Austal FY2021 H1 EBIT climbs to AU$70.5 million as company faces regulatory probe in US

Shipbuilder Austal said it achieved another strong half of earnings, according to financial results for the six months ended December 31, 2020 (FY2021 H1), which were released by the company on Friday, February 26.

The results were announced in the wake of a joint investigation by the US and Australian governments that ultimately compelled Craig Perciaville, president of the company’s Austal USA business, to resign from his post.

Multi-agency probe concluded

Austal said that separate but related investigations were conducted by the US Department of Justice, the US Securities Exchange Commission (SEC), and the Australian Securities and Investments Commission (ASIC) into historical matters concerning the company’s Littoral Combat Ship (LCS) program before July 2016.

The company added that the investigations by regulatory authorities have been focused primarily on its US operations, including the write back of work in progress (WIP) attributable to the LCS program in July 2016, the procurement of certain ship components for use in connection with US government contracts, and charging and allocation of labour hours.

The probe was centred on inaccurate cost estimates, that in turn left Austal unable to properly account for cost overruns in the LCS program. The company said that this, “delayed [its] understanding of the magnitude of those costs and the need to change those estimates.”

Also identified were misallocation of labour hours in the early stages of the program and the installation of certain valves on the tenth through twentieth vessels built under the program. Although the valves did not meet all of the required military specifications at the time of their procurement, Austal clarified that the US Navy has since agreed to modify the contract in regard to these vessels to accept the “as-built” condition of those valves on board the LCS vessels such that they are not required to be replaced.

Austal added that it has resolved the navy’s contractual claims in relation to the installation of these valves and is in discussions with US regulatory authorities regarding these issues.

Austal and Austal USA said that, throughout the investigations, they cooperated with US regulatory authorities and had also engaged external lawyers in the US to conduct their own detailed investigation in relation to what they understand to be the focus of the US regulatory investigations.

The Austal USA board has in the meantime appointed CFO Rusty Murdaugh to take over as interim company president following Perciaville’s resignation.

Financial results

Austal generated AU$840.3 million (US$657.6 million) revenue in FY2021 H1 (FY2020 H1: AU$1.038 billion – US$813 million). Group revenue declined due to a number of factors, including an appreciation in the average US$/AU$ exchange rate from 0.684 in FY2020 H1 to 0.724 in FY2021 H1, a reduction in USA throughput, a reduction in commercial shipbuilding following the delivery of three large ferries and Covid-19 travel impacts dampening sustainment activity in the USA and delaying the commissioning and delivery of vessels in Australasia.

Austal USA accounted for 76 per cent of total revenue, with Australasia at 25 per cent; (FY2020 H1: USA 77 per cent, Australasia 23 per cent). Shipbuilding accounted for approximately 84 per cent of total revenue while support accounted for around 17 per cent (FY2020 H1: shipbuilding ~ 85 per cent, support ~ 15 per cent).

Austal reported a 17.6 per cent increase in EBIT to AU$70.5 million (US$55.1 million) (FY 2020 H1: AU$59.9 million – US$46.8 million), notwithstanding the decline in revenue.

The EBIT improvement was driven by improved shipbuilding margins in both the USA and Australasia, some of which are ongoing and others which were confined to this particular half. This was also reflected in the NPAT result of AU$52.4 million (US$41 million) (FY2020 H1: AU$40.8 million – US$31.9 million), an increase of 28.7 per cent.

Austal said it continues to navigate challenges created by Covid-19, which have included some short duration shutdowns; restrictions on the mobility of commissioning engineers; delays in supply chain logistics channels which ultimately resulted in delays to vessel deliveries; and travel restrictions that limited the ability to conduct maintenance support activities.

USA segment

Austal’s USA segment reported revenue of AU$641.6 million (US$502.1 million) down 20 per cent (FY2020 H1: AU$804.6 million – US$629.7 million) and EBIT of AU$69.4 million (US$54.3 million) up six per cent (FY2020 H1: AU$65.6 million – US$51.3 million). EBIT margin from USA grew to 10.8 per cent, compared to 8.1 per cent in the prior corresponding period, which the company said is attributable to the ongoing Littoral Combat Ship (LCS) and Expeditionary Fast Transport (EPF) programs.

The company delivered its 13th LCS (LCS 26) and its 12th EPF (EPF 12) during the period.

EBIT from support work increased to AU$13.0 million (US$10.1 million) in FY2021 H1, up by 6.2 per cent on the prior corresponding period. FY2021 H1 EBIT margin was aided by the approval of US Navy incentives and additional funding that related to work undertaken in FY2020, and the reversal of a doubtful debt.

Austal acquired land, buildings and dry dock facilities from MARRS to expand its Mobile, Alabama, shipyard in August 2020. The asset acquisition was funded by cash reserves for a consideration under US$10 million.

The property and facilities on the Mobile River include a dry dock capable of launching heavier steel ships, which will support Austal’s program to invest approximately US$100 million in building steel shipbuilding capability, up to US$50 million of which will be co-funded by the United States government.

Australasia segment

Austal’s Australasia segment reported revenue of AU$205.9 million (US$161.1 million) down 15 per cent (FY2020 H1: AU$240.7 million – US$188.3 million) and EBIT of AU$12.0 million (US$9.3 million) up 45 per cent (FY2020 H1: AU$8.2 million – US$6.4 million).

The decline in revenue reflected a reduction in throughput following the completion of three large ferries, all of which were delivered during the half. Two large ferries were delivered from Henderson, Western Australia, and Austal’s Vietnam shipyard delivered its first vessel, a 97-metre high speed ferry for Trinidad and Tobago.

Whilst overall segment revenue declined, EBIT increased as a result of improved shipbuilding margin from 2.4 per cent in FY2020 H1 to 6.4 per cent in FY2021 H1 as the company’s Philippines and Vietnam operations matured and lower margin commercial vessels were completed in Australia.

The EBIT and EBIT margin increase in Australasia was driven by new deliveries and orders under the Guardian-class patrol boat program (GCPB) and the Cape-class patrol boat program as well as the delivery of a new 97-metre ferry for Trinidad and Tobago. Work also commenced on six new Cape-class boats slated for the Royal Australian Navy. Austal delivered the eighth GCPB during FY2021 H1.

Support revenue increased 71.2 per cent, from AU$30.8 million (US$24.1 million) in FY2020 H1 to AU$52.7 million (US$41.2 million) in FY2021 H1, stemming primarily from emergent work related to support of the first ten Cape-class boats and a small contribution from the acquisition of ship repair and support business BSE on November 30, 2020.

The company said broader macroeconomic and travel effects of the pandemic have dampened demand for commercial ferries in the past 12 months and the company’s sustainment services in the short to medium term.

Outlook

Austal has maintained its October 2020 guidance for FY2021 EBIT of AU$125 million (US$97.8 million) and reduced revenue guidance to approximately AU$1.65 billion (US$1.29 billion) as a result of the appreciating AU$, reduced USA support activities and Covid-19 related program delays in Australasia.

Austal estimates that revenue associated with existing shipbuilding contracts plus the commencement of work on EPF 15 plus support revenue at FY2021 levels will total approximately AU$1.4 billion (US$1.1 billion) in FY2022.