Austal to take financial hit on T-ATS program

After reviewing forecasts for the T-ATS towing and rescue ship program at its Austal USA subsidiary, Austal Limited (ASX:ASB) says in a filing that it is making a “substantial revision” in its earnings guidance for FY2023.

Its EBIT guidance for FY2023 has been reduced from earnings of approximately AUD 58 million (about US $39 million) to an expected range of between zero profit and a potential loss of AUD 10 million (about US $6.7 million).

The company says that despite the significantly reduced EBIT guidance, it retained a healthy cash at bank position of approximately AUD 179 million as at June 30, 2023 (December 31, 2022: AUD184.9 million).

Austal says that the T-ATS program has encountered changes in specification and general cost inflation pressures.

In addition, the efficiency assumptions for the newly commissioned Austal USA steel manufacturing line, such as labor hours and consequentially, recovery of overheads, did not meet forecasts and have been subsequently revised. While Austal expects these efficiency issues to increasingly improve as it progresses construction of the T-ATS vessels — Austal USA’s first steel shipbuilding project —they are slowing progress on the first vessels in production.

“The exercise of the option to construct the fifth and final vessel in the contract has also added in the associated cost issues to the onerous contract,” says the company.

Austal USA has submitted Requests for Equitable Adjustment (REAs) to seek recoveries for some of the additional costs incurred in the T-ATS project, but Austal says the precise timing and success of those claims is uncertain and any successful REA would benefit Austal’s FY2024 results.

Austal is submitting further REAs, but says the outcome of those REAs is similarly uncertain.

“This is clearly a disappointing financial result for Austal given the success that we have had recently winning new projects to expand our U.S. operations,” said Austal CEO Paddy Gregg. “The underlying issue is that the T-ATS award was received just prior to a period of unprecedented hyperinflation; some inaccurate assumptions were made regarding the efficiency of the new steel panel line in its first project’ and the project has also been subject to specification changes from the original award.

“It is clear that we need to make changes to some reporting structures and processes so that Austal USA can identify and rectify these sorts of issues in a more timely manner.

“It is important to note that the T-ATS contract is different to our more recently awarded programs, which have Economic Price Adjustment clauses that provide important cost escalation and variation protection. “Also, the T-ATS negotiations were conducted prior to the completion of our steel panel line, which limited operational visibility compared to subsequent contract awards.

“We will continue to proactively apply the lessons we’ve learn so far to enhance operational efficiencies as the T-ATS project progresses, and we are optimistic the REAs will mitigate some of the provisioned losses on the project.”