revenue (and operating profit) for the 1997
half year included $12.198 million associated with the strategic
investment by Deutsche Morgan Grenfell (DMG). Excluding this amount,
revenue for the six months to 31 December 1998 increased in comparison
to the 1997 half year by approximately 102% ($13.646 million). This
increase represents growth in system sales and royalty income from
Mercury Marine, and the recognition of automotive 2-stroke licence
income from Texmaco, Indonesia.
Operating expenditure for the 1998 half year
increased due to cost of sales in relation to the growth in Mercury
Marine system sales, expenditure associated with the acquisition
of 50% of the Meteor I joint venture from Brunswick Corporation,
Orbital's share of Synerject's operating costs, and costs associated
with the redemption of the convertible debenture.
Abnormal expenses totaling $46.373 million
were recorded in relation to amortisation of cash expenditures on
Patents, Licences and Technologies ($16.357 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. Intangible assets as at 31 December
1998 of $41.444 million will be fully amortised over the six month
period to 30 June 1999.
Orbital also recorded an abnormal expense
of $3.790 million in relation to the rationalisation of United States
operations. These expenses include estimates for the anticipated
loss on disposal of plant and equipment and inventory, as well as
a lease surrender fee. The abnormal expense will increase over the
six months to 30 June 1999 as costs are incurred for employee redundancy
costs and wages and overhead costs until such time as the Tecumseh
facility is disposed of.
Orbital recorded an income tax benefit of
$5.083 million incorporating an income tax credit of $15.079 million,
and an abnormal tax benefit of $0.483 million arising from the DMG
Technology investment. 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
and $1.365 million in relation to the rationalisation of the United
States operations.
The operating loss after abnormal items and
income tax was $49.780 million for the six months ended 31 December
1998 (1997: $53.728 million).
CASH POSITION
Orbital's consolidated cash balance increased
over the last six months following the August 1998 issue of the
convertible debenture and receipts from a number of customers. As
at 31 December 1998, Orbital's cash balance was $46.860 million
compared to $27.789 million at 30 June 1998.
During January 1999, Orbital redeemed a US$20
million convertible note issued in August 1998. Orbital had drawn
down only US$10 million of the note, but extinguished the entire
facility. In view of the potential dilutive effect resulting from
Orbital's share price and Orbital's sound cash position, redemption
of the note was considered the most effective use of company funds.
Costs associated with the redemption were almost completely off
set by foreign exchange gains arising from the strengthening of
the Australian dollar against the US dollar during the time Orbital
held the funds.
As at 31 January 1999, Orbital's cash balance
was $26.374 million.
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