Austal’s US head steps down after delays and cost blowouts on key contract

Shipbuilder Austal’s US boss has stepped down as the company slipped to a full-year loss due to delays and cost blowouts on a key US defence contract.

Austal chief executive Patrick Gregg at the company’s shipbuilding facility in Henderson, WA. Picture: Colin Murty / The Australian

The head of Australian-American shipbuilder Austal’s US business has stepped down as the company slipped to a full-year loss due to delays and cost blowouts on a key US defence contract.

Outgoing Austal USA president Rusty Murdaugh was elevated to the top job in 2021 and will be replaced, on an interim basis, by global support business manager Michelle Kruger until a permanent replacement is found.

The leadership change comes as Austal, backed by billionaire Andrew Forrest, faces several challenges associated with a $US385m contract to deliver five Navajo-class Towing, Salvage and Rescue ships (T-ATS) for the US Navy.

Handing down its full-year results on Thursday, the company confirmed an additional $171m had been set aside in provisioned losses on the contract, stemming from cost blowouts, changes in specification and inefficiencies at a newly commissioned manufacturing line in Alabama.

It resulted in a full-year loss of $13.8m, compared with a $79.6m profit in the previous year.

On a brighter note, revenue was up 11 per cent to $1.6bn, driven by a 36 per cent increase within Austal’s support and service segment to $367.3m.

The company said challenges associated with the T-ATS program had “torpedoed” what would otherwise have been a “very solid set of results”.

“The provisioned T-ATS losses we announced last month has led to this disappointing financial result, which has detracted from a very bright outlook underpinned by a record order book in the USA and growing support business across both the USA and Australasia,” chief executive Patrick Gregg said.

“We are focused on getting the T-ATS construction program back on track while methodically building a diversified, sustainable, recurrent and earnings-accretive revenue stream via the support business, which sets us up very well for the medium to long-term.

“Backed by the learnings we are taking from the T-ATS program, which was our first steel program in our newly commissioned US facility, in addition to the robust cost escalation protections for the recent major US steel project awards, we are well placed to secure and execute our record pipeline of work profitably.”

Austal said it was continuing to progress Requests for Equitable Adjustment (REAs) in a bid to recover some of the additional costs incurred in the T-ATS project.

The company’s order book is currently worth up to $11.6bn, and dominated by two major US projects.

In May the company announced it had won a contract worth up to $4.9bn to build up to seven T-AGOS surveillance ships for the US Navy. It is also in the early stages of a contract to build up to 11 Offshore Patrol Cutters for the US Coast Guard. That project is worth up to $5.1bn.

Construction on both programs is expected to commence by the end of 2023-24.

Austal’s US shipyard and support centres now account for 77 per cent of the company’s revenue, with Australasia at 23 per cent.

The company is guiding to a revenue increase of between 8 per cent and 10 per cent in 2023-24, with its underlying EBIT margin expected to land in the range of 3 to 4 per cent.

In a note to clients Citi analyst Sam Teeger said the margin guidance and potential upside through additional contracts made the outlook “incrementally more positive”.

“Partially offsetting the aforementioned positivity was that the first T-ATS vessel is only 40 per cent complete, so there is still risk in this program, which may be even higher following the unexpected US management change.”

Austal said it would commence a search for Mr Murdaugh’s replacement immediately, with a strong focus on candidates with “shipbuilding execution and delivery experience”.

“Rusty was promoted from chief financial officer to president during a period of considerable uncertainty for the USA business, and in his time as Austal USA president numerous shipbuilding orders, potentially worth billions of dollars have been secured for the business, which will underpin our USA operations for the next decade and beyond,” Mr Gregg said.

The company will pay a final dividend of 3c per share, bringing its full-year payout to 7c, 1c lower than the previous year.

Its shares were trading 1.6 per cent higher on Thursday at $1.94.