Austal Limited, an Australian shipbuilder that is currently building, set to build, or contributing work to at least nine major U.S. government shipbuilding programs, stopped trading this week to announce an estimated Fiscal Year 2023 loss of between $69 to $75 million on their $385 million five-ship Navajo-class Towing, Salvage and Rescue Ship (T-ATS) contract.
In a terse press release, the company requested a “voluntary trading halt” in the Australian stock market “pending an announcement in relation to a potential downwards adjustment to its earnings guidance arising out the T-ATS program at Austal’s USA operations.” Two days later, the company announced that the company’s FY 2023 earnings guidance had plunged from about $68 million to something between zero and a loss of about $7 million.
The estimated program losses, announced days after an otherwise triumphant Sydney Harbor commissioning of the Austal USA-built Independence-variant Littoral Combat Ship, the USS Canberra (LCS-30), was not a good look.
Austal’s fiscal problems stand to shake public and professional confidence in the on-the-move Australian-American shipbuilder complicating its transition from a prickly Western Australian boat-builder to a globe-spanning contributor to maritime security.
The T-ATS Program Is A Problem:
The Navajo-class Towing, Salvage and Rescue Ship has been a problematic program for years. For what should be a simple-to-build and easy-to-employ utility ship—all the Navy needed was a robust variant of an oilfield support platform—the U.S. Navy has seemed, at best, ambivalent about replacing vessel from the start.
The Navy didn’t really see the value of these “non-combatant” vessels. In 2016, the Military Sealift Command even tried to get rid of their aged Navajo-class predecessors, privatizing the entire towing, salvage and rescue mission-set. Since then, the Miliary Sealift Command has done their darndest to overcomplicate the program by shoehorning missions once done by at least three legacy specialized naval craft down into a single hull. According to the Navy, the ship’s missions now include “towing, salvage, rescue, oil spill response, humanitarian assistance and wide area search and surveillance” along with enabling “future rapid capability initiatives, supporting modular payloads with hotel services and appropriate interfaces.”
After the Military Sealift Command finally committed to recapitalizing the old ships, an initial building contract was awarded to Louisiana’s Gulf Island Shipyard in 2018. It didn’t go well. Gulf Island Shipyard was troubled from the start, with the expansion-minded Bollinger Shipyards finally stepping in to rescue the hapless facility in 2021. The remainder of the program—five ships—were transferred to Austal USA’s shipyard, helping Austal inaugurate a steel ship production line—a line that was made possible with $50 million in government support.
Given all the problems, the program has moved very slowly. Bollinger finally launched the first T-ATS in late May, six years after the contract award. When awarded, the Navy expected Austal to deliver its first T-ATS, T-ATS 11, in late 2024.
For Austal, the T-ATS was a lifesaver, fitting in just when the legacy Independence-variant Littoral Combat Ship and Spearhead-class Expeditionary Fast Transport production lines started to wind down. Austal, for its part, was desperate for contracts, and, with a newly-placed interim president who was obviously jockeying for a permanent appointment, observers worried that the yard might have underbid in desperation. In the end, Austal got a $385 million fixed-price incentive contract to build up to five T-ATS ships.
It didn’t take long for Austal to get into trouble. In FY 2022, Austal “recorded” an “onerous provision of $10.1 million” on Austal’s first two T-ATS vessels, due to “changes in specification and material quantities from the initial award.” By January 2023, the losses had increased, and when those losses were applied to two newly-awarded T-ATS ships, Austal’s potential exposure had ballooned by $41.2 million. With the award of a fifth T-ATS in June, that potential loss increased again. All this ugly performance went directly onto Austal’s books, immediately hitting the bottom line.
Of course, these are only estimates of performance. Austal is making “Requests for Equitable Adjustments,” and hoping that the Navy will foot the bill for some contract changes. Unfortunately for Austal’s shareholders, resolution is a contentious process and often not something that gets resolved in either an efficient or direct fashion. And that means the FY 2023 numbers look really ugly.
Not Good, Not Terrible:
For an Australian company desperate to raise its domestic profile and recover from a nagging fraud scandal, the trading halt came at the worst possible moment.
With all the top U.S. Navy leadership in Australia to commission the Austal-built Littoral Combat Ship, USS Canberra, Austal’s debutante ball as a potentially big AUKUS participant ended under less-than-perfect circumstances.
The news also must have been something of a poison pill for equity funds mulling offers for the “in play” company.
All this embarrassment was avoidable.
To industry observers, it was clear from the start that the T-ATS was set to be a loss-leader for Austal. As early as mid-2022, anything up to $50 million in losses could, essentially, have been portrayed by Austal as a prompt and responsible “repayment” of the government’s $50 million grant to help convert the yard to steel manufacturing.
For Austal, a more frank and forthright discussion of the T-ATS risks at an earlier stage, coupled with an effort to produce clear and correct ASX Statements, could have done a lot to get out ahead of the ugly FY 2023 profit estimates.
Austal also could have done more to remind stockholders that the worst days in a government shipbuilding program are often the very first days spent building a first-in-class ship.
Austal has been through this before. In 2011, when I was an Austal USA executive, Austal’s first Expeditionary Fast Transport, the USNS Spearhead, came in at $31 million over the target per-unit price. Just like today, several Requests for Equitable Adjustments were in the cue. But, back then, accountability was immediate, and the Austal USA president was sent packing. After a few more hiccups, the program eventually improved, hitting budget goals and making the company a modest profit.
The T-ATS will likely tread a similar path. To some extent, the company could be setting the stage to outperform later in the production run. In efforts to predict future performance, unsophisticated fiscal models can overweigh “worst-case” first-production efforts. The models may paint a more dire fiscal picture than warranted, as accountants struggle to quantify promises of future efficiencies and incremental production improvements.
Of course, things could always get worse. Austal hasn’t closed the books on any of the T-ATS ships. Program losses could increase. But, with FY 2023 winding down, Austal stockholders desperately need to understand how the T-ATS Program’s as-yet-unrealized losses compare with other areas of Austal Limited’s non-U.S.-based shipbuilding empire, gaining confidence that Austal USA isn’t covering for losses in Austal’s other yards in Australia and other parts of the Asia-Pacific.
In the U.S., Austal USA needs to come clean with their government customers about any other potential future work challenges. “Inaccurate assumptions” over production efficiencies may have informed Austal’s bids for subsequent work, spilling over into Austal’s Auxiliary Floating Dry Dock Medium (AFDM) project, their massive multi-ship U.S. Coast Guard Offshore Patrol Cutter contract, and their most recent award to build Navy T-AGOS ocean surveillance ships. Austal may also need to accelerate efforts to build a steady book of work as a submarine subcontractor, leaning on more experienced shipbuilding organizations to ride out the ups-and-downs of Austal’s erratic and home-brewed book of business.
These are all surmountable problems—the Coast Guard’s current shipbuilding efforts are so troubled, just getting functional ships launched may be enough for the Coast Guard to do what it can to help Austal remain whole. The T-AGOS Program saw a dramatic—and somewhat unexplained procurement plus-up. If Austal stops the T-ATS losses, survives their potential underbid on the AFDM dry dock and keeps getting submarine work, then the yard will likely be in a strong position to take on even more.
But, to do that, Austal’s American yard must focus on the fundamentals of shipbuilding and mature their basic business processes. The failure to include Economic Price Adjustment Clauses and the apparent “slowing progress on the first vessels in production” is enough to give even the most pro-Austal observers a pause. And, as losses translate into repeated rounds of belt-tightening and cost-cutting, Austal engineers and other critical non-production workers may start heading for the exits—Austal has been looking for a Vice President for Engineering for almost a year, and some of Austal’s senior naval architects are looking for greener and less-hectic pastures.
It’s time for Austal to grow up. Put bluntly, Austal is no longer a backyard concern, building aluminum fishing smacks in some West Australian garage. The company is an international national security enterprise, and it is high time for Austal Limited to start acting like it is one.
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