Orbital Results for the Year Ended 30 June 2006
PERTH, Australia, Aug. 24, 2006 -- Orbital Corporation Limited today reports results for the year ended 30 June 2006.
In commenting on the results Orbital's Chief Executive Officer, Dr. Rod Houston said the 2006 financial year has seen a return to profits with a particularly strong 2nd half operating result.
Key Features
-- Net profit after tax of $0.5 million compared to a loss of $1.7 million
last year
-- Net profit after tax of $1.9 million in the 2nd half year
-- Contribution from Synerject joint venture up 41% to $4.1 million
-- Annualised cost savings in excess of $1.5 million
-- Polaris enters into a licence to manufacture products utilising
Orbital's DI fuel injection technology
-- First production commitment for an Orbital DI 4-stroke production
application
-- At 1 July 2006 Orbital had engineering orders on hand in excess of $8
million, a 100% improvement compared to this time last year.
-- Synerject purchases electronic components manufacturing facility in
Delavan USA in March 2006.
-- Synerject negotiates stand alone long term financing arrangements,
supported by additional capital from its shareholders Orbital and
Siemens.
"As indicated in February 2006 Orbital has been operating at near capacity in the 2nd half year and Synerject has typically generated a particularly strong 2nd half," said Dr Houston. "We have also achieved several strategic goals during this period putting in place firm foundations for future growth, both organically and through acquisition."
"We were disappointed in our 1st half result which reflected a particularly tough powertrain engineering services market, however our commitment to targeting sales and marketing to specific customers and markets including the emerging Indian and Chinese markets has contributed to a significant increase in engineering activity in the last 6 months," added Dr Houston.
FINANCIAL SUMMARY
The headline financial results for Orbital for the year ended 30 June 2006 are as follows:
30 June 2006 30 June 2005
A$m A$m
Revenue 11.9 11.5
Synerject profit 4.1 2.9
Earnings/(loss) before interest and tax 1.0 (2.3)
Net profit/(loss) after tax 0.5 (1.7)
EPS (cents) 0.1 (0.4)
Total revenue for the year ended 30 June 2006 increased by 3% to $11.9 million, due to increased engineering services revenue of $0.4 million and licence and royalty income of $0.2 million offset by a reduction in interest income of $0.2 million.
Total expenses fell by 6% to $15.3 million with continued savings across most expense categories. Finance costs have increased by $0.6 million due to the introduction of international accounting standards with effect from 1 July 2005. This requires the write down of long term borrowings to fair value and a notional interest charge (non cash) in each accounting period. Management personnel expenses have decreased by approximately $1.0 million due to staff reductions early in the financial year. Depreciation and amortisation expense decreased by $0.3 million as a result of the rationalisation of operations in recent years.
Orbital's share of profits of its joint venture with Siemens, Synerject LLC increased by 41% to $4.1 million. Synerject's revenue increased by 37% to US$57.5 million mainly as a result of its acquisition of Delavan in March 2006. Synerject generated net cash during the year of US$1.6 million notwithstanding the Delavan investment and product development costs totalling approximately US$6 million.
Synerject negotiated stand alone long term finance arrangements to replace the existing Siemens loan which was due to expire in September 2006. At 30 June 2006 Synerject had a 4 year loan facility of US$8 million, a standby facility of US$3 million and cash at bank of US$4.7 million. Unlike the previous loan parent company guarantees are not required for the new arrangements.
Operating cash outflow in the 1st half was $2.0 million with operating cash inflow in the 2nd half of $0.2 million reflecting the improvement in the engineering services business. During the 2nd half Orbital invested a further $2.7 million (US$2.0 million) in Synerject as part of Synerject's long term financing arrangements. Orbital had cash on hand of $3.3 million at 30 June 2006 sufficient for existing operating requirements in the 2007 financial year.
Detailed comments on Orbital's three revenue streams are as follows: Powertrain Engineering Services (PES)
Orbital's PES business provides professional engineering consultancy services to engine manufacturers, OEMs, suppliers and governments on a global basis. The provision of these services creates a significant revenue stream while allowing Orbital to work closely with its customers on advanced powertrain applications and developments, some of which also involve the application and development of Orbital proprietary technology.
The priority of the PES marketing activities at the beginning of the year was to increase our efforts in the emerging markets in China and India while also exploiting the continued interest in the unique capabilities of Orbital's proprietary technology. This process has started to deliver good results with the improvement in the forward order book which stands at $8 million as of July 1st, 2006, almost double the order book value at the same time last year.
The current order book shows a significant proportion of the services relate to the application and development of Orbital technology (greater than 50%). In particular this relates to new programs in the area of spark ignited heavy fuel, new engine development and applications for direct injection gasoline as well as new gaseous applications covering both LPG and CNG DI applications.
The increased level of Orbital technology programs is a result of the continued commitment to technical innovation and internal R&D expenditure at Orbital over the last 2-3 years. Consequently Orbital has been able to continue to build on it's intellectual property portfolio in key areas for the future. An example of the outcomes from this committed expenditure is the development of a new gaseous DI injector suitable for both LPG and CNG applications in automotive and non-automotive markets. Over the year we have had 27 new patents granted and 7 new patent applications as a result of a sustained effort to capture the value from our R&D and engineering services activities.
Orbital continued to provide a range of product development services to Australian OEM's and vehicle studies for the Australian Government.
During the year PES successfully extended the level of services offered in the Asian region and built on its success in North America. This has resulted in improvements in the number of target customers in these regions and has provided significant revenues relating to the delivery of engine design and development programs for both automotive and non-automotive applications.
Royalties and Licenses
Orbital licenses its patented direct injection technology to OEMs and suppliers. Royalties and license fees are derived from a wide range of customers in the marine, motorscooter and motorcycle sectors.
Licensing and royalty revenue increased by 8% compared to the prior year. This increase relates primarily to increased royalties from the marine sector which has shown a 20% increase in engine volumes year on year. The 2-stroke DI market has held up well in this sector despite the aggressive marketing of 4- stroke engines, due to the inherent 2-stroke benefits in performance, light weight and lower maintenance.
In contrast the European DI scooter market has continued to struggle in an environment of lenient emissions regulations which have enabled the continued sale of low cost carburettor solutions. New initiatives to re-invigorate this market with the development of a new prototype low cost DI fuel system with improved functionality are about to be introduced to the customer although the impact of these initiatives will take at least 12 months to emerge.
Bajaj are progressing well with the DI autorickshaw program. Production launch will follow an extensive pilot vehicle release which is currently in progress. Based on the positive feedback from the market place, prospects for further gasoline and gaseous DI applications in the Indian market are expected to be strong.
Envirofit are making continued progress with the launch of their retro-fit Orbital DI system for the Philippines 2-stroke taxi fleet. Positive results from their first 3,000 vehicle taxi fleet could lead to further growth in sales of these kits across Asia.
Synerject
Orbital's 50% owned joint venture with Siemens-VDO Automotive Corporation, Synerject LLC, is a supplier and manufacturer of engine management systems (EMS) and electronic fuel injection systems for the non-automotive OEMs.
Orbital's overall share of Synerject's profit rose 41% to $4.1 million. As foreshadowed at Orbital's AGM one of Synerject's major customers introduced "just in time" deliveries to run down it's inventories, which has impacted Synerject's current year reported profit. Synerject has however increased sales to other customers. Significant expenditure on new electronic control unit (ECU) product development has been capitalised in Orbital's equity accounted results in accordance with Australian accounting standards.
Synerject has had a good year in regard to the growth of annual turnover from A$55 million in 2005 to over $77 million this year (37% increase), primarily as a result of the Delavan acquisition in March this year. Delavan contributed a small profit during the year but will reach its real potential as cost reductions and operating efficiencies are introduced during the next year.
Synerject has established new financing arrangements to replace the existing Siemens loan. As part of this arrangement Orbital and Siemens have agreed that the present 50:50 ownership will continue unchanged. This results in the re-calculation of ownership percentage being delayed by two years. These arrangements are important steps to prepare for the next growth phase for Synerject including establishing a manufacturing base and applications centre in China. These stand alone financing arrangements will also enable Synerject to start paying dividends to its shareholders starting in the second half of 2007.
Outlook
The turnaround in PES demonstrated in the 2nd half year is expected to continue based on the current strong order book going into the new financial year. The turnaround has been particularly strong in the area of Orbital technology applications which is encouraging for the long term revenue streams for Orbital and Synerject.
At this stage the pipeline of opportunities demonstrates a good mix of contracts from a broader customer base. The continuing pressure on oil supply and hence fuel prices are creating unprecedented demand for technical innovation in the area of improved fuel efficiency. This in turn also creates major opportunities in the area of biofuels such as ethanol and biodiesel as well as gaseous fuels such as LPG, CNG and LNG all of which become much more compelling as the oil price escalates and supply issues create market uncertainty. Orbital already has a number of new contracts in the above areas and through our continued commitment to R&D have developed technology and knowledge which is expected to open up more opportunities going forward. As a result Orbital expects continued growth in our engineering services revenue in the 2007 financial year.
Further opportunities to enhance our engineering and intellectual property earnings through additional strategic alliances with key customers in the Asian region will also be targeted this year. Orbital's track record in the area of turning technology innovation into market ready products and services makes it an ideal partner for customers and suppliers who need to span the gap between research/innovation and manufacturing.
Royalty revenue is expected to continue to grow for 2007 as we anticipate the launch of the autorickshaw in India. On-going production validation programs for new Orbital DI applications will continue throughout 2007 in the area of spark ignited heavy fuels and gasoline applications for a number of new applications. The royalties from these programs are expected to come on line in the 2008 financial year.
Synerject has good prospects for revenue growth, both through acquisition and organically as the non-automotive market moves towards wider adoption of engine management systems. Synerject has made important strategic steps to build it's product portfolio and is moving quickly to create a low cost manufacturing base in China during 2007. Overall revenue of this JV is expected to grow as a result of increased sales to existing DI and port injection customers together with increased sales for the Delavan acquisition.
The continuing world wide energy crisis is resulting in greater attention in government and consumers in seeking improved fuel efficiency and increased demand for alternative fuels. Orbital is well positioned with its existing technology and expertise to participate. The multiple income streams from Synerject, PES and licensing and royalties provide diversification and cover the entire value chain of advanced powertrain system development and supply.
Forward Looking Statements
This release includes forward-looking statements that involve risks and uncertainties. These forward-looking statements are based upon management's expectations and beliefs concerning future events. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements. Actual results and events may differ significantly from those projected in the forward-looking statements as a result of a number of factors including, but not limited to, those detailed from time to time in the Company's Form 20-F filings with the US Securities and Exchange Commission. Orbital makes no undertaking to subsequently update or revise the forward-looking statements made in this release to reflect events or circumstances after the date of this release.
Orbital is an international developer of engine and related technologies, providing research, design and development services for the worlds producers of powertrains and engine management systems for application in motorcycles, marine and recreational vehicles, automobiles and trucks. Orbital's principal operations in Perth, Western Australia, provide a world class facility with capabilities in design, manufacturing, development and testing of engines and powertrains. Orbital provides its customers with leading edge, world class, engineering expertise. Headquartered in Perth, Western Australia, Orbital stock is traded on the Australian Stock Exchange (OEC) and the OTC Bulletin Board (OBTLY).
APPENDIX 4E
Preliminary Final Report
Orbital Corporation Limited
ABN 32 009 344 058
Financial year ended 30 JUNE 2006
Results for announcement to the market
A$'000 A$'000
Total revenue UP 387 3% to 11,863
Net profit/(loss) from ordinary
activities after tax
attributable to members UP 2,216 N/A to 515
Net profit/(loss) attributable
to members UP 2,216 N/A to 515
There is no proposal to pay dividends for the year ended 30 June 2006.
Commentary on results for the period
The Commentary on the results for the period is contained in the press release dated 24 August 2006 accompanying this statement.
ORBITAL CORPORATION LIMITED AND ITS CONTROLLED ENTITIES
INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2006
NOTE CONSOLIDATED
2006 2005
$'000 $'000
Engineering services income 8,645 8,252
Licence and royalty income 2,394 2,217
Revenue 11,039 10,469
Other income 2 824 1,007
Total Revenue 11,863 11,476
Personnel expenses (8,297) (8,850)
Depreciation and amortisation (1,122) (1,436)
Engineering consumables and contractors (1,076) (1,473)
Travel and accommodation (1,009) (998)
Communications and computing (667) (744)
Patent costs (462) (545)
Insurance costs (535) (551)
Audit, compliance and listing costs (689) (492)
Finance costs (622) (3)
Other expenses (786) (1,128)
Total expenses (15,265) (16,220)
Share of net profit of Synerject
(adjustment to provision) 3 4,135 2,936
Profit/(loss) before related income tax 733 (1,808)
Income tax (expense)/benefit 4 (218) 107
Net profit/(loss) after related income tax 515 (1,701)
Basic earnings/(loss) per share
(in cents) 5 0.1 (0.4)
Diluted earnings/(loss) per share
(in cents) 5 0.1 (0.4)
The income statement is to be read in conjunction with the notes to the financial statements
ORBITAL CORPORATION LIMITED AND ITS CONTROLLED ENTITIES
STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 30 JUNE 2006
CONSOLIDATED
2006 2005
$'000 $'000
Recognised directly in equity
Employee Share Plan 264 248
Foreign exchange translation differences 276 (238)
Net income recognised directly in equity 540 10
Net profit/(loss) for the period 515 (1,701)
Total recognised income and expense
for the period 1,055 (1,691)
The above items are net of tax where applicable.
The statement of recognised income and expense is to be read in conjunction with the notes to the financial statements
ORBITAL CORPORATION LIMITED AND ITS CONTROLLED ENTITIES
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2006
NOTE CONSOLIDATED
2006 2005
$'000 $'000
Current Assets
Cash and cash equivalents 3,325 7,972
Receivables 3,643 2,985
Inventories 6 12
Total Current Assets 6,974 10,969
Non-Current Assets
Investments accounted for using
the equity method 6,321 -
Deferred tax assets 6,445 6,300
Property, plant & equipment 6,432 7,424
Total Non-Current Assets 19,198 13,724
Total Assets 26,172 24,693
Current Liabilities
Payables 3,268 2,389
Employee benefits 1,046 1,055
Provisions 106 485
Total Current Liabilities 4,420 3,929
Non-Current Liabilities
Non interest-bearing liabilities 12,809 19,000
Employee benefits 1,200 1,135
Provisions - 100
Other - 654
Total Non-Current Liabilities 14,009 20,889
Total Liabilities 18,429 24,818
Net Assets/(Liabilities) 7,743 (125)
Equity
Contributed equity 6 216,768 216,768
Reserves 6 38 (238)
Accumulated losses 6 (209,063) (216,655)
Total Equity/(Deficiency) 7,743 (125)
Net tangible assets/(deficiency)
per ordinary share (cents) 1.88 (0.03)
The balance sheet is to be read in conjunction with the notes to the financial statements
ORBITAL CORPORATION LIMITED AND ITS CONTROLLED ENTITIES
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2006
CONSOLIDATED
2006 2005
$'000 $'000
Cash Flows from Operating Activities
Cash receipts from customers 10,183 11,124
Cash paid to suppliers and employees (12,300) (15,418)
Cash used in operations (2,117) (4,294)
Interest income 332 515
Interest expense - (3)
Income taxes paid (83) (38)
Net cash used in operating activities (1,868) (3,820)
Cash Flows from Investing Activities
Synerject equity investment (2,735) -
Proceeds from sale of property, plant & equipment 166 56
Acquisition of property, plant & equipment (211) (427)
Net cash used in investing activities (2,780) (371)
Cash Flows from Financing Activities
Payment of finance lease liabilities - (179)
Net cash used in financing activities - (179)
Net decrease in cash and cash equivalents (4,648) (4,370)
Cash and cash equivalents at 1 July 7,972 12,350
Effects of exchange rate fluctuations on the balances
of cash held in foreign currencies 1 (8)
Cash and cash equivalents at 30 June 3,325 7,972
Non-Cash Investing Activities
There were no non-cash investing or financing activities for the years ended 30 June 2006 and 2005.
The statement of cash flows is to be read in conjunction with the notes to the financial statements.
ORBITAL CORPORATION LIMITED AND ITS CONTROLLED ENTITIES
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
Orbital Corporation Limited (the "Company") is a company domiciled in
Australia. The consolidated financial report of the Company for the
year ended 30 June 2006 comprises the Company and its subsidiaries
(together referred to as the "consolidated entity") and the
consolidated entity's interest in jointly controlled entities.
(a) Statement of Compliance
The consolidated financial report is a general purpose financial
report which has been prepared in accordance with Australian
Accounting Standards ('AASBs") adopted by the Australian Accounting
Standards Board ("AASB") and the Corporations Act 2001. International
Financial Reporting Standards ("IFRSs'") form the basis of Australian
Accounting Standards ("AASBs") adopted by the AASB, and for the
purpose of this report are called Australian equivalents to IFRS
("AIFRS") to distinguish from previous Australian GAAP. The financial
reports of the consolidated entity and the Company also comply with
IFRSs and the interpretations adopted by the International Accounting
Standards Board.
This is the consolidated entity's first financial report prepared in
accordance with Australian Accounting Standards, being AIFRS and IFRS,
and AASB 1 First time adoption of Australian equivalents to
International Financial Reporting Standards has been applied. An
explanation of how the transition to AIFRS has affected the reported
financial position, financial performance and cash flows of the
consolidated entity and the Company is provided in note 10.
(b) Basis of Preparation
The consolidated financial report is presented in Australian dollars.
The entity has elected not to early adopt the following accounting
standards and amendments as at transition date:
-- AASB 119 Employee Benefits (December 2004)
-- AASB 2004-3 Amendments to Australian Accounting Standards (December
2004) amending AASB 1 First time Adoption of Australian Equivalents
to International Financial Reporting Standards (July 2004), AASB
101 Presentation of Financial Statements and AASB 124 Related Party
Disclosures
-- AASB 2005-1 Amendments to Australian Accounting Standards (May
2005) amending AASB 139 Financial Instruments: Recognition and
Measurement
-- AASB 2005-3 Amendments to Australian Accounting Standards (June
2005) amending AASB 119 Employee Benefits (either July or December
2004)
-- AASB 2005-4 Amendments to Australian Accounting Standards (June
2005) amending AASB 139 Financial Instruments: Recognition and
Measurement, AASB 132 Financial Instruments: Disclosure and
Presentation, AASB 1 First-time Adoption of Australian Equivalents
to International Financial Reporting Standards (July 2004), AASB
1023 General Insurance Contracts and AASB 1038 Life Insurance
Contracts
-- AASB 2005-5 Amendments to Australian Accounting Standards (June
2005) amending AASB 1 First time Adoption of Australian Equivalents
to International Financial Reporting Standards (July 2004), and
AASB 139 Financial Instruments: Recognition and Measurement
-- AASB 2005-6 Amendments to Australian Accounting Standards (June
2005) amending AASB 3 Business Combinations
-- AASB 2006-1 Amendments to Australian Accounting Standards (January
2006) amending AASB 121 The Effects of Changes in Foreign Exchange
Rates (July 2004)
-- UIG 4 Determining whether an Arrangement contains a Lease
-- UIG 5 Rights to Interests arising from Decommissioning, Restoration
and Environmental Rehabilitation Funds
-- UIG 7 Applying the Restatement Approach under AASB 129 Financial
Reporting in Hyperinflationary Economies
-- UIG 8 Scope of AASB 2.
-- AASB 7 Financial instruments: Disclosure (August 2005) replacing
the presentation requirements of financial instruments in AASB 132.
AASB 7 is applicable for annual reporting periods beginning on or
after 1 January 2007
-- AASB 2005-9 Amendments to Australian Accounting Standards
(September 2005) requires that liabilities arising from the issue
of financial guarantee contracts are recognised in the balance
sheet. AASB 2005-9 is applicable for annual reporting periods
beginning on or after 1 January 2006
-- AASB 2005-10 Amendments to Australian Accounting Standards
(September 2005) makes consequential amendments to AASB 132
Financial Instruments: Disclosures and Presentation, AASB 101
Presentation of Financial Statements, AASB 114 Segment Reporting,
AASB 117 Leases, AASB 133 Earnings per Share, AASB 139 Financial
Instruments: Recognition and Measurement, AASB 1 First-time
Adoption of Australian Equivalents to International Financial
Reporting Standards, AASB 4 Insurance Contracts, AASB 1023 General
Insurance Contracts and AASB 1038 Life Insurance Contracts, arising
from the release of AASB 7. AASB 2005-10 is applicable for annual
reporting periods beginning on or after 1 January 2007.
The initial application of the above standards is not expected to have
an impact on the financial results of the Company and the consolidated
entity as the standards and the amendments either are not applicable
or are concerned only with disclosures.
The financial report is prepared on the basis of historical costs
(except that certain financial instruments are stated at their fair
value).
The Company is of a kind referred to in ASIC Class Order 98/100 dated
10 July 1998 (updated by CO 05/641 effective 28 July 2005 and CO 06/51
effective 31 January 2006) and in accordance with that Class Order,
amounts in the financial report and the Directors' Report have been
rounded off to the nearest thousand dollars, unless otherwise stated.
The preparation of a financial report in conformity with Australian
Accounting Standards requires management to make judgements, estimates
and assumptions that affect the application of policies and reported
amounts of assets and liabilities, income and expenses. The estimates
and associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the
judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the period
in which the estimate is revised if the revision affects only that
period, or in the period of the revision and future periods if the
revision affects both current and future periods.
Judgements made by management in the application of Australian
Accounting Standards that have a significant effect on the financial
report and estimates with a significant risk of material adjustment in
the next year are discussed in note 1(v).
(c) Basis of Consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Company. 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.
Investments in subsidiaries are carried at their cost of
acquisition less impairment losses in the Company's financial
statements.
(ii) Associates
Associates are those entities for which the consolidated entity
has significant influence, but not control, over the financial and
operating policies. The consolidated financial statements include
the consolidated entity's share of the total recognised gains and
losses of a jointly-controlled associate on an equity accounted
basis, from the date that significant influence commences until
the date that significant influence ceases. 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
an associate. During the year ended 30 June 2006, the joint
venture recouped past losses, the consolidated entity released its
provision for losses to profit and loss account, and equity
accounting has now been resumed, and will continue until the date
joint control ceases. Other movements in reserves, post
recommencing equity accounting, are recognised directly in
consolidated reserves.
(iii) Transactions Eliminated on Consolidation
Intragroup balances and any unrealised gains and losses or income
and expenses arising from intragroup transactions, are eliminated
in preparing the consolidated financial statements. Unrealised
gains arising from transactions with associates are eliminated to
the extent of the consolidated entity's interest in the entity
with adjustments made to the investment in the associates.
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 associates or, if not consumed
or sold by the associate, when the consolidated entity's interest
in such entities is disposed of.
(d) Foreign Currency
(i) Foreign currency transactions
Transactions in foreign currencies are translated at the foreign
exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the
balance sheet date (except those representing the consolidated
entity's net investment in subsidiaries, associates and jointly
controlled entities -- see below) are translated to Australian
dollars at the foreign exchange rate ruling 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.
Nonmonetary assets and liabilities denominated in foreign
currencies that are stated at fair value are translated to
Australian dollars at foreign exchange rates ruling at the dates
the fair value was determined.
(ii) Financial statements of foreign operations
The assets and liabilities of foreign operations are translated to
Australian dollars at foreign exchange rates ruling at the balance
sheet date. The revenues and expenses of foreign operations are
translated to Australian dollars at rates approximating the
foreign 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'. In respect of all foreign
operations, the Company has opted to use the exemption in AASB 1,
whereby all foreign exchange differences that have arisen before 1
July 2004 have been expensed to profit and loss. Foreign exchange
gains and losses are therefore deemed to be zero as at 1 July
2004.
(iii) Net investment in foreign operations
Exchange differences arising from the translation of the net
investment in foreign operations are taken to the foreign currency
translation reserve. They are released into the income statement
upon disposal.
In respect of all foreign operations, any differences that have
arisen after 1 July 2004, the date of transition to AIFRS, are
presented as a separate component of equity.
(e) Derivative Financial Instruments
(i) Current accounting policy
The consolidated entity may use derivative financial instruments
to hedge its exposure to foreign exchange fluctuations. In
accordance with its treasury policy, the consolidated 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. The gain or loss on
remeasurement to fair value is recognised immediately in profit or
loss.
(ii) Comparative period policy
The consolidated entity is exposed to fluctuations in interest
rates and foreign exchange rates from its activities. The
consolidated entity may use forward foreign exchange contracts to
hedge the foreign exchange rate risks. Derivative financial
instruments are not held for speculative purposes.
(f) Property, Plant and Equipment
(i) Acquisition
Items of property, plant and equipment are stated at cost or
deemed cost less accumulated depreciation (see below) and
impairment losses (see below).
Certain items of property, plant and equipment that had been
revalued to fair value on or prior to 1 July 2004, the date of
transition to AIFRS, are measured on the basis of deemed cost,
being the revalued amount at the date of that revaluation.
(ii) 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.
(iii) 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.
(iv) Operating Leases
Payments made under operating leases are expensed on a straight
line basis over the term of the lease.
(g) Intangibles
(i) Research and Development Expenditure
Current accounting policy
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.
Expenditure on intangibles which may be 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.
Comparative period policy
Under previous AGAAP, the consolidated entity's past expenditure
on research and development was expensed as incurred.
(ii) Patents, Licences and Technologies
Patents, licences and technology development and maintenance costs
are expensed as incurred.
(h) Receivables
Receivables are stated at their amortised cost, less impairment
losses. The collectibility of debts is assessed at balance date and
specific provision is made for any doubtful accounts. Normal
settlement terms are 30 to 45 days.
(i) 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.
(j) Cash and cash equivalents
Cash and cash equivalents comprise cash balances, at call deposits and
bank-endorsed bills of exchange at discounted value.
(k) Impairment
The carrying amounts of the consolidated entity's assets, other than
inventories and deferred tax assets, are reviewed at each balance
sheet date to determine whether there is any indication of impairment.
If any such indication exists, the asset's recoverable amount is
estimated.
An impairment loss is recognised whenever the carrying amount of an
asset or its cash-generating unit exceeds its recoverable amount.
Impairment losses are recognised in the income statement, unless an
asset has previously been revalued, in which case the impairment loss
is recognised as a reversal to the extent of that previous revaluation
with any excess recognised through profit or loss.
The carrying amount of property, plant and equipment 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. Adoption of this AIFRS accounting policy has not had any
effect upon the carrying value of property plant and equipment
The carrying amount of all non-financial assets including 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. Adoption of this AIFRS accounting policy
has not had any effect upon the carrying value of assets.
When a decline in the fair value of an available-for-sale financial
asset has been recognised directly in equity and there is objective
evidence that the asset is impaired, the cumulative loss that had been
recognised directly in equity is recognised in profit or loss even
though the financial asset has not been derecognised. The amount of
the cumulative loss that is recognised in profit or loss is the
difference between the acquisition cost and current fair value, less
any impairment loss on that financial asset previously recognised in
profit or loss.
(i) Calculation of recoverable amount
The recoverable amount of the consolidated entity's receivables
carried at amortised cost is calculated as the present value of
estimated future cash flows, discounted at the original effective
interest rate (i.e. the effective interest rate computed at
initial recognition of these financial assets). Receivables with a
short duration are not discounted.
Impairment of receivables is not recognised until objective
evidence is available that a loss event has occurred. All
receivables are individually assessed for impairment.
The recoverable amount of other assets is the greater of their
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. For an asset that does not generate largely
independent cash inflows, the recoverable amount is determined for
the cash-generating unit to which the asset belongs.
(ii) Reversals of impairment
Impairment losses are reversed when there is an indication that
the impairment loss may no longer exist and there has been a
change in the estimate used to determine the recoverable amount.
An impairment loss in respect of a held-to-maturity security or
receivable carried at amortised cost is reversed if the
subsequent increase in recoverable amount can be related
objectively to an event occurring after the impairment loss was
recognised.
An impairment loss in respect of an investment in an equity
instrument classified as available for sale is not reversed
through profit or loss. If the fair value of a debt instrument
classified as available-for-sale increases and the increase can be
objectively related to an event occurring after the impairment
loss was recognised in profit or loss, the impairment loss shall
be reversed, with the amount of the reversal recognised in profit
or loss.
An impairment loss is reversed only to the extent that the asset's
carrying amount does not exceed the carrying amount that would
have been determined, net of depreciation or amortisation, if no
impairment loss had been recognised.
(iii) Derecognition of financial assets and liabilities
Current accounting policy
A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar financial assets) is
derecognised when:
-- the rights to receive cash flows from the asset have expired
-- the consolidated entity retains the right to receive cash flows
from the asset, but has assumed an obligation to pay them in
full without material delay to a third party, or
-- the consolidated entity has transferred its rights to receive
cash flows from the asset and either (a) has transferred
substantially all the risks and rewards of the asset, or (b)
has neither transferred nor retained substantially all the
risks and rewards of the asset, but has transferred control of
the asset.
A financial liability is derecognised when the obligation under
the liability is discharged, cancelled or expired. When an
existing financial liability is replaced by another from the same
lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original
liability and the recognition of a new liability. The difference
in the respective carrying amounts is recognised in profit and
loss.
Comparative period policy
A financial asset was derecognised when the contractual right to
receive or exchange cash no longer existed. A financial liability
was derecognised when the contractual obligation to deliver or
exchange cash no longer existed.
(l) Share capital
(i) Dividends
Dividends are recognised as a liability in the period in which
they are declared.
(ii) Transaction Costs
Transaction costs of an equity transaction are accounted for as a
deduction from equity, net of any related income tax benefit.
(m) Non-Interest-bearing borrowings
(i) Current accounting policy
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 2006 totalled approximately 515,000.
As at 1 July 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 cost and repayment value being recognised in
the income statement over the period of the borrowings on an
effective interest basis.
(ii) Comparative period policy
Prior to the adoption of AIFRS at 1 July 2005, the loan was
recorded at the amount advanced and no recognition was given to
effective interest in the income statement. The effect of this
change in policy is set out in Note 11, and Orbital has taken
advantage of the election in AASB 1 to not restate comparatives
for the effect of this change in policy.
(n) Employee Benefits
(i) Wages, Salaries, Annual Leave and Sick Leave
The provisions for employee entitlements to wages, salaries,
annual leave and sick 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
consolidated entity expects to pay as at the reporting date
including related on-costs, such as workers' compensation and
payroll tax. Sick leave recognised as a liability represents
expected future payments as a result of employees utilising non
vesting accumulated sick leave entitlements while recovering from
serious injury or illness. The consolidated entity does not
recognise a liability when it is probable that sick leave taken in
the future will not be greater than the entitlements that will
accrue in the future.
(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 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 consolidated entity's experience
with staff departures and is discounted using the rates attached
to national government securities at balance 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 two plans, one of which is subject to qualification
by length of service and achievement of corporate performance
targets related to returns to shareholders. These targets have not
yet been met. The fair value of options and shares granted to
employees is recognised as an employee benefit expense with a
corresponding increase in equity. The fair value 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. Options have not been issued since
the year ended 30 June 2000 and there will be no expense
recognised in this or future reporting periods in relation to the
option plan. The fair value of shares will be measured having
regard to the conditions attached to the shares and the
consolidated entity's estimate of shares that will eventually
vest. 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.
(v) Employee redundancy benefits
Provisions for employee redundancy benefits are only recognised
when a detailed plan has been approved and the employee
redundancies have either commenced or been publicly announced, or
firm commitments related to the redundancy benefits have been
entered into. Costs related to ongoing activities are not provided
for.
(o) Provisions - Warranties
Provision for warranty is recognised when the underlying products are
sold. The provision is based on historical claim data.
(p) 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.
(q) Revenue Recognition
Revenues are recognised at 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 and Sale of Goods
Revenue from services rendered is recognised in the income
statement in proportion to the stage of completion of the
transaction at the balance sheet 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, or there is a risk of return
of goods or there is continuing management involvement with the
goods.
Revenue from rendering services is recognised in the period in
which the service is provided.
Revenue earned under various licence, royalty and other agreements
is recognised 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.
Revenue received in advance represents cash payments received from
customers in accordance with contractual commitments prior to the
performance of the service.
Revenue from sale of goods is recognised when the significant
risks and rewards of ownership have been transferred to the buyer.
(ii) Interest Income
Interest income is recognised as it accrues.
(iii) Asset Sales
The gross proceeds of asset sales are included as other income of
the consolidated entity. 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.
(r) Expenses
(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.
Lease incentives received are recognised in the income statement
as an integral part of the total lease expense and spread over the
lease term.
(ii) Finance lease payments
Minimum lease payments are apportioned between the finance charge
and the reduction of the outstanding liability. The finance charge
is allocated to each period during the lease term so as to produce
a constant periodic rate of interest on the remaining balance of
the liability.
(iii) Financing costs
Financing costs and other income include separate disclosure of
interest payable on borrowings calculated using the effective
interest method, dividends on redeemable preference shares,
interest receivable on funds invested, dividend income, foreign
exchange gains and losses, 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.
Interest income is recognised in the income statement as it
accrues, using the effective interest method. Dividend income is
recognised in the income statement on the date the entity's right
to receive payments is established which in the case of quoted
securities is ex-dividend date. The interest expense component of
finance lease payments is recognised in the income statement using
the effective interest method.
(s) Income Tax
(i) Current income tax expense and liability
Income tax on the profit and loss for the year presented comprises
current and deferred tax. Income tax is recognised in the income
statement except to the extent that it relates to items recognised
directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for
the year, using tax rates enacted or substantially enacted at the
balance sheet date, and any adjustment to tax payable in respect
of previous years.
(ii) Deferred income tax expense and liability
Deferred tax is provided using the balance sheet liability method,
providing for temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes. The amount of deferred tax
provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using
tax rates enacted or substantively enacted at the balance sheet
date.
A deferred tax asset is recognised only to the extent that it is
probable that future taxable profits will be available against
which the asset can be utilised. Deferred tax assets are reduced
to the extent that it is no longer probable that the related tax
benefit will be realised.
(iii) Tax Consolidation
The Company and its wholly-owned Australian resident entities have
formed a tax-consolidated group with effect from 1 July 2003 and
are therefore taxed as a single entity from that date. The head
entity within the tax-consolidated group is Orbital Corporation
Limited.
Current tax expense/income, deferred tax liabilities and deferred
tax assets arising from temporary differences of the members of
the tax-consolidated group are recognised in the separate
financial statements of the members of the tax-consolidated using
the 'separate taxpayer within group' approach by reference to the
carrying amounts of assets and liabilities in the separate
financial statements of each entity and the tax values applying
under tax consolidation.
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.
(t) Segment Reporting
A segment is a distinguishable component of the consolidated entity
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.
(u) 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 ATO 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.
(v) Accounting estimates and judgements
Management discussed with the Audit Committee the development,
selection and disclosure of the consolidated entity's critical
accounting policies and estimates and the application of these
policies and estimates.
1.2 Reclassification of comparative information
These are the consolidated entity's first AIFRS annual consolidated
financial statements prepared in accordance with Australian Accounting
Standards -- AIFRS.
Accounting policies have been applied in preparing the financial
statements for the year ended 30 June 2006, the comparative
information for the year ended 30 June 2005 and the preparation of an
opening AIFRS balance sheet at 1 July 2004 (the consolidated entity's
date of transition).
In preparing its opening AIFRS balance sheet, comparative information
for the year ended 30 June 2005, the consolidated entity has adjusted
amounts reported previously in financial statements prepared in
accordance with its old basis of accounting (previous GAAP).
FIRST AND FINAL ADD -- CONTINUATION OF NOTES -- TO FOLLOW