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23rd
August 2007
ORBITAL
DELIVERS INCREASED PROFIT FOR 2007 FINANCIAL YEAR
PERTH,
AUSTRALIA: Orbital
Corporation Limited today announced a full year profit after tax
of $1.3 million for the year ended 30 June 2007.
Key Features
- Net profit after
tax of $1.3 million compared to a profit of $0.5 million last
year
- Revenue up 32%
to $15.2 million
- EBIT (including
Synerject earnings) increased by 57% compared to last year to
$1.6 million
- This year's result
includes costs for full and final settlement of the R&D syndicate
dispute with Coles Myer of $0.6 million
- Significant improvement
in cash flow from operating activities
- Share placement
and share purchase plan raised $8.8 million net of costs
- Cash on hand at
30 June 2007 of $11.3 million
- Bajaj commence
production of an autorickshaw utilising Orbital direct injection
technology
- Bajaj enter into
a new license for LPG and CNG Autorickshaw vehicles
- Synerject invests
in manufacturing and engineering facilities in China
We are pleased that we have achieved
continuing improvement in our financial results while still investing
in future opportunities including the Chinese market" said
Dr Houston.
Our operating activities show improved
cash flow and the successful capital raising has put Orbital in
a better position to pursue growth opportunities both inside and
outside our current core business." added Dr Houston.
FINANCIAL OVERVIEW
Total revenue for the year ended 30 June 2007
increased by 32% to $15.2 million, due to the increased engineering
services revenue of $12.5 million (+45%) offset by reductions in
royalty and licence income of $0.1 million and other income of $0.1
million. The increased engineering income was generated across a
range of customers including approximately $2.0 million increase
in OCP development programs and $1.9 million increase in other engineering
contracts including alternative fuels. The decrease in royalties
was due to the strengthening Australian dollar.
Expenses increased by $2.0 million (14%) to
$16.7 million mainly as a result of the increased personnel, consumables
and contractors required to support the increased engineering activity
noted above. The increase also includes $0.6 million (including
legal expenses) in full and final settlement of the dispute with
Coles Myer Limited regarding research & development syndication
arrangements. Finance costs of $885k (2006: $622k) are primarily
notional interest charges (non cash) arising from the introduction
of international financial reporting standards with effect from
1 July 2005. This requires the write up of long term non interest
bearing borrowings to fair value in each accounting period.
Orbital's share of profits of its joint venture
with Siemens, Synerject LLC of $3.2 million compares to $4.1 million
last financial year. The strengthening Australian dollar impacted
this result by approximately $0.2 million.
Synerject's underlying result increased by
30% to US$3.5 million from US$2.7 million last financial year. In
2007 Synerject expensed development costs under USGAAP of US$1.1
million compared with US$2.5 million in 2006. These expenses which
relate to the development of the M3 electronic control unit are
capitalised under AIFRS for the purpose of equity accounting the
Synerject result.
Synerject's revenue increased by 39% to US$80
million mainly as a result of its acquisition of Delavan in March
2006 which accounted for US$19.3 million of the increase. Synerject's
2007 result also includes $0.9 million costs associated with the
establishment of manufacturing and engineering facilities in China.
Synerject's net cash inflow for the year was US$0.1 million after
incurring the China costs noted above and investing $2.5 million
in capital equipment.
Synerject's cash at 30 June 2007 was US$4.3
million and net debt was US$3.2 million, with an overall joint venture
gearing ratio of 21%.
Orbital's cash outflow from operating activities
was $0.2 million for the year including the costs and settlement
of the legal dispute noted above for $0.6 million compared to $1.8
million cash outflow in 2006. This improvement is primarily as a
result of the increase in engineering services. In 2007 investment
in engineering facilities increased to $0.7 million (2006: $0.2
million). In 2006 Orbital invested US$2.0 million additional equity
in Synerject (2007 $nil).
In November 2006 Orbital raised $4.0 million
through the placement of 26.7 million shares at an issue price of
15 cents. In December 2006 Orbital successfully completed a share
purchase plan raising a further $5.2 million. The share purchase
plan was oversubscribed; however the Directors determined the oversubscriptions
would be accepted in full. After transaction costs a total of $8.8
million was raised. At 30 June 2007 Orbital had cash on hand of
$11.3 million.
Orbital's revenue streams include income
that can be derived from the development and commercialisation of
new products and technology. Income is received from our R&D,
Engineering, Licensing and (Joint) Manufacturing activities. Detailed
comments on Orbital's revenue and investment streams are as follows:
Engineering Services
Orbital's professional engineering consultancy
services create a significant revenue stream while allowing Orbital
to work closely with customers on advanced powertrain applications
and developments, a large proportion of which involve the application
and development of Orbital proprietary technology.
Engineering services revenue increased by 45%
to $12.5 million for the full year, with an engineering contribution
of over $3.2m which is up by $2.8 million compared to the previous
year.
The overall increased engineering income in
FY07 was generated across a range of customers including new areas
of work in heavy duty LNG/CNG systems development as well as design
and development of small engines for the lawn, garden and utility
markets. These new opportunities for both our engineering and technology
capabilities are a good example of the broadening customer base
Orbital has been developing over the last two years. The level of
services relating to the application and development of Orbital
technology continues at a strong level of above 50% of the engineering
revenue.
The engineering services order book at 30 June
07 was $5 million which compares to $6 million at 31 December 2006;
however the prospects for continued growth in the engineering services
revenue continue to be positive. The lower figure at this time is
due to a delay in the second half orders from China and India as
well as the normal cyclic nature of our customers business outsourcing
engineering services. As a continuing response to these cyclic fluctuations
we have developed a wider base of geographic and technology customers
evidenced by the level of prospects we have developed during the
second half of FY07.
To exploit the opportunities provided by the
changing landscape in the area of global warming concerns, energy
utilisation, transport and sustainability, Orbital has refined its
strategies and direction to firmly establish itself as a provider
of innovative technical solutions.
We are strongly positioned with offerings from
strategic consulting, independent technical reviews, audits, project
management, advanced research, new engine design and development
as well as specific technology solutions for improved fuel efficiency
and emissions benefits across a broad range of vehicles sizes and
fuel types.
Royalties and Licences
Orbital licenses its patented direct injection
technology to original equipment manufacturers (OEM) and suppliers.
Royalties and license fees are derived from a wide range of customers
in the marine, motorcycle and recreational sectors.
License and royalty revenue decreased by $100k
compared to the prior year due to the impact of the strong A$ in
this period.
Marine market
The overall marine market was robust compared
to the previous year, with increased sales in the larger Mercury
V6 Optimax range contributing to an increased level of marine outboard
royalties.
The Bombardier personal watercraft Orbital
Direct Injection (DI) products have been a decreasing volume product
for a few years now as they transition all new Sea-Doo products
to 4-stroke engines.
The 2-stroke DI outboard market continues to
hold up well in this sector with strong commitment from both Mercury
and Tohatsu to the future of this product. This was evidenced by
the strong public support for the DI 2-stroke product, with Mercury
celebrating the 10 year anniversary of the release of OptiMax (Orbital
/ Synerject DI) products last November, and the launch of two new
OptiMax products to the market in June 2007.
Engineering services programs at Orbital in
the area of future emissions development for outboard engines is
a good indication of the future investment in the DI 2-stroke and
the potential longevity of our royalty streams. Based on other new
engineering programs the prospects continue to be positive for the
application of Orbital DI to future high performance 2-stroke engines
in both the snowmobile and recreational motorcycle markets.
European scooter markets
The softness in the European scooter market
continued as predicted with on-going delays in the introduction
of tougher European emissions legislation for these vehicles.
Development of a prototype lower cost DI fuel
system for these markets has progressed well, however in the absence
of tougher emissions standards the challenge of meeting the cost
targets for the incumbent carburettor continues.
Initiatives in relation to sourcing lower cost
components out of India, which are now available due to the Bajaj
DI launch, are being investigated. As in the marine outboard market,
there are strong fundamental reasons for the continued use of DI
2-stroke engines in this scooter market. However step changes in
legislation for emissions durability requirements are still out
in 2009/10.
Indian Rickshaw market
In May this year Bajaj launched their gasoline
DI autorickshaw program. This launch was a key step for Orbital
DI technology into a new and growing market segment. On the release
of this product Bajaj's Managing Director, Mr. Rajiv Bajaj commented
"The first customers have enjoyed a 30% fuel economy improvement
and experienced significantly improved driving characteristics."
The initial volume ramp up will be slow as
Bajaj develop the market pull for this product and manage the roll
out to new dealers and cities in the coming months. Although the
volumes will start out low, this DI product will add to our royalty
income in FY08 and add to the systems sales revenue of Synerject
going forward.
In the pipeline there are further models under
development which will utilise Orbital DI for gaseous applications,
including both LPG and CNG fuels. The benefits in running costs
for these gaseous fuels in India are a key part of the future growth
opportunities in this market.
Retrofit aftermarket
In the retro-fit aftermarket our licensee Envirofit
continues to make progress towards a full release of a taxi fleet
of 3 wheeler DI 2-strokes in the Philippines. This program is an
important test to fully validate the potential of this retro-fit
market, which could involve many millions of old 2-stroke engines
in the Asia pacific market.
The Orbital DI system has demonstrated, in
a small test fleet, the potential to bring large benefits in terms
of hydrocarbon and particulate reduction as well as up to a 35%
improvement in fuel efficiency. Orbital are supporting this program
to help provide final sign-off, and if successful this market will
add to our overall royalty revenues in the coming years.
DI 4 stroke
Application of the Orbital DI 4-stroke technology
has continued with a number of customers throughout this year. The
first production customer for this technology is expected to launch
this financial year with a spark ignited kerosene product, with
other customers keen to follow.
Application progress in the gasoline DI 4-stroke
area has continued with existing and new customers assessing the
potential for motorcycle and recreational applications.
The key driver for this gasoline DI 4-stroke
market is the improved fuel efficiency of up to 30% due to running
a lean, stratified combustion, and in contrast to the automotive
passenger car market, there is no requirement for lean NOx catalyst
technology under lean operating conditions.
Research & Development
The last two years have seen uplift in the
level of resource focus and expenditure in the area of Research
and Development (R&D). This has enabled a number of new market
focussed developments in the following key areas:
- Spark ignited kerosene and diesel combustion
for 4-stroke and 2-stroke engines, with cold start capability
down to -20oC.
- Development of lower emissions capability
for 2-stroke marine engines to meet future emissions legislation.
- Continued development of LPG and CNG variants
of the Orbital DI system for automotive, commercial and recreational
applications (to meet the growing demand for fuel diversification)
- DI E100 (100% Ethanol fuel) combustion
development in combination with turbo charging. To meet the growing
demand for fuel diversification and solve some of the long standing
concerns with 100% Ethanol operation.
- Orbital DI in combination with HCCI (homogeneous
charge compression ignition) is now running successfully at Orbital
(to help control the HCCI process - a potential future combustion
process sitting part way between diesel and spark ignited combustion
- with the benefits of both)
- Development of a new DI engine concept
engine for motorcycles and All Terrain Vehicles (ATV) to deliver
superior engine efficiency, product differentiation and improved
engine costs for emerging markets.
Sustained effort over the last two years in
the above areas has resulted in 66 patent applications being granted
and a further 12 new patent applications lodged. This result is
an important part of the continued commitment to strengthening the
Orbital patent portfolio and extending the life and scope of our
royalty streams.
We have also developed an enhanced marketing
campaign as part of our overall strategy to keep our customers informed
about our new areas of research and development. As an example of
the higher output from this campaign are the 8 new technical papers
being presented at various technical conferences around the world
over the next 6-8 months, a significant increase compared to the
previous 3 years output of 6 papers in total.
Synerject
Orbital's 50% owned joint venture with Siemens-VDO,
Synerject LLC, is a supplier and manufacturer of engine management
systems (EMS) and electronic fuel injection systems for the non-automotive
OEMs.
Under US GAAP, overall revenue for Synerject
was up 39% to US$80 million compared to the prior year, with an
improved underlying profit result up 30% (US$3.5 million). The overall
profit result has been impacted by the increased level of expenditure
establishing the manufacturing and engineering capabilities in China.
In addition Synerject have incurred a high level of engineering
expense in the initial conversion of customer motorcycles from simple
carburettor to Synerject port injection, costs which will be recovered
from future component sales when they occur.
Orbital's share of AIFRS adjusted profits from
Synerject of $3.2 million were down on the equity accounted result
for last year, due to increased China costs noted above and the
stronger Australian dollar.
A large contributor to the revenue growth has
been the first full year turnover from the Delavan acquisition which
has added more than US$30 million revenue. This facility is responsible
for the manufacture of the Bombardier E-TEC fuel system and electronic
control unit (ECU). Overall profitability is in line with expectations,
with work continuing to focus on reducing manufacturing costs for
improved margins going forward. Future revenue growth from this
plant will depend on the strength of the overall marine outboard
market and the launch of new E-TEC products some of which are expected
this year.
Establishment of the China manufacturing facility
in Changchun for the new line of low cost ECUs has progressed well,
with the first prototypes being produced this financial year and
final validation testing now being completed. During this year Synerject
has also established a small engineering team in Chongqing, which
is a key part of the overall strategy to build up capability close
to their customers. Boosted by the commitment in China to introduce
Euro 3 emissions for all new models from January 2008, Synerject
have made good progress with establishing close links and application
programs with most of the major motorcycle manufacturers and producers.
Synerject's new financing arrangements which
were put in place last year will deliver the first cash dividend
(45% of Synerject's US GAAP profit) to the parents in September
2007.
Outlook
Global environmental concerns and legislation
together with high fuel prices continue to generate significant
interest in Orbital's technology and engineering capability.
Orbital is well positioned with its existing
technology and expertise to help solve some of these issues. In
order to fully exploit these opportunities Orbital has undertaken
a detailed review of its vision and strategic direction. In doing
so we have reviewed the existing core income streams from Synerject,
Engineering services and intellectual property with a view to enhancing
these current businesses but also developing new business opportunities
through alliances, acquisition or joint ventures.
The first stage of this review has focused
on broadening the nature of our business to focus on the development
and commercialisation of a wider range of innovative technologies
and services. In particular those related to the clean, efficient
and safe transportation as well as the efficient use of energy and
resources where each is readily developable in Australia and applicable
to the world.
We look forward to the successful roll out
of the DI autorickshaw in India and the launch of further products
incorporating Orbital direct injection technology in the next 12
months.
On-going production validation programs for
new Orbital DI applications will continue in the area of gaseous
(LPG, CNG and LNG), spark ignited kerosene/diesel and gasoline engines
for 2008. The royalties from these programs are expected to come
on line in the 2009 financial year.
The overall marine market may be softer this
year due to the potentially weaker US economy and higher cost of
credit which traditionally impacts discretionary spending. Overall
royalty growth in 2008 will be dependent on the strength of the
DI product roll-out in India and the robustness of the marine market
in the US.
Synerject has invested and will continue to
invest during 2008 in manufacturing and engineering facilities in
China which will produce the recently developed ECU for the motorcycle
market. A number of new customers for the complete engine management
system (EMS) incorporating this Chinese manufactured ECU are expected
to be launched in 2008, however the initial low volumes are not
expected to generate profits until 2009.
The Chinese and Indian markets are important
to Synerject and Orbital growth aspirations with the anticipated
conversion to EMS systems from carburettor in Asia over the next
5 years creating significant growth opportunities. The exact timing
of the change-over is difficult to predict, however Synerject is
now well positioned to supply this large emerging market in the
future.
The lower order book in engineering services
at the beginning of this year may limit the growth in engineering
revenue for the full year. However the overall prospects for engineering
services is positive, given the continued level of strong customer
leads and proposals in our sales database. The launch of our new
campaign to increase the level of customer contact and broaden the
mix of contracts has delivered a number of new customers, although
some will take some time to mature. Backed up by the higher level
of R&D activity discussed earlier, we expect to see a growth
in new opportunities across a wider field of customers and technologies
going forward.
The development of a centre of excellence for
gaseous and alternative fuels is a key focus for our future R&D
investments and business development activities. There are growth
opportunities both through engineering services and alliances which
are being developed over the next year.
The market for professional engineering services
staff is more competitive, however the company remains committed
to maintaining its core strengths and capabilities. The stronger
balance sheet will provide a solid commercial base for extending
the scope of business either through bolt on acquisitions or extension
of today's business by way of vertical or geographical expansion.
Orbital looks forward to building upon the
solid performance in 2007 and capitalising on the many opportunities
which present themselves for our current revenue streams and beyond.
See here
for for financial report.
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