ORBITAL CORPORATION LIMITED
APPENDIX 4E
Preliminary Final Report
Company Details
Name of Entity:
ABN:
Year Ended (Current Year):
Year Ended (Prior Year):
Orbital Corporation Limited
32 009 344 058
30 June 2014
30 June 2013
Results for announcement to the market
A$'000
A$'000
Total revenue
DOWN
8,362
31%
to
18,337
Statutory net profit from ordinary activities after
tax attributable to members
Statutory net profit attributable to members
Underlying net profit/(loss) from ordinary
activities after tax attributable to members
UP
UP
1,312 360%
to
1,676
1,312 360%
to
1,676
DOWN
2,167 158%
to
(797)
Net tangible assets per share (cents)
2014
2013
42.29
39.22
Dividends
There is no proposal to pay dividends for the year ended 30 June 2014
Commentary on results for the period
The Commentary on the results for the period is contained in the press release dated 29 August 2014
accompanying this statement.
Annual Meeting
The annual meeting will be held as follows:
Place:
Conference Room
BGC Centre
28 The Esplanade
Perth, Western Australia
Date:
Tuesday 21 October 2014
Time:
8:30am
Approximate date the annual report will be available: 17 September 2014
Audit
This report is based on accounts which have been audited. (see attached Annual Report)
ABN 32 009 344 058
ANNUAL REPORT
30 JUNE 2014
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
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 associate for the year ended 30 June
2014 and the auditors’ report thereon.
Reference Contents of Directors’ Report
Page
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
Operating and Financial Review
Directors
Directors’ Interests
Directors’ Meetings
Company Secretary
Principal Activities
Consolidated Result
Dividends
State of Affairs
Events Subsequent to Balance Sheet Date
Likely Developments and Expected Results
Share Options
Indemnification
Non-Audit Services
Rounding Off
Lead Auditor’s Independence Declaration
Remuneration Report
2
8
9
9
10
10
10
10
10
10
10
10
10
11
11
11
12
1
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
1.
OPERATING AND FINANCIAL REVIEW
SUMMARY OF BUSINESSES
Orbital is an innovation company with 30 years’ experience in advanced technology, product development and
commercialization. Orbital has a diversified portfolio of products and services offered through multiple business channels.
These diversified channels are product and/or service focused and comprised of divisions and joint ventures.
Orbital earns income from multiple channels:
System Sales;
Synerject Joint Venture;
Consulting Services; and
Royalties and Licences.
A key foundation technology and revenue generator is Orbital’s FlexDITM engine management system technology which
has been commercialised, since 1996 in the marine market and subsequently in the motorcycle, recreational and, most
recently, Unmanned Aerial Vehicle (UAV) markets. FlexDITM generates revenue for Orbital in all four sources. Building on
the success of FlexDI™, other high technology systems and services are offered through our various business segments.
The Company had been awarded a contract for the design, development and validation of a next generation production
engine for Insitu Inc, a subsidiary of The Boeing Company (Insitu-Boeing). The development program has been a
significant focus for Orbital over the past year. If successful the development program will lead to production of small
unmanned aircraft system (SUAS) engines in 2015. The next generation propulsion system will be one of the most
advanced engines flying on a SUAS application. The engine will utilize Orbital’s Argon FlexECU, our smallest, lightest and
highest specification Engine Control Unit (ECU).
In addition to the Insitu-Boeing SUAS contract, the Company is also a supplier of engine management systems, fuel
system components and spare parts to its other UAV customer, Textron Unmanned Systems (formerly known as AAI
Corporation), a division of Textron Inc (Textron). The Company’s system sales business also includes two Liquid Propane
Gas (LPG) fuel system businesses.
The Company develops and sells systems to domestic and international markets. Domestically, the Company is the
supplier of a Liquid Phase Injection (LPi) LPG fuel system to Ford Motor Company of Australia for use in their EcoLPi range
of Falcon passenger cars and utilities. The Company is also an importer and wholesaler of LPG fuel systems for the
Australian retrofit market, with the LPG related businesses holding an estimated combined domestic market share of more
than 40%. The SUAS business is international and has applied Orbital’s patented FlexDITM engine management system to
heavy fuel applications in the SUAS market.
The Consulting Services business provides engineering and testing facility services to domestic customers and advanced
engineering services for international customers based in India, Japan, China, USA, and Europe. The Company is
planning to expand consulting services in the growing Indian market through a proposed Joint Arrangement with UCAL
Fuel Systems Limited, a leading fuel system supplier in India.
The Company holds an investment in Synerject LLC, the world’s largest independent supplier of non-automotive engine
management systems (EMS). Synerject operates engineering facilities in Europe, North America and China and also has
production facilities in North America and China. Synerject supplies EMS to customers in the marine, low-end 2 and 3
wheeler, recreational and utility markets. Synerject’s customers are located in North America, Europe, Japan, China and
South-East Asia.
FINANCIAL REVIEW
Total revenue and profit after tax for the year ended 30 June 2014 was $18,337,000 and $1,676,000 respectively (2013:
total revenue $26,699,000 and profit after tax of $364,000).
There are a number of items impacting the profit after tax that are not associated with the normal operations of the
Group. This information has been set out below to enable users of this report to make appropriate comparisons with prior
periods and to assess the underlying operating performance of the business.
Statutory profit after tax
Deduct income items
Gain on sale of share of Synerject
Change in fair value of contingent consideration
Research and development grant
Add-back expense items
Taxation expense relating to the gain on sale of share of Synerject
Goodwill impairment
Termination costs
Underlying (loss)/profit after tax
2014
$’000
1,676
-
(248)
(2,224)
-
-
-
(796)
2013
$’000
364
(1,702)
(1,410)
-
1,590
1,965
563
1,370
The non-IFRS information above has not been audited, but has been extracted from Orbital’s annual financial report which
has been audited by the external auditors. This information has been presented to assist in making appropriate
comparisons with prior periods and to assess the operating performance of the business.
2
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
1.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
FINANCIAL REVIEW (CONTINUED)
The financial performance of the Company has improved from a profit of $364,000 last year to a profit of $1,676,000 this
year. The improvement in profitability was primarily due to the combined benefits of a Research and Development grant
and profitable system sales which were partially offset by an increased investment in research and development. On an
operating basis, we made an underlying loss of $797,000. With the strategic changes made over the year, the business is
now on a better base to achieve sustainable profits in the future.
The Company recognised a gain on the change in fair value of the contingent consideration liability in respect of the Sprint
Gas acquisition of $248,000.
The Company’s net assets increased by 7%, compared with the previous year. This increase is largely attributable to the
translation of the foreign subsidiary and the current year’s profit after tax. Trade receivables have decreased by
$1,486,000, inventories have increased by $170,000 and trade payables have increased by $895,000. Other receivable
of $2,224,000 for the Research and Development Tax Incentive is outstanding at the end of the period. Inventory and
trade payables have been managed in line with the activity levels of the LPG businesses.
Net cash used in operating activities was $1,951,000 (2013: $1,717,000) reflecting an excess of operational expenditures
of $1,373,000 (2013: $2,231,000) and an increase in working capital of $542,000 (2013: reduction of $514,000). The
improvement in operational expenditures has arisen from the Companies continued focus on improving cost controls and
the operating performance of the Group.
Orbital will continue to concentrate on cash management and manage costs appropriately to minimise overheads while
protecting key resources necessary to create opportunities for future growth.
The Company’s investment in Synerject is accounted for using the equity method of accounting and as such it does not
include Orbital’s share of Synerject’s revenue in its Income Statement. To assist in making appropriate comparisons of
the relative size of each of the Group’s income streams graphical representations of sales, including the pro-rata shares of
Synerject sales, have been included in the Segment review which follows. The segment information presented is non-
IFRS information which has not been audited.
SEGMENT REVIEW
SYSTEM SALES
Unmanned Aerial Vehicles is
an exciting new market and
Orbital is positioned as the
market leader for Small
Unmanned Aerial Systems
capable of operating on heavy
fuels.
2014 KEY PERFORMANCE HIGHLIGHTS
► Significant progress made in the
development contract for Insitu-
Boeing.
SIGNIFICANT CHANGES
► Major design, development and
production contract with Insitu-
Boeing, the world’s largest SUAS
operator.
► Delivery of additional EMS to the SUAS
► Decrease in Australian LPG market
market.
► OAS and SGA gain market share,
albeit in a declining LPG market.
drove restructuring to adjust cost
base.
► Reduced sales as a result of
change from being an engine
supplier to Textron to only
supplying Orbital’s patented EMS
and Fuel Systems.
FUTURE OBJECTIVES
► Develop next generation SUAS
engine and engine management
systems.
► Structure LPG businesses for
sustainable profitability.
►
Plan for expansion of SUAS
business internationally.
SALES $m
METRICS
2014
$’000
2013
$’000
Segment
Revenue
Segment
Result
14,136
23,424
602
2,163
3
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
1.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
SEGMENT REVIEW (CONTINUED)
SYSTEM SALES (CONTINUED)
Summary of Segment
The System Sales segment is a developer and supplier of engines, propulsion systems, engine management systems and
fuel system components for Original Equipment Manufacturers and the motor vehicle aftermarket. The segment operates
predominantly in alternative fuel markets and provides systems that range from heavy fuels for Unmanned Aerial Vehicles
(UAV) to Liquid Propane Gas (LPG) for motor vehicles.
The key focus of the UAV business during the year was the contract for the design, development and validation of a next
generation production engine for Insitu Inc, a subsidiary of The Boeing Company (NYSE: BA) (Insitu-Boeing), and one of
the largest and most experienced UAV operators in the world. The development program will be conducted through
FY2014 and FY2015 and if successful will lead to low volume production of UAV engines in 2015 with production ramp-up
in subsequent years. The UAV market is projected to double in the next decade and with Orbital’s unique FlexDITM
technology, this is projected to be a significant growth area for the Company.
A key product sold this year by Orbital was the patented FlexDITM Engine Management System (EMS) for Small Unmanned
Aircraft Systems (SUAS) supplied for use by Textron Unmanned Systems (formerly known as AAI Corporation), a division
of Textron Inc (NYSE: TXT) (Textron), in their Aerosonde® 4.7 UAV. Responsibility for the manufacture of engines for
use by Textron was transitioned to its sister company Lycoming Engines in line with Textron’s original intent for engine
supply, however Orbital is still responsible for the supply of the core technology that enables operation on heavy fuels, the
patented FlexDITM EMS. The engine uses Orbital’s FlexDITM technology enabling spark ignition of military specification
kerosene fuels and has been designed to be a lightweight and compact package which enables the end-user increased
payload and/or range opportunities. The “One-Fuel” policy being adopted by the military for both safety and ease of
logistics replaces the use of conventional petrol (or gasoline) fuels used in the past for this application. As disclosed on 23
June 2014, Orbital settled the contract dispute with Textron that had led to the impairment of receivables in the half year
financial results. As a result of the dispute there was a suspension of sales to Textron in the second half of the year.
As anticipated, the LPG fuel system businesses experienced little revenue growth as both Ford production and the LPG
aftermarket continued to be subdued. Despite the declining market, the LPG fuel system businesses managed to increase
their market share.
Orbital Autogas Systems (OAS) developed, and is the supplier of Liquid LPG systems to Ford Motor Company of Australia
for the Ford EcoLPi Falcon range of passenger cars and utilities. The Ford EcoLPi Falcon offers performance of a big family
car with fuel running cost better than many mid/small sized cars. OAS sells this system into the aftermarket under the
brand name “Liquid”.
Sprint Gas Australia (SGA) is a major nationwide distributor of LPG systems for the aftermarket. SGA offers a wide range
of systems from the older generation “vapouriser” systems through to sequential injection systems and the Orbital Liquid
LPG systems.
Highlights
Revenues for the year were $14,136,000, a 40% decrease on the previous year. The result reflected the change in SUAS
engine production from Orbital to Textron’s sister company and also the impact of the dispute with Textron that led to a
production gap for SUAS EMS of over 6 months. The LPG related businesses were able to generate a slight increase in
total sales as a result of their increasing market share in a declining market. The contribution to the group was
diminished from last year as a result of the lower sales but was still a positive result of $602,000.
Business Model
Development and supply of high value systems, starting with engine management systems, engines and engine parts is
the cornerstone of Orbital’s growth strategy. This will initially supplement and eventually replace Orbital’s traditional
revenue streams of engineering consulting services and royalties. Growth to date has been underpinned by demand for
alternative fuel systems in niche markets.
Outlook
Revenues from SUAS will be higher in the next financial year as we resume sales of EMS components to Textron and
progress the Insitu-Boeing development contract to flight testing and low volume engine production.
Due to the subdued LPG systems market at present, both OAS and SGA have undertaken restructures to manage their
businesses to the market demand, and have managed to increase market share; albeit in a contracting market. Orbital is
currently the largest player in the Australian LPG market. With the Australian market continuing to contract we expect
there to be continued consolidation within the industry.
4
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
1.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
SEGMENT REVIEW (CONTINUED)
SYNERJECT
Synerject has continued its
diversification into new
products and new markets
2014 KEY PERFORMANCE HIGHLIGHTS
SIGNIFICANT CHANGES
►
►
3.25% growth in Revenue.
19.5% growth in Profit after Tax.
► Continued improvement in
non-traditional markets.
SALES $m (pro-rata share)
METRICS
Revenue
(100%)
Profit after tax
(100%)
Share of profit
Investment in
Synerject
2014
U$’000
2013
U$’000
141,746
137,287
9,889
8,275
A$’000
A$’000
3,256
3,220
13,980
12,468
►
►
FUTURE OBJECTIVES
Expansion of low end 2 &
3 wheeler EMS markets
targeting India, China &
Asia.
Expansion of utility
market with new line of
low cost EMS products.
► Continued growth while
maintaining profitability
Summary of Segment
Synerject, Orbital’s 30:70 (previously 42:58) Partnership with Continental AG, is a key supplier of engine management
systems and fuel systems to the non-automotive market.
Original equipment products using Synerject’s engine management systems range from the high performance
motorcycle/recreational vehicles to the high volume scooter and small engine applications. Application centres in Europe,
China, Taiwan and the United States provide on-site support of customer development and production programs.
Highlights
Tight cost control and careful investment by Synerject management has resulted in improved profit after tax during this
period.
Synerject’s market and product expansion has enabled that company to achieve revenue growth consistently over the last
5 years despite the severe contractions in the recreational market during and following the global financial crisis. Whilst
the recreational market has somewhat improved, it is still being influenced by the current financial situation in the key
USA and European markets, highlighting the success and importance of Synerject’s expanded/diversified product
strategy.
Synerject generated US$6,346,000 positive cash flow and paid dividends to shareholders (Orbital share A$1,634,000). At
30 June 2014, Synerject held cash of US$8,611,000 (June 2013: US$7,138,000).
Business Model
Synerject continues to develop new products and new markets to expand on their product offering beyond their original
markets of EMS for recreational marine product and scooters. Synerject’s markets today include a range of EMS for top
end motorcycles, ATV’s (All Terrain Vehicles), snowmobiles, marine outboard engines and scooters through to systems
specifically designed for small engines such as those used in the Lawn and Garden market. Synerject is expanding its
presence in India and other countries where there is an increasing demand for EMS in the low end motorcycle/scooters
products which are a major part of these countries’ transport structure.
Outlook
The outlook for Synerject is for continued growth in the marine and recreational segment and in the low-end 2 & 3
wheeler and utility markets in future years.
5
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
1.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
SEGMENT REVIEW (CONTINUED)
CONSULTING SERVICES
The Company’s
diversification strategy
continues to deliver a
reduced reliance on
consulting services while
identifying opportunities
for systems sales growth
2014 KEY PERFORMANCE HIGHLIGHTS
SIGNIFICANT CHANGES
► Broadening domestic customer base,
►
less reliance in international customers.
Focused on domestic customers,
particularly in fuel and additive
testing.
► Continued revenues from the Heavy
Duty Engine Testing facility.
► Restructuring to adjust cost
base to reduced market.
► Customer programs in the field of
advanced DI CNG injection.
► Refocus of resources
development of new products.
SALES $m
METRICS
FUTURE OBJECTIVES
2.90
Segment
Revenue
Segment
Result
2014
$’000
2013
$’000
► Maintain core engine and EMS
technical capability.
► Reduce but maintain Perth-
2,898
2,057
(176)
(2,206)
based development, testing and
certification facilities.
► Continue consulting as the
incubator for new product
development focusing on high
value customer projects.
Summary of Segment
Orbital Consulting Services (OCS) provides engineering consulting services in engine design, development and supply of
combustion systems, fuel and engine management systems, along with engine and vehicle testing and certification.
Orbital provides fuel economy and emission solutions to a wide variety of engine and vehicle applications, from 150 tonne
trucks through to small industrial engines. OCS also provides contract design and analysis for the local resources industry.
Throughout the year, Orbital’s engineering group have provided research and development support across the Orbital
group. This is a key service made available to the group, ranging from technical support of existing products and
customers through to analysis and design of potential future product offerings. At 30 June 2014, the OCS order book
(inclusive of the Insitu-Boeing program) stood at approximately $3,033,000 (30 June 2013 $1,100,000).
Highlights
OCS revenue for the year was $2,898,000 up 41% compared to last year.
During this reporting period the OCS group redeployed key resources to the SUAS activities and on continuing research
and development projects. Tight cost control provided a significant improvement in the segment result for the year.
Business Model
The business model for the OCS group is based around the provision of consulting services in three main areas: 1)
integration of Orbital technology; 2) advanced engineering aimed at design, development and validation of new
technology; and 3) the operation of engine and fuel testing and certification facilities.
Outlook
The OCS group will continue its transition to becoming an engineering centre supporting the rest of the Orbital group,
whilst still providing a base level of advanced engineering and testing facilities to support the overhead of maintaining our
world-class capabilities.
6
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
1.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
SEGMENT REVIEW (CONTINUED)
ROYALTIES AND LICENCES
Volumes of high
performance two-stroke
outboard engines that
utilise Orbital’s technology
to improve power to
weight ratio have
continued to improve
2014 KEY PERFORMANCE HIGHLIGHTS
►
Large FlexDITM Outboard market
expanded year on year.
►
SIGNIFICANT CHANGES
Focus on key patent applications
in CNG DI, Dual Fuel LNG and
SUAS EMS.
►
Increased royalties from SUAS
customers.
►
Targeted patent portfolio.
SALES $m
METRICS
FUTURE OBJECTIVES
1.12
Segment
Revenue
Segment
Result
2014
$’000
2013
$’000
► Royalty revenues from new SUAS
business expansion.
1,124
1,007
636
517
►
Expand SUAS EMS portfolio,
especially in the area of heavy
fuel.
► Key patent work to protect
investment in Orbital’s new
products and systems.
Summary of Segment
Orbital earns royalties from product using its FlexDITM systems and technology. The royalty bearing products today are in
the marine, scooter/motorcycle and SUAS markets.
Total FlexDITM product volumes reduced compared to the same period last year, however larger horsepower engines that
attract a higher royalty improved. This, together with the addition of royalties from SUAS has resulted in a 4% increase
in revenue for the year.
Highlights
The larger horsepower outboard engines have maintained their popularity and have actually achieved a fourth consecutive
year of increased volumes. Total marine volumes overall were slightly lower than last financial year.
Business Model
Orbital has maintained a portfolio of patents to protect the intellectual property invested in the development of our
FlexDITM technology.
Orbital has licenced a number of Original Equipment Manufacturers (OEM) and component manufacturers to utilise
Orbital’s technology. At present there are 16 authorised users; 3 of which are currently in production with our
technology.
The business model for Orbital is transitioning away from an expectation that OEMs will pay large licence fees and ongoing
royalties to gain access to our technology to a model were Orbital is the systems integrator and provider of products and
systems that incorporate our technology and utilise our engineering expertise.
Outlook
Orbital will continue to receive royalties from its existing licenced two-stroke outboard engine manufacturers for a number
of years still to come, however it must be noted that when production of the current models of two-stroke engines cease
they are not likely to be replaced by new models incorporating our FlexDITM technology. The two-stroke engine outboards
remain popular today especially the light-weight portability of the small horsepower engines and the power/weight ratios
in the performance engine category.
7
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
2.
DIRECTORS
The Directors of the Company at any time during or since the end of the financial year are:
Dr Mervyn Thomas Jones, B.E(Hons), Ph.D, DipBusStuds, CEng (UK), FIChemE (UK), FAICD, MIoD (NZ)
Chairman, Independent Non-Executive Director
Joined the Board in March 2008, appointed Chairman 2 September 2013. 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 is also a member of the Company’s Audit Committee and the Company’s Human Resources, Remuneration and
Nomination Committee.
During the past three years, Dr Jones has also served as a director of Pacific Environment Limited (appointed 3 July 2009;
resigned 2 July 2012).
Mr Terry Dewayne Stinson, BBA (magna cum laude), FAICD
Managing Director and Chief Executive Officer
Joined the Board and appointed Chief Executive Officer in June 2008. Mr Stinson has been a senior executive with
Siemens, Europe’s largest engineering conglomerate, 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 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, was CEO of Synerject LLC and held various executive
positions with Mercury Marine in R&D, engineering, manufacturing and others.
Mr Stinson was appointed a Member of the Australian Industry Innovation Council (AIIC) in 2009, is a member of the
Sustainable Energy Association, is Chairman of Sprint Gas (Aust) Pty Ltd and a Non-executive Board Member of Gas
Energy Australia (GEA).
Dr Vijoleta Braach-Maksvytis, BSc (Hons), Ph.D, FAICD
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 and is also a
member of the Company’s Audit Committee.
During the past three years, Dr Braach-Maksvytis has also served as a director of AWE Limited (appointed 7 October
2010; ongoing).
Mr John Paul Welborn, B.Com, CA, MAICD, SA Fin
Independent Non-Executive Director
Joined the Board in June 2014. Mr Welborn is currently the Managing Director and Chief Executive Officer of Equatorial
Resources Limited (ASX: EQX), an ASX listed iron ore exploration and development company with two 100% owned large
scale iron ore projects in the Republic of Congo.
Mr Welborn chairs the Company’s Audit Committee and is also a member of the Company’s Human Resources,
Remuneration and Nomination Committee.
Mr Welborn is a Chartered Accountant with a Bachelor of Commerce degree from the University of Western Australia and
holds memberships of the Institute of Chartered Accountants in Australia, the Financial Services Institute of Australasia
and the Australian Institute of Company Directors.
Mr Welborn is a former International Rugby Union Player with extensive experience in the resources sector as a senior
executive and in corporate management, finance and investment banking. He was the Head of Specialised Lending in
Western Australia for Investec Bank (Australia) Ltd and has more than 20 years of commercial experience in national
and international professional services and management consulting firms.
8
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
Mr Welborn has also served on the Boards of a number of charitable organisations, and is a former Commissioner of
Tourism Western Australia.
During the past three years Mr Welborn has also served as a director of Equatorial Resources Limited (appointed August
2010; ongoing), Prairie Mining Limited (appointed February 2009; ongoing) and Noble Mineral Resources Limited
(appointed March 2013; resigned December 2013).
Mr William Peter Day, LLB (Hons), MBA, FCPA, FCA, FAICD (Resigned as Chairman 1 September 2013 and resigned as
Director 28 February 2014)
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 was a member of the Company’s Audit Committee and the Company’s Human Resources, Remuneration and
Nomination Committee.
During the past three years, Mr Day has also served as a director of Ansell Limited (appointed 20 August 2007; ongoing),
SAI Global Limited (appointed 15 August 2008; ongoing) and Federation Centres Limited (appointed 01 October 2009;
resigned 28 February 2014). He is also involved in a number of public interest activities.
3.
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
Ordinary Shares
ELTSP Rights
Performance Rights
M T Jones
T D Stinson
V Braach-Maksvytis
J P Welborn
Total
70,000
392,690
-
-
-
-
3,035,000
1,150,000
-
-
-
-
462,690
3,035,000
1,150,000
4.
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*
M T Jones
T D Stinson
V Braach-Maksvytis
J P Welborn
W P Day
8
8
8
1
6
8
8
8
1
6
4
-
4
1
3
4
-
4
1
3
5
-
5
1
3
5
-
5
1
3
* Number of meetings held during the time the director held office during the year.
9
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
5.
COMPANY SECRETARY
Mr Ian G Veitch, B.Bus, GradDipACG, ACA, ACIS, ACSA
Mr Veitch joined Orbital in 2006 and was appointed to the position of Company Secretary on 1 July 2009, and
subsequently appointed to the position of Chief Financial Officer on 11 February 2013. He has over 18 years experience
in company secretarial, corporate and financial accounting roles. Mr Veitch holds a Bachelor of Business degree, is a
Chartered Accountant and is also a Chartered Secretary. Mr Veitch is a Member of the Institute of Chartered Accountants
in Australia, a Member of the Institute of Chartered Secretaries and Administrators, and an Associate of Chartered
Secretaries Australia.
6.
PRINCIPAL ACTIVITIES
Orbital has designed, developed and also undertaken low volume production of an engine management system (EMS) for
small unmanned aircraft systems (SUAS) utilising Orbital’s FlexDITM technology.
Orbital imports, manufactures and assembles an automotive LPG fuel system for Ford Motor Company of Australia’s
EcoLPi range of Falcon passenger cars and utilities and also imports, assembles and distributes an extensive range of LPG
systems for aftermarket LPG installers and mechanical workshops around Australia.
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, trucks, and most recently in SUAS’s.
There were no significant changes in the nature of the activities of the Group during the year.
7.
CONSOLIDATED RESULT
The consolidated profit after income tax for the year attributable to the members of Orbital was $1,676,000
(2013:$364,000).
8.
DIVIDENDS
No dividend has been paid or proposed in respect of the current financial year.
9.
STATE OF AFFAIRS
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 SHEET DATE
On 27 June 2014, the Company announced that it was going to undertake an on-market share buy-back of up to 10% of
its issued capital in accordance with the Corporations Act and Rules of the Australian Stock Exchange. The buy-back
commenced on 15 July 2014 and was completed on 20 July 2014. During this period the Company bought back
4,975,699 shares at a total consideration paid of $771,000. On 24 July 2014 the 4,975,699 shares were cancelled.
Other than the matters above, 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 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 operating and financial review
above.
12.
SHARE OPTIONS
The Company has no unissued shares under option at the date of this report.
13.
INDEMNIFICATION
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)
(b)
in his or her capacity as an officer of the Company; and
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.
10
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
13.
INDEMNIFICATION (CONTINUED)
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.
Indemnification of auditors
To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, as part of the terms of
its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No
payment has been made to indemnify Ernst & Young during or since the financial year.
14.
NON-AUDIT SERVICES
In the comparative period, Ernst & Young, the Company’s auditor, performed certain other services in addition to their
statutory duties.
The Board considered the non-audit services provided during the comparative period 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 comparative period was 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 37 to the financial statements.
15.
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.
16.
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 financial report of Orbital Corporation Limited for the financial year ended 30 June 2014, 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
T G Dachs
Partner
Perth
28 August 2014
11
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.
REMUNERATION REPORT - AUDITED
Principles of compensation
This Remuneration Report for the year ended 30 June 2014 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 Group, directly or indirectly,
including any director (whether executive or otherwise) of the parent company, and the senior executives of the Group.
The remuneration report is presented under the following sections:
17.1.
17.2.
17.3.
17.4.
17.5.
17.6.
17.7.
17.8.
17.9.
Individual key management personnel disclosures
Remuneration overview
Remuneration governance
Non-executive director remuneration arrangements
Executive remuneration arrangements
Company performance and the link to remuneration
Executive contractual arrangements
Directors and executive officers’ remuneration - company and group
Equity instruments
17.1.
INDIVIDUAL KEY MANAGEMNT PERSONNEL DISCLOSURES
Details of KMP of the Group are set out below.
Key management personnel
Position
(i) Directors
Mervyn T Jones
Vijoleta Braach-Maksvytis
John P Welborn
Terry D Stinson
W Peter Day
(ii) Executives
Geoff P Cathcart
Ian G Veitch
Chairman (Non-executive)
(Non-executive)
(Non-executive) (appointed 17 June 2014)
Managing Director and Chief Executive Officer (Executive)
Chairman (Non-executive) (ceased being a KMP 28 February 2014)
Chief Technical Officer
Chief Financial Officer
17.2.
REMUNERATION OVERVIEW
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 growth and success
of the Group.
Executive members of the KMP may receive a short-term incentive (STI) approved by the Board as reward for exceptional
performance in a specific matter of importance. STI amounts of $74,000 became payable during the 2014 financial year
(2013: nil).
Long-term incentive (LTI) awards consisting of shares that vest based on attainment of pre-determined performance
goals are awarded to selected executives. For the 2014 financial year, the Company used earnings per share as the
performance measure for the share awards. During the 2014 financial year, the performance hurdles for the 2011 grant of
shares which were based on relative total shareholder return and earnings per share were not met and no shares vested.
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 2014 financial year.
Remuneration report at FY13 AGM
The FY13 remuneration report received positive shareholder support at the FY13 AGM with a vote of 92% in favour.
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; and
Align the interests of executives with shareholders through measuring total shareholder return (TSR) and earnings per
share (EPS).
12
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.2.
REMUNERATION OVERVIEW (CONTINUED)
Key changes to remuneration structure in 2014
The key changes made to remuneration structure in 2014 related to the replacement of the Medium Term Incentive (MTI)
Plan with a new Short Term Incentive (STI) Plan. The key features of the STI plan are summarised in the table below.
Table 1 – STI Performance hurdles (and weighting %)
KPI
EBIT
Free Cash Flow
Non-organic growth of EBIT
Board Discretion
Proportion of STI award
KPI applies to
Minimum KPI
Stretch KPI
40%
30%
20%
10%
$’000
1,622
404
1,000
TBD
$’000
2,433
1,404
2,000
TBD
17.3.
REMUNERATION GOVERNANCE
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, company 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 short-term incentive (STI) bonus plan and any discretionary bonus payments.
Remuneration structure
In accordance with best practice corporate governance, the structure of non-executive directors and executive
remuneration is separate and distinct.
Services from remuneration consultants
From 1 July 2011, all proposed remuneration consultancy contracts (within the meaning of section 206K of the
Corporations Act 2001) are subject to prior approval by the Board or the Human Resources, Remuneration and
Nomination Committee in accordance with the Corporations Act 2001.
Did a remuneration consultant provide a
remuneration recommendation in relation to any of
the KMP for the financial year?
No remuneration recommendation was provided by a
remuneration consultant for the financial year.
13
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.4.
NON-EXECUTIVE DIRECTOR REMUNERATION ARRANGEMENTS
Objective
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.
Structure
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 2014 AGM.
On appointment to the Board, all non-executive Directors enter into a service agreement with the Company in the form of
a letter of appointment which details remuneration arrangements.
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 $102,500 (effective 1 September 2013) (2013:$88,000). Each non-
executive director receives a base fee of $72,000 (effective 1 September 2013) (2013: $69,200) for being a director of
the Group.
The remuneration of non-executive directors for the year ended 30 June 2014 and 30 June 2013 is detailed in Section
17.8 of this report.
Are the non-executive directors
paid any incentive or equity
based payments or
termination/retirement
benefits?
If non-executive directors are
paid additional fees, how are
these additional fees calculated?
Are non-executive Directors’
fees going to increase in
FY2015?
No. The non-executive Directors are not paid any short term incentives, long term
incentives, equity based remuneration or termination/retirement benefits
From time to time, non-executive Directors may be requested to provide additional non-
executive director related services. This could include sitting on a due diligence
committee or undertaking a special project for the Group. During the year, no additional
fees were paid to any of the non-executive Directors.
The Board has decided not to increase the directors’ fees.
17.5.
EXECUTIVE REMUNERATION ARRANGEMENTS
Objective
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.
Structure
The CEO’s target remuneration mix for FY2014 comprised 48% fixed remuneration, 28% target STI opportunity and 24%
LTI opportunity. The LTI value is the total accounting expense associated with the grant made during the financial year.
Key Management Personnel’s target remuneration mix for FY2014 was 54% fixed remuneration, 24% target STI
opportunity and 22% LTI opportunity.
In the 2014 financial year, the executive remuneration framework consisted of the following components:
►
►
Fixed remuneration
Variable remuneration (STI and LTI)
14
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.5.
EXECUTIVE REMUNERATION ARRANGEMENTS (CONTINUED)
The table below illustrates the structure of Orbital’s executive remuneration arrangements:
Table 2 – Structure of remuneration arrangements
Remuneration
component
Vehicle
Purpose
Link to company performance
Set with reference to role,
market and experience.
No direct link to company
performance.
Fixed compensation
Represented by
total fixed
remuneration
(TFR).
Comprises base
salary,
Superannuation
contributions and
other benefits.
STI component
Paid in cash
(discretionary)
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.
STI component
Paid in cash.
(KPI related)
Rewards executives for their
contribution to achievement of
Group outcomes.
LTI component
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.
Fixed compensation
Discretionary award by the
Board to reward executives for
exceptional performance in a
specific area of importance.
EBIT.
Free Cash Flow.
Non-organic growth of EBIT
Board Discretion.
Vesting of awards is dependent
on Orbital Corporation Limited’s
TSR performance relative to a
peer group and its Earnings Per
Share.
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
Human Resources, Remuneration and Nomination 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) (discretionary)
The table below contains a summary of the key features of the STI plan.
What is the STI?
Executive directors and senior executives may
from time-to-time receive a
discretionary cash bonus approved by the Board as a retrospective reward for
exceptional performance in a specific matter of importance.
When is the STI grant paid?
There are no pre-determined timeframes at which assessments for STI rewards are to
be undertaken.
How does the Company’s STI
structure support achievement
of the Company’s strategy?
The STI rewards executives for their contribution to the achievement of Group
outcomes in areas of significant importance not addressed by the pre-determined
performance criteria of the STI (KPI related) and LTI.
How are the performance
conditions of the STI
determined?
What are the maximum
possible values of award under
the STI plan?
The Board has no pre-determined performance criteria against which the amount of a
STI is assessed.
There are no pre-determined maximum possible values of award under the STI
scheme. In assessing the value of an STI award to be granted the Board will give
consideration to the contribution of the action being rewarded to the success of the
Group.
15
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.5.
EXECUTIVE REMUNERATION ARRANGEMENTS (CONTINUED)
Variable remuneration — short-term incentive (STI) (discretionary) (Continued)
What was the value of STI paid
in the financial year?
Discretionary STI cash bonuses totalling $74,000 were awarded during the 2014
financial year and no bonuses were paid during the 2013 financial year.
Is a portion of STI deferred?
No discretionary STI cash bonuses relating to the 2014 or 2013 financial years will
become payable in future financial years.
Variable remuneration — short-term incentive (STI) (KPI related)
The STI plan was established to incentivise executives to achieve stretch key performance indicators (KPI’s). The STI plan
is a time based plan.
The table below contains a summary of the key features of the STI plan.
What is the STI?
When is the STI grant paid?
Executive directors and senior executives may receive STI bonuses based on the
achievement of key performance indicators (“KPI’s”) related to the performance of the
Group over the short term (one financial year).
The annual STI payments for executives are subject to the approval of the Human
Resources, Remuneration and Nomination Committee, after consideration of performance
against KPIs. This process usually occurs within three months after the reporting date.
Payments are made as a cash bonus in the following reporting period.
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.
How are the performance
conditions of the STI
determined?
The three KPI’s chosen by the Human Resource, Remuneration and Nomination
Committee in July 2013 relate to 1) EBIT, 2) Free Cash Flow, and 3) Non-organic growth
of EBIT. The Committee also included a provision for an award of up to 10% of the
potential STI on a discretionary basis.
How does the Company’s STI
structure support achievement
of the Company’s strategy?
These three measures were chosen as they directly align the individual’s reward to the
Group’s strategy and performance. The objective of the Group is to grow the business in
a profitable and cash flow positive manner.
What are the performance
conditions under the STI for
KMP in 2014?
The STI performance hurdles (and weighting %) for 2014 were:
KPI
EBIT
Free Cash Flow
Non-organic growth of EBIT
Board Discretion
Proportion of
STI award KPI
applies to
Minimum KPI
Stretch KPI
$’000
$’000
40%
30%
20%
10%
1,622
404
1,000
TBD
2,433
1,404
2,000
TBD
How are actual results
measured against the
performance hurdles?
For each performance hurdle there are two targets ‘Base’ and ‘Stretch’. ‘Base’ is the
minimum target to trigger a STI payment for that hurdle. The amounts paid for each
hurdle varies between 2.3%-12% of TFR for ‘Base’ and 4.5%-24% of TFR for ‘Stretch’.
Where achievement is below ‘Base’ no payment is made.
What are the ranges of possible
values of award under the STI
plan?
Name
Terry Stinson
Geoff Cathcart
Ian Veitch
Position
Amount
(Min – Max)
Chief Executive Officer
0 - $227,136
Chief Technical Officer
0 - $117,806
Chief Financial Officer
0 - $102,232
The maximum bonus is only payable if the stretch targets on all three of the KPI’s are
achieved and the Board Discretion element is paid in full. No bonus is awarded where
performance falls below minimum thresholds.
16
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.5.
EXECUTIVE REMUNERATION ARRANGEMENTS (CONTINUED)
Variable remuneration — short-term incentive (STI) (KPI related) (Continued)
What was the value of STI paid
in the financial year?
Is a portion of STI deferred?
The Human Resources, Remuneration and Nomination Committee has considered the KPI
related bonus for the 2014 financial year. The STI (KPI related) cash bonus available for
the 2014 financial year is $nil. This amount has been determined on the basis that 1)
the EBIT for FY14 was below $1,622,000, 2) the free cash flow for FY14 was below
$404,000, and 3) the non-organic growth of EBIT was below $1,000,000.
No. At this stage, the Board does not consider it appropriate to defer a portion of the STI
(KPI related). This is because the performance criteria are objective (EBIT, free cash
flow, and non-organic growth in EBIT) and obtained from the audited results of the
Group.
Variable remuneration — long-term incentive (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 Employee Share Plan No.1.
Executive Long Term Share Plan
The table below contains a summary of the key features of the Executive Long Term Share plan (ELTSP).
What is the ELTSP?
The ELTSP is a performance based 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.
How does the ELTSP align the
interests of shareholders and
executives?
The ELTSP links rewards for the executive KMP to the Company’s strategy to grow
shareholder value by increasing the Group’s earnings per share. Vesting of shares only
occurs if Orbital generates earnings per share of at least 1.28 cents per share. The
higher the earnings per share result the higher the number of shares that will vest.
How does the ELTSP support
the retention of executives?
What are the principal terms of
the issue made under the LTI in
2014?
An objective of offering shares under the ELTSP is to promote retention. At any one
time, an executive KMP will have unvested rights. If an executive resigns they would
forfeit the benefits of those unvested rewards. This provides a valuable incentive to stay
with the Company so long as the shares are seen by the executive KMP as likely to vest
at the end of the performance period.
Grant date: 31 August 2013 (Managing Director grant date: 23 October 2013 being
the date of the AGM at which his participation in the plan was approved by
shareholders).
Life: 3 years.
Expiry date: 31 August 2016.
Exercise Price: nil.
Fair value per right: 19.5 cents (Managing Director: 17 cents).
Market price of shares on grant date: 19.5 cents (Managing Director: 17 cents).
Measure of performance is earnings per share for the year ended 30 June 2016. See
Table 3 for the vesting schedule.
Vested shares are held in trust by the trustee for a period of ten years, or until the
cessation of employment.
What are the performance
conditions for the vesting of
ELTSP shares?
The performance conditions, which are based 100% on Earnings Per Share (EPS)
(performance years 2014 and 2013), apply to determine the number of shares (if any)
that vest to the Executives.
How is the market price of the
ELTSP determined?
See tables 3, 4 and 5, below for the vesting schedules for EPS tested and TSR tested LTI
awards granted in prior years.
The fair value of the EPS related rights is equal to the market price of shares on the grant
date. The fair value of the TSR related 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 is allocated to each reporting period evenly over the
period from grant date to vesting date.
17
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.5.
EXECUTIVE REMUNERATION ARRANGEMENTS (CONTINUED)
Variable remuneration — long-term incentive (LTI) (continued)
In what circumstances would
the LTI entitlements be
forfeited?
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.
What happens to LTI
entitlements upon a change of
control in the Group?
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.
Do shares granted under the
LTI dilute existing shareholders’
equity?
The issue of shares can have a small dilutionary impact upon other shareholders.
However, the number of shares issued under the ELTSP in the five years preceding the
offer must not exceed 5% of the total shares on issue at the time an offer to a participant
is made.
Are the shares issued under the
LTI bought on market?
No. the company issues new shares for the ELTSP, it does not buy the shares on the
market.
Does the executive obtain the
benefit of dividends paid on
shares issued under the LTI?
KMP are entitled to any dividends paid on vested shares subject to the ten year
restriction on trading. Unvested rights do not participate in dividend payments or any
other distributions to shareholders.
What other rights does the
holder of vested LTI shares
have?
Subject to the conditions and restrictions attaching to the shares, the holder of the
shares has the same rights as any other holder of shares. This includes voting rights, a
right to dividends, bonus shares and capital distributions.
Does the Company have
executive share ownership
guidelines?
Can executive KMP hedge to
ensure that they obtain a
benefit from unvested LTI’s?
How many LTI awards vested in
the financial year?
The Company does not have a formal policy requiring executives to own shares.
However a significant component of each executive’s remuneration consists of grants
under an employee share plan. Hence, at any given time, after an executive has been
with the Company for more than three years, the executive typically has three unvested
equity grants which are subject to performance conditions. As at the date of this report,
all executives who have been with the company for longer than three years have shares
in the Company which have fully vested or been acquired on market.
No. All executive KMP have been advised that under section 206J of the Corporations Act
it is an offence for them to hedge unvested grants made under the ELTSP.
None. TSR Performance targets under the LTI offered in FY2011 were not met in FY2014
and the EPS for the financial year was less than 15 cents per share and as a result nil
(2013: nil) shares were issued to KMPs.
Is a portion of LTI deferred?
Granted ELTSP shares are subject to a three year performance period. Vested ELSTP
shares are subject to restrictions on trading for a period of ten years.
The following table sets out the relevant percentages of shares offered which will vest based on various percentile
rankings of the Company for the performance year 2014:
Table 3 – Vesting schedule for the EPS tested LTI awarded for the performance year 2014
Company Performance
(Earnings per share)
Compounded EPS growth of less than 20% per annum
(up to 73% growth over 3 years)
Compounded EPS growth of between 20% and 34.9% per annum
(at least 73% growth over 3 years)
Compounded EPS growth of between 35% and 49.9% per annum
(at least 246% growth over 3 years)
Compounded EPS growth of 50% or greater per annum
(at least 338% growth over 3 years)
% of offered shares
issued to each executive
0%
25% to 49% (on a straight line basis)
50% to 99% (on a straight line basis)
100%
18
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.5.
EXECUTIVE REMUNERATION ARRANGEMENTS (CONTINUED)
Variable remuneration — long-term incentive (LTI) (continued)
The following table sets out the relevant percentages of shares offered which will vest based on various percentile
rankings of the Company for the performance year 2013:
Table 4 – Vesting schedule for the EPS tested LTI awarded for the performance year 2013
Company Performance
(Earnings per share)
Under 5 cents
At or above 5 cents but below 7 cents
At or above 7 cents but below 9 cents
At or above 9 cents
% of offered shares
issued to each executive
0%
25% to 50% (on a straight line basis)
50% to 100% (on a straight line basis)
100%
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 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.
The following table sets out the relevant percentages of shares offered which will vest based on various percentile
rankings of the Company:
Table 5 – Vesting schedule for the TSR tested LTI awarded for the performance year 2011 and 2012
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 vest under the FY2012, FY2013 and FY 2014 offer unless the Company’s TSR is at or above the 50th
percentile or the EPS for the years ending 30 June 2014, 30 June 2015 and 30 June 2016 is at or above 15, 5 and 1.28
cents per share, respectively.
TSR Performance targets under the LTI offered in FY2011 were not met in FY2014 and as a result nil (2013: nil) shares
were issued to KMPs.
At the Company’s Annual General Meeting in October 2013, shareholders approved the terms and conditions of the
Executive Long Term Share Plan and also approved the issue of shares to the Managing Directors under that plan.
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:
(a) do not give the holder a legal or beneficial interest in shares of the Company; and
(b) 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:
(a) a performance hurdle is met over the periods specified by the Board; or
(b) the Board allows early exercise on cessation of employment; or
it is determined by the Board in light of specific circumstances.
(c)
19
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.5.
EXECUTIVE REMUNERATION ARRANGEMENTS (CONTINUED)
Variable remuneration — long-term incentive (LTI) (continued)
Performance Rights Plan (continued)
The terms and conditions of the offer of Performance Rights made during the year ended 30 June 2009 are as follows:
(a) Mr T D Stinson will be awarded 1,150,000 performance rights;
(b)
the grant of performance rights will be in seven tranches, each tranche with a different specified share price target
as set out below:
Table 6 – Vesting schedule for the performance rights plan
Tranche
Number of performance
rights
Share price target
1
2
3
4
5
6
7
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
The target share prices were chosen as they directly align the director’s reward with group strategy.
(c)
the acquisition price and exercise price of the performance rights will be nil.
(d) 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;
(e)
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 2014.
LTI awards for 2014 financial year
Shares were granted under the Employee Share Plan No.1 to a number of executives on 5 February 2014. No Shares
were granted under the Executive Long Term Share Plan or the Performance Rights Plan during the 2014 financial year.
Details in respect of the award are provided in Section 17.9.
17.6.
COMPANY PERFORMANCE AND THE LINK TO REMUNERATION
Performance linked compensation includes both short-term and long-term incentives and is designed to reward key
management personnel for meeting or exceeding their financial and personal objectives. The STI is an “at risk” bonus
provided in the form of cash, while the 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.
20
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.6.
COMPANY PERFORMANCE AND THE LINK TO REMUNERATION (CONTINUED)
Company performance and its link to medium-term incentives
EBIT, Free Cash Flow and Non-organic growth of EBIT are considered in setting the STI as they are considered important
short term performance targets.
Company performance for the current year, the last 4 years and KPI targets are as follows:
Table 7 – Orbital five year performance linked to short-term incentives
2010
2011
2012
2013
2014 Minimum
Stretch KPI
KPI
$’000
$’000
$’000
$’000
$’000
$’000
$’000
EBIT
4,641
2,043
(2,808)
2,570
1,554
1,622
Free Cash Flow
(3,350)
1,685
(768)
5,967
(1,054)
404
Non-organic growth in EBIT
-
-
-
-
-
1,000
2,433
1,404
2,000
Company performance and its link to long-term incentives
The performance measure which drives LTI vesting is the Company’s TSR performance relative to the companies within its
peer group and earnings per share (EPS). The table below show the performance of the Group as measured by the
Group's total shareholder return (TSR) to the median of the TSR for peer group and also the Group’s earnings per share
for the past five years (including the current period) to 30 June 2014. The earnings per share values in the table below
have been adjusted to reflect the share consolidation undertaken in October 2010.
Company performance for the current year and last 4 years is as follows:
Table 8 – Orbital five year performance linked to long-term incentives
2010
2011
2012
2013
2014
2014
2015
Minimum Minimum
TSR ranking (percentile)
Earnings per share (cents)
56th
9.39
Closing share price ($)
0.25**
*
3.65
0.25
*
(6.28)
0.22
18th
0.74
0.15
*
3.39
0.16
50th
15.00
-
50th
9.00
-
* The Company did not measure its TSR ranking in 2011, 2012, or 2014 as the Board determined that Orbital’s TSR would
be below the median TSR of the peer group.
** Share prices were adjusted for 10:1 share consolidation that occurred in October 2010.
As a result of the Company’s performance over the last five years, LTIs offered during 2007 were partially vested in
financial year 2010. The performance target for the LTIs offered in 2008, 2009, 2010 and 2011 were not met during the
financial years 2011, 2012, 2013 and 2014 and as such no shares vested.
17.7.
EXECUTIVE CONTRACTUAL ARRANGEMENTS
Remuneration arrangements for KMP are formalised in employment agreements. Details of these contracts are provided
below.
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 $378,000 per annum
The CEO’s target MTI opportunity per annum is 20% of annual Total Employment Costs (TEC) and his maximum
STI opportunity per annum is 60% of TEC
►
subject to receiving any required or appropriate shareholder approval
The CEO is eligible to participate in Orbital Corporation Limited’s LTI plan on terms determined by the Board,
The CEO’s termination provisions are as follows:
21
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.7.
EXECUTIVE CONTRACTUAL ARRANGEMENTS (CONTINUED)
Table 9 – Summary of contractual provisions for the CEO
Notice
Period
Payment
in lieu of
notice
Treatment of
MTI on
termination
Treatment of LTI
on termination
Termination payments
Employer initiated
termination
12 months
12 months
Pro-rated for
time and
performance
Board discretion
None
Termination for
serious misconduct
Employee-initiated
termination
None
None
Unvested
awards forfeited
Unvested awards
forfeited
3 months
3 months
Unvested
awards forfeited
Unvested awards
forfeited subject to
Board discretion
None
None
Other KMP
All other KMP have rolling contracts.
Standard KMP termination provisions are as follows:
Table 10 – Summary of KMP termination provisions
Notice
Period
Payment
in lieu of
notice
Treatment of
MTI on
termination
Treatment of LTI
on termination
Termination payments
Employer initiated
termination
3 months
3 months
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
3 months
3 months
Unvested
awards forfeited
Unvested awards
forfeited subject to
Board discretion
None
None
22
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.8.
DIRECTORS’ AND EXECUTIVE OFFICERS’ REMUNERATION – COMPANY AND GROUP
Details of the nature and amount of each major element of remuneration of the Company and the Group’s Key Management Personnel are:
Table 11 – Compensation of KMP for the years ended 30 June 2014 and 2013
Short Term
Year
Salary and
Director’
Fees
$
Cash
Bonuses
$
Total
$
Post
Employment
Long-term
Benefits*
Employer
Superannuation
Contributions
$
Long
Service
Leave
$ (d)
Share Based Payments
Total
Employee
Share Plans
Performance
Rights Plan
Proportion of
remuneration
performance
related
$ (a)(b)
$ (c)
$
%
Non-executive Directors
Mervyn T Jones
2014
Chairman and Director (Non-executive)
2013
Vijoleta Braach-Maksvytis
Director (Non-executive)
John P Welborn (e)
Director (Non-executive)
W Peter Day (f)
Chairman and Director (Non-executive)
Total Consolidated, all non-executive
directors
Executive Director
Terry D Stinson
Director and Chief Executive Officer
Other Key Management Personnel
Geoff P Cathcart
Chief Technical Officer
Ian G Veitch (g)
Chief Financial Officer
Keith A Halliwell (h)
Chief Financial Officer
Total Consolidated, Executive Director
and Key Management Personnel
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
88,494
63,486
65,474
63,486
2,522
-
46,234
90,459
202,724
217,431
-
-
-
-
-
-
-
-
-
-
88,494
63,486
65,474
63,486
2,522
-
46,234
90,459
202,724
217,431
8,195
5,714
6,063
5,714
240
-
4,277
8,141
18,775
19,569
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
96,689
69,200
71,537
69,200
2,762
-
50,511
98,600
221,499
237,000
-
-
-
-
-
-
-
-
-
-
346,508
34,000
380,508
333,945
-
333,945
32,088
40,073
12,161
8,387
15,221
34,511
474,489
82,867
49,283
514,555
17.6%
25.7%
242,643
20,000
213,525
-
208,308
20,000
262,643
213,525
228,308
26,803
25,623
19,269
7,581
14,558
4,670
77,964
-
168,814
-
-
-
797,459
74,000
794,248
-
77,964
6,870
12,245
-
168,814
871,459
794,248
-
18,058
78,160
90,624
-
(2,742)
24,412
32,448
9,388
33,774
2,941
6,266
-
(65,175)
27,550
57,732
-
-
-
-
-
-
306,415
287,480
255,188
103,345
-
118,955
34,511
1,036,092
49,283
1,024,335
9.6%
11.7%
9.0%
6.1%
-
(53.6)%
13.1%
10.4%
23
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.8.
DIRECTORS’ AND EXECUTIVE OFFICERS’ REMUNERATION – COMPANY AND GROUP (CONTINUED)
Notes in relation to the table of directors' and executive officers remuneration
(a)
(b)
The fair value of the Employee Share Plan #1 is based upon the market value (at offer date) of shares offered.
The fair value of the TSR related Executive Long Term Share plan ("ELTSP") 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 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.
The following factors and assumptions were used in determining the fair value of TSR related rights issued under
the ELTSP on grant date:
Table 12 – Summary of terms and conditions of unvested TSR related rights
Grant Date
Life
Fair
Value
per
right
Market
price of
shares on
grant date
Exercise
Price
Expiry
Date
Expected
volatility
Risk free
interest rate
31-Aug-10
3 years
31-Aug-13
33 cents
31-Aug-11*
3 years
31-Aug-14
25 cents
nil
nil
34 cents
60.00%
4.27%
35 cents
110.00%
3.79%
* The grant date of the TSR related rights for the Managing Director was 26 October 2011.
The following factors and assumptions were used in determining the fair value of EPS related rights offered under the
ELTSP on grant date:
Table 13 – Summary of terms and conditions of unvested EPS related rights
Grant Date
Life
Expiry
Date
Fair Value
per right
Exercise
Price
31-Aug-10
3 years
31-Aug-13
34 cents
31-Aug-11*
3 years
31-Aug-14
35 cents
31-Aug-12*
3 years
31-Aug-15
20 cents
31-Aug-13*
3 years
31-Aug-16
19.5 cents
nil
nil
nil
nil
Market price
of shares on
grant date
34 cents
35 cents
20 cents
19.5 cents
* The grant dates of the EPS related rights for the Managing Director were 26 October 2011, 7 November 2012 and
23 October 2013 respectively.
The fair value of the EPS related rights is equal to the market price of shares on the grant date.
(c)
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.
24
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.8.
DIRECTORS’ AND EXECUTIVE OFFICERS’ REMUNERATION – COMPANY AND GROUP (CONTINUED)
Table 14 – Summary of terms and conditions of unvested performance rights
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%
5.75%
31-Aug-08
10 years
35 cents
$5.00
79 cents
55.00%
5.75%
31-Aug-08
10 years
28 cents
$7.50
79 cents
55.00%
5.75%
31-Aug-08
10 years
23 cents
$10.00
79 cents
55.00%
5.75%
31-Aug-08
10 years
13 cents
$20.00
79 cents
55.00%
5.75%
31-Aug-08
10 years
9 cents
$30.00
79 cents
55.00%
5.75%
31-Aug-08
10 years
5 cents
$50.00
79 cents
55.00%
5.75%
(d)
Prior year comparatives have been restated to include long service leave
(e) Mr Welborn became a KMP on 17 June 2014
(f)
Mr Day ceased to be a KMP on 28 February 2014
(g) Mr Veitch became a KMP on 11 February 2013
(h) Mr Halliwell ceased to be a KMP on 8 February 2013.
17.9.
EQUITY INSTRUMENTS
All shares refer to ordinary shares and rights of Orbital Corporation Limited.
Analysis of Shares Offered as Compensation
Details of the shares and rights offered under the LTI to each key management person 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.
Table 15 – Summary of KMP executives interests in LTI equity rights
Employee Share Plan No. 1
Executive Long Term Share Plan
Number of
shares
issued
Share
Price
Value (a)
$
Number
of Rights
Offered
Value of
Rights
Offered
(b)
$
Number
of Rights
Vested
Number of
Expired or
Forfeited (c)
Executive Director
T D Stinson
2014
-
2013
-
Executives
-
-
-
1,165,000
198,050
-
1,100,000
220,000
G P Cathcart
2014
5,844
$0.1711
1,000
537,000
104,715
2013
7,468
$0.1339
1,000
450,000
90,000
I G Veitch
2014
5,844
$0.1711
1,000
466,000
90,870
2013
7,468
$0.1339
1,000
330,000
66,000
K A Halliwell (d)
2014
-
-
-
-
-
2013
7,468
$0.1339
1,000
600,000
120,000
-
-
-
-
-
-
-
-
(665,000)
(525,000)
(252,700)
(199,500)
(76,000)
(60,000)
-
(1,614,067)
25
DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2014
17.9.
EQUITY INSTRUMENTS (CONTINUED)
(a) The fair value of the employee share plan No. 1 based upon the market value (at offer date of 31 October 2013 and
31 October 2012 respectively) of shares offered. These awards are fully vested.
(b) Represents the fair value of rights offered on 31 August 2013 and 31 August 2012 respectively using a Monte-Carlo
simulation model for the TSR related rights (31 August 2012 offer) and the market price on the grant date for EPS
related right (31 August 2012 and 31 August 2013 offers). The vesting of the shares offered on 31 August 2012 and
31 August 2013 is subject to the Group achieving the criteria listed in tables 3, 4 and 5. Performance conditions
were met not in respect of rights offered in August 2010 and shares in relation to that offer expired at the expiration
of the performance period during the 2014 financial year.
(c) The value of the Executive Long Term Share Plan rights expired or forfeited during the period was $nil on the date of
expiry or forfeiture.
(d) Represents 266,500 rights expired and 1,347,567 rights forfeited by Mr Halliwell on his resignation.
Table 16 – Movement of KMP executives interests in LTI equity rights
Held at
1-Jul13
Offered
Forfeited
Vested
Expired (a)
30-Jun-14
Exercisable
Held at
Not
Executive director
Mr TD Stinson
Executives
Dr GP Cathcart
Mr IG Veitch
2,535,000
1,165,000
1,012,700
498,500
537,000
466,000
-
-
-
-
(665,000)
3,035,000
3,035,000
-
-
(252,700)
(76,000)
1,297,000
888,500
1,297,000
888,500
(a) The fair value of these performance rights was nil at the expiry date.
Table 17 – Movement of KMP interests in shares
Held at
1-Jul13
Granted as
compensation
Held at
Purchases
ESP #1
ELTSP
Sales
Other (b)
30-Jun-14
Non-executive directors
Dr MT Jones
18,000
Dr V Braach-Maksvytis -
-
Mr JP Welborn (a)
10,000
Mr WP Day
Executive director
Mr TD Stinson
392,690
Executives
Dr GP Cathcart
Mr IG Veitch
61,563
20,443
52,000
-
-
-
-
-
-
-
-
-
-
-
5,844
5,844
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(10,000)
70,000
-
-
-
-
-
-
392,690
67,407
26,287
(a) Mr JP Welborn was appointed a Non-executive director on 17 June 2014.
(b) Represents shareholdings at the time that Mr WP Day ceased to be a KMP.
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 personnel or their related parties at year-end.
End of Remuneration Report
Signed in accordance with a resolution of the Directors:
M T Jones
Director
T D Stinson
Managing Director
Dated at Perth, Western Australia this 28th day of August 2014.
26
CORPORATE GOVERNANCE STATEMENT
1. CORPORATE GOVERENACE AT ORBITAL
A minimum of three directors, with a broad range of
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 Recommendations contained in
the ASX Corporate Governance Council’s (ASXCGC)
second edition of its Corporate Governance Principles
and Recommendations with 2010 Amendments. Orbital
believes that, throughout the 2014 financial year and to
the date of this report, it has complied with all the
ASXCGC Recommendations.
governance
Information
framework is also provided in the Corporate Governance
section of Orbital’s website (www.orbitalcorp.com.au)
on Orbital’s
corporate
2. BOARD OF DIRECTORS
2.1. Role of the Boards
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 8.
The composition of the Board is determined using the
following principles:
27
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 to 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, Remuneration and
Nomination Committee.
The Committee annually
reviews the size, composition and diversity of the Board
and the mix 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.
Recognising the importance of Board renewal, the
Committee
into
director’s
consideration in its succession planning.
tenure
takes
each
CORPORATE GOVERNANCE STATEMENT
2.5. Directors’ Retirement and Re-election
2.9 Directors’ Remuneration
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
automatic and
performance.
for a director’s re-election
is not
is subject to satisfactory director
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
their
involvement with committee work.
the Board’s
expectations
regarding
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:
the performance of the Board and each of
its
committees against the requirements of their respective
charters; and
the individual performance of the Chairman and each
director.
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.
Details of remuneration paid to directors (executive and
non-executive) are set out in the Remuneration Report
on pages 12 to 26. 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 2014 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.
Board papers are
distributed to directors in advance of any director’s
meeting to ensure that there is sufficient time for the
directors to digest the content of the papers and prepare
for the meeting. Executives are regularly involved in
board
other
opportunities, including visits to operations, for contact
with a wider group of employees.
discussions
directors
have
and
2.11 Company Secretary
Details of the Company Secretary are set out on page 9
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
in determining accounting policies
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
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.
28
CORPORATE GOVERNANCE STATEMENT
Members of the Audit Committee during the year were
Dr M T Jones (Chairman 1 July 2013 – 1 September
2013), Mr W P Day (Chairman 1 September 2013 – 28
February 2014), Mr J P Welborn (Chairman since 23
June 2014) 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 2014 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
the 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, 8.1, 8.2
to
The role of the Human Resources, Remuneration and
review and make
is
Nomination Committee
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,
packages,
superannuation entitlements, fringe benefits policies and
professional indemnity and liability insurance policies.
the Remuneration Committee
From
obtains independent advice on the appropriateness of
remuneration packages, given trends in comparative
companies both locally and internationally.
time-to-time,
performance
incentive
It reviews
The Committee also oversees the appointment and
induction process
the
for directors.
composition of the Board and makes recommendations
on 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.
29
The Human Resources, Remuneration and Nomination
Committee
the selection,
appointment and succession planning process of the
Company’s Chief Executive Officer.
is also responsible
for
Members of the Human Resources, Remuneration and
Nomination Committee during the year were Dr V
Braach-Maksvytis (Chairman), Dr M T Jones, Mr W P
Day (1 July 2013 – 28 February 2014) and Mr J P
Welborn (since 23 June 2014).
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 is available in the
Corporate Governance section of Orbital’s website.
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
following
on the Company’s website promptly
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; and
is prepared
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
the
requirements of Accounting Standards and the
Corporations Act and is lodged with Australian and
United States
stock
exchanges. Financial reports are sent to any
shareholder or ADR holder who requests them.
regulatory bodies and
in accordance with
The Board encourages participation of shareholders at
the Annual General Meeting to ensure a high level of
the Group's
accountability and
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.
identification with
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.
CORPORATE GOVERNANCE STATEMENT
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, 3.5
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
the Company’s
Company’s policy on
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 Codes are available
in the Corporate Governance section of Orbital’s
website.
trading
in
5.2 Securities Ownership and Dealing
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
transactions
Chairman before undertaking any
involving the Company's securities; and
30
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
rests with
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
senior
strategies
risk management
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 regulation, reduction in development and
testing expenditure by the Group’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 safety 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.
CORPORATE GOVERNANCE STATEMENT
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
The Group holds a number of permits, licences and
registrations for environmental 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 material 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
responsibility
the
The Committee has
for
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
regulatory
legislative or
to any
requirements, and the following principles:
regard
in auditing
in senior
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
the company, currently
involved
employed
the
company, and assesses whether this impairs or
judgment or
impair the Auditor’s
appears to
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.
financial positions
in
Consider whether taken as a whole, the various
relationships between the company and 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.
financial
The company shall not engage its external Auditor
for certain non-audit services (including book-
information systems design,
keeping,
services,
valuations,
audit
actuarial
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.
internal
The Chairman of the Committee will meet (at least
annually) with the external Auditors without the
presence of management
8. DIVERSITY
ASXCGC Recommendations 3.2, 3.3, 3.4, 3.5
8.1 Diversity Policy
The Company respects and values the competitive
advantage of diversity, and the benefit of its integration
throughout the Company, in order to enrich the
Company's perspective, improve corporate performance,
increase shareholder value, and enhance the probability
of achievement of the Company's objectives.
(including
Diversity constitutes people at relevant levels within the
Company
executive,
management and otherwise) with a diverse blend of
skills, experiences, perspectives, styles and attributes
gained from life's journey, including on account of their
culture, gender, age or otherwise.
board,
senior
The Company is committed to employing and retaining
the best technical and non-technical staff based on their
capacity to perform well for the Company.
A copy of the Diversity Policy is available in the
Corporate Governance section of Orbital’s website.
8.2 Measurable Objectives —Diversity
it
is satisfied
The Board has not set any measurable objectives for
that current
gender diversity as
reward decisions
employment, advancement and
regarding staff within
the Company are made
irrespective of race, religion, gender, age, or any other
irrelevant point of difference, therefore no measureable
objectives have been put in place at this time to
specifically change or increase gender diversity.
8.3 Workforce gender profile at 30 June 2013
Proportion of women in total organisation:
22%
Proportion of women in senior executive
positions:
Proportion of women on the board:
0%
25%
31
CORPORATE GOVERNANCE STATEMENT
9. ASX CORPORATE GOVERNANCE COUNCIL RECOMMENDATIONS CHECKLIST
The table below summarises the Group’s compliance with the ASX Corporate Governance Council’s Recommendations.
Recommendation
Principle 1 - Lay solid foundations for management and oversight
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
Comply
Yes / No
Reference
Yes
2.1
Yes
Remuneration Report
Companies should provide the information indicated in the guide
to reporting on Principle 1.
Yes
2.1, 2.8, Remuneration Report
Principle 2 – Structure the board to add value
2.1
A majority of the board should be independent directors
2.2
The chair should be an independent director.
2.3
The roles of chair and chief executive officer should not be
exercised by the same individual.
2.4
The board should establish a nomination committee
Companies should disclose the process for evaluating the
performance of the board, its committees and individual directors
Yes
Yes
Yes
Yes
Yes
2.2
2.2
2.2
3.1, 3.3
2.8
Companies should provide the information indicated in the guide
to reporting on Principle 2.
Yes
2.2, 2.4, 2.5, 2.7, 2.8, 3.1, 3.3
1.1
1.2
1.3
2.5
2.6
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.
Companies should establish a policy concerning diversity and
disclose the policy or a summary of that policy. The policy should
include requirements for the board to establish measurable
objectives for achieving gender diversity for the board to assess
annually both the objectives and progress in achieving them.
Companies should disclose in each annual report the measurable
objectives for achieving gender diversity set by the board in
accordance with the diversity policy and progress towards
achieving them.
Companies should disclose in each annual report the proportion of
women employees in the whole organisation, women in senior
executive positions and women on the board.
3.2
3.3
3.4
Yes
5.1
Yes
8.1
No
Yes
8.2
8.3
3.5
Companies should provide the information indicated in the guide
to reporting on Principle 3.
Yes
5.1, 8.1, 8.2, 8.3
Principle 4 – Safeguard integrity in financial reporting
4.1
The board should establish an audit committee.
4.2
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.
Yes
Yes
3.1, 3.2
3.1, 3.2
32
CORPORATE GOVERNANCE STATEMENT
Recommendation
4.3
The audit committee should have a formal charter.
4.4
Companies should provide the information indicated in the guide
to reporting on Principle 4
Principle 5 – Make timely and balanced disclosure
5.1
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.
5.2
Companies should provide the information indicated in the guide
to reporting on Principle 5..
Principle 6 – Respect the rights of shareholders
6.1
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.
6.2
Companies should provide the information indicated in the guide
to reporting on Principle 6.
Principle 7 – Recognise and manage risks
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.
Comply
Yes / No
Yes
Yes
Reference
3.1, 3.2
3.1, 3.2, 7
Yes
4.2
Yes
Yes
Yes
Yes
Yes
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
The board should establish a remuneration committee
8.2
The remuneration committee should be structured so that it:
Yes
Yes
3.1
3.3
consists of a majority of independent directors.
is chaired by an independent chair.
has at least three members.
8.3
Companies should clearly distinguish the structure of
nonexecutive directors' remuneration from that of executive
directors and senior executives
Yes
2.9, Remuneration Report
8.4
Companies should provide the information indicated in the guide
to reporting on Principle 8.
Yes
3.1
33
INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2014
Sale of goods
Engineering services income
Royalty and licence income
Other revenue
Total Revenue
Other income
Materials and consumables
Employee benefits expense
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
Share of profit from associate
Consolidated
2014
$'000
14,136
2,898
1,124
179
18,337
2013
$'000
23,424
2,057
1,007
211
26,699
4,402
3,889
(7,283)
(9,642)
(908)
(985)
(1,839)
(278)
(408)
(260)
(694)
(948)
(536)
(1,017)
3,256
(10,428)
(11,210)
(959)
(688)
(1,814)
(407)
(621)
(308)
(690)
(516)
(687)
(3,386)
3,220
Note
6
7
8(d)
8(a)
8(b)
8(c)
15
Profit before income tax
1,197
2,094
Income tax benefit/(expense)
9(a)
479
(1,730)
Profit for the year attributable to owners of the parent
1,676
364
Earnings per share
Basic earnings per share (in cents)
Diluted earnings per share (in cents)
10
10
3.39
3.39
0.74
0.74
The income statement is to be read in conjunction with the notes to the financial statements set out on pages 38 to 87.
34
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2014
Net profit for the year
Items that may be reclassified subsequently to profit or loss
Share of foreign currency reserve of equity accounted investment
Foreign currency translation reserve released on sale of share in equity
accounted investment
Foreign currency translation
Other comprehensive (loss)/ income for the period, net of tax
Total comprehensive income for the year
Total comprehensive income for the period attributable to owners
of the parent
Consolidated
2014
$'000
1,676
80
-
(340)
(260)
1,416
1,416
2013
$'000
364
35
(18)
1,505
1,522
1,886
1,886
The statement of comprehensive income is to be read in conjunction with the notes to the financial statements set out
on pages 38 to 87.
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2014
Share
Capital
Retained
Profits
$'000
$'000
Employee
Equity
Benefits
Reserve
$'000
Foreign
Currency
Translation
Reserve
$'000
Total
$'000
At 1 July 2012
Profit for period
Other comprehensive income
Total comprehensive income/(loss) for the
period
Share based payments
Balance at 30 June 2013
At 1 July 2013
Profit for period
Other comprehensive loss
Total comprehensive income/(loss) for the
period
19,436
-
-
-
82
19,518
19,518
-
-
-
2
364
-
364
-
366
366
1,676
-
1,676
1,547
(3,554)
17,431
-
-
-
-
1,522
1,522
364
1,522
1,886
98
-
180
1,645
(2,032)
19,497
1,645
(2,032)
19,497
-
-
-
-
(260)
1,676
(260)
(260)
1,416
Share based payments
72
-
60
-
132
Balance at 30 June 2014
19,590
2,042
1,705
(2,292)
21,045
The statement of changes in equity is to be read in conjunction with the notes to the financial statements set out on
pages 38 to 87.
35
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2014
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 taxation asset
Plant and equipment
Intangibles and goodwill
Total non-current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
Trade payables and other liabilities
Borrowings
Contingent consideration
Employee benefits
Deferred revenue
Government grants
Other provisions
Total current liabilities
Non-current liabilities
Borrowings
Long term borrowings
Employee benefits
Government grants
Other provisions
Total non-current liabilities
TOTAL LIABILITIES
NET ASSETS
EQUITY
Share capital
Reserves
Retained profits
TOTAL EQUITY
Note
11
12
13
14
15
16
17
18
19
12
12
21
22
23
24
12
12
21
23
24
25
26
26
Consolidated
2014
$'000
5,416
1,341
5,755
3,328
2013
$'000
6,902
705
4,713
3,158
15,840
15,478
13,980
5,001
2,845
-
21,826
37,666
3,696
521
638
1,938
316
225
192
7,526
19
7,792
32
974
278
9,095
16,621
21,045
19,590
(587)
2,042
12,468
4,656
3,383
146
20,653
36,131
2,801
432
886
1,837
316
225
795
7,292
42
7,757
55
1,199
289
9,342
16,634
19,497
19,518
(387)
366
21,045
19,497
The statement of financial position is to be read in conjunction with the notes to the financial statements set out on
pages 38 to 87.
36
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2014
Cash Flows from Operating Activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash used by operations
Interest received
Interest paid
Income taxes paid
Consolidated
Note
2014
$'000
2013
$'000
20,825
(22,826)
(2,001)
179
(51)
(42)
29,524
(30,920)
(1,396)
211
(206)
(326)
Net cash used in operating activities
31
(1,915)
(1,717)
Cash Flows from Investing Activities
Dividends received from associate
Proceeds from sale of share in investment in associate
Net Proceeds from sale of plant and equipment
Acquisition of plant and equipment
Investment in short term deposit
Redemption of short term deposit
1,634
-
64
(377)
(460)
-
1,485
5,777
9
(253)
-
666
Net cash from investing activities
861
7,684
Cash Flows from Financing Activities
Repayment of borrowings
Net cash used in financing activities
(433)
(433)
(2,864)
(2,864)
Net increase /(decrease) in cash and cash equivalents
(1,487)
3,103
Cash and cash equivalents at 1 July
6,902
3,799
Cash and cash equivalents at 30 June
11
5,416
6,902
Non-Cash Investing and Financing Activities
There were no non-cash investing or financing activities for the years ended 30 June 2013 and 2014.
Refer to note 5 for details of non-cash operating items.
The statement of cash flows is to be read in conjunction with the notes to the financial statements set out on pages 38
to 87.
37
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
Page
Page
Reporting Entity
Basis of Preparation
Statement of Compliance with IFRS
Basis of Preparation
Functional and Presentation Currency
Use of Estimates and Judgments
1.
2.
3.
(a)
(b)
(c)
(d)
(a)
Significant accounting policies
New accounting standards and
interpretations
Basis of consolidation
Foreign currency
Financial instruments
Inventories
Plant and equipment
Intangibles and goodwill
Impairment
Share capital
Employee benefits
Provisions - Warranties
Revenue recognition
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m) Operating leases
Finance expense
(n)
Income tax
(o)
Operating segments
(p)
Goods and services tax
(q)
Earnings per share
(r)
(s)
(t)
(u)
(v)
Government grants
Business combinations
New standards and interpretations not
yet adopted
Comparatives
Significant accounting judgments,
estimates and assumptions
Operating segments
Other revenue
Other income
Expenses
Income Tax
Earnings per share
Cash and cash equivalents
Financial assets and financial liabilities,
financial risk management objectives
and policies
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Trade and other receivables
14.
Inventories
15.
Investment in associate
16.
Deferred tax assets and liabilities
17.
Plant and equipment
18.
Intangibles and goodwill
19.
Trade payables and other liabilities
20.
Financing arrangements
21.
Employee benefits
22.
Deferred revenue
23.
Government grants
24. Other provisions
25.
Share capital
26.
Retained profits and reserves
27.
Consolidated entity
28.
Information relating to Orbital Corporation
Limited
29.
Related party disclosures
30.
Key management personnel
31.
Notes to the statement of cash flows
32.
Share based payment plans
68
69
70
72
73
74
74
75
75
75
76
77
77
78
79
79
80
82
83
33.
Defined contribution superannuation plans
85
34.
Commitments
35.
Contingencies
86
86
36.
Events subsequent to balance sheet date
87
37.
Remuneration of auditors
87
39
39
39
39
39
39
39
39
40
42
42
43
44
44
45
46
46
46
47
47
47
47
48
48
48
49
49
49
53
54
56
59
59
59
60
60
61
61
67
38
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
1.
REPORTING ENTITY
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 2014 comprises the Company and its subsidiaries (together referred to as
the "Group"). Orbital Corporation Limited is a for-profit entity and the Group operates in a number of industries
(see the Directors’ Report and Note 5).
The consolidated financial report was authorised for issue by the directors on 27 August 2014.
2.
BASIS OF PREPARATION
(a)
Statement of Compliance with IFRS
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 Preparation
The financial report is a general purpose financial report, which has been prepared in accordance with the
requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative
pronouncements of the Australian Accounting Standards Board.
The consolidated financial statements have also been prepared on the historical cost basis, except for derivative
asset and contingent consideration which is measured at fair value.
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
dollars unless otherwise stated.
(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 entities within the Group.
(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 4.
3.
SIGNIFICANT ACCOUNTING POLICIES
(a)
New Accounting Standards and Interpretations
The accounting policies adopted are consistent with those of the previous financial year. From 1 July 2013, the
Group has adopted all the standards and interpretations mandatory for annual periods beginning on or after 1
July 2013 as described in the table below. The Group has not elected to early adopt any new standards or
amendments.
39
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(a)
New Accounting Standards and Interpretations (continued)
Reference
Title
Summary
AASB 10
(IFRS 10)
Consolidated
Financial
Statements
AASB 10 establishes a new control model that applies to all entities. It replaces
parts of AASB 127 Consolidated and Separate Financial Statements dealing
with the accounting for consolidated financial statements and UIG-112
Consolidation - Special Purpose Entities.
AASB 12
(IFRS 12)
Disclosure of
Interests in
Other Entities
AASB 13
(IFRS 13)
Fair Value
Measurement
AASB 119
(IAS 19)
Employee
Benefits
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.
Consequential amendments were also made to this and other standards via
AASB 2011-7 and AASB 2012-10.
There is no impact to The Group.
AASB 12 includes all disclosures relating to an entity's interests in subsidiaries,
joint arrangements, associates and structured entities. New disclosures have
been introduced about the judgments made by management to determine
whether control exists, and to require summarised information about joint
arrangements, associates, structured entities and subsidiaries with non-
controlling interests.
Additional disclosures were made in Note 15.
AASB 13 establishes a single source of guidance for determining the fair value
of assets and liabilities. AASB 13 does not change when an entity is required to
use fair value, but rather, provides guidance on how to determine fair value
when fair value is required or permitted. Application of this definition may
result in different fair values being determined for the relevant assets.
AASB 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.
Consequential amendments were also made to other standards via AASB 2011-
8.
Additional disclosures were made in Note 12.
The main change introduced by this standard is to revise the accounting for
defined benefit plans. The amendment removes the options for accounting for
the liability, and requires that the liabilities arising from such plans is
recognised in full with actuarial gains and losses being recognised in other
comprehensive income. It also revised the method of calculating the return on
plan assets.
The revised standard changes the definition of short-term employee benefits.
The distinction between short-term and other long-term employee benefits is
now based on whether the benefits are expected to be settled wholly within 12
months after the reporting date.
Consequential amendments were also made to other standards via AASB 2011-
10.
There is no material impact to The Group.
(b)
Basis of Consolidation
(i) Subsidiaries
Subsidiaries are all those entities over which the Group has control.
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.
40
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b)
Basis of Consolidation (continued)
(i) Subsidiaries (continued)
Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the investee. Specifically, the
Consolidated Entity controls an investee if and only if the Group has:
Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of
the investee)
Exposure, or rights, to variable returns from its involvement with the investee, and
The ability to use its power over the investee to affect its returns
When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all
relevant facts and circumstances in assessing whether it has power over an investee, including:
The contractual arrangement with the other vote holders of the investee
Rights arising from other contractual arrangements
The Group’s voting rights and potential voting rights
The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are
changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group
obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities,
income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of
comprehensive income from the date the Group gains control until the date the Group ceases to control the
subsidiary.
Profit or loss and each component of other comprehensive income are attributed to the equity holders of the
parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests
having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to
bring their accounting policies into line with the Group’s accounting policies. All intra- Group assets and liabilities,
equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated
in full on consolidation.
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.
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.
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.
(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 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.
41
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b)
Basis of Consolidation (continued)
(ii)
Associate (continued)
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.
(c)
Foreign Currency
(i)
Foreign currency transactions
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, applying the step by step
method, 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’. They are released into the income statement upon disposal.
(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.
(d)
Financial Instruments
(i)
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 11
Cash and cash equivalents comprise cash balances, at call deposits and bank-endorsed bills of exchange at
discounted value.
42
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d)
Financial Instruments (continued)
(i)
Non-derivative financial instruments (continued)
Other financial assets - refer note 12
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 13
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 19
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.
Borrowings - refer note 12
Included in current liabilities is an amount for obligations under hire purchase contracts. The hire purchase
contracts are capitalised at commencement of the contract at the present value of the minimum hire purchase
payments. Hire purchase payments are apportioned between finance charges and reduction of the hire purchase
liability. Finance charges are recognised in finance costs in the income statement.
Long term borrowings - refer note 12
Included in non-current liabilities is an amount owing to the Government of Western Australia resulting from a
loan of $14,346,000 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 on initial recognition is accounted for as a government grant as disclosed in note
12(b).
Contingent consideration - refer note 12
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 mitigate 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.
(e)
Inventories – refer note 14
Inventories are carried at the lower of cost and net realisable value. Inventory is valued at weighted average
cost and includes expenditure incurred in acquiring the inventories and bringing them to their present location
and condition, which for finished goods and work in progress includes cost of direct materials and direct
manufacturing labour.
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of
completion and selling expenses.
43
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f)
Plant and Equipment – refer note 17
(i)
Recognition and measurement
Items of 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 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 plant and equipment are recognised in profit or loss as
incurred.
(iii) Depreciation and Amortisation
Items of plant and equipment 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: 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)
Intangibles and goodwill – refer note 18
(i)
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
Patents, licences and technology development and maintenance costs, not qualifying for capitalisation, are
expensed as incurred.
(iii) Goodwill
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.
44
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g)
Intangibles and goodwill (continued) – refer note 18
(iii) Goodwill (continued)
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)
Impairment
(i)
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.
(ii) 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.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-
generating units), to which the goodwill relates.
45
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i)
Share Capital – refer note 25
i)
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)
Employee Benefits
(i)
Short-term benefits - refer note 21
The provisions for employee entitlements expected 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 employee benefits 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 21
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 33
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 32
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 based on a Total Shareholder Return (“TSR”) basis is measured using a Monte-Carlo simulation model.
The fair value of the shares granted based on an Earnings Per Share (“EPS”) basis are based on the market price
of the shares on the date of issue. 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 – refer note 24
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.
46
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l)
Revenue Recognition
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 Orbital 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)
Operating Leases
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.
Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of
funds.
(o)
Income Tax – refer note 9
(i)
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.
47
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(o)
Income Tax (continued) – refer note 9
(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 5
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.
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 10
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.
48
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(s)
Government Grants – refer note 23
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.
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
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 2014, but
have not been applied in preparing this financial report:
49
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
Application
date of
standard *
1 January 2018 1 July 2018
Application
date for
Group*
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(u)
New standards and interpretations not yet effective (continued)
Reference
Title
Summary
AASB 9
(IFRS 9)
Financial
Instruments
On 24 July 2014 The IASB issued the final
version of IFRS 9 which replaces IAS 39 and
includes a logical model for classification and
measurement, a single, forward-looking
‘expected loss’ impairment model and a
substantially-reformed approach to hedge
accounting.
IFRS 9 is effective for annual periods
beginning on or after 1 January 2018.
However, the Standard is available for early
application. The own credit changes can be
early applied in isolation without otherwise
changing the accounting for financial
instruments.
The final version of IFRS 9 introduces a new
expected-loss impairment model that will
require more timely recognition of expected
credit losses. Specifically, the new Standard
requires entities to account for expected
credit losses from when financial instruments
are first recognised and to recognise full
lifetime expected losses on a more timely
basis.
The AASB is yet to issue the final version of
AASB 9. A revised version of AASB 9 (AASB
2013-9) was issued in December 2013 which
included the new hedge accounting
requirements, including changes to hedge
effectiveness testing, treatment of hedging
costs, risk components that can be hedged
and disclosures.
AASB 9 includes requirements for a simplified
approach for classification and measurement
of financial assets compared with the
requirements of AASB 139.
The main changes are described below.
a. Financial assets that are debt
instruments will be 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.
b. 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.
50
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(u)
New standards and interpretations not yet effective (continued)
Reference
Title
Summary
AASB 9
(IFRS 9)
Financial
Instruments
AASB
2012-3
Amendments to
Australian
Accounting
Standards -
Offsetting Financial
Assets and
Financial Liabilities
Interpreta-
tion 21
Levies
AASB
2013-3
Amendments to
AASB 136 –
Recoverable
Amount Disclosures
for Non-Financial
Assets
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.
d. Where the fair value option is used for
financial liabilities the change in fair
value is to be 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
AASB 9 also removes the volatility in
profit or loss that was caused by changes
in the credit risk of liabilities elected to
be measured at fair value. This change in
accounting means that gains caused by
the deterioration of an entity’s own credit
risk on such liabilities are no longer
recognised in profit or loss.
Consequential amendments were also
made to other standards as a result of
AASB 9, introduced by AASB 2009-11 and
superseded by AASB 2010-7, AASB 2010-
10 and AASB 2014-1 – Part E.
AASB 2012-3 adds application guidance to
AASB 132 Financial Instruments:
Presentation to address inconsistencies
identified in applying some of the offsetting
criteria of AASB 132, including clarifying
the meaning of "currently has a legally
enforceable right of set-off" and that some
gross settlement systems may be
considered equivalent to net settlement.
This Interpretation confirms that a liability
to pay a levy is only recognised when the
activity that triggers the payment occurs.
Applying the going concern assumption
does not create a constructive obligation.
AASB 2013-3 amends the disclosure
requirements in AASB 136 Impairment of
Assets (IAS 36). The amendments include
the requirement to disclose additional
information about the fair value
measurement when the recoverable
amount of impaired assets is based on fair
value less costs of disposal.
51
Application
date of
standard *
1 January
2018
Application
date for
Group*
1 July 2018
1 January
2014
1 July 2014
1 January
2014
1 July 2014
1 January
2014
1 July 2014
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
Application
date of
standard *
1 July 2014
Application
date for Group*
1 July 2014
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(u)
New standards and interpretations not yet effective (continued)
Reference
Title
Summary
AASB 2014-
1
Part A -
Annual
Improveme
nts
2010–2012
Cycle
Amendments to
Australian
Accounting
Standards -
Part A
Annual
Improvements
to IFRSs 2010–
2012 Cycle
AASB 2014-1 Part A: This standard sets out
amendments to Australian Accounting
Standards arising from the issuance by the
International Accounting Standards Board
(IASB) of International Financial Reporting
Standards (IFRSs) Annual Improvements to
IFRSs 2010–2012 Cycle and Annual
Improvements to IFRSs 2011–2013 Cycle.
Annual Improvements to IFRSs 2010–2012
Cycle addresses the following items:
► AASB 2 - Clarifies the definition of 'vesting
conditions' and 'market condition' and
introduces the definition of 'performance
condition' and 'service condition'.
► AASB 3 - Clarifies the classification
requirements for contingent consideration
in a business combination by removing all
references to AASB 137.
► AASB 8 - Requires entities to disclose
factors used to identify the entity's
reportable segments when operating
segments have been aggregated. An entity
is also required to provide a reconciliation
of total reportable segments' asset to the
entity's total assets.
► AASB 116 & AASB 138 - Clarifies that the
determination of accumulated depreciation
does not depend on the selection of the
valuation technique and that it is calculated
as the difference between the gross and
net carrying amounts.
► AASB 124 - Defines a management entity
providing KMP services as a related party
of the reporting entity. The amendments
added an exemption from the detailed
disclosure requirements in paragraph 17 of
AASB 124 for KMP services provided by a
management entity. Payments made to a
management entity in respect of KMP
services should be separately disclosed.
AASB 2014-
1
Part A -
Annual
Improveme
nts
2011–2013
Cycle
Amendments to
Australian
Accounting
Standards -
Part A
Annual
Improvements
to IFRSs 2011–
2013 Cycle
Annual Improvements to IFRSs 2011–2013
Cycle addresses the following items:
► AASB13 - Clarifies that the portfolio
exception in paragraph 52 of AASB 13
applies to all contracts within the scope of
AASB 139 or AASB 9, regardless of
whether they meet the definitions of
financial assets or financial liabilities as
defined in AASB 132.
1 July 2014
1 July 2014
► AASB40 - Clarifies that judgment is needed
to determine whether an acquisition of
investment property is solely the
acquisition of an investment property or
whether it is the acquisition of a group of
assets or a business combination in the
scope of AASB 3 that includes an
investment property. That judgment is
based on guidance in AASB 3.
52
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
Application
date of
standard *
1 January 2016 1 July 2016
Application
date for
Group*
1 January 2017 1 July 2017
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(u)
New standards and interpretations not yet effective (continued)
Reference
Title
Summary
Amendments
to IAS 16
and
IAS 38 **
Clarification of
Acceptable
Methods of
Depreciation
and
Amortisation
(Amendments
to
IAS 16 and
IAS 38)
IFRS 15 **
Revenue from
Contracts with
Customers
IAS 16 and IAS 38 both establish the
principle for the basis of depreciation and
amortisation as being the expected pattern of
consumption of the future economic benefits
of an asset.
The IASB has clarified that the use of
revenue-based methods to calculate the
depreciation of an asset is not appropriate
because revenue generated by an activity
that includes the use of an asset generally
reflects factors other than the consumption of
the economic benefits embodied in the asset.
The IASB also clarified that revenue is
generally presumed to be an inappropriate
basis for measuring the consumption of the
economic benefits embodied in an intangible
asset. This presumption, however, can be
rebutted in certain limited circumstances.
In May 2014, the IASB issued IFRS 15
Revenue from Contracts with Customers,
which replaces IAS 11 Construction
Contracts,
IAS 18 Revenue and related Interpretations
(IFRIC 13 Customer Loyalty Programmes,
IFRIC 15 Agreements for the Construction of
Real Estate, IFRIC 18 Transfers of Assets
from Customers and SIC-31 Revenue—
Barter Transactions Involving Advertising
Services).
The core principle of IFRS 15 is that an entity
recognises revenue to depict the transfer of
promised goods or services to customers in
an amount that reflects the consideration to
which the entity expects to be entitled in
exchange for those goods or services. An
entity recognises revenue in accordance with
that core principle by applying the following
steps:
(a) Step 1: Identify the contract(s) with a
customer
(b) Step 2: Identify the performance
obligations in the contract
(c) Step 3: Determine the transaction price
(d) Step 4: Allocate the transaction price to
the performance obligations in the
contract
(e) Step 5: Recognise revenue when (or as)
the entity satisfies a performance
obligation
Early application of this standard is permitted.
*
**
Designates the beginning of the applicable annual reporting period unless otherwise stated.
These IFRS amendments have not yet been adopted by the AASB.
The adoption of the standards and interpretations effective from 1 July 2014 will have no impact on the financial
position or performance of the Group.
The Directors have not yet determined the impact of new and amended accounting standards and interpretations
applicable from 1 July 2015.
(v)
Comparatives
Certain comparatives have been reclassified to conform with current year presentation.
53
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
4.
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the financial statements requires management to make judgments, estimates and
assumptions that affect the reported amounts in the financial statements. Management continually evaluates its
judgments and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses.
Management bases its judgments 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 judgments, 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
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.
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 Put and Call options were issued over the remaining 45% non-controlling interest.
Management has determined that 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 option (Contingent
consideration liability).
(b)
Significant accounting estimates and assumptions
Taxation
Judgment is required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised
on the Statement of Financial Position. 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. Judgments are also required
about the application of income tax legislation. These judgments 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 Statement of Financial Position
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 TSR related Executive Long Term
Share Plan rights is determined by an external valuer using a monte-carlo simulation model, with the
assumptions detailed in note 32. The fair value of the performance rights is determined by an external valuer
using a monte-carlo simulation model, with assumptions detailed in note 32. 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.
54
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
4.
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED)
(b)
Significant accounting estimates and assumptions (continued)
Impairment of non-financial assets
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. The cash flows are derived from
budgets approved by management and do not include restructuring activities that the Group is not yet
committed to or significant future investments that will enhance the asset’s performance of the cash generating
unit being tested. The recoverable amount is most sensitive to gross sales and gross margins used in the value
in use models. The key assumptions used to determine the recoverable amount for the different CGUs are,
disclosed and further explained in Note 17 and Note 18.
As a result of these assessments, the Company has impaired the goodwill previously recognised on the
acquisitions of Orbital Autogas Systems and Sprint Gas in 2013. Refer to note 18 for more information.
Impairment of goodwill, intangibles with indefinite useful lives and plant and equipment
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. Refer to Note 18 for further information.
Plant and equipment are tested whenever events or changes in circumstances indicate that the carrying value
exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and
value in use. Refer to Note 17 for further information.
Product warranty
In determining the level of provision required for product warranties the Group has made judgments 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 24.
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.
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 judgments in respect of the
expected earnings before interest, depreciation and amortisation expected to be generated by the business
during the calculation period.
Other Provisions
The other provisions account includes a provision for restoration obligations relating to SUAS engines sold in the
previous year. In determining the level of provision required for restoration obligations the Group has made
judgments in respect of the expected expenditures required to fulfill the obligation.
55
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
5.
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
System sales (sale of goods)
The system sales businesses provide LPG fuel systems to an Australian automobile manufacturer, LPG retrofit
installers and also operate spare parts businesses for LPG fuel systems. The segment also includes the supply of
Small Unmanned Aerial System (SUAS) engines, component parts and engine management systems since August
2012.
Consulting services (consultancy)
The consulting 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.
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, auto rickshaws 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 system sales segment is managed on an Australian basis for the LPG business and on an American basis for
the SUAS supply. The consulting services and royalties and licences segments are managed on a worldwide
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 sale of SUAS engines, LPG fuel systems, the provision of consulting
services and the sale of intellectual property rights to Orbital’s OCP technology. The consolidated entity operates
predominantly in the aviation, automotive, marine, motorcycle and unmanned aircraft system engine markets.
Major customers
The Group has a number of customers to which it provides both products and services. The SUAS supply is to
two major customers that respectively accounted for 10% and 6% (2013: one major customer 45%) of external
revenue. The system sales segment supplies an Australian automobile manufacturer with LPG fuel systems that
accounted for 24% of external revenue (2013: 18%). No other customer accounts for more than 10% of
revenue.
56
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
5.
OPERATING SEGMENTS (CONTINUED)
(a)
Operating Segments
System Sales
Consulting
Services
Royalties and
Licences (i)
Consolidated
2014
$'000
2013
$'000
2014
$'000
2013
$'000
2014
$'000
2013
$'000
2014
$'000
2013
$'000
Segment revenue - external
customers
Unallocated other revenue
Total revenue
14,136
23,424
2,898
2,057
1,124
1,007
18,158
26,488
179
211
18,337
26,699
Segment result
602
2,163
(176)
(2,206)
636
517
1,062
474
Research & development costs
Unallocated expenses - (net) (ii)
Gain on sale of plant and equipment
Finance costs
Share of profit from associate
Gain on sale of share in associate
Net profit before related income tax
Income tax benefit/(expense)
Profit after tax attributable to members
(1,910)
(1,094)
(585)
(1,524)
(90)
(536)
3,256
-
3
(687)
3,220
1,702
1,197
2,094
479
(1,730)
1,676
364
System Sales
Consulting
Services
Royalties and
Licences (i)
Consolidated
2014
$'000
2013
$'000
2014
$'000
2013
$'000
2014
$'000
2013
$'000
2014
$'000
2013
$'000
Non-cash (revenue) and expenses
Depreciation and amortisation
Equity settled employee
compensation
Other non-cash
(income)/expenses
474
25
498
29
434
50
461
60
(887)
1,064
(225)
(225)
Segment non-cash expenses
(388)
1,591
259
296
-
-
-
-
-
1
-
1
Equity settled employee compensation
Amortisation of non-interest bearing loans
Share of profit from associate
Movement in provision for surplus lease space
Foreign exchange translation gain
Movement in fair value of financial instruments
Total non-cash (revenue) and expenses
908
75
959
90
(1,112)
839
(129)
1,888
57
533
90
521
(3,256)
(3,220)
(135)
47
(72)
(122)
(136)
-
(3,138)
(890)
(i) Royalties and licences costs include direct patent costs.
(ii) Unallocated expenses (net) include corporate management, finance and administration overhead expenses net of unallocated
other income.
57
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
5.
OPERATING SEGMENTS (CONTINUED)
(a)
Operating Segments
System Sales
Consulting
Services
Royalties and
Licences
Consolidated
2014
$'000
2013
$'000
2014
$'000
2013
$'000
2014
$'000
2013
$'000
2014
$'000
2013
$'000
8,345
7,650
3,289
3,442
294
308
11,928
11,400
5,416
6,902
1,341
705
13,980
12,468
5,001
4,656
37,666
36,131
Segment assets
Unallocated assets
Cash
Other financial assets
Investment in associate
Deferred tax assets
Consolidated Total Assets
Segment liabilities
3,199
3,120
5,029
4,270
103
1,072
8,331
8,462
Unallocated liabilities
Long term borrowings
Consolidated Total Liabilities
Consolidated Net Assets
8,290
8,172
16,621
16,634
21,045
19,497
Segment acquisitions of non-
current assets
150
40
227
213
-
-
377
253
(b)
Geographic information
Americas
Europe
Asia
Australia
Consolidated
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000
Revenue – external
customers
3,935
14,008
170
68
1,159
276 12,894 12,136 18,158 26,488
Non-current assets 18,891 17,124
-
-
-
-
2,845
3,529 21,826 20,653
58
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
6.
OTHER REVENUE
Interest revenue
7.
OTHER INCOME
Automotive grant income (a)
Net foreign exchange gains
Grant income
Fair value movement in contingent consideration (note 12)
Fair value movement in financial instruments (note 12)
Movement in impairment allowance account for receivables
Movement in provision for constructive obligations
Rental income from sub-lease
Research and development grant (b)
Other
Gain on sale of plant and equipment
Gain on sale of share in equity accounted investment
CONSOLIDATED
2014
$'000
2013
$'000
179
211
182
290
891
248
136
130
148
108
2,224
45
-
-
4,402
323
122
329
1,410
-
-
-
-
-
-
3
1,702
3,889
(a) The Group received Automotive Transformation Scheme (ATS) credits from the Federal Government for
qualifying research and development activities and accounts for these as government grants.
(b) In accordance with research and development tax legislation the Group is entitled to a refundable research
and development tax offset accounted for as a government grant.
8.
EXPENSES
(a)
Employee benefits expense
Salaries and wages
Contributions to defined contributions superannuation funds
Share based payments
(Decrease) in liability for annual leave
(Decrease)/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
Freight & courier
Motor vehicle expenses
Allowance for warranty
Loss on disposal of plant and equipment
Other
Goodwill impairment
Impairment of receivables
59
8,088
825
132
(3)
92
-
508
9,642
3
533
536
288
358
21
68
63
18
90
111
-
-
1,017
9,169
815
180
(38)
(53)
563
574
11,210
166
521
687
324
262
30
90
69
387
-
84
1,965
175
3,386
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
8.
EXPENSES (CONTINUED)
(d) Materials and consumables
Raw materials and consumables purchased
Write back inventory impairment
Change in inventories
CONSOLIDATED
2014
$'000
2013
$'000
7,351
(336)
268
7,283
8,603
(214)
2,039
10,428
(e)
Lease payments included in income statement
Minimum lease payments – operating lease
1,109
1,066
(f)
Research and development costs
Research and development costs charged directly to the income
statement
1,910
1,094
9.
INCOME TAX
(a)
Recognised in the income statement
Current income tax
Current year expense
Benefits arising from previously unrecognised tax losses
Relating to originating and reversing temporary differences
Total income tax benefit/(expense) in income statement
(2,048)
2,098
429
479
(b)
Numerical reconciliation between tax benefit and pre-tax net profit/(loss)
Profit before tax
Income tax using the statutory tax rates
- Difference in tax rate
- Non-deductible expenditure
- Non assessable income
- Current year deferred tax assets not recognised
- Previous year deferred tax assets derecognised
- Benefits arising from previously unrecognised tax losses
- Net withholding tax recouped/(paid)
- United States of America Federal and State taxes
Income tax benefit/(expense) on pre-tax net profit
(c)
Tax consolidation
1,197
(359)
(130)
(1,816)
667
(31)
-
2,098
12
38
479
(680)
590
(1,640)
(1,730)
2,094
(628)
(196)
(331)
-
(593)
(328)
590
(22)
(222)
(1,730)
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 recognized in the financial statements in respect of this agreement on the basis that the possibility of
default is remote.
10.
EARNINGS PER SHARE
Basic earnings per share
The calculation of basic earnings per share at 30 June 2014 was based on profit attributable to ordinary
shareholders of $1,676,000 (2013: profit $364,000) and a weighted average number of ordinary shares
outstanding during the financial year ended 30 June 2014 of 49,502,395 shares (2013: 49,079,683 shares),
calculated as follows:
60
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
10.
EARNINGS PER SHARE (CONTINUED)
CONSOLIDATED
Profit attributable to ordinary shareholders
2014
$
1,676,000
Weighted average number of ordinary shares
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
Number
49,502,395
-
2013
$
364,000
Number
49,079,683
-
49,502,395
49,079,683
Cents
Cents
3.39
3.39
0.74
0.74
Earnings per share
Basic earnings per share
Diluted earnings per share
Rights granted to employees (including Key Management Personnel) as described in note 32 are considered to
be contingently issuable potential ordinary shares. These potential ordinary shares have not been included in
the determination of basic earnings per share. The 5,220,500 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 events.
CONSOLIDATED
11.
CASH AND CASH EQUIVALENTS
Cash at bank
Cash at bank – US dollars
Cash at bank – European currency units
At call deposits – financial institutions*
2014
$'000
575
8
2
4,831
5,416
* The deposits are at call with an Australian Bank, earning an interest rate of 2.68%
12.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES
(a)
Other financial assets
Financial instruments at fair value through profit or loss
Derivatives not designated as hedges
Foreign exchange forward contracts
Short term deposits
Short term deposits
Total other financial assets
136
1,205
1,341
2013
$'000
760
13
4
6,125
6,902
-
705
705
Financial assets at fair value through profit and loss
Financial assets through profit or loss reflect the positive change in fair value of those foreign exchange
forward contracts that are not designated in hedge relationships, but are intended to reduce the level of
foreign currency risk for expected sales.
Short term deposits – financial institutions
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.
Short term deposits are held as collateral for the financial arrangements provided by Westpac Banking
Corporation, refer note 20 for further details.
61
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
12.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED)
(b)
Financial liabilities
Financial liabilities and borrowings
Current
Obligations under hire purchase contracts
Current portion of loans and advances - secured
Total current borrowings
Non-current
Obligations under hire purchase contracts
Loans and advances - secured
Total non-current borrowings
CONSOLIDATED
2014
$'000
2013
$'000
23
498
521
19
7,792
7,811
17
415
432
42
7,757
7,799
Obligations under hire purchase contracts
Obligations under hire purchase contracts mature in 2015.
Interest calculations on hire purchase contracts are based on fixed interest rates applicable at the date of
drawdown and payable monthly. The average interest rate on hire purchase contracts at reporting date is
7.35% (2013: 7.35%).
Loans and advances - secured
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 utilising a market interest rate of 6.52% was $7,558,000 on initial
recognition.
Subsequent to initial recognition the loan is carried at amortised cost. Amortisation for the year ended 30 June
2014 was $533,000 (2013: $521,000).
This loan facility is secured by way of a second ranking floating debenture over the whole of the assets and
undertakings of the Company.
Other financial liabilities
Financial instruments at fair value through profit or loss
Contingent consideration for business acquisition
Total financial liabilities at fair value through profit or loss
Total current other financial liabilities
638
638
638
886
886
886
62
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
12.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED)
(b)
Financial liabilities (continued)
Other financial liabilities (continued)
Contingent Consideration for business acquisition
On 27 May 2011, Orbital Autogas Systems Pty Ltd acquired 55% of the voting shares of Sprint Gas (Aust) Pty
Ltd, a 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 obligation under the Put and Call options that gives rise to the contingent consideration liability
was initially recognised at fair value and subsequently carried at fair value through the profit and loss.
A gain of $248,000 (2013: $1,410,000) was 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 is discounted at the present value using a
market discount rate.
(c)
Hedging activities and derivatives
The Group uses foreign exchange forward contracts to manage some of its transaction exposures. The foreign
exchange contracts are not designated as cash flow hedges and are entered into for periods consistent with
foreign currency exposure of the underlying transactions.
At 30 June 2014 the contractual undiscounted payments related to foreign exchange forward contracts totaled
$2,330,000 (2013: $nil) maturing between 3 to 12 months. The Group has pledged $500,000 of its short-term
deposits in order to fulfill the collateral requirements for the foreign exchange forward contracts in place.
(d)
Fair values
Comparison of fair values to carrying amounts by class of financial instrument, other than those where their
carrying amounts approximate fair value:
Financial Assets
Foreign exchange forward contracts
Total
Financial Liabilities
Loans and advances - secured
Contingent Consideration
Total
Carrying Amounts
Fair Value
2014
$’000
2013
$’000
2014
$’000
2013
$’000
136
136
-
-
136
136
-
-
8,290
638
8,928
8,172
886
9,058
8,498
638
9,136
8,127
886
9,013
The Group assessed that cash and short-term deposits, trade receivables, trade payables and other current
liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.
The following methods and assumptions were used to estimate the fair values:
Foreign exchange forward contracts are valued using a discounted cash flow valuation technique with market
observable inputs such as foreign exchange forward rates and interest rates.
The fair value of the Group’s secured loan is calculated by discounting the expected future cash flows at the
prevailing market interest rate at reporting date 2014: 6.31% (2013: 6.77%).
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 is discounted at the present value using a market discount rate of 6.31% (2013: 6.77%).
63
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
12.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED)
(e)
Fair value measurement
The following table provide the fair value measurement hierarchy of the Group’s assets and liabilities:
As at 30 June 2014:
Assets measured at fair value:
Foreign exchange forward contracts – US dollar
Liabilities measured at fair value:
Contingent consideration
Liabilities for which fair values are disclosed:
Loans and advances - secured
As at 30 June 2013:
Assets measured at fair value:
Foreign exchange forward contracts – US dollar
Liabilities measured at fair value:
Contingent consideration
Liabilities for which fair values are disclosed:
Loans and advances - secured
Fair value measurement using
Quoted
prices in
active
markets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$’000
$’000
$’000
-
-
-
136
-
-
638
8,498
-
Fair value measurement using
Quoted
prices in
active
markets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$’000
$’000
$’000
-
-
-
-
-
8,127
-
886
-
Total
$’000
136
638
8,498
Total
$’000
-
886
8,127
The following table shows a reconciliation of the movement in the fair value of financial instruments categorised
within Level 3 between the beginning and the end of the reporting period:
Contingent consideration
At 1 July
Released to the income statement
At 30 June
2014
$'000
886
(248)
638
2013
$'000
2,296
(1,410)
886
Significant unobservable inputs to the valuation of the contingent consideration and the sensitivity
of the input to fair value:
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 is discounted to its present value using a market discount rate. During the year management estimated
average EBITDA by reference to the actual results of the business since acquisition and the latest forecasts of
future results for the business. This reduced the fair value of the contingent consideration and resulted in a fair
value gain of $248,000, which has been reflected in the profit and loss account. If the business was to perform
20% better or 20% worse than forecast the estimated fair value of the contingent consideration would increase
by $59,000/decrease by $59,000 respectively.
64
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
12.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED)
(f)
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.
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 financial arrangements.
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
Short term deposits
Financial Liabilities
Contingent consideration
CONSOLIDATED
2014
$'000
5,416
1,205
6,621
2013
$'000
6,902
705
7,607
638
886
The following sensitivity analysis is based on the interest rate risk exposures in existence at reporting date:
At 30 June 2014, 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)
- 1% (100 basis points)
Other comprehensive income
Higher/(Lower)
2014
$’000
2013
$’000
-
-
-
-
Post tax profit/(loss)
Higher/(Lower)
2013
$’000
96
(94)
2014
$’000
78
(79)
65
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
12.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED)
(f)
Financial risk management objectives and policies (continued)
Foreign currency risk
As a result of the investment in Synerject LLC, an associate, the Group's income statement and statement of
financial position can be affected significantly by movements in the US$/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 10% (FY2013: 5%) of the Group's sales are denominated in currencies other than the functional
currency of the operating entity making the sale, whilst approximately 26% (FY2013: 18%) 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.
At 30 June 2014, 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
Foreign exchange forward contract
Financial Liabilities
Trade and other payables
CONSOLIDATED
2014
$'000
8
92
136
236
101
2013
$'000
13
403
-
416
588
At 30 June 2014, 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
CONSOLIDATED
2014
$'000
2
-
2
10
2013
$'000
4
-
4
46
The following sensitivity is based on the foreign currency risk exposures in existence at reporting date:
At 30 June 2014, 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 +5%
AUD/USD/EURO -5%
Post tax profit/(loss)
Higher/(Lower)
2014
$’000
105
(115)
2013
$’000
12
(11)
Other comprehensive income
Higher/(Lower)
2014
$’000
2013
$’000
-
-
-
-
The movements in profit in 2014 are more sensitive than in 2013 due to the foreign exchange forward
contract.
66
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
12.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED)
(f)
Financial risk management objectives and policies (continued)
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, other than the research and
development grant receivable from the Australian Government. 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 13.
Liquidity risk
The only external borrowings of the Group is the interest free Western Australian Government loan of
$14,346,000 repayable in yearly instalments from May 2010 to May 2025.
The Group has recognised a contingent consideration liability of $638,000 payable 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 2014. 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 2014. 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:
CONSOLIDATED
6 months or less
6-12 months
1-5 years
Over 5 years
13.
TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Allowance for impairment loss (a)
Accrued royalties
Other receivables
Prepayments
67
2014
$'000
3,708
1,148
3,225
8,953
17,034
2,601
(21)
2,580
211
2,564
400
5,755
2013
$'000
2,794
1,309
2,714
9,986
16,803
4,246
(180)
4,066
299
73
275
4,713
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
13.
TRADE AND OTHER RECEIVABLES (CONTINUED)
(a)
Allowance for impairment loss
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 $21,000 (2013: $180,000) has been recognised by the Group at balance
date. Movement in this allowance account has been included in the other expenses item.
CONSOLIDATED
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
2014
$'000
(180)
130
29
(21)
At 30 June, the ageing of trade receivables is as follows:
Total
0-30 days
31-60 days
61-90 days
PDNI*
+91 days
PDNI*
2014
Consolidated
2,601
1,276
176
2013
Consolidated
4,246
2,576
1,347
153
108
975
35
2013
$'000
(5)
(175)
-
(180)
+91 days
CI*
21
180
Receivables past due but not considered impaired are $1,128,000 (2013:$143,000). Management has been in
contact with each relevant debtor and is satisfied that payment will be received in full.
Included with the not considered impaired category is a balance of $1,043,000 receivable from Textron.
A settlement has been reached with Textron over a dispute related to past contracts that had resulted in
Textron withholding payment on outstanding invoices. A new payment plan has been agreed and Management
is satisfied that payments will be received accordingly.
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.
(b)
Foreign exchange and interest rate risk
Detail regarding foreign exchange and interest rate risk exposure is disclosed in note 12.
CONSOLIDATED
2014
$'000
2013
$'000
14.
INVENTORIES
Materials and production supplies – at lower of cost and net
realisable value
3,328
3,158
(a)
Inventory expense
Inventories recognised as an expense for the year ended 30 June 2014 totaled $7,283,000 (2013:
$10,428,000) for the Group (Refer to Note 8(d)).
68
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
15.
INVESTMENT IN ASSOCIATE
(a)
Interest in Synerject LLC
The Group holds a 30% (2013: 30%) share of Synerject LLC. The investment is recognised and disclosed as an
investment in an associate.
The principal activities of Synerject LLC are the marketing, sale and manufacture, including research and
development in the area of engine management systems and components in the marine, recreational, motorcycle
and utility markets. Synerject is a key supplier of engine management systems to the non-automotive market.
Original equipment products using Synerject’s engine management systems range from the high performance
motorcycle/recreational vehicles to the high volume scooter and small engine applications. Application centres in
Europe, China, Taiwan and the United States provide on-site support of customer development and production
programs.
The Group accounts for the investment in Synerject using the equity method.
The Group sold 12% of its share in Synerject effective 1 March 2013. The dividend distribution rate changed from
45% to 55% of audited profits.
Other information for Synerject is as follows:
Country of incorporation:
Financial Year end:
30 June Ownership:
USA
31 December
2014: 30%; 2013: 30%.
The following is summarised financial information for Synerject at 30 June 2014 based on its consolidated
financial statements modified for fair value adjustments on acquisition and differences in the Group’s
accounting policies:
2014
US$'000
2013
US$'000
Revenue (100%)
141,746
137,287
Profit (100%)
Other comprehensive income
Total comprehensive income
Current assets
Non-current assets
Current liabilities
Net assets
9,970
253
10,223
56,597
9,605
29,709
36,493
2014
A$'000
8,725
118
8,843
49,858
9,710
28,424
31,144
2013
A$'000
Revenue (100%)
154,323
133,665
Profit (100%)
Other comprehensive income
Total comprehensive income
Current assets
Non-current assets
Current liabilities
Net assets
10,855
275
11,130
60,082
10,196
31,538
38,740
8,190
115
8,305
53,755
10,469
30,645
33,579
Orbital’s interest in the net assets of Synerject
11,622
10,074
Share of goodwill
2,358
2,394
Share of Synerject’s net assets equity accounted
13,980
12,468
69
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
15.
INVESTMENT IN ASSOCIATE (CONTINUED)
(b) Movement in the carrying amount of the Group’s interest in Synerject
Beginning of year
Sale of interest
Share of profits after tax
Share of reserves
Dividends received
Unrealised foreign exchange movements
End of year
(c)
Results of Synerject
CONSOLIDATED
2014
$'000
2013
$'000
12,468
-
3,256
80
(1,634)
(190)
13,980
13,696
(4,086)
3,220
35
(1,485)
1,088
12,468
Share of Synerject’s net profit
3,256
3,220
(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
16.
DEFERRED TAX ASSETS AND LIABILITIES
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
283
667
-
950
288
699
78
1,065
Consolidated
Deferred Tax Assets
Tax value of loss carry-forwards
recognised
Other net temporary differences (a)
2014
$’000
5,001
2013
$’000
4,656
Deferred Tax Liabilities
2013
$’000
2014
$’000
Net
2014
$’000
2013
$’000
-
-
5,001
4,656
1,014
682
(1,014)
(682)
-
-
Net deferred tax assets
6,015
5,338
(1,014)
(682)
5,001
4,656
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 2014, the available tax carry forward losses of US$18,835,062 (2013: US$25,517,641)
expire between the years 2015 and 2024.
Movement in temporary differences during the year
Tax value of loss carry-forwards recognised
Other net temporary differences
Net tax assets
Balance
1 Jul 12
Acquired
during the
year
Consolidated
Recognised
in income
Recognised
in equity
(b)
Balance
30 June 13
$’000
5,439
328
5,767
$’000
$’000
$’000
-
-
-
(1,312)
(328)
(1,640)
529
-
529
$’000
4,656
-
4,656
70
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
16.
DEFERRED TAX ASSETS AND LIABILITIES (CONTINUED)
Movement in temporary differences during the year
Balance
1 Jul 13
Acquired
during the
year
Consolidated
Recognised
in income
Recognised
in equity
(b)
Balance
30 June 14
$’000
$’000
$’000
$’000
$’000
Tax value of loss carry-forwards recognised
Other net temporary differences
Net tax assets
4,656
-
4,656
-
-
-
429
-
429
(84)
-
(84)
5,001
-
5,001
(a)
Other net temporary differences
Deferred tax assets
Annual leave
Long service leave
Staff bonus
Revenue in advance
Other
Deferred tax liabilities
Unrealised foreign exchange gain on inter-company loan
Other
Net temporary differences
CONSOLIDATED
2014
$'000
197
338
22
393
64
1,014
(1,003)
(11)
(1,014)
-
2013
$'000
545
17
5
115
-
682
(534)
(148)
(682)
-
(b)
The amounts recognized through equity represent the foreign exchange differences arising on the
translation of the foreign subsidiary.
(c)
Unrecognised deferred tax assets
Deferred tax assets have not been recognized in respect of the following items:
Australia (net at 30%)
Tax losses
Capital loss on investment
Other net temporary differences
United States of America (net 34%)
Tax losses
Other net temporary differences
20,027
1,934
317
22,278
1,796
132
1,928
20,533
1,934
2,029
24,496
4,699
775
5,474
71
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
17.
PLANT AND EQUIPMENT
Plant and equipment
At cost
Less: accumulated depreciation
CONSOLIDATED
2014
$'000
2013
$'000
18,121
(15,276)
18,044
(14,661)
Total plant and equipment – net book value
2,845
3,383
Reconciliations
Reconciliations of the carrying amounts for plant and equipment is set out below:
Plant and equipment
Carrying amount at beginning of year
Additions
Disposals
Depreciation
Carrying amount at end of year
Total
Carrying amount at beginning of year
Carrying amount at end of year
3,383
377
(153)
(762)
2,845
3,383
2,845
3,949
253
(6)
(813)
3,383
3,949
3,383
All plant and equipment of the Group is subject to floating charges from the Group’s banker and from the
Government of Western Australia (see note 12).
Finance Leases
The carrying value of plant and equipment held under finance leases and hire purchase contracts at 30 June
2014 was $33,000 (2013: $59,000). No additions to plant and equipment under finance leases were made
during the year (2013: $nil). Leased assets and assets under hire purchase contracts are pledged as security
for the related finance lease and hire purchase liabilities.
Impairment tests
Plant and equipment are tested at the level of their respective cash generating units as follows:
► Orbital Autogas Systems cash generating unit
► Sprint Gas cash generating unit
► Engineering Service 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 2014 based on financial budgets approved by
management. The pre-tax, risk-adjusted discount rate applied to these cash flow projections is 18.0% (2013:
18.0%).
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 2014 based on financial budgets approved by
management. The pre-tax, risk-adjusted discount rate applied to these cash flow projections is 18.0% (2013:
18.0%) and cash flows beyond the three-year period are extrapolated to five years using a 3% growth rate and
a terminal value of 3.5 times the fifth year’s cash flow projection. The growth rate and terminal value used are
appropriate for a business in Sprint Gas’s industry.
Consulting Service 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 2014 based on financial budgets approved by
management. The pre-tax, risk-adjusted discount rate applied to these cash flow projections is 18.0% (2013:
18.0%).
The calculations of value in use for the Orbital Autogas Systems, Sprint Gas and Consulting Services cash
generating units are most sensitive to the following assumptions:
► Revenue
► Gross margins
► Discount rates
72
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
17.
PLANT AND EQUIPMENT (CONTINUED)
Impairment tests (continued)
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 current year and management estimates for the budget period.
Consulting services revenue is dependent on the demand for the Group’s engineering services.
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.
CONSOLIDATED
2014
$'000
18.
INTANGIBLES AND GOODWILL
Goodwill acquired in business combinations
Capitalised development expenditure
Total intangibles and goodwill – net book value
Net carrying value
Goodwill acquired in business combinations
At cost
Less: allowance for impairment
Carrying amount at end of year
Capitalised development expenditure
At cost
Less: accumulated amortisation and impairment
-
-
-
-
-
-
826
(826)
(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
Impairment charge
Carrying amount at end of year
-
-
-
-
Reconciliations of the carrying amounts for capitalised development expenditure:
Carrying amount at beginning of year
Amortisation
Carrying amount at end of year
146
(146)
-
2013
$'000
-
146
146
1,965
(1,965)
-
826
(680)
146
1,965
(1,965)
-
292
(146)
146
(b)
Description of the Group’s intangible assets and goodwill
Goodwill
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 ($1,602,000).
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.
73
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
18.
INTANGIBLES AND GOODWILL (CONTINUED)
(c)
Impairment losses recognised
The carrying amounts of goodwill allocated to Orbital Autogas Systems and to Sprint Gas totalling $1,965,000
were impaired in full in the prior reporting period. The impairment charge 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. Management also considered the announcement by Ford Motor Company of
Australia that it will cease the manufacture of vehicles in Australia in 2016 when considering the impairment of
Orbital Autogas System’s goodwill. The assessment of recoverable amount was based on a value in use models
using a discount rate of 18% and was determined at the cash-generating unit level. The impairment charge was
recognised in the income statement in the line item “other expenses”.
19.
TRADE PAYABLES AND OTHER LIABILITIES
Current
Trade creditors and accruals
Revenue received in advance
CONSOLIDATED
2014
$'000
3,696
-
3,696
2013
$'000
2,785
16
2,801
(a)
Interest rate, foreign exchange and liquidity risk
Information regarding interest rate, foreign exchange and liquidity risk exposure is set out in note 12.
20.
FINANCING ARRANGEMENTS
The consolidated entity has standby arrangements with Westpac Banking Corporation to provide support
facilities:
Total facilities available
Corporate credit card facility
Bank guarantee
Dividends received
Facilities utilized at balance date
Corporate credit card facility
Bank guarantee
Facilities not utilized at balance date
Corporate credit card facility
Bank guarantee
228
505
733
49
505
554
179
-
179
230
505
735
26
505
531
204
-
204
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 totaling $733,000 (2013:
$735,000).
The Company has also pledged short term deposits of $705,000 (2013: $705,000) held as collateral for the
financing facilities.
The bank guarantee has been provided for the benefit of the landlords of the Balcatta, Melbourne and Brisbane
premises.
74
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
21.
EMPLOYEE BENEFITS
(a)
Current
Annual leave
Long service leave
(b)
Non-Current
Long service leave
(c)
Aggregate liability for employee entitlements
CONSOLIDATED
2014
$'000
2013
$'000
747
1,191
1,938
765
1,072
1,837
32
55
1,970
1,892
The present value of employee entitlements 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
4.0%
3.0%
10
4.0%
3.1%
10
Number of employees at year end
89
87
22.
DEFERRED REVENUE
(a)
Current
Deferred revenue for operation of heavy duty engine testing facility
316
(b) Movement in deferred revenue
At 1 July
At 30 June
316
316
316
316
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 for a
period of five years from the date of commissioning of the facility.
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.
23.
GOVERNMENT GRANTS
Current liabilities
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
Movement in government grants
At 1 July
Released to the income statement
At 30 June
974
1,199
1,424
(225)
1,199
1,199
1,424
1,649
(225)
1,424
75
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
23.
GOVERNMENT GRANTS (CONTINUED)
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 was transferred to deferred
revenue (see note 22) 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.
CONSOLIDATED
2014
$'000
2013
$'000
24.
OTHER PROVISIONS
(a)
Current
Warranties
Surplus lease space
Other
(b)
Non-Current
Surplus lease space
(c)
Reconciliations
134
58
-
192
278
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 from non-current
Carrying amount at end of year
Other provisions - current
Carrying amount at beginning of year
Arising during the year
Utilised
Released to the income statement
Carrying amount at end of year
Surplus lease space – non-current
Carrying amount at beginning of year
Arising during the year
Reclassified to current
Carrying amount at end of year
76
111
227
(204)
134
182
(259)
135
58
502
-
(354)
(148)
-
289
124
(135)
278
111
182
502
795
289
229
1
(119)
111
182
(182)
182
182
50
452
-
-
502
336
135
(182)
289
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
24.
OTHER PROVISIONS (CONTINUED)
The product warranty provision relates to sales of LPG fuel systems and also the sale of small unmanned
aircraft engines. In determining the level of provision required for product warranties the Group has made
judgments 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.
Surplus lease space provision relates to certain unutilised office space. The provision takes account of rental
income Orbital would recover by sub-letting the space. During the year a sub-lease agreement was entered
into and rental from the sub-lease agreement is recognised in the income statement in the line item “other
income”.
The other provisions account included a provision for restoration obligations relating to SUAS engines sold
during the previous year. In determining the level of provision required for restoration obligations the Group
has made judgments in respect of the expected expenditures required to fulfill the obligation. The restoration
obligation was completed during the 2014 financial year and the provision balance not utilised was released to
the income statement in the line item “other income”.
25.
SHARE CAPITAL
Ordinary shares
CONSOLIDATED
2014
$'000
2013
$'000
19,590
19,518
Movement in ordinary shares on issue
Number
$'000
At 1 July 2012
Shares issued pursuant to employee share plan
At 30 June 2013
At 1 July 2013
Shares issued pursuant to employee share plan
At 30 June 2014
48,722,477
612,114
49,334,591
49,334,591
422,403
49,756,994
19,436
82
19,518
19,518
72
19,590
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.
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.
26.
RETAINED PROFITS AND RESERVES
(a) Movements in retained earnings were as follows:
Balance 1 July
Net profit
Balance 30 June
77
CONSOLIDATED
2014
$'000
2013
$'000
366
1,676
2,042
2
364
366
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
26.
RETAINED PROFITS AND RESERVES (CONTINUED)
(b)
Other reserves
Consolidated
Balance 1 July 2012
Equity-settled transaction-employee shares
Other comprehensive income
Balance at 30 June 2013
Balance 1 July 2013
Equity-settled transaction-employee shares
Other comprehensive income
Balance at 30 June 2014
(c)
Nature and purpose of reserves
Employee
Equity
Benefits
Reserve
$’000
Foreign
Currency
Translation
Reserve
$’000
1,547
98
-
1,645
1,645
60
1,705
(3,554)
-
1,522
(2,032)
(2,032)
-
(260)
(2,292)
Total
$’000
(2,007)
98
1,522
(387)
(387)
60
(260)
(587)
Employee equity benefits reserve
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 32 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.
27.
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
- Kala Technologies 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
2014
%
2013
%
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
Ord
(a)
(a)
(a)
(a)
(a)
(a)
(b)
(a)
(a)
(a)
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
100
(a) Dormant for the years ended 30 June 2014 and 30 June 2013.
(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.
78
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
28.
INFORMATION RELATING TO ORBITAL CORPORATION LIMITED
Current assets
Total assets
Current liabilities
Total liabilities
Issued capital
Accumulated losses
Employee equity benefits reserve
Total shareholders’ equity
Profit/(loss) of the parent entity
Total comprehensive profit /(loss) of the parent entity
Guarantee
CONSOLIDATED
2014
$'000
2013
$'000
3
37,666
-
27,155
19,590
(10,768)
1,689
10,511
1,596
1,596
3
36,131
-
27,332
19,518
(12,364)
1,645
8,799
(8,812)
(8,812)
Orbital Corporation Limited has provided a guarantee to Westpac Banking Corporation for all liabilities and
obligations of Orbital Australia Pty Ltd. See note 20 for details of Orbital Australia Pty Ltd's outstanding
liabilities to Westpac Banking Corporation.
29.
RELATED PARTY DISCLOSURES
(a)
Identity of related parties
The Group has a relationship with its subsidiaries (see note 27), with its investment accounted for using the
equity method (see note 15), and with its key management personnel (refer to disclosures for key
management personnel, see note 30).
(b)
Controlled Entities
Details of interest in controlled entities are set out in Note 27.
(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
1
-
3
-
During the year the Group purchased goods and services to the value of $110,000 (2013: $148,000) from
Synerject LLC. All transactions are in the ordinary course of business and on normal commercial terms
and conditions. The Group received dividends of $1,634,122 (2013:$1,484,854) from Synerject LLC.
79
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
30.
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
Dr MT Jones (appointed as Chairman 2 September 2013)
Dr V Braach-Maksvytis
Mr JP Welborn (appointed as director 17 June 2014)
Mr WP Day (resigned as Chairman 1 September 2013, resigned as director 28 February 2014)
Executive directors
Mr TD Stinson (Managing Director & Chief Executive Officer)
Executives
Dr GP Cathcart (Chief Technical Officer)
Mr IG Veitch (Chief Financial Officer)
Key management personnel compensation
The key management personnel compensation included in ‘employee benefits expense’ (see note 8) are as
follows:
Short-term employee benefits
Post-employment benefits
Long-term employee benefits
Equity compensation benefits
CONSOLIDATED
2014
$
1,074,183
96,933
24,412
62,061
1,257,589
2013
$
1,011,679
110,193
32,448
107,015
1,261,335
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 personnel or their related parties at
year-end.
Movement 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:
Held at
Granted as
compensation
Held at
1-Jul13
Purchases
ESP #1
ELTSP
Sales
Other (a) 30-Jun-14
Non-executive directors
Dr MT Jones
Dr V Braach-Maksvytis
Mr JP Welborn
Mr WP Day
18,000
-
-
10,000
52,000
-
-
-
Executive director
Mr TD Stinson
Executives
Dr GP Cathcart
Mr IG Veitch
392,690
61,563
20,443
-
-
-
80
-
-
-
-
-
5,844
5,844
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
70,000
-
-
(10,000)
-
-
392,690
-
-
67,407
26,287
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
30.
KEY MANAGEMENT PERSONNEL (CONTINUED)
Movement in shares (continued)
Held at
Granted as
compensation
Held at
1-Jul12
Purchases
ESP #1
ELTSP
Sales
Other (a) 30-Jun-13
Non-executive directors
Dr MT Jones
Dr V Braach-Maksvytis
Mr JP Welborn
Mr WP Day
Executive director
Mr TD Stinson
Executives
Dr GP Cathcart
Mr IG Veitch
Mr KA Halliwell
18,000
-
-
10,000
392,690
54,095
-
180,238
-
-
-
-
-
-
-
-
-
-
-
-
-
7,468
-
7,468
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
18,000
-
-
10,000
392,690
-
20,443
(187,706)
61,563
20,443
-
(a) Represents shareholdings at the time that Mr WP Day and Mr KA Halliwell ceased to be a KMP and Mr IG
Veitch became a KMP.
Movement 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 director
Mr TD Stinson
Executives
Dr GP Cathcart
Mr IG Veitch
Executive director
Mr TD Stinson
Executives
Dr GP Cathcart
Mr IG Veitch
Mr KA Halliwell
Held at
Held at
1-Jul13
Offered
Forfeited
Vested
Expired
Other (a) 30-Jun-14
2,535,000 1,165,000
1,012,700 537,000
498,500 466,000
-
-
-
-
(665,000)
-
3,035,000
-
-
(252,700)
(76,000)
-
-
1,297,000
888,500
Held at
Held at
1-Jul12
Offered
Forfeited
Vested
Expired
Other (a) 30-Jun-13
1,960,000 1,100,000
762,200
-
1,014,067
450,000
-
600,000 (1,347,567)
-
-
-
-
(525,000)
-
2,535,000
-
-
-
(199,500)
(266,500)
-
498,500
-
(1,012,700)
498,500
-
(a) Represents ELTSP rights holding at the date that Mr IG Veitch became a KMP.
81
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
30.
KEY MANAGEMENT PERSONNEL (CONTINUED)
Movement 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 director
Mr TD Stinson
Executive director
Mr TD Stinson
Held at
Held at
1-Jul13
Offered
Forfeited
Vested
Expired
Other
30-Jun-14
1,150,000
-
-
-
-
-
1,150,000
Held at
Held at
1-Jul12
Offered
Forfeited
Vested
Expired
Other
30-Jun-13
1,150,000
-
-
-
-
-
1,150,000
No performance rights were vested at 30 June 2014 (2013: nil).
NOTE
CONSOLIDATED
2014
$'000
2013
$'000
31.
NOTES TO THE STATEMENT OF CASH FLOWS
Reconciliation of cash flows from operating activities
Profit after income tax
Adjustments for:
Profit on sale of plant and equipment
Depreciation
Amortisation
Amortisation of deferred revenue and government grants
Impairment, write-off of trade receivables
Movement in fair value of financial assets
Movement in fair value of financial liabilities
Impairment of goodwill
Amortisation of non-interest bearing loans
Amounts set aside to warranty and other provisions
Share of net profit of equity accounted investment
Profit on sale of share in equity accounted investment
Employee compensation expense
Net foreign exchange gains
Net cash used in operating activities before changes in assets and
liabilities
8
17
18
12
12
18
12(b)
15
7
32(a)
Changes in assets and liabilities during the year:
(Increase)/decrease in receivables
(Increase)/decrease in inventories
(Increase)/decrease in deferred tax assets
Increase/(decrease) in payables
Increase/(decrease) in employee provisions
1,676
364
90
762
146
(225)
(160)
(136)
(248)
-
533
(615)
(3,256)
-
132
(72)
(3)
813
146
(225)
175
-
(1,410)
1,965
521
287
(3,220)
(1,702)
180
(122)
(1,373)
(2,231)
(842)
(170)
(417)
808
79
(542)
(713)
2,039
1,640
(2,108)
(344)
514
Net cash used in operating activities
(1,915)
(1,717)
82
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
CONSOLIDATED
2014
$'000
2013
$'000
32.
SHARE BASED PAYMENTS
(a)
Recognised share-based payment expenses
Expense arising from equity-settled share-based payment transactions
132
180
The share-based payment plans are described below.
(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 422,403 (2013: 612,114) shares issued under Plan No. 1 to eligible employees at a
market value on the day of issue of $72,000 (2013: $82,000).
(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 performance conditions for the LTI offered in 2014 are based 100% on earnings per share.
Additionally, the number of shares granted is broken into four bands as shown in the table below.
Vesting schedule for the EPS tested LTI awarded for the performance year 2014
Company Performance
(Earnings per share)
Compounded EPS growth of less than 20% per annum
(up to 73% growth over 3 years)
% of offered shares
issued to each executive
0% to 25%
Compounded EPS growth of between 20% and 34.9% per annum
(at least 73% growth over 3 years)
25% to 49% (on a straight line basis)
Compounded EPS growth of between 35% and 49.9% per annum
(at least 246% growth over 3 years)
50% to 99% (on a straight line basis)
Compounded EPS growth of 50% or greater per annum
(at least 338% growth over 3 years)
100%
At the Company’s Annual General Meeting in October 2013, shareholders approved the above plan in relation
to the ongoing remuneration of Executive Directors and senior executives.
During the year, a total of 2,168,000 rights under the plan were offered to 3 executives (2013: 2,480,000
rights offered to 4 executives).
The performance conditions for the LTI offered in 2013 were based on two performance hurdles, as set out
below:
Vesting schedule for the EPS tested LTI awarded for the performance year 2013
Company Performance
(Earnings per share)
Under 5 cents
% of offered shares
issued to each executive
0%
At or above 5 cents but below 7 cents
25% to 50% (on a straight line basis)
At or above 7 cents but below 9 cents
50% to 100% (on a straight line basis)
At or above 9 cents
100%
83
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
32.
SHARE BASED PAYMENTS (CONTINUED)
(c)
Executive Long Term Share Plan (“ELTSP”) (continued)
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
2014
No.
2013
No.
4,046,200
2,168,000
-
-
(993,700)
5,220,500
4,227,300
2,480,000
(1,610,100)
-
(1,051,000)
4,046,200
The outstanding balance as at 30 June 2014 is represented by:
1,172,500 rights with an average fair value at grant date of $0.300 that will potentially vest in August 2014;
1,880,000 rights with an average fair value at grant date of $0.200 that will potentially vest in August 2015.
2,168,000 rights with an average fair value at grant date of $0.170 that will potentially vest in August 2016;
Fair value of rights on grant date
The following factors and assumptions were used in determining the fair value of TSR related rights offered
under the ELTSP on grant date:
TSR related rights
Grant Date
Life
Expiry
Date
Fair Value
per right
Exercise
Price
Market price
of shares on
grant date
Expected
volatility
Risk free
interest
rate
31-Aug-10
3 years
31-Aug-13
33 cents
31-Aug-11*
3 years
31-Aug-14
25 cents
nil
nil
34 cents
35 cents
60%
110%
4.27%
3.79%
* The grant date of the TSR related rights for the Managing Director was 26 October 2011.
The following factors and assumptions were used in determining the fair value of EPS related rights offered
under the ELTSP on grant date:
EPS related rights
Grant Date
Life
Expiry
Date
Fair Value
per right
Exercise
Price
Market price
of shares on
grant date
31-Aug-11*
3 years
31-Aug-14
35 cents
31-Aug-12*
3 years
31-Aug-15
20 cents
31-Aug-13*
3 years
31-Aug-16
19.5 cents
nil
nil
nil
35 cents
20 cents
19.5 cents
* The grant date of the EPS related rights for the Managing Director were 26 October 2011, 7 November 2012
and 22 October 2013, respectively.
The fair value of the EPS related rights is equal to the market price of shares on the grant date.
84
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
32.
SHARE BASED PAYMENTS (CONTINUED)
(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 2008.
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:
(a) do not give the holder a legal or beneficial interest in shares of the Company; and
(b) 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:
(a) a performance hurdle is met over the periods specified by the Board; or
(b) the Board allows early exercise on cessation of employment (see “Cessation of employment” below); or
(c) 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:
(a) Mr T D Stinson will be awarded 1,150,000 performance rights;
(b) 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
200,000
200,000
200,000
200,000
125,000
125,000
100,000
Share price
target
$
$2.50
$5.00
$7.50
$10.00
$20.00
$30.00
$50.00
Fair value at
grant date
$
94,000
70,000
56,000
46,000
16,250
11,250
5,000
(c) the acquisition price and exercise price of the performance rights will be nil.
(d) 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;
(e) 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 2014 or 30 June 2013.
33.
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.
85
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
CONSOLIDATED
2014
$'000
2013
$'000
34.
COMMITMENTS
(a)
Operating leases
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
1,012
3,769
1,575
6,356
1,214
3,855
2,501
7,570
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. None of the leases include contingent rentals.
During the financial year ended 30 June 2014, $1,109,101 was recognised as an expense in the income
statement in respect of operating leases (2013:$1,066,256).
(b)
Finance leases and hire purchase commitments
Future minimum lease payments under finance leases and hire purchase contracts are as follows:
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
24
19
43
20
43
63
(c)
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
-
-
-
291
-
291
35.
CONTINGENCIES
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 3 months 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.
86
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014
36.
EVENTS SUBSEQUENT TO BALANCE SHEET DATE
On 27 June 2014, the Company announced that it was going to undertake an on-market share buy-back of up
to 10% of its issued capital in accordance with the Corporations Act and Rules of the Australian Stock
Exchange. The buy-back commenced on 15 July 2014 and was completed on 20 July 2014. During this period
the Company bought back 4,975,699 shares at a total consideration paid of $771,000. On 24 July 2014 the
4,975,699 shares were cancelled.
Other than the matters above, 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 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.
37.
REMUNERATION OF AUDITORS
Amounts received or due and receivable for audit services by:
Auditors of the Company
- Audit and review of financial reports – Australian reporting
- Audit and review of financial reports – USA reporting
CONSOLIDATED
2014
$
2013
$
238,900
115,900
225,600
112,500
Amounts received or due and receivable for other services by:
- Auditors of the Company
14,850
-
Total auditors’ remuneration
369,650
338,100
The Auditors of the Group in 2014 and 2013 were Ernst & Young.
87
Director’s Declaration
Orbital Corporation Limited
In accordance with a resolution of the directors of Orbital Corporation Limited, I 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)
Giving a true and fair view of the financial position of the Group as at 30 June 2014 and of their
performance, as represented by the results of their operations and their cash flows, for the year ended
on that date; and
(ii)
Complying with Accounting Standards in Australia and the Corporations Regulations 2001.
(b)
(c)
The financial statements and notes also comply with International Financial reporting Standards as disclosed in
note 2(a).
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 he 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 2014.
On behalf of the Board,
MT Jones
Chairman
TD Stinson
Managing Director
Dated at Perth, Western Australia this 28th day of August 2014
88
Ernst & Young Building
11 Mounts Bay Road
Perth WA 6000 Australia
GPO Box M939 Perth WA 6843
Tel: +61 8 9429 2222
Fax: +61 8 9429 2436
www.ey.com/au
Independent auditor’s report 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 2014, 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. Those standards require that we comply with relevant ethical
requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about
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 the auditor's 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 complied with the independence requirements of the Corporations Act 2001. We have
given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the
directors’ report.
Opinion
In our opinion:
a.
the financial report of Orbital Corporation Limited is in accordance with the Corporations Act 2001, including:
i
giving a true and fair view of the consolidated entity's financial position as at 30 June 2014 and of its
performance for the year ended on that date; and
ii
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).
89
Ernst & Young Building
11 Mounts Bay Road
Perth WA 6000 Australia
GPO Box M939 Perth WA 6843
Tel: +61 8 9429 2222
Fax: +61 8 9429 2436
www.ey.com/au
Report on the remuneration report
We have audited the Remuneration Report included in pages 12 to 26 of the directors' report for the year ended 30 June
2014. 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 2014, complies with
section 300A of the Corporations Act 2001.
Ernst & Young
T G Dachs
Partner
Perth
28 August 2014
90
ORBITAL CORPORATION LIMITED
SHAREHOLDING DETAILS
Class of Shares and Voting Rights
As at 31 July 2014 there were 4,594 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 2014
SG Hiscock & Company Ltd
(as notified 01 August 2013)
Mulloway Pty Ltd
(as notified 18 February 2014)
Distribution of Shareholdings as at 31 July 2014
4,760,107
10.63%
2,580,688
5.76%
1-1,000
1,001-5,000
5,001-10,000
10,001-100,000
100,001 and over
Number of shareholders
Total Shares on Issue
Number of shareholders holding less than a marketable parcel
Top 20 Shareholders as at 31 July 2014
NAME
J P MORGAN NOMINEES AUSTRALIA LIMITED
1 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
2 ANNAPURNA PTY LTD
3 MULLOWAY PTY LTD
4
5 CITICORP NOMINEES PTY LIMITED
6 DEBUSCEY PTY LTD
7 BOND STREET CUSTODIANS LIMITED
8 MR MICHAEL WILLIAM FORD & MRS NINA BETTE FORD
9 MULLOWAY PTY LTD
10 MR CHRISTOPHER IAN WALLIN & MS FIONA KAY WALLIN
11 MORGAN STANLEY AUSTRALIA SECURITIES (NOMINEE) PTY LIMITED
12 MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED
13 TWOKIND PTY LTD
14 SINO WEST ASSETS LIMITED
15 MR JOSHUA LEIGH SWEETMAN
16 NATIONAL NOMINEES LIMITED
17 MR TERRY STINSON
18 MR JOHN AYRES
19 PRA TRADING PTY LTD
20 MR NORMAN COLBURN MAYNE
2,844
1,030
283
383
54
4,594
44,781,295
3,547
NUMBER OF
SHARES HELD
% OF
SHARES
4,618,309
2,000,000
1,924,433
1,761,361
1,758,645
1,100,000
1,044,350
858,122
741,255
689,200
661,860
637,715
575,000
571,885
554,055
423,133
392,690
356,667
350,000
350,000
10.31%
4.47%
4.30%
3.93%
3.93%
2.46%
2.33%
1.92%
1.66%
1.54%
1.48%
1.42%
1.28%
1.28%
1.24%
0.94%
0.88%
0.80%
0.78%
0.78%
Top 20 Shareholders Total
21,368,680
47.72%
The twenty largest shareholders hold 47.72% of the ordinary shares of the Company.
On-market share buy-back
As announced per ASX release on 27 June 2014, Orbital initiated a buy-back of up to 4,975,699 (10%) of the
Company’s fully paid ordinary shares. As at 21 July 2014 Orbital had bought back 4,975,699 shares for a total
consideration of $771,000.
91
ORBITAL CORPORATION LIMITED
CORPORATE INFORMATION
ABN 32 009 344 058
REGISTERED AND PRINCIPAL OFFICE
4 Whipple Street
Balcatta, Western Australia 6021
Australia
CONTACT DETAILS
Australia: -
Telephone: 61 (08) 9441 2311
Facsimile: 61 (08) 9441 2111
INTERNET ADDRESS
http://www.orbitalcorp.com.au
Email: info@orbitalcorp.com.au
DIRECTORS
M.T. Jones, Chairman
T.D. Stinson, Managing Director and Chief Executive Officer
V. Braach-Maksvytis
J.P. Welborn
COMPANY SECRETARY
I.G. Veitch
SHARE REGISTRY
Link Market Services Limited
Level 4 Central Park
152 St Georges Terrace
Perth, Western Australia 6000
Telephone: 61 (08) 9211 6670
SHARE TRADING FACILITIES
Australian Stock Exchange Limited (Code “OEC”)
AUDITORS
Ernst & Young
The Ernst & Young Building
11 Mounts Bay Road
Perth, Western Australia 6000