ANNUAL REPORT 2011
Orbital Corporation Limited
ABN 32 009 344 058
Corporate Profile
Contents
Orbital is a leader in Specialised Engine and Vehicle
Systems.
Orbital provides engine and vehicle technologies and
alternative fuel solutions that improve performance, add
features and reduce fuel costs whilst reducing harmful
greenhouse gas emissions.
Orbital FlexDI technology “One engine - any fuel” - has been
commercialised in the marine, motorcycle, recreational and
autorickshaw light commercial vehicle markets since 1996.
Orbital Autogas Systems Liquid LPG systems, offering
seamless performance and satisfying Australian emissions
requirement, are now commercially available in the Ford
EcoLPi products, Holden Special Vehicles (HSV) as an
option, and as after-market kits for popular car models.
The Orbital group earns income from multiple sources
including:
• Alternative Fuels
o Orbital Autogas Systems
o Sprint Gas
• Synerject LLC Joint venture
• Orbital Consulting Services
• Royalties and Licences
Orbital’s principal operations in Perth, Western Australia,
provide a world class facility with capabilities in design,
manufacturing, development and testing of engines and
engine management systems. Headquartered in Perth,
Western Australia, Orbital stock is traded on the Australian
Stock Exchange (OEC) and the NYSE Amex (OBT)
• Chairman’s and CEO’s Report . . . .
1
• Review of Operations. . . . . . . 2
• Directors’ Report . . . . . . . . 9
• Corporate Governance Statement . . .
23
•
Income Statement . . . . . . . . 30
• Statement of Comprehensive Income . . . 31
• Statement of Changes in Equity . . . . 31
• Statement of Financial Position . . . .
32
• Statement of Cash Flows . . . . . . 33
• Notes to the Financial Statements . . . 34
• Directors’ Declaration . . . . . . . 82
•
Independent Auditor’s Report . . . . . 83
• Shareholding Details . . . . . . . 84
• Offices and Officers . . . . . Back Cover
Highlights of the Year
•
Statutory net profit after tax of $1.76 million compared
to a profit of $4.52 million last year.
• Underlying profit after tax of $0.16 million compared
to a loss of $2.31 million last year.
•
Synerject increased revenue to US$120.83 million
(+34%) and profit after tax to US$6.50 million (+37%).
• Orbital Autogas Systems (OAGS) launched “Liquid”
LPG injection systems on the Ford EcoLPi Falcon and
continued development of aftermarket kits.
• Holden Special Vehicles
the
introduction of the OAGS “Liquid” LPG system on its
prestigious high performance vehicles. This includes
HSV’s top of the line model “Grange”.
(HSV) announced
• Orbital successfully delivered industry benchmark
results utilising FlexDI™ on Changan demonstrator
engines and vehicle, meeting stringent Chinese fuel
consumption targets.
• Orbital acquired the business of Sprint Gas, one of the
largest distributors in the Australian LPG aftermarket, for
an initial investment of $2.00 million.
• Orbital completed the sale of land and buildings in
Perth for $8.65 million. Orbital will lease the facilities
for 10 years, with 2 further 5 year options if required.
The proceeds have been used to acquire Sprint Gas
and will be utilised to support further strategic growth
plans of the company.
Changan’s ICCS engine incorporating Orbital’s FlexDI technology. The ICCS engine was
displayed to the public for the first time at the Shanghai Auto Show in April.
Chairman’s and CEO’s Report
X
X
On behalf of the Board of Directors we present Orbital’s
Annual Report for the year ended 30 June 2011.
Overview
We are pleased to report a statutory profit for the year
ended 30 June 2011 of $1.76 million (2010: $4.52 million)
and an underlying profit after tax of $0.16 million; an
improvement in the underlying result of $2.46 million year
on year. (see page 4 for a breakdown)
Underlying Profit/(Loss)
1.0
0.0
(1.0)
(2.0)
$'ms
(3.0)
(4.0)
(5.0)
(6.0)
FY09
FY10
FY11
As noted in previous years, Orbital has strategically
invested in developing an Australian LPG business. We
foreshadowed our investment in this development as
we worked closely with Ford Australia on the EcoLPi
Falcon incorporating the most advanced LPG “Liquid”
technology currently available, to deliver across-the-board
improvements. Ford has now launched the EcoLPi and has
received positive industry feedback. We also developed a
range of Liquid kits for the LPG aftermarket. Our in-house
development was complimented in May 2011 by the
acquisition of Sprint Gas, one of the largest distributors in
the Australian LPG aftermarket. These investments are now
yielding positive results, with Orbital returning to underlying
operating profits in this reporting period.
One of the more significant contributions to this year’s
improvement was the increased profit of Orbital’s 42%
owned joint venture, Synerject. Synerject increased revenue
by 34% to US$120.83 million, reported profit after tax of
US$6.50 million (+37%) and generated US$8.52 million
positive operating cashflow. Synerject has introduced a
number of new products into the motorcycle markets in
Taiwan and North America and the snowmobile markets in
North America and Europe. More stringent global emissions
requirements continue to drive demand for Synerject’s non-
automotive engine management solutions.
Capital Management and Investment
During the year Orbital entered into a sale and leaseback
of its land and buildings in Perth for $8.65 million. The
transaction generated a net profit of $4.24 million and
provided capital at a net funded cost of approximately
8.6% p.a.; these funds will be more appropriately invested
in strategic growth opportunities.
As noted above, in May 2011 we acquired 55% of the
business of Sprint Gas Australia for an investment of $2.00
million with an option to acquire the remaining 45% at a
price based on post-acquisition earnings. Sprint Gas is one
of the largest distributors of automotive LPG conversion kits
in Australia. Sprint Gas has a national footprint and a wide
range of products, which will complement the Liquid LPi
aftermarket kits distributed by Orbital Autogas Systems.
Peter Day – Chairman
Terry Stinson – CEO
Board of Directors and Staff
We thank our fellow Directors Vijoleta Braach-Maksvytis
and Merv Jones for their ongoing contributions throughout
the year. We would also like to acknowledge the invaluable
contribution Grahame Young made during 25 years of
service to Orbital before his retirement from the board in
February this year. We thank him and wish him well for
the future.
Outlook
In 2010, we targeted a return to profits in the year ended
30 June 2011. That has been achieved.
In the 2012 financial year we are targeting increased profits
and sustainable operating cashflow. This will be achieved
through growth provided by recent investments in the next
generation Ford EcoLPi Falcon, Liquid LPi aftermarket kits, the
Sprint Gas acquisition, and continued growth for Synerject.
We also have a number of potential organic growth
opportunities which may be progressed in 2012, including
engine supply to the unmanned aerial systems sector and
dual fuel LNG systems supply for road transport. We will
also assess acquisition opportunities as they arise.
Orbital has strengthened its financial capacity including
cash on hand at 30 June 2011 of $6.87 million. which can
provide a solid base and the investment flexibility needed
for anticipated growth
W P DAY
Chairman
T D STINSON
Chief Executive Officer
We targeted
a return to
profits in the
year ended
30 June 2011.
That has been
achieved.
Annual Report 2011 1
Review of Operations
Business
Segment
Business Name
& Brands
Activities
Year in Brief
The Future
Alternative Fuels
ORBITAL
ORBITAL
ALTERNATIVE FUELS
Alternative Fuels
■ Alternative Fuel application and system supply is a
cornerstone of Orbital’s forward strategy
■ LPG (Liquid Propane Gas)
5.8
8%
$’m sales
Synerject
76%
51.4
Orbital Share of Synerject Sales $’m
Consulting Services
ORBITAL
ORBITAL
Consulting
Consulting
9.5
25%
14%
$’m sales
■ Supplier to Ford Australia, HSV and aftermarket
■ Distributorship through Sprint Gas and OAGS
■ Exclusive rights to Vialle LPG product in Australia
■ CNG (Compressed Natural Gas)
■ Exclusive distribution rights to Continental LPG
and CNG fuel supply components for Australia
and New Zealand
■ LNG (Liquid Natural Gas)
■ Provision of fleet level heavy duty engine dual
fuel LNG – diesel substitution systems
■ 42:58% Orbital/Continental joint venture established
in 1997
■ Global manufacturer and supplier of engine
management systems (EMS) and electronic fuel
injection systems for non-automotive markets
■ Synerject has access to Continental automotive
components, purchasing and know how
■ Largest independent EMS supplier for non-
automotive applications
■ Specialist engineering consulting service based in
Perth, Western Australia, employing approximately
61 staff.
■ Engine design and development
■ Combustion systems
■ Fuel systems
■ Engine management systems
■ Alternative fuels (LPG, CNG, Ethanol, Heavy
Fuels)
■ Fuel economy and emissions solutions
Intellectual Property
ORBITAL
ORBITAL
Intellectual Property
Intellectual Property
■ Patented Orbital Technologies
■ Licensing
■ Royalties
1.1
2%
$’m sales
2 Orbital
Business
Segment
Business Name
& Brands
Alternative Fuels
ORBITAL
ALTERNATIVE FUELS
5.8
8%
$’m sales
Synerject
76%
51.4
9.5
25%
14%
$’m sales
1.1
2%
$’m sales
Orbital Share of Synerject Sales $’m
Consulting Services
ORBITAL
ORBITAL
Consulting
Consulting
Intellectual Property
ORBITAL
ORBITAL
Intellectual Property
Intellectual Property
Activities
Year in Brief
The Future
■ Revenue of $5,847k, with a loss of $2,764k compared to
$6,203k and $1,737k respectively in the previous year
■ Australian LPG system aftermarket subdued this year due to low
petrol prices and decreasing Government rebate
■ Increase in investment for next generation LPG systems
■ Ford introduction of the EcoLPi Falcon cars, using Orbital’s Liquid
LPG fuel system
■ Acquisition of Sprint Gas Australia, major domestic
distributorship
■ HSV offering Orbital’s Liquid LPG as option on prestigious
performance cars
■ 50 Liquid LPG aftermarket kits now available
■ Launch of EcoLPi Falcon
■ Inclusion of Sprint Gas Australia business for full year
■ Development of additional Liquid LPG system aftermarket kits,
covering popular Australian vehicle models. The Liquid LPG
systems offer
■ Fuel cost saving
■ Improved torque, power and cold starting
■ Emissions – up to 14% reduction in CO2 emissions vs
gasoline vehicle
■ Market growth will be influenced by increased petrol prices
■ Continue to explore opportunities in the CNG/LPG markets in
■ Acquisition of Sprint Gas Australia provides access to key Victorian
Australia and Asia
LPG market and outlet for Orbital’s Liquid LPG systems
■ Revenue of $US120,834k compared to US$90,375k in the
■ Develop China/Asia motorcycle sales opportunities as emission
previous year - 34% increase
legislation drives move to engine management systems
■ Equity accounted contribution to Orbital of $3,233k compared
■ Taiwan, with very stringent emission requirements, will remain a
to $1,874k in the previous year – 72% increase
key market for Synerject EMS
■ Taiwan is a key scooter market driven by the stringent emission
■ Expand the high end performance market with additional
standards
■ Successfully expanding high end product penetration in the
motorcycle and recreational markets
■ Investing in new products for the Asian motorcycle market
■ Expanding presence in India
■ Operating cashflow US$8,517k
motorcycle, snowmobile and ATV models
■ Initial sales into Lawn and Garden market
■ Develop low cost EMS systems to suit high volume, low cost
scooter markets
■ Revenue of $9,492k with contribution to group of $161k
compared to $9,621k and $1,031k respectively in the
previous year
■ Development of spark ignition heavy fuel engines for UAS
(Unmanned Aircraft Systems)
■ Mitchell Corporation
■ Provision of engine management expertise and development
support to Mitchell’s existing LNG truck fleet
■ Advanced Engineering Contracts
■ Contracts awarded for advanced fuel/combustion systems
for alternative fuels
■ Changan demonstrator program for the FlexDITM passenger car
successfully completed
■ Revenue $1,081k compared to $1,199k in the previous year
■ Contribution $610k compared to $732k in the previous year
■ North American marine market showing slight improvement,
however still well down on pre global financial crisis market.
■ Negative foreign exchange impact of $127k due to
strengthening Australian Dollar
■ Order book at 30th June of $4.63 million
■ UAS - niche area for Consulting Services
■ Supporting Corporate and Alternative Fuels growth initiatives
■ Increased workload for heavy duty test facilities
■ Fuel and Control Systems development for alternative. fuels
■ Engine emission certification
■ Fuel quality
■ Targeting engineering support for the resource sector
■ Marine market likely to remain flat given European and North
American markets financial situation
■ Motorcycle markets in Europe to remain low until driven by
future emission legislation
Annual Report 2011 3
Orbital achieved
a $2.46 million
year on year
improvement in
the underlying
result in FY2011.
Review of Operations
OPERATING AND FINANCIAL REVIEW
The headline financial results for Orbital for the year ended 30 June 2011 are shown below.
Alternative Fuels
- Revenue
- Contribution
Consulting Services
- Revenue
- Contribution
Licences & royalties
- Revenue
- Contribution
Total Revenue
Total Contribution
Synerject
- Revenue (100%)(1)
- Equity accounted profit
Unallocated other income
Unallocated other expenses
Foreign exchange gain/(loss)
Finance costs (net)
Research and development
Business development costs*
Government grant on restructure of loan*
Gain on sale of property*
Write-off capitalised development costs*
Provision for slow moving inventory*
Terminations costs*
Profit before tax
Taxation
Profit after tax
June 2011
June 2010
US$m
120.8
US$m
90.4
June 2011
$’000
June 2010
$’000
5,847
(757)
9,492
161
1,081
610
16,420
14
6,203
(1,727)
9,621
1,031
1,199
732
17,023
36
3,233
1,874
959
(2,809)
79
(353)
(1,158)
(205)
-
4,237
(1,065)
(942)
(417)
1,573
190
1,763
644
(3,488)
(97)
(513)
(1,152)
(595)
7,695
-
-
-
(276)
4,128
388
4,516
Underlying profit/(loss) (excluding one off items*)
155
(2,308)
(1) As reported by Synerject LLC.
Detailed comments on Orbital’s four business streams are as follows:
4 Orbital
Alternative
fuel system
development is
core to Orbital’s
growth strategy.
Orbital’s Liquid LPi systems were also introduced on Holden
Special Vehicles in late 2010, confirming that the systems
can meet the needs of Australia’s most prestigious and highest
performance cars.
In May 2011, Orbital acquired the business of SGA for
an initial investment of $2,000,000. SGA is a major LPG
distributor in Victoria, with a presence in most capital cities
in Australia. SGA offers a full range of LPG systems for
the aftermarket, and will be an outlet for Orbital’s Liquid LPi
systems. SGA also enables an Orbital presence in Victoria
which is the centre of Australia’s auto LPG markets and the
home of Australia’s automotive manufacturing businesses.
Orbital strategically invested in the LPG aftermarket at a time
when the Australian market was under pressure. The Australian
LPG aftermarket contracted throughout the year (approximately
50%), driven initially by the relatively lower differential
between the cost of petrol and LPG, and reduction in the
Government installation subsidy. However, LPG continues to
offer a lower cost, cleaner alternative to petrol. We acquired
a company that has a lead market share position in Australia.
Orbital’s initial investment is effectively net asset value and we
retain the support of the long standing owners. This positions
Orbital for future recovery in LPG markets.
Looking forward, Orbital is undertaking research and
development in the next generation of alternative fuels systems;
for example direct injection of alternative fuels. In the case of
CNG, direct injection can reclaim some of the performance
typically lost with manifold injection applications of CNG.
Orbital continues to support direct injection CNG projects for
international customers.
Alternative Fuels
Revenue
Contribution
Write-off of capitalised
development costs
Provision for slow moving
inventory
Segment result
June 2011
$’000
June 2010
$’000
5,847
(757)
6,203
(1,727)
(1,065)
(942)
-
-
(2,764)
(1,727)
Alternative fuel system development is core to Orbital’s growth
strategy. Long term projections for increased crude oil prices,
together with sovereign fuel security and requirements to
reduce vehicle emissions, drive this strategy. The USA has
announced major developments and sponsorship for use of
CNG (Compressed Natural Gas). In the Asia Pacific region,
the size of the CNG vehicle fleet increased by almost 16% to
6.7 million vehicle, with a global increase of 11%. In Europe
there is a push for increasing use of CNG and LPG (Liquid
Petroleum Gas) with European Automotive manufacturer’s
now offering product using both of these fuels. In the LNG
(Liquid Natural Gas) application the “Blue Corridor” (key
road transport routes with LNG readily available) is being
developed in Continental Europe. Orbital is already active in
this space and plans to grow in each of these markets.
Revenue decreased by approximately 6% compared to last
year due to Ford ceasing production of the previous generation
LPG Falcon at the end of September 2010. Revenue was
partly compensated by increased aftermarket sales including
contribution from Sprint Gas Australia (SGA) which was
acquired at the end of May 2011. Gross margins improved
due to the stronger Australian dollar compared to the Euro.
Operational efficiencies have also been introduced reducing
overheads resulting in an overall year on year improvement in
contribution of $970,000.
In conjunction with the acquisition of SGA, the Orbital Autogas
Systems operation was also reviewed. The contraction in
the LPG aftermarket prompted a write-down of previously
capitalised development costs for Liquid LPi aftermarket kits
($1,065,000). In addition it was decided to provide for slow
moving Liquid LPi aftermarket inventory ($942,000). In total
these non-cash adjustments amounted to $2,007,000.
Ford Australia has recently released their “EcoLPi” Ford Falcon
vehicle range equipped with Orbital’s Liquid LPG systems
(Liquid LPi). The response from the motoring press has been
very positive. Liquid LPi technology solves issues of emissions
compliance, cold start and reduced power compared with
previous LPG systems. Most importantly, fuel cost savings are
approximately $1,000 year based on current fuel costs for a
typical Australian family vehicle.
Ford Australia’s EcoLPi Falcon is the only dedicated LPG car built in
Australia
Annual Report 2011 5
Synerject
revenue
increased
by 34% to
US$ 120.83 m.
Review of Operations
Synerject
June 2011
US$’000
June 2010
US$’000
Revenue (100%)
Profit after tax (100%)
Operating cash flow,
after capex (100%)
120,834
6,500
90,375
4,744
8,517
5,957
Orbital equity accounted
contribution
A$’000
A$’000
3,233
1,874
Synerject, Orbital’s 42:58% Joint Venture Partnership with
Continental AG, is a key supplier of engine management
systems to the non-automotive market, with small engine
applications for scooters through to high performance
motorcycles, outboards and snowmobiles.
Synerject revenue increased by 34% to US$120,834,000
with a corresponding increase in profit after tax.
The marine and recreational markets are still impacted by
the ongoing effect of the global financial crisis however
Synerject achieved growth with investment in new products
which have been launched throughout the year. In particular,
Synerject has expanded in the supply of systems to the high
end market including snowmobiles and high performance
motorcycles.
Taiwan, with its stringent in-field emission requirements
remains a major market for Synerject, with 2 out of the 3
major Taiwanese motorcycle/scooter manufactures utilizing
Synerject product. China is the largest motorcycle market in
the world and has recently introduced motorcycle Euro III
emissions standards. This remains Synerject’s primary growth
target.
Synerject has also recently introduced new product into the
high volume utility and small engine markets.
Notwithstanding the revenue growth Synerject kept tight
control of working capital, generating increased cash flow
year on year. Synerject had net cash on hand at 30 June
2011 of US$2,291,000 (2010: US$3,316,000 net
debt). Orbital received dividends of A$1,208,000 from
Synerject during the year (2010: A$677,000).
Synerject production facility in Delavan, USA
6 Orbital
The Australian dollar has strengthened against the US dollar
over recent years adversely impacting the translated equity
accounted share of Synerject’s profit (FY2011: A$416,000
impact).
Synerject is well positioned in all of its markets and has a
number of new product launches planned in the next 12
months. Synerject has a strong balance sheet and the active
support of both parents.
Synerject Revenue
140
120
100
80
60
US $m
40
20
0
8
7
6
5
4
US $m
3
2
1
0
10
8
6
4
US $m
2
0
3.5
3
2.5
2
1.5
A $m
1
0.5
0
FY09
FY10
FY11
Synerject Profit After Tax
FY09
FY10
FY11
Synerject Free Cashflow
FY09
FY10
FY11
Orbital Equity Accounted Result
FY09
FY10
FY11
Orbital’s heavy
duty engine test
cell continues
to be in high
demand.
Consulting Services
June 2011
$’000
June 2010
$’000
Revenue
Contribution
9,492
161
9,621
1,031
Orbital Consulting Services (OCS) provides engineering
consulting services, design, development and testing in the
areas of engine design, engine combustion, fuel systems,
engine management systems, alternative fuels, engine
and vehicle testing and certification. Orbital provides fuel
economy and emissions solutions to a wide variety of vehicle
applications, from small displacement utility engines to large
transportation and power generation applications.
OCS revenue of $9,492,000 was marginally lower than
FY2010. A significant portion of OCS customers are
overseas and the strong Australian dollar has meant that
OCS services are less competitive globally and margins are
under pressure. Orbital continues to win new programs on a
consistent basis due to the unique technology and services
offered by Orbital, and the order book is higher now than
this time last year.
Orbital’s new dual fuel LNG system development continues
working with Western Australia’s Mitchell Corporation
(recently acquired by Toll Transport). The initial pilot level
fleet of three LNG system fitted prime movers has expanded
to nine. Mitchell has achieved significant fuel cost savings
compared to diesel fuel only operation and improved
reliability. Orbital’s success with the Mitchell LNG program
has generated interest from the broader transport industry.
To expand significantly in this segment will require industry
buy-in, expanded fuelling infrastructure and additional
investment. We see this as a growth area; however we
will continue to have a measured approach to limit Orbital’s
future financial exposure without limiting the upside in LNG
for transport.
Major work for OCS is the development of spark ignition
heavy fuel engines for UAS (unmanned aerial systems)
applications. Orbital’s proprietary FlexDITM systems enable
a petrol type engine to run on heavy fuels and continue to
deliver high performance. Orbital goes beyond FlexDITM
offering engine design, development and prototype engine
systems for various customer applications. We anticipate
that this segment of our business will grow and strategically it
is complementary to Orbital’s alternative fuels initiative.
The Changan program has been successfully completed,
confirming the capability of the Orbital FlexDITM fuel system,
which was integrated into Changan’s new Intelligent
Compound Combustion system (ICCS). Orbital and
Changan hit the target of 20% reduction for vehicle fuel
consumption as measured on the European Drive Cycle. The
improved performance of the engine was also demonstrated
in the vehicle assessment. Changan are satisfied with the
results and displayed the engine concept at the Shanghai
Auto show in April 2011.
Orbital’s heavy duty engine test cell continues to be in high
demand, with the test facility working extended hours during
the year to match customer demand plus supporting Orbital’s
large engine R&D. The heavy duty test facility has proven to
be a worthwhile investment.
Orbital’s core engineering group provides engineering fee
for service to external customers and creates new products
for the Orbital group. The support ranges from advanced
engine R&D through to development of LPG aftermarket kits
and support for customer application programs.
At 31 July, 2011 Orbital had an order book of $4,630,000
(30 June 2010: $3,400,000)
Royalties and Licences
June 2011
$’000
June 2010
$’000
Revenue
Contribution
1,081
610
1,199
732
Orbital earns royalties and licenses from products using
its FlexDITM systems and technology. The royalty bearing
products today are in the recreational and scooter/
motorcycle markets.
Orbital’s key royalty earning products, the Mercury Marine
Optimax and the Tohatsu TLDI, achieved a slight increase in
volume in a relatively flat global outboard engine market. As
Orbital’s royalties are predominantly earned in US Dollars
the volume increase was however offset by the strength of
the Australian Dollar.
The recreational market growth is expected to remain flat,
especially in the key North American market, due to financial
insecurity and the general careful use of discretionary income.
Changan’s ICCS engine incorporating Orbital’s FlexDI technology
Mercury Optimax outboard engines
Annual Report 2011 7
Orbital
acquired 55%
of the business
of Sprint Gas
Australia.
Review of Operations
Other
Outlook
The Orbital Board targeted a return to underlying operating
profits in FY2011. That has been achieved.
Year over year, changes in the exchange rate and markets
impacted profitability. The strong Australian dollar has
made our engineering services less competitive for overseas
customers and the translation of royalty revenue and Orbital’s
share of Synerject’s results were both negatively impacted.
The launch of the Ford EcoLPi Falcon range was delayed
which meant that OAGS sales of the newly developed Liquid
LPi system to Ford were negligible in FY2011. The Australian
LPG retrofit market is at record lows impacting the launch of
the recently developed LLi retrofit kits.
Notwithstanding the impacts to the operating environment
a $2,463,000 improvement in underlying operating result
was achieved through cost reduction and efficiencies and
the continuing growth of revenue and profits of Synerject.
Continued delivery on our strategy and the investments to
date provides a solid foundation for targeted growth in the
coming year:
Ford has now launched the EcoLPi Falcon which is receiving
excellent media coverage and positive feedback from the
market.
Synerject has launched a number of new products in FY2011
and plans further product launches in FY2012.
Sprint Gas was acquired on 27th May 2011 and will
contribute full year earnings in FY2012. Sprint Gas revenue
was approximately $7,300,000 in FY2011.
OAGS has now developed approximately 50 Liquid LPi
aftermarket kits and trained a national network of installers.
OAGS will also distribute through Sprint Gas’s long
established distribution channels.
Orbital’s UAS engine systems initiative is gaining momentum
and FlexDITM provides Orbital with a unique position in this
market.
Orbital expects Royalties to be flat year on year and the
Consulting Services business to provide some growth and a
marginally improved contribution. As noted above the OCS
order book at 31 July 2011 is $4,630,000.
The business efficiencies achieved in FY2011 will provide
benefits in FY2012 with reduction in overheads (on a like
for like basis). The integration of Sprint Gas will provide
synergistic benefits for both Sprint Gas and OAGS.
As noted above the sale of property has provided a cash
reserve for strategic growth. The Board will assess acquisition
opportunities as they arise and direct R&D investment in a
number of alternative fuel application opportunities.
The Orbital Board looks forward to growth, improving our
profitability and delivering sustainable operating cashflows.
In February 2011 Orbital completed the sale and leaseback
of its land and buildings in Balcatta for $8,650,000. The
sale generated a net profit of approximately $4,237,000
and provides cash reserves for strategic acquisitions such
as Sprint Gas and organic growth opportunities such as
the launch of the new Ford EcoLPi Falcon range of vehicles.
Orbital has entered into a lease agreement to rent the
facilities for 10 years (plus two 5 year options) for an initial
rent of $745,000 per annum.
In May 2011 Orbital acquired 55% of the business of Sprint
Gas Australia for $2,000,000. Sprint Gas, founded in
1978, imports, assembles and distributes automotive LPG
conversion kits in the Australian LPG aftermarket. Sprint Gas
generated sales of approximately $7,300,000 in FY2011
through distribution centres in Victoria, Queensland and
Western Australia. The Sprint Gas business will compliment
the recently developed range of Liquid LPi kits distributed by
Orbital Autogas Systems. Put and call options are in place
for the vendors remaining 45% holding of Sprint Gas which
Orbital records as contingent (future) consideration. Orbital
consolidates 100% of Sprint Gas. This business will be
reported in the Alternative Fuels segment going forward.
Research and development investment of $1,158,000
(2010: $1,152,000) related primarily to applications of
Orbital’s FlexDITM system in conjunction with the Changan
project in China.
During the year management irrevocably waived their right
to cash bonuses which were awarded and accrued in
FY2010, resulting in a credit to the Income Statement of
$407,000 in this year.
Other overhead expenses were managed closely and a
range of savings were achieved including corporate costs,
travel and accommodation, communication, insurance and
patent costs.
Cash Flow
Operating cash flows
Synerject dividend
Sale of Balcatta property
Acquisition of Sprint Gas
Other capital expenditures
and development costs
Financing cash flow
Movement in cash/short
term deposits
June 2011
$’000
June 2010
$’000
(1,792)
1,208
(584)
8,557
(1,780)
(1,074)
(1,848)
(5,049)
677
(4,372)
-
-
(2,478)
336
3,271
(6,514)
Net cash used in operating activities (including the receipt of
dividends from Synerject) was $584,000; an improvement
of $3,788,000 compared to FY2010. Cash utilised
for acquisition of plant and equipment and development
costs decreased to $1,074,000 (FY2010: $2,478,000)
as Orbital completed the investment in Liquid LPi retrofit
kits and the heavy duty engine test facility. Orbital repaid
$1,848,000 loans (2010: $336,000 net drawdown). At
30 June 2011 Orbital had cash and short term deposits of
$6,874,000 (June 2010: $3,608,000).
8 AnnuAl RepORt 2010
ORbitAl CORpORAtiOn limited
Directors’ Report
FOR THE YEAR ENDED 30 JUNE 2011
The Directors present their report together with the financial
report of Orbital Corporation Limited (the Company
or Orbital) and of the Group, being the Company, its
subsidiaries and the Group’s interest in its associates for the
year ended 30 June 2011 and the auditors’ report thereon.
Ref Contents of Directors’ Report
Page
1.
2.
3.
4.
5.
6.
Directors
Company Secretary
Principal Activities
Consolidated Result
Directors’ Meetings
Directors’ Interests
7. Operating and Financial Review
8.
9.
Dividends
State of Affairs
10. Events Subsequent to Balance Date
11.
Likely Developments and Expected Results
12. Share Options
13.
Indemnification and Insurance of Officers
14. Non-Audit Services
15.
Lead Auditor’s Independence Declaration
16. Rounding Off
17. Remuneration Report
1.
DIRECTORS
9
10
10
10
10
10
10
11
11
11
11
11
11
11
12
12
13
The Directors of the Company at any time during or since the
end of the financial year are:
Mr William Peter Day,
LLB (Hons), MBA, FCPA, FCA, GAICD
Chairman, Independent Non-Executive Director
Joined the Board and appointed Chairman in August 2007.
Mr Day retired as Chief Financial Officer of the global
packaging group Amcor in 2007. He has a diversified
background in finance and general management in mining,
manufacturing, food and financial services industries.
He has held senior executive and director positions with
Bonlac Foods, Rio Tinto, CRA and Comalco including Chief
Financial Officer at Commonwealth Aluminum Corporation
(USA) and Managing Director, CRA Business Services
in Australia. He is a former Chairman of the Australian
Accounting Standards Board, and was Deputy Chairman of
the Australian Securities & Investments Commission.
Mr Day is a member of the Company’s Audit Committee
and the Company’s Human Resources, Remuneration and
Nomination Committee.
Mr Day is a non-executive director of Ansell Limited (appointed
20 August 2007), SAI Global Limited (appointed 15 August
2008) and Centro Retail Trust Limited (also Chairman
appointed 01 October 2009). He is also involved in a
number of public interest activities.
Mr Terry Dewayne Stinson,
BBA (magna cum laude)
Managing Director and Chief Executive Officer
conglomerate
Joined the Board in June 2008. Mr Stinson has been a
senior executive with Siemens VDO, Europe’s largest
engineering
(recently purchased by
Continental Corporation), with direct responsibility for sales
in excess of US$300 million per annum in their Gasoline
Systems, Fuel Systems and Fuel Components operations in
the United States, Germany, Italy, China and support in
many others. Mr Stinson has also served as a representative
Director for Siemens VDO on the Synerject Board.
Prior to that, he held the position of VP Manufacturing for
Outboard Marine Corporation, a privately held US$1 billion
multinational outboard marine propulsion and boat company
and executive positions with Synerject and Mercury Marine.
Mr Stinson was appointed a Member of the Australian
Industry Innovation Council (AIIC) in 2009 and is Chairman
of Sprint Gas (Aust) Pty Ltd.
Dr Mervyn Thomas Jones,
B.E(Hons), Ph.D, DipBusStuds, CEng (UK), FIChemE (UK),
FAICD, MIoD (NZ)
Independent Non-Executive Director
Joined the Board in March 2008. Dr Jones has more than 40
years experience as a consulting engineer and as a senior
executive. He has specific expertise in the development and
management of organic business growth in the Asia Pacific
region, as well as acquisition experience in both Australia
and China.
Dr Jones chairs the Company’s Audit Committee (since 28
February 2011) and is also a member of the Company’s
Human Resources, Remuneration and Nomination Committee
(Chairman until 28 February 2011).
Dr Jones is also a non-executive director of Pacific Environment
Limited (appointed 3 July 2009, appointed Chairman 16
February 2010).
Dr Vijoleta Braach-Maksvytis,
BSc (Hons), Ph.D, MAICD
Independent Non-Executive Director
Joined the Board in March 2008. Dr Braach-Maksvytis is
an innovation strategist with more than 20 years experience
in organisational change, formation of cross-sectoral and
global partnerships, the commercialisation of technology,
and intellectual property strategy. Previous roles include
Head of the Office of the Chief Scientist of Australia, Science
Executive and Director Global Development for CSIRO,
and most recently, Deputy Vice Chancellor Innovation and
Development at the University of Melbourne, and is currently
an advisor in the area of social innovation.
Dr Braach-Maksvytis pioneered nanotechnology in Australia
and holds over 20 patents in the field. Dr Braach-Maksvytis
was a Member of the Australian Federal Government’s Green
Car Innovation Fund Committee and on the advisory board
of the Intellectual Property Research Institute of Australia, and
is a member of a number of other public interest boards.
Dr Braach-Maksvytis chairs
the Company’s Human
Resources, Remuneration and Nomination Committee (since
28 February 2011) and is also a member of the Company’s
Audit Committee.
Dr Braach-Maksvytis is also a non-executive director of AWE
Limited (appointed 7 October 2010).
Mr John Grahame Young,
LLB, FTIA, TEP
Independent Non-Executive Director
Mr Young retired from the Board on 28 February 2011.
Joined the Board in November 1985. Mr Young is a lawyer
with more than 30 years experience in corporate, revenue
and intellectual property law. He has been a director of
Cape Bouvard Investments Pty Ltd since 1998.
Mr Young chaired the Company’s Audit Committee and
was also a member of the Company’s Human Resources,
Remuneration and Nomination Committee.
ORbitAl CORpORAtiOn limited
AnnuAl RepORt 2010 9
Directors’ Report
FOR THE YEAR ENDED 30 JUNE 2011
2.
COMPANY SECRETARY
Mr Ian G Veitch, B.Bus, GradDipACG, CA was appointed
to the position of Company Secretary on 1 July 2009. He
is a Chartered Accountant with over 17 years experience
in corporate accounting and an Affiliate of Chartered
Secretaries Australia.
3.
PRINCIPAL ACTIVITIES
Orbital is an international developer of innovative technical
solutions for a cleaner world. Orbital provides innovation,
design, product development and operational improvement
services to the world’s producers, suppliers, regulators and
end users of engines and engine management systems
for applications in motorcycles, marine and recreational
vehicles, automobiles and trucks.
There were no significant changes in the nature of the
activities of the Group during the year.
4.
CONSOLIDATED RESULT
The consolidated profit after income tax for the year
attributable to the members of Orbital was $1,763,084
(2010:$4,515,451 profit).
5.
DIRECTORS’ MEETINGS
The number of Directors’ meetings (including meetings of the committees of Directors) and the number of meetings attended by each
of the Directors of the Company during the financial year are shown below.
Directors’
Meetings
Audit Committee
Meetings
Human Resources, Remuneration
& Nomination Committee Meetings
Director
No. of
meetings
attended
No. of
meetings
held*
No. of
meetings
attended
No. of
meetings
held*
No. of
meetings
attended
No. of
meetings
held*
W P Day
T D Stinson
M T Jones
V Braach-Maksvytis
J G Young
11
11
11
10
8
11
11
11
11
8
4
-
4
4
3
4
-
4
4
3
* number of meetings held during the time the director held office during the year.
3
-
3
3
2
3
-
3
3
2
6.
DIRECTORS’ INTERESTS
The relevant interest of each Director in the share capital of the
Company shown in the Register of Directors’ Shareholdings
as at the date of this report is as follows: -
Director
W P Day
T D Stinson
M T Jones
Ordinary
Shares
ELTSP
Rights
Performance
Rights
10,000
-
-
375,690 1,320,000 1,150,000
18,000
-
-
-
-
V Braach-Maksvytis
-
403,690 1,320,000 1,150,000
7.
OPERATING AND FINANCIAL REVIEW
A comprehesive review of operations of the consolidated
entity, is set out in pages 4 to 8 of this report.
10 Orbital
8.
DIVIDENDS
No dividend has been paid or proposed in respect of the
current financial year.
9.
STATE OF AFFAIRS
In May 2011, the Group acquired 55% of the voting shares
of Sprint Gas (Aust) Pty Ltd, a new company incorporated to
acquire the operating business of Sprint Gas, an Australian
business specialising in the importation and wholesaling
of LPG Fuel systems (refer note 38). There were no other
significant changes in the state of affairs of the Group during
the financial year, other than as reported elsewhere in the
financial statements.
10.
EVENTS SUBSEQUENT TO BALANCE DATE
On 11 August 2011 the Company announced that its
American Depositary Shares will begin trading on the NYSE
Amex on 25 August 2011.
There has not arisen in the interval between the end of the
financial year and the date of this report any other item,
transaction or event of a material and unusual nature likely,
in the opinion of the directors of the Company, to affect
significantly the operations of the Group, the results of those
operations, or the state of affairs of the Group, in future years.
11.
LIKELY DEVELOPMENTS AND EXPECTED RESULTS
Information as to the likely developments in the operations of
the Group is set out in the review of operations above. Further
information as to the likely developments in the operations
of the Group and the expected results of those operations
in subsequent financial years has not been included in this
report because to include such information would be likely to
result in unreasonable prejudice to the Group.
12.
SHARE OPTIONS
The Company has no unissued shares under option at the
date of this report.
13.
INDEMNIFICATION AND INSURANCE OF
OFFICERS
To the extent permitted by law, the Company indemnifies
every officer of the Company against any liability incurred
by that person:
(a) in his or her capacity as an officer of the Company; and
(b) to a person other than the Company or a related body
corporate of the Company
unless the liability arises out of conduct on the part of the
officer which involves a lack of good faith.
During the year the Company paid a premium in respect of
a contract insuring all Directors, Officers and employees of
the Company (and/or any subsidiary companies of which it
holds greater than 50% of the voting shares) against liabilities
that may arise from their positions within the Company and
its controlled entities, except where the liabilities arise out of
conduct involving a lack of good faith. The Directors have
not included details of the nature of the liabilities covered or
the amount of the premium paid in respect of the insurance
contract as disclosure is prohibited under the terms of the
contract.
14.
NON-AUDIT SERVICES
During the year Ernst & Young, the Company’s auditor, has
performed certain other services in addition to their statutory
duties.
The Board has considered the non-audit services provided
during the year by the auditor and in accordance with advice
provided by resolution of the Audit Committee is satisfied that
the provision of those non-audit services by the auditor during
the year is compatible with, and did not compromise, the
auditor independence requirements of the Corporations Act
2001 for the following reasons:
• all non-audit services were subject to the corporate
governance procedures adopted by the Company and
have been reviewed by the Audit Committee to ensure
that they do not impact the integrity and objectivity of the
auditor;
•
the non-audit services do not undermine the general
principles relating to auditor independence as set out
in Professional Statement F1 Professional Independence,
as they did not involve reviewing or auditing the auditor’s
own work, acting in a management or decision making
capacity for the Company, acting as an advocate for the
Company or jointly sharing risks and rewards.
Details of the amounts paid to the auditor of the Company,
Ernst & Young, and its related practices for audit and non-
audit services provided during the year are shown in note 42
to the financial statements.
Annual Report 2011 11
Directors’ Report
FOR THE YEAR ENDED 30 JUNE 2011
15.
LEAD AUDITOR’S INDEPENDENCE DECLARATION
UNDER SECTION 307C OF THE CORPORATIONS
ACT 2001
The directors received the following declaration from the
auditor of Orbital Corporation Limited.
Auditor’s independence declaration to the Directors of
Orbital Corporation Limited
In relation to our audit of the consolidated financial
report of Orbital Corporation Limited and
its
controlled entities for the year ended 30 June 2011,
to the best of my knowledge and belief, there have
been no contraventions of the auditor independence
requirements of the Corporations Act 2001 or any
applicable code of professional conduct.
Ernst & Young
G Lotter, Partner
Perth
23 August 2011
16.
ROUNDING OFF
The Company is of a kind referred to in ASIC Class Order
98/100 dated 10 July 1998 and in accordance with that
Class Order, amounts in the financial report and Directors’
Report have been rounded off to the nearest thousand dollars
unless otherwise indicated.
12 Orbital
17.
REMUNERATION REPORT - AUDITED
17.2.
Remuneration at a glance
Orbital’s remuneration strategy is designed to attract, motivate
and retain employees and non-executive directors by
identifying and rewarding high performers and recognising
the contribution of each employee to the continued growth
and success of the Group.
There have been no material changes to the medium-term
incentive (MTI) bonus plan for the 2011 financial year.
As in previous years, incentive payments are based on 1)
Profit after tax, 2) Operating Cash Flow, and 3) Pro-rata
Consolidated Sales.
Long-term incentive (LTI) awards consisting of shares that vest
based on attainment of pre-determined performance goals
are awarded to select executives. For the 2011 financial
year, the Company used relative total shareholder return
and earnings per share as the performance measures for
the share awards. During the 2011 financial year, the
performance hurdles for the 2008 grant of shares were not
met and no shares were vested.
As a result of the one for ten share consolidation conducted
by the Company during the financial year, all of the LTI
targets impacted by the number of shares outstanding have
been reset to maintain their relativity.
The remuneration of non-executive directors of the Company
consists only of directors’ fees and committee fees. Director
fees and committee fees were reviewed and adjusted during
the year. The Chairman, Mr Peter Day, sacrificed a portion
of his directors fee in the 2011 financial year.
Remuneration strategy
Orbital’s remuneration strategy is designed to attract, motivate
and retain employees and non-executive directors by
identifying and rewarding high performers and recognising
the contribution of each employee to the continued growth
and success of the Group.
To this end, key objectives of the Company’s reward
framework are to ensure that remuneration practices:
• Are aligned to the Group’s business strategy
• Offer competitive remuneration benchmarked against
the external market
• Provide strong linkage between individual and Group
performance and rewards
• Align the interests of executives with shareholders through
measuring total shareholder return (TSR)
Principles of compensation
This Remuneration Report for the year ended 30 June
2011 outlines the director and executive remuneration
arrangements of the Company and the Group in accordance
with the requirements of the Corporations Act 2001 and its
Regulations. For the purposes of this report Key Management
Personnel (KMP) are defined as those persons having authority
and responsibility for planning, directing and controlling the
major activities of the Company and the Group, directly
or indirectly, including any director (whether executive or
otherwise) of the parent company, and the senior executives
of the Group and Company. Remuneration disclosures for
two senior managers of the Group who are not KMP but are
within the 5 highest paid executives of the Company and the
Group is also presented.
The remuneration report is presented under the following
sections:
17.1. Individual key management personnel and other
executives disclosures
17. 2. Remuneration at a glance
17. 3. Board oversight of remuneration
17. 4. Non-executive director remuneration arrangements
17. 5. Executive remuneration arrangements
17. 6. Company performance and the link to
remuneration
17. 7. Executive contractual arrangements
17. 8. Remuneration tables
17. 9. Equity instruments
17.1.
Individual Key Management Personnel and
Other Executives Disclosures
Details of KMP and the highest paid executives of the
Company and the Group are set out below.
Key management personnel
(i) Directors
W Peter Day Chairman (Non-executive)
Mervyn T Jones (Non-executive)
Vijoleta Braach-Maksvytis (Non-executive)
J Grahame Young (Non-executive) –
retired 28 February 2011
Terry D Stinson (Executive)
(ii) Executives
Keith A Halliwell – Chief Financial Officer
B Anthony Fitzgerald – Director, Orbital Autogas Systems –
resigned 1 July 2011
Geoff P Cathcart – Director, Consulting Services &
Engineering
Other than the resignation of B Anthony Fitzgerald, there
were no other changes to KMP after reporting date and
before the date the financial report was authorised for issue.
Other executives
David R Worth – Director, Business Development, Orbital
Consulting Services
Ian G Veitch – Company Secretary
Annual Report 2011 13
Directors’ Report
FOR THE YEAR ENDED 30 JUNE 2011
17.3. Board Oversight of Remuneration
Structure
The remuneration of non-executive directors consists of
directors’ fees and committee fees. Non-executive directors
do not receive retirement benefits, nor do they participate in
any incentive programs.
The Chairman of the Board receives a fee of $105,000
which also covers membership of Committees of the Board.
The Chairman sacrificed a portion of his fee in the 2011
financial year. Each non-executive director receives a
base fee of $55,000 for being a director of the Group.
An additional fee of $3,500 is also paid for each Board
committee on which a non-executive director sits or $8,000
if the director is the Chairman of a Board committee. The
payment of additional fees for serving on a committee
recognises the additional time commitment required by non-
executive directors who serve on committees.
The remuneration of non-executive directors for the year
ended 30 June 2011 and 30 June 2010 is detailed in
Section 17.8 of this report.
17.5. Executive Remuneration Arrangements
Remuneration levels and mix
The Group aims to reward executives with a level and
mix of remuneration commensurate with their position and
responsibilities within the Group and aligned with market
practice. The Group undertakes an annual remuneration
review to determine the total remuneration positioning
against the market.
The CEO’s target remuneration mix comprises 60% fixed
remuneration, 20% target MTI opportunity and 20% LTI. The
LTI value is the total accounting expense associated with
the grant made during the financial year. Executives’ target
remuneration mix ranges from 65-85% fixed remuneration,
8-20% target MTI opportunity and 7-15% LTI.
Structure
In the 2011 financial year, the executive remuneration
framework consisted of the following components:
•
•
Fixed remuneration
Variable remuneration (MTI and LTI)
Human Resources, Remuneration and Nomination
Committee
The Human Resources, Remuneration and Nomination
Committee reviews and makes recommendations to the
Board on remuneration packages and policies applicable to
directors, secretary and senior executives of the Company.
Data is obtained from independent surveys to ensure that
compensation throughout the Group is set at market rates
having regard to experience and performance. In this
regard, formal performance appraisals are conducted at
least annually for all employees. Compensation packages
may include a mix of fixed compensation, performance-
based compensation and equity-based compensation.
The Human Resources, Remuneration and Nomination
Committee comprises three independent non-executive
directors. Further information on the committee’s role,
responsibilities and membership can be seen at www.
orbitalcorp.com.au.
Remuneration approval process
The Board approves the remuneration arrangements of
the CEO and executives and all awards made under the
long-term incentive (LTI) plan, following recommendations
from the Human Resources, Remuneration and Nomination
Committee. The Board also sets the aggregate remuneration
of non-executive directors which is then subject to shareholder
approval.
The Human Resources, Remuneration and Nomination
Committee approves, having regard to the recommendations
made by the CEO, the medium-term incentive (MTI) bonus
plan.
Remuneration structure
In accordance with best practice corporate governance,
the structure of non-executive directors and executive
remuneration is separate and distinct.
17.4. Non-Executive Director Remuneration
Arrangements
Remuneration policy
The Board seeks to set aggregate remuneration at a level that
provides the Company with the ability to attract and retain
directors of the highest calibre, whilst incurring a cost that is
acceptable to shareholders.
The amount of aggregate remuneration sought to be
approved by shareholders and the fee structure is reviewed
against fees paid to non-executive directors of comparable
companies. The Board considers advice from external
consultants when undertaking the review process.
The Company’s constitution and the ASX listing rules
specify that the non-executive directors’ fee pool shall be
determined from time to time by a general meeting. The latest
determination was at the 2001 annual general meeting
(AGM) held on 25 October 2001 when shareholders
approved an aggregate fee pool of $400,000 per year.
The Board will not seek any increase for the non-executive
director pool at the 2011 AGM.
14 Orbital
17.5. Executive Remuneration Arrangements (continued)
The table below illustrates the structure of Orbital Corporation Limited’s executive remuneration arrangements:
Remuneration component
Fixed compensation
MTI component
LTI component
Vehicle
Represented
by total fixed
remuneration
(TFR).
Comprises
base salary,
Superannuation
contributions
and other
benefits.
Paid in cash.
Purpose
Set with reference to role, market
and experience.
Executives are given the opportunity
to receive their fixed remuneration
in a variety of forms including cash
and fringe benefits such as motor
vehicles. It is intended that the
manner of payment chosen will be
optimal for the recipient without
creating undue cost for the Group.
Rewards executives for their
contribution to achievement of
Group outcomes.
Awards are
made in the
form of shares
or performance
rights.
Rewards executives for their
contribution to the creation of
shareholder value over the longer
term.
Link to performance
No link to company
performance.
Profit after tax.
Pro-rata Consolidated
Sales.
Operating Cash
Flows.
Vesting of awards is
dependent on Orbital
Corporation Limited’s
TSR performance
relative to a peer
group and its Earnings
Per Share.
Fixed compensation
Fixed compensation consists of base compensation (which is calculated on a total cost basis and includes any FBT charges related
to employee benefits including motor vehicles), as well as employer contributions to superannuation funds.
Executive contracts of employment do not include any guaranteed base pay increases. TFR is reviewed annually by the remuneration
committee. The process consists of a review of company, business unit and individual performance, relevant comparative
remuneration internally and externally and, where appropriate, external advice independent of management.
The fixed component of executives’ remuneration is detailed in Section 17.8.
Variable remuneration — short-term incentive (STI)
Orbital does not provide a STI for KMP.
Variable remuneration — medium-term incentive (MTI)
The medium term incentive, replacing the short term incentive, was established in 2009 to incentivise executives to achieve stretch
key performance indicators (KPI’s). The MTI plan is a target based plan rather than a time based plan.
Executive directors and senior executives may receive MTI bonuses based on the achievement of key performance indicators (“KPI’s”)
related to the performance of the Group over the medium term. The three KPI’s chosen by the Human Resource, Remuneration and
Nomination Committee in August 2009 relate to 1) Profit after tax, 2) Operating Cash Flow, and 3) Pro-rata Consolidated Sales.
These three measures are chosen as they directly align the individual’s reward to the Group’s strategy and performance.
The KPI’s are summarised as follows:
Key Performance Indicator
Proportion of MTI award
KPI applies to
Minimum KPI
$’000
Financial measure:
Profit after tax
Operating Cash Flow
Pro-rata Consolidated Sales
33%
33%
33%
100
100
100,000
Stretch KPI
$’000
9,000
2,700
150,000
Bonuses can only be paid if Orbital generates a profit after tax and also generates positive operating cash flow (before working
capital movements). Abnormal one-off items influencing the KPIs may be excluded at the discretion of the Human Resources,
Remuneration and Nomination Committee. No bonus will be paid unless the Board is satisfied that Orbital has sufficient cash
reserves.
Bonuses are awarded when a target is achieved which is higher than that which has already been achieved and rewarded. The
MTI earned accumulates over time as targets are achieved with any incremental MTI earned paid annually.
Annual Report 2011 15
Directors’ Report
FOR THE YEAR ENDED 30 JUNE 2011
17.5. Executive Remuneration Arrangements (continued)
Variable remuneration — medium-term incentive (MTI) (continued)
The total potential MTI available is set at a level so as to provide sufficient incentive to executives to achieve the operational
targets and such that the cost to the Group is reasonable in the circumstances.The annual MTI payments for executives are subject
to the approval of the Human Resources, Remuneration and Nomination Committee on an annual basis, after consideration of
performance against KPIs. This process usually occurs within three months after the reporting date. Payments made are delivered
as a cash bonus in the following reporting period.
MTI awards for 2010 and 2011 financial years
For the 2010 financial year, 100% of the MTI cash bonus of $406,645 as previously accrued in that period vested to executives,
however all participants in the MTI scheme voluntarily and irrevocably waived their right to their MTI cash bonuses. The Group
recorded a reversal of the MTI cash bonus of $406,645 during the current financial year.
The Human Resources, Remuneration and Nomination Committee has considered the MTI bonus for the 2011 financial year. The
MTI cash bonus available for the 2011 financial year is nil. This amount has been determined on the basis that 1) the Group’s Profit
after tax (after removing abnormal items) target for the year ended 30 June 2011 has been met, however 2) Positive Operating
Cash Flows for the year ended 30 June 2011 were not achieved, and 3) the Consolidated Pro-rata Sales of the Group have not
reached the minimum threshold of $100,000,000.
During the year the MTI bonus plan was altered so that Positive Operating Cash Flow (excluding working capital movements) is
now a pre-requisite for the payment of any MTIs.
Estimates of the minimum and maximum possible total value of the award over time is as follows:
Name
Position
Terry Stinson
Chief Executive Officer
Keith Halliwell
Chief Financial Officer
Tony Fitzgerald
Director, Orbital Autogas Systems
Geoff Cathcart
Director, Consulting Services and Engineering
David Worth
Director, Business Development, OCS
Ian Veitch
Company Secretary
Amount
(Min – Max)
0 - $630,000
0 - $359,478
0 - $332,013
0 - $269,325
0 - $166,971
0 - $72,114
The maximum bonus is only payable if the stretch targets on all three of the KPI’s are achieved. No bonus is awarded where
performance falls below minimum thresholds.
Variable remuneration — long-term incentives (LTI)
LTI awards are made annually to executives in order to align remuneration with the creation of shareholder value over the long-
term. As such, LTI awards are only made to executives and other key talent who have an impact on the Group’s performance
against the relevant long-term performance measure.
Employee Share Plan No.1
Senior executives (together with all other eligible employees) are each offered shares in the Company, at no cost to the employees,
to the value of $1,000 per annum under the terms of the Company’s Employee Share Plan. There are no performance conditions,
because the plan is designed to align the interests of participating employees with those of shareholders. Directors do not
participate in Share Plan No.1.
Executive Long Term Share Plan
Executives may also be offered rights in the Company’s Executive Long Term Share Plan under which offered shares will vest for
no consideration subject to the satisfaction of performance conditions over a 3 year period or subject to Board discretion for other
qualifying reasons. The performance conditions, which are based 50% on the relative ranking of the Total Shareholder Return
(“TSR”) of the Company to a group of selected peers, and 50% on Earnings Per Share (EPS) (FY2009: based 100% on TSR), apply
to determine the number of shares (if any) that vest to the Executives.
TSR is the percentage increase in a company’s share price plus reinvested dividends over a given period and reflects the increase
in value delivered to shareholders over that period. The peer group to which the Company’s TSR will be compared will comprise
the 50 smallest companies, other than resource companies and property and investment trust companies, within the S&P / ASX
300 Index. These companies have a similar market capitalisation to the Company. The TSR performance criterion was chosen
as it is widely accepted as one of the best indicators of shareholder wealth creation as it includes share price growth, dividends
and other capital adjustments. In addition, this criterion provides a readily obtained objective means of measuring the Group’s
performance against its peer group.
The Company’s TSR ranking at the end of the Performance Period, when compared to the TSR of the peer group will determine the
percentage of shares originally offered which will vest to the Executive.
16 Orbital
X
X
17.5. Executive Remuneration Arrangements (continued)
Variable remuneration — long-term incentives (LTI) (continued)
The following table sets out the relevant percentages of shares offered which will vest based on various percentile rankings of the
Company:
Company Performance
(TSR Ranking)
Up to the 50th percentile
% of offered shares
issued to each executive
0%
At or above the 50th percentile but below the 75th percentile
50% to 99% (on a straight line basis)
At or above the 75th percentile but below the 90th percentile
At or above the 90th percentile
100%
125%
No shares will be granted under the FY2009 offer unless the Company’s TSR is at or above the 50th percentile.
No shares will be granted under the FY2011 and FY2010 offers unless the Company’s TSR is at or above the 50th percentile or
the EPS for the years ended 30 June 2012 and 30 June 2013 is at or above 15 and 11 cents per share, respectively.
TSR Performance targets under the LTI offered in FY2008 were not met in FY2011 and as a result nil (2010: 911,400) shares
were issued to KMPs.
At the Company’s Annual General Meeting in October 2010, shareholders approved the above plan in relation to the ongoing
remuneration of the Executive Director.
Performance Rights Plan
The Company also introduced a Performance Rights Plan in 2009 as part of the employment contact of Mr T D Stinson. The
Performance Rights Plan was approved by shareholders in October 2008. The Board has no present intention to utilise the
Performance Rights Plan for any other senior executives.
Under the Performance Rights Plan, performance rights will only be issued if the terms and conditions detailed below are satisfied.
A performance right is a right to acquire one fully paid ordinary share in the Company. Until they are exercised, performance
rights:
(i) do not give the holder a legal or beneficial interest in shares of
the Company; and
(ii) do not enable participating executives to receive dividends,
rights on winding up, voting rights or other shareholder benefits.
Performance rights issued under the Performance Rights Plan will be
exercisable if:
(i) a performance hurdle is met over the periods specified by the
Board; or
(ii)
the Board allows early exercise on cessation of employment; or
(iii)
it is determined by the Board in light of specific circumstances.
The terms and conditions of the offer of Performance Rights made
during the year ended 30 June 2009 are as follows:
(i) Mr T D Stinson will be awarded 1,150,000 performance
rights;
(ii)
the grant of performance rights will be in seven tranches, each
tranche with a different specified share price target as set out in
the next column:
Tranche
Number of
performance rights
Share price
target
1
2
3
4
5
6
7
200,000
200,000
200,000
$2.50
$5.00
$7.50
200,000
$10.00
125,000
$20.00
125,000
$30.00
100,000
$50.00
The target share prices were chosen as they directly align the director’s reward with group strategy.
(iii)
the acquisition price and exercise price of the performance rights will be nil.
(iv) Mr T D Stinson will only be permitted to exercise a performance right if:
• the Company attains the specified share price target (see table above) within eight years from the date of grant of the
performance right; and
• the specified share price target is also achieved at the end of two years from the date the target is first achieved (“Vesting
Date”) based on the Company’s average closing share price over a 90 day period up to and including the Vesting Date;
(v)
If the specified share price target is either not achieved within eight years from the date of grant, or if so achieved, not also
achieved at the end of the Vesting Date, the performance right will lapse.
No performance rights were granted during the year ended 30 June 2011.
Annual Report 2011 17
Directors’ Report
FOR THE YEAR ENDED 30 JUNE 2011
17.5. Executive Remuneration Arrangements (continued)
Termination and change of control provisions
Where a participant ceases employment prior to the vesting of their award, the unvested shares are forfeited unless the Board
applies its discretion to allow vesting at or post cessation of employment in appropriate circumstances.
In the event of a change of control of the Group, the performance period end date will generally be brought forward to the date of
the change of control and awards will vest subject to performance over this shortened period, subject to ultimate Board discretion.
LTI awards for 2011 financial year
Shares were granted under the Employee Share Plan No.1 to a number of executives on 17 January 2011. No Shares were
granted under the Executive Long Term Share Plan or the Performance Rights Plan during the 2011 financial year.
Details in respect of the award are provided in Section 17.9.
17.6. Company performance and the link to remuneration
Company performance and its link to medium-term incentives
Performance linked compensation includes both medium-term and long-term incentives and is designed to reward key management
personnel for meeting or exceeding their financial and personal objectives. The medium-term incentive (MTI), which has replaced
the short term incentive, is an “at risk” bonus provided in the form of cash, while the long-term incentive (LTI) is provided as ordinary
shares of Orbital Corporation Limited under the rules of the various Share Plans.
In considering the Group’s performance and benefits for shareholders wealth the Human Resources, Remuneration and Nomination
Committee has regard to the following indices in respect of the current financial year and the previous four financial years.
Profit after tax, Pro-rata Consolidated Sales and Operating Cash Flows are considered in setting the MTI as they are considered
important medium term performance targets.
Company performance for the current year, the last 4 years and KPI targets are as follows:
Profit after tax
Operating Cash Flow
2007
$’000
1,333
(182)
2008
$’000
2009
$’000
2010
$’000
2011
$’000
Minimum KPI
$’000
Stretch KPI
$’000
469
(2,451)
4,516
1,763
73
(856)
(4,372)
(584)
positive
positive
100,000
9,000
2,700
150,000
Pro-rata Consolidated Sales
65,004
59,875
63,867
61,081
65,889
Operating Cash Flow (before
working capital movements)*
(250)
901
(2,372)
(2,934)
(833)
positive
Not applicable
* A positive operating cash flow (before working capital movements) must be achieved as a pre-condition for the payment of any
MTI.
Company performance and its link to long-term incentives
The performance measure which drives LTI vesting is the Company’s TSR performance relative to the companies within its peer
group and earnings per share (EPS). The table below show the performance of the Group as measured by the Group’s total
shareholder return (TSR) to the median of the TSR for peer group and also the Group’s earnings per share for the past five years
(including the current period) to 30 June 2011. The earnings per share values in the table below have been adjusted to reflect
the share consolidation undertaken during the reporting period.
Company performance for the current year and last 4 years is as follows:
2007
2008
2009
2010
2011
2012
Minimum
2013
Minimum
TSR ranking (percentile)
Earnings per share (cents)
*
3.00
76th
1.00
70th
(5.10)
56th
9.39
*
3.65
50th
15.00
50th
11.00
* The Company did not measure its TSR ranking in 2007 or 2011 as the Board determined that Orbital’s TSR would be below
the median TSR of the peer group.
As a result of the Company’s performance over the last five years, LTIs offered during 2005, 2006 and 2007 were fully vested
in financial year 2008 and partially vested in financial years 2009 and 2010 respectively. The performance target for the LTIs
offered in 2008 were not met during the financial year 2011 and as such no shares were vested.
18 Orbital
X
X
17.7. Executive contractual arrangements
Remuneration arrangements for KMP are formalised in employment agreements. Details of these contracts are provided below.
CEO
The CEO, Mr. Stinson, is employed under a rolling contract.
Under the terms of the present contract as disclosed to the ASX on 14 September 2007:
•
•
•
The CEO receives fixed remuneration of $350,000 per annum
The CEO’s target MTI opportunity per annum is 20% of annual TEC and his maximum MTI opportunity per annum is
60% of TEC
The CEO is eligible to participate in Orbital Corporation Limited’s LTI plan on terms determined by the Board, subject to
receiving any required or appropriate shareholder approval
The CEO’s termination provisions are as follows:
Notice
Period
Payment in lieu
of notice
Treatment of MTI
on termination
Treatment of LTI
on termination
Termination
payments
Employer initiated
termination
Termination for
serious misconduct
12 months
12 months
None
None
Pro-rated for time
and performance
Board discretion
None
Unvested awards
forfeited
Unvested awards
forfeited
None
Employee-initiated
termination
3 months
3 months
Unvested awards
forfeited
Unvested awards
forfeited subject to
Board discretion
None
Other KMP
All other KMP have rolling contracts.
Standard KMP termination provisions are as follows:
Notice
Period
Payment in
lieu of notice
Treatment of MTI
on termination
Treatment of LTI on
termination
Termination
payments
Employer
initiated
termination
1 month
1 month
Pro-rated for time
and performance
Board discretion
4 weeks pay, plus 2 weeks
pay for each completed
year of service, plus for each
completed year of service
beyond 10, an additional
1/2 weeks pay, plus a
pro-rata payment for each
completed month of service in
the final year. The maximum
entitlement to termination pay
is limited to 65 weeks pay.
Termination
for serious
misconduct
Employee-
initiated
termination
None
None
Unvested awards
forfeited
Unvested awards
forfeited
None
1 month
1 month
Unvested awards
forfeited
Unvested awards
forfeited subject to
Board discretion
None
Payments applicable to outgoing executives
The following arrangements applied to outgoing executives in office during the 2011 financial year:
•
•
Mr Fitzgerald received a termination payment of $288,241, in accordance with the Company’s policy on termination
payments, after over 29 years of service to the Group;
In accordance with the terms of the Company’s Executive Long Term Share Plan, Mr Fitzgerald’s Executive Long Term Share
Plan rights that had not reached their vesting date were forfeited.
Other than the termination of Mr Fitzgerald, there were no changes to the KMP of the Group for the year ended 30 June 2011
or subsequent to 30 June 2011.
Annual Report 2011 19
Directors’ Report
FOR THE YEAR ENDED 30 JUNE 2011
17.8. Remuneration Tables
Details of the nature and amount of each major element of remuneration of each director of the Company and each of the five
named Company executives, and relevant group executives who receive the highest remuneration are:
Non-executive Directors
W Peter Day
Chairman (Non-executive)
Mervyn T Jones
Director (Non-executive)
Vijoleta Braach-Maksvytis
Director (Non-executive)
J Grahame Young
Director (Non-executive)
Total Consolidated, all non-executive directors
Executive Director
Terry D Stinson
Director and Chief Executive Officer
Total Consolidated, all specified directors
Executives
Keith A Halliwell
Chief Financial Officer
B Anthony Fitzgerald (e)
Director, Orbital Autogas Systems
Geoff P Cathcart
Director, Consulting Services & Engineering
Other executives
David R Worth (f)
Director, Business Development OCS
Ian G Veitch (f)
Company Secretary
Total Consolidated, all specified executives
Year
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
Year
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
Short Term
Post Employment
Share Based Payments
Termination
Payments
Salary and
Director's
Fees
$
Cash
Bonuses
$ (a)
Total
$
Employer
Superannuation
Contributions
$
Employee
Share Plans
$ (b)(c)
Performance
Rights Plan
$ (d)
$
Total
$
Proportion of
remuneration
performance
related
% (g)
63,075
96,376
60,827
55,092
57,955
50,505
41,949
52,358
223,806
254,331
322,892
321,101
546,698
575,432
-
-
-
-
-
-
-
-
-
-
(140,000)
140,000
(140,000)
140,000
63,075
96,376
60,827
55,092
57,955
50,505
41,949
52,358
223,806
254,331
182,892
461,101
406,698
715,432
5,676
8,674
5,475
4,958
5,216
4,545
3,775
4,712
20,142
22,889
36,144
38,532
56,286
61,421
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
113,800
58,383
113,800
58,383
49,283
49,283
49,283
49,283
-
-
-
-
-
-
-
-
-
-
-
-
-
-
68,751
105,050
66,302
60,050
63,171
55,050
45,724
57,070
243,948
277,220
382,119
607,299
626,067
884,519
-
-
-
-
-
-
-
-
-
-
31.2%
40.8%
21.3%
28.0%
Short Term
Post Employment
Share Based Payments
Termination
Payments
Employer
Superannuation
Contributions
$
Employee
Share Plans
$ (b)(c)
Performance
Rights Plan
$ (d)
Proportion of
remuneration
performance
related
% (g)
Total
$
Salary and
Director's
Fees
$
Cash
Bonuses
$ (a)
256,694
245,701
230,593
225,629
196,340
186,998
174,288
170,203
155,268
147,926
(79,884)
79,884
(73,781)
73,781
(59,850)
59,850
(37,105)
37,105
(16,025)
16,025
Total
$
176,810
325,585
156,812
299,410
136,490
246,848
137,183
207,308
139,243
163,951
28,757
27,439
27,671
27,076
18,841
16,669
20,915
20,424
12,985
12,325
59,542
46,982
(41,647)
39,917
42,427
31,172
17,571
16,002
14,033
11,448
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
288,241
-
-
-
-
-
-
-
265,109
400,006
431,077
366,403
197,758
294,689
175,669
243,734
166,261
187,724
17.3%
31.7%
-8.2%
31.0%
16.5%
30.9%
8.3%
21.8%
7.7%
14.6%
6.1%
27.6%
1,013,183
976,457
(266,645)
266,645
746,538
1,243,102
109,169
103,933
91,926
145,521
288,241
-
1,235,874
1,492,556
Notes in relation to the table of directors’ and executive officers remuneration
(a)
Bonuses are those paid or accrued as payable in relation to the year reported. For the 2010 financial year, 100% of
the MTI cash bonus of $406,645 as previously accrued in that period vested to executives, however all participants in
the MTI scheme voluntarily and irrevocably waived their right to their MTI cash bonuses. The Group recorded a reversal
of the MTI cash bonus of $406,645 during the current financial year.
(b)
The fair value of the Employee Share Plan #1 is based upon the market value (at offer date) of shares offered.
(c)
The fair value of the Executive Long Term Share plan (“ELTSP”) is calculated at the date of grant through utilisation of the
assumptions underlying the Black-Scholes methodology to produce a Monte-Carlo simulation model and is allocated to
each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the
fair value of the rights recognised in this reporting period. In valuing the rights the market based hurdles that must be met
before the executive long term share plan rights vest in the holder have been taken into account.
20 Orbital
X
X
17.8. Remuneration Tables (continued)
TSR related rights
The following factors and assumptions were used in determining the fair value of TSR related rights issued under the ELTSP
on grant date:
Grant Date
Life
Fair Value
per right
Exercise
Price
Market price
of shares on
grant date
Expected
volatility
Risk free interest
rate
31-Aug-08
3 years
58 cents
31-Aug-09
3 years
38 cents
31-Aug-10
3 years
33 cents
nil
nil
nil
79 cents
62.70%
55 cents
65.00%
34 cents
60.00%
5.68%
5.03%
4.27%
EPS related rights
The following factors and assumptions were used in determining the fair value of EPS related rights issued under the ELTSP
on grant date:
Grant Date
Life
Fair Value
per right
Exercise
Price
Market price
of shares on
grant date
31-Aug-09
3 years
55 cents
31-Aug-10
3 years
34 cents
nil
nil
55 cents
34 cents
The fair value of the EPS related rights is equal to the market price of shares on the grant date.
(d)
The fair value of the Performance Rights is calculated at the date of grant through utilisation of the assumptions underlying
the Black-Scholes methodology to produce a Monte-Carlo simulation model and allocated to each reporting period evenly
over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the performance
rights recognised in this reporting period. In valuing the performance rights the hurdles that must be met before the
executive long term share plan shares vest in the holder have been taken into account.
Grant Date
Life
Fair Value
per right
Target
price
Market price
of shares on
grant date
Expected
volatility
Risk free interest
rate
31-Aug-08
10 years
47 cents
$2.50
79 cents
55.00%
31-Aug-08
10 years
35 cents
$5.00
79 cents
55.00%
31-Aug-08
10 years
28 cents
$7.50
79 cents
55.00%
31-Aug-08
10 years
23 cents
$10.00
79 cents
55.00%
31-Aug-08
10 years
13 cents
$20.00
79 cents
55.00%
31-Aug-08
10 years
9 cents
$30.00
79 cents
55.00%
31-Aug-08
10 years
5 cents
$50.00
79 cents
55.00%
5.75%
5.75%
5.75%
5.75%
5.75%
5.75%
5.75%
(e)
(f)
Mr Fitzgerald ceased to be a KMP on 1 July 2011.
Mr Worth and Mr Veitch are included above as their remuneration is within the 5 highest paid executives not being
directors or KMP.
(g)
The reversal of the cash bonus has been excluded from the calculation of proportion of remuneration performance related.
17.9. Equity Instruments
All shares refer to ordinary shares of Orbital Corporation Limited.
Analysis of Shares Offered as Compensation
Details of the shares offered under the LTI to each key management person and specified senior managers during the reporting
period are as shown below. Please refer to footnote (b) below for the terms and conditions relating to the granting of the rights
offered under the Executive Long Term Share Plan.
Annual Report 2011 21
Directors’ Report
FOR THE YEAR ENDED 30 JUNE 2011
17.9.
Equity Instruments (continued)
Analysis of Shares Offered as Compensation (continued)
Employee Share Plan No. 1
Executive Long Term Share Plan
Executive Director
T D Stinson
Executives
K A Halliwell
B A Fitzgerald
G P Cathcart
Other executives
DW Worth
IG Veitch
Number of
shares
issued
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
-
-
3,369
1,625
3,369
1,625
3,369
1,625
3,369
1,625
3,369
1,625
Number of
Value (a) Rights Granted/ Value (b)
(Forfeited)
$
$
-
-
665,000
525,000
222,775
244,125
Price
-
-
$0.2968
$0.6160
$0.2968
$0.6160
$0.2968
$0.6160
1,000
1,000
1,000
1,000
1,000
1,000
337,567
266,500
(316,000)
246,000
252,700
199,500
113,085
123,923
-
114,390
84,655
92,768
Number of
Rights
Vested
-
-
-
40,920
-
34,100
-
16,120
$0.2968
$0.6160
$0.2968
$0.6160
1,000
1,000
1,000
1,000
88,033
69,500
76,000
60,000
29,492
32,318
25,460
27,900
-
14,880
-
3,100
(a)
(b)
(c)
(d)
The fair value of the employee share plan No. 1 based upon the market value (at offer date of 31 October 2010 and
31 October 2009 respectively) of shares offered. These awards are fully vested.
Represents the fair value of rights offered on 31 August 2010 and 31 August 2009 respectively using a Monte-Carlo
simulation model. The vesting of the shares offered on 31 August 2010 is subject to the achievement of two performance
conditions; a) 50% related to the Total Shareholder Return (“TSR”) of the Company compared to a peer group of selected
companies over a three year period, and b) 50% related to the Group achieving earnings in excess of 11 cents per share
for the year ending 30 June 2013. The vesting of the shares offered on 31 August 2009 is subject to the achievement of
two performance conditions; a) 50% related to the Total Shareholder Return (“TSR”) of the Company compared to a peer
group of selected companies over a three year period, and b) 50% related to the Group achieving earnings in excess of
15 cents per share for the year ending 30 June 2012. Performance conditions were met in respect of shares offered in
August 2006 and shares in relation to that offer were vested at the expiration of the performance period during the 2010
financial year.
No performance rights vested during the years ended 30 June 2011 or 30 June 2010.
As a result of the one for ten share consolidation conducted on 20 October 2010 by the Company, all of the KPIs
impacted by the number of shares outstanding have been reset by a multiple of 10 to maintain their relativity, whilst the
number of rights outstanding for each offer has been divided by 10. The share consolidation did not change the time
remaining to expiry of the rights outstanding or change the total fair value of the rights outstanding at the time of the
Company undertaking the share consolidation. Refer to note 36 for details of number of awards outstanding and their
new terms and conditions. The share price on the consolidation date was $0.27.
End of Remuneration Report
Signed in accordance with a resolution of the Directors:
W P DAY
Director
T D STINSON
Managing Director
Dated at Perth, Western Australia this 23rd day of August 2011.
22 Orbital
Corporate Governance Statement
FOR THE YEAR ENDED 30 JUNE 2011
1.
CORPORATE GOVERNANCE AT ORBITAL
The Board of Directors of Orbital Corporation Limited is
responsible for the corporate governance of the Group.
The Board guides and monitors the business and affairs of
the Group on behalf of the shareholders by whom they are
elected and to whom they are accountable. This statement
reports on Orbital’s key governance principles and practices.
These principles and practices are reviewed regularly
and revised as appropriate to reflect changes in law and
developments in corporate governance.
The Company, as a listed entity, must comply with the
Corporations Act 2001 (Cwth) (Corporations Act), the
Australian Securities Exchange (ASX) Listing Rules (ASX
Listing Rules) and other Australian and international laws.
The ASX Listing Rules requires the Company to report on the
extent to which it has followed the Corporate Governance
the ASX Corporate
Recommendations contained
Governance Council’s (ASXCGC) second edition of its
Corporate Governance Principles and Recommendations
(August 2007). Orbital believes that, throughout the 2011
financial year and to the date of this report, it has complied
with all the ASXCGC Recommendations.
in
Information on Orbital’s corporate governance framework
is also provided in the Corporate Governance section of
Orbital’s website (www.orbitalcorp.com.au)
2.
BOARD OF DIRECTORS
2.1
Role of the Board
ASXCGC Recommendations 1.1, 1.3
The Board’s primary role is to protect and enhance long-term
shareholder value by providing strategic guidance to the
Group and effective oversight of management.
To fulfil this role, the Board is responsible for the overall
corporate governance of the Group including formulating
its strategic direction, approving and monitoring capital
expenditure, setting remuneration, appointing, removing
and creating succession policies for directors and senior
executives, establishing and monitoring the achievement of
management’s goals and ensuring the integrity of internal
control and management information systems.
It is also responsible for approving and monitoring financial
and other reporting. A copy of the Board’s Charter is
available in the Corporate Governance section of Orbital’s
website.
The Board has delegated responsibility for operation and
administration of the Group to the Chief Executive Officer
and executive management. Responsibilities are delineated
by formal authority delegations.
The Board conducts an annual review of its processes to
ensure that it is able to carry out its functions in the most
effective manner.
2.2
Composition of the Board
ASXCGC Recommendations 2.1, 2.2, 2.3, 2.6
The names and qualifications of the directors of the Company
in office at the date of this Report are detailed in the Directors’
Report on page 9.
The composition of the Board is determined using the
following principles:
•
•
•
•
A minimum of three directors, with a broad range of
expertise;
An independent non-executive director as Chairman;
A majority of independent non-executive directors;
and
The role of Chief Executive Officer (CEO) and
Chairman should not be exercised by the same
individual.
An independent director is a non-executive director who:
•
•
•
•
•
•
•
is not a substantial shareholder of the company or
an officer of, or otherwise associated directly with,
a substantial shareholder of the company;
within the last three years has not been employed in
an executive capacity by the company or another
group member, or been a director after ceasing to
hold any such employment;
within the last three years has not been a principal
of a professional adviser or a consultant to the
company or another group member, or an employee
materially associated with the service provided;
is not a material* supplier or customer of the
company or other group member, or an officer of
or otherwise associated directly or indirectly with a
material supplier or customer;
has no material* contractual relationship with the
company or another group member other than as a
director of the company;
has not served on the board for a period which
could, or could reasonably be perceived to,
materially interfere with the director’s ability to act in
the best interests of the company; and
is free from any interest and any business or other
relationship which could, or could reasonably be
perceived to, materially interfere with the director’s
ability to act in the best interests of the company.
*No non-executive director is a supplier to or
customer of the Group, nor does any non-executive
Director have a contractual relationship with the
Group (other than as a director of the Company)
and therefore the Board has not had to consider any
materiality threshold.
2.3
Conflicts of Interest
In accordance with the Corporations Act 2001 and the
Company’s constitution, directors must keep the Board
advised, on an ongoing basis, of any interest that could
potentially conflict with those of the Company. Where the
Board believes that a significant conflict exists the director
concerned must not be present at the meeting whilst the
item is considered or vote on the matter. The Board has
procedures in place to assist directors to disclose potential
conflicts of interest.
2.4
Board Succession Planning
ASXCGC Recommendation 2.6
The Board manages its succession planning with the
assistance of the Human Resources, Remunerations and
Nominations Committee. The Committee annually reviews
the size, composition and diversity of the Board and the mix
Annual Report 2011 23
Corporate Governance Statement
FOR THE YEAR ENDED 30 JUNE 2011
of existing and desired competencies across members and
reports its conclusions to the Board. In conducting the review
a skills matrix is used to enable the Committee to assess
the skills and experience of each director and the combined
capabilities of the Board.
•
•
the performance of the Board and each of its
committees against
their
respective charters; and
requirements of
the
the individual performance of the Chairman and
each director.
the
importance of Board
Recognising
the
Committee takes each director’s tenure into consideration in
its succession planning.
renewal,
2.5
Directors’ Retirement and Re-election
ASXCGC Recommendation 2.6
Non-executive directors must retire at the third AGM following
their election or most recent re-election. At least one non-
executive director must stand for election at each AGM. Any
director appointed to fill a vacancy since the date of the
previous AGM must submit themselves to shareholders for
election at the next AGM.
Board support for a director’s re-election is not automatic and
is subject to satisfactory director performance.
2.6
Directors’ Appointment, Induction Training and
Continuing Education
All new directors are required to sign and return a letter of
appointment which sets out the key terms and conditions of
their appointment, including duties, rights and responsibilities,
the time commitment envisaged and the Board’s expectations
regarding their involvement with committee work.
As part of the induction process, new directors are provided
with detailed information about the nature of the Group’s
business, current issues, group strategy, financial matters,
policies and procedures and are given the opportunity to
meet with management to obtain an insight into the Group’s
business operations.
All directors are expected to maintain the skills required to
discharge their obligations to the company. Directors are
encouraged to undertake continuing professional education
including industry seminars and approved education courses.
2.7
Board Access to Independent Professional Advice
and Company Information
ASXCGC Recommendation 2.6
Each director has the right of access to all relevant Company
information and to the Group’s executives and, subject to
prior consultation with the Chairman, may seek independent
professional advice from a suitably qualified adviser at
the Group’s expense. The director must consult with an
advisor suitably qualified in the relevant field, and obtain
the Chairman’s approval of the fee payable for the advice
before proceeding with the consultation. A copy of the
advice received by the director is made available to all other
members of the board.
2.8
Review of Board Performance
ASXCGC Recommendations 2.5, 2.6
The Human Resources, Remuneration and Nomination
Committee is responsible for determining the process for
evaluating Board performance. Evaluations are conducted
by way of questionnaires appropriate in scope and content
to effectively review:
24 Orbital
The performance of each director retiring at the next AGM
is taken into account by the Board in determining whether or
not the Board should support the re-election of the director.
2.9
Directors’ Remuneration
Details of remuneration paid to directors (executive and non-
executive) are set out in the Remuneration Report on pages 13
to 22. The Remuneration Report also contains information on
the Company’s policy for determining the nature and amount
of remuneration for directors and senior executives and the
relationship between the policy and company performance.
Shareholders will be invited to consider and approve the
Remuneration Report at the 2011 AGM.
2.10 Board Meetings
The full Board currently holds six scheduled meetings each
year, plus strategy meetings and any extraordinary meetings
at such other times as may be necessary to address any
specific significant matters that may arise.
The agenda for meetings is prepared in conjunction
with the Chairman, Managing Director and Company
Secretary. Standing items include the managing director’s
report, financial reports, strategic matters, governance
and compliance. Submissions are circulated in advance.
Executives are regularly involved in board discussions
and directors have other opportunities, including visits to
operations, for contact with a wider group of employees.
2.11 Company Secretary
Details of the Company Secretary are set out on page
10 of the Directors’ Report. The appointment and removal of
a Company Secretary is a matter for decision by the Board.
The Company Secretary is responsible for ensuring that
Board procedures are complied with and that governance
matters are addressed.
3.
COMMITTEES OF THE BOARD
3.1
Board Committees, Membership and Charters
ASXCGC Recommendations 2.4, 2.6, 4.1, 4.2, 4.3, 4.4,
8.1, 8.3,
To assist in the execution of its responsibilities, the Board
has established a number of Board Committees including
an Audit Committee and a Human Resources, Remuneration
and Nomination Committee. These committees have written
mandates and operating procedures, which are reviewed
on a regular basis. The effectiveness of each committee is
also constantly monitored. The Board has also established
a framework for the management of the Group including a
system of internal control and the establishment of appropriate
ethical standards.
3.2
Audit Committee
ASXCGC Recommendations 4.1, 4.2, 4.3, 4.4
The role of the Audit Committee is to give the Board of
Directors additional assurance regarding the quality and
reliability of financial information prepared for use by the
Board in determining accounting policies for inclusion in the
financial report. The Committee has a documented charter,
approved by the Board. A copy of the Audit Committee’s
Charter is available in the Corporate Governance section
of Orbital’s website. All members of the Committee must be
independent, non-executive directors.
Members of the Audit Committee during the year were Mr J
G Young (Chairman – 1 July 2010 to 28 February 2011),
Dr M T Jones (Chairman – from 28 February 2011), Mr W
P Day and Dr V Braach-Maksvytis. The external auditors,
Chief Executive Officer, Chief Financial Officer, Company
Secretary and other financial and accounting staff are
invited to Audit Committee meetings at the discretion of
the Committee. The Chief Executive Officer and Chief
Financial Officer declared in writing to the Board that the
Company’s financial reports for the year ended 30 June
2011 present a true and fair view, in all material respects,
of the Company’s financial condition and operational results
and are in accordance with relevant accounting standards.
This statement is required annually.
The responsibilities of the Audit Committee include, liaising
with the external auditors and ensuring that the annual
and half-year statutory audits/reviews are conducted in
an effective manner; reviewing and ensuring management
implement appropriate and prompt remedial action for any
deficiencies identified; monitoring compliance with Australian
and international taxation requirements; the Australian and
United States corporations laws and ASX Listing Rules; and
improving quality of the accounting function.
The Audit Committee reviews the performance of the
external auditors on an annual basis and meets with them
to discuss audit planning matters, statutory reporting and as
required for any special reviews or investigations deemed
necessary by the Board. The Audit Committee also assesses
whether non-audit services provided by the external auditor
are consistent with maintaining the external auditor’s
independence and provides advice to the Board whether
the provision of such services by the external auditor is
compatible with the general standard of independence
of auditors imposed by the Corporations Act. The Audit
Committee charter provides for rotation of the external audit
partner every five years.
3.3
Human Resources, Remuneration and
Nomination Committee
ASXCGC Recommendations 2.4, 2.6
role of
The
the Human Resources, Remuneration
and Nomination Committee is to review and make
recommendations to the Board on the remuneration
packages and policies applicable to the Chief Executive
Officer, senior executives and directors. It also plays
a role in evaluation of the performance of the Chief
Executive Officer and management succession planning.
This role also includes responsibility for employee share
schemes, incentive performance packages, superannuation
fringe benefits policies and professional
entitlements,
indemnity and liability insurance policies. From time-to-time,
the Remuneration Committee obtains independent advice on
the appropriateness of remuneration packages, given trends
in comparative companies both locally and internationally.
The Committee also oversees the appointment and induction
process for directors. It reviews the composition of the Board
and makes recommendations on the appropriate skill mix,
personal qualities, expertise and diversity. When a vacancy
exists or there is a need for particular skills, the Committee, in
consultation with the Board, determines the selection criteria
based on the skills deemed necessary. Potential candidates
are identified by the Committee with advice from an external
consultant, where appropriate. The Board then appoints
the most suitable candidate who must stand for election at
the next general meeting of shareholders. The Nomination
Committee is also responsible for the selection, appointment
and succession planning process of the Company’s Chief
Executive Officer.
Members of the Human Resources, Remuneration and
Nomination Committee during the year were Dr M T Jones
(Chairman – 1 July 2010 to 28 February 2011), Dr V
Braach-Maksvytis (Chairman – from 28 February 2011), Mr
W P Day and Mr J G Young (retired 28 February 2011).
The Human Resources, Remuneration and Nomination
Committee meet as and when required. The Committee
has a documented charter, approved by the Board. A copy
of the Human Resources, Remuneration and Nomination
Committee’s Charter
the Corporate
is available
Governance section of Orbital’s website.
in
The performance of all Directors is reviewed by the Chairman
each year. Directors whose performance is unsatisfactory
are asked to retire.
4
SHAREHOLDERS
4.1
Shareholder Communication
ASXCGC Recommendations 6.1, 6.2
Directors recognise that shareholders, as the ultimate
owners of the Company, are entitled to receive timely and
relevant high quality information about their investment.
Similarly, prospective new investors are entitled to be able
to make informed investment decisions when considering the
purchase of shares.
Information is communicated to shareholders as follows:
•
•
•
The disclosure of full and timely information about
Orbital’s activities in accordance with the disclosure
requirements contained in the ASX Listing Rules and
the Corporations Act;
All information released to the market to be placed
on the Company’s website promptly following
release;
The annual financial report is distributed to all
shareholders (and to American Depositary Receipt
(ADR) holders) on request in accordance with
Corporation Act requirements and includes relevant
information about the operations of the Group during
the year, changes in the state of affairs of the Group
and details of future developments, in addition to
other disclosures required by the Corporations Act
and US Securities Law;
Annual Report 2011 25
Corporate Governance Statement
FOR THE YEAR ENDED 30 JUNE 2011
•
The half-yearly report contains summarised financial
information and a review of the operations of
the Group during the period. The half-year
financial report is prepared in accordance with
the requirements of Accounting Standards and the
Corporations Act and is lodged with Australian
and United States regulatory bodies and stock
exchanges. Financial reports are sent to any
shareholder or ADR holder who requests them; and
The Board encourages participation of shareholders
at the Annual General Meeting to ensure a high level of
accountability and identification with the Group’s strategy
and goals. Important issues are presented to the shareholders
as single resolutions. The Company’s external auditor is
requested to attend annual general meetings to answer
any questions concerning the audit and the content of the
auditor’s report.
Shareholders are requested to vote on the appointment
of Directors, aggregate remuneration of non-executive
directors, the granting of shares to Directors and changes to
the Constitution. A copy of the Constitution is available to
any shareholder who requests it.
4.2
Continuous Disclosure and Market
Communications
ASXCGC Recommendations 5.1, 5.2
The Board of Directors aims to ensure that shareholders are
informed of all major developments affecting the Group’s
state of affairs. The Board has adopted a policy to identify
matters that may have a material effect on the price of the
Company’s securities and to notify the ASX as required.
This policy on Release of Price Sensitive Information is
overseen and coordinated by the Company Secretary.
All directors, officers and members of the Company’s
management committee are required to forward details of
any potentially price sensitive information to the Company
Secretary, who is also to be made aware, in advance, of
proposed information disclosures (including information to be
presented at private briefings) to enable consideration of the
continuous disclosure requirements. Proposed announcements
are to be approved by the Managing Director and either the
Chairman or Company Secretary prior to release to the ASX.
The Company Secretary is responsible for all communications
with the ASX.
The Company’s policy on Release of Price Sensitive
Information and
its policy on communication with
shareholders are available in the Corporate Governance
Section of Orbital’s website.
5.
PROMOTING RESPONSIBLE AND ETHICAL
BEHAVIOUR
5.1
Code of Conduct and Whistleblower Policy
ASXCGC Recommendations 3.1, 3.3
All Directors, managers and employees are expected to act
with the utmost integrity and objectivity, striving at all times
to enhance the reputation and performance of the Group.
Every employee has a nominated supervisor to whom they
may refer any issues arising from their employment. The
Board has approved a Code of Conduct, applicable to
all Directors and employees of the Group, providing for
the conduct of business in accordance with the highest
ethical standards and sound corporate governance. The
Code also incorporates the Company’s policy on trading
in the Company’s securities. A Code of Ethics, relating to
Accounting Practice and Financial Reporting, has also
been adopted by the Board and applies specifically to the
Chief Executive Officer, Chief Financial Officer and senior
finance officers of the Company who influence financial
performance. The Code of Ethics is complementary to the
Code of Conduct, copies of both of which are available
in the Corporate Governance section of Orbital’s website.
5.2
Securities Ownership and Dealing
ASXCGC Recommendation 3.2, 3.3
The Company’s policy with respect to Directors and Officers
dealing in the Company’s shares or options states that:
•
•
•
•
Directors and Officers are prohibited from dealing
in the Company’s securities at any time when they
possess information which, if publicly disclosed,
would be likely to affect the market price of the
Company’s securities;
Directors and Officers are prohibited from short term
trading in the Company’s securities;
Directors must obtain the written approval of the
Chairman before undertaking any transactions
involving the Company’s securities; and
Directors and Officers are prohibited
from
undertaking transactions in the Company’s securities
during the period from one month prior to the
proposed release of the Company’s annual or half-
year result until two days after that release.
A copy of the Securities Trading Policy is available in the
Corporate Governance section of Orbital’s website.
6. RISK MANAGEMENT
6.1
Approach to Risk Management and Internal
Control
ASXCGC Recommendations 7.1, 7.4
The Board oversees the establishment, implementation and
review of the Company’s risk management systems, which
have been established by management for assessing,
monitoring and managing operational, financial reporting
and compliance risks for the Group. Responsibility for
establishing and maintaining effective risk management
strategies rests with senior management, accountable to
the Chief Executive Officer and the Audit Committee of the
Board. The Audit Committee reviews the risk management
and internal control structure implemented by management
so as to obtain reasonable assurance that the Group’s
assets are safeguarded and that reliable financial records
are maintained. Operational and other compliance
risk management has also been reviewed and found
to be operating efficiently and effectively. A copy of the
Company’s risk management policy is available in the
Corporate Governance section of Orbital’s website.
Risks to the Group arise from matters such as competitive
technologies that may be developed, delays in government
26 Orbital
regulation, reduction in development and testing expenditure
by the Company’s customers, the impact of exchange rate
movements, environmental issues, occupational safety and
health and financial reporting.
6.2
Internal Control Framework
ASXCGC Recommendations 7.2, 7.4
The Board recognises that no cost effective internal control
system will preclude all errors and irregularities. The system is
based upon written procedures, policies and guidelines, an
organisational structure that provides an appropriate division
of responsibility, and the careful selection and training of
qualified personnel.
Established practices ensure:
•
•
•
•
•
Capital expenditure commitments are subject to
authority level approval procedures;
Financial exposures are controlled by the use of
forward exchange contracts, where appropriate;
Occupational safety and health issues are monitored
by a management committee;
Financial reporting accuracy and compliance with
regulatory requirements; and
Compliance with environmental regulation.
Where risks, such as natural disasters, cannot be adequately
mitigated using internal controls, those risks are transferred
to third parties through insurance coverage to the extent
considered appropriate.
6.3
Chief Executive Officer and Chief Financial
Officer Assurance
ASXCGC Recommendations 7.3, 7.4
The Chief Executive Officer and Chief Financial Officer
have declared, in writing to the Board, that the Company’s
financial reports are founded on a sound system of risk
management and internal compliance and control which
implements the policies adopted by the Board, and that they
have evaluated the effectiveness of the company’s financial
disclosure controls and procedures and have concluded that
they are operating efficiently and effectively.
Monthly financial results are reported against budgets
approved by the directors and revised forecasts for the year
are prepared regularly.
6.4
Environmental Regulation
for environmental
The Group holds a number of permits, licences and
registrations
regulation under both
Australian Commonwealth and State legislation. These
permits, licences and registrations are primarily for the
storage of fuels and chemicals and the disposal of waste
and are reviewed by the Group on an on-going basis. The
directors are not aware of any serious breaches during the
period covered by this report.
7.
EXTERNAL AUDITOR RELATIONSHIP
ASXCGC Recommendation 4.4
The Audit Committee oversees the terms of engagement
of Orbital’s external auditor. The Audit Committee ensures
that the audit approach covers all financial statement areas
where there is a risk of material misstatement and that audit
activities are carried out throughout the Orbital Group in the
most effective, efficient and comprehensive manner.
The Committee has the responsibility for the appointment,
compensation and oversight of the external Auditor and
to ensure that the external Auditor meets the required
standards for Auditor Independence. In monitoring Auditor
Independence the Committee will have regard to any
legislative or regulatory requirements, and the following
principles:
•
•
•
•
•
It is mandatory that the Audit Partner responsible for
the Audit be rotated at least every five years. At least
two years must expire before the Audit Partner can
again be involved in the Audit of the Group.
The Committee monitors the number of former
employees of the external Auditor who were involved
in auditing the company, currently employed in
senior financial positions in the company, and
assesses whether this impairs or appears to impair
the Auditor’s judgment or independence in respect
of the company. An individual auditor who was
engaged by the external Auditor and participated
in the company’s audit shall be precluded from
employment as Chief Executive Officer or Chief
Financial Officer of the company for a period of
twelve months from the time of the audit.
the company and
Consider whether taken as a whole, the various
relationships between
the
external Auditor and the economic importance of
the company (in terms of fees paid to the external
Auditor for the Audit as well as fees paid to the
external Auditor for the provision of non-audit
services) to the external Auditor impair or appear
to impair the Auditor’s judgment or independence in
respect of the company.
The company shall not engage its external Auditor for
certain non-audit services (including book-keeping,
financial information systems design, valuations,
actuarial services, internal audit outsourcing, human
resources and unrelated legal/expert services). Any
proposal to grant the external Auditor non-prohibited
non-audit services will be referred to the Chairman
of the Audit Committee by management prior to
granting the work.
The Chairman of the Committee will meet (at least
annually) with the external Auditors without the
presence of management
Annual Report 2011 27
Corporate Governance Statement
FOR THE YEAR ENDED 30 JUNE 2011
8.
ASX Corporate Governance Council Recommendations Checklist
The table below summarises the Group’s compliance with the ASX Corporate Governance Council’s Recommendations.
Recommendation
Comply
Yes / No
Reference
Principle 1 - Lay solid foundations for management and oversight
1.1
1.2
1.3
Companies should establish the functions reserved to the board and those
delegated to senior executives and disclose those functions.
Companies should disclose the process for evaluating the performance
of senior executives.
Companies should provide the information indicated in the guide to
reporting on Principle 1
Principle 2 - Structure the board to add value
2.1
2.2
2.3
2.4
2.5
2.6
A majority of the board should be independent directors.
The chair should be an independent director.
The roles of chair and chief executive officer should not be exercised
by the same individual.
The board should establish a nomination committee.
Companies should disclose the process for evaluating the performance
of the board, its committees and individual directors.
Companies should provide the information indicated in the guide to
reporting on Principle 2.
Principle 3 - Promote ethical and responsible decision-making
3.1
Companies should establish a code of conduct and disclose the code or
a summary of the code as to:
• The practices necessary to maintain confidence in the company’s
integrity.
• The practices necessary to take into account their legal obligations
and the reasonable expectations of their stakeholders.
• The responsibility and accountability of individuals for reporting
and investigating reports of unethical practices.
3.2
3.3
Companies should establish a policy concerning trading in company
securities by directors, senior executives and employees, and disclose
the policy or a summary of that policy.
Companies should provide the information indicated in the guide to
reporting on Principle 3
Principle 4 - Safeguard integrity in financial reporting
4.1
4.2
4.3
4.4
The board should establish an audit committee
The audit committee should be structured so that it:
• Consists only of non-executive directors
• Consists of a majority of independent directors
• Is chaired by an independent chair, who is not chair of the board
• Has at least three members
The audit committee should have a formal charter.
Companies should provide the information indicated in the Guide to
reporting on Principle 4
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
2.1
Remuneration
Report
2.1, 2.8,
Remuneration
Report
2.2
2.2
2.2
3.1, 3.3
2.8
2.2, 2.4, 2.5, 2.7,
2.8, 3.1, 3.3
5.1
5.2
5.1, 5.2
3.1, 3.2
3.1, 3.2
3.1, 3.2
3.1, 3.2, 7
28 Orbital
Recommendation
Comply
Yes / No
Reference
Principle 5 - Make timely and balanced disclosure
5.1
5.2
Companies should establish written policies designed to ensure
compliance with ASX listing rule disclosure requirements and to ensure
accountability at a senior executive level for that compliance and
disclose those policies or a summary of those policies.
Companies should provide the information indicated in the guide to
reporting on Principle 5.
Principle 6 - Respect the rights of shareholders
6.1
6.2
Companies should design a communications policy for promoting
effective communication with shareholders and encouraging their
participation at general meetings and disclose their policy or a
summary of that policy.
Companies should provide the information indicated in the guide to
reporting on Principle 6.
Principle 7 - Recognise and manage risk
7.1
7.2
7.3
Companies should establish policies for the oversight and management
of material business risks and disclose a summary of those policies.
The board should require management to design and implement the
risk management and internal control system to manage the company’s
material business risks and report to it on whether those risks are being
managed effectively. The board should disclose that management has
reported to it as to the effectiveness of the company’s management of
its material business risks
The board should disclose whether it has received assurance from the
chief executive officer [or equivalent] and the chief financial officer
[or equivalent] that the declaration provided in accordance with
section 295A of the Corporations Act is founded on a sound system of
risk management and internal control and that the system is operating
effectively in all material respects in relation to financial reporting
risks.
Yes
Yes
Yes
Yes
Yes
Yes
4.2
4.2
4.1
4.1
6.1
6.2
Yes
6.3
7.4
Companies should provide the information indicated in the guide to
reporting on Principle 7.
Yes
6.1, 6.2, 6.3
Principle 8 – Remunerate fairly and responsibly
8.1
8.2
8.3
The board should establish a remuneration committee.
Companies should clearly distinguish the structure of nonexecutive
directors’ remuneration from that of executive directors and senior
executives.
Companies should provide the information indicated in the Guide to
reporting on Principle 8.
Yes
Yes
Yes
3.1
2.9,
Remuneration
Report
3.1
Annual Report 2011 29
Income Statement
FOR THE YEAR ENDED 30 JUNE 2011
Engineering services income
Sale of goods
Licence and royalty income
Other revenue
Total Revenue
Other income
Inventory expenses
Employee benefits expenses
Depreciation and amortisation
Engineering consumables and contractors
Occupancy expenses
Travel and accommodation
Communications and computing
Patent costs
Insurance costs
Audit, compliance and listing costs
Finance costs
Other expenses
NOTE
CONSOLIDATED
2011
$’000
2010
$’000
9,492
5,847
1,081
218
16,638
6,110
(4,484)
(10,494)
(1,174)
(1,954)
(1,165)
(634)
(593)
(300)
(441)
(704)
(688)
(1,777)
9,621
6,203
1,199
242
17,265
8,759
(4,607)
(10,792)
(1,004)
(2,085)
(786)
(866)
(791)
(338)
(441)
(560)
(755)
(745)
7
8
9(d)
9(a)
9(b)
9(c)
Share of profit from equity accounted investment
16
3,233
1,874
Profit before income tax
Income tax benefit
Profit for the year attributable to the members of the parent entity
10(a)
1,573
190
1,763
4,128
388
4,516
Earnings per share:
Basic earnings per share (in cents)
Diluted earnings per share (in cents)
11
11
3.65
3.65
9.39
9.29
The income statements are to be read in conjunction with the notes to the financial statements set out on pages 34 to 81.
30 Orbital
Statement of Comprehensive Income
FOR THE YEAR ENDED 30 JUNE 2011
Net profit for the year
Other comprehensive income
Share of foreign currency reserve of equity accounted investment
Foreign currency translation
Other comprehensive income for the year, net of tax
CONSOLIDATED
2011
$’000
2010
$’000
1,763
4,516
343
(3,758)
(3,415)
(356)
(813)
(1,169)
TOTAL COMPREHENSIVE (LOSS)/INCOME FOR THE YEAR
(1,652)
3,347
Total comprehensive (loss)/income for the year attributable to owners of the parent
(1,652)
3,347
The statements of comprehensive income are to be read in conjunction with the notes to the financial statements set out on pages
34 to 81.
Statement of Changes in Equity
FOR THE YEAR ENDED 30 JUNE 2011
Share
Capital
Retained
Profits
$’000
$’000
Employee
Equity
Benefits
Reserve
$’000
Foreign
Currency
Transalation
Reserve
$’000
Total
$’000
At 1 July 2009
Profit for period
Other comprehensive income
Total comprehensive income for the period
19,055
(3,224)
884
399
17,114
-
-
-
4,516
-
4,516
-
-
-
-
4,516
(1,169)
(1,169)
(1,169)
3,347
Transactions with owners in their
capacity as owners
Shares issued in accordance with share plan
Share based payments
Balance at 30 June 2010
117
89
-
-
(117)
250
-
-
-
339
19,261
1,292
1,017
(770)
20,800
At 1 July 2010
19,261
1,292
1,017
(770)
20,800
Profit for period
Other comprehensive income
Total comprehensive income for the period
-
-
-
1,763
-
1,763
-
-
-
-
1,763
(3,415)
(3,415)
(3,415)
(1,652)
Transactions with owners in their
capacity as owners
Share based payments
Balance at 30 June 2011
84
-
250
-
334
19,345
3,055
1,267
(4,185)
19,482
The statements of changes in equity are to be read in conjunction with the notes to the financial statements set out on pages
34 to 81.
Annual Report 2011 31
Statement of Financial Position
AS AT 30 JUNE 2011
Assets
Current assets
Cash and cash equivalents
Other financial assets
Trade and other receivables
Inventories
Total Current Assets
Non-Current Assets
Investment in associate
Deferred tax assets
Property, plant & equipment
Intangibles and goodwill
Total Non-Current Assets
Total Assets
Liabilities
Current liabilities
Trade payables and other liabilities
Interest bearing borrowings
Employee benefits
Deferred revenue
Government grants
Other provisions
Total Current Liabilities
Non-current liabilities
Long term borrowings
Employee benefits
Government grants
Contingent consideration
Other provisions
Total Non-Current Liabilities
Total Liabilities
Net Assets
Equity
Share capital
Reserves
Retained profits
Total Equity
NOTE
CONSOLIDATED
2011
$’000
2010
$’000
12
13
14
15
16
17
18
19
20
21
23
24
27
25
26
23
27
28
25
3,440
3,434
6,841
4,388
3,608
-
5,084
3,722
18,103
12,414
11,406
4,958
4,134
2,173
22,671
11,534
5,215
7,911
1,525
26,185
40,774
38,599
5,004
648
2,354
316
225
195
8,742
7,777
132
1,649
2,688
304
12,550
2,676
2,056
2,420
316
225
173
7,866
7,604
455
1,874
-
-
9,933
21,292
17,799
19,482
20,800
29
30
30
19,345
(2,918)
3,055
19,261
247
1,292
19,482
20,800
The statements of financial position are to be read in conjunction with the notes to the financial statements set out on pages
34 to 81.
32 Orbital
Statement of Cash Flows
FOR THE YEAR ENDED 30 JUNE 2011
Cash Flows from Operating Activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash used in operations
Interest received
Interest paid
Income taxes paid
Net cash used in operating activities
Cash Flows from Investing Activities
Dividends received from associate
Net proceeds from sale of property, plant & equipment
Acquisition of property, plant & equipment
Costs incurred on development of intangibles
Acquisition of subsidiary
Redemption/(acquisition) of short term deposits
Net cash provided by investing activities
Cash Flows from Financing Activities
Proceeds from borrowings
Repayment of borrowings
Net cash (used in)/provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 July
Effects of exchange rate fluctuations on the
balances of cash held in foreign currencies
NOTE
CONSOLIDATED
2011
$’000
2010
$’000
17,070
(18,742)
17,947
(22,925)
35
38
(1,672)
218
(104)
(234)
(1,792)
1,208
8,557
(481)
(593)
(1,780)
(3,434)
3,477
-
(1,848)
(1,848)
(4,978)
242
(107)
(206)
(5,049)
677
44
(1,394)
(1,128)
-
3,500
1,699
536
(200)
336
(163)
(3,014)
3,608
6,623
(5)
(1)
Cash and cash equivalents at 30 June
12
3,440
3,608
Non-Cash Investing Activities
There were no non-cash investing or financing activities for the years ended 30 June 2010 and 2011.
Refer to note 6 for details of non-cash operating items.
The statements of cash flows are to be read in conjunction with the notes to the financial statements set out in pages 34 to 81.
Annual Report 2011 33
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
Notes Index
Page
1.
REPORTING ENTITY
3. Significant accounting policies
1. Reporting Entity
2. Basis of Preparation
(a) Statement of Compliance with IFRS
(b) Basis of Measurement
(c) Functional and Presentation Currency
(d) Use of Estimates and Judgements
34
34
34
34
34
34
34
(a) New accounting standards and interpretations 34
35
(b) Basis of consolidation
35
(c) Foreign currency
36
(d) Financial instruments
36
(e) Inventories
37
(f) Property, plant and equipment
37
(g) Intangibles and goodwill
37
(h) Impairment
38
(i) Share capital
38
(j) Employee benefits
38
(k) Provisions – Warranties
39
(l) Revenue recognition
39
(m) Operating leases
39
(n) Finance expense
39
(o) Income tax
39
(p) Operating segment
40
(q) Goods and services tax
40
(r) Earnings per share
40
(s) Government grants
(t) Business combinations
40
(u) New standards and interpretations
not yet adopted
40
4. Financial risk management objectives and policies 44
5. Significant accounting judgements, estimates and
assumptions
47
6. Operating segments
49
7. Other revenue
51
8. Other income
52
9. Expenses
52
10. Income Tax
53
11. Earnings per share
54
12. Cash and cash equivalents
54
13. Other financial assets
55
14. Trade and other receivables
55
15. Inventories
56
16. Investment in associate
56
17. Deferred tax assets and liabilities
57
18. Property, plant and equipment
59
19. Intangibles and goodwill
60
20. Trade and other payables
62
21. Interest bearing loans and borrowings
62
22. Financing arrangements
63
23. Employee benefits
64
24. Deferred revenue
64
25. Other provisions
65
26. Long term borrowings
66
27. Government grants
67
28. Contingent consideration
67
29. Share capital
68
30. Retained profits and reserves
69
70
31. Consolidated entity
32 Information relating to Orbital Corporation Limited 71
71
33. Related party disclosures
72
34. Key management personnel
75
35. Notes to the statement of cash flows
75
36. Share based payment plans
78
37. Defined contribution superannuation fund
78
38. Business combination
80
39. Commitments
80
40. Contingencies
81
41. Events after the balance sheet date
81
42. Remuneration of auditors
34 Orbital
Orbital Corporation Limited (the “Company”) is a company
domiciled in Australia. The address of the Company’s
registered office is 4 Whipple Street, Balcatta, Western
Australia. The consolidated financial report of the Company
for the year ended 30 June 2011 comprises the Company
and its subsidiaries (together referred to as the “Group”).
The consolidated financial report was authorised for issue by
the directors on 23 August 2011.
2.
(a)
BASIS OF PREPARATION
Statement of Compliance
The financial report complies with Australian Accounting
Standards as issued by the Australian Accounting Standards
Board and International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board.
(b)
Basis of Measurement
The consolidated financial statements have been prepared on
the historical cost basis, except for contingent consideration
which is measured at fair value.
(c)
Functional and Presentation Currency
These consolidated financial statements are presented
in Australian dollars, which is the Company’s functional
currency and the functional currency of the majority of the
Group.
The Company is of a kind referred to in ASIC Class Order
98/100 dated 10 July 1998 and in accordance with that
Class Order, all financial information presented in Australian
dollars has been rounded to the nearest thousand unless
otherwise stated.
(d)
Use of Estimates and Judgements
The preparation of financial statements requires management
to make judgements, estimates and assumptions that affect
the application of accounting policies and reported amounts
of assets, liabilities, income and expenses. Actual results may
differ from these estimates.
Estimates and underlying assumptions are reviewed on
an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised if
the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current
and future periods.
Judgements made by management in the application of
Australian Accounting Standards that have a significant
effect on the financial report and estimates with a significant
risk of material adjustment in the next year are discussed in
note 5.
3.
(a)
SIGNIFICANT ACCOUNTING POLICIES
New Accounting Standards and Interpretations
The accounting policies adopted are consistent with those of
the previous financial year. From 1 July 2010, the Group
has adopted all the standards and interpretations mandatory
for annual periods beginning on or after 1 July 2010.
Adoption of these standards and interpretations did not have
any effect on the financial position or performance of the
Group. The Group has not elected to early adopt any new
standards or amendments.
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
(b)
(i)
Basis of Consolidation
Subsidiaries
Subsidiaries are all those entities over which the Group has
the power to govern the financial and operating policies so
as to obtain benefits from their activities. The existence and
effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether a
group controls another entity.
The financial statements of the subsidiaries are prepared
for the same reporting period as the parent company, using
consistent accounting policies. In preparing the consolidated
financial statements, all
intercompany balances and
transactions, income and expenses and profit and losses
resulting from intragroup transactions have been eliminated
in full.
Subsidiaries are fully consolidated from the date on
which control is obtained by the Group and cease to be
consolidated from the date on which control is transferred
out of the Group.
The acquisition of subsidiaries is accounted for using the
acquisition method of accounting. The acquisition method
of accounting involves recognising at acquisition date,
separately from goodwill, the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the
acquiree. The identifiable assets acquired and the liabilities
assumed are measured at their acquisition date fair values.
The difference between the above items and the fair value of
the consideration (including the fair value of any pre-existing
investment in the acquiree) is goodwill or a discount on
acquisition.
not amortised. After application of the equity method, the
Group determines whether it is necessary to recognise any
impairment loss with respect to the Group’s net investment in
associates.
The Group’s share of its associates’ post-acquisition profit or
losses is recognised in the income statement, and its share
of post-acquisition movements in reserves is recognised in
reserves. The cumulative post-acquisition movements are
adjusted against the carrying amount of the investment.
Dividends received from the associate reduce the carrying
amount of the investment.
When the Group’s share of losses in the associate equals or
exceeds its interest in the associate, including any unsecured
long-term receivables or loans, the Group does not recognise
further losses, unless it has incurred obligations or made
payments on behalf of the associate.
The associate’s accounting policies conform to those used
by the Group for like transactions and events in similar
circumstances.
(iii)
Transactions Eliminated on Consolidation
Intra-group balances, and any unrealised gains and losses or
income and expenses arising from intra-group transactions,
are eliminated in preparing the consolidated financial
statements. Unrealised gains arising from transactions with
associates are eliminated to the extent of the Group’s interest
in the entity with adjustments made to the investment in the
associate. Unrealised losses are eliminated in the same way
as unrealised gains, but only to the extent that there is no
evidence of impairment. Gains and losses are recognised
as the contributed assets are consumed or sold or, if not
consumed or sold, when the Group’s interest in such entities
is disposed of.
A change in the ownership interest of a subsidiary that does
not result in a loss of control, is accounted for as an equity
transaction.
(c)
(i)
Foreign Currency
Foreign currency transactions
If the Group loses control over a subsidiary, it
• Derecognises the assets (including goodwill) and
liabilities of the subsidiary.
• Derecognises the carrying amount of any non-controlling
interest.
• Derecognises the cumulative translation differences,
recorded in equity.
• Recognises the fair value of the consideration received.
• Recognises the fair value of any investment retained.
• Recognises any surplus or deficit in profit or loss.
• Reclassifies the parent’s share of components previously
recognised in other comprehensive income to profit or
loss.
(ii)
Associate
The Group’s investment in its associate is accounted for using
the equity method of accounting in the consolidated financial
statements. The associate is an entity over which the Group
has significant influence and that is neither a subsidiary nor
a joint venture.
The Group generally deems they have significant influence if
they have over 20% of the voting rights.
Under the equity method, investments in associates are
carried in the consolidated statement of financial position at
cost plus post-acquisition changes in the Group’s share of net
assets of the associate. Goodwill relating to an associate
is included in the carrying amount of the investment and is
Transactions in foreign currencies are converted to the
respective functional currencies of Group entities at exchange
rates at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies at the reporting
date (except those representing the Group’s net investment in
subsidiaries and its associate – see below) are retranslated
to the functional currency at the exchange rate at that date.
Foreign exchange differences arising on translation are
recognised in the income statement. Non-monetary assets
and liabilities that are measured in terms of historical cost in
a foreign currency are translated using the exchange rate at
the date of the transaction.
(ii)
Financial statements of foreign operations
The assets and liabilities of foreign operations are translated
to Australian dollars at exchange rates ruling at the reporting
date. The revenues and expenses of foreign operations are
translated to Australian dollars at rates approximating the
exchange rates ruling at the dates of the transactions. Foreign
exchange differences arising on retranslation are recognised
directly in a separate component of equity described as
‘foreign currency translation reserve’.
(iii)
Net investment in foreign operations
Exchange differences arising from the translation of balances
representing the net investment in foreign operations are
taken to the foreign currency translation reserve. They are
released into the income statement upon disposal.
Annual Report 2011 35
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
(d)
(i)
Financial Instruments
Non-derivative financial instruments
Non-derivative financial instruments comprise trade and
other receivables, cash and cash equivalents, loans and
borrowings, and trade and other payables.
Non-derivative financial instruments are recognised initially at
fair value plus, for instruments not at fair value through profit
or loss, any directly attributable transaction costs. Subsequent
to initial recognition non-derivative financial instruments are
measured as described below.
A financial instrument is recognised if the Group becomes
party to the contractual provisions of the instrument. Financial
assets are derecognised if the Group’s contractual rights to
the cash flows from the financial asset expire or if the Group
transfers the financial asset to another party without retaining
control or substantially all risks and rewards of the asset.
Regular way purchases and sales of financial assets are
accounted for at trade date, i.e., the date that the Group
commits itself to purchase or sell the asset. Financial liabilities
are derecognised if the Group’s obligations specified in the
contract expire or are discharged or cancelled.
Cash and cash equivalents - refer note 12
Cash and cash equivalents comprise cash balances, at call
deposits and bank-endorsed bills of exchange at discounted
value.
Other financial assets - refer note 13
Other financial assets comprise term deposits with financial
institutions with maturities between 90 days and 365 days.
Subsequent to initial recognition other financial assets are
stated at amortised cost.
Trade and other receivables - refer note 14
Subsequent to initial recognition, trade receivables are stated
at their amortised cost, less impairment losses. Normal
settlement terms are 30 to 60 days. The collectability of debts
is assessed at balance date and specific allowance is made
for any doubtful accounts. Individual debts that are known to
be uncollectible are written off when identified. An impairment
allowance is recognised when there is objective evidence that
the Group will not be able to collect the receivable. Financial
difficulties of the debtor, default payments or debts more
than 60 days overdue are considered objective evidence
of impairment. The amount of the impairment loss is the
receivable carrying amount compared to the present value of
estimated future cash flows, discounted at the original effective
interest rate.
Trade and other payables - refer note 20
Liabilities are recognised for amounts due to be paid in the
future for goods or services received. Subsequent to initial
recognition, trade and other payables are stated at their
amortised cost.
Trade payables are non-interest bearing and are normally
settled on 30-day terms.
Interest bearing borrowings - refer note 21
Included in current liabilities is an amount owing under a trade
finance facility utilised for the import of inventory. The trade
finance facility provides loans of up to 180 days with interest
payable at maturity. The loans are initially recognised at the
fair value of consideration received plus transaction costs
and subsequently stated at amortised cost with any difference
between cost and repayment value being recognised in the
income statement over the period of the borrowings on an
effective interest basis.
Long term borrowings - refer note 26
Included in non-current liabilities is an amount owing to
the Government of Western Australia resulting from a loan
of $14,346,164 restructured in January 2010. The loan
is interest-free with annual repayments commencing in May
2010 and concluding in May 2025.
The non-interest bearing loan from the Government of Western
Australia was recognised initially at fair value and subsequently
stated at amortised cost using the effective interest method. The
difference between the fair value and face value of the loan is
accounted for as a government grant as disclosed in note 26.
Contingent consideration - refer note 28
Included in non-current liabilities is an amount owing to the
owners of the non-controlling interest in Sprint Gas (Aust) Pty
Ltd. The contingent consideration was recognised initially at
fair value and subsequently at fair value through profit and
loss.
(ii)
Derivative financial instruments
The Group may use derivative financial instruments to hedge
its exposure to foreign exchange fluctuations and interest rate
movements. In accordance with its treasury policy, the Group
entity does not hold the derivative financial instruments for
trading purposes. However, derivatives that do not qualify for
hedge accounting are accounted for as trading instruments.
Derivative financial instruments are recognised initially at fair
value. Subsequent to initial recognition, derivative financial
instruments are stated at fair value. Changes in the fair value
of the derivative financial instrument that are not designated as
cash flow hedging instruments are recognised in profit or loss.
Cash flow hedges
Changes in the fair value of the derivative hedging instrument
designated as a cash flow hedge are recognised directly in
equity to the extent that the hedge is effective. To the extent that
the hedge is ineffective, changes in fair value are recognised
in profit or loss.
If the hedging instrument no longer meets the criteria for
hedge accounting, expires or is sold, terminated or exercised,
then hedge accounting is discontinued prospectively. The
cumulative gain or loss previously recognised in equity remains
there until the forecast transaction occurs. When the hedged
item is a non-financial asset, the amount recognised in equity
is transferred to the carrying amount of the asset when it is
recognised. In other cases the amount recognised in equity is
transferred to profit or loss in the same period that the hedged
item affects profit or loss.
(e)
Inventories - refer note 15
Inventories are carried at the lower of cost and net realisable
value. Cost is based on the first-in first-out principle and
includes expenditure incurred in acquiring the inventories and
bringing them to their present location and condition. Net
realisable value is the estimated selling price in the ordinary
course of business, less the estimated costs of completion and
selling expenses.
36 Orbital
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
(iii)
Goodwill
(f)
(i)
Property, Plant and Equipment - refer note 18
Recognition and measurement
Items of property, plant and equipment are stated at cost less
accumulated depreciation and impairment losses.
Cost includes expenditures that are directly attributable to the
acquisition of the asset.
(ii)
Subsequent costs
The cost of replacing part of an item of property, plant and
equipment is recognised in the carrying amount of the item if it
is probable that the future economic benefits embodied within
the part will flow to the Group and its cost can be measured
reliably. The costs of day-to-day servicing of property, plant
and equipment are recognised in profit or loss as incurred.
(iii)
Depreciation and Amortisation
Items of property, plant and equipment, including buildings
but excluding freehold land, are depreciated/amortised on
a straight line basis over their estimated useful lives. The
depreciation rates used in the current and comparative period
for each class of asset are as follows: Buildings 2.5%; Plant
and Equipment 6.67% to 33.3%. Assets are depreciated or
amortised from the date of acquisition.
The residual value, the useful life and the depreciation method
applied to an asset are reassessed at least annually.
(iv)
Asset Sales
The net profit or loss from asset sales are included as other
income or expenses of the Group. The profit or loss on
disposal of assets is brought to account at the date that an
unconditional contract of sale is signed. The profit or loss
on disposal is calculated as the difference between the
carrying amount of the asset at the time of disposal and the
net proceeds on disposal.
(g)
(i)
Intangibles and goodwill - refer note 19
Research and Development
Expenditure on research activities, undertaken with the
prospect of gaining new scientific or technical knowledge
and understanding, is recognised in the income statement as
an expense as incurred.
Expenditure on development activities, whereby research
findings are applied to a plan or design for the production
of new or substantially improved products and processes,
is capitalised if the product or process is technically and
commercially feasible and the Group has sufficient resources
to complete development.
Expenditure on intangibles which may be capitalised includes
the cost of materials and direct labour. Other development
expenditure is recognised in the income statement as an
expense as incurred. Capitalised expenditure is stated at
cost less accumulated amortisation and impairment losses.
Amortisation is charged to the income statement on a straight-
line basis over the estimated useful lives of intangible assets
unless such lives are indefinite.
(ii)
Patents, Licences and Technologies
licences and
Patents,
technology development and
maintenance costs, not qualifying for capitalisation, are
expensed as incurred.
Goodwill acquired in a business combination is initially
measured at cost being the excess of the cost of the business
combination over the Group’s interest in the net fair value of
the acquiree’s identifiable assets, liabilities and contingent
liabilities.
Following initial recognition, goodwill is measured at cost
less any accumulated impairment losses.
For the purpose of impairment testing, goodwill acquired in a
business combination is, from the acquisition date, allocated
to each of the Group’s cash-generating units, or groups of
cash-generating units, that are expected to benefit from the
synergies of the combination, irrespective of whether other
assets or liabilities of the Group are assigned to those units
or groups of units.
Impairment is determined by assessing the recoverable
amount of the cash-generating unit (group of cash-generating
units), to which the goodwill relates.
When the recoverable amount of the cash-generating unit
(group of cash-generating units) is less than the carrying
amount, an impairment loss is recognised. When goodwill
forms part of a cash-generating unit (group of cash-generating
units) and an operation within that unit is disposed of,
the goodwill associated with the operation disposed of
is included in the carrying amount of the operation when
determining the gain or loss on disposal of the operation.
Goodwill disposed of in this manner is measured based
on the relative values of the operation disposed of and the
portion of the cash-generating unit retained. Impairment
losses recognised for goodwill are not subsequently reversed.
(h)
(i)
Impairment
Financial assets
A financial asset is considered to be impaired if objective
evidence indicates that one or more events have had a
negative effect on the estimated future cash flows of that
asset.
An impairment loss in respect of a financial asset measured
at amortised cost is calculated as the difference between
its carrying amount, and the present value of the estimated
future cash flows discounted at the original effective interest
rate. An impairment loss in respect of an available-for-sale
financial asset is calculated by reference to its current fair
value.
Individually significant financial assets are tested for
impairment on an individual basis. The remaining financial
assets are assessed collectively in groups that share similar
credit risk characteristics.
All impairment losses are recognised in profit or loss. Any
cumulative loss in respect of an available-for-sale financial
asset recognised previously in equity is transferred to profit
or loss.
An impairment loss is reversed if the reversal can be related
objectively to an event occurring after the impairment loss
was recognised. For financial assets measured at amortised
cost and available-for-sale financial assets that are debt
securities, the reversal is recognised in profit or loss. For
available-for-sale financial assets that are equity securities,
the reversal is recognised directly in equity.
Annual Report 2011 37
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
3.
(ii)
SIGNIFICANT ACCOUNTING POLICIES (continued)
Non-financial assets
The carrying amounts of the Group’s non-financial assets,
other than inventories and deferred tax assets, are reviewed
at each reporting date to determine whether there is any
indication of impairment. If any such indication exists then
the asset’s recoverable amount is estimated.
An impairment loss is recognised if the carrying amount of
an asset or its cash-generating unit exceeds its recoverable
amount. A cash-generating unit is the smallest identifiable
asset group that generates cash flows that largely are
independent from other assets and groups. Impairment
losses are recognised in profit or loss. Impairment losses
recognised in respect of cash-generating units are allocated
first to reduce the carrying amount of any goodwill allocated
to the units and then to reduce the carrying amount of the
other assets in the unit (group of units) on a pro rata basis.
The recoverable amount of an asset or cash-generating unit
is the greater of its value in use and its fair value less costs to
sell. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value
of money and the risks specific to the asset.
An impairment loss in respect of goodwill is not reversed.
In respect of other assets, impairment losses recognised in
prior periods are assessed at each reporting date for any
indications that the loss has decreased or no longer exists.
An impairment loss is reversed if there has been a change
in estimates used to determine the recoverable amount. An
impairment loss is reversed only to the extent that the asset’s
carrying amount does not exceed the carrying amount
that would have been determined, net of depreciation or
amortisation, if no impairment loss had been recognised.
(iii)
Goodwill
Impairment is determined by assessing the recoverable
amount of the cash-generating unit (group of cash-generating
units), to which the goodwill relates.
(i)
(i)
Share capital - refer note 29
Issued Capital
Share capital is recognised at the fair value of the
consideration received.
(ii)
Dividends
Dividends are recognised as a liability in the period in which
they are declared.
(iii)
Transaction Costs
Transaction costs of an equity transaction are accounted for
as a deduction from equity, net of any related income tax
benefit.
(j)
(i)
Employee Benefits
Short-term benefits - refer note 23
The provisions for employee entitlements to wages, salaries
and annual leave due to be settled within 12 months of year
end represent present obligations resulting from employees’
services provided up to the balance date, calculated at
undiscounted amounts based on wage and salary rates
that the Group expects to pay as at the reporting date
including related on-costs, such as workers’ compensation
and payroll tax. Expenses for non-accumulating sick leave
are recognised when the leave is taken and are measured at
the rates paid or payable.
(ii)
Long Service Leave - refer note 23
The provision for employee entitlements to long service
leave represents the present value of the estimated future
cash outflows to be made resulting from employees’ services
provided up to balance sheet date.
The provision is calculated using estimated future increases
in wage and salary rates including related on-costs and
expected settlement dates based on the Group’s experience
with staff departures and is discounted using the rates
attached to national government securities at balance sheet
date, which most closely match the terms of maturity of the
related liabilities.
(iii)
Defined Contribution Superannuation Fund
refer note 37
-
Obligations for contributions to the defined contribution
superannuation fund are recognised as an expense in the
income statement as incurred.
(iv)
Share-based payment transactions - refer note 36
Employees have been offered the right to take up shares in
the Company under three plans (i) the Employee Share Plan
No.1 provides $1,000 of shares per annum and is subject
to qualification by length of service, (ii) the Executive Long
Term Share Plan (“ELTSP”) is subject to qualification by length
of service and achievement of corporate performance targets
related to returns to shareholders, and (iii) the Performance
Rights Plan is subject to qualification by length of service and
achievement of share price targets.
The fair value of rights granted to employees is recognised as
an employee benefit expense with a corresponding increase
in equity. The fair value of the shares granted under the
Employee Share Plan No.1 is based on the market price
of the shares on the date of issue. The fair value of the
ELTSP is measured at grant date taking into account market
performance conditions only, and spread over the vesting
period during which the employees become unconditionally
entitled to the performance–based shares. The fair value
of the shares granted is measured using a Monte-Carlo
simulation model. The amount recognised as an expense
is adjusted to reflect the actual number of shares that vest
except where forfeiture is only due to market conditions that
are not met. The fair value of the Performance Rights is
measured at grant date taking into account the share price
targets and spread over the expected life of the rights.
(k)
Provisions – Warranties - refer note 25
A provision is recognised if, as a result of a past event, the
Group has a present legal or constructive obligation that can
be estimated reliably, and it is probable that an outflow of
economic benefits will be required to settle the obligation.
Provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific
to the liability.
Provision for warranty is recognised when the underlying
products are sold. The provision is based on historical claim
data.
38 Orbital
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
(l)
Revenue Recognition
Borrowing costs consist of interest and other costs that an
entity incurs in connection with the borrowing of funds
Revenues are recognised and measured at the fair value of
the consideration received net of the amount of goods and
services tax (GST). Exchanges of goods or services of the
same nature and value without any cash consideration are
not recognised as revenues.
(i)
Revenue from Rendering of Services
Revenue from services rendered is recognised in the income
statement in proportion to the stage of completion of the
transaction at the reporting date. The stage of completion is
assessed by reference to the extent of work performed. No
revenue is recognised if there are significant uncertainties
regarding recovery of the consideration due.
Revenue received in advance represents cash payments
received from customers in accordance with contractual
commitments prior to the performance of the service.
(ii)
Sale of goods
Revenue from the sale of goods is recognised when there is
persuasive evidence, usually in the form of an executed sales
agreement at the time of delivery of the goods to customer,
indicating that there has been a transfer of risks and rewards
to the customer, no further work or processing is required, the
quantity and quality of the goods has been determined, the
price is fixed and generally title has passed.
(iii)
Licence and royalties
Revenue earned under various licence, royalty and other
agreements is recognised on an accrual basis upon the
satisfactory completion of contracted technical specifications.
Additional revenue may be earned after a fixed time interval
or after delivery of a prototype engine and/or hardware
meeting specified performance targets, provided the licence
agreements are not terminated. Under the terms of the
licence agreements, licensees are not specifically obliged
to commence production and sale of engines using OCP
Technology and may terminate the agreements upon notice
to Orbital. If a licensee were to terminate its licence
agreement with Orbital, the licensee would forfeit the licence
and any technical disclosure fees paid through to the date of
termination. Revenue under royalty agreements is recognised
when such amounts become due and payable.
(iv)
Interest Revenue
Revenue is recognised as interest accrues using the effective
interest method.
(v)
Dividends
Revenue is recognised when the Group’s right to receive the
payment is established.
(m)
(i)
Operating leases
Operating lease payments
Payments made under operating leases are recognised in
the income statement on a straight-line basis over the term
of the lease.
(n)
Finance expense
Borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset (i.e. an asset
that necessarily takes a substantial period of time to get
ready for its intended use or sale) are capitalised as part of
the cost of that asset. All other borrowing costs are expensed
in the period they occur.
(o)
(i)
Income Tax - refer note 10
Current income tax expense and liability
Income tax on the profit or loss for the year presented
comprises current and deferred tax. Income tax is recognised
in the income statement except to the extent that it relates
to items recognised directly in equity, in which case it is
recognised in equity.
Current tax is the expected tax payable on the taxable
income for the year, using tax rates enacted or substantially
enacted at the balance sheet date, and any adjustment to
tax payable in respect of previous years.
(ii)
Deferred income tax expense and liability
Deferred tax is provided using the balance sheet liability
method, providing for temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation
purposes. The amount of deferred tax provided is based
on the expected manner of realisation or settlement of the
carrying amount of assets and liabilities, using tax rates
enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is
probable that future taxable profits will be available against
which the asset can be utilised. Deferred tax assets are
reduced to the extent that it is no longer probable that the
related tax benefit will be realised.
(iii)
Tax Consolidation
The Company and its wholly-owned Australian resident
entities have formed a tax-consolidated group with effect
from 1 July 2002 and are therefore taxed as a single entity
from that date. The head entity within the tax-consolidated
group is Orbital Corporation Limited.
(p)
Operating segments - refer note 6
An operating segment is a component of an entity that
engages in business activities from which it may earn
revenues and incur expenses (including revenues and
expenses relating to transactions with other components
of the same entity), whose operating results are regularly
reviewed by the entity’s executive management team (the
chief operating decision maker) to make decisions about
resources to be allocated to the segment and assess its
performance and for which discrete financial information is
available. Management will also consider other factors in
determining operating segments such as the existence of a
line manager and the level of segment information presented
to the executive management team.
The group aggregates two or more operating segments
when they have similar economic characteristics, and the
segments are similar in each of the following respects:
• Nature of the products and services,
• Nature of the production processes,
• Type or class of customer for the products and services,
• Methods used to distribute the products or provide the
services, and if applicable
• Nature of the regulatory environment.
Annual Report 2011 39
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
When the grant relates to an asset (investment grants relating
to the construction of a heavy duty engine test facility), the fair
value is credited to deferred income and is released to the
income statement over the expected useful life of the relevant
asset by equal annual instalments.
(t)
Business combinations – refer note 38
Business combinations are accounted for using the acquisition
method. The consideration transferred in a business
combination shall be measured at fair value, which shall be
calculated as the sum of the acquisition date fair values of the
assets transferred by the acquirer, the liabilities incurred by
the acquirer to former owners of the acquiree and the equity
issued by the acquirer, and the amount of any non-controlling
interest in the acquiree. For each business combination, the
acquirer measures the non-controlling interest in the acquiree
either at fair value or at the proportionate share of the
acquiree’s identifiable net assets. Acquisition-related costs
are expensed as incurred, and included in administrative
expenses.
When the Group acquires a business, it assesses the financial
assets and liabilities assumed for appropriate classification
and designation in accordance with the contractual terms,
economic conditions, the Group’s operating or accounting
policies and other pertinent conditions as at the acquisition
date. This includes the separation of embedded derivatives
in host contracts by the acquiree.
If the business combination is achieved in stages, the
acquisition date fair value of the acquirer’s previously held
equity interest in the acquiree is remeasured to fair value at
the acquisition date through profit or loss.
Any contingent consideration to be transferred by the
acquirer will be recognised at fair value at the acquisition
date. Subsequent changes to the fair value of the contingent
consideration which is deemed to be an asset or liability will
be recognised in accordance with AASB 139 either in profit
or loss or as a change to other comprehensive income. If the
contingent consideration is classified as equity, it should not
be remeasured until it is finally settled within equity
(u)
New standards and interpretations
not yet effective
The following standards, amendments to standards and
interpretations have been identified as those which may
impact the entity in the period of initial application. They are
available for early adoption at 30 June 2011, but have not
been applied in preparing this financial report:
3.
SIGNIFICANT ACCOUNTING POLICIES
(continued)
(p)
Operating segments - refer note 6 (continued)
Operating segments that meet the quantitative criteria as
prescribed by AASB 8 are reported separately. However, an
operating segment that does not meet the quantitative criteria
is still reported separately where information about the
segment would be useful to users of the financial statements.
Information about other business activities and operating
segments that are below the quantitative criteria are
combined and disclosed in a separate category for “all other
segments”.
(q)
Goods and services tax
Revenue, expenses and assets are recognised net of the
amount of goods and services tax (GST), except where the
amount of GST incurred is not recoverable from the taxation
authority. In these circumstances, the GST is recognised as
part of the cost of acquisition of the asset or as part of the
expense.
Receivables and payables are stated with the amounts of
GST included. The net amount of GST recoverable from, or
payable to, the Australian Taxation Office is included as a
current asset or liability in the statement of financial position.
Cash flows are included in the statement of cash flows on
a gross basis. The GST components of cash flows arising
from investing and financing activities which are recoverable
from, or payable to, the ATO are classified as operating
cash flows.
(r)
Earnings per share – refer note 11
The Group presents basic and diluted earnings per share
(EPS) data for its ordinary shares. Basic EPS is calculated by
dividing the profit or loss attributable to ordinary shareholders
of the Company by the weighted average number of
ordinary shares outstanding during the period.
Diluted EPS is determined by adjusting the profit or loss
attributable to ordinary shareholders and the weighted
average number of ordinary shares outstanding for the
effects of all dilutive potential ordinary shares.
(s)
Government grants – refer note 27
Government grants are recognised in the Statement of
Financial Position as a liability when the grant is received.
Government grants are recognised as income over the
periods necessary to match them with the related costs which
they are intended to compensate, on a systematic basis.
Government grants received on compensation for expenses
and losses already incurred or for the purpose of giving
immediate financial support are recognised immediately in
profit and loss for the period.
When the grant relates to a discount on services to be
rendered in the future, the fair value is credited to deferred
revenue and is released to the income statement over the
periods that the discounted services are rendered.
40 Orbital
Application
date of
standard
1 January
2013
Application
date for
Group
1 July 2013
3.
(u)
SIGNIFICANT ACCOUNTING POLICIES (continued)
New standards and interpretations not yet effective (continued)
Reference
Title
Summary
AASB 9
(IFRS 9)
Financial Instruments
AASB 9 (IFRS 9) includes requirements for the classification
and measurement of financial assets resulting from the first part
of Phase 1 of the IASB’s project to replace IAS 39 Financial
Instruments: Recognition and Measurement (AASB 139 Financial
Instruments: Recognition and Measurement) (IAS 39).
These requirements improve and simplify the approach for
classification and measurement of financial assets compared with
the requirements of AASB 139(IAS 39). The main changes from
AASB 139 (IAS 39) are described below.
(a) Financial assets are classified based on (1) the objective of the
entity’s business model for managing the financial assets; (2)
the characteristics of the contractual cash flows. This replaces
the numerous categories of financial assets in AASB 139 (IAS
39), each of which had its own classification criteria.
(b) AASB 9 allows an irrevocable election on initial recognition to
present gains and losses on investments in equity instruments
that are not held for trading in other comprehensive income.
Dividends in respect of these investments that are a return on
investment can be recognised in profit or loss and there is no
impairment or recycling on disposal of the instrument.
(c) Financial assets can be designated and measured at fair value
through profit or loss at initial recognition if doing so eliminates
or significantly reduces a measurement or recognition
inconsistency that would arise from measuring assets or
liabilities, or recognising the gains and losses on them, on
different bases.
AASB 2009-
11
(IFRS 9 and
consequential
amendments
to IFRS 1, 3,
4, 5, 7, IAS
1, 2, 8, 12,
18, 21, 27,
28, 31, 32,
36, 39 and
IFRIC 10, 12)
AASB 124
(Revised)
(IAS 24)
Amendments to Australian
Accounting Standards arising
from AASB 9 (IFRS 9)
[AASB 1, 3, 4, 5, 7, 101,
102, 108, 112, 118, 121,
127, 128, 131, 132, 136,
139, 1023 & 1038 and
Interpretations 10 & 12]
• These amendments arise from the issuance of AASB 9
Financial Instruments (IFRS 9) that sets out requirements for
the classification and measurement of financial assets. The
requirements in AASB 9 (IFRS 9) form part of the first phase
of the International Accounting Standards Board’s project
to replace IAS 39 Financial Instruments: Recognition and
Measurement.
• This Standard shall be applied when AASB 9 (IFRS 9) is
applied.
1 January
2013
1 July 2013
Related Party Disclosures
(December 2009)
1 January
2011
1 July 2011
The revised AASB 124 (IAS 24) simplifies the definition of a
related party, clarifying its intended meaning and eliminating
inconsistencies from the definition, including:
(a) The definition now identifies a subsidiary and an associate
with the same investor as related parties of each other
(b) Entities significantly influenced by one person and entities
significantly influenced by a close member of the family of that
person are no longer related parties of each other
(c) The definition now identifies that, whenever a person or entity
has both joint control over a second entity and joint control or
significant influence over a third party, the second and third
entities are related to each other
A partial exemption is also provided from the disclosure requirements
for government-related entities. Entities that are related by virtue of
being controlled by the same government can provide reduced
related party disclosures.
Annual Report 2011 41
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
3.
(u)
SIGNIFICANT ACCOUNTING POLICIES (continued)
New standards and interpretations not yet effective (continued)
Reference
Title
Summary
Application
date of
standard
AASB 2009-
12
Amendments to Australian
Accounting Standards
This amendment makes numerous editorial changes to a range of
Australian Accounting Standards and Interpretations.
1 January
2011
[AASBs 5, 8, 108, 110, 112,
119, 133, 137, 139, 1023
& 1031 and Interpretations 2,
4, 16, 1039 & 1052]
(IFRS 5, 8,
IAS 8, 10,
12, 19, 33,
37, 39 and
IFRIC 2, 4,
16)
In particular, it amends AASB 8 Operating Segments (IFRS 8)
to require an entity to exercise judgement in assessing whether
a government and entities known to be under the control of that
government are considered a single customer for the purposes of
certain operating segment disclosures. It also makes numerous
editorial amendments to a range of Australian Accounting
Standards and Interpretations, including amendments to reflect
changes made to the text of IFRS by the IASB.
Application
date for
Group
1 July 2011
AASB 1054
Australian Additional
Disclosures
This standard is as a consequence of phase 1 of the joint Trans-
Tasman Convergence project of the AASB and FRSB.
1 January
2011
1 July 2011
This standard relocates all Australian specific disclosures from other
standards to one place and revises disclosures in the following
areas:
(a) Compliance with Australian Accounting Standards
(b) The statutory basis or reporting framework for financial
statements
(c) Whether the financial statements are general purpose or
special purpose
(d) Audit fees
(e) Imputation credits
Emphasises the interaction between quantitative and qualitative
AASB 7 (IFRS 7) disclosures and the nature and extent of risks
associated with financial instruments.
Clarifies that an entity will present an analysis of other comprehensive
income for each component of equity, either in the statement of
changes in equity or in the notes to the financial statements.
Provides guidance to illustrate how to apply disclosure principles in
AASB 134 (IAS 34) for significant events and transactions.
Clarifies that when the fair value of award credits is measured
based on the value of the awards for which they could be
redeemed, the amount of discounts or incentives otherwise granted
to customers not participating in the award credit scheme, is to be
taken into account.
This Standard makes numerous editorial amendments to a range
of Australian Accounting Standards and Interpretations, including
amendments to reflect changes made to the text of IFRS by the
IASB.
These amendments have no major impact on the requirements of
the amended pronouncements.
increase
requirements
the disclosure
for
The amendments
transactions involving transfers of financial assets. Disclosures
require enhancements to the existing disclosures in AASB 7 (IFRS 7)
where an asset is transferred but is not derecognised and introduce
new disclosures for assets that are derecognised but the entity
continues to have a continuing exposure to the asset after the sale.
1 January
2011
1 July 2011
1 January
2011
1 July 2011
1 January
2011
1 July 2011
AASB 2010-4
(IFRS 1, 7,
IAS 1, 34
and IFRIC 13)
Further Amendments to
Australian Accounting
Standards arising from the
Annual Improvements Project
[AASB 1, AASB 7, AASB 101,
AASB 134 and Interpretation
13]
AASB 2010-5
(IFRS 1, 3, 4,
5, IAS 1, 7,
12, 18, 19,
21, 32, 33,
34, 37, 39,
40 and SIC
12, 15, 27,
32)
AASB 2010-6
(IFRS 1 & 7)
Amendments to Australian
Accounting Standards
[AASB 1, 3, 4, 5, 101,
107, 112, 118, 119, 121,
132, 133, 134, 137, 139,
140, 1023 & 1038 and
Interpretations 112, 115,
127, 132 & 1042]
Amendments to Australian
Accounting Standards –
Disclosures on Transfers of
Financial Assets [AASB 1 &
AASB 7]
42 Orbital
3.
(u)
SIGNIFICANT ACCOUNTING POLICIES (continued)
New standards and interpretations not yet effective (continued)
Reference
Title
Summary
Application
date of
standard
1 January
2013
Application
date for
Group
1 July 2013
AASB 2010-7
(IFRS 9 and
consequential
amendments
to IFRS 1, 3,
4, 5, 7, IAS
1, 2, 8, 12,
18, 20, 21,
27, 28, 31,
32, 36, 37,
39 and IFRIC
2, 5, 10, 12,
19 and SIC
27)
AASB 2011-1
(IFRS 1, 5,
IAS 1, 7, 8,
21, 28, 32,
34 and IFRIC
2 and SIC
12, 13)
AASB 2011-2
Amendments to Australian
Accounting Standards arising
from AASB 9 (December
2010)
[AASB 1, 3, 4, 5, 7, 101,
102, 108, 112, 118, 120,
121, 127, 128, 131, 132,
136, 137, 139, 1023, &
1038 and interpretations 2, 5,
10, 12, 19 & 127]
The requirements for classifying and measuring financial liabilities
were added to AASB 9 (IFRS 9). The existing requirements for the
classification of financial liabilities and the ability to use the fair
value option have been retained. However, where the fair value
option is used for financial liabilities the change in fair value is
accounted for as follows:
• The change attributable to changes in credit risk are presented
in other comprehensive income (OCI)
• The remaining change is presented in profit or loss
If this approach creates or enlarges an accounting mismatch in
the profit or loss, the effect of the changes in credit risk are also
presented in profit or loss.
This Standard amendments many Australian Accounting Standards,
removing the disclosures which have been relocated to AASB
1054.
1 January
2011
1 July 2011
This Standard makes amendments to the application of the revised
disclosures to Tier 2 entities, that are applying AASB 1053.
1 January
2013
1 July 2013
Amendments to Australian
Accounting Standards
arising from the Trans-Tasman
Convergence project
[AASB 1, AASB 5, AASB
101, AASB 107, AASB 108,
AASB 121, AASB 128, AASB
132, AASB 134, Interpretation
2, Interpretation 112,
Interpretation 113]
Amendments to Australian
Accounting Standards
arising from the Trans-Tasman
Convergence project –
Reduced disclosure regime
[AASB 101, AASB 1054]
**
(IFRS 10)
Consolidated Financial
Statements
IFRS 10 establishes a new control model that applies to all entities.
It replaces parts of IAS 27 Consolidated and Separate Financial
Statements dealing with the accounting for consolidated financial
statements and SIC-12 Consolidation – Special Purpose Entities.
1 January
2013
1 July 2013
The new control model broadens the situations when an entity is
considered to be controlled by another entity and includes new
guidance for applying the model to specific situations, including
when acting as a manager may give control, the impact of
potential voting rights and when holding less than a majority voting
rights may give control.
Annual Report 2011 43
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
3.
(u)
SIGNIFICANT ACCOUNTING POLICIES (continued)
New standards and interpretations not yet effective (continued)
Reference
Title
Summary
**
(IFRS 11)
Joint Arrangements
**
(IFRS 12)
Disclosure of Interests in Other
Entities
**
(IFRS 13)
Fair Value Measurement
IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-
controlled Entities – Non-monetary Contributions by Ventures. IFRS
11 uses the principle of control in IFRS 10 to define joint control,
and therefore the determination of whether joint control exists may
change. In addition IFRS 11 removes the option to account for
jointly controlled entities (JCEs) using proportionate consolidation.
Instead, accounting for a joint arrangement is dependent on the
nature of the rights and obligations arising from the arrangement.
Joint operations that give the venturers a right to the underlying
assets and obligations themselves is accounted for by recognising
the share of those assets and obligations. Joint ventures that give
the venturers a right to the net assets is accounted for using the
equity method.
IFRS 12 includes all disclosures relating to an entity’s interests in
subsidiaries, joint arrangements, associates and structures entities.
New disclosures have been introduced about the judgements
made by management to determine whether control exists, and to
require summarised information about associates and subsidiaries
with non-controlling interests.
IFRS 13 establishes a single source of guidance under IFRS for
determining the fair value of assets and liabilities. IFRS 13 does
not change when an entity is required to use fair value, but rather,
provides guidance on how to determine fair value under IFRS
when fair value is required or permitted by IFRS. Application of
this definition may result in different fair values being determined
for the relevant assets.
IFRS 13 also expands the disclosure requirements for all assets or
liabilities carried at fair value. This includes information about the
assumptions made and the qualitative impact of those assumptions
on the fair value determined.
*
Designates the beginning of the applicable annual reporting period unless otherwise stated
**
The AASB has not issued this standard, which was finalised by the IASB in May 2011
The directors have not determined the impact of the above new and amended accounting standards.
Application
date of
standard
1 January
2013
Application
date for
Group
1 July 2013
1 January
2013
1 July 2013
1 January
2013
1 July 2013
4.
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group’s principal financial instruments comprise cash and short-term deposits, receivables, payables, and financial liabilities.
The Group manages its exposure to key financial risks, including interest rate and currency risk in accordance with the Group’s
financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets whilst
protecting future financial security.
The Group from time-to-time enters into derivative transactions, principally forward currency contracts. The purpose is to manage
the currency risks arising from the Group’s operations and its sources of revenue. The main risks arising from the Group’s financial
instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The Group uses different methods to measure
and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate and foreign
exchange risk and assessments of market forecasts for interest and foreign exchange rates. Ageing analyses and monitoring of
specific credit allowances are undertaken to manage credit risk, liquidity risk is monitored through the development of future rolling
cash flow forecasts.
The Board reviews and agrees policies for managing each of these risks as summarised below.
Primary responsibility for identification and control of financial risks rests with the Audit Committee under the authority of the Board.
The Board reviews and agrees policies for managing each of the risks identified below, including the setting of limits for hedging
cover of foreign currency and interest rate risk, credit allowances, and future cash flow forecast projections.
44 Orbital
4.
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
Risk Exposures and Responses
Interest rate risk
The Group’s exposure to market interest rates relates primarily to the Group’s cash, cash equivalents on deposit and term deposits
with Australian banks.
The primary goal of the Group is to maximize returns on surplus cash, using deposits with maturities of less than 90 days.
Management continually monitors the returns on funds invested. The Group also has a term deposit of greater than 90 days and
less than 365 days that has been pledged as security to the Group’s bankers for a trade finance facility.
At balance date, the Group had the following mix of financial assets and financial liabilities exposed to Australian variable interest
rate risk that are not designated in cash flow hedges:
Financial assets
Cash and cash equivalents
Financial liabilities
Interest bearing liabilities
Contingent consideration
CONSOLIDATED
2011
$’000
2010
$’000
3,440
3,608
648
2,688
3,336
2,056
-
2,056
The following sensitivity analysis is based on the interest rate risk exposures in existence at the balance sheet date:
At 30 June 2011, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax
profit and other comprehensive income would have been affected as follows:
Consolidated
+1% (100 basis points)
-.5% (50 basis points)
Post tax profit
Higher/(Lower)
Other comprehensive income
Higher/(Lower)
2011
$’000
2010
$’000
2011
$’000
2010
$’000
8
(4)
36
(18)
-
-
-
-
The movements in profit are due to higher/lower interest revenue from variable rate cash balances. The sensitivity is the same in
2011 as in 2010 because the only balances affected by interest rates are cash and interest-bearing loan balances.
Foreign currency risk
As a result of the investment in Synerject LLC, an associate, the Group’s income statement and statement of financial position can
be affected significantly by movements in the US$/A$ exchange rates.
The Group also has transactional currency exposures. Such exposure arises from sales or purchases by an operating entity in
currencies other than the functional currency.
Approximately 20% (FY2010: 17%) of the Group’s sales are denominated in currencies other than the functional currency of the
operating entity making the sale, whilst approximately 14% (FY2010: 26%) of costs are denominated in currencies other than the
functional currency of the operating entity making the expenditure.
With respect to assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an
acceptable level by buying or selling forward foreign currency contracts at spot rates when incurred. The Group does not hold
foreign currency positions for trading purposes.
Annual Report 2011 45
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
4.
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
At 30 June 2011, the Group had the following exposure to US$ foreign currency that is not designated in cash flow hedges:
Financial assets
Cash and cash equivalents
Trade and other receivables
Financial liabilities
Trade and other payables
CONSOLIDATED
2011
$’000
2010
$’000
68
120
188
139
195
308
503
-
At 30 June 2011, the Group had the following exposure to European Currency Units that is not designated in cash flow hedges:
Financial assets
Cash and cash equivalents
Trade and other receivables
Financial liabilities
Trade and other payables
13
23
36
130
23
48
71
-
The following sensitivity is based on the foreign currency risk exposures in existence at the balance sheet date:
At 30 June 2011, had the Australian Dollar moved, as illustrated in the table below, with all other variables held constant, post
tax profit and other comprehensive income would have been affected as follows:
Consolidated
AUD/USD/EURO +10%
AUD/USD/EURO -5%
Post Tax Profit
Higher/(Lower)
Other comprehensive
income
Higher/(Lower)
2011
$’000
2010
$’000
2011
$’000
2010
$’000
4
(2)
(46)
26
-
-
-
-
The movements in profit in 2011 are less sensitive than in 2010 due to the lower level of net US Dollar assets and the net Euro
financial liabilities position at balance date.
Credit risk
Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents and trade and other receivables.
The Group’s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying
amount of these financial assets (as outlined in each applicable note).
The Group does not hold any credit derivatives to offset its credit exposure, however the Group does hold receivable insurance
where appropriate.
It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures including
an assessment of their independent credit rating, financial position, past experience and industry reputation. Risk limits are set for
each individual customer in accordance with parameters set by management. These risk limits are regularly monitored.
In addition, receivable balances are monitored on an ongoing basis.
There are no significant concentrations of credit risk within the Group and financial instruments are only invested with a major
financial institution to minimise the risk of default of counterparties. An ageing of receivables is included in note 14.
Liquidity risk
The Group has established a trade finance facility with its bankers. The Group does not have any other bank overdrafts, bank
loans, preference shares, finance leases or committed available credit lines at 30 June 2011.
The only external borrowings of the Group are the trade finance facility repayable on terms not exceeding 180 days and the
interest free Western Australian Government loan of $14,346,164 repayable in yearly instalments from May 2010 to May
2025.
46 Orbital
X
4.
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
The Group has recognised a contingent consideration liability of $3,474,000 payable in November 2013 to the owners of the
non-controlling interest in Sprint Gas (Aust) Pty Ltd.
The table below reflects all contractually fixed pay-offs, repayments and interest resulting from recognised financial liabilities as of
30 June 2011. For all obligations the respective undiscounted cash flows for the respective upcoming fiscal years are presented.
Cash flows for financial liabilities without fixed amount or timing are based on the conditions existing at 30 June 2011. The
Group’s approach to managing liquidity is to ensure, as far as is possible, that it will always have sufficient liquidity to meet its
liabilities when due and payable without incurring unacceptable losses or risks.
The remaining contractual maturities of the Group’s financial liabilities are:
6 months or less
6-12 months
1-5 years
Over 5 years
Fair value
CONSOLIDATED
2011
$’000
5,652
288
5,329
11,763
23,032
2010
$’000
4,732
240
1,546
12,360
18,878
The methods for estimating fair value are outlined in the relevant notes to the financial statements.
The Group’s contingent consideration liability belongs to level 3 fair value hierarchy, where the inputs for the valuation of the
liability are not based on observable market data (unobservable inputs)(Level 3).
The following table shows a reconciliation of the movement in the fair value of the financial instruments categorised within Level 3
between the beginning and the end of the reporting period.
At 1 July
Recognised during the year
Released to the income statement
At 30 June
-
2,688
-
2,688
-
-
-
-
No gains or losses were recognised in the income statement during the current year due to a change in the fair value of the
contingent consideration.
The fair value of the contingent consideration payable was calculated with reference to the estimated future value of the Sprint Gas
business, which is based on an estimated average EBITDA multiple. The undiscounted value was discounted at the present value
using a market discount rate of 9.8%. If the business was to perform 20% better or 20% worse than forecast the estimated fair
value of the contingent consideration would increase by $531,000/decrease by $531,000 respectively
5.
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the
reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets,
liabilities, contingent liabilities, revenue and expenses. Management bases its judgements and estimates on historical experience
and on other various factors it believes to be reasonable under the circumstances, the result of which form the basis of the carrying
values of the assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions and conditions.
Management has identified the following critical accounting policies for which significant judgements, estimates and assumptions
are made. Actual results may differ from these estimates under different assumptions and conditions and may materially affect
financial results or the financial position reported in future periods.
Further details of the nature of these assumptions and conditions may be found in the relevant notes to the financial statements.
(a)
Significant accounting judgements
Impairment of non-financial assets other than goodwill
The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the
particular asset that may lead to impairment. These include product and manufacturing performance, technology, economic and
political environments and future product expectations. If an impairment trigger exists the recoverable amount of the asset is
determined. Given the current uncertain economic environment management considered that the indicators of impairment were
significant enough and as such these assets have been tested for impairment in this financial period. Value in use models, based
on approved budgets and forecasts, have been used to assess impairments of each cash generating unit.
Annual Report 2011 47
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
5.
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (continued)
Capitalised development costs
Development costs are only capitalised when it can be demonstrated that the technical feasibility of completing the intangible
asset is valid so that the asset will be available for use or sale. During the reporting period the Group identified an impairment
trigger in relation to the capitalised development costs for the aftermarket LPI kits and recognised an allowance for impairment of
$1,065,000.
Consolidation of Sprint Gas (Aust) Pty Ltd
On 27 May 2011, Orbital Autogas Systems Pty Ltd acquired 55% of the voting shares of Sprint Gas (Aust) Pty Ltd, a new
company incorporated to acquire the operating business of Sprint Gas, an Australian business specializing in the importation and
wholesaling of LPG Fuel systems. Concurrently with the entering into of the Business Acquisition Agreement, the Group entered
into a Subscription and Shareholders Agreement with the owners of the 45% non-controlling interest in Sprint Gas (Aust) Pty Ltd.
As part of the Subscription and Shareholders Agreement Call and Put options were issued over the remaining 45% non-controlling
interest. Management has determined that the Call and Put options, exercisable after 30 months, are in nature a forward contract
and in substance represent contingent consideration. The Group has accounted for the business combination as though it acquired
a 100% interest and has recognised a financial liability to the non-controlling shareholders equal to the fair value of the underlying
obligations under the Put and Call option (Contingent consideration liability).
(b)
Significant accounting estimates and assumptions
Taxation
The Group’s accounting policy for taxation requires management’s judgement as to the types of arrangements considered to be
a tax on income in contrast to an operating cost. Judgement is also required in assessing whether deferred tax assets and certain
deferred tax liabilities are recognised on the balance sheet. Deferred tax assets, including those arising from unrecouped tax
losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be
recovered, which is dependent on the generation of sufficient future taxable profits. Assumptions about the generation of future
taxable profits and repatriation of retained earnings depend on management’s estimates of future cash flows. These depend on
estimates of future production and sales volumes, operating costs, capital expenditure, dividends and other capital management
transactions. Judgements are also required about the application of income tax legislation. These judgements and assumptions are
subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact
the amount of deferred tax assets and deferred tax liabilities recognised on the balance sheet and the amount of other tax losses
and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred
tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the income statement.
Share-based payment transactions
The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at
the date at which they are granted. The fair value of shares granted under the Employee Share Plan No.1 is the market value on the
date of issue. The fair value of the Executive Long Term Share Plan rights is determined by an external valuer using a monte-carlo
simulation model, with the assumptions detailed in note 36. The fair value of the performance rights is determined by an external
valuer using a monte-carlo simulation model, with assumptions detailed in note 36. The accounting estimates and assumptions
relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the
next annual reporting period but may impact expenses and equity.
Impairment of goodwill and intangibles with indefinite useful lives
The Group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis.
This requires an estimation of the recoverable amount of the cash-generating units, using a value in use discounted cash flow
methodology, to which the goodwill and intangibles with indefinite useful lives are allocated. No impairment loss has been
recognised in the current year in respect of goodwill.
Product warranty
In determining the level of provision required for product warranties the Group has made judgements in respect of the expected
performance of the product, number of customers who will actually use the product warranty and how often, and the costs of
fulfilling the performance of the product warranty. Historical experience and current knowledge of the performance of products has
been used in determining this provision. The related carrying amounts are disclosed in note 25.
Estimation of useful lives of assets
The estimation of the useful lives of assets has been based on historical experience as well as manufacturers’ warranties (for plant
and equipment). In addition, the condition of the assets is assessed at least once per year and considered against the remaining
useful life. Adjustments to useful lives are made when considered necessary.
Revenue from Rendering of Services
Revenue from services rendered is recognised in the income statement in proportion to the stage of completion of the transaction
at the reporting date. The stage of completion is assessed by reference to the extent of work performed. No revenue is recognised
if there are significant uncertainties regarding recovery of the consideration due.
48 Orbital
X
5.
(b)
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (continued)
Significant accounting estimates and assumptions (continued)
Recognition of contingent consideration
The Group has measured the value of the contingent consideration liability by reference to the fair values of the underlying
obligations under the Put and Call options that give rise to the liability. In determining the fair values of underlying obligations
under the Put and Call options the Group has made judgements in respect of the expected earnings before interest, depreciation
and amortisation expected to be generated by the business during the calculation period.
6.
OPERATING SEGMENTS
Identification of reportable segments
The group has identified its operating segments based on the internal reports that are reviewed and used by the executive
management team (the chief operating decision makers) in assessing performance and in determining the allocation of resources.
The operating segments are identified by management based on the manner in which the product is sold, whether retail or
wholesale, and the nature of the services provided, the identity of service line manager and country of origin. Discrete financial
information about each of these operating businesses is reported to the executive management team on at least a monthly basis.
The reportable segments are based on the similarity of the products produced and sold and/or the services provided, as these are
the sources of the Group’s major risks and have the most effect on the rates of return.
Types of products and services
Engineering services (consultancy)
The engineering services business provides consultancy services to original equipment manufacturers, engine manufacturers and
government departments. The engineering services provided include research, design, development, calibration, improvement,
production support, performance testing, emissions testing and certification.
Alternative fuels (sale of goods)
The alternative fuels businesses provide LPG fuel systems to an Australian automobile manufacturer, LPG retrofit installers and also
operate spare parts businesses for LPG fuel systems.
Royalties and licences (intellectual property rights)
The royalties and licences business receives revenue from licensees of Orbital technologies. Applications utilising Orbital
technologies include outboard engines, autorickshaws and scooters.
Accounting policies
The following items and associated assets and liabilities are not allocated to operating segments as they are not considered part
of the core operations of any segment:
• Corporate management and finance and administration overhead expenses.
• Share of profit from equity accounted investment.
• Finance costs - including adjustments on provisions due to discounting.
• Cash and cash equivalents.
• Borrowings.
Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used
for more than one period.
Inter-segment pricing is determined on an arm’s length basis.
Geographical information
The engineering services and royalties and licences segments are managed on a worldwide basis. The alternative fuels segment
is managed on an Australian basis.
In presenting geographical information revenue is based on the geographical location of customers and non-current assets are
based on the geographical location of the assets.
Revenue is derived predominantly from the provision of engineering services, the sale of LPG fuel systems and the sale of intellectual
property rights to Orbital’s OCP technology. The consolidated entity operates predominantly in the automotive, marine and
motorcycle engine markets.
Major customers
The Group has a number of customers to which it provides both products and services. The alternative fuels segment supplies an
Australian automobile manufacturer with LPG fuel systems that accounted for 12.7% of external revenue (2010: 22.9%). The next
most significant customer which accounted for 12.2% (2010: 12.1%) of external revenue was in the engineering services segment.
No other customer accounts for more than 10% of revenue.
Annual Report 2011 49
X
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
6.
OPERATING SEGMENTS (continued)
(a)
Operating segments
Consulting
Services
Alternative
Fuels
Royalties and
licences (i)
Consolidated
2011
$’000
2010
$’000
2011
$’000
2010
$’000
2011
$’000
2010
$’000
2011
$’000
2010
$’000
Segment Revenue - external customers
9,492
9,621
5,847
6,203
1,081
1,199 16,420 17,023
Unallocated other revenue
Total Revenue
Segment profit/(loss)
Research & development
Unallocated expenses - net (ii)
Gain on restructure of WA Government Loan
Gain on sale of property, plant and equipment
Finance costs
Share of profit from equity accounted investment
Net profit before related income tax
Income tax benefit
Profit after tax attributable to members
218
242
16,638 17,265
161
1,031
(2,764)
(1,727)
610
732
(1,993)
36
(1,158)
(1,152)
(2,581)
(3,570)
- 7,695
4,760
-
(688)
(755)
3,233
1,874
1,573
4,128
190
388
1,763
4,516
Consulting
Services
Alternative
Fuels
Royalties and
licences (i)
Consolidated
2011
$’000
2010
$’000
2011
$’000
2010
$’000
2011
$’000
2010
$’000
2011
$’000
2010
$’000
Non-cash (revenue) and expenses
Depreciation and amortisation
695
737
479
267
Equity settled employee compensation
122
127
9
49
Other non-cash (income)/expenses
(225)
(345)
2,007
-
Segment non-cash expenses
592
519
2,495
316
-
1
-
1
Equity settled employee compensation
Amortisation of non-interest bearing loans
Gain on restructure of WA Government Loan
Share of profit from equity accounted investment
Foreign exchange translation (gain)/loss
Total non-cash (revenue) and expenses
- 1,174
1,004
1
132
177
- 1,782
(345)
1
3,088
202
614
836
163
626
- (7,695)
(3,233)
(1,874)
(79)
97
592
(7,847)
(i)
Licence and royalty costs include direct patent costs and research and development.
(ii) Unallocated expenses (net) include corporate management and finance and administration overhead expenses net of
unallocated other income. In FY10, unallocated expenses include $595,000 of due diligence and capital raising expenses
for a proposed acquisition which did not proceed.
50 Annual Report 2010
Orbital
6.
OPERATING SEGMENTS (continued)
(a)
Operating segments (continued)
Segment Assets
Unallocated assets
Cash
Other financial assets
Equity accounted investment in associate
Deferred tax asset
Consolidated Total Assets
Segment Liabilities
Unallocated liabilities
Borrowings
Consolidated Total Liabilities
Consolidated Net Assets
Consulting
Services
Alternative
Fuels
Royalties and
licences (i)
Consolidated
2011
$’000
2010
$’000
2011
$’000
2010
$’000
2011
$’000
2010
$’000
2011
$’000
2010
$’000
7,619 10,695
9,581
6,784
336
763 17,536 18,242
3,440
3,608
3,434
-
11,406 11,534
4,958
5,215
40,774 38,599
7,766
7,348
5,672
2,847
77
- 13,515 10,195
7,777
7,604
21,292 17,799
19,482 20,800
Segment acquisitions of non current assets
217
827
857
1,695
-
- 1,074
2,522
Acquisitions of non-current assets represent acquisitions of property, plant and equipment of $481,000 and development of
intangibles of $593,000
(b)
Geographic information
Americas
Europe
Asia
Australia
Consolidated
2011 2010 2011 2010 2011 2010 2011 2010 2011 2010
$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000
Revenue - external customers
3,473 4,032
889
282 1,917 3,665 10,141 9,044 16,420 17,023
Non-current assets
16,122 16,749
-
-
-
- 6,549 9,436 22,671 26,185
7.
OTHER REVENUE
Interest revenue
CONSOLIDATED
2011
$’000
2010
$’000
218
242
Orbital
2010 Annual Report 51
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
8.
OTHER INCOME
Gain on sale of property, plant and equipment
Automotive grant income (a)
Net foreign exchange gains
Government grant arising on restructure of non interest bearing loan (refer note 26)
Grant income
Other
CONSOLIDATED
2011
$’000
2010
$’000
4,760
680
79
-
587
4
41
538
-
7,695
330
155
6,110
8,759
(a) The Group received Automotive Competitiveness and Investment Scheme (ACIS) credits from the Federal Government for
qualifying research and development activities and accounts for these as government grants. During the year ACIS was
replaced by the Automotive Transformation Scheme
9.
EXPENSES
(a)
Employee benefits expense
Salaries and wages
Contributions to defined contributions superannuation funds
Share based payments
(Decrease)/Increase in liability for annual leave
Increase in liability for long service leave
Termination costs
Other associated personnel expenses
(b)
Finance costs
Interest on borrowings
Non-cash interest expense WA Government Loan
(c)
Other expenses
Administration
Marketing
Investor relations
(Write-back)/allowance for impairment of receivables
Write-off previously capitalised development expenditure
Net foreign exchange losses
Other
(d)
Inventory expenses
Raw materials and consumables purchased
Inventory write-downs (Note 15)
Change in inventories
(e)
Lease payments included in income statement
8,249
892
334
18
19
418
564
10,494
74
614
688
234
73
28
43
1,065
-
334
1,777
8,485
914
339
(110)
98
276
790
10,792
129
626
755
284
97
88
(114)
-
97
293
745
4,208
942
(666)
4,484
5,245
-
(638)
4,607
Minimum lease payments - operating lease
490
171
52 Orbital
X
9.
EXPENSES (continued)
(f)
Research and development costs
Research and development costs charged directly to the income statement:
– LPI development
– Green Car Innovation Fund project
– Other research & development
10.
INCOME TAX
(a)
Recognised in the income statement
Current income tax
Current year (expense)/benefit
Prior year under provided
Deferred tax
Relating to originating and reversing temporary differences
Benefit on recognition of tax losses
Total income tax benefit in income statement
(b)
Numerical reconciliation between tax benefit and pre-tax net profit
Profit before tax
Income tax using the statutory tax rates
– Non deductible expenditure
– Non assessable items
– Deferred tax assets not brought to account in prior years now recognised
– Net withholding tax recouped/(paid)
– United States of America Federal and State taxes
– Under provided for in prior periods
Income tax benefit on pre-tax net profit
(c)
Tax consolidation
CONSOLIDATED
2011
$’000
2010
$’000
-
963
195
275
-
877
1,158
1,152
(342)
-
(342)
79
(108)
(29)
-
532
532
(2,826)
3,243
417
190
388
1,573
4,128
(472)
(711)
706
922
(70)
(185)
-
190
(1,238)
(1,193)
444
2,404
202
(123)
(108)
388
(i) Members of the tax consolidated group and the tax sharing arrangement
Orbital Corporation Limited and its 100% owned Australian resident subsidiaries formed a tax consolidated group with effect
from 1 July 2002. Orbital Corporation Limited is the head entity of the tax consolidated group. Members of the group have
entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the
head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of
this agreement on the basis that the possibility of default is remote.
Annual Report 2011 53
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
11.
EARNINGS PER SHARE
Basic earnings per share
The calculation of basic earnings per share at 30 June 2011 was based on the profit attributable to ordinary shareholders of
$1,763,084 (2010: profit $4,515,451) and a weighted average number of ordinary shares outstanding during the financial
year ended 30 June 2011 of 48,325,837 shares (2010: 48,086,676 shares), calculated as follows:
CONSOLIDATED
2011
$
2010
$
Profit attributable to ordinary shareholders
1,763,084
4,515,451
Weighted average number of ordinary shares (1)
Number
Number
Weighted average number of ordinary shares at 30 June
Effect of potential dilutive ordinary shares
Weighted average number of potential dilutive ordinary shares at 30 June
48,325,837 48,086,676
539,125
-
48,325,837 48,625,801
Earnings per share
Basic earnings per share
Diluted earnings per share
cents
cents
3.65
3.65
9.39
9.29
Shares granted to employees (including Key Management Personnel) as described in note 36 are considered to be potential
ordinary shares and have been included in the determination of the diluted earnings per share to the extent they are dilutive. These
potential ordinary shares have not been included in the determination of basic earnings per share. In the current year, no potential
shares which are issuable under the ELTSP have been included in the diluted earnings per share calculation. The 2,849,800
rights granted under the ELTSP and the 1,150,000 performance rights have not been included in the diluted earnings per share
calculation as they are contingent on future performance.
(1) Share Consolidation
On 28 October, 2010 the shareholders in Annual General Meeting approved the consolidation of ordinary shares on the basis
that every ten ordinary shares be consolidated into one ordinary share, and where this consolidation results in a fraction of a share
being held by a shareholder, the directors of the Company be authorised to round that fraction up to the nearest whole share. The
share consolidation became effective on 28 October, 2010. The effect of the share consolidation has been retroactively applied
to the number of shares outstanding and earnings per share calculations above.
12.
CASH AND CASH EQUIVALENTS
Cash at bank
Cash at bank - US dollars
Cash at bank - European currency units
At call deposits - financial institutions
CONSOLIDATED
2011
$’000
2010
$’000
1,181
68
13
2,178
3,440
148
195
23
3,242
3,608
54 Orbital
X
13.
OTHER FINANCIAL ASSETS
Short term deposits - financial institutions
CONSOLIDATED
2011
$’000
3,434
3,434
2010
$’000
-
-
Short term deposits represents term deposits with financial institutions for periods greater than 90 days and less than 365 days
earning interest at the respective term deposit rates at time of lodgement.
Due to the short term nature of the deposits carrying value approximates fair value. Short term deposits are only invested with a
major financial institution to minimise the risk of default of counterparties.
14.
TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Allowance for impairment loss (a)
Accrued royalties
Taxation instalments
Other receivables
Prepayments
(a)
Allowance for impairment loss
6,284
(154)
6,130
288
48
117
258
6,841
4,138
(116)
4,022
734
141
71
116
5,084
Trade receivables are non-interest bearing and are generally on 30-60 day terms. An allowance for impairment loss is recognised
when there is objective evidence that an individual trade receivable is impaired. An impairment allowance account of $154,000
(2010: $116,000) has been recognised by the Group at balance date. Movement in this allowance account has been included
in the other expenses item.
Movements in the allowance for impairment loss were as follows:
At 1 July
Write-back/(charge) for the year
Amounts written off
At 30 June
At 30 June, the ageing analysis of trade receivables is as follows:
(116)
(43)
5
(154)
(230)
114
-
(116)
Total
0-30
days
31-60
days
61-90
days
PDNI*
+91
days
PDNI*
+91
days
CI*
6,284
4,484
1,097
267
282
154
4,138
2,494
1,009
419
100
116
2011 Consolidated
2010 Consolidated
* Past due not impaired (‘PDNI’)
Considered impaired (‘CI’)
Receivables past due but not considered impaired are $549,000 (2010:$519,000). Payment terms on these amounts have
not been re-negotiated. Management has been in contact with each relevant debtor and is satisfied that payment will be received
in full.
Other balances within trade and other receivables do not contain impaired assets and are not past due. It is expected that these
other balances will be received when due.
Annual Report 2011 55
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
14.
TRADE AND OTHER RECEIVABLES (continued
(b)
Fair value and credit risk
Due to the short term nature of these receivables, their carrying value is assumed to approximate fair value.
The maximum exposure to credit risk is the fair value of receivables. Collateral is not held as security.
(c)
Foreign exchange and interest rate risk
Detail regarding foreign exchange and interest rate risk exposure is disclosed in note 4.
CONSOLIDATED
2011
$’000
2010
$’000
15.
INVENTORIES
Materials and production supplies - at lower of cost and net realisable value
4,388
3,722
(a)
Inventory expense
Inventories recognised as an expense for the year ended 30 June 2011 totalled $4,484,000 (2010: $4,607,000) for the Group
(Refer to Note 9(d)).
Inventory write-downs recognised as an expense totalled $942,000 (2010: $nil) for the Group as a result of the contraction of the
Australian LPG retrofit market (Refer to Note 19(c)).
16.
INVESTMENT IN ASSOCIATE
(a)
Interest in Synerject LLC
On 31 March 2009 the Group sold an 8% share of Synerject LLC to Continental Corporation. The sale of the interest to
Continental Corporation resulted in a loss of joint control of Synerject, as such the investment is now recognised and disclosed as
an investment in an associate.
The principal activities of Synerject LLC are the marketing, sale and manufacture, including research and development in the area
of engine management systems and components in the marine, recreational, motorcycle and utility markets.
The Group accounts for the investment in Synerject using the equity method.
The Group has the following interests in Synerject:
Name
Principal activities
incorporation Year end
2011
2010
Country of
Financial
30 June Ownership
Synerject LLC
Manufacture of engine management systems
USA
31 December
42%
42%
Summarised financial information relating to Synerject at 30 June 2011 is as follows:
Total
Total
Revenues
Profit
Assets
Liabilities Net assets
(100%)
(100%)
(100%)
(100%)
(100%)
US$’000
US$’000
US$’000
US$’000
US$’000
120,834
6,500
53,810
33,025
20,785
90,375
4,744
46,071
29,688
16,383
30 June 2011
30 June 2010
56 Orbital
X
16.
INVESTMENT IN ASSOCIATE (continued)
Share of
Synerject’s
net profit
recognised
A$’000
Total
Assets
(100%)
A$’000
Total
Liabilities
(100%)
A$’000
Net assets
as reported
by
Synerject
(100%)
A$’000
Share of
Synerject’s
net assets
equity
accounted
A$’000
Revenues
(100%)
A$’000
Profit
(100%)
A$’000
30 June 2011
122,314
6,580
3,233
50,107
30,752
19,355
11,406
30 June 2010
104,323
5,476
1,874
53,478
34,461
19,017
11,534
(b)
Movements in the carrying amount of the Group’s interest in Synerject
Beginning of year
Share of profits after tax
Share of reserves
Dividends received
Unrealised foreign exchange movements
End of year
(c)
Results of Synerject
Share of Synerject’s profit before income tax
Share of income tax expense
Share of Synerject’s net profit - as disclosed by Synerject
Adjustments:
- dissimilar accounting treatment with respect to revenue recognition
- dissimilar accounting treatment with respect to development expenditure
- dissimilar accounting treatment with respect to intangibles
CONSOLIDATED
2011
$’000
2010
$’000
11,534
3,233
343
(1,208)
(2,496)
11,406
11,264
1,874
(357)
(677)
(570)
11,534
2,835
(71)
2,764
357
98
14
2,363
(87)
2,276
(402)
(354)
354
Share of jointly controlled entity’s net profit accounted for using the equity method
3,233
1,874
(d)
Commitments
Share of Synerject’s capital commitments contracted but not provided for or payable:
Within one year
One year or later and no later than five years
Later than 5 years
292
1,014
467
1,773
649
1,349
741
2,739
17.
DEFERRED TAX ASSETS AND LIABILITIES
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Consolidated
Deferred
Tax Assets
Deferred
Tax Liabilities
Net
2011
2010
2011
2010
2011
2010
$’000
$’000
$’000
$’000
$’000
$’000
Tax value of US loss carry-forwards recognised
4,716
5,215
-
-
4,716
5,215
Other net temporary differences
Net tax assets
2,301
2,197
(2,059)
(2,197)
242
-
7,017
7,412
(2,059)
(2,197)
4,958
5,215
Annual Report 2011 57
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
17.
DEFERRED TAX ASSETS AND LIABILITIES (continued)
Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of the following items:
Australia (net at 30%)
Tax losses
Timing difference from provision for capital loss on investment
Other net temporary differences (a)
United States of America (net at 34%)
Tax losses
Other net temporary differences
(a)
Other net temporary differences
Annual leave
Long service leave
Staff bonus
Revenue in advance
Impairment allowance
Other
Government loan
Accelerated depreciation: plant & equipment
Net temporary differences
CONSOLIDATED
2011
$’000
2010
$’000
17,907
1,934
233
20,074
17,654
1,934
(207)
19,381
8,588
3,339
11,927
10,632
5,075
15,707
339
407
15
1,122
320
(208)
(1,851)
89
233
259
401
173
964
-
193
(2,023)
(174)
(207)
Under the tax laws of the United States, tax losses that cannot be fully utilised for tax purposes during the current year may be carried
forward, subject to some statutory limitations, to reduce taxable income in future years. At 30 June 2011, the available tax carry
forward losses of US$40,154,383 (2010: US$45,034,834) expire between the years 2012 and 2024.
Movement in temporary differences during the year
Consolidated
Balance
1-Jul-09
$’000
Acquired
during the year
$’000
Recognised
in income
$’000
Recognised
in equity (b)
$’000
Balance
30-Jun-10
$’000
Tax value of loss carry-forwards recognised
Net tax assets
5,054
5,054
-
-
417
417
(256)
(256)
5,215
5,215
Consolidated
Balance
1-Jul-10
$’000
Acquired
during the year
$’000
Recognised
in income
$’000
Recognised
in equity (b)
$’000
Balance
30-Jun-11
$’000
Tax value of loss carry-forwards recognised
5,215
-
532
(1,031)
4,716
Other temporary differences
Net tax assets
-
5,215
242
242
-
-
242
532
(1,031)
4,958
(b) The amounts recognised through equity represent the foreign exchange differences arising on the translation of the foreign
subsidiary.
58 Orbital
X
18.
PROPERTY, PLANT AND EQUIPMENT
Freehold land
At cost
Buildings
At cost
Less: accumulated depreciation
Plant and equipment
At cost
Less: accumulated depreciation
CONSOLIDATED
2011
$’000
2010
$’000
-
1,091
-
-
-
3,057
(1,137)
1,920
21,693
(17,559)
4,134
22,336
(17,436)
4,900
Total property, plant and equipment - net book value
4,134
7,911
Reconciliations
Reconciliations of the carrying amounts for each class of property,
plant and equipment are set out below:
Freehold land
Carrying amount at beginning of year
Disposals
Carrying amount at end of year
Buildings
Carrying amount at beginning of year
Disposals
Depreciation
Carrying amount at end of year
Plant and equipment
Carrying amount at beginning of year
Additions
Acquired in business combination
Disposals
Depreciation
Carrying amount at end of year
Total
Carrying amount at beginning of year
Carrying amount at end of year
1,091
(1,091)
-
1,091
-
1,091
1,920
(1,866)
(54)
-
2,002
-
(82)
1,920
4,900
481
468
(839)
(876)
4,134
4,304
1,394
-
(3)
(795)
4,900
7,911
4,134
7,397
7,911
All property, plant and equipment of the Group are subject to floating charges from the Group’s banker (see note 22) and from
the Government of Western Australia (see note 26).
Annual Report 2011 59
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
19.
INTANGIBLES AND GOODWILL
Net carrying value
Goodwill acquired in business combinations
At cost
Capitalised development expenditure
At cost
Less: accumulated amortisation
Less: allowance for impairment
Total intangibles and goodwill - net book value
(a) Reconciliation of carrying amounts at the beginning and end of the period
Reconciliations of the carrying amounts for goodwill
Carrying amount at beginning of year
Goodwill arising from acquisition of Sprint Gas business (note 38)
Carrying amount at end of year
Reconciliations of the carrying amounts for capitalised development expenditure
Carrying amount at beginning of year
Additions
Write-off of previously capitalised development expenditure
Amortisation
Carrying amount at end of year
(b) Description of the Group’s intangible assets and goodwill
Goodwill
CONSOLIDATED
2011
$’000
2010
$’000
1,736
363
1,891
(389)
(1,065)
437
1,298
(136)
-
1,162
2,173
1,525
363
1,373
1,736
363
-
363
1,162
593
(1,065)
(253)
437
170
1,128
-
(136)
1,162
The goodwill arose on the acquisitions of Boral Alternative Fuel Systems on 26 June 2008 ($363,000) and Sprint Gas (Aust) Pty
Ltd on 27 May 2011 ($1,373,000).
After initial recognition, goodwill acquired in a business combination is measured at cost less any accumulated impairment losses.
Goodwill is not amortised but is subject to impairment testing on an annual basis or whenever there is an indication of impairment.
Capitalised development expenditure
Expenditure on development activities relating to next generation LPG fuel systems for the Ford EcoLPI Falcon have been capitalised.
The EcoLPI range of Falcon vehicles were launched by Ford Australia in July 2011.
(c) Impairment losses recognised
(i) Continuing operations
An impairment loss of $1,065,000 on previously capitalised development expenditure was recognised for continuing operations
in the 2011 financial year (2010: $nil). The impaired development expenditure related to the development of LPG fuel systems
for aftermarket conversions. The impairment loss was recognised as a result of the contraction of the Australian LPG retrofit market,
which led to a significant decrease in the number of vehicles being converted to LPG during the reporting period and to lower than
expected penetration of our Liquid LPG product into this contracting market. The assessment of recoverable amount was based on
a value in use model using a discount rate of 18.4% and was determined at the cash-generating unit level. The cash-generating
unit consists of the capitalised development costs relating to the reportable Alternative Fuels Segment. The impairment loss has been
recognised in the income statement in the line item “other expenses”.
60 Orbital
X
19.
INTANGIBLES AND GOODWILL (continued)
(d) Impairment tests for goodwill and intangibles with indefinite useful lives
(i) Description of the cash generating units and other relevant information
Goodwill acquired through business combinations have been allocated to and are tested at the level of their respective cash
generating units, each of which is an operating segment within the same reportable segment (refer to note 6), for impairment testi
• Orbital Autogas Systems cash generating unit
• Sprint Gas cash generating unit
Orbital Autogas Systems cash generating unit
The recoverable amount of the Orbital Autogas Systems cash generating unit has been determined based on a value in use calculation
using cash flow projections as at 30 June 2011 based on financial budgets approved by management covering a five-year period.
The pre-tax, risk-adjusted discount rate applied to these cash flow projections is 18.4%.
Sprint Gas cash generating unit
The recoverable amount of the Sprint Gas cash generating unit has been determined based on a value in use calculation using
cash flow projections as at 30 June 2011 based on financial budgets approved by management covering a five-year period.
The pre-tax, risk-adjusted discount rate applied to these cash flow projections is 18.4%.
(ii) Carrying amount of goodwill and intangible assets allocated to each of the cash generating units
The carrying amounts of goodwill and intangible assets allocated to the Orbital Autogas Systems segment and to the Sprint Gas
segment are shown below:
Carrying amount of goodwill
2011
$’000
2010
$’000
363
363
2011
$’000
1,373
Carrying amount of capitalised development expenditure
437
1,162
-
2010
$’000
-
-
2011
$’000
1,736
2010
$’000
363
437
1,162
Orbital Autogas
Systems
Sprint Gas
Total
(iii) Key assumptions used in value in use calculations for the Orbital Autogas Systems and Sprint Gas units, respectively, for
30 June 2011 and 30 June 2010
The calculations of value in use for the Orbital Autogas Systems and Sprint Gas cash generating units are most sensitive to the
following assumptions:
• Revenue
• Gross margins
• Discount rates
Revenues – revenues for the Orbital Autogas Systems unit are based on expected volumes of production of the Ford EcoLPI Falcon
by its largest customer, Ford Australia, over the budget period and for the Sprint Gas unit are based on values achieved in the
years preceding the start of the budget period.
Gross margins — gross margins are based on the average values achieved in the years preceding the start of the budget period.
Discount rates — discount rates reflect management’s estimate of the time value of money and the risks specific to each unit that
are not already reflected in the cash flows. In determining appropriate discount rates for each unit, regard has been given to the
external borrowing rate of the entity as a whole.
Annual Report 2011 61
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
19.
INTANGIBLES AND GOODWILL (continued)
(iv) Sensitivity to changes in assumptions
Orbital Autogas Systems sales unit
With regard to the assessment of the value in use of the Orbital Autogas Systems sales unit, management believe that no
reasonably possible change in any of the above key assumptions would cause the carrying value of the unit to materially exceed
its recoverable amount.
Sprint Gas sales unit
With regard to the assessment of the value in use of the Sprint Gas sales unit, management believe that no reasonably possible
change in any of the above key assumptions would cause the carrying value of the unit to materially exceed its recoverable
amount.
20.
TRADE PAYABLES AND OTHER LIABILITIES
Current
Trade creditors and accruals
Revenues received in advance
(a)
Fair value
CONSOLIDATED
2011
$’000
2010
$’000
3,453
1,551
5,004
2,047
629
2,676
Due to the short term nature of trade payables and other liabilities, their carrying value is assumed to approximate their fair
value.
(b)
Interest rate, foreign exchange and liquidity risk
Information regarding interest rate, foreign exchange and liquidity risk exposure is set out in note 4.
21.
INTEREST BEARING LOANS AND BORROWINGS
Current
Loans and advances - secured (a)
(a)
Security
648
2,056
A first ranking mortgage debenture with fixed and floating charges over the whole of the assets has been granted to the Company’s
banker for the establishment of the credit facilities and forward exchange contracts totalling $3,365,000 (2010: $3,800,000).
(b)
Maturity
All loans and advances have a maturity of no greater than 180 days.
62 Orbital
21.
INTEREST BEARING LOANS AND BORROWINGS (continued)
(c)
Interest
Interest calculations are based on fixed interest rates applicable at the date of drawdown and payable on maturity. The average
interest rate on borrowings outstanding at reporting date is 8.49% (2010: 8.00%).
(d)
Fair value
Due to the short term nature of these loans, their carrying value is assumed to approximate their fair value.
(e)
Interest rate, foreign exchange and liquidity risk
Information regarding interest rate, foreign exchange and liquidity risk exposure is set out in note 4.
22.
FINANCING ARRANGEMENTS
The consolidated entity has standby arrangements with Westpac Banking Corporation to provide support facilities:
NOTE
CONSOLIDATED
2011
$’000
2010
$’000
Total facilities available
Forward exchange contracts facility
Trade finance facility
Corporate credit card facility
Bank guarantee
Multi-option credit facility
Facilities utilised at balance date
Forward exchange contracts facility
Trade finance facility
Corporate credit card facility
Bank guarantee
Multi-option credit facility
Facilities not utilised at balance date
Forward exchange contracts facility
Trade finance facility
Corporate credit card facility
Bank guarantee
Multi-option credit facility
21
200
2,500
200
465
-
3,365
-
648
34
465
-
1,147
200
1,852
166
-
-
2,218
350
2,500
200
-
750
3,800
-
2,056
29
-
-
2,085
350
444
171
-
750
1,715
A first ranking mortgage debenture with fixed and floating charges over the whole of the assets has been granted to the Company’s
banker for the establishment of the credit facilities and forward exchange contracts totalling $3,365,000 (2010: $3,800,000).
The Company has also provided the Company’s banker with security over a short term deposit of $3,365,000 (2010: $nil) held
by the Company’s banker as cash collateral for the financing facilities.
The bank guarantee has been provided for the benefit of the landlord of the Balcatta premises.
Annual Report 2011 63
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
23.
EMPLOYEE BENEFITS
(a) Current
(b) Non-Current
(c) Aggregate Liability for employee entitlements
CONSOLIDATED
2011
$’000
2010
$’000
2,354
2,420
132
455
2,486
2,875
The present value of employee entitlements not expected to be settled within twelve months of balance date have been calculated
using the following weighted averages:
Assumed rate of increase in wage and salary rates
Discount rate at 30 June
Settlement term (years)
Number of employees at year end
24.
DEFERRED REVENUE
(a)
Current
4.0%
5.1%
10
118
3.5%
5.2%
10
102
Deferred revenue for operation of heavy duty engine testing facility
316
316
(b)
Movement in deferred revenue
At 1 July
Transferred from government grants (see note 27)
Released to the income statement
At 30 June
316
-
-
316
-
512
(196)
316
In June 2008 the Group received funding of $2,760,000 from the Commonwealth of Australia through the Alternative Fuels
Conversion Program administered by the Department of the Environment, Water, Heritage and the Arts towards the construction
of a heavy duty engine test facility. The terms of the Grant included providing the Commonwealth with preferential access to the
facility at a discount to the commercial rate. This discount to commercial rates of $512,000 has been transferred from government
grants (see note 27) and recorded as deferred revenue.
The deferred revenue will be recognised as income over the periods in which the Commonwealth utilises the Heavy Duty Engine
Testing Facility at discounted rates.
64 Orbital
X
25.
OTHER PROVISIONS
(a)
Current
Warranties
Surplus lease space
Other
(b)
Non-Current
Surplus lease space
(c)
Reconciliations
Reconciliations of the carrying amounts for each class of provisions are set out below:
Warranties - current
Carrying amount at beginning of year
Arising during the year
Utilised
Carrying amount at end of year
Surplus lease space - current
Carrying amount at beginning of year
Utilised
Reclassified (to) from non current
Carrying amount at end of year
Other provisions - current
Carrying amount at beginning of year
Arising during the year
Utilised
Carrying amount at end of year
Surplus lease space - non-current
Carrying amount at beginning of year
Arising during the year
Reclassified (to) from non current
Carrying amount at end of year
CONSOLIDATED
2011
$’000
2010
$’000
88
37
70
195
304
304
119
91
(122)
88
-
(13)
50
37
54
70
(54)
70
-
354
(50)
304
119
-
54
173
-
-
92
67
(40)
119
-
-
-
-
-
54
-
54
-
-
-
-
Surplus lease space provision relates to certain unutilised office space. The provision takes account of estimated rental income
Orbital is able to recover by sub-letting the space.
Annual Report 2011 65
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
26.
LONG TERM BORROWINGS
Non-Current
Loans and advances - secured (a)
CONSOLIDATED
2011
$’000
2010
$’000
7,777
7,604
(a) The Government of Western Australia had previously provided the company with a fully utilised loan facility of $19,000,000
under the terms of a “Development Agreement”. During the 2010 year Orbital reached agreement with the WA Government
through the Department of Commerce for the Restructure of the Non-Interest Bearing Loan.
Under the agreed restructure the original loan has been terminated and replaced by a new loan of $14,346,000 with the
following terms and conditions.
• Term – 2010 to 2025.
• Repayments - Commencing May 2010 at $200,000 per annum.
• Repayments - Increasing annually to a maximum of $2,100,000 per annum in 2023.
•
Interest free.
The restructured loan’s net fair value at 27 January 2010 utilising a market interest rate of 6.52% was $7,558,000 which
compares to the carrying value of the old loan of $15,253,000 at that date. In accordance with the Accounting Standards, the
benefit of the interest free government loan amounting to $7,695,000 was accounted for as a government grant.
This loan facility is secured by way of a second ranking floating debenture over the whole of the assets and undertakings of the
Company.
The non-interest bearing loan from the Government of Western Australia was initially recognised at fair value and subsequently
stated at amortised cost with any difference between cost and repayment value being recognised in the income statement over
the period of the borrowings on an effective interest basis. During the 2011 year Orbital made an additional loan repayment to
the Government of Western Australia of $200,000 which resulted in the recognition of an interest expense of $117,000 in the
reporting period.
The fair value of the loan 2011: $7,423,513 (2010:$7,184,041) is calculated by discounting the expected future cash flows
at the prevailing market interest rate at reporting date 2011: 7.23% (2010: 7.17%)
66 Orbital
X
27.
GOVERNMENT GRANTS
Current liabilities
CONSOLIDATED
2011
$’000
2010
$’000
Investment grant for construction of heavy duty engine testing facility
225
225
Non-current liabilities
Investment grant for construction of heavy duty engine testing facility
Total government grants deferred
1,649
1,874
1,874
2,099
(a)
Movement in government grants
At 1 July
Transferred to deferred revenue
Released to the income statement
At 30 June
2,099
-
(225)
1,874
2,760
(512)
(149)
2,099
In June 2008 the Group received funding of $2,760,000 from the Commonwealth of Australia through the Alternative Fuels
Conversion Program administered by the Department of the Environment, Water, Heritage and the Arts towards the construction
of a heavy duty engine test facility. The Group will fund the maintenance and operation of the facility until at least financial year
2014/2015 and provide the Commonwealth with preferential access to the facility.
The terms of the Grant included providing the Commonwealth with preferential access to the facility at a discount to the commercial
rate. This discount to commercial rates of $512,000 has been transferred to deferred revenue (see note 24) and recorded as
deferred revenue.
The government grant will be recognised as income over the periods and in the proportions in which depreciation on the heavy
duty engine test facility is charged.
28.
CONTINGENT CONSIDERATION
Non-current liabilities
Contingent consideration for business acquisition
2,688
-
On 27 May 2011, Orbital Autogas Systems Pty Ltd acquired 55% of the voting shares of Sprint Gas (Aust) Pty Ltd, a new company
incorporated to acquire the operating business of Sprint Gas, an Australian business specialising in the importation and wholesaling
of LPG Fuel systems.
Concurrently with the entering into of the Business Acquisition Agreement, the Group entered into a Subscription and Shareholders
Agreement with the owners of the 45% non-controlling interest in Sprint Gas (Aust) Pty Ltd. As part of the Subscription and
Shareholders Agreement Put and Call options were issued over the remaining 45% non-controlling interest. The Put and Call
options, exercisable after 30 months, are in nature a forward contract and therefore a present ownership interest is granted. The
Group has accounted for the business combination as though it acquired a 100% interest and has recognised a financial liability
to the non-controlling shareholders equal to the fair value of the underlying obligations under the Put and Call options (contingent
consideration liability).
The underlying obligations under the Put and Call options that gives rise to the contingent consideration liability were initially
recognised at fair value and subsequently at fair value through the profit and loss
The contingent consideration payable will be calculated with reference to the estimated value of the Sprint Gas business, based
on an estimated average EBITDA multiple. The undiscounted estimated contingent consideration payable is $3,474,000. If the
business was to perform 20% better or 20% worse than the current four year forecast the estimated fair value of the contingent
consideration would increase by $531,000/decrease by $531,000 respectively.
Annual Report 2011 67
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
28.
CONTINGENT CONSIDERATION (continued)
(a)
Movement in contingent consideration
At 1 July
Recognised during the year
Released to the income statement
At 30 June
CONSOLIDATED
2011
$’000
2010
$’000
-
2,688
-
2,688
-
-
-
-
No gains or losses were recognised in the income statement during the current year due to a change in the fair value of the
contingent consideration
29.
SHARE CAPITAL
Ordinary shares
Movement in ordinary shares on issue
At 1 July 2009
Shares issued pursuant to employee share plans
At 30 June 2010
Shares issued pursuant to Share Consolidation
Shares issued pursuant to employee share plans
At 30 June 2011
19,345
19,261
Number
$’000
47,888,505
308,889
48,197,394
1,494
283,670
48,482,558
19,055
206
19,261
-
84
19,345
Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share
at shareholders’ meetings.
In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds of
liquidation.
(a)
Capital management
When managing capital, management’s objective is to ensure the entity continues as a going concern as well as to maintain
optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that
ensures the lowest cost of capital, provides a strong capital base so as to maintain investor, creditor and market confidence and
to sustain future development of the business.
Management defines capital as contributed shareholder equity and has no current plans to change the share capital.
(b)
Share Consolidation
On 28 October, 2010 the shareholders in Annual General Meeting approved the consolidation of ordinary shares on the basis
that every ten ordinary shares be consolidated into one ordinary share, and where this consolidation results in a fraction of a share
being held by a shareholder, the directors of the Company be authorised to round that fraction up to the nearest whole share. The
share consolidation became effective on 28 October, 2010.
The effect of the share consolidation has been retroactively applied to the number of shares outstanding and Earnings per share
calculations above.
68 Orbital
X
30.
RETAINED PROFITS AND RESERVES
(a)
Movements in retained earnings were as follows:
Balance 1 July
Net profit
Balance 30 June
(b)
Other reserves
Consolidated
Balance 1 July 2009
Equity-settled transaction-employee shares
Transfer to share capital
Other comprehensive income
Balance at 30 June 2010
Balance 1 July 2010
Equity-settled transaction-employee shares
Other comprehensive income
Balance at 30 June 2011
(c)
Nature and purpose of reserves
Employee equity benefits reserve
CONSOLIDATED
2011
$’000
2010
$’000
1,292
1,763
(3,224)
4,516
3,055
1,292
Employee
Foreign
Equity
Benefits
Reserve
$’000
Currency
Translation
Reserve
$’000
Total
$’000
884
250
(117)
399
1,283
-
-
250
(117)
-
(1,169)
(1,169)
1,017
(770)
247
1,017
250
-
1,267
(770)
-
(3,415)
(4,185)
247
250
(3,415)
(2,918)
The employee equity benefits reserve is used to record the value of share based payments provided to employees, including KMP’s,
as part of their remuneration. Refer to note 36 for further details of these plans.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements
of foreign subsidiaries.
Annual Report 2011 69
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
31.
CONSOLIDATED ENTITY
Ultimate Parent Entity
- Orbital Corporation Limited
Controlled Entities, incorporated and carrying
on business in:
Australia
- Orbital Australia Pty Ltd
- Orbital Australia Manufacturing Pty Ltd
- OEC Pty Ltd
- S T Management Pty Ltd
- OFT Australia Pty Ltd
- Investment Development Funding Pty Ltd
- Power Investment Funding Pty Ltd
- Orbital Environmental Pty Ltd
- Orbital Share Plan Pty Ltd
- Orbital Autogas Systems Pty Ltd
- Sprint Gas (Aust) Pty Ltd
United States of America
- Orbital Holdings (USA) Inc.
- Orbital Fluid Technologies Inc.
- Orbital Engine Company (USA) Inc.
United Kingdom
- Orbital Engine Company (UK) Ltd
Note
Class of
Shares
Consolidated
Entity Interest
2011
%
2010
%
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
-
100
100
100
100
(a)
(a)
(a)
(a)
(a)
(a)
(b)
(c)
(a)
(a)
(a)
(a) Dormant for the years ended 30 June 2011 and 30 June 2010.
(b) Orbital Share Plan Pty Ltd was established on 22 September 2008 and acts as the trustee of the Orbital Executive Long
Term Share Plans.
(c) Refer to note 38 for further discussion.
70 Orbital
32.
INFORMATION RELATING TO ORBITAL CORPORATION LIMITED
Current assets
Total assets
Current liabilities
Total liabilities
Issued capital
Retained profits/(accumulated losses)
Employee equity benefits reserve
Total shareholders’ equity
Profit/(loss) of the parent entity
Total comprehensive income of the parent entity
Guarantee
2011
$’000
2010
$’000
4
38,645
22
41,494
-
19,163
-
20,694
19,345
(1,130)
1,267
19,482
19,261
522
1,017
20,800
(1,652)
(1,652)
4,270
4,270
Orbital Corporation Limited has provided a guarantee to Westpac Banking Corporation for all liabilities and obligations
of Orbital Australia Pty Ltd. See note 22 for details of Orbital Australia Pty Ltd’s outstanding liabilities to Westpac Banking
Corporation.
33.
RELATED PARTY DISCLOSURES
(a)
Identity of related parties
The Group has a relationship with its subsidiaries (see note 31), with its investment accounted for using the equity method (see note
16), and with its key management personnel (refer to disclosures for key management personnel, see note 34).
(b)
Controlled Entities
Details of interest in controlled entities are set out in Note 31.
(c)
Other Related Parties
Details of dealings with other related parties, being joint venture entity Synerject LLC, are set out below:
(i)
Receivables and Payables
The aggregate amounts receivable from/payable to Synerject LLC by the Group at balance date are:
Receivables
Current
Payables
Current
(ii)
Transactions
CONSOLIDATED
2011
$’000
2010
$’000
-
3
7
110
During the year the Group provided engineering services to Synerject LLC of $nil (2010: $nil) and purchased goods and services
to the value of $140,000 (2010: $190,000) from Synerject LLC. All transactions are in the ordinary course of business and on
normal commercial terms and conditions.
Annual Report 2011 71
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
34
KEY MANAGEMENT PERSONNEL
The following were key management personnel of the Group at any time during the reporting period and unless otherwise
indicated were key management personnel for the entire period:
Non-executive directors
Mr WP Day (Chairman)
Mr JG Young – retired 28 February 2011
Dr MT Jones
Dr V Braach-Maksvytis
Executive directors
Mr TD Stinson (Managing Director & Chief Executive Officer)
Executives
Mr KA Halliwell (Chief Financial Officer)
Mr BA Fitzgerald (Director, Orbital Autogas Systems) (ceased to be KMP on 1 July 2011)
Dr GP Cathcart (Director, Consulting Services and Engineering)
Key management personnel compensation
The key management personnel compensation included in ‘employee benefits expense’ (see note 9) are as follows:
Short-term employee benefits
Post-employment benefits
Equity compensation benefits
Termination benefits
CONSOLIDATED
2011
$
2010
$
876,810
131,555
223,405
288,241
1,587,275
132,605
225,737
-
1,520,011
1,945,617
Individual directors and executives compensation disclosures
No director has entered into a material contract with the Group since the end of the previous financial year and there were no
material contracts involving directors’ interests at year-end.
Loans to key management personnel and their related parties.
The Group has not made any loans to key management personnel or their related parties since the end of the previous financial
year and there were no loans to any key management person or their related parties at year-end.
72 Orbital
34
KEY MANAGEMENT PERSONNEL (continued)
Movements in shares
The movement during the reporting period in the number of ordinary shares in Orbital Corporation Limited held, directly, indirectly
or beneficially, by each key management person, including their related parties, is as follows:
Non-executive directors
Mr WP Day
Mr JG Young
Dr V Braach-Maksvytis
Dr MT Jones
Executive directors
Mr TD Stinson (d)
Executives
Mr KA Halliwell
Mr BA Fitzgerald
Dr GP Cathcart
Non-executive directors
Mr WP Day
Mr JG Young
Dr V Braach-Maksvytis
Dr MT Jones
Executive directors
Mr TD Stinson
Executives
Mr KA Halliwell
Mr BA Fitzgerald
Dr GP Cathcart
Held at
Granted as compensation
Held at
1-Jul-10
Purchases
ESP #1
ELTSP
Sales
Other(a)(b) 30-Jun-11
10,000
74,854
-
18,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,000
(74,854)
-
-
-
-
18,000
230,088
145,602
-
-
-
-
375,690
136,734
37,500
3,369
103,242
48,091
-
-
3,369
3,369
-
-
-
-
-
-
2
177,605
2
106,613
2
51,462
Held at
Granted as compensation
Held at
1-Jul-09
Purchases
ESP #1
ELTSP
Sales
Other(c)
30-Jun-10
10,000
74,854
-
18,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,000
74,854
-
18,000
120,100
110,000
-
-
-
(12)
230,088
94,189
67,517
30,346
-
-
-
1,625
40,920
1,625
34,100
1,625
16,120
-
-
-
-
136,734
-
103,242
-
48,091
(a) Represents shareholdings at time that Mr J G Young ceased to be a Director.
(b) Represents the rounding of shareholdings as a result of the share consolidation.
(c) As a result of a change to the ratio of ADRs to ordinary shares the equivalent ordinary shares of Mr Stinson were rounded
down to the nearest multiple of 160.
(d) Mr Stinson’s shareholding of 375,690 is represented by 6,618 ADRs and 269,802 ordinary shares.
Annual Report 2011 73
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
34
KEY MANAGEMENT PERSONNEL (continued)
Movements in ELTSP rights
The movement during the reporting period in the number of ELTSP rights to ordinary shares in Orbital Corporation Limited held,
directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:
Executive directors
Mr TD Stinson
Executives
Mr KA Halliwell
Mr BA Fitzgerald
Dr GP Cathcart
Executive directors
Mr TD Stinson
Executives
Mr KA Halliwell
Mr BA Fitzgerald
Dr GP Cathcart
Held at
1-Jul-10
Offered
Forfeited
Vested
Expired
30-Jun-11
Held at
655,000
665,000
363,500
337,567
-
-
333,000
311,600
(627,600)
256,500
252,700
-
-
-
-
-
-
1,320,000
(27,000)
674,067
(17,000)
-
(17,000)
492,200
Held at
1-Jul-09
Offered
Forfeited
Vested
Expired
30-Jun-10
Held at
130,000
525,000
163,000
266,500
142,000
246,000
83,000
199,500
-
-
-
-
-
-
655,000
(40,920)
(25,080)
363,500
(34,100)
(20,900)
333,000
(16,120)
(9,880)
256,500
Movements in performance rights
The movement during the reporting period in the number of performance rights to ordinary shares in Orbital Corporation Limited
held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:
Executive directors
Mr TD Stinson
Executive directors
Mr TD Stinson
Held at
1-Jul-10
Offered
Forfeited
Vested
Expired
30-Jun-11
Held at
1,150,000
-
-
-
-
1,150,000
Held at
1-Jul-09
Offered
Forfeited
Vested
Expired
30-Jun-10
Held at
1,150,000
-
-
-
-
1,150,000
74 Orbital
35.
NOTES TO THE STATEMENTS OF CASH FLOWS
Reconciliation of cash flows from operating activities
Profit after income tax
Adjustments for:
(Profit) on sale of property, plant and equipment
Depreciation
Amortisation
Amortisation of deferred revenue and government grants
Impairment, write-off/(write-back) of trade receivables
Impairment of capitalised development costs
Inventory write-down
Amortisation of non-interest bearing loans
Gain on restructure of non-interest bearing loans
Amounts set aside to warranty and other provisions
Share of net profit of equity accounted investment
Employee compensation expense
Net foreign exchange (gains)/losses
Net cash used in operating activities before
changes in assets and liabilities
Changes in assets and liabilities during the year:
(Increase)/decrease in receivables
(Increase)/decrease in inventories
(Increase)/decrease in deferred tax assets
(Decrease)/increase in payables
(Decrease)/increase in employee provisions
Net cash used in operating activities
36.
SHARE-BASED PAYMENT PLANS
(a)
Recognised share-based payment expenses
NOTE
CONSOLIDATED
2011
$’000
2010
$’000
8
18
19
19
16
36(a)
1,763
4,516
(4,760)
930
253
(225)
38
1,065
942
613
-
318
(3,233)
334
(79)
(41)
877
136
(345)
(114)
-
-
626
(7,695)
(133)
(1,874)
339
97
(2,041)
(3,611)
(621)
360
(532)
1,629
(587)
249
28
(638)
(417)
(951)
540
(1,438)
(1,792)
(5,049)
The expense recognised for employee services received during the year is shown in the table below:
Expense arising from equity-settled share-based payment transactions
334
339
The share-based payment plans are described below. Entitlements to shares are based 50% of Total Shareholder Return and
50% on Earnings Per Share.
(b)
Employee share Plan No. 1
Under Employee Share Plan No. 1 each eligible employee is offered fully paid ordinary shares to the value of $1,000 per annum.
During the year there were 283,670 (2010: 144,589) shares issued under Plan 1 to eligible employees at a market value on the
day of issue of $84,193 (2010: $89,000).
Annual Report 2011 75
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
36.
SHARE BASED PAYMENT PLANS (continued)
(c)
Executive Long Term Share Plan (“ELTSP”)
Executives may also be offered shares in the Company’s Executive Long Term Share Plan under which offered shares will be
granted subject to the satisfaction of performance conditions over a 3 year period or subject to Board discretion for other
qualifying reasons.
The number of shares that the executive actually receives depends on two performance hurdles, as set out below:
(i) 50% of the shares offered will be issued depending on the performance of the Company relative to a group of selected peers
(being the 50 smallest companies by market capitalisation (other than resource companies and property and investment trust
companies) within the S&P / ASX 300 Index). The peer group is ranked in terms of Total Shareholder Return (“TSR”). TSR is
the percentage increase in a company’s share price plus reinvested dividends over a three year period commencing on 1
September 2010 and ending on 31 August 2013 (“Performance Period”).
The following table sets out the relevant percentages of an executive’s Personal Allotment which will be issued at the conclusion
of the Performance Period based on the TSR ranking of the Company relative to the peer group:
Company Performance (TSR Ranking)
% of Personal Allotment issued to each executive
Up to the 50th percentile
0%
At or above the 50th percentile but below the 75th percentile
50% to 99% (on a straight-line basis).
At or above the 75th percentile but below the 90th percentile
At or above the 90th percentile
100%
125%
No shares will be granted unless the Company’s TSR is at or above the 50th percentile. In 2011 nil (2010: 164,300) rights
were issued in accordance with the terms of the plan.
(ii) 50% of the shares offered will be issued if the Company achieves earnings in excess of 11 cents per share for the year ending
30 June 2013.
At the Company’s Annual General Meeting in October 2010, shareholders approved the above plan in relation to the ongoing
remuneration of Executive Directors and senior executives.
During the year, a total of 1,730,900 rights under the plan were offered to 6 executives (2010: 1,436,000 rights offered to 7
executives).
Summary of rights granted under the ELTSP
Outstanding at the beginning of the year
Granted during the year
Forfeited during the year
Vested during the year and shares issued
Expired during the year
Outstanding at the end of the year
2011
No
2010
No
1,855,000
1,730,900
(642,600)
-
(93,500)
780,000
1,436,000
(96,000)
(164,300)
(100,700)
2,849,800
1,855,000
The outstanding balance as at 30 June 2011 is represented by:
• 310,000 rights with a fair value at grant date of $0.580 that will potentially vest in August 2011;
• 1,120,500 rights with a fair value at grant date of $0.465 that will potentially vest in August 2012;
• 1,419,300 rights with a fair value at grant date of $0.335 that will potentially vest in August 2013.
76 Orbital
36.
SHARE BASED PAYMENT PLANS (continued)
Fair value of rights on grant date
TSR related rights
The following factors and assumptions were used in determining the fair value of TSR related rights issued under the ELTSP
on grant date:
Life
3 years
3 years
3 years
Fair Value
per share
58 cents
38 cents
33 cents
Exercise Price
Price of shares
on grant date
nil
nil
nil
79 cents
55 cents
34 cents
Expected
volatility
62.70%
65.00%
60.00%
Risk free
interest rate
5.68%
5.03%
4.27%
Grant Date
31-Aug-08
31-Aug-09
31-Aug-10
EPS related rights
The following factors and assumptions were used in determining the fair value of EPS related rights issued under the ELTSP
on grant date:
Grant Date
31-Aug-09
31-Aug-10
Life
3 years
3 years
Fair Value
per share
55 cents
34 cents
Exercise Price
nil
nil
Price of shares
on grant date
55 cents
34 cents
The fair value of the EPS related rights is equal to the market price of shares on the grant date.
(d)
Performance Rights Plan
The Company also introduced a Performance Rights Plan as part of its long-term incentive arrangements for senior executives,
which was approved by shareholders in October 2009.
Under the Performance Rights Plan, performance rights will only be issued if the terms and conditions detailed below are satisfied.
A performance right is a right to acquire one fully paid ordinary share in the Company. Until they are exercised, performance
rights:
(i) do not give the holder a legal or beneficial interest in shares of the Company; and
(ii) do not enable participating executives to receive dividends, rights on winding up, voting rights or other shareholder benefits.
Performance rights issued under the Performance Rights Plan will be exercisable if:
(i) a performance hurdle is met over the periods specified by the Board; or
(ii) the Board allows early exercise on cessation of employment (see “Cessation of employment” below); or
(iii) it is determined by the Board in light of specific circumstances.
The Terms and conditions of the offer of Performance Rights made during the year ended 30 June 2009 are as follows:
(i) Mr T D Stinson will be awarded 1,150,000 performance rights;
(ii) the grant of performance rights will be in seven tranches, each tranche with a different specified share price target as set
out below:
Tranche
1
2
3
4
5
6
7
Number of
performance
rights
Share price
target
$
Fair Value at
grant date
$
200,000
200,000
200,000
200,000
125,000
125,000
100,000
$2.50
$5.00
$7.50
$10.00
$20.00
$30.00
$50.00
94,000
70,000
56,000
46,000
16,250
11,250
5,000
Annual Report 2011 77
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
36.
SHARE BASED PAYMENT PLANS (continued)
(d)
Performance Rights Plan (continued)
(iii) the acquisition price and exercise price of the performance rights will be nil.
(iv) Mr T D Stinson will only be permitted to exercise a performance right if:
•
•
the Company attains the specified share price target (see table above) within eight years from the date of grant of the
performance right; and
the specified share price target is also achieved at the end of two years from the date the target is first achieved (“Vesting
Date”) based on the Company’s average closing share price over a 90 day period up to and including the Vesting Date;
(v) If the specified share price target is either not achieved within eight years from the date of grant, or if so achieved, not also
achieved at the end of the Vesting Date, the performance right will lapse.
No performance rights were granted during the years ended 30 June 2011 or 30 June 2010.
37.
DEFINED CONTRIBUTION SUPERANNUATION FUND
The Group contributes to a defined contribution plan for the provision of benefits to Australian employees on retirement, death or
disability. Employee and employer contributions are based on various percentages of gross salaries and wages. Apart from the
contributions required under superannuation legislation, there is no legally enforceable obligation on the Company or its controlled
entities to contribute to the superannuation plan.
38.
BUSINESS COMBINATION
Initial acquisition of Sprint Gas Business
On 27 May 2011, Orbital Autogas Systems Pty Ltd acquired 55% of the voting shares of Sprint Gas (Aust) Pty Ltd, a new
company incorporated to acquire the operating business of Sprint Gas, an Australian business specialising in the importation
and wholesaling of LPG Fuel systems. The consideration transferred was $2,000,000 cash as payment in full for 2,200,000
ordinary shares in the new company, Sprint Gas (Aust) Pty Ltd.
Concurrently with the entering into of the Business Acquisition Agreement, the Group entered into a Subscription and Shareholders
Agreement with the owners of the 45% non-controlling interest in Sprint Gas (Aust) Pty Ltd. As part of the Subscription and
Shareholders Agreement Put and Call options were issued over the remaining 45% non-controlling interest. The Put and Call
options, exercisable after 30 months, are in nature a forward contract and in substance represent contingent consideration. The
Group has accounted for the business combination as though it acquired a 100% interest and has recognised a financial liability
to the non-controlling shareholders equal to the fair value of the underlying obligations under the Put and Call options (Contingent
consideration liability).
The option that gives rise to the contingent consideration liability is classified as a financial liability at fair value through profit and
loss.
The acquisition of Sprint Gas significantly broadens the Group’s wholesaling and distribution activities in the area of alternative
fuels and positions the Group as a leader in the Australian LPG market.
The relocation provision recognised on acquisition was a present obligation of Sprint Gas (Aust) Pty Ltd prior to the business
combination and its execution was not conditional upon it being acquired by Orbital Corporation Limited. The key factor
contributing to the $1,373,000 of goodwill is the profits expected to be generated by the business during the contingent
consideration calculation period. None of the goodwill recognised is expected to be deductable for income tax purposes.
Included in the business acquired were receivables with a gross contractual and fair value of $1,208,000 resulting from trade
sales with customers. Management expects these amounts to be collected in full and converted to cash consistent with customer
terms, which call for payment within 30-45 days of the initial sale.
78 Orbital
38.
BUSINESS COMBINATION (continued)
Initial acquisition of Sprint Gas Business (continued)
The total provisional cost of the combination was $4,688,000 and comprised the payment of cash and the recognition of a
contingent consideration liability. As the acquisition was made close to year end, the Company has left the acquisition accounting
open pending further adjustment to the fair values of net assets acquired. The initial accounting for the combination will be finalised
within the next financial year.
The provisional fair values of the identifiable assets and liabilities of Sprint Gas (Aust) Pty Ltd as of the date of acquisition were as
follows:
Cash and cash equivalents
Trade and other receivables
Inventories
Plant and equipment
Deferred tax asset
Trade and other payables
Employee benefits
Relocation provision
Provisional fair value of identifiable net assets
Goodwill arising on acquisition
The fair values have been determined provisionally and based upon the best information
available as initial accounting was not complete at the reporting date.
Acquisition-date fair-value consideration transferred:
Cash paid
Contingent consideration liability
Consideration transferred
Direct costs relating to the acquisition (included in administration expenses)
The cash outflow on acquisition is as follows:
Net cash acquired with the subsidiary
Cash paid (including $200,000 loan to Sprint Gas (Aust) Pty Ltd)
Net consolidated cash outflow
Consolidated Fair value
at acquisition date
$’000
420
1,319
1,968
468
242
4,417
(835)
(197)
(70)
(1,102)
3,315
1,373
4,688
Consolidated Fair value
at acquisition date
$’000
2,000
2,688
4,688
206
420
(2,200)
(1,780)
The consolidated statement of comprehensive income includes sales revenue and net profit for the year ended 30 June 2011 of
$1,112,153 and $204,049 respectively, as a result of the acquisition of Sprint Gas (Aust) Pty Ltd.
It is not possible to quantify the impact that the acquisition of Sprint Gas (Aust) Pty Ltd would have had on the consolidated statement
of comprehensive income had it occurred at the beginning of the reporting period as separate books and records were not
maintained for this business unit.
Annual Report 2011 79
Notes to the Financial Statements
FOR THE YEAR ENDED 30 JUNE 2011
39.
COMMITMENTS
(a)
Operating leases
The Group leases premises and plant & equipment under operating leases. The lease for the engineering premises is for a period
of 10 years with options to extend for two further periods of five years each. Leases for warehousing premises typically run for a
period of 5 years. The plant & equipment leases typically run for a period of 5 years and the lease payments are fixed. None
of the leases include contingent rentals.
CONSOLIDATED
2011
$’000
2010
$’000
Non-cancellable future operating lease rentals not provided for in the financial statements and payable:
- Not later than one year
- Later than one year but not later than five years
- later than five years
1,022
3,536
4,273
8,831
184
3
-
187
During the financial year ended 30 June 2010, $489,612 was recognised as an expense in the income statement in respect of
operating leases (2010:$171,081).
(b)
Other
In June 2008 the Group received funding of $2,760,000 from the Commonwealth of Australia through the Alternative Fuels
Conversion Program administered by the Department of the Environment, Water, Heritage and the Arts towards the construction
of a heavy duty engine test facility.
The Group will fund the maintenance and operation of the facility until at least financial year 2014/2015 and provide the
Commonwealth with preferential access to the facility, as follows:
Operational commitment to the running of the heavy duty engine testing facility not provided for in the financial statements and
payable:
- Not later than one year
- Later than one year but not later than five years
40.
CONTINGENCIES
391
682
1,073
391
1,073
1,464
The details and estimated maximum amounts of contingent liabilities that may become payable are set out below. The directors
are not aware of any circumstance or information that would lead them to believe that these liabilities will crystallise.
In the event of the Company terminating the employment of the Chief Executive Officer (other than by reason of serious misconduct
or material breach of his service agreement), an equivalent of 12 months remuneration is payable to the CEO. In the event of the
Company terminating the employment of a KMP (other than by reason of serious misconduct or material breach of their service
agreement), an equivalent of 4 weeks pay, plus 2 weeks pay for each completed year of service, plus for each completed year of
service beyond 10, an additional 1/2 weeks pay, plus a pro-rata payment for each completed month of service in the final year
is payable to the KMP. The maximum entitlement to termination pay is limited to 65 weeks pay. There are no other contingent
liabilities for termination benefits under the service agreements with Directors or other persons who take part in the management
of any entity within the Group.
80 Orbital
X
41.
EVENTS AFTER THE BALANCE SHEET DATE
On 11 August 2011 the Company announced that its American Depositary Shares will begin trading on the NYSE Amex on 25
August 2011.
There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event
of a material and unusual nature that is likely, in the opinion of the Directors of the Company, to significantly affect the operations
of the Group, the results of those operations, or the state of affairs of the Group in subsequent financial years.
42.
REMUNERATION OF AUDITORS
Amounts received or due and receivable for audit services by:
Auditors of the Company
- Audit and review of financial reports
Amounts received or due and receivable for taxation services by:
Auditors of the Company
Amounts received or due and receivable for other services by:
Auditors of the Company
Total auditors’ remuneration
The Auditors of the Group in 2011 and 2010 were Ernst & Young.
CONSOLIDATED
2011
$
2010
$
347,900
374,420
10,000
10,055
5,150
5,627
363,050
390,102
Annual Report 2011 81
Directors’ Declaration
FOR THE YEAR ENDED 30 JUNE 2011
In accordance with a resolution of the directors of Orbital Corporation Limited, we state that:
1.
In the opinion of the Directors:
(a)
the financial statements and notes and the additional disclosures included in the Directors’ Report designated as audited,
of the Group are in accordance with the Corporations Act 2001, including:
(i)
(ii)
giving a true and fair view of the financial position of the Group as at 30 June 2011 and of their performance, as
represented by the results of their operations and their cash flows, for the year ended on that date; and
complying with Accounting Standards in Australia and the Corporations Regulations 2001.
(b)
the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 2(a).
(c)
there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due
and payable.
2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with
Section 295A of the Corporations Act 2001, from the chief executive officer and chief financial officer for the financial year
30 June 2011.
On behalf of the Board
:
W P DAY
Chairman
T D STINSON
Managing Director
Dated at Perth, Western Australia this 23rd day of August 2011
82 Orbital
Independent Auditor’s Report
FOR THE YEAR ENDED 30 JUNE 2011
To the members of Orbital Corporation Limited
Report on the Financial Report
We have audited the accompanying financial report of Orbital Corporation Limited, which comprises the consolidated statement of financial
position as at 30 June 2011, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated
statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant
accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the company and
the entities it controlled at the year’s end or from time to time during the financial year.
Directors’ Responsibility for the Financial Report
The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with
Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to
enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 2(a), the directors
also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with
International Financial Reporting Standards.
Auditor’s Responsibility
Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian
Auditing Standards. These standards require that we comply with relevant ethical requirements relating to audit engagements and plan and
perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures
selected depend on our judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud
or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the
financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Independence
In conducting our audit we have met the independence requirements of the Corporations Act 2001. We have given to the directors of the
company a written Auditor’s Independence Declaration.
Opinion
In our opinion:
a.
the financial report of Orbital Corporation Limited is in accordance with the Corporations Act 2001, including:
i
ii
giving a true and fair view of the consolidated entity’s financial position at 30 June 2011 and of its performance for the year
ended on that date; and
complying with Australian Accounting Standards and the Corporations Regulations 2001; and
b.
the financial report also complies with International Financial Reporting Standards as disclosed in Note 2 (a).
Report on the Remuneration Report
We have audited the Remuneration Report included in pages 13 to 22 of the directors’ report for the year ended 30 June 2011. The directors
of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the
Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance
with Australian Auditing Standards.
Opinion
In our opinion the Remuneration Report of Orbital Corporation Limited for the year ended 30 June 2011, complies with section 300A of the
Corporations Act 2001.
Ernst & Young
G Lotter, Partner Perth 23 August 2011
GL;HG;ORBITAL;063
Liability limited by a scheme approved
under Professional Standards Legislation
Annual Report 2011 83
Shareholding Details
Class of Shares and Voting Rights
As at 31 July 2011 there were 5,157 shareholders of the ordinary shares of the Company. The voting rights attaching to the
ordinary shares, set out in Article 8 of the Company’s Constitution, subject to any rights or restrictions for the time being attached
to any class or classes of shares, are:-
a) at meetings of members or class of members, each member entitled to vote may vote in person or by proxy or
representative; and
b) on a show of hands every person present who is a member has one vote, and on a poll every person present in person or by
proxy or representative has one vote for each ordinary share held.
Substantial Shareholders and Holdings as at 31 July 2011
SG Hiscock & Company Ltd
(as notified on 13 July 2011)
Distribution of Shareholdings as at 31 July 2011
1-1,000
1,001-5,000
5,001-10,000
10,001-100,000
100,001 and over
Total Shares on Issue
Number of shareholders holding less than a marketable parcel
Top 20 Shareholders as at 31 July 2011
4,755,400
9.80%
3,078
1,240
411
376
52
5,157
48,482,558
3,313
NAME
NUMBER OF SHARES HELD % OF SHARES
National Nominees Limited*
Equity Trustees Limited SGH PI Smaller Co’s
Verido Holdings Pty Ltd
Colbern Fiduciary Nominees Pty Limited
Bond Street Custodians Limited
Annapurna Pty Limited
Morgan Stanley Australia Securities (Nominee) Pty Limited
Equity Trustees Limited SGH Tiger A/C
Mr Christopher Ian Wallin & Ms Fiona Kay Wallin
Nefco Nominees Pty Limited
Twokind Pty Ltd
Ms Barbara Lynn Gallisath
Mr Michael William Ford & Mrs Nina Bette Ford
Interstate Investments Pty Ltd
Dr Colin Rose
Texas Holdings Pty Ltd
Mr Terry Dewayne Stinson
Mr Murray Gordon Scott
Ms Kerry Moran
Mr William Ewart Granter
11,710,775
3,196,510
1,510,000
1,165,497
907,850
900,000
796,770
792,901
689,200
597,500
575,000
441,930
365,122
331,515
313,407
312,728
269,802
257,673
240,000
230,067
25,604,247
24.15%
6.59%
3.11%
2.40%
1.87%
1.86%
1.64%
1.64%
1.42%
1.23%
1.19%
0.91%
0.75%
0.68%
0.65%
0.65%
0.56%
0.53%
0.50%
0.47%
52.81%
The twenty largest shareholders hold 52.81% of the ordinary shares of the Company.
* Denotes The Bank of New York Mellon nominee company for United States American Depository Receipts. This nominee
company is the main representative body for Orbital’s 9,000 (approx) US shareholders.
On-market buy-back
There is no current on-market buy-back.
84 Orbital
REGISTERED AND PRINCIPAL OFFICE
SHARE REGISTRY
4 Whipple Street
Balcatta, Western Australia 6021
CONTACT DETAILS
Australia: -
Telephone: +61 (0)8 9441 2311
Facsimile: +61 (0)8 9441 2111
INTERNET ADDRESS
http://www.orbitalcorp.com.au
Email: info@orbitalcorp.com.au
DIRECTORS
Peter Day – Chairman
Terry Stinson – Chief Executive Officer
Mervyn Jones
Vijoleta Braach-Maksvytis
COMPANY SECRETARY
Ian Veitch
Computershare Investor Services Pty Ltd
Level 2, Reserve Bank Building
45 St Georges Terrace
Perth, Western Australia, 6000
Telephone: +61 (0)8 9323 2000
Facsimile: +61 (0)8 9323 2033
ADR FACILITY
The Bank of New York Mellon
101 Barclay Street
New York, NY, 10286
United States of America
Telephone: +1 (212) 815 2218
Facsimile: +1 (212) 571 3050
SHARE TRADING FACILITIES
Australian Stock Exchange Limited (Code “OEC”)
NYSE Amex (Code: “OBT”)
AUDITORS
Ernst & Young
The Ernst & Young Building
11 Mounts Bay Road
Perth, Western Australia, 6000
ORBITAL
Alternative Fuels
ORBITAL
ORBITAL
Consulting
Consulting
ORBITAL
ORBITAL
Intellectual Property
Intellectual Property
Alternative Fuels
Synerject
Orbital Consulting Services
Royalties & Licences