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Volkswagen 20-F 2009 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F
OR
For the fiscal year ended June 30, 2009 OR
OR
Commission file number 1-10936 ORBITAL CORPORATION LIMITED Australian Company Number: 009 344 058 Western Australia, Australia (Jurisdiction of incorporation) 4 Whipple Street, Balcatta, Western Australia 6021, Australia (Address of principal executive offices) Keith Halliwell Chief Financial Officer Tel: +61 8 9441 2311 Fax: +61 8 9441 2111 khalliwell@orbitalcorp.com.au 4 Whipple Street, Balcatta, Western Australia, 6021, Australia (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act None Securities registered or to be registered pursuant to Section 12(g) of the Act American Depositary Shares* Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report Ordinary Shares 478,885,050 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. YES ¨ NO x Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days YES x NO ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one). Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ITEM 17 ¨ ITEM 18 ¨ If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES ¨ NO ¨
Table of ContentsTABLE OF CONTENTS
Table of ContentsCURRENCY OF PRESENTATION AND DEFINITIONS “Orbital” means Orbital Corporation Limited, a corporation incorporated under the laws of the State of Western Australia, Commonwealth of Australia and its consolidated subsidiaries. See the Glossary at the end of this Annual Report for definitions of technical terms. Orbital publishes its consolidated financial statements in Australian dollars. In this Annual Report, unless otherwise specified or the context requires, references to the “US$” or “US Dollars” are to United States dollars and references to “$” or “A$” are to Australian dollars. For the convenience of the reader, this Annual Report contains translations of Australian dollar amounts into United States dollars at the rate or rates indicated. Unless otherwise stated, the translations of Australian dollars into US dollars have been made at the buy rate for telegraphic transfers of Westpac Banking Corporation, for the dates specified. These translations should not be construed as representations that the A$ amounts actually represent the US$ amounts or could be converted into US$ at the conversion rate used. FORWARD LOOKING STATEMENTS This Annual Report contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate”, “estimate”, “expect”, “project”, “believe”, “intend”, “envision” and similar words or phrases. These forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are beyond Orbital’s control, that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of the factors that would affect our financial performance, cause actual results to differ from our estimates, or underlie such forward-looking statements, are set forth in various places in this report including, but not limited to, Item 3 “Key Information – Risk Factors”; Item 4 “Information on the Company” and Item 5 “Operating and Financial Review and Prospects”. These risks include, but are not limited to, the following:
Orbital undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Because of the risks, uncertainties and other factors discussed above, such forward-looking statements should not be unduly relied upon.
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Table of ContentsPART 1
NOT APPLICABLE
NOT APPLICABLE
Exchange Rate Information The following table sets forth, for the fiscal years indicated, the high, low, average and period-end WM/Reuters Australian Dollar Fix Rate at 4:00pm (Sydney) for Australian dollars expressed in United States dollars per A$1.00. Orbital’s fiscal year ends on June 30 of each year.
Details of the high and low Dollar Fix Rates for Australian dollars expressed in United States dollars per A$1.00 in each month during the last six months are as follows:
On December 14, 2009, the Dollar Fix Rate was US$0.9103 per A$l.00.
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Table of ContentsThe Australian dollar is convertible into US dollars at freely floating rates. There are currently no restrictions on the flow of Australian currency between Australia and the United States. Fluctuations in the exchange rate between the Australian dollar and the US dollar may affect Orbital’s earnings, the book value of its assets and its shareholders’ equity as expressed in Australian and US dollars, and consequently may affect the market price for the American Depositary Shares (the “ADSs”). In addition, fluctuations in the exchange rate between the Australian dollar and the US dollar will affect the US dollar equivalent of the Australian dollar price of Orbital’s ordinary shares on the ASX and, as a result, are likely to affect the market price of Orbital’s ADSs in the United States. See “Item 3. Key Information - Risk Factors – Fluctuations in exchange rates may have a material adverse effect on us”. Any fluctuations will also affect the conversion into US dollars by the Depositary of cash dividends, if any, paid in Australian dollars on the ordinary shares represented by the ADSs. To date, Orbital has denominated and received most of its earnings from license, development and supply agreements in US dollars. Cash and investments have been denominated in a combination of US dollars and Australian dollars, and a significant proportion of expenditure in past years has been denominated in US dollars however presently most of Orbital’s expenditure is denominated in Australian dollars. In periods when the US dollar appreciates against the Australian dollar, the Australian dollar conversion of the US dollar earnings under the license and supply agreements may be materially enhanced. However, when the US dollar depreciates against the Australian dollar, Australian dollar conversion of the US dollar earnings under the license and supply agreements may be materially reduced. Orbital may, where appropriate, enter into forward foreign currency hedging contracts to minimise currency exposure particularly in relation to royalties received in US dollars and Euros and their conversion into Australian dollars to satisfy Australian dollar expenditures and realise profits in Australian dollars. Orbital’s financial statements for the years ended June 30, 2009, 2008 and 2007 have been prepared in accordance with Australian equivalents to International Financial Reporting Standards (“AIFRS”), which Orbital adopted on July 1, 2005. In complying with AIFRS, Orbital is also in compliance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Prior to July 1, 2005, Orbital prepared its financial statements in accordance with Australian Generally Accepted Accounting Practice (“AGAAP”). The accounting policies set out in Note 1 have been applied consistently to the 2007, 2008 and 2009 financial years. The selected consolidated financial data in accordance with AIFRS below has been derived from Orbital’s consolidated financial statements for the years ended June 30, 2009, 2008, 2007, 2006 and 2005, which have been audited by Ernst & Young (2009 & 2008) and KPMG (2007, 2006 & 2005), both independent registered public accounting firms. The consolidated financial statements as of June 30, 2009, 2008 and 2007, and the Reports of independent registered public accounting firms thereon, are included elsewhere in this report, see F1 – F50. The consolidated financial statements as of June 30, 2006 and June 30, 2005 and the Report of independent registered public accounting firm thereon have not been included in this report.
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Table of ContentsSelected Financial Data Amounts prepared in accordance with IFRS (in 000’s except per Ordinary Share and ADS amounts)
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Table of ContentsAmounts prepared in Accordance with IFRS (in ‘000’s except per Ordinary Share and ADS amounts)
As at 1 July 2005, upon the adoption of AIFRS, the loan facility with the State of Western Australia was recognised at fair value resulting in a non-cash decrease of A$6.8 million to A$12.2 million and subsequently stated at amortised cost with any difference between amortised cost and repayment value being recognised in the income statement over the period of the borrowings on an effective interest basis. This adjustment was reflected as a change in accumulated losses as at July 1, 2005.
Risk Factors
Orbital experienced operating losses over a number of years prior to the 2006 fiscal year and again in the current fiscal year, as a result of which the company’s net assets were significantly reduced. If we were to incur future losses, we may not be able to continue our operations. The company has positive shareholders’ equity and we believe that the company is operating on a going concern basis.
A major source of Orbital’s revenue is the provision of engineering services to customers in the automotive, motorcycle and marine and recreation sectors. Customers utilise Orbital’s services as they either do not have the necessary skills in-house or their internal resources are overloaded. The sourcing of overload work is very dependent on the state of the market. In the event of a market downturn, this source of work would diminish. Reduction by Orbital’s customers of their expenditure on out-sourced engineering services may substantially lessen the revenue received by Orbital.
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Agreements are entered into with vehicle, engine and component manufacturers and financing parties that grant rights to manufacture, use and sell products that utilise Orbital Combustion Process (“FlexDi”) Technology. In the fiscal year ended June 30, 2009, royalty and licence fees revenue generated from the seventeen current licensed users of FlexDi technology and their affiliates accounted for approximately 7% of Orbital’s consolidated operating revenues. During the last two fiscal years, royalty and licence fees income from licensed users accounted for approximately 12% of Orbital’s total consolidated revenues. Orbital has already received and brought to account through revenue a majority of the total lump sum fees due under its existing license agreements. The amount of additional lump sum fees earned under these agreements will depend on several factors, including the commercialisation of products incorporating FlexDi Technology, whether the licensees expand the territories or volumes covered by the agreements and whether additional engineering or engine development services are provided. As a result, the remaining fees received by Orbital under existing agreements may be substantially less than the fees received in prior years.
The agreements with OEMs usually entitle Orbital to receive ongoing royalties when licensees sell engines incorporating FlexDi Technology. The total royalties paid to Orbital will depend on whether manufacturers succeed in selling large numbers of these engines to consumers. As at November 30, 2009, eleven of Orbital’s seventeen current licensed users are in commercial production and selling products using FlexDi Technology. For the year ended June 30, 2009, Orbital has not received any royalty payments under any of its other agreements. Orbital may not be able to enter into additional agreements with new customers. In addition, current licensees may choose not to commercially produce engines incorporating FlexDi Technology, and those who do may not succeed in selling these products to consumers. The failure to obtain new customers or receive royalties from existing or new customers could have a material adverse effect on Orbital’s business and results of operations.
Orbital relies on a small number of key customers for the majority of its revenues. Three customers accounted for 44% of total revenue in fiscal 2009. The loss of one or more of these customers could have a material adverse effect on Orbital’s business and results of operations. Three customers accounted for 40% of Orbital’s total revenue in fiscal 2008. Synerject, which makes a significant contribution to Orbital’s overall result, is also reliant on a small number of key customers for the majority of its revenues. In fiscal 2009, two customers accounted for 66% (2008: two customers accounted for 78%) of Synerject’s total revenue.
Orbital and its licensees engage in production testing programs, which typically last two to four years, for the application of FlexDi Technology to customer engines. These tests must be successfully completed before manufacturers will consider committing the large capital amounts needed to modify existing or build new engine manufacturing plants. Orbital generally receives engineering fees for undertaking these programs. Orbital may not be able to complete these testing programs successfully or without unforeseen problems or delays. As a result there can be no certainty that further products using FlexDi Technology will be introduced into the market or that Orbital will continue to receive engineering fees for performing these production programs.
Many factors will influence whether Orbital’s licensees decide to produce engines commercially using FlexDi Technology. These include the cost of adapting existing facilities or building new manufacturing facilities, the cost of producing each system and the reliability and efficiency of FlexDi Technology. Manufacturers also will evaluate competing technologies and consider how government fuel economy and emissions standards in different countries may favour one technology over another. If manufacturers begin commercial production using FlexDi Technology, the number of engines sold will depend on market acceptance. Many of these factors are beyond Orbital’s control, but will ultimately affect the amount of royalties received. If licensees decide not to use FlexDi Technology commercially or consumers choose not to buy products incorporating FlexDi Technology, there would be a material adverse effect on Orbital’s business and results of operations.
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Orbital has needed significant capital amounts to conduct its business. Although capital costs have reduced, Orbital will incur on-going research and development costs and operating costs to enhance the FlexDi Technology to improve performance or lower unit costs to extend the roll out of our technology and requires working capital support. Additionally, the Company will be required to either repay or refinance the A$19 million loan for the Government of Western Australia in 2014 and there is no assurance that this can be done. In the past, these costs have been paid with a combination of operating revenues, equity injections, debt and other financing. However, there can be no assurance that Orbital will have sufficient operating revenues to fund future costs or that outside financing will be available at affordable prices, or at all. A failure to obtain sufficient financing for ongoing costs could prevent Orbital from carrying out business plans on time and give an advantage to competitors with greater financial resources. If a shortage of financing causes long delays in the further development and commercialisation of FlexDi Technology, licensees could choose not to build engines with FlexDi Technologies or to use competing technologies. This could have a material adverse effect on Orbital’s business and results of operations. If Orbital has insufficient cash available to meet its costs, it may be required to cease operations.
Orbital has obtained patents on many aspects of its FlexDi Technology, and has applied for additional patents on other aspects of this technology. Orbital’s success in part, may depend upon the ability to protect the technology and products under United States and foreign intellectual property laws. Orbital is not a party to any present patent or intellectual property litigation, but in the future may be sued by other parties that claim FlexDi Technology infringes their patent rights or other rights, or may need to sue other parties to enforce its patent or other intellectual property rights. In the event of being sued by other parties, if proved, these claims could have a material adverse effect upon Orbital. Even if Orbital won any of these suits, the management time and legal expenses required to defend these claims could have an adverse effect on Orbital’s future operating results. Orbital also has trade secrets and know-how, which are not patentable but are still important to Orbital’s business. Orbital seeks to protect these rights through confidentiality agreements and contractual protections. These arrangements may not protect Orbital from unauthorised use or disclosure of its trade secrets and know-how.
The price of Orbital’s ordinary shares on the Australian Stock Exchange (“ASX”) and price of the ADSs on the New York Stock Exchange (prior to July 1, 2004) and the OTC Bulletin Board have experienced historic volatility. (Orbital’s ADSs were de-listed from the NYSE effective June 30, 2004 and the ADSs now trade only on the OTC Bulletin Board.) In addition, high technology stocks traded in both markets have experienced substantial price and volume fluctuations from time to time, even though these changes were sometimes unrelated to the operating performance of specific companies. Announcements of operating results or technical innovations by Orbital or its competitors, including reports or announcements about FlexDi Technology, may have a material effect on the market price of the ordinary shares or the ADSs. On November 30, 2009, the closing price of Orbital’s ordinary shares on the ASX was A$0.055. The closing price on June 30, 2009 was A$0.075. The closing price of the ADSs on the OTC Bulletin Board on November 30, 2009 was US$1.90, a decrease of approximately 21% from the closing price of US$2.40 for the ADSs on the OTC Bulletin Board on June 30, 2009. See Item 9. - “The Offer and Listing - Nature of Trading Market”.
Orbital is subject to business risk from product liability or professional indemnity suits if third parties claim that defects in FlexDi Technology or in engineering services provided by Orbital resulted in personal injury or other losses. Orbital may also be required to indemnify licensees for claims arising from alleged defects in products, which use FlexDi Technology or are designed or manufactured by Orbital. Licensees are, however, required to indemnify us from liabilities caused by defects in products not manufactured by Orbital. Orbital believes that sufficient product liability and indemnity insurance is held for the range of products and services currently provided to licensees and other customers but sufficient coverage may not be able to be obtained in the future, at affordable costs, or at all. Even if Orbital has such insurance, a judgement against us in a large product liability or professional indemnity suit could have a material adverse effect on Orbital’s business or financial condition.
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Orbital faces significant competition from automobile and engine manufacturers and engineering firms specialising in internal combustion engine technology. Many of these competitors have substantially greater financial, marketing and technological resources than Orbital. Orbital’s commercial success depends in part upon whether FlexDi Technology can compete successfully against both existing and new engine technologies, including new technologies that are similar to FlexDi Technology. To achieve further commercial success, FlexDi Technology will need to displace current four-stroke and two-stroke internal combustion engine technologies, which have a dominant market position. Current four-stroke and two-stroke engine technologies may continue to dominate the engine market, or they may be replaced by new technologies other than FlexDi Technology. Orbital’s competitors may develop products that are technically superior to Orbital’s products or more acceptable to the market. This could reduce available market share to Orbital or make FlexDi Technology less attractive or obsolete, which would have a material adverse effect on Orbital’s business.
Orbital records its transactions and prepares its financial statements in Australian dollars. Most of Orbital’s earnings from license and supply agreements are in US dollars. Cash and investments are denominated in both Australian and US dollars. Approximately 74% of Orbital’s expenditures are denominated in Australian dollars. When the US dollar appreciates against the Australian dollar, the US dollar earnings would convert into more Australian dollars. However, when the US dollar depreciates against the Australian dollar the US dollar earnings would convert into fewer Australian dollars. Fluctuations in exchange rates between the Australian dollar and the US dollar may also affect the book value of assets and the amount of shareholders’ equity. To reduce its potential currency exposure, Orbital has from time to time entered into forward foreign currency exchange contracts to fix, in Australian dollars, the majority of forecast US dollar royalty and engineering services fee receipts. Details of Orbital’s total foreign currency forward exchange contracts as of June 30, 2009 are contained in Item 5. – “Operating and Financial Review and Prospects – Foreign currency exchange sensitivity”. As at November 30, 2009, Orbital’s outstanding forward foreign currency exchange contracts totalled US$nil. See also Item 3 – “Key Information - Exchange Rate Information” above.
Products using FlexDi Technology must comply with many emissions, fuel economy and other regulations in the US and other countries. Based on internal testing, Orbital believes that products using FlexDi Technology will be able to meet current emissions and fuel economy standards in the countries that are Orbital’s most important markets. The effects of any future regulations on Orbital’s business or results of operations cannot be predicted. However, if Orbital were unable to comply with any material new regulations in the US or other key markets, this could delay further commercialisation of FlexDi Technology and have a material adverse effect on Orbital’s business and results of operations.
The sale of LPG Vapouriser kits is a significant portion of our revenue (2009: 39%; 2008: 0%). Changes in emissions regulation that come into effect on July 1, 2010 will prevent the manufacture of new vehicles with a vapouriser kit. Our planning for this end of production life may not be optimal resulting in missed sales if inventory runs out or in an excessive amount of inventory remaining at June 30, 2010. Sales to the aftermarket will continue past June 30, 2010 as retrofit conversions can still be undertaken on vehicles manufactured before June 30, 2010.
In fiscal 2009 we invested approximately $1.0 million in the development of the next generation Liquid LPG fuel systems. We have continued to invest in kit development post June 30, 2009. Sales of these kits may not be at a high enough volume and/or high enough margin to recoup the investment in the development of the next generation LPG fuel systems. The overall level of conversion of vehicles to LPG in Australia is considerably lower than in past fiscal years and this depressed market may continue resulting in less demand for our LLI fuel systems.
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Our major customer for LPG fuel systems is Ford Australia. Demand for large sedans may drop which will effect the level of our sales to Ford. There may be delays between the ending of manufacture of vehicles with a vapouriser LPG fuel system and the commencement of production of vehicles with a LLI LPG fuel system.
Under US federal tax laws, a foreign corporation is treated as a passive foreign investment company (“PFIC”) if 50% or more of its assets or 75% or more of its income is passive. Historically, Orbital has not been treated as a PFIC and currently believes that it is not a PFIC. This is, however, a factual determination made annually, which could change, based upon future developments or changes in Orbital’s gross income or the value of its assets. If Orbital were classified as a PFIC in any taxable year, a US holder of Ordinary Shares or ADSs would be subject to special rules. These rules are intended to reduce or eliminate any benefit from the deferral of US income tax that a US holder could derive if the foreign company does not distribute all of its earnings on a current basis. See Item 10. - “Additional Information - United States Federal Income Taxation”.
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History And Development Of The Company Orbital Corporation Limited is incorporated as a public company under the laws of Australia and operates under the Corporations Act 2001. Following a special resolution passed by shareholders at the Company’s annual general meeting on October 26, 2004, the Company changed its name from Orbital Engine Corporation Limited to Orbital Corporation Limited on October 27, 2004. The Company’s domicile is Australia where its registered office and principal place of business is located at 4 Whipple Street, Balcatta, Western Australia (tel +61 8 9441 2311). The Company operates as the ultimate holding company of the Orbital group of companies, the details of which are as follows: PARTICULARS IN RELATION TO CONTROLLED ENTITIES
Orbital provides clean engine technologies and alternative fuel systems to customers worldwide. Orbital develops and commercialises alternative fuel systems for the Australian and global markets with the benefits of improving the environment through reduced harmful greenhouse gas emissions, and improved fuel economy and reduced costs for customers. Orbital’s beginnings date to the late 1960s, when Ralph Sarich, Orbital’s founder, began development of a rotary internal combustion engine called the Orbital Engine. Mr Sarich entered a partnership, known as the Sarich Design and Development Partnership, with two other individuals for the purpose of developing, patenting and marketing the Orbital Engine. In November 1972, the partnership entered into a joint venture with The Broken Hill Proprietary Company Limited (“BHP”), then one of Australia’s largest companies. Under that joint venture, in which each of the partnership and BHP had a 50% interest, Orbital Engine Company (Australia) Pty Ltd (now Orbital Australia Pty Ltd) was established in January 1973, for the development and commercialisation of the Orbital Engine. In 1978, the partnership assigned its interest in Orbital Engine Company (Australia) Pty Ltd to the Sarich Design and Development Unit Trust (the “Trust”). In 1984, the Trust publicly offered some of its interest in Orbital Engine Company (Australia) Pty Ltd through the listing on the Australian Stock Exchange (“ASX”) of the Sarich Technologies Trust (“STT”). In December 1988, STT was converted to an ASX listed company, Sarich Technologies Limited. In May 1989, BHP exchanged its 50% equity interest in Orbital Engine Company (Australia) Pty Ltd for a 35% shareholding in Sarich Technologies Limited, reflecting BHP’s rights to income under the original joint venture agreement with the partnership and certain debt owing from Orbital Engine Company (Australia) Pty Ltd to BHP. In November 1990, Sarich Technologies Limited changed its name to Orbital Engine Corporation Limited.
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Table of ContentsIn the period between 1973 and 1983, Orbital established a team of engineers and technicians and developed fuel injection and combustion technology that enhanced the performance of the rotary Orbital Engine, culminating with General Motors Corporation entering into an agreement in 1983 to evaluate the Orbital Engine. During this period, Orbital recognised that its fuel injection and combustion technology could also be applied to a conventional two-stroke engine to reduce many of its shortcomings. In 1983, Orbital determined that the application of its technology to two-stroke engines had the potential for greater commercial return and market acceptance than the rotary Orbital Engine due, among other things, to the commercial barrier of requiring completely new manufacturing processes and facilities to produce the rotary Orbital Engine. As a consequence, Orbital decided to cease development of the rotary Orbital Engine in favour of applying its fuel injection and combustion technology to two-stroke engines. In December 1991, Orbital offered for sale 2,890,000 American Depositary Shares (“ADSs”) (representing 23,120,000 ordinary shares in Orbital) and BHP offered for sale 510,000 ADSs representing 4,080,000 ordinary shares in Orbital. These ADSs were listed on the NYSE at that time. BHP reduced its shareholding to 9.5% in July/August 1998 and to nil in December 1999. In June 1997, Orbital and Siemens-VDO Automotive established a joint venture, Synerject LLC, to design, develop, manufacture, distribute and sell fuel rail assemblies incorporating FlexDi technology. See “Strategic Alliances – Siemens-VDO” below. In July and August 1998, Orbital was listed by local market makers on “over the counter” markets in Germany, with the Company’s securities traded on the Frankfurt and Berlin Stock Exchanges. Effective July 1, 2004, Orbital’s ADSs were de-listed from the NYSE as the continued listing requirements relating to market capitalization and shareholder equity were not met. Trading in the Company’s ADSs was transferred to the OTC Bulletin Board with effect from July 1, 2004. As of November 30, 2009, approximately 22% of Orbital’s outstanding shares were held in the form of ADSs traded on the OTC Bulletin Board. See Item 9. - “The Offer and Listing - Nature of Trading Market”. Following approval by shareholders at its Annual General Meeting on October 26, 2004, the Company changed its name from Orbital Engine Corporation Limited to Orbital Corporation Limited with effect from October 27, 2004. Orbital Engine Company (Australia) Pty Ltd changed its name to Orbital Australia Pty Ltd, effective December 1, 2004. The Company’s principal capital expenditures since July 1, 2006 have consisted of ongoing improvements to test facilities and equipment (A$3.903 million), including the construction of the Heavy Duty Engine Testing Facility ($2.943 million). In June 2008 Orbital acquired the business assets of Boral Alternative Fuel Systems (renamed Orbital Autogas Systems – OAGS), a tier 1 supplier of LPG fuels systems, for $1.758m. Orbital is currently constructing a heavy duty engine testing facility with an estimated total cost of $3.56 million, of which $2.76 million has been funded through a government grant from the Australian Federal Government. There are no other significant capital expenditures and divestitures currently in progress. Business Overview Orbital’s strategy is to focus on:
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Table of ContentsOrbital technology has been commercialised in the motorcycle, marine and recreational markets. Orbital’s goal is to broaden the application of Orbital technology in these and other markets. Orbital’s strategy is to continue to participate actively, where appropriate, in the commercialisation of FlexDi Technology to reduce risks and advance the rate of adoption of this technology while targeting growth in the alternative fuels industry. Orbital Combustion Process (“FlexDi”) The breakthrough in engine design achieved by Orbital is a stratified combustion process, which involves an air-assisted injection of fuel directly into the combustion chamber and uses electronic control of the fuel delivery, injection timing, ignition and other variables. The FlexDi combustion process and control is suitable for both two-stroke and four-stroke engines and has been applied successfully across a range of cylinder displacements from 50cc to greater than 500cc, including high operating engine speeds. In a conventional engine, the fresh fuel/air mixture is prepared upstream of the cylinder (whether by carburettor or conventional EFI) and enters the cylinder during the intake stroke, with the intent of forming a homogenous mixture of air and fuel within the cylinder. The FlexDi systems allow a highly stratified combustion process to occur, containing the combustible fuel cloud to a small area within the cylinder, with the remainder of the air in the cylinder being not fuelled. This process, at light loads, allows the engines with FlexDi Technology to run very lean (in some cases, total engine operation is carried out without the use of an air intake throttle). Under high load conditions, the FlexDi system tends to run more like a homogeneously charged engine, with good mixing of the fuel/air mixtures within the cylinder. In the case of a two-stroke engine, the FlexDi system allows injection to occur after exhaust port closures at light loads, minimising the short-circuiting of fresh fuel/air mixture out of the exhaust port as occurs in conventional two-stroke engines. In the case of a four-stroke engine, this allows lean engine operation, significantly reducing the engine pumping work. The combustion process itself, due to control of the air to fuel ratio gradient within the spray plume, allows clean and controlled combustion, resulting in further improvements in fuel economy and emissions control. Apart from the basic combustion process and the associated fuel and control system, Orbital has developed other technologies including catalyst systems, control systems, control hardware and control software for vehicle applications of engines using the FlexDi Technologies. Sources of Revenue (in 000’s of A$) Orbital’s sources of revenue are currently from:
Further details on segment revenue is contained in note 6 of the financial statements on page F-21. During the last three fiscal years Orbital spent approximately A$3.979 million on research and development programs. The Orbital group’s licence fee income and royalties relates to the sale of rights to its intellectual property, such as patents and know-how, to major vehicle, engine and component manufacturers through license and engineering service agreements. These agreements grant the licensee limited rights to manufacture, use and sell products utilising FlexDi Technology. As at November 30, 2009, Orbital has 17 agreements to end users of technology or suppliers, which grant license rights related to FlexDi Technology. Orbital’s customer base covers applications in the automotive, marine, recreational and motorcycle markets. At November 30, 2009 Orbital had 11 customers (2008: 11 customers) using FlexDi Technology in commercial production.
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Table of ContentsAt November 30, 2009 the following agreements granting rights to Orbital’s FlexDi Technology were in place: Agreements for Rights to FlexDi Technology
Although these license agreements differ in their specific terms, generally each license agreement defines the scope of access rights to the FlexDi Technology, including geographic regions, applications covered by the license agreement (for example, engine types and horsepower range), any areas of exclusivity which may have been granted, the duration of the license and royalty periods, and confidentiality provisions. The license agreements also set out the basis on which initial and ongoing technical disclosure is to be made between the parties and the details of technical programs to utilise the FlexDi Technology, such as performance targets and the quantities of vehicles and engines required to be produced by Orbital for testing purposes by the licensees. A license agreement also typically covers the licensee’s right to Orbital’s improvements and Orbital’s rights to the licensee’s improvements on the basic FlexDi Technology, as well as indemnity provisions relating to losses arising from products designed and manufactured by Orbital or its licensees. Under the terms of the license agreements, licensees are not specifically obliged to commence production and sale of engines using FlexDi Technology and may terminate the agreements upon notice to Orbital. If a licensee were to terminate its license agreement with Orbital, the licensee would forfeit the license and any technical disclosure fees paid through to the date of termination.
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Table of ContentsThe license agreements may provide for the payment to Orbital of fees upon the execution of the license agreement. These initial license fees may be negligible in some instances and significantly larger in others. Additional fees may also be required after a fixed time interval or after delivery of prototype engines and/or hardware employing the FlexDi Technology that meets specified performance targets, provided the license agreements are not terminated. In some cases the license agreements provide for technical disclosure fees and territory fees that are payable upon disclosure and transfer of Orbital’s technical know-how or upon any expansion of the licensees’ rights to FlexDi Technology. Generally, under the terms of Orbital’s license agreements, royalty payments will become payable if licensees commence commercial production and sale of engines or components incorporating the FlexDi Technology. Such royalties will usually be based on several factors, which may include a base amount, the engine’s particular horsepower rating, an adjustment for inflation, the benefit delivered to the Original Equipment Manufacturer, access to improvements and the level of technology applied. Royalties currently achieved for the non-automotive application of FlexDi Technology range from approximately US$6.00 for a small scooter to US$67.00 for a large multi-cylinder marine outboard engine. Commercial production or sale of engines with FlexDi Technology commenced in 1996. Production royalties of approximately A$1.11 million were received by Orbital in the 2009 fiscal year compared to approximately A$1.99 million in 2008. There can be no assurance that Orbital will be successful in entering into additional license agreements, that other licensees will commence commercial manufacture of products incorporating the FlexDi Technology, or that Orbital will receive additional fees under existing agreements. Orbital’s financial results have varied from period to period in the past and will continue to experience such fluctuations in the future. There can also be no assurance that products incorporating FlexDi Technology will achieve market success. Strategic Alliances Continental In June 1997, Orbital formed a joint venture company, Synerject, LLC, with Continental Corporation (previously Siemens Automotive Corporation. Continental Corporation acquired Siemens Automotive Corporation in January 2008). At the time of formation, Synerject’s principal activities were to design, develop, manufacture, distribute and sell fuel rail assemblies incorporating FlexDi technology. In November 1998, Orbital announced the expansion of the operations of the Synerject joint venture to allow Synerject to provide motorcycle and scooter Original Equipment Manufacturers (“OEMs”) with both air assisted direct injection and electronic fuel injection systems. This includes engine management systems and all peripheral components, and system integration services, in addition to supply of the fuel rail assembly. This expansion enables Synerject to provide both technical and program management services to the customer. Fiscal 2000 saw the launch of the Aprilia SR 50 DITECH (DI Technology), the first commercial motorcycle or scooter using Orbital’s DI technology, followed by Aprilia’s Scarabeo DITECH™ scooter in 2001. In May 2002, Piaggio, manufacturer of the Vespa brand scooter, and Peugeot Motocycles each launched two motor scooter models incorporating Orbital’s direct injection technology. Peugeot launched its Jetforce scooter during the 2003 fiscal year and Kymco launched its 100cc KDI 2-stroke scooter in the 2005 fiscal year. In May 2007 Bajaj Auto Ltd commenced production in India of an autorickshaw utilising Orbital’s direct injection technology. During 1998 Orbital’s relationship with Continental was expanded to create an alliance that facilitates the supply of complete integrated systems incorporating FlexDi technology to automotive customers. This capability is attractive in order to penetrate the automotive industry, as manufacturers are continuing to reduce the number of suppliers and rely more heavily on large companies that act as systems integrators. These system integrators source, validate, and coordinate the supply of the components of a system which may include the fuel rail assembly, electronic control unit, compressor, fuel pump and wiring harnesses. The system is then sold to the manufacturer as a complete unit. Synerject LLC was restructured and refinanced during fiscal year 2003. In January 2003, new financing arrangements were put in place for Synerject LLC until September 30, 2006. As part of the restructure, in April 2003, Synerject LLC acquired, by way of capital contributions from each joint venturer, the operations of Orbital’s marine and recreation system sales business and Continental’s non-automotive systems business. The actual performance of each of these contributed businesses in the 3 year period to June 30, 2006, compared to the planned performances, was reviewed to determine the optional adjustment to the percentage shareholdings of Orbital and Continental in Synerject LLC (“the recalculation”). The change in shareholdings as a result of the above recalculation was 10% i.e. ownership percentages of 40:60.
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Table of ContentsThere was an option for the joint venturer who has the majority shareholding as determined by the recalculation above, to call from the other shareholder (“minority shareholder”) the percentage of shares determined by the recalculation. The minority shareholder may dilute their shareholding or may choose to exercise an option to maintain the 50:50 ownership structure by either paying the other joint venturer US$400,000 for each 1% interest of Synerject or by injecting additional capital into Synerject LLC of US$800,000 for each 1% interest in Synerject. Continental exercised its option to call from Orbital 10% of the shares in Synerject LLC on March 31, 2009. On that date Orbital exercised its option to maintain the 50:50 ownership amounting to US$4,000,000. Orbital also agreed on March 31, 2009 to sell 8% of Synerject to Continental for US$4,000,000. Following the sale of the interest the ownership percentages are Orbital 42%:Continental 58%. As a result of the change in ownership the Group now recognises and discloses its investment in Synerject as an investment in associate. Orbital and Continental hold a 42%/58% interest in Synerject LLC and share equal board representation. Under the terms of the joint venture agreement, the net income and losses of the joint venture are allocated in accordance with the percentage interest held. Orbital and Continental also executed a new shareholder’s agreement that provides for Orbital representation on the board of Synerject and commits both parties to manage the business for the benefit of all shareholders. In March 2006 Synerject acquired a business based in Delavan, Wisconsin, which supplies fuel systems and components for outboard marine engines from BRP US Inc for approximately US$2.5m. The investment by Synerject consisted of working capital, principally inventory and plant & equipment. During FY2007 Synerject established a manufacturing facility in Changchun, China and an engineering support facility in Chongqing, China . These facilities have been established to produce low cost electronic control units for motorcycle applications, with manufacturing commencing in FY2008. Synerject has operations located in Newport News, Virginia, Delavan, Wisconsin, Toulouse, France and Changchun and Chongqing, China (as noted above). In Newport News, Synerject manufactures air injectors and fuel rail assemblies for the majority of Orbital’s marine and motorcycle customers and supplies systems to marine customers. In Delavan, Synerject manufactures electronic management modules and direct injection fuel injectors and oil pump assemblies primarily for Bombardier Recreational Products. In Toulouse, Synerject sources components (including air injectors and fuel rail assemblies manufactured in Newport News) and supplies systems to motorcycle customers. As noted below, in April 2003, Synerject acquired Continental’s non-automotive systems business which is now conducted in Toulouse. UCAL Fuel Systems In February 2003, Orbital entered into a Technical Cooperation Agreement with UCAL Fuel Systems Ltd, a manufacturer of carburettors and fuel injection system components for the Indian motorcycle and automotive markets. Under the agreement UCAL has been granted the right to manufacture and supply components of Orbital’s direct injection fuel systems to the 2-stroke 2 and 3 wheeler motor vehicle market in India. Vialle In June 2008, in parallel with the acquisition of Boral Alternative Fuel Systems (now Orbital Autogas Systems), Orbital entered into Licencing Agreements with Vialle for the distribution of LPG fuel systems in Australia and New Zealand. The Licence Agreements cover the sale of vapouriser LPG fuel systems and Liquid LPG fuel systems. Motonic Corporation In September 2009, Orbital Autogas Systems reached an agreement with Motonic Corporation of Korea for the exclusive access to Motonic products for the Australian LPG Autogas market. Motonic is the world’s largest supplier of LPG Autogas components. Motonic is a Tier 1 supplier of LPG Autogas systems to Hyundai, the world’s largest supplier of LPG vehicles
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Table of ContentsCompetition Orbital’s success depends upon its ability to continue to earn revenue from engineering services and to maintain a competitive position in the development of FlexDi Technology in relation to other existing and emerging technologies. Success of the FlexDi Technology is also dependent upon Orbital’s ability to both displace current fuel injection and combustion technologies for four-stroke or two-stroke internal combustion engines, which have an established and dominant position in this field, and its ability to gain market share against emerging technologies. There is significant competition from automobile and engine manufacturers and engineering firms specialising in the development of internal combustion engine technology for the automotive, marine, motorcycle and small engine industry. These companies may have substantially greater resources for research, development and manufacturing than Orbital. Despite the fact that Orbital has developed, patented and licensed the FlexDi Technology to a number of automobile and engine manufacturers, it is possible that Orbital’s competitors may succeed in developing alternative technologies and products that are more effective or commercially more acceptable than those developed by Orbital. There is a difference between an individual engine design and the broad range of possibilities covered by the FlexDi Technology for which fees are charged under licensing agreements. Manufacturers may have their own specific engine designs incorporating FlexDi Technology as well as their own proprietary and non-proprietary know-how. Licensees may market the individual characteristics of their engine designs without reference to the fact that the FlexDi Technology is required or being used. Under the terms of Orbital’s license agreements, royalties would be payable in such situations. The main competition to the use of FlexDi Technology for four-stroke automotive applications is both the previously introduced side injection high pressure, single fluid, direct injection fuel systems being employed by Japanese and European vehicle manufacturers and the newer generation spray guided systems now being introduced in Europe. FlexDi Technology provides a better combination of fuel economy and emissions when compared to current published side injection high pressure, single fluid, DI fuel systems on multi cylinder engines. Management also believes the FlexDi fuel system cost to be comparable to the side injection high pressure fuel systems and at the same production volumes would have a significant cost benefit to the new piezo high pressure guided fuel systems. Technology for the 4-stroke engine that is entering the market place or is currently being tested for introduction into the market includes variable valve timing, variable valve lift, turbocharging and engine down sizing. Over the last few years there has been a slow increase in the introduction of high pressure side injection fuel systems for companies including Alfa Romeo, Renault, Peugeot, Volkswagon and Daimler Chrysler. These systems have been introduced into the European market primarily and operate in a stoichiometric mode most of the time and hence deliver only very small benefits in fuel economy. Other competition to engines employing FlexDi Technology may also include other lean burn engines, electro-magnetic valve lift and timing actuation, electric motors, hybrid vehicles and fuel cells and other concepts not known to Orbital. Insofar as these technologies incorporate efficient technology for internal combustion engines they would be complementary to FlexDi Technology, for instance in hybrid vehicles. Current four-stroke technology also remains the main competitor to the introduction of FlexDi Technology for non-automotive applications. Various direct injection technologies, such as high pressure, single fluid direct injection systems, are available to engine manufacturers to improve the performance of two-stroke engines as an alternative to both the current four-stroke and FlexDi Technology. With respect to provision of engineering services, Orbital competes against engineering groups such as Ricardo, AVL, FEV and others, which have well established European presences and growing presences in the China/Asia market. An additional competitor to Orbital’s services is the customer’s internal resources. In all cases, Orbital must compete on work-scope, cost and quality with its competitors. Orbital’s competitors may have significantly more finance available than Orbital which may help to win certain work programs. The engineering service requirement is directly influenced by global, national and OEM company financial positions and also by the presence, or lack of, drivers such as new emission or other regulatory changes. Synerject, as an Engine Management System and component supplier for the non-automotive market for both direct injection and manifold port injection, and for Orbital’s proprietary air injector for the automotive market, competes directly with established suppliers such as Bosch, Del’orto, Magneti Marelli, Delphi and others.
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Table of ContentsAlternative Fuels Key to our strategic growth is the alternative fuels market which fits well with both Orbital’s skill set and manufacturing/supply partners. This market is expanding due to recognition that the current oil based fuels alone cannot support future energy requirements as well as environmental concerns related to current vehicle and truck fleets. It is of particular strategic importance to Orbital, as we can service our own domestic market with development and supply of systems utilising Liquid Petroleum Gas (LPG) and perhaps, in the future, Natural Gas (NG). Not only does Australia have an abundance of these gases offering supply security, these gases offer the end user lower cost per energy unit transport and with reduction in greenhouse gases of between 10% to 25% depending on the fuel used. Following the acquisition of Orbital Autogas Systems in June 2008, Orbital has developed the next generation liquid petroleum injection system for the Australian market incorporating Orbital technology, knowhow and technology from our license with Vialle of The Netherlands, and with exclusive component support/supply for the Australian and New Zealand market from Continental Corporation. Ford Australia has awarded Orbital Autogas Systems the supply contract from mid 2010 for this system for application to the Ford E-Gas range of vehicles. In addition, this system is now being introduced to the OE and the retrofit markets. The system, satisfying the ADR79/02 emission regulations being introduced in Australia, addresses the compromises of the existing LPG systems of power loss, poor cold engine operation and starting. Performance is as least as good as the standard gasoline vehicle whilst offering the significant cost savings of LPG as a fuel. The system also provides a greenhouse gas reduction up to 13% compared to the gasoline equivalent vehicle, making it a very attractive system to fleet operators. With our assistance, Sygma Motors in Sao Jose, Brazil have demonstrated spark ignition of ethanol in large conventional diesel industrial engines. Work is underway developing the FlexDITM system with Ethanol for this important market. Ethanol is a renewable fuel; its properties allow engines to run with high compression ratio for efficient combustion and good emission control. Orbital is excited to be working with partners in Brazil, a world leader in use of renewable energy, and renewable fuels in transportation. Synerject Orbital equity accounts its 42% share of Synerject LLC’s results. Orbital’s share of the net profit of Synerject LLC in 2007, 2008 and 2009 was A$3.157 million, A$2.357 million and A$1.846 million respectively. Synerject’s traditional recreational markets in North America and Europe have been significantly affected by the global economic crisis, with sales of recreational products such as outboard engines down by over 50% in the USA this financial year. Synerject are managing the situation well with strict cost control, and growing their Taiwan/Asian motorcycle system market to partially compensate. These markets are driven by the emission legislations being implemented requiring Engine Management Systems (EMS). Synerject has also explored, and won, new markets now supplying EMS components and systems to the high end motorcycle market and the snowmobile market. Synerject are now manufacturing the M3 ECU from its facility at Changchun in China, and are well positioned to both supply EMS systems and provide technical support to Chinese motorcycle customers seeking EMS solutions to satisfy ever increasingly more stringent emission standards, both in the domestic and the important export market. During the financial year, Orbital finalised its commercial arrangements with Continental Corporation for the ownership of the joint venture company Synerject. Orbital had an option to take up 10% of Synerject shares to maintain a 50:50 joint ownership by payment of US$4,000,000. However, to facilitate expansion of Synerject, Continental requested to take a controlling interest in Synerject and new commercial arrangements were negotiated. Continental has taken on an additional 8% ownership of Synerject in exchange for US$4,000,000. This brings immediate benefits to Synerject as Continental now has a majority interest in the joint venture entitling Synerject to have better access to Continental’s purchasing systems and processes. In addition, Orbital gains the exclusive access to Continental LPG and CNG fuel supply components for Australia and New Zealand; supporting our Alternative Fuels strategic growth, and Continental also contributed a North American EMS business to Synerject. In accordance with the shareholders agreement Orbital still maintains significant influence in the strategy of Synerject and will continue to share the ongoing agreed dividend stream. Continental recognise that a significant portion of Synerject’s revenue stream and profits are generated from Orbital FlexDITM based products and see Orbital as a long term partner to continue to grow and support this business. Consulting Services The engineering consulting services business has been a challenge in this financial year with companies in the traditional markets of Europe, USA and Japan not outsourcing work due to the tough financial climate. We implemented new strategies and marketing
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Table of Contentsapproaches early in the financial year which have succeeded in winning significant engineering programs in Brazil and China, work which also aligns well with Orbital’s growth strategies of alternative fuels and combustion efficiency. In Brazil, we are working with Sygma Motors on the development of ethanol EMS systems, including our own FlexDITM systems. In China, we are developing a demonstrator FlexDITM vehicle for Changan. Consulting Services is a key part of our organisation, supporting not only our external customers, but also enabling development and support for our own growth initiatives in the alternative fuels. This group has been instrumental in the development and validation of the next generation LPG systems for Orbital Autogas Systems and supports our internal Research and Development (R&D), an important investment for our future. At June 30, 2009, Orbital had a consulting services order book in excess of $5,000,000, in line with the previous year. Intellectual Property Royalty revenue of $1,115,000 with research and development expenditure of $1,246,000 and other costs of $999,000 resulted in a loss in this business segment of $1,130,000 (2008: contribution $771,000). Orbital earns licensing and royalties from production utilising its FlexDITM systems and technology. Given that much of the product is in recreational applications and hence subject to discretionary spending, the product volumes have been adversely affected by the global economic crisis. We expect the recreational market segment to remain subdued for at least this calendar year, with the recovery starting in 2010. In Europe, the motorcycle market can still use carburetors and catalysts and meet the current emission legislation. Our products remain in the ‘high end’ only of this market, and the volumes will continue to be low until emission legislation drives the <150 cc displacement scooters, including the 50 cc mopeds, to utilise engine management systems to be able to achieve real world emission durability. The uptake of the FlexDITM systems has been slower than expected in India; however in the last 6 months we are seeing an increase in the number of centres in India that Bajaj have introduced the RE GDI Autorickshaw, indicating an improved market acceptance of this product. Orbital has worked closely with UCAL (Bajaj’s supplier of the FlexDITM systems for the autorickshaw), Synerject and Bajaj during the year to support this important product development. Orbital Research and Development Orbital’s R&D, aligned with the growing importance of alternative fuels and energy management, are central to Orbital’s activities aimed at positioning the company as a leading edge technology company with the ability to provide solutions to OEM’s and Industry. This year we commissioned a new Single Cylinder Research Engine (SCRE) facility in which we developed the initial ethanol systems now being applied in Brazil. We are also commissioning our new Heavy Duty Engine Test Facility. This facility, funded by the Australian Government will enable us to test and certify engines up to 600 kW, and is intended to support Government and Industry in investigation and implementation of alternative fuels for the line haul transport industry in Australia. The continued commitment to the core R&D has resulted in 6 new patents granted in the last 12 months, along with 5 new patent family applications strengthening the Orbital patent portfolio and extending the life of the current and future royalty streams. Patent Protection Orbital continues to actively investigate new technologies while also seeking to improve and enhance existing technology through continued research and development and product development, particularly in regard to FlexDi related technology. Orbital believes that patent protection of its technologies and processes is critical to its future financial performance and that its success depends upon its ability to protect its proprietary products and technology under United States and foreign patent laws and other intellectual property laws. Accordingly, Orbital has been, and intends to continue to be, active in securing and policing intellectual property rights for its proprietary products and technology.
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Table of ContentsAs at November 30, 2009, Orbital had approximately 73 individual patent families with a total of over 210 patents and patent applications around the world. As of November 30, 2009 there were approximately 48 granted patents and 2 patent applications pending in the United States (including PCT patent applications). There are numerous other developments for which patent protection has not been obtained and these form part of Orbital’s proprietary know-how. Trade secrets and confidential know-how are protected through confidentiality agreements, contractual provisions and administrative procedures. There can be no assurance that such arrangements will provide meaningful protection for Orbital in the event of any unauthorised use or disclosures. Orbital is not a party to any present litigation relating to patents, but it has in the past and may in the future receive claims from other parties that the FlexDi engines or components or elements of such engines infringe patent rights or other rights of such other parties. Orbital may also in the future need to sue other parties for infringement of patent or other Intellectual Property rights relating to its FlexDi Technology. In the event of either being sued by other parties or suing other parties, the management time and legal expenses required to be devoted to these claims could have an adverse effect on Orbital’s future operating results, even if Orbital won any such suits. Marketing channels Engineering Consulting Services – We typically sell the majority of our consultancy services through our own dedicated sales force with engineering background, servicing an international customer base – generally engine manufacturers from our head office and from regional sales support offices. We also occasionally generate consultancy service through the presentation of papers at technical seminars. Alternative Fuels - Orbital Autogas Systems – OEM – We directly market our LPG fuel systems to Australian OEM’s who provide an LPG fuel system option (currently Ford Australia – Falcon models). Aftermarket – We are also a supplier to aftermarket re-fitters who supply the retail customer, and also automotive distributors who supply fleet operators. This sector is supported by our own dedicated sales force based in Sydney. Description of Property Orbital has its principal facilities in Balcatta, Western Australia. The Balcatta premises comprise two owned properties and one leased property. The leased property is occupied on a monthly tenancy basis. Rent under the lease is payable monthly in advance. Orbital is responsible for its proportionate costs of insurance, rates and taxes of the leased property. The primary focus of the Balcatta facility is the provision of engineering services, the preparation of engines utilising FlexDi Technology for the production validation process and research and development and administration. Equipment includes engine development test cells, engine durability test cells, vehicle emission chassis dynamometer cells, outboard motor test tanks, a personal water craft test tank, robot driven vehicle mileage accumulation chassis dynamometers, and an environmental test cell (incorporating both an engine and vehicle test cell). Other facilities include a comprehensive electronics laboratory, extensive emissions measuring equipment and a specialised computer system. The computer system supports a range of complex and data intensive engineering requirements, including computer-aided design, manufacturing and engineering programs, combustion analysis and fluid mechanics. The Balcatta facility also includes a number of fuel systems laboratories with high speed transient fuelling analysis equipment and environmental and durability test equipment. Under the terms of Orbital’s loan facilities with Westpac Banking Corporation and the State Government of Western Australia, the assets of Orbital, including its plant and equipment (but excluding patents, licences and technologies), have been pledged to secure the borrowings under such facilities. Government Regulation Orbital Corporation Limited is a company registered in Australia. Companies in Australia are regulated by the Australian Securities and Investments Commission (“ASIC”) and are governed by the Corporations Act 2001 (Cwth).
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Table of ContentsEvents After the End of the Financial Year There has not arisen in the interval between the end of the Company’s financial year and the date of this report, any item, transaction or event of a material and unusual nature that is likely to significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity for the year ended June 30, 2009.
None
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General During the 2009 fiscal year Orbital’s revenues were generated from contracts for engineering services, including engine development programs, sale of goods and licensing and licensing related agreements for FlexDi Technology. In addition Orbital equity accounted its share in Synerject LLC’s result. Because of the timing of recognition of fees due under Orbital’s license agreements, Orbital’s financial results have varied from period to period in the past and are expected to continue to experience such fluctuations in the future. Unless otherwise indicated, all financial information in the following discussion is derived from Orbital’s Consolidated Financial Statements, included herein, prepared in accordance with International Financial Reporting Standards which are called IFRS to distinguish from previous Australian GAAP. Critical Accounting Policies and Estimates Orbital’s consolidated financial statements have been prepared in accordance with Australian equivalents to International Financial Reporting Standards (“AIFRS”), which Orbital adopted on July 1, 2005. In complying with AIFRS, Orbital is also in compliance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Our significant accounting policies are more fully described in Note 3 to our consolidated financial statements. The preparation of our consolidated financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. We continually evaluate our estimates and judgements including those related to product warranties, trade debtors and deferred taxation. We base our estimates and judgements on historical experience and on various other assumptions we believe to be reasonable under the circumstances. This forms the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. In developing accounting policies, in addition to IFRS requirements, we also consider industry practice. The critical accounting policies discussed below are applied consistently to all segments of Orbital. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors. The financial statements of the equity accounted associate, Synerject LLC, are prepared under US GAAP and adjusted to reflect consistent accounting policies with Orbital. The following are the critical accounting policies and estimates that have been adopted in preparing our IFRS financial statements: Non-Interest-bearing borrowings Included in non-current liabilities is an amount owing to the Government of Western Australia resulting from a loan of $19,000,000 made to the Company in 1989. Repayment of this facility will be in full on the date which is 25 years after the date on which the first advance is made (May 1989), or in any year prior to that date if the aggregate number of commercially produced FlexDi 2 stroke engines, calculated on a worldwide basis, exceeds 5,000,000, by equal annual payments, each of one fifth of the loan, on 1 July in the year commencing 1 July following the year in which such production is achieved. To date there have been no FlexDi 2-stroke engines produced on a commercial basis. No interest accrues on this facility until such time as the loan becomes payable. As at July 1, 2005 the non-interest bearing loan from the Government of Western Australia was recognised initially at fair value and subsequently stated at amortised cost with any difference between amortised cost and repayment value being recognised in the income statement over the period of the borrowings on an effective interest basis. Equity Accounting The consolidated financial statements include the consolidated entity’s share of the total recognised gains and losses of a jointly-controlled entity on an equity accounted basis. For a number of years, the consolidated entity’s share of losses exceeded its interest in the joint venture, and during that period, the consolidated entity’s carrying amount was reduced to nil and recognition of further losses continued to the extent that the consolidated entity had incurred legal or constructive obligations on behalf of the jointly controlled entity.
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Table of ContentsResearch and Development Expenditure 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 consolidated entity has sufficient resources to complete development. Orbital’s share of development expenditure capitalised (included in results of jointly controlled entity) in FY2009 is $0.297 million (2008 $0.810 million, 2007 $0.643 million) Patents, Licences and Technologies Patents, licences and technology development and maintenance costs are expensed as incurred. Expenditure capitalised and amortisation Expenditure on intangible assets which are capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. 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 will be charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Impairment The carrying amount of all assets other than inventories and deferred tax assets but including property, plant and equipment and development expenditure is reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount is the greater of the asset’s fair value less costs to sell and value in use. 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. Allowance for impairment loss of Trade Debtors Allowance for impairment loss of trade debtors is estimated based on an analysis of trade debtors exceeding agreed payment terms and the likelihood of collection having regard to recent payment histories, subsequent cash receipts and direct correspondence with the relevant customers. We believe that we adequately manage our credit risk through our evaluation process, credit policies and credit control and collection procedures. However, losses on amounts receivable from our largest customers could be material to our results of operations. Allowance for impairment loss amounted to A$0.230 million at June 30, 2009 (A$0.428 million at June 30, 2008), with a bad debts write-off for the year of A$Nil (2008: A$Nil). Refer to “Results of Operations Fiscal 2009 Compared with Fiscal 2008” below for further explanation of the above expenses. Income Tax (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. (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.
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Table of ContentsA 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. The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised as amounts payable (receivable) to (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts. Any difference between these amounts is recognised by the Company as an equity contribution or distribution. The Company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only. Deferred taxation We recognise a deferred tax asset in our balance sheet only where we determine that it is probable that it will be recovered. A portion of the deferred tax asset recorded in our balance sheet relates to current or prior period tax losses where management considers that it is more likely than not that we will recover the benefit of those tax losses in future periods through the generation of sufficient future taxable profits. Our assumptions in relation to the generation of sufficient future taxable profits depend on our estimates of future taxable profits, which are estimated based on forecasts of engineering services income, licence and royalty receipts and Synerject’s business plans. These estimates are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter the projections, which may impact the recoverability of the deferred tax asset recorded in our balance sheet and those tax losses currently provided as not recoverable. In such circumstances, some or all of the carrying value of the deferred tax asset may require provisioning and we would charge the expense to the profit and loss account, and conversely, some or all of the amounts provided as not recoverable may be reversed and we would credit the benefit to the profit and loss account. At June 30, 2009, our deferred tax asset included A$5.054 million (A$5.494 million at June 30, 2008), in relation to prior period tax losses. Temporary differences Temporary taxation differences, arising due to timing differences between the periods in which transactions are recognised for accounting purposes differing to the periods in which those transactions are recognised for income taxation purposes, of the Company and its Australian resident controlled entities increased during fiscal 2009 by A$0.999 million to A$3.778 million at June 30, 2009 from A$2.779 million at June 30, 2008. A$1.934 million of the temporary difference relates to a provision for capital loss on an investment.
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Table of ContentsCarry forward tax losses Australia Tax carry forward losses of the Company and its Australian resident controlled entities increased during fiscal 2009 by A$3.393 million to A$57.703 million at June 30, 2009 from A$54.310 million at June 30, 2008. Australian income tax carry forward losses do not expire and can be carried forward indefinitely subject to:
Potential future income tax benefits in Australia have not been recognised as assets at June 30, 2009 because it is not probable that future profits will be available against which the consolidated entity can utilise the losses and timing differences. For the consolidated entity to fully realize its potential Australian future income tax benefits it will need to generate future Australian taxable income of approximately A$57.703 million and be in a position to utilize the taxable income against the benefits in the Company and the controlled entities retaining those benefits in accordance with the consolidations legislation. United States of America Tax carry forward losses of approximately A$57.594 million (US$47.106 million) (2008: A$50.420 million (US$48.778 million)) are available to certain controlled entities in the United States. A deferred tax asset of A$5.054 million (US$4.134 million) (2008: A$5.494 million, US$5.315 million) has been recognized as an asset as it is probable that future profits will be available against which the consolidated entity can utilise the losses. Under the tax laws of the United States, tax losses that cannot be fully utilized for tax purposes during the current year may, subject to some statutory limitations, be carried forward to reduce taxable income in future years. At June 30, 2009, the US$47.106 million of tax carry forward losses available expires between the years 2010 and 2023. For the controlled entities in the United States to realize their potential United States future income tax benefits they will need to generate future taxable income of approximately US$47.106 million. Approximately US$3.568 million of taxable income will be required prior to 2010 when the first portion of the benefit is due to expire. Based upon the level of historical taxable income and current projections for future taxable income over the periods in which the tax carry forward losses are deductible in both Australia and the United States, management are only in a position to state that it is probable that benefits totalling A$5.054 million in respect of carry forward losses will be realised in full. The deferred tax asset recognised as at June 30 each year represents management’s assessment of the amount of carry forward losses that it is probable will be deductable in the following five years. The movement in the recognised deferred tax asset from June 30, 2008 to June 30, 2009 is the result of the movement of the assessment period and also updates to future forecast results. Results of Operations Fiscal 2009 Compared with Fiscal 2008 Orbital’s net loss after tax was A$2.451 million for the year ended June 30, 2009 compared to a net profit of A$0.469 million for the year ended June 30, 2008. Revenue from trading activities in fiscal 2009 as detailed in Income Statements in the Consolidated Financial Statements increased as compared to fiscal 2008 by 11% to A$16.513 million:
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Other income, excluding the gain on sale of interest in Synerject of $3.678 million, was steady at A$0.370 million compared to fiscal 2008 (A$0.372 million). Total costs and expenses (excluding share of net profit of equity accounted investee, Synerject LLC) increased 1.0% to A$17.814 million in fiscal 2009 from A$17.644 million in fiscal 2008. The net increase was due to the following:
Orbital’s share of Synerject’s net profit decreased by 22% to A$1.846 million in fiscal 2009 from A$2.357 million in fiscal 2008. Synerject’s revenue decreased by 8% to US$74.635 million impacted by the difficult economic conditions experienced in the North American marine market. Development expenses of A$0.297 million incurred by Synerject have been capitalised in Orbital’s equity accounted results (fiscal 2008 A$0.810 million) in accordance with IFRS. Details of Synerject’s operations and results are contained in Synerject’s Consolidated Financial Statements (refer Item 19 – Exhibit (b)) included herein. The income tax expense for fiscal 2009 was A$2.147 million, being primarily de-recognised Deferred Tax Asset (A$1.584 million) and State and Federal income taxes in the USA (A$0.563 million) as a result of our share of Synerject taxable income. In fiscal 2008 Orbital recognised benefits from the reversal of a withholding tax provision of A$0.456 million in the net income tax benefit of A$0.445 million. Inflation has had a minimal effect on Orbital’s results of operations in fiscal 2009 compared to fiscal 2008. Results of Operations Fiscal 2008 Compared with Fiscal 2007 Orbital’s net profit after tax was A$0.469 million for the year ended June 30, 2008 compared to a net profit of A$1.333 million for the year ended June 30, 2007. Revenue from trading activities in fiscal 2008 as detailed in note 6 to the Consolidated Financial Statements decreased as compared to fiscal 2007 by 2% to A$14.939 million:
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Table of ContentsOther income decreased by 5% to A$0.372 million compared to fiscal 2007 (A$0.390 million) primarily due to reduced system warranty credits, offset by an insurance claim for water damage. Total costs and expenses (excluding share of net profit of equity accounted investee, Synerject LLC) increased 0.4% to A$17.644 million in fiscal 2008 from A$17.568 million in fiscal 2007. The net increase was due to the following:
Orbital’s share of Synerject’s net profit decreased by 25% to A$2.357 million in fiscal 2008 from A$3.157 million in fiscal 2007. Synerject’s revenue increased by 2% to US$81.020 million with increases across a number of customers and products but offset (in general) by the difficult economic conditions experienced in the North American marine market. Development expenses of A$0.810 million incurred by Synerject have been capitalised in Orbital’s equity accounted results (fiscal 2007 A$0.643 million) in accordance with IFRS. The establishment of a manufacturing facility in Changchun, China with an engineering support base in Chongqing and low initial sales volumes has resulted in a loss of US$2 million for the year, including the costs of the factory and employees in China. Orbital’s equity accounted share of the Synerject result was adversely affected by $0.4 million compared to FY2007 due to the strong Australian dollar. Details of Synerject’s operations and results are contained in Synerject’s Consolidated Financial Statements (refer Item 19 – Exhibit (b)) included herein. The income tax benefit for fiscal 2008 was A$0.445 million, being primarily net withholding tax recouped and recognised Deferred Tax Asset. In fiscal 2007 Orbital recognised benefits from tax losses not previously brought to account of A$0.358 million which, after expensing withholding taxes resulted in a net tax benefit of A$0.098 million. Inflation has had a minimal effect on Orbital’s results of operations in fiscal 2008 compared to fiscal 2007. Liquidity and Capital Resources As at June 30, 2009, Orbital’s cash balance, including short term deposits was A$10.123 million compared to A$8.804 million at June 30, 2008 and A$11.287 million at June 30, 2007. At November 30, 2009 the cash balance was A$7.494 million. In Orbital’s opinion, the working capital is sufficient for the Group’s present requirements. For fiscal 2009 Orbital recorded a net cash outflow from operations of A$2.267 million compared to cash outflows of A$0.885 million in fiscal 2008 and A$0.182 million in fiscal 2007. The cash outflow in fiscal 2009 resulted from cash flow used in operating activities of A$3.613 million offset by reduced working capital requirements of A$1.346. This compares with net cash used by operating activities in fiscal 2008 of A$0.057 million (fiscal 2007: A$0.250 million) plus working capital applications of A$0.828 million (fiscal 2007: working capital sources A$0.068 million). Synerject’s equity accounted result is non cash and therefore has no impact on operating cash flow in either fiscal 2009 or fiscal 2008 (however Synerject paid dividends to Orbital in Fiscal 2009 and Fiscal 2008, including a special dividend of A$3.151 million).
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Table of ContentsResearch and development expenditures were A$1.810 million in fiscal 2009, A$1.147 million in fiscal 2008 and A$1.022 million in fiscal 2007. Research and development activity during fiscal years 2009, 2008 and 2007 was in developing new technology for advanced combustion systems, combustion of alternative fuels (liquid and gaseous) in internal combustion engines, further developing the air-assist DI system for application on new products, and in fiscal year 2009 development of the next generation LPG fuel systems. A continued focus has been placed on R&D in fiscal years 2009 and 2008 with increased expenditure compared to previous years, and more attention to the publication and presentation of technical papers. Orbital utilised net cash of A$2.149 million for investing activities in fiscal 2009 compared with A$1.630 million in fiscal 2008 and A$0.644 million in fiscal 2007. The expenditure in fiscal 2009 consisted mainly of the construction of a heavy duty engine testing facility. No advances to Synerject were required in fiscal 2009 or 2008. Synerject paid Orbital dividends of $4.577 million in fiscal 2009 ($0.958 million in fiscal 2008 and $nil in 2007). Orbital raised A$8.792 million (after transaction costs) through a share placement and a share purchase plan in fiscal 2007. Orbital did not have any other cash flow requirements for financing activities in fiscal 2007. In May 1989, the Government of Western Australia provided Orbital with a loan facility totalling A$19,000,000 under the terms of a “Development Agreement”. As at June 30, 2009 this facility was fully utilised by Orbital. Repayment of this facility is due:
Interest is not payable on this facility until such time as the loan becomes payable, when interest will begin to accrue at the overdraft rate charged by the Commonwealth Bank of Australia on overdrafts in excess of A$100,000. Orbital established a $3.500 million Trade Finance facility with Westpac Banking Corporation to provide support for the import of inventory for the Orbital Autogas Systems business. At June 30, 2009, A$1.520 million of the facility had been drawn down. Orbital also has standby arrangements with Westpac Banking Corporation to provide support facilities of A$0.935 million, of which A$0.032 million was drawn down at June 30, 2009. At June 30, 2008 available support facilities totalled A$0.823 million, of which A$0.073 million was drawn down. Orbital had no capital expenditure contracted but not provided for as at June 30, 2009. In July 2008 the Group received funding of A$2.76 million 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 total construction costs are estimated at A$3.56 million. 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 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. Capital Expenditure The Company has budgeted capital expenditures of A$1.719 million for fiscal year 2010 primarily in the expansion of the Orbital Autogas Systems business. Funds for such expenditure will be sourced internally. In the event of a delay or a reduction in capital expenditure during fiscal 2009 the Company would still have sufficient plant, equipment and other facilities to maintain operating levels in line with previous years. There are no long-term capital commitments by the Company. Orbital’s Jointly Controlled Entity, Synerject LLC Net cash provided by Synerject’s operating activities in fiscal 2009 was US$2.904 million and fiscal 2008 was US$2.699 million. In June 2006 Synerject negotiated a 4 year term bank loan of $8.0 million which, together with additional capital contributions of US$2 million from each member, replaced loan arrangements which were due to mature in September 2006. In addition Synerject has available a US$5.0 million line of credit to be drawn as and when required maturing October 31 2009. At June 30, 2009 Synerject had drawn down $1.636 million under this line of credit. Synerject’s long term loan repayment commitments in fiscal 2010 are approximately US$1.889 million (actual paid fiscal 2009 US$4.776 million) and it is expected that Synerject will fund these
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Table of Contentsrepayments out of operating cash surpluses during the year. Synerject’s cash at bank at June 30, 2009 was US$1.078 million (2008 US$2.614 million) and total debt outstanding (including the line of credit) at June 30, 2009 was US$8.876 million (June 2008 US$5.736 million). Member guarantees are not required to support Synerject’s financing arrangements. Trend Information We anticipate that royalty earnings will be influenced by the subdued North American marine market. Engineering services revenue can be cyclical in nature and the order book (thus future revenue and cash flows) at June 30, 2009 was approximately $5.0 million compared to $4.2 million at December 31, 2008. The Synerject result will be influenced by the timing of the launch of new products in China and India and the subdued North American marine market. Off-Balance Sheet Arrangements Synerject Loan Guarantee Commitments Prior to July 2006 Orbital guaranteed 50% of the borrowings by its related business undertaking, Synerject LLC. The guarantee was entered into in 1997, at the time of formation of Synerject, to enable it to obtain loan funds for its trading operations. As noted above, in June 2006 Synerject negotiated new financing arrangements to replace the loan from Siemens-VDO. The new loan is secured by Synerject assets. There is no guarantee required from Orbital for the new financing arrangements and no obligations remaining under the Siemens-VDO line of credit. Details of Synerject’s operations and results are contained above in this Annual Report and in Synerject’s Consolidated Financial Statements (refer Item 19 – Exhibit (b)) included herein. Inflation Orbital’s operating costs are subject to the effects of inflation, and under the terms of Orbital’s license agreements, certain fees and royalty payments are, or will be, indexed to inflation, generally based on the US Producers Price Index for Finished Goods. In general, inflation has had minimal effect on Orbital’s results of operations during the last two fiscal years. Market Exposures Refer to Item 11. – “Qualitative and Quantitative Disclosures About Market Risk - Market Exposures” included herein. Interest rate sensitivity The table below provides information about Orbital’s financial instruments that are sensitive to changes in interest rates as at June 30.
At June 30, 2009 and June 30, 2008 Orbital did not have any interest rate sensitive derivative instruments.
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Table of ContentsForeign currency exchange sensitivity The functional currency of the Company is Australian Dollars. The table below provides information about Orbital’s derivative and other financial instruments that are sensitive to changes in foreign currency fluctuations as at June 30.
The Company’s equity accounted jointly controlled entity has a functional currency of United States dollars. The table below provides information about Orbital’s net investment in equity accounted jointly controlled entity which is sensitive to changes in foreign currency fluctuations as at June 30.
At June 30, 2009 Orbital did not have any foreign currency sensitive derivative instruments. At June 30, 2008 Orbital did not have any foreign currency sensitive derivative instruments. Details of Orbital’s foreign currency translation exposure as at June 30, 2009, where movements on re-translation in future periods will be recognized in net profit / (loss) are as follows:
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Table of ContentsMaturity Profile of Commercial Commitments
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 The Group has a capital commitment of $180,000 payable not later than one year in relation to the construction of the heavy duty engine testing facility.
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Directors and Senior Management The business of Orbital is managed by a board of directors which, in accordance with the company’s Constitution, may be comprised of no fewer than three, nor more than nine members. The present number of directors is five, one of whom is an executive director, as set out below. On November 13, 1985 the Company announced the appointment of Mr John Grahame Young as a Non-Executive Director. On August 22, 2007 the Company announced the appointment of Mr William Peter Day as a Director and Chairman of Orbital. On March 11, 2008 the Company announced the appointment of Dr Mervyn Jones and Dr Vijoleta Braach-Maksvytis as Non-Executive Directors effective March 31, 2008. On May 20, 2008 the Company announced the appointment of Mr Terry Stinson as the Managing Director and Chief Executive Officer effective June 21, 2008. On July 23, 2008 the Company announced the resignation of Mr John Richard Marshall as a Non-Executive Director effective July 23, 2008. Directors of Orbital are classified as either executive or non-executive directors, with the former being those directors engaged in full-time employment by Orbital. As at the date of this report, the directors of Orbital were as follows:
Qualifications and experience of each of the Directors are as follows: MR WILLIAM PETER DAY, LLB (Hons), M Administration, FCPA, FCA (Aust & UK), FTIA, MAICD, age 59 Joined the Board and appointed Chairman in August 2007. Mr Day was Chief Financial Officer of the global packaging group Amcor for seven years; he retired from that role in 2007. He has a diversified background in finance and general management in mining, manufacturing, food and financial services industries, as well as a number of public interest areas. He has held senior executive and director positions with Bonlac Foods, Rio Tinto, CRA and Comalco. He is a former Chairman of the Australian Accounting Standards Board, and was Deputy Chairman of the Australian Securities & Investments Commission. Mr Day is also a non executive director of Ansell Limited and SAI Global Limited.
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Table of ContentsMR JOHN GRAHAME YOUNG, LLB, FAICD age 65 Independent Non-Executive Director. Joined the Board in November 1985. Mr Young is a lawyer with more than 30 years experience in corporate, revenue and intellectual property law. He has been a director of Cape Bouvard Investments Pty Ltd since 1998. Mr Young chairs the Company’s Audit Committee. DR MERVYN THOMAS JONES, B.Eng (Hons), Ph.D, DipBusStuds, CEng (UK), FIChemE (UK), MAICD, MIoD (NZ), age 61 Independent Non-Executive Director. Joined the Board in March 2008. Dr Jones has more than 35 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 non-executive director of Pacific Environment Limited. Dr Jones chairs the Company’s Human Resources, Remuneration and Nomination Committee. DR VIJOLETA BRAACH-MAKSVYTIS, Bsc (Hons), Phd, MAICD age 51 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, and is also a company director, on the advisory board of the Intellectual Property Research Institute of Australia, Commissioner for UNESCO, and Governor for Foundation for Development Cooperation. MR TERRY DEWAYNE STINSON, BBA (Hons), age 51 Managing Director and Chief Executive Officer. Joined the Board on June 21, 2008. Mr Stinson has been a senior executive with Siemens VDO, Europe’s largest engineering conglomerate (recently purchased by Continental Corporation), with direct responsibility for sales in excess of US$300 million per annum in their Gasoline Systems, Fuel Systems and Fuel Components operations in the United States, Germany, Italy, China and support operations in every country where automobiles are manufactured. Mr Stinson has also served as a representative Director for Siemens VDO on the Synerject JV Board. Prior to that, he held the position of VP Manufacturing for Outboard Marine Corporation, a privately held $US1 billion multinational outboard marine propulsion and boat company. Under an Executive Service Agreement, Mr Stinson’s total fixed remuneration (“TFR”) will be $350,000, with annual cash bonuses of up to 60% of the TFR payable on achievement of stringent performance targets to be set by the Board. Mr Stinson will also participate in the Company’s performance based Executive Long Term Share Plan and the Performance Rights Plan. Participation in the Executive Long Term Share Plan is subject to shareholders approval each year. The Executive Long Term Share Plan currently provides for the issue of shares based on the Company achieving a Total Shareholder Return, over a 3 year performance period, at or above the 50th percentile of a peer group of companies. Shareholders have approved Mr Stinson’s participation in the Performance Rights Plan under which Mr Stinson was awarded 11,500,000 performance rights. The performance rights have been granted in seven tranches, each tranche with a different specified share price target as set out below:
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Table of ContentsMr Stinson will only be permitted to exercise a performance right if:
The combined potential annual value of the Executive Long Term Share Plan and the Performance Rights Plan will be set at a maximum of 70% of the TFR. The service agreement is for an indefinite period and may be terminated at any time by the Company on 12 months notice (other than for reasons of serious misconduct). Mr Stinson is required to provide three months notice of termination. Details of each Director’s remuneration are shown below.
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Table of ContentsCurrently, senior management of Orbital who are not directors are as follows:
Details of each Key Management Personnel’s remuneration are shown below.
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Table of ContentsCompensation Details of total remuneration of Directors and executive officers of the Company and the consolidated entity are as follows:
For fiscal 2009 the aggregate amount of compensation paid and accrued to the directors and senior management of Orbital as a group, inclusive of retirement and share plans, was A$1.561 million. All permanent employees of Orbital (including executive directors and officers) are entitled to become members of Orbital’s retirement plans. Such employees and Orbital contribute various percentages of gross salary and wages. For the fiscal year ended June 30, 2009 the aggregate amount of compensation paid or accrued by Orbital for the retirement plans of directors and officers totalled A$0.132 million. Board Practices The directors (excluding the Managing Director) are subject to retirement by rotation, with one-third retiring each year (or the number nearest to one-third of the number of directors if not a multiple of three), and may not continue to hold office without re-election after the third Annual General Meeting of shareholders following their last election by the shareholders. Eligible retiring directors may offer themselves for re-election by the shareholders. Directors may be appointed by the Board of Directors up to the total number permitted. Such directors hold office until the next Annual General Meeting of shareholders and may be re-elected by the shareholders at such meeting. The service agreement between the Company and the Chief Executive Officer provides for a cash payment equal to one year’s remuneration in the event of termination by the Company other than by reason of the Chief Executive Officer’s serious misconduct or material breach of the agreement. No other officer’s service contract provides for benefits to such person upon termination, other than in the event of redundancy. No retirement or termination benefits are payable to non-executive Directors. Corporate Governance The following outlines the main Corporate Governance practices of the Company that were in place throughout the financial year: Board of Directors and its Committees The Board’s primary role is to protect and enhance long-term shareholder value by providing strategic guidance to the Company and effective oversight of management. To fulfil this role, the Board is responsible for the overall corporate governance of the consolidated entity including its strategic direction, establishing goals for management and monitoring the achievement of these goals. The Board is also responsible for reviewing and ratifying systems of risk management and internal compliance controls. Details of the Board’s charter are located on the Company’s website (www.orbitalcorp.com.au).
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 consolidated entity including a system of internal control and the establishment of appropriate ethical standards. 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.
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Table of ContentsThe agenda for meetings is prepared in conjunction with the Chairman, Managing Director and Company Secretary. Standing items include the managing director’s report, financial reports, strategic matters, governance and compliance. Submissions are circulated in advance. Executives are regularly involved in board discussions and directors have other opportunities, including visits to operations, for contact with a wider group of employees. 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.
Each Director has the right of access to all relevant Company information and to the Company’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.
The names and qualifications of the Directors of the Company in office at the date of this Report are detailed above. The composition of the Board is determined using the following principles:
An independent director is a non-executive director who:
The Company’s policy with respect to Directors and Officers dealing in the Company’s shares or options states that:
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Table of ContentsA copy of the policy is available on the Company’s website.
In accordance with the Corporations Act 2001 and the Company’s constitution, Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Where the Board believes that a significant conflict exists the Director concerned must not be present at the meeting whilst the item is considered or vote on the matter. The Board has procedures in place to assist Directors to disclose potential conflicts of interest.
The role of the Human Resources, Remuneration and Nomination Committee is to review and make recommendations to the Board on the remuneration packages and policies applicable to the Chief Executive Officer, senior executives and Directors themselves. 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 share schemes, incentive performance packages, superannuation entitlements, fringe benefits policies and professional indemnity and liability insurance policies. The Remuneration Committee obtains independent advice on the appropriateness of remuneration packages, given trends in comparative companies both locally and internationally. The Committee also oversees the appointment and induction process for directors. It reviews the composition of the Board and makes recommendations on the appropriate skill mix, personal qualities, expertise and diversity. When a vacancy exists or there is a need for particular skills, the Committee, in consultation with the Board, determines the selection criteria based on the skills deemed necessary. Potential candidates are identified by the Committee with advice from an external consultant, where appropriate. The Board then appoints the most suitable candidate who must stand for election at the next general meeting of shareholders. The Nomination Committee is also responsible for the selection, appointment and succession planning process of the Company’s Chief Executive Officer. Members of the Human Resources, Remuneration and Nomination Committee during the year were Dr M T Jones(Chairman), Mr W P Day, Mr J G Young, Dr V Braach-Maksvytis, and Mr J R Marshall. The Human Resources, Remuneration and Nomination Committee meet as and when required. The Committee has a documented charter, approved by the Board. The charter may be viewed on the Company’s website. The performance of all Directors is reviewed by the Chairman each year. Directors whose performance is unsatisfactory are asked to retire. Remuneration Report
Remuneration is referred to as compensation throughout this report. This Remuneration Report outlines the director and executive remuneration arrangements of the Group. For the purposes of this report Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any director (whether executive or otherwise) of the parent company, and the senior executives of the Group. The Remuneration Committee reviews and makes recommendations to the Board on remuneration packages and policies applicable to directors, secretary and senior executives of the Company. The performance of the Company depends upon the quality of its directors and executives. To prosper, the Company must attract, motivate and retain highly skilled directors and executives. To this end, the Company embodies the following principles in its remuneration framework:
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Table of ContentsData 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. In addition to their salaries, the Group also provides non-cash benefits to its key management personnel. Fixed compensation Fixed compensation consists of base compensation (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. Compensation levels are reviewed annually by the remuneration committee through a process that considers segment and overall performance of the Group. In addition, data from independent surveys is reviewed to ensure the directors’ and senior executives’ compensation is competitive in the market place. A senior executive’s compensation is also reviewed on promotion. Performance-linked compensation 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 short-term incentive (STI) is an “at risk” bonus provided in the form of cash, while the long-term incentive (LTI) is provided as ordinary shares of Orbital Corporation Limited under the rules of the Executive Long Term Share Plan, and the Performance Rights Plan (offered to Mr Stinson). Short-term Incentive Executive directors and senior executives may receive bonuses based on the achievement of goals related to the performance of the Group, including a combination of sales, earnings before interest and tax (EBIT) and cash and individual key performance indicators (KPI’s). These measures are chosen as they directly align the individual’s reward to the Group’s strategy and performance. Achievement of budgeted goals may result in bonuses of between 5 – 20% of salary. No bonus is awarded where performance falls below a minimum. Long-term Incentive 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, which are based on the relative ranking of the Total Shareholder Return (“TSR”) of the Company to a group of selected peers, apply to determine the number of shares (if any) to be granted to the Executives. TSR is the percentage increase in a company’s share price plus reinvested dividends over a given period and reflects the increase in value delivered to shareholders over that period. The peer group to which the Company’s TSR will be compared will comprise the 50 smallest companies, other than resource companies and property and investment trust companies, within the S&P / ASX 300 Index. These companies have a similar market capitalisation to the Company. The TSR performance criterion was chosen as it is widely accepted as one of the best indicators of shareholder wealth creation as it includes share price growth, dividends and other capital adjustments. In addition, this criterion provides a readily obtained objective means of measuring the Group’s performance against its peer group. The Company’s TSR ranking at the end of the Performance Period, when compared to the TSR of the peer group will determine the percentage of shares originally offered which will be granted to the Executive.
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Table of ContentsThe following table sets out the relevant percentages based on various percentile rankings of the Company:
No shares will be granted unless the Company’s TSR is at or above the 50th percentile. In 2009, 1,611,000 shares (2008: 1,200,000) were issued in accordance with the terms of the plan. No shares were issued in the 2007 financial year as the company’s performance against its peer group ranked it below the 50th percentile. At the Company’s Annual General Meetings in October 2004 and October 2008, shareholders approved the above plan in relation to the ongoing remuneration of Executive Directors and senior executives. At the Company’s Annual General Meeting in October 2008, shareholders approved a Performance Rights Plan in relation to the ongoing remuneration of Executive Directors and senior executives. Mr Stinson is currently the only participant in the Performance Rights Plan. Executive Directors and 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, but the plan is designed to align the interests of participating employees with those of shareholders. Participation of Executive Directors is subject to shareholder approval. In considering the Group’s performance and benefits for shareholders wealth the Remuneration Committee has regard to the following indices in respect of the current financial year and the previous four financial years. EBIT is considered in setting the STI as it is considered an important short term financial performance target. Dividends, changes in share price, and return of capital are included in the TSR calculation which is the performance criterion assessed for the LTI. The STI/LTI were first introduced in 2001 for the 2001/02 financial year. An analysis of the remuneration and performance data since that time has revealed that performance targets in the STI plan have been met in the 2003 and 2004 years, when the company recorded significant improvement in its results and in 2006 and 2007 when the Company achieved strategic goals and positive EBIT. Performance targets under the LTI were met under the LTI for the first time since its inception in 2008 and as a result 1,200,000 shares were issued. Performance targets under the LTI were also met in 2009 and as a result 1,611,000 shares were issued.
Service Agreements The service contract for the Chief Executive Officer is unlimited in term, but capable of termination on 12 months notice by the Company. The Company has the right to terminate the contract immediately by making payment equal to 12 months pay in lieu of notice. The Chief Executive Officer has the right to terminate the contract on 3 months notice. The Chief Executive Officer has no entitlement to termination payment in the event of removal for misconduct. Contractual arrangements between the Company and other senior executives are also unlimited in term and provide for termination on one month’s notice (or payment in lieu) in accordance with the Company’s standard conditions. On termination of employment, executive directors and senior executives are also entitled to receive their statutory entitlements of accrued annual and long service leave, together with any superannuation benefits.
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Table of ContentsNon-executive Directors Total remuneration for all non-executive Directors, last voted upon by shareholders at the 2001 Annual General Meeting, is not to exceed $400,000 per annum. When setting fees and other compensation for non-executive Directors, the Board seeks independent advice and applies Australian and international benchmarks. The Chairman’s base fee is $100,000 per annum, plus a further fee of $5,050 per annum for membership of the Audit Committee. Other non-executive Directors’ base fees are currently $50,000 per annum. An additional fee of $5,050 per annum is payable for membership (other than as Chairman) of the Audit Committee. The Chairman of that Committee receives an additional fee of $7,070 per annum. Non-executive Directors do not receive performance related remuneration. Audit Committee The role of the Audit Committee is to give the Board of Directors additional assurance regarding the quality and reliability of financial information prepared for use by the Board in determining accounting policies for inclusion in the financial report. The Committee has a documented charter, approved by the Board. The charter is available on the Company’s website. All members of the Committee must be independent, non-executive directors. Members of the Audit Committee during the year were Mr J G Young (Chairman), Mr W P Day, Dr M T Jones, Dr V Braach-Maksvytis and Mr J R Marshall. 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 June 30, 2009 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 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 Stock Exchange Listing Rules; and improving quality of the accounting function. The Audit Committee reviews the performance of the external auditors on an annual basis and meets with them to discuss audit planning matters, statutory reporting and as required for any special reviews or investigations deemed necessary by the Board. The Audit Committee also assesses whether non-audit services provided by the external auditor are consistent with maintaining the external auditor’s independence and provides advice to the Board whether the provision of such services by the external auditor is compatible with the general standard of independence of auditors imposed by the Corporations Act 2001. The Audit Committee charter provides for rotation of the external audit partner every five years. Risk Management 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 consolidated entity. Responsibility for establishing and maintaining effective risk management strategies rests with senior management, accountable to the Chief Executive Officer and the Audit Committee of the Board. The Audit Committee reviews the risk management and internal control structure implemented by management so as to obtain reasonable assurance that the consolidated entity’s assets are safeguarded and that reliable financial records are maintained. The Chief Executive Officer and Chief Financial Officer have declared, in writing to the Board, 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. Operational and other compliance risk management has also been reviewed and found to be operating efficiently and effectively. Details of the Company’s risk management policy are available on the Company’s website.
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Risks to the consolidated entity arise from matters such as competitive technologies that may be developed, delays in government regulation, reduction in development and testing expenditure by the Company’s customers, the impact of exchange rate movements on royalty receipts, environmental issues, occupational safety and health and financial reporting.
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:
To ensure that its engineering services are of the highest standard, the consolidated entity has obtained ISO 9001 accreditation for research, design and development services to the world’s producers of powertrain and engine management systems and the provision of general engineering services. Orbital Autogas Systems are certified TS16949 and ISO14001f or its automotive component manufacturing capabilities. 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.
The Chief Executive Officer and Chief Financial Officer are required to, at least annually, evaluate internal controls over financial reporting and disclose in writing to the Company’s Auditors and the Audit Committee:
Monthly financial results are reported against budgets approved by the Directors and revised forecasts for the year are prepared regularly.
The consolidated entity 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 Company on an on-going basis. The Directors are not aware of any serious breaches during the period covered by this report. Ethical Standards 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 consolidated entity. 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 consolidated entity, providing for the conduct of business in accordance with the highest ethical standards and sound corporate governance. The Code also incorporates the Company’s policy on trading in the Company’s securities. A Code of Ethics, relating to Accounting Practice and Financial Reporting, has also been adopted by the Board and applies specifically to the Chief Executive Officer, Chief Financial Officer and senior finance officers of the Company who influence financial performance. The Code of Ethics is complementary to the Code of Conduct, copies of both of which are available on the Company’s website.
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Table of ContentsContinuous Disclosure and Communication with Shareholders The Board of Directors aims to ensure that shareholders are informed of all major developments affecting the consolidated entity’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 Australian Stock Exchange (“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 at least one of either the Managing Director or the Chairman prior to release to the ASX. The Company Secretary is responsible for administering communications with the ASX. Information is communicated to shareholders as follows:
The Board encourages participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the consolidated entity’s strategy and goals. Important issues are presented to the shareholders as single resolutions. The Company’s external auditor is requested to attend annual general meetings to answer any questions concerning the audit and the content of the auditor’s report. Shareholders are requested to vote on the appointment of Directors, the 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. The Company’s policy on Release of Price Sensitive Information and its policy on communication with shareholders are available on the Company’s website. Employees Details of the number, category and location of employees of the Orbital Group in the last three years are as follows:
The management and employees of the Group are not associated with any particular labour union.
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Table of ContentsShare Ownership Details of share ownership by Directors and senior managers at December 14, 2009 are as follows:
Directors and senior managers do not have different voting rights from other shareholders. Employee Share Plan - 2007 Offer Under the Company’s No. 1 Plan referred to above, all eligible employees as at October 31, 2007 have been offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before that date). No shares have been offered to employees under the No. 2 Plan. On October 31, 2007, a total of 236,374 fully paid ordinary shares were issued to employees under the No. 1 Plan. Executive Long Term Share Plan - 2007 Offer At the Company’s Annual General Meeting on October 23, 2007, shareholders approved the participation of the then Managing Director, Dr Rodney Houston, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Managing Director and eligible executives of the Company. Dr Houston has been offered up to 512,500 fully paid ordinary shares. Shares offered under the Plan will only be granted, at no cost to participants, if performance conditions are met or if, on cessation of employment, there is a Qualifying Reason. The performance conditions are based on the relative ranking of the Total Shareholder Return (TSR) of the Company to a group of selected peers. 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 by market capitalisation (other than resource companies and property and investment trust companies) within the S&P/ASX 300 Index. The comparison will be made over a three year “Performance Period” commencing on September 1, 2007 and ending on August 31,. Dr Rod Houston On 23 July 2008 the Company announced the issue of shares to Dr Rodney Houston, the former Chief Executive Officer and Managing Director, in accordance with the terms and conditions of the Executive Long Term Share Plan as approved by shareholders. The Board of Directors exercised their authority under the Plan to make an ex-gratia allocation of 1,037,500 ordinary shares in the Company. The remaining 907,500 Executive Long Term Share Plan shares offered under the 2005, 2006 and 2007 offers, but not yet granted, have been forfeited by Dr Houston. Employee Share Plan - 2008 Offer Under the Company’s No. 1 Plan referred to above, all eligible employees as at October 31, 2008 have been offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before that date). No shares have been offered to employees under the No. 2 Plan. On October 31, 2008, a total of 1,673,358 fully paid ordinary shares were issued to employees under the No. 1 Plan.
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Table of ContentsExecutive Long Term Share Plan - 2008 Offer At the Company’s Annual General Meeting on October 22, 2008, shareholders approved the participation of the then Managing Director, Mr Terry Stinson, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Managing Director and eligible executives of the Company. Mr Stinson has been offered up to 1,625,000 fully paid ordinary shares. Shares offered under the Plan will only be granted, at no cost to participants, if performance conditions are met or if, on cessation of employment, there is a Qualifying Reason. The performance conditions are the same as those in the 2007 year under the Plan (referred to above). The comparison will be made over a three year “Performance Period” commencing on September 1, 2008 and ending on August 31, 2011. Performance Rights Plan - 2008 Offer 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:
Terms and conditions It is proposed that the performance rights will be subject to performance hurdles which would have to be satisfied over particular periods specified by the Board. The relevant performance hurdles would need to be met over those specified periods before the performance rights become exercisable. When issuing an invitation under the Performance Rights Plan, the Board has a discretion to determine the terms and conditions of an award of performance rights to ensure that they are appropriate for the relevant executive (including the number of performance rights to be awarded, the relevant performance hurdles and the length of the periods in which those performance hurdles must be satisfied). Exercise of performance rights Performance rights issued under the Performance Rights Plan will be exercisable if:
Where an event occurs (such as a takeover bid, a scheme of arrangement or the winding up of the Company) and the performance rights are granted in tranches and are subject to separate performance hurdles, and the participant has exceeded the last performance hurdle but has not yet met the next performance hurdle, the participant may be permitted to exercise a proportion of his or her performance rights associated with the next performance hurdle relative to the extent to which the participant has achieved that next performance hurdle. Cessation of employment Performance rights lapse immediately (even if they have otherwise become exercisable) on termination for misconduct or any other reason justifying termination without notice. In the case of death, total permanent disablement, redundancy, retirement, or where employment has terminated by reason of the Company selling a business:
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In all other cases where employment ceases, performance rights lapse immediately unless they have otherwise become exercisable, in which case they lapse at the end of 30 days. Disposal restriction Shares will be issued directly to executives once they have exercised their performance rights. Executives will not be permitted to dispose of those shares until the earlier of:
Under the Performance Rights Plan:
Employee Share Plan - 2009 Offer Under the Company’s No. 1 Plan referred to above, all eligible employees as at October 31, 2009 have been offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before that date). No shares have been offered to employees under the No. 2 Plan. On December 14, 2009, a total of 1,445,894 fully paid ordinary shares were issued to employees under the No. 1 Plan.
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Table of ContentsExecutive Long Term Share Plan – 2009 Offer At the Company’s Annual General Meeting on October 21, 2009, shareholders approved the participation of the then Managing Director, Mr Terry Stinson, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Managing Director and eligible executives of the Company. Mr Stinson has been offered up to 6,562,500 fully paid ordinary shares. Shares offered under the Plan will only be granted, at no cost to participants, if performance conditions are met or if, on cessation of employment, there is a Qualifying Reason. The number of shares that the executive actually receives depends on two performance hurdles, as set out below:
The following table sets out the relevant percentages of an executive’s Personal Allotment which will be issued at the conclusion of the Performance Period based on the TSR ranking of the Company relative to the peer group:
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Major Shareholders Orbital’s ordinary shares currently constitute the entire outstanding capital of the Company. As of December 14, 2009, Orbital had issued and outstanding 481,973,944 fully paid ordinary shares. Orbital is not directly or indirectly controlled by another corporation or by any foreign government and there are no arrangements known to Orbital, the operation of which may at a subsequent date result in a change in control of Orbital. There is only one shareholder who has greater than 5% of the Company’s issued capital. The details of the shareholder are:
There has been no significant change in the composition of major shareholders. The Executive Officers and Directors of Orbital as a group own 5,110,203 ordinary shares which represent 1.05% of that class. Major shareholders do not have different voting rights from other shareholders. Shareholder Locations There are 481,973,944 ordinary shares in the company on issue at December 14, 2009, 78% of which are held by 5,664 shareholders located in Australia. There are 2,702,621 ADR’s (representing 108,104,840 ordinary shares in the company) on issue at December 14, 2009 held by 384 registered holders located in the United States of America. Related Party Transactions There were no related party transactions with Directors during fiscal 2009 (nil in both fiscal 2008 and 2007). The aggregate amounts receivable from (net of provisions for doubtful debts)/ payable to wholly owned controlled entities by the Company at November 30, 2009 and June 30 in each of the preceding two years are as follows:
The largest amounts outstanding during the periods covered were as follows:
During fiscal 2009, nil interest expense (fiscal 2008: nil; fiscal 2007: nil) was recognised by the Company in relation to these loans. The interest rate charged during the year was nil (2008 and 2007: nil) Details of dealings with other related parties, being Synerject LLC, are as follows: The aggregate amounts receivable from / payable to Synerject LLC by the Orbital Group at November 30, 2009 and June 30 in each of the preceding two years are:
During fiscal 2009, the Orbital Group provided engineering services to Synerject LLC to the value of A$0.081 million (2008: A$0.081 million) and purchased goods and services from Synerject LLC to the value of A$0.140 million (2008: A$0.078 million). All trading transactions are in the ordinary course of business and on normal commercial terms and conditions. Included above are unsecured working capital advances which are interest free and repayable on demand.
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Consolidated Financial Statements and Other Financial Information Refer pages F-1 through F-50 included herein. Significant Changes There have been no significant changes to the operations of the Company since the date of the annual financial statements. Legal Proceedings Orbital does not presently have any legal proceedings pending with significant effects on the Company’s financial position or profitability. Dividend Policy Orbital’s Board of Directors annually reviews the Company’s ability to pay dividends, which may be declared out of current year profits or retained earnings of the Company. The Company does not anticipate being in a position to pay a dividend in the 2010 fiscal year.
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Nature Of Trading Market Orbital’s ordinary shares are traded on the ASX. The ASX is a nationally operated stock exchange with an Automated Trading System in the capital city of each Australian state. The ordinary shares are also traded in the United States in the form of ADSs evidenced by American Depositary Receipts (“ADRs”) issued by The Bank of New York as depositary under a deposit agreement dated May 9, 2003. Each ADS represents forty ordinary shares. The ADSs have traded on the Over the Counter Bulletin Board (OTCBB) with effect from July 1, 2004, under the symbol “OBTLY”. Prior to that time, the ADSs were traded on the New York Stock Exchange (NYSE) but were de-listed as a result of Orbital’s non-compliance with NYSE’s continued listing requirements relating to market capitalization and stockholder equity. The following table sets forth, for the periods indicated, the high and low closing sale prices per share and the high and low day trade volume of Orbital’s fully paid ordinary shares based upon information provided by the ASX Automated Trading System, and the high and low closing sale prices per ADS and the high and low day trade volume as reported on the NYSE to June 30, 2004 and thereafter on the OTCBB. Note that effective May 9, 2003 the ratio of ordinary shares to ADSs was changed from 1 : 8 to 1 : 40.
On November 30, 2009, the closing sale price of the ordinary shares on the ASX was A$0.055 per ordinary share and the closing sale price of the ADSs on the OTCBB on that date was US$1.90 per ADS. On November 30, 2009, 2,702,621 ADSs, representing 108,104,840 ordinary shares, or approximately 22% of the outstanding ordinary shares, were outstanding and were held by 384 holders of record including nominee companies holding on behalf of beneficial shareholders.
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Memorandum and Articles (Constitution) No objects and purposes of the Company are stated or, under Australian law, are required to be stated, in the Company’s Constitution. At the Company’s Annual General Meeting on October 26, 2004 shareholders voted to adopt a new Constitution for the Company – refer Exhibit 1.1. Under the Company’s Constitution:
The Company has fully paid ordinary shares on issue. Dividends, as declared by Directors and which are only payable from profits, are payable on all fully paid ordinary shares equally. Except as otherwise provided by statute, all dividends unclaimed for one year after having been declared may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed. At meetings of shareholders, each shareholder present in person or by proxy or representative has, on a show of hands, one vote and, on a poll, each shareholder present in person or by proxy or representative has one vote in respect of each fully paid share held by that shareholder. Nothing in the Company’s Constitution discriminates against any existing or prospective holder of shares in the Company as a result of such shareholder owning a substantial number of shares. Changes to the rights of shareholders in relation to a particular class of shares may only be made with the consent in writing of the holders of three-quarters of the issued shares of that class or if authorised by a special resolution passed at a separate meeting of the holders of that class of share. The Company does not currently have different classes of shares. Details of requirements for Directors to stand for re-election are set out at “Item 6. Directors, Senior Management and Employees – Board Practices”. In accordance with the Company’s Constitution, any Director may whenever that Director thinks fit convene a general meeting of shareholders of the Company. Under the Corporations Act 2001, the Directors must call and arrange to hold a general meeting on the signed written request of either members with at least 5% of the votes that may be cast at the general meeting or at least 100 members who are entitled to vote at the general meeting. The request must state any resolution to be proposed at the meeting. The Directors must call the meeting within 21 days after the request is given to the Company and the meeting is to be held not later than 2 months after the request is given to the Company. Shareholders must be given at least 28 days written notice of a meeting of the Company’s shareholders, which notice may be given personally or by post and must set out:
The persons entitled to attend a general meeting of the Company shall be the shareholders (in person, by proxy or representative), the directors, the Company’s auditor and such other person or persons as the meeting may approve. There are no limitations under the Constitution of Orbital to the right of non-residents to hold or vote ordinary shares. Takeovers of Australian companies by foreign interests are subject to review and approval by the Treasurer of the Commonwealth of Australia under the Foreign Acquisitions and Takeovers Act 1975. The statute applies to any acquisition or proposed acquisition of 15% or more of the outstanding shares of an Australian company by one foreign person or group of associated foreign persons or any
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Table of Contentsacquisition or proposed acquisition which results in one foreign person or group of associated foreign persons controlling 15% or more of total voting power. In addition, the statute applies to any acquisition or proposed acquisition by non-associated foreign persons resulting in foreign persons controlling, in the aggregate, 40% or more of total voting power or ownership. Material Contracts Other than the Executive Service Agreement referred to in Exhibit 10.1, there are no material contracts (other than contracts entered into in the ordinary course of business) to which the Company or any member of the Orbital Group is a party in the two years immediately prior to publication of this document. Exchange Controls Under existing Australian legislation, the Reserve Bank of Australia does not prohibit the import and export of funds, and generally no governmental permission is required for Orbital to move funds in and out of Australia. However, for the movement of funds to and from “tax havens”, as specified by current regulations, a tax clearance certificate must be obtained. The United States is not a declared tax haven. Accordingly, at the present time, remittances of any dividends, interest or other payments by Orbital to non-resident holders of Orbital’s securities in the United States are not restricted by exchange controls. Taxation The following is a summary of material United States federal income and Australian tax consequences of the ownership of ordinary shares or ADSs by US Holders. Except as otherwise noted, the statements of Australian and United States tax laws set out below are based on the laws in force, as of the date of this Annual Report, and are subject to any changes in United States or Australian law, and in any double taxation convention between the United States and Australia, occurring after that date possibly with retrospective effect. On September 27, 2001, a Protocol was signed to amend the double tax convention between Australia and the United States. The Protocol provides for reductions in withholding taxes on certain dividends, interest and royalties. In particular, no withholding tax will be chargeable in the source country on dividends payable to a listed public company from an 80% or more beneficially owned subsidiary. The rate of withholding tax on royalties will be reduced from 10% to 5%. The Protocol was formally ratified on May 13, 2003 and has effect from July 1, 2003 in relation to withholding taxes and from income tax years beginning on or after July 1, 2004 for other taxes covered by the Protocol. For purposes of this discussion, a US Holder is any beneficial owner of ADSs or ordinary shares that is:
Australian Taxation The following summary outlines the Australian income tax implications to non-resident holders of ADSs and ordinary shares who held ADSs or ordinary shares as capital assets. The summary is not exhaustive of all possible tax considerations, and holders of ADSs and ordinary shares are advised to satisfy themselves as to the overall tax consequences regarding the application of any relevant Double Taxation Agreement, by consulting their own tax advisers. The summary is based on legislation and case law applicable at the date of this report. Future legislative changes and developments in case law interpretation may impact upon the taxation position set out below.
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Table of ContentsResidency A natural person will be a resident of Australia if that person has been in Australia for more than 183 days in a year of income, unless that person has a usual place of abode outside of Australia and does not intend to take up residency in Australia. A corporation will be a resident of Australia if it is incorporated in Australia, or if not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power is controlled by shareholders who are residents of Australia. Taxation of Dividends Dividends paid by an Australian resident corporation may be paid as franked or unfranked dividends. Australian corporations are required to provide shareholders with notices detailing the extent to which dividends are franked or unfranked, and the deduction, if any, of dividend withholding tax. To the extent to which those dividends are paid out of profits which have been subject to Australian company tax, they will be franked dividends. Fully franked dividends paid to a non-resident will be exempt from Australian dividend withholding tax. Unfranked or partially franked dividends will be subject to Australian dividend withholding tax to the extent the dividends are unfranked. The rate of withholding tax on dividends is discussed below. Shareholders who elect to participate in a dividend reinvestment plan in effect elect to invest their dividends in an allotment of ordinary shares. As is the case with a cash dividend, the receipt of these additional ordinary shares will represent assessable income to an Australian resident shareholder, and will carry franking credits to the same extent as any cash dividend. The Australian Government provides a taxation incentive in the form of 125% tax deduction for companies which incur expenditure on research and development activities. This incentive has contributed to Orbital’s past level of accumulated carry forward tax losses, which were available for off-set against future income. The availability of these carry forward losses has impacted the amount of tax Orbital has paid and accordingly, the ability of Orbital to pay franked dividends. Bonus shares issued to existing shareholders out of a share capital account are not dividends for Australian income tax purposes, and are therefore not subject to dividend withholding tax. Withholding Tax on Dividends The double taxation treaty between Australia and the United States limits the Australian dividend withholding tax on the unfranked portion of dividends paid to a US resident who is beneficially entitled to the dividend to 15%, unless the shareholder carries on business in Australia through a permanent establishment, or performs independent personal services from a fixed base in Australia, and his share holding is effectively connected with the permanent establishment or fixed base, in which case a 30% withholding tax applies. From July 1, 2003 where a US resident holds at least 10%, but less than 80%, of the voting power of an Australian company, withholding tax on the unfranked portion of a dividend will be 5%. A withholding tax exemption is available where a dividend paid by the company is paid out of profits which include certain dividends received from foreign companies. Capital Gains Tax (“CGT”) The sale of ADSs and ordinary shares may be subject to Australian CGT where the ADSs or the ordinary shares are held by:
Australian CGT is generally payable upon the profit arising from the sale of assets acquired after September 19, 1985. For assets that are sold prior to September 21, 1999 the profit is calculated as the disposal proceeds less the costs, indexed for inflation for assets held for at least twelve months. Capital losses are not subject to indexation and can only be offset against capital gains. For assets that are sold after September 21, 1999 the taxation treatment depends on whether the assets were sold by an individual or a company. Special rules also apply to Australian complying superannuation funds.
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Table of ContentsFor assets that were acquired prior to September 21, 1999 by an individual, and held for at least one year, the individual taxpayer now has a choice of including in assessable income either:
For assets acquired on or after September 21, 1999 by an individual, and held for at least one year, the individual will only be taxed on 50% of the difference between the disposal price and the original cost. For assets that are sold after September 21, 1999, the capital gain is calculated as the disposal proceeds less the costs, indexed for inflation to September 30, 1999 for assets held for at least one year. Companies are not eligible for the 50% discount treatment. Where the asset is held for less than one year, 100% of the gain will be assessable for both individuals and companies. Assets acquired before September 19, 1985 generally remain free from tax. Capital losses are not available in respect of assets acquired before this date. Ordinary shares issued to a shareholder who is a resident for Australian tax purposes, through participation in the dividend reinvestment plan will be deemed to be acquired when issued and will be subject to Australian CGT upon disposal as discussed above, regardless of the date of acquisition of the relevant original shares participating in the plan. Stamp Duty No Australian stamp duty will be payable on the issue or stock market transfer of an ADS, provided the ADS is registered on a register kept by or on behalf of the person who issued the ADS in the United States, and the ADS is registered on the register:
From July 1, 2001, no Australian stamp duty is payable on the transfer of Orbital’s ordinary shares. United States Federal Income Taxation The following is a summary of the material United States Federal income tax consequences resulting from the ownership and disposition of ADSs or ordinary shares by US Holders. This summary applies only to holders who hold ADSs or ordinary shares as capital assets and does not apply to holders of ADSs or ordinary shares that are subject to special rules, such as holders that:
This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, as well as on the Convention between the United States of America and Australia (the “Treaty”). These laws are subject to change, possibly on a retrospective basis.
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Table of ContentsThis summary is also based in part on representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement and any related agreement will be performed in accordance with its terms. Beneficial owners of ADSs or ordinary shares are advised to consult their tax advisers as to the Australian, United States and other tax consequences resulting from the ownership and disposition of ADSs and ordinary shares, including state and local tax consequences. For United States Federal income tax purposes, holders of ADRs evidencing ADSs will generally be treated as owners of the ordinary shares underlying such ADRs. Exchanges of ordinary shares for ADRs, and ADRs for ordinary shares, generally will not be subject to United States federal income tax. Taxation of Dividends Under the United States federal income tax laws, and subject to the passive foreign investment company (“PFIC”) rules discussed below, US Holders will include in gross income the gross amount of any dividend paid, before reduction for Australian withholding taxes, by Orbital out of its current or accumulated earnings and profits, as determined for United States federal income tax purposes. Dividends paid to non-corporate US Holders in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable at a maximum rate of 15 percent provided that the US Holder holds the ADSs or ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends paid with respect to the shares or ADSs generally will be qualified dividend income. US Holders must include any Australian tax withheld from the dividend payment in this gross amount even though they do not in fact receive it. The dividend is taxable to a US Holder when such US Holder, in the case of ordinary shares, or the Depositary, in the case of ADSs, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution to be included in income of a US Holder will be the US dollar value of the Australian dollar payments made, determined at the spot Australian dollar/US dollar rate on the date the dividend distribution is included in the income of the US Holder, regardless of whether the payment is in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is includible in income to the date such payment is converted into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a return of capital to the extent of the US Holder’s basis in the ordinary shares or ADSs and thereafter as capital gain. Subject to foreign tax credit limitations, the Australian tax withheld in accordance with the double taxation treaty between Australia and the United States and paid over to Australia will be creditable against the US Holder’s United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15 percent tax rate. Dividends will be income from sources outside the United States. Dividends paid in taxable years beginning before January 1, 2007 generally will be “passive” or “financial services” income and dividends paid in taxable years beginning after December 31, 2006 will, depending on the US Holder’s circumstances, be “passive” or “general” income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to US Holders. It is possible that we are or will be at least 50% owned by persons treated as United States persons under the US tax code. Under Section 904(h) of the US tax code, dividends paid by a non-U.S. corporation that is at least 50% owned by US persons may be treated as US source income rather than non-US source income for foreign tax credit purposes to the extent the non-US corporation has more than an insignificant amount of US source income. The effect of this rule, if applicable in future years, may be to treat a portion of the dividends paid by us as United States source income for foreign tax credit purposes. Such treatment may adversely affect a shareholder’s ability to use foreign tax credits. Distributions of additional ordinary shares to US Holders with respect to their ordinary shares or ADSs that are made as part of a pro rata distribution to all shareholders of the company will generally not be subject to United States federal income tax. US Holders of ADSs or ordinary shares that elect, under either the bonus share election plan or the dividend reinvestment plan, to receive additional ordinary shares at a discount rather than cash dividends will be treated for United States Federal income tax purposes as having received a dividend equal to the fair market value of the additional ordinary shares received.
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Table of ContentsTaxation of Capital Gains Subject to the PFIC rules discussed below, upon a sale or other disposition of ordinary shares or ADSs, a US Holder will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the US dollar value of the amount realized and the US Holder’s tax basis, determined in US dollars, in the ordinary shares or ADSs sold or otherwise disposed of. Capital gain of a noncorporate US Holder that is recognized in taxable years beginning on or after May 6, 2003 and before January 1, 2011 is generally taxed at a maximum rate of 15 percent where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Passive Foreign Investment Company Rules Orbital believes that ordinary shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change based upon future developments or changes in Orbital’s gross income or the value of its assets. If Orbital were to be treated as a PFIC, unless a US Holder elects to be taxed annually on a mark-to-market basis with respect to the ordinary shares or ADSs, gain realized on the sale or other disposition of ordinary shares or ADSs would in general not be treated as capital gain. The US Holder would be treated as if such holder had realized such gain and certain “excess distributions” rateably over the holder’s holding period for the ordinary shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, ordinary shares or ADSs will be treated as stock in a PFIC if Orbital was a PFIC at any time during the US Holder’s holding period in the ordinary shares or ADSs. Dividends that a US Holder receives from Orbital will not be eligible for the special tax rates applicable to qualified dividend income if Orbital is treated as a PFIC with respect to a US Holder either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income. Documents on Display The Company files annual and semi-annual reports and other information with the Securities and Exchange Commission (“SEC”). You may read and copy documents that have been filed with the SEC at the SEC’s public reference room located at 100 F Street NW, Washington DC 20549. Please telephone the SEC at 1-800-SEC-0330 to obtain information on the operation of the public reference room. Such materials can also be obtained on the SEC’s internet site at www.sec.gov. Copies of certain of the documents referred to in this annual report on Form 20-F may be on Orbital’s website (www.orbitalcorp.com.au) and may also be inspected on request at the Company’s registered office.
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Market Exposures We are exposed to market risks, including changes in interest rates, changes in foreign currency exchange rates, and credit risk. To manage the volatility relating to these risks, we take advantage of natural offsets to the extent possible. For example, whenever possible we have cash expenses in the same countries and currencies as we generate our cash flows. In appropriate circumstances, and where we are unable to naturally offset our exposure to these risks, we enter into derivative transactions to synthetically reduce the exposures. The purpose of these hedging instruments is to create a corresponding, but opposite, movement in the underlying value of the cash flow being hedged. We enter into these transactions only in accordance with internal policies set by our directors. We do not hold or enter into derivative financial instruments for trading purposes. A summary of market risk factors is generally discussed below. For additional quantitative and qualitative information about these market risks, refer to note 4 “Financial Risk Managements Objectives and Policies” in our audited consolidated financial statements. Interest rate risk The Group’s exposure to market interest rates relates primarily to the Group’s cash and cash equivalents on deposit 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. Foreign currency risk As a result of investment in the equity accounted jointly controlled entity, Synerject LLC, the Group’s balance sheet can be affected significantly by movements in the US$/A$ exchange rates. The present value of the additional investment in Synerject LLC is recognized in its functional currency and is not exposed to any foreign currency risk. 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 17% of the Group’s sales are denominated in currencies other than the functional currency of the operating entity making the sale, whilst approximately 26% of costs are denominated in 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 foreign currencies at spot rates when necessary. The Group does not hold foreign currency positions for trading purposes. 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 instruments. The Group does not hold any credit derivatives to offset its credit exposure, however the Group does hold receivable insurance where appropriate. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. Risk limits are set for each individual customer in accordance with parameters set by management. These risk limits are regularly monitored. In addition, receivable balances are monitored on an ongoing basis. There are no significant concentrations of credit risk within the Group and financial instruments are only invested with a major financial institution to minimise the risk of default of counterparties. Liquidity risk The Group established a trade finance facility with its bankers during fiscal 2009. The Group’s does not have any other bank overdrafts, bank loans, preference shares, finance leases or committed available credit lines as at June 30, 2009. The only external borrowing of the Group are the trade finance facility repayable on terms not exceeding 180 days and the interest free Western Australian Government loan of $19 million repayable in May 2014.
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Not Applicable PART II
None
None
(a) Disclosure Controls and Procedures: Orbital has carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of Orbital, of the effectiveness of the design and operation of Orbital’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this annual report. Based upon that evaluation, Orbital’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2009, Orbital’s disclosure controls and procedures were effective. (b) Management’s Report on Internal Control Over Financial Reporting: Orbital’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Securities Exchange Act of 1934 defines internal control over financial reporting in Rule 13a-15(f) and 15d-15(f) as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Orbital’s management assessed the effectiveness of its internal control over financial reporting as of June 30, 2009. In making this assessment, Orbital’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control-Integrated Framework. Based upon its assessment, Orbital’s management concluded that, as of June 30, 2009, its internal control over financial reporting is effective based upon those criteria.
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Table of ContentsErnst & Young, an independent registered public accounting firm that audited the consolidated financial statements included in this annual report on Form 20-F, has not issued an audit report on the Company’s internal control over financial reporting as of June 30, 2009 (c) Attestation Report of the Registered Public Accounting Firm: The Group is a non-accelerated filer and as such Ernst & Young, an Independent Registered Public Accounting Firm has not issued an Attestation Report for Fiscal 2009. (d) Changes in Internal Control Over Financial Reporting: There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.
The Company’s audit committee is made up of the four non-executive directors of the Company’s Board. Mr W P Day qualifies as an audit committee financial expert as defined under the rules of the SEC. His responsibilities are, however, the same as those of the other Audit Committee members. The SEC has determined that an audit committee member who is designated as an audit committee financial expert will not be deemed to be an “expert” for any other purpose as a result of being identified as an audit committee financial expert. Mr Day is a Fellow of CPA Australia, Fellow of the Institute of Chartered Accountants in Australia and a Fellow of the Institute of Chartered Accountants in United Kingdom. He is currently a member of the International Accounting Standards Board’s Joint International Group on Financial Statements, a former Chairman of the Australian Accounting Standards Board and was Deputy Chairman of the Australian Securities and Investments Commission.
The Company has adopted a Code of Ethics relating to Accounting Practice and Financial Reporting. The Code applies specifically to the Company’s Chief Executive Officer, Chief Financial Officer and senior finance officers of the Company who influence financial performance. The Code of Ethics is available on the Company’s website at www.orbitalcorp.com.au or a copy may be obtained free of charge by writing to the Company Secretary, PO Box 901 Balcatta, Western Australia, Australia 6914.
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The aggregate fees billed for each of the last two fiscal years for professional services rendered by the Company’s auditor, Ernst & Young are as follows:
Pre-approval Policies and Procedures Orbital’s Audit Committee has adopted policies and procedures for the pre-approval of audit and non-audit services rendered by the Company’s auditors, Ernst & Young. Pre-approval of an audit or non-audit service may be given as a general pre-approval, as part of the Audit Committee’s approval of the scope of the engagement of the auditor or on an individual basis. Any proposed services exceeding general pre-approved levels require specific approval of the Chairman of the Audit Committee. The policy prohibits retaining the auditor to perform the prohibited non-audit functions as defined for the purposes of section 201 of the Sarbanes-Oxley Act. All services performed by Ernst & Young and other Ernst & Young member firms as detailed above received Audit Committee approval prior to provision of those services. No services were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
Not Applicable
Not Applicable
Not Applicable
Not Applicable PART III
Not Applicable
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See pages F-1 through F-50 included herein.
(a) Financial Statements and Financial Statement Schedules The following financial statements together with the Reports of Independent Registered Public Accounting Firms thereon, are filed as part of the Annual Report.
(b) Financial Statements – Synerject LLC (1) The following financial statements together with the Report of Independent Auditors thereon, are filed as part of the Annual Report.
(c) Exhibits
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Table of ContentsGLOSSARY OF TECHNICAL TERMS
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Table of ContentsSIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Table of ContentsReport of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Orbital Corporation Limited We have audited the accompanying consolidated balance sheets of Orbital Corporation Limited and subsidiaries (the “Company”) as of June 30, 2009 and 2008, and the related consolidated statements of income, recognised income and expense, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Synerject LLC (“Synerject”), a significant investee of the Company which is accounted for by use of the equity method (see note 16 to the consolidated financial statements), as of and for the years ended June 30, 2009 and 2008. The Company’s investment in Synerject was $11,264,000 and $13,109,000, respectively, as of June 30, 2009 and 2008 and its share of profit of Synerject was $1,846,000 and $2,357,000, respectively, for the years ended June 30, 2009 and 2008. Those statements were prepared in accordance with accounting principles generally accepted in the United States of America and were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Synerject, on the basis of accounting principles generally accepted in the United States of America, as of and for the years ended June 30, 2009 and 2008, is based solely on the report of the other auditors. We have applied auditing procedures to the adjustments to reflect the investment in Synerject and share of profit of Synerject in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Orbital Corporation Limited and subsidiaries at June 30, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
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Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Orbital Corporation Limited We have audited the accompanying consolidated income statement, statement of cash flows, and recognised income and expenses of Orbital Corporation Limited and its controlled entities (the “Consolidated Entity”) for the year ended 30 June 2007. These consolidated financial statements are the responsibility of the Consolidated Entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of the Consolidated Entity for the year ended 30 June 2007, in conformity with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. In complying with Australian Accounting Standards, the financial statements are also in conformity with International Financial Reporting Standards (“IFRS”).
Table of ContentsINCOME STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009
The income statements are to be read in conjunction with the notes to the financial statements set out on pages F7 to F50.
F-3
Table of ContentsSTATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 30 JUNE 2009
The above items are net of tax where applicable. The statements of recognised income and expense are to be read in conjunction with the notes to the financial statements set out on pages F7 to F50.
F-4
Table of ContentsBALANCE SHEETS AS AT 30 JUNE 2009
The balance sheets are to be read in conjunction with the notes to the financial statements set out on pages F7 to F50.
F-5
Table of ContentsSTATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2009
Non-Cash Investing Activities On 31 March 2009, the Group executed contracts that offset the requirement for the payment of US$4,000,000 to maintain a 50% interest in Synerject with the entitlement to the receipt of US$4,000,000 for the sale of an 8% interest in Synerject. There were no other non-cash investing or financing activities for the years ended 30 June 2007, 2008 and 2009. The statements of cash flows are to be read in conjunction with the notes to the financial statements set out in pages F7 to F50.
F-6
Table of ContentsNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 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 2009 comprises the Company and its subsidiaries (together referred to as the “Group”) and the Group’s investment accounted for using the equity method. The consolidated financial report was authorised for issue by the directors on 25 August 2009. 2. BASIS OF PREPARATION (a) Statement of Compliance The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board (AASB) and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (b) Basis of Measurement The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments which are measured at fair value. The methods used to measure fair values are discussed further in note 5. (c) Functional and Presentation Currency These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group. The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. (d) Use of Estimates and Judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of Australian Accounting Standards and (IFRS) that have a significant effect on the financial report and estimates with a significant risk of material adjustment in the next year are discussed in note 5. 3. SIGNIFICANT ACCOUNTING POLICIES The Group has adopted all of the new and revised Standards and Interpretations issued by the AASB and IASB that are relevant to the operations of the Group and effective for the reporting periods effective of 1 July 2008. The adoption of the Standards gave rise to additional disclosure, however did not have a material effect on the financial statements of the Group. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities.
F-7
Table of ContentsNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 3. SIGNIFICANT ACCOUNTING POLICIES (continued)
(a) Basis of Consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefit from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included from the date control commences until the date control ceases. All subsidiaries have the same reporting period as the Company. Investments in subsidiaries are carried at their cost of acquisition less impairment losses in the Company’s financial statements. (ii) Associates 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 balance sheet 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. 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 reporting date of the associate and the Group are identical and the associate’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. (iii) Joint Ventures The Group had an interest in a joint venture that was a jointly controlled entity. Joint ventures are contractual arrangements whereby two or more parties undertake an economic activity that is subject to joint control. A jointly controlled entity is a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The Group accounts for its interest in the jointly controlled entity using the equity method of accounting. Under the equity method, the investment in the joint venture is carried in the consolidated balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the joint venture. 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 the joint venture. The Group’s share of the joint venture’s post-acquisition profits or losses was recognised in the income statement, and its share of post-acquisition movements in reserves were recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends received from the joint venture were recognised in the consolidated financial statements as a reduction of the carrying amount of the investment. When the Group’s share of losses in the joint venture equals or exceeds its interest in the joint venture, 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 joint venture. The reporting date of the joint venture and the Group are identical and the joint venture’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. (iv) 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 by the associate or, if not consumed or sold by the associate, when the Group’s interest in such entities is disposed of. (b) Foreign Currency (i) Foreign currency transactions Transactions in foreign currencies are translated 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 associates – 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. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency (Australian dollars) at exchange rates ruling at the dates the fair value was determined.
F-8
Table of ContentsNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Foreign Currency (continued)
(ii) Financial statements of foreign operations The assets and liabilities of foreign operations are translated to Australian dollars at exchange rates ruling at the reporting date. The revenues and expenses of foreign operations are translated to Australian dollars at rates approximating the exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity described as ‘foreign currency translation reserve’. (iii) Net investment in foreign operations Exchange differences arising from the translation of balances representing the net investment in foreign operations are taken to the foreign currency translation reserve. They are released into the income statement upon disposal. (c) 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. Trade receivables 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 sheet 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 provision 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. Cash Cash and cash equivalents comprise cash balances, at call deposits and bank-endorsed bills of exchange at discounted value. Other financial assets Other financial assets comprise term deposits with financial institutions with maturities between 90 days and 365 days. Trade payables Liabilities are recognised for amounts due to be paid in the future for goods or services received. Trade and other payables are stated at their amortised cost. Trade payables are non-interest bearing and are normally settled on 30-day terms. Interest bearing borrowings Included in current liabilities is an amount owing under a trade finance facility utilised for the import of inventory. The trade finance facility provides loans of up to 180 days with interest payable at maturity. The loans are initially recognised at the fair value of consideration received less transaction costs and subsequently stated at amortised cost with any difference between cost and repayment value being recognised in the income statement over the period of the borrowings on an effective interest basis. Non-interest bearing liabilities Included in non-current liabilities is an amount owing to the Government of Western Australia resulting from a loan of $19,000,000 made to the Company in 1989. The loan is interest-free until repayment of this loan becomes due in May 2014 or prior to that date, by five equal annual instalments, if the worldwide aggregate number of OCP engines produced exceeds 5,000,000. The aggregate number of engines produced with OCP technology as at 30 June 2009 totalled approximately 617,000 (2008: 597,000). The non-interest bearing loan from the Government of Western Australia was recognised initially at fair value and subsequently stated at amortised cost with any difference between cost and repayment value being recognised in the income statement over the period of the borrowings on an effective interest basis. Included in current liabilities in the comparative period is an amount owing to Continental Corporation for the Group to maintain its 50% interest in Synerject LLC by the payment of US$4,000,000 which was deferred from 28 September 2006 to 30 June 2008. The liability was initially recognised at its fair value and subsequently stated at amortised cost with any difference between the fair value and the future payment value being recognised in the income statement over the period of the settlement deferral under the effective interest rate method (refer to note 16).
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Table of ContentsNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Financial Instruments (continued)
(ii) Derivative financial instruments The Group may use derivative financial instruments to hedge its exposure to foreign exchange fluctuations and interest rate movements. In accordance with its treasury policy, the Group entity does not hold the derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. Changes in the fair value of the derivative financial instrument that are not designated as cash flow hedging instruments are recognised in profit or loss. Cash flow hedges Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss. (d) Property, Plant and Equipment (i) Recognition and measurement Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. (ii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. (iii) Depreciation and Amortisation Items of property, plant and equipment, including buildings but excluding freehold land, are depreciated/amortised on a straight line basis over their estimated useful lives. The depreciation rates used in the current and comparative period for each class of asset are as follows: Buildings 2.5%; Plant and Equipment 6.67% to 33.3%. Assets are depreciated or amortised from the date of acquisition. The residual value, the useful life and the depreciation method applied to an asset are reassessed at least annually. (iv) Valuation Land and buildings are independently valued every three years on a market value basis of valuation. The Directors then use these valuations to assess the recoverable amount of land and buildings. (v) 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. (e) Intangibles (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.
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Table of ContentsNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (e) Intangibles (continued)
(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. 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. (f) Inventories Inventories are carried at the lower of cost and net realisable value. Cost is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (g) 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. (ii) Goodwill Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates.
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Table of ContentsNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 3. SIGNIFICANT ACCOUNTING POLICIES (continued)
(h) Share capital (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. (i) Employee Benefits (i) Short-term benefits The provisions for employee entitlements to wages, salaries and annual leave, to be settled within 12 months of year end represent present obligations resulting from employees’ services provided up to the balance date, calculated at undiscounted amounts based on wage and salary rates that the Group expects to pay as at the reporting date including related on-costs, such as workers’ compensation and payroll tax. Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. (ii) Long Service Leave 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 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 Employees have been offered the right to take up shares in the Company under three plans (i) the Employee Share Plan No.1 provides $1,000 of shares per annum and is subject to qualification by length of service, (ii) the Executive Long Term Share Plan (“ELTSP”) is subject to qualification by length of service and achievement of corporate performance targets related to returns to shareholders, and (iii) the Performance Rights Plan is subject to qualification by length of service and achievement of share price targets. The fair value of rights granted to employees is recognised as an employee benefit expense with a corresponding increase in equity. The fair value of the shares granted under the Employee Share Plan No.1 is based on the market price of the shares on the date of issue. The fair value of the ELTSP is measured at grant date taking into account market performance conditions only, and spread over the vesting period during which the employees become unconditionally entitled to the performance–based shares. The fair value of the shares granted is measured using a Monte-Carlo simulation model. The amount recognised as an expense is adjusted to reflect the actual number of shares that vest except where forfeiture is only due to market conditions that are not met. The fair value of the Performance Rights is measured at grant date taking into account the share price targets and spread over the expected life of the rights. (j) Provisions - Warranties 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. (k) 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, or the costs incurred or to be incurred cannot be measured reliably. Revenue received in advance represents cash payments received from customers in accordance with contractual commitments prior to the performance of the service.
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Table of ContentsNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 3. SIGNIFICANT ACCOUNTING POLICIES (continued)
(k) Revenue Recognition (ii) Sale of goods Revenue from the sale of goods is recognised when there is persuasive evidence, usually in the form of an executed sales agreement at the time of delivery of the goods to customer, indicating that there has been a transfer of risks and rewards to the customer, no further work or processing is required, the quantity and quality of the goods has been determined, the price is fixed and generally title has passed. (iii) Licence and royalties Revenue earned under various licence, royalty and other agreements is recognised on an accrual basis upon the satisfactory completion of contracted technical specifications. Additional revenue may be earned after a fixed time interval or after delivery of a prototype engine and/or hardware meeting specified performance targets, provided the licence agreements are not terminated. Under the terms of the licence agreements, licensees are not specifically obliged to commence production and sale of engines using OCP Technology and may terminate the agreements upon notice to Orbital. If a licensee were to terminate its licence agreement with Orbital, the licensee would forfeit the licence and any technical disclosure fees paid through to the date of termination. Revenue under royalty agreements is recognised when such amounts become due and payable. (iv) Interest Revenue Revenue is recognised as interest accrues using the effective interest method. (v) Dividends Revenue is recognised when the Group’s right to receive the payment is established. (l) Leases (i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. (m) Finance expense Financing costs include interest payable on borrowings calculated using the effective interest method, and gains and losses on hedging instruments that are recognised in the income statement. Borrowing costs are expensed as incurred and included in net financing costs. (n) Income Tax (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. (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.
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Table of ContentsNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (n) Income Tax (continued)
(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. The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are assumed by the head entity in the tax-consolidated group and are recognised as amounts payable (receivable) to (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts. Any difference between these amounts is recognised by the Company as an equity contribution or distribution. The Company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only. (o) Segment Reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group’s primary format for segment reporting is based on business segments. (p) 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 balance sheet. 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. (q) Earnings per share 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. (r) Government grants Government grants are recognised when the grant is received. 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. (s) Accounting estimates and judgements Management discussed with the Audit Committee the development, selection and disclosure of the Group's critical accounting policies and estimates and the application of these policies and estimates. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed in note 5.
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Table of ContentsNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 3. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(t) New standards and interpretations not yet adopted 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 2009, but have not been applied in preparing this financial report:
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