As expected the news yesterday from Perth-based shipbuilder Austal (ASB) wasn’t good – a big hit on a US Navy ship building program that will trigger a big loss for the year to June 30.
Austal told the ASX yesterday that it now expects a full-year earnings loss of between $116 million and $121 million after writing down the value of its work in progress.
That was because of extra costs taken on (but shared) to complete the contract because of design changes after a testing program. Austal says unaudited earnings before interest and tax will be hit by the $156 million write back due to increased construction costs for its Littoral Combat Ship contract with the US Navy.
The company expects to pay a final dividend of two cents per share and has issued 2016-17 earnings before interest and tax (EBIT) guidance of $45 million to $55 million.
Austal shares dropped as much as 21.5% at the opening before recovering to $1.10, still down 9%. That is not as low as 98 cents hit late last year when these problems first surfaced.
But assurance in yesterday’s statement and on a conference call from Austal management that the costs of the changes to the building program would be shared with the US Navy, helped soften the damage to the share price.
Austal also made it clear that no money need to be repaid to the US Navy for any over billing.
In yesterday’s statement to the ASX, Austal said:
"Cost increases associated with the revised baseline design are shared 50 / 50 with the US Navy up to a ceiling price per the LCS contract structure. This will reduce the negative profit impact to Austal.
"The change of estimate means that too much revenue and profit was attributed to work already completed. "Work in progress (WIP) is overstated because additional costs will be incurred to meet the shock standard and US Naval Vessel Rules. This is being written back as a one-off, US$115 million (A$156 million) downward adjustment to revenue and work in progress (WIP) in FY2016.
"Austal expects to record an EBIT loss of $(116-121) million in FY2016 primarily as a result of this US$115 million (A$156 million) write back of WIP.
The adjustment does not affect Austal’s current cash position because billings to the US Navy are calculated based on actual cost incurred, not revenue booked and therefore no overbilling has occurred.
"The Group is expected to continue to generate positive operating cash flows and is forecasting FY2017 US shipbuilding margin of 5% – 7% in and FY2017 Group EBIT of A$45 million – $55 million.
"Austal has initiated discussions with the US Navy about increases in design scope that may improve Austal’s position. Austal has not recognised any value associated with these discussions in its profit calculations due to the preliminary nature of the process.
"Austal is compliant with all of its banking covenants and maintains the support of all the members of its banking syndicate,” the company assured investors yesterday.
Austal Chief Executive Officer David Singleton said in the statement that while the financial impact from the LCS program was clearly disappointing, "the outlook for the US business remained positive in terms of the generation of future profits and cash flows".
“Operationally, we have implemented a considerable number of modifications to LCS 8 which has only recently been contractually delivered to the US Navy. This is only the fourth ship of the 13 LCS ordered by the US Navy to date,”he said.
“Initial findings from two shock tests performed in June 2016 on LCS 6, the only vessel that will undergo the tests, have been favourable and provide us with confidence on the baseline design and cost of construction across the program to meet the standard.
“The predicted US shipbuilding margin is made up of a combination of the stable and predictable performance from the EPF programme and now combined with a much clearer understanding of the margins that will be generated from the remaining LCS vessels block buy contract. LCS margins are lower than EPF but will rise in later years as the design modifications are built into the baseline design of new ships without requiring modification of components already built.
“Pleasingly, the Expeditionary Fast Transport program (formerly called JHSV) is performing financially well and provides a clear example of the benefits of being able to work through first-in-class issues.
“Meanwhile, Austal remains in a strong financial position and is continuing to generate positive operating cash flows, which will support ongoing debt reduction and returns to shareholders,” Mr Singleton said in yesterday’s statement.
