Associated Banc-Corp
Annual Report 2014

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Austal Limite A ed Appe endix 4E for the year end ded 30 June 2014 30 June 2014. T The previous cor rresponding perio od is 1 July 2012 3. 2 to 30 June 2013 1. The report ting period is from m 1 July 2013 to 2. Results fo r announcement t to the market. 2.5 2.6 2.1 2.2 2.3 2.4 inary activities Re evenue from ord ordinary activities rofit (loss) from o Pr period attributable et profit for the p Ne ons ividend distributio D ayable with respe o dividends is pa No etermining entitle ecord date for de Re ures in 2.1 to 2.4 xplanation of figu Ex ive income with n t of comprehensi 3. Statement ition with notes t of financial pos 4. Statement nd notes t of cash flows an 5. Statement equity t of changes in e 6. Statement ibution reinvestm dividend or distri 7. Details of tributions dividends or dist 8. Details of dinary security ble assets per ord 9. Net tangib / share) urrent period ($ / Cu onding period ($ / revious correspo Pr r entities during t ained or lost over 10. Control ga associates and j 11. Details of oint venture enti on nificant informatio 12. Other sign d by foreign entit g standards used 13. Accounting ements of subsid he financial state Th ting policies for t onsistent accoun co The foreign entiti arent company. T pa der accounting st eir accounts und th ncial Reporting S ternational Finan In 9.1 9.2 14.2 ary on the result 14. Commenta e arnings per share Ea 14.1 basic urrent period – b Cu onding period – b revious correspo Pr diluted urrent period – d Cu onding period – d revious correspo Pr olders including eturns to shareh Re e declared with re o dividends were No es of operating pe ignificant feature Si 14.3 egment results Se 14.4 rends in perform Tr 14.5 O ther factors affec 14.6 15. Audit / rev view of accounts not audited or su 16. Accounts ons of audit/revie 17. Qualificatio ance cting the results i upon which this ubject to review ew s after tax e to members ect to the year en ements to the div that may be req notes 14. nded 30 June 20 vidends quired ment plans / share) he period ties ties iaries are prepar the same reportin ies including Aus tandards that are Standards. red using ng period as the e stal USA prepare e equivalent to basic diluted distributions and espect to the yea erformance d buy backs ar ended 30 June e 2014. in period or futur is based re up 24.8 down 1 down 1 8% to 1% to 2% to $'000 $ $ $ 1,122,863 31,859 31,548 rations within the e Annual Report o Review of Ope o Annual Report o Annual Report o Annual Report o Annual Report N/A Refer to Refer to Refer to Refer to Refer to N/A N/A $ $ 1.24 1.15 - N/A Refer to o Annual Report $ $ $ $ 0.09 0.12 0.09 0.12 o Annual Report o Annual Report o Annual Report o Annual Report d accounts Refer to Refer to Refer to Refer to Audited N/A No qua lifications AU USTAL L IMITED 2014 ANNUUAL REPPORT HIEF EXECUTIVE OFFICER’S REPORT Contents Contents ..................................................................................................................................................................... 1  Index to the notes to the financial statements ............................................................................................................ 2  Chairman’s report ...................................................................................................................................................... 3  Chief Executive Officer’s report ................................................................................................................................. 5  Review of operations ................................................................................................................................................. 7  Directors’ report ......................................................................................................................................................... 9  Message from the Nomination and Remuneration Committee ................................................................................ 15  Remuneration report (audited) ................................................................................................................................. 16  Auditor independence and non-audit services ......................................................................................................... 28  Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2014 ....... 29  Consolidated statement of financial position as at 30 June 2014 ............................................................................ 30  Consolidated statement of changes in equity for the year ended 30 June 2014 ..................................................... 31  Consolidated statement of cash flows for the year ended 30 June 2014 ................................................................ 32  Notes to the financial statements ............................................................................................................................. 33  Directors’ declaration ............................................................................................................................................... 90  Corporate governance statement ............................................................................................................................ 91  Independent audit report to the members of Austal Limited .................................................................................... 98  Shareholder information ......................................................................................................................................... 100  Corporate directory ................................................................................................................................................ 101  1 | AUSTAL LIMITED ANNUAL REPORT 2014 HIEF EXECU UTIVE OFFICE ER’S REPOR RT Index to the notes s to the f financial s statemen nts Basis of prep paration ....... ..................... ..................... .................... ..................... ..................... .................... Note 1. Note 2. Corporate In Basis of pre nformation ..... paration ........ ...................... ...................... ...................... ...................... ..................... ..................... ...................... ...................... ...................... ...................... Current year r performance e ................... ..................... .................... ..................... ..................... .................... Note 3. Note 4. Note 5. Note 6. Note 7. Note 8. Note 9. Operating se Revenue .... Other incom Earnings pe Reconciliatio Dividends pa Income and egments ....... ..................... me and expens r share ......... on of net profit aid and propo other taxes .. ...................... ...................... ses ................. ...................... t after tax to n sed ............... ...................... ...................... ...................... ...................... ...................... net cash flows ...................... ...................... ..................... ..................... ..................... ..................... from operatio ..................... ..................... ...................... ...................... ...................... ...................... ns ................. ...................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... Capital struc cture ............. ..................... ..................... .................... ..................... ..................... .................... Note 10. Note 11. Note 12. Note 13. Cash and ca Interest bea Contributed Government ash equivalent ring loans and equity and res t grants relatin ts ................... d borrowings .. serves ........... ng to assets ... ...................... ...................... ...................... ...................... ..................... ..................... ..................... ..................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... Working cap pital .............. ..................... ..................... .................... ..................... ..................... .................... Note 14. Note 15. Note 16. Note 17. Trade and o Construction Inventories a Trade and o other receivabl n contracts in and work in pr other payables les ................. progress ....... rogress .......... s ..................... ...................... ...................... ...................... ...................... ..................... ..................... ..................... ..................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... Infrastructur re & other ass sets ............... ..................... .................... ..................... ..................... .................... Note 18. Note 19. Property, pla Intangible as ant and equipm ssets ............. ment .............. ...................... ...................... ...................... ..................... ..................... ...................... ...................... ...................... ...................... Other liabiliti ies ............... ..................... ..................... .................... ..................... ..................... .................... Note 20. Provisions .. ..................... ...................... ...................... ..................... ...................... ...................... k manageme ent ................. ..................... .................... ..................... ..................... .................... Fair value m Financial ris Derivative fin measurements k managemen nancial instrum ..................... nt ................... ments and hed ...................... ...................... dging ............ ..................... ..................... ..................... ...................... ...................... ...................... ...................... ...................... ...................... Unrecognise ed items ....... ..................... ..................... .................... ..................... ..................... .................... Commitmen Events after nts and conting r the balance d gencies .......... date ............... ...................... ...................... ..................... ..................... ...................... ...................... ...................... ...................... management t and related parties ......... .................... ..................... ..................... .................... Parent intere Related part Key manage Share based Parent entity Business co ests in subsidi ty disclosure . ement personn d payments ... y ................... ombinations ... iaries ............. ...................... nel compensa ...................... ...................... ...................... ...................... ...................... ation ............... ...................... ...................... ...................... ..................... ..................... ..................... ..................... ..................... ..................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... ...................... Financial ris Note 21. Note 22. Note 23. Note 24. Note 25. The Group, Note 26. Note 27. Note 28. Note 29. Note 30. Note 31. 3  ................ 33  3 ................. 33  3 ................. 33 9  ................ 39  9 ................. 39  3 ................. 43  5 ................. 45  7 ................. 47  8 ................. 48  8 ................. 48  9 ................. 49 3  ................ 53  3 ................. 53  4 ................. 54  6 ................. 56  7 ................. 57 8  ................ 58  8 ................. 58  0 ................. 60  0 ................. 60 ................. 61 2  ................ 62  2 ................. 62  5 ................. 65 8  ................ 68  8 ................. 68 0  ................ 70  0 ................. 70  4 ................. 74  9 ................. 79 2  ................ 82  2 ................. 82  2 ................. 82 3  ................ 83  3 ................. 83  3 ................. 83  3 ................. 83  4 ................. 84  8 ................. 88  9 ................. 89 2 | AUSTAL L LIMITED ANN UAL REPORT 2 2014                                                                 HIEF EXECUTIVE OFFICER’S REPORT Chairman’s report It is my pleasure to present the 2014 Annual Report to you on behalf of the Board of Austal Limited. The past 12 months represented a year of solid operational improvement and strengthening of the balance sheet by generation of cash and repaying of debt. In that time our Group:   Exceeded revenue guidance of $1 billion. Concluded the sale of surplus assets in Henderson and used proceeds to repay debt.  Maintained a strong focus on cash generation also used to repay debt.  Made operational improvements at our US shipyard, which translated into improved shipbuilding margins and profit growth.   Confirmed funding for two more Littoral Combat Ships under our existing contract with the US Navy. Secured new shipbuilding contracts with the Royal Navy of Oman and the Abu Dhabi National Oil Company.  Matured delivery of the US Navy and Australian Customs contracts such that the outlook is one of lower risk and more predictable earnings.   Successfully delivered an 80 m high speed ferry from the Philippines Shipyard Operation and grew local capability. Profitability grew Support activities following the restructure and consolidation in FY2013. The Chief Executive Officer, Andrew Bellamy, will provide more detail in his report on the operational achievements for the year, and the strategic direction and outlook for Austal. Financial results  Austal reported a net profit after tax of $31.859 million in FY2014, compared to $35.742 million in FY2013. FY2014 earnings before interest, tax, depreciation and amortisation were $79.338 million for the year compared to $62.575 million in FY2013. The improvement in earnings was driven by stronger shipbuilding margins in our US and Australian shipyards as existing programs matured.  Revenue for the year grew by 24.8 per cent from $899.491 million in FY2013 to $1,122.863 million. 3 | AUSTAL LIMITED ANNUAL REPORT 2014    US operations was the largest contributor to revenue, delivering $933.615 million (FY2013: $747.739 million) and $61.682 million in earnings before interest and tax (EBIT) (FY2013: $50.100 million) as Austal continued to perform work on its major Littoral Combat Ships (LCS) and Joint High Speed Vessels (JHSV) contracts for the US Navy. Australian operations delivered an improved result as the Cape Class program matured with $241.912 million in revenue (FY2013: $144.058) and $16.684 million EBIT (FY2013: $0.041 million). Philippines Operation reported a $2.703 million EBIT (FY2013: $5.020 million). Group net debt was reduced to $68.579 million (FY2013: $137.074 million) with proceeds from the sale of surplus assets and cash generated from operations being used to repay long term debt. Reconciliation of EBITDA: 2014 $’000 2013 $’000 Profit before income tax $ 47,144 $ 26,726 Finance costs Finance income EBIT Depreciation Amortisation EBITDA $ 8,742 (321) $ 13,571 (2,231) $ 55,565 $ 38,066 $ 21,593 2,180 $ 21,914 2,595 $ 79,338 $ 62,575 EBITDA is a non-IFRS measure. The information is unaudited but is extracted from the audited financial statements. EBITDA is used by management to understand cashflows within the group. Board and senior management Giles Everist joined the Board as an Independent Director in November 2013 and brings extensive financial experience to the team. The senior management team has remained stable during the year and the focus has been on increasing the sustainability of the organisation. Strategy and governance The Board has been actively engaged in the strategy development risk assessment process. This has provided clear direction to senior management about growth objectives. These objectives are now incorporated into both short term and long term incentive programs for executives. The Group’s risk management framework has been HIEF EXECUTIVE OFFICER’S REPORT refreshed during the year at both a strategic and corporate level. Both the Audit and Risk committee and Remuneration committee have been involved in that process to ensure that the necessary controls and governance are in place. Austal has the opportunity to leverage its intellectual property in new markets and new opportunities to expand the engineering services business. Outlook The significant steps we took to transform Austal in the year have placed the Group in a stronger position to deliver on our significant order book and progress the operational improvements we have made. The US Navy funded an additional US$680 million of work in the 12 months, taking the Group order book to $2.8 billion as at 30 June 2014. This secures revenue through CY2018. With a record amount of work in hand, our focus is to deliver prudent cash management and continue to drive operational improvements across our businesses, with a near-term view to return dividends to shareholders. I would like to acknowledge our employees for their loyalty and hard work during the year. The achievements we made would not have been possible without their professionalism and dedication, and to shareholders, thank you for your ongoing support of Austal during the year. I am pleased that we have delivered on the operational and financial performance to drive shareholder value, and your Board will focus on continuing to achieve this objective. John Rothwell AO Chairman 4 | AUSTAL LIMITED ANNUAL REPORT 2014 Chief Executive Officer’s report Austal was able to sustain and build upon the prior year’s significant operational improvements. This translated into improved operating profit before tax for the Group. Financial summary Year ended 30 June 2014 $’000 2013 $’000 Revenue* $ 1,122,863 $ 899,491 EBIT Net Interest (Expense) / Income $ 55,565 (8,421) $ 38,066 (11,340) Operating Profit Before Tax $ 47,144 $ 26,726 Tax (Expense)/Benefit $ (15,285) $ 9,016 Operating Profit After Tax $ 31,859 $ 35,742 % EBIT/Revenue Basic Earnings Per Share ($ per share) Net Assets Return on Invested Capital (%) $ $ 4.9% 0.09 433,232 7.8% $ $ 4.2% 0.12 407,187 5.5% *Excludes other income Operational improvements Management’s focus was to implement further operational improvements to sustain and enhance the turn-around in operating profit which began in the prior year. Improving margins at our state of the art shipyard in the US, where Austal is contracted to construct Littoral Combat Ships (LCS) and Joint High Speed Vessels (JHSV) for the US Navy was the primary driver in improved profitability for the Group. Both programs are maturing well with the number of design changes reducing and the workforce stabilising. Austal delivered JHSV 3 to the US Navy and JHSV 4 was launched. LCS 4 was delivered and LCS 6 was launched. Construction of LCS 6, 8,10 and 12 progressed well. The award of two service and support contracts for the US Navy is an indicator of the future potential for service work. Operational improvements at our Australian shipyard delivered a profitable result after a difficult few years, as production of the Cape Class Patrol Boats (CCPB) matured. The $330 million contract progressed well with two vessels delivered and a further six CCPB in production. The design of two High Speed Support Vessels (HSSV) for the Royal Navy of Oman is underway following the contract award in March. The Philippines shipyard delivered an 80m high speed ferry to Tahiti and a further three wind farm support vessels to the UK. A positive financial result is pleasing as we continue to invest in the development of capability in the yard. 5 | AUSTAL LIMITED ANNUAL REPORT 2014 This year saw the establishment of a production design team as well as small component manufacture for Australian operations. The two ferries contracted to the Abu Dhabi National Oil Company (ADNOC) in April are being constructed in the Philippines shipyard. Consolidation of the Henderson Service base into the Henderson shipyard yielded an improved financial performance in the year. All three business units are now generating income from both shipbuilding contracts and from Service and Systems activities. Strategy We made significant progress in implementing the strategic plan, which included further reducing gearing through a reduction in net debt to strengthen the balance sheet. This was achieved from the proceeds of the sale of the surplus Henderson Service Base and from cash generated by operations. The order book grew to $2.8 billion following appropriation of funds in line with US Navy contracts. This secures work through 2018 with two additional LCS funded in the year. The new contract for two HSSV for the Royal Navy of Oman is strategically significant because it is the first example of the JHSV concept being adopted in a new and important region. The ADNOC ferry contract underlines our competitiveness with the establishment of the Philippines shipyard. Our strategy is clear for the year ahead. Austal will strive to improve margins in the US through operational efficiency. Australian Operations will expand to deliver the Cape Class Patrol Boat and HSSV contracts and continue to target opportunities for domestic and export defence contracts. Technology transfer to the Philippines Operation will continue, and capacity will be expanded in line with market potential. The Philippines shipyard will increase the supply of small components within the Group to increase the competitiveness of the Group as a whole. All three business units will pursue service and systems opportunities from their well-established shipbuilding operations. A prudent cash management focus will ensure that costs and inflows are aligned. This will enhance Austal’s ability to deliver on the record amount of work in progress and strategic objectives. Future succ improving o production manageme sales, mark spend to en work. Thes well positio to generate cess will be b operating mar efficiencies, a ent. We will in keting and res nsure we mai e measures w ned to delive e returns for s built upon furt rgins, implem and prudent c ncrementally search and d intain a stron will ensure th er its strategic shareholders. ther menting cash increase our evelopment g pipeline of hat Austal is c objectives Andrew Be Executive D llamy Director and C Chief Executi ive Officer Aremiti Ferry 2 – built in the Ph hilippines People Our Values o and Teamwo tangible and throughout t of Excellence ork have bee d sustainable he year. e, Customer, n the basis fo business suc Integrity or many ccesses I’d like to tha stakeholders and loyalty. ank all of our s for their har employees a rd work, comm nd other mitment We have con developed g presented op grow and we important ex and experien and more su ntinued to inv greater depth pportunities f e have augme xternal recruit nce. The org ustainable as vest in our pe of talent. This for many emp ented this wit ts to increase ganisation is s eople and s has ployees to th some our skills stronger a result. Outlook Austal is bet book as a re strengthenin FY2014. tter positioned esult of improv ng the Group’ d to deliver o ved margins s balance she n the order and eet in We will susta and shipbuil major contra JHSV. We e FY2015 as p demonstrate performance sequestratio new US Nav contracts. ain the opera ding margins acts for the US expect furthe per the contra ed strong ong e, low-cost LC on. Austal is w vy constructio ational improv s, delivering o S Navy, the L r LCS to be fu act. The US N going support CS despite well positione on and vessel vements n our two LCS and unded in Navy has to the high ed to win l support The translati are directly i exchange ra translation w the AUD. A international business. operations ion of profits mpacted by t ate. We could with markets f weaker AUD l competitiven from our US the USD / AU d see a benef forecasting w D also improve ness of our A UD fit in profit eakening of es the ustralian We will cont Australian op remaining C are well prep the two HSS opportunities both domest inue to impro perations as Cape Class Pa pared for the SV for Oman. s exist to con tic and export ove productivi production of atrol Boats m start of const A good num struct similar t defence ma ty in our f the atures. We truction for ber of vessels for arkets. We will inves Philippines O commercial established Philippines. successful s Philippines a st in developi Operations w contracts. Fo a production We will conti supply of sma across the Gr ing capabilitie hilst we pursu or the first tim design team nue to build u all component roup. es in the ue new me we have in the upon the ts from the Our Service developed in and Australia grew in FY2 expected tha of our busine and Systems n preparation an defence v 014 and will c at these prod ess in the me s products ha for deployme essels. This continue to do ucts become edium term. ave been ent to US activity o so. It is a core part 6 | AUSTAL L LIMITED ANN UAL REPORT 2 2014 program are being effectively incorporated into subsequent vessels. USNS Coronado (LCS 4), the US Navy’s fourth LCS and second built by Austal USA and General Dynamics, completed acceptance trials and was delivered to the US Navy during FY2014. USNS Jackson (LCS 6) – the first LCS being built by Austal as the prime contractor under the 10-vessel contract – was launched in January 2014 with delivery scheduled to occur in FY2015. Construction of LCS 8 and LCS 10 continued with the keel laying for LCS 10 performed in April 2014. Australian operations Year ended 30 June Revenue EBIT EBIT Margin 2014 $'M 2013 $'M $ 241.912 $ 144.058 16.684 6.9% 0.041 0.0% Austal’s Australian operations delivered a significant increase in EBIT and EBIT margin in FY2014. This result was driven by productivity gains and cost optimisation achieved at the Henderson shipyard on the $330 million contract to design, construct and service the Cape Class Patrol Boat for Australian Customs and Border Protection. The second Cape Class Patrol Boat Cape Byron was delivered in May 2014 and there was a further increase in construction activity on subsequent patrol boats, with all eight due to be completed by August 2015. The margin uplift was also driven by the consolidation of Henderson based service and construction activities into one shipyard which yielded a reduction in overhead cost, increased asset utilisation and increased labour efficiency. Service revenue was underpinned by the docking of two Royal Australian Navy Armidale Class Patrol Boats. The transition of the Australian business into a Defence organisation has necessitated and supported a build-up of systems integration and sustainment skills and capabilities. The award of two 72 m HSSV for the Royal Navy of Oman in March 2014 increased the order book for Australia by $142M and extends contracted work until the end of FY2016. Review of operations A financial breakdown for each business unit has been included below, including IFRS and non-IFRS information. This information has been extracted from the audited financial statements and included in order to demonstrate growth across the primary segments. US operations Year ended 30 June Revenue EBIT EBIT Margin 2014 $'M 2013 $'M $ 933.615 $ 747.739 61.682 6.6% 50.100 6.7% Austal’s US operations continued to be the biggest contributor to earnings. Austal USA enhanced its contract management skills as prime contractor and has delivered improved EBIT margins from shipbuilding activities. FY2014 was Austal USA’s first full year as a prime contractor to the US Navy for both the LCS and JHSV programs. The pass through revenue related to systems integration which is undertaken by major sub-contractors had a dilutive effect on EBIT margin compared to the prior year. Continued focus on skills development and stabilisation of the workforce within the target range of 4,100 – 4,200 has produced a tangible improvement in labour productivity which transitions Austal down the learning curve as the programs progress. Supply chain activities were focussed on improvements to material planning and logistics, reduced inventory levels, optimisation of economic order quantities, and greater alignment with supplier production schedules to realise material cost reductions. Management maintained a stringent focus on cash management. Capital expenditure was restricted to sustaining activities having completed a major period of investment in FY2013. Two more vessels were added to the order book after funds for LCS 18 & 20 - the seventh and eighth LCS under the US$3.5 billion contract – were appropriated by Congress in March 2014. These projects added a further US$680 million to the order book and secured funding for the LCS program through until 2018. There was significant progress in both the JHSV and LCS programs during the year. JHSV 3, USNS Millinocket was delivered in March 2014 after successfully completing acceptance trials in January, JHSV 4, USNS Fall River was launched in January and the keel of JHSV 5, USNS Trenton was laid in March 2014. Productivity improvement opportunities identified in the early stages of the 7 | AUSTAL LIMITED ANNUAL REPORT 2014 Philippines operations 107.0  65.8  60.1  38.9  17.8  14.3  16.0  19.7  21.7  FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Medical Treatment Injury Frequency Rate (per million hours worked) 6.35  6.05  5.90  5.38  3.92  3.90  2.20  2.30  2.30  FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Lost Time Injury Frequency Rate (per million hours worked) Occupational health and safety policy Austal’s perpetual focus and leadership on safe people, safe practices and safe work environments is effective in promoting a culture that raises awareness of individual responsibility for safety and health and it instils safety as an accepted workplace practice and the way we do business. Year ended 30 June Revenue EBIT EBIT Margin 2014 $'M 2013 $'M $ 33.767 $ 39.986 2.703 8.0% 5.020 12.6% The Philippines Operations successfully completed the construction of an 80 metre commercial vehicle / passenger ferry which was delivered to Tahiti in the second quarter of FY2014 and also completed the construction of three wind farm vessels for operation in Europe. The year on year fall in revenue and EBIT was caused by the reduction in activities following the completion of the 80 metre ferry. Throughput is expected to pick up again in FY2015 after the award of two 48 m crew transfer vessels for delivery to ADNOC. The award of the two vessels added US$27.8M to the Philippines Order book and provides contracted work through FY2015. The Philippines Operations entered the Service market in FY2014 by supporting the docking of Austal vessels in Europe and Asia. The Philippines Operations are playing a pivotal role in cost optimisation of manufacturing activities within the Group by supplying sub-assemblies and components to Australia. The capital investment program to establish the footprint for infrastructure required to construct larger vessels (80 – 130 m in length) was completed on schedule. The Group continues to focus on capability development with the objective of the Philippines becoming self-sustaining. The two key areas of focus are on production / project management and the establishment of a Philippines based design team. Safety performance Our goal of ZERO Harm means no injuries to anyone, ever and whilst the target is aspirational, it remains a target to strive for. Safety performance in Austal’s Australian Operations was particularly pleasing in FY2014 with zero lost time injuries (LTIs) incurred whilst labour hours exceeded 1 million hours. Australia received 13 Industrial Foundation for Accident Prevention awards and attained a Gold level Safe Way achiever award for the 4th consecutive year. Austal reports safety performance in accordance with AS1885.1. 8 | AUSTAL LIMITED ANNUAL REPORT 2014 Directors’ report The Board of Directors of Austal Limited submit their report for the year ended 30 June 2014. Directors The names and details of the Company’s Directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. John Rothwell AO – Non-Executive Chairman With 40 years of experience in boat and shipbuilding, John has played a major role in the development of the Australian aluminium shipbuilding industry. He is the architect responsible for the establishment of Austal and was the Founding Managing Director. John identified markets for high speed ferries throughout Asia which resulted in Austal’s rapid growth. In 1998 he saw the potential for US Defence contracts for high speed aluminium naval ships and he led the formation of a new shipyard in Mobile, Alabama. John was appointed an Officer of the Order of Australia (AO) in January 2004 for services to the Australian shipbuilding industry, and for significant contributions to vocational education and training. He was named “Australian Entrepreneur of the Year” by Ernst and Young in 2002 and he was awarded the WA Citizen of the Year in the category of Industry and Commerce in 1999. John stepped down as Executive Chairman and Chief Executive Officer on 22 August 2008 to continue as Non-Executive Chairman after managing the Company for 20 years. Dario Amara – Independent Director Dario is a construction and engineering executive with extensive industry experience and networks gained over 33 plus years in the Australian and international markets, spanning the infrastructure, industrial and property sectors. He has successfully operated as a CEO for over 16 years with John Holland Asia Limited, GRDMINPROC Limited (now of part AMEC plc), Emerson Stewart Group Limited which he founded and listed on the ASX within 30 months of launching and more recently as CEO of the POSCO-BGC E&C Joint Venture, an initiative to capture billion dollar plus resources projects. Concurrent with his executive leadership roles he has successfully served as a Project Director or as Project Board Chairman on large and complex projects delivered by a variety of commercial models. In addition Dario has served on several arts and cultural boards as Chairman on a pro bono basis for over 22 years and currently serves on the Murdoch University Art Collection Board. He is a Civil Engineer with a Bachelor of Engineering (Distinction), a Fellow of the Institution of Engineers Australia, a Chartered Professional Engineer, on the National Professional Engineers Register and a Registered Building Practitioner and Contractor (Western Australia.) 9 | AUSTAL LIMITED ANNUAL REPORT 2014 David Singleton – Independent Director David brings a wealth of highly relevant business expertise and experience to Austal in both the defence and manufacturing and product support sectors. David has held numerous senior roles with BAE Systems (formerly British Aerospace), which is one of the world’s largest defence companies. He served as Group Head of Strategy and Mergers & Acquisitions in London from 1997 to 1998 and again in 2003. In the intervening years, David was BAE’s Managing Director of Asset Management before spending three years in Rome as the Chief Executive Officer of Alenia Marconi Systems (AMS). AMS was a European leader of naval warfare and air defence systems, C4I, ground and naval radars, naval command and control training systems and long term naval support. David started his career with the UK Ministry of Defence and worked in research, development and manufacturing as well as senior management roles in Royal Ordnance which by then was part of BAE. He has also served as a member of the National Defence Industries Council in the UK, and as a board member and Vice President (Defence) of Intellect, a leading trade association for the UK technology industry. David is the CEO and Managing Director of Perth-based mineral exploration company Poseidon Nickel Limited. Prior to this role, he served as CEO and Managing Director of Clough Limited between 2003 and 2007. David is also a Non-Executive Director of Quickstep Holdings. David was appointed to the Board of Directors of Austal Limited on 21 December 2011. Giles Everist – Independent Director Giles has a breadth of experience with project and service based businesses gained over more than 25 years, working internationally in Australia, UK and Africa, largely in the resources, engineering and construction industries. Giles was appointed as Non-Executive Director in November 2013. Giles is a qualified chartered accountant and was formerly the Chief Financial Officer and Company Secretary of Monadelphous Group Limited between 2003 and 2009. He has held senior financial executive roles with Rio Tinto in the United Kingdom and Australia, as well as major US design engineering Group Fluor Corp during his career. Giles is currently a Non-Executive Director of Decmil Group Limited, LogiCamms Ltd and Macmahon Holdings Limited. 10 | AUSTAL LIMITED ANNUAL REPORT 2014 Andrew Bellamy BSc (Hons) Material Science, MA (Marketing) – Chief Executive Officer Mr Bellamy commenced as CEO in February 2011 and has been instrumental in Austal’s emergence as a global defence prime contractor. Mr Bellamy is responsible for the Group’s worldwide operations and is a member of the Board of Austal Limited and the Board of Austal USA. As CEO, Mr Bellamy has overseen the successful expansion of Austal’s largest shipyard in Mobile, Alabama, and developed and implemented strategies to ensure the efficient delivery of the Group’s multi-billion defence contracts for the US Navy – the Littoral Combat Ship and Joint High Speed Vessels. Under Mr Bellamy’s leadership, Austal has successfully transitioned its Henderson, Western Australia shipyard away from commercial vessels to defence vessels, which has included the award of contracts such as the Cape Class Patrol Boat program for the Australian Government and high speed defence vessels for a naval customer in the Middle-East. He has also overseen the growth of Austal’s commercial vessel shipyard in the Philippines into a profitable operation and the positioning of Austal’s global service footprint. Separately, Mr Bellamy has taken steps to strengthen Austal’s balance sheet, including a reduction in the Group’s debt and a focus on capital management across the business. This has provided Austal with the capacity to successfully and profitably deliver on its existing vessel programs and the ability to win additional work. Mr Bellamy joined Austal in September 2008 as Head of Global Sales and Marketing. In this role, Mr Bellamy had responsibility for the Sales and Marketing function across all Austal’s international businesses, including the strategically significant US operations. In 2010, Mr Bellamy was appointed Chief Operating Officer of Austal’s Australian businesses and oversaw the growth and expansion of Austal’s international network of locations at a time of significant turbulence in global markets. Previously, Mr Bellamy held senior positions within the Oil and Gas industry with Honeywell and ICI in North America, Europe, Middle East and Asia. Mr Bellamy holds a BSc (Hons) in Materials Science from the University of Sunderland and an MA (Marketing) from the University of Lincoln and Humberside. JHSV 4 11 | AUSTAL LIMITED ANNUAL REPORT 2014 Interests in the shares and options of the company and related bodies corporate The interests of the directors in the shares of Austal Limited at the date of this report were as follows: Director Ordinary Shares John Rothwell Dario Amara David Singleton Andrew Bellamy Giles Everist 32,200,745 50,000 28,600 566,928 50,000 Number Options^ Performance Rights^^ - - - 280,000 - - - - 287,313 - ^This represents options granted from the Employee Option Share Plan (ESOP) (refer to Note 29 of the financial statements). There were no additional ordinary shares issued or options granted to directors and exercised between the balance date and the date of this report. ^^This represents performance rights granted from the Long Term Incentive Plan (LTIP). (Refer to Note 29 of the financial statements) Principal activities The principal activities during the year of entities within the consolidated entity were the design, manufacture and support of high performance aluminium vessels. These activities are unchanged from the previous year. Results The net profit after tax of the consolidated entity for the financial year was $31.859 million after income tax (FY2013: $35.742 million). Review of operations A review of the operations and financial position of the consolidated entity is outlined in the Review of Operations on page 7. Dividends No dividend has been declared for FY2014 (FY2013: Nil). Significant events after the balance date The Group announced the completion of the sale of Hull 270 (102 m stock vessel) on 20 August 2014 for $61.500 million. Likely developments and future results A general discussion of the Group outlook is included in the Chairman’s Report on page 3 and the Review of Operations on page 7. Significant changes in the state of the affairs There were no significant changes to structure or operations of the Group during the financial year. 12 | AUSTAL LIMITED ANNUAL REPORT 2014 Environmental regulation and performance The Group has a policy of at least complying with, but in most cases exceeding, environmental performance requirements. No environmental breaches have been notified by any Government Agency during the year ended 30 June 2014. Share options and performance rights There were 9,392,329 un-issued ordinary shares under options and 1,049,022 un-vested performance rights at the date of this report. Refer to Note 29 for further details of the options outstanding. There were no options exercised or performance rights that had vested during the year. Indemnification and insurance of directors and officers An indemnity agreement has been entered into between the parent entity and each of the Directors named in this report. Under the agreement, the company has agreed to indemnify those Directors against any claim to the extent allowed by the law, for any expenses or costs which may arise as a result of work performed in their respective capacities. The parent entity has paid premiums during the financial year in respect of a contract insuring the Directors and officers of the Group in respect of liability resulting from these indemnities. The terms of the insurance arrangements and premiums payable are subject to a confidentiality clause. Indemnification of auditors To the extent permitted by law, the parent entity has agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. Directors’ meetings The number of meetings of directors (including meetings of committees of Directors) held during the year and the number of meetings attended by each Director was as follows: Meeting Nomination & Austal Limted Audit & Risk Remuneration Board Committee Committee Number of meetings held 8 4 2 Number of meetings attended: John Rothwell Dario Amara David Singleton Giles Everist * 8 - 2 8 4 - 6 3 2 3 2 2 Andrew Bellamy ** 8 4 2 * Giles Everist joined the board in November 2013 and both subcommittees in January 2014. Three Board meetings, two Audit & Risk Committee meetings and two Nomination & Remuneration Committee meetings were held after that date. ** Andrew Bellamy attended all Audit & Risk and Nomination & Remuneration committee meetings as a guest of each committee. 13 | AUSTAL LIMITED ANNUAL REPORT 2014 Committee membership The Company has an Audit and Risk Committee and a Nomination and Remuneration Committee of the Board of Directors. Members acting on the committees of the Board during the year were: Audit and Risk Dario Amara^ Giles Everist David Singleton Nomination and Remuneration David Singleton^ Giles Everist John Rothwell ^ Designates the Chairman of the committee. Rounding The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Class Order 98/0100. The Company is an entity to which the Class Order applies. 14 | AUSTAL LIMITED ANNUAL REPORT 2014 Message e from the e Nomina ation and Remune eration Co e ommittee Dear Shareh holders, The achieve people throu this success ements over t ughout the Gr s. he past year roup. The lea would not ha adership show ave been poss wn by our CE sible without EO and his ex the hard work xecutive team k and dedicat m has been ins tion of our strumental to Fundamenta entire busine an important and provide al to our on-go ess through t t part. Our re long term su oing success he implemen emuneration p stainable retu is our ability tation of a co policy and pra urns to share to attract, rew omprehensive actices need holders. ward and reta e human capit to be sensitiv ain talented in tal strategy, o ve to the need ndividuals ac of which remu d to preserve ross our uneration is e our capital We seek to t groups, our As a global G the major jur however it is of our busine take a leader executives an Group, we ha risdictions in s the ultimate ess. rship position nd other stak ave also cons which we ope responsibility in this import eholders to e sidered remun erate, includin y of the Board tant area of g ensure that we neration guide ng the USA, w d to ensure th governance. e get the bala elines, regula where a num hat the remun We have eng ance right in a ations, laws a ber of our key neration arran gaged with sh arriving at ou and market pr y personnel a ngements me hareholder r approach. ractices in all are located, eet the needs We recognis shareholder se that there i communicat is always roo ion in genera m for improve al and our disc ement and on closures in ou ne of our area ur Annual Re as of focus th port in particu his year has b ular. been on It is with plea concise. I lo future. asure that we ook forward t e set out belo to engaging w w our FY201 with you at ou 4 Remunerat ur Annual Gen tion Report. W neral Meeting We hope that g or other suc you find it bo ch opportunity oth clear and y in the Yours sincer rely David Single Chairman, N eton Nomination an nd Remunera ation Committ tee JHSV 3 & LCS 4 15 | AUSTA AL LIMITED ANN NUAL REPORT 2014 Remuneration report (audited) This Remuneration Report for the year ended 30 June 2014 outlines the remuneration arrangements of the Company and the Group in accordance with the requirements of the Corporations Act 2001 (the Act) and its regulations. This information has been audited as required by section 308(3C) of the Act. The remuneration report is presented under the following sections: 1. Key Management Personnel (KMP) 2. Relationship between remuneration and Austal Limited’s performance 3. Remuneration governance 4. Executive remuneration 5. Remuneration Structure 6. Board composition 7. Non-executive Director remuneration 8. Remuneration of key management personnel 9. Details of contractual provisions for KMP 10. Options granted or vested during the period 11. Performance rights granted or vested during the period 12. Shares granted or vested during the period 13. Equity instruments held by KMP 14. Loans to KMP 15. Other transactions with KMP 1. Key Management Personnel (KMP) This report covers all KMP as defined in Accounting Standards, including all Directors, as well as those Executives who have specific responsibility for planning, directing, and controlling material activities of the Group. KMP for the year ended 30 June 2014 were as follows: Executives Non-executive Directors Executive directors Mr Andrew Bellamy Chief Executive Officer Executives with no Director duties Mr Graham Backhouse President Australia Mr Greg Jason Mr Brian Leathers Mr Craig Perciavalle Mr Joselito Turano Group Chief Financial Officer Chief Financial Officer USA President USA President Philippines Mr John Rothwell Mr Dario Amara Mr Giles Everist (1) Mr David Singleton Non-Executive Chairman Independent Director Independent Director Independent Director (1) Mr Giles Everist joined the Board of Directors in November 2013. 2. Relationship between remuneration and Austal Limited’s performance Our long-term remuneration framework is linked to a number of internal and external performance measures which when achieved provide direct benefits to the shareholders through increased returns. Two key performance measures we use are:  Total Shareholder Return (TSR) (the capital growth in the value of our share plus dividend paid). We use absolute return as opposed to a relative return due to the lack of a comparable peer group; and  Return on Capital Invested (ROIC) (Net operating profit after tax exclusive of abnormal items / Net Assets (excluding Cash, Debt, Derivatives and Tax Accounts). Actual ROIC results are compared against internal targets). The current Austal Long Term Incentive Plan was established in CY2013. (Refer to Note 29) 16 | AUSTAL LIMITED ANNUAL REPORT 2014 A summary of the TSR and ROIC metrics over the past three years is set out below as an indication of performance, noting that the actual metrics will be calculated in line with the rules of the plan at vesting date. Total Shareholder Returns Return on Invested Capital 71.8%  7.8%  5.5%  3.0%  FY12 FY13 FY14 FY12 FY13 FY14 (39.8%) (38.2%) Group Performance The graph below shows share price performance compared to the earnings per share (EPS) over time. EPS (cents per share) 18 16 14 12 10 8 6 4 2 0 Annual Average Share Price $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 FY10 FY11 FY12 FY13 FY14 Basic EPS Annual Average Share Price 3. Remuneration governance Independence of the Nomination and Remuneration Committee The foundation of the Group’s remuneration governance structure is the independence and competence of the Nomination and Remuneration Committee (NRC). The NRC Charter provides that a majority of members of the NRC are independent. For the year ended 30 June 2014 the members of the NRC were David Singleton (Independent Chairman) and Giles Everist (Independent Director) and John Rothwell. As representatives of shareholders, the independence of the NRC is important as it underscores the impartiality in making its recommendations to the Board on remuneration matters. The remuneration report for 30 June 2013 was approved at the 2013 Annual General Meeting. Use of Independent Remuneration Consultants The NRC has the ability to engage the services of an Independent Remuneration Consultant. They also have the ability to engage legal counsel, where needed. The NRC engaged a Remuneration Consultant for the year ended 30 June 2014 to assist with the improvements in remuneration reporting. The Remuneration Consultant was not engaged to provide recommendations in relation to KMP remuneration. 17 | AUSTAL LIMITED ANNUAL REPORT 2014 Share Trading Policy All equity based remuneration awards granted pursuant to the Group’s policy are subject to the Group’s Share Trading Policy, details of which can be found on our website. In particular, there is a prohibition on employees entering into contracts to hedge their exposure to the share price movement of the Group. 4. Executive remuneration Remuneration Framework The Group is committed to responsible remuneration practices. The need to reward the Group’s employees fairly and competitively based on performance needs to be balanced with the requirement to do so within the context of principled behaviour and action, particular in the area of safety, risk, compliance and control. Remuneration should contribute to the Group’s achievements in a way that supports the Group’s culture and goals. The Remuneration Policy Framework set out below summarises the key features of the Group’s remuneration approach. Our Vision: Maintain a responsible, performance-based Remuneration Policy that is aligned with the long-term interests of our shareholders. Our Goal: Strike the right balance between meeting shareholders expectations, paying our employees competitively, and responding appropriately to the regulatory environment. Our Approach: Governance Performance Alignment Individual Remuneration Determination Remuneration Structure and Instruments Principles: Principles: Principles: Principles: • Clearly defined and documented governance procedure • Independent Remuneration Committee • Independent Remuneration Consultant • Annual assessment of Remuneration Policy • Reward Group annual performance measured relative to its planned key performance indicators • Business performance aligned • Recognize and reward teamwork and development of the culture of the organisation • Total Remuneration based approach • Facilitate competitiveness by paying competitive remuneration levels for comparable roles and experience, subject to performance • Promote meritocracy by recognizing individual performance, with a particular emphasis on contribution, ethics and safety • Award and differentiate based on individual performance and contributions. • Equal remuneration opportunity • Provide the appropriate balance of fixed and variable remuneration consistent with the position and role in the Group • Significant portion of variable remuneration deferred and aligned with the long-term performance of the Group • Promote ethical behaviour and do not create incentives to expose the Group to inappropriate risk 5. Remuneration structure The mix of Fixed and Variable Remuneration (short term and long term) is designed to ensure the retention of individuals over the longer term and to ensure that there is adequate consideration of risk in the remuneration decisions. Fixed remuneration The level of fixed remuneration, which is most commonly paid in the form of base salary, is set based on the role and experience of the individual, his or her individual sustained long-term performance, and market positioning. Variable remuneration The level of variable remuneration (which includes short term and long term incentives) granted is entirely at the discretion of the Board and in the case of substandard performance can be zero. In addition, a portion of variable remuneration (usually in the form of Long Term Incentive (LTI)) is deferred and is typically subject to forfeiture in the event of certain specific performance targets not being met, or in the case of resignation or detrimental activities by employees. 18 | AUSTAL LIMITED ANNUAL REPORT 2014 Remuneration peer group From time to time the Group will undertake a detailed review of its remuneration structures and amounts and as part of that review will benchmark against comparable companies. The criteria for selecting the peer Group include: market capitalization, industry segment and location of operations. Remuneration structure The target mix of remuneration for KMP is set out below: LTI 13% STI 17% Fixed 70% It is important to note that these remuneration structures are targets only. They do not set out any entitlements to employees or commitments by the Group. The mix of percentages will change in cases where targeted variable remuneration amounts are not paid in full. Fixed remuneration The fixed remuneration of the CEO is made up of two components:  Cash – 77%  Shares – 23% The 77% cash element is paid through payroll in the usual manner and 23% of the CEO’s remuneration is made in shares which are subject to an 18 month holding period from the date at which the shares are released to the CEO and no performance condition exists as it is considered part of his base remuneration. Only the cash component is considered for the purpose of calculating variable compensation potential. The variable compensation does include a performance condition. The Board is recommending that the issue of shares, which form part of the CEO’s base salary, will be made in 2 equal instalments through the year immediately after the publication of the interim and full year accounts. The number of shares to be issued will be calculated based on the 6 month volume weighted average price (VWAP) of the shares immediately preceding the issue. The Board considers that this best reflects the intention of paying a proportion of the CEO’s salary as shares but avoids the administrative issues of issuing monthly as is the case for the cash component. This arrangement is subject to shareholder approval at the 2014 Annual General Meeting. The CEO’s salary was reviewed in line with a peer group of listed ‘industrial’ companies some of which are included within the ASX 300.  The Board considered the complexity of Austal’s business, given its geographic diversity having major opportunities in Australia, USA and Philippines, and the complexity of defence contracting across the globe when determining the peer Group comparison data. 19 | AUSTAL LIMITED ANNUAL REPORT 2014  The peer group was selectively compiled from companies within or just below the ASX 300. The peer Group excludes ASX 100 companies which are deemed to be considerably larger in scale for comparison purposes. The focus was on companies that are manufacturing industrial goods, and / or industrial businesses with a contract delivery model for their products/services or selling into international markets (like Austal).  Exclusions have primarily extended to resources, oil & gas, financial services, property, investment funds, consumer goods, technology, healthcare or energy/infrastructure companies for comparison purposes.  Some Perth companies that sit outside the definitions above were included where the market capitalisation was close to that of Austal at the time of compilation for local market comparison purposes.  Perth listed companies of comparable scale are heavily weighted toward mining services or construction based business which has historically attracted a salary premium.  The data was extracted from FY2013 and is therefore dated 12 months. There has been a significant slowdown for many of these businesses over the past 12 months and it is expected that the bonus components awarded to executives will reflect this. The average and median remuneration data from the peer group is summarised below. The Board is satisfied that the CEO’s remuneration is market competitive having completed the review. Peer group data: Metric Salary including Superannuation Short Term Incentive Long Term Incentive Total Remuneration Average $ 1,004,480 $ 352,520 $ 329,560 $ 1,686,560 Median $ 933,000 $ 210,000 $ 273,000 $ 1,416,000 Fixed remuneration for KMPs being cash and shares for the CEO and cash for other KMPs is targeted at the 50th percentile of peer group base salaries for comparable positions. In cases where an individual has critical proprietary knowledge or specific and relevant industry experience, base salary may exceed the 50th percentile of peer group, this is particularly the case with regard to high performers. Variable remuneration - Short Term Incentive program (STI) All KMPs are eligible to participate in the Group’s Short Term Incentive program. STI is designed to support the Group’s overall strategy by:    focusing participants on achieving financial year performance goals which contribute to sustainable shareholder value; providing a significant incentive based on individual performance measured against challenging targets to motivate key employees; and providing clear correlation between key performance measures that influence business outcomes and the employee’s ability to influence those measures. The Group uses a range of qualitative and quantitative performance measures to set goals and assess the performance of individuals. These performance measures are specific to each individual’s area of responsibility and include both financial and non-financial measures, such as ethics, health and safety. The Board reviews and approves performance targets and objectives annually for the CEO and executive management team. Performance targets relate to key business objectives that must be delivered during the current financial year. Each performance objective may contain multiple targets and initiatives to provide specific milestones for measurement. The performance objective/s as a part of the STI program are designed to focus employees on adding shareholder value and may be a mixture of financial and non-financial objectives. The objectives will be relative to the most desirable outcomes identified by the CEO. Financial objectives are to account for a minimum of 50% of the STI objectives and will relate to Board approved budget targets. 20 | AUSTAL LIMITED ANNUAL REPORT 2014 When non‐financial performance objectives are used, they will relate to strategic performance such as safety, customer satisfaction, operational improvement, business growth and employee relations. When used, the weighting allocated to each of the non‐financial objectives will likely be dependent upon the employee’s job size and role focus. Performance relative to financial and individual targets set during the annual budget process provides the basis for determining payments made for at‐risk remuneration. STI awards for KMP are generally between 20% and 50% of total fixed cash remuneration and are paid in cash as soon as possible after the performance criteria has been measured and validated and after the Board has approved the recommended amounts. The FY2014 STI for the CEO was solely focussed on EBIT and the Board has elected to adopt a balanced scorecard approach for assessing the CEO’s performance with respect to the STI plan for FY2015. Details of STI awards accrued for KMP for the year ended 30 June 2014 are set out below. Name Position Andrew Bellamy CEO Graham Backhouse President - Australia Greg Jason Brian Leathers Craig Perciavalle Joey Turano Group CFO CFO - USA President - USA President - Philippines * Maximum STI Award 50% 30% 30% 30% 40% 30% * Accrued * Unawarded STI 33% 28% 20% 10% 13% 20% STI 17% 2% 10% 20% 27% 10% *Represents percentage of total fixed cash remuneration. Vested benefits will be paid in the following financial year. The Board has the discretion not to grant STI performance awards in the event of substandard Group performance, notwithstanding that individuals may have achieved their agreed performance targets. Variable remuneration - Long Term Incentive plan The Group’s Long Term Incentive (LTI) plan is a key element of the Group’s remuneration strategy which is designed to retain and rewards executives over the long term. LTI awards are granted purely at the discretion of the Board, based on the performance of the CEO and other KMP. The objectives of the LTI plan are to:   align key employee behaviour toward the growth and profitability objectives of the Group and reward key employees for sustained contributions to business success; and attract and retain exceptional employees that have the capacity to significantly impact the growth and profitability of the Group LTI awards amounts are typically up to 50% of fixed cash remuneration (effective from the start of the financial year) and are in the form of Performance Rights, which convert at zero cost to the employee, on a one for one basis to actual shares in the Company subject to meeting the vesting conditions. The LTI awards are based on 3-year performance period. Performance periods typically start at 1 July and end at the completion of the third fiscal year other than for a transition period of two years which bridges a gap between the old scheme and the new scheme. The Performance Rights vest at the end of the performance period, subject to meeting the performance hurdles and continued service with the Group at the time of vesting. The Board decided to suspend the LTI plan for FY2012, and no awards were granted during the year in light of the concerns raised by shareholders through the vote at the 2012 Annual General Meeting regarding the Remuneration Report and remuneration of KMP. This was despite the LTI plan being approved by shareholders at the 2012 Annual General Meeting. 21 | AUSTAL LIMITED ANNUAL REPORT 2014 The diagram below illustrates the granting, performance period and holding period of LTI awards through the transition period to the new scheme. First transition year Grant 30 June 2014 30 June 2015 30 June 2016 30 June 2017 2 Year Performance Period 50% Vesting Holding Period Minimum One Year 3 Year Performance Period 50% Vesting Holding Period Minimum One Year Second transition year Grant 30 June 2015 30 June 2016 30 June 2017 30 June 2018 2 Year Performance Period 25% Vesting Holding Period Minimum One Year 3 Year Performance Period 75% Vesting Holding Period Minimum One Year Third transition year Grant 30 June 2016 30 June 2017 30 June 2018 30 June 2019 3 Year Performance Period 100% Vesting Holding Period Minimum One Year The vesting criteria for awards is linked to the tenure of the individual and Group level quantitative absolute performance measures. The Group has selected absolute Total Shareholder Return (TSR) and Return on Invested Capital (ROIC) as the most appropriate performance measures to assess executive performance because the Board believes that these performance measures perfectly align the incentives with the objectives of shareholders. The Performance Rights vest subject to the terms of the plan. An example of performance targets is set out below. Performance Measure Percentage of award Thresholds Percentage vesting Total Shareholder Return 30% Return on Invested Capital 70% <= 15% 15% - 25% >=25% Zero Pro-rated on linear basis 30% <= 6% 6% - 10% >=10% Zero Pro-rated on linear basis 70% 6. Board composition The Nomination and Remuneration sub-committee has undertaken a review of the structure, size and composition of the Board through an investor survey and other inputs from independent advisors during the year. As a result, the sub-committee has recommended that the current practice of maintaining 3 independent non-executive directors should remain. The process to ensure that the skills at Board level are appropriate to the business needs has continued with the appointment of Giles Everist. The sub-committee also undertook an annual review of the position of Chairman at Austal in part because he is now aged over 70 years. The Board (excluding the Chairman) unanimously agreed that the Chairman’s intimate knowledge of the shipbuilding industry, of Austal and its major customers, together with his demonstrated high level of commitment, meant that he remains a significant asset to the Group and he was requested to remain as Chairman, to which he has agreed. 22 | AUSTAL LIMITED ANNUAL REPORT 2014 7. Non-Executive Director remuneration The remuneration of Non-Executive Directors is determined by other executive members of the Board in accordance with the Group’s Nomination and Remuneration Committee Charter, which also provides that no Director or Manager shall be involved in any decisions as to his or her own remuneration. Non-Executive Directors receive only fixed remuneration, typically in the form of cash, non-cash benefits and superannuation contributions. Fees may also be paid in the form of equity in the Group. The remuneration pool limit for Non-Executive Directors is set at $3 million. The Directors agreed that the Chairman would reduce his time commitment to the Group from 1 January 2014 with a corresponding pro rata reduction to his remuneration. The Group proposes a review of Non-Executive Director remuneration for the year ending 30 June 2015. 23 | AUSTAL LIMITED ANNUAL REPORT 2014 8. Remuneration of key management personnel Year ended 30 June 2014 Short-Term Benefits Salary & Fees Cash Bonus* Other Monetary Benefits Non Monetary Benefits Post Employment Benefits Super- annuation / Social Security Long-Term Benefits Share Based Payments % Employee Leave Termination Benefits Equity Settled Total Performance Related % Options Non-executive directors John Rothwell Dario Amara David Singleton Giles Everist (1) Executive directors $ 318,182 $ - $ - $ - $ - $ - $ - $ - $ 318,182 - - 93,000 - - - - - - - 93,000 - - 95,000 - - - - - - - 95,000 - - 55,833 - - - - - - - 55,833 - - Andrew Bellamy 782,753 263,040 - - 17,774 13,297 - 328,027 1,404,891 18.7 - Other key management personnel Joey Turano 226,151 27,421 7,877 - 853 - - 5,388 267,690 10.2 - Graham Backhouse 268,373 86,427 - - 25,460 7,059 - 6,288 393,607 22.0 - Craig Perciavalle 430,591 54,972 14,021 - 28,764 - - 30,250 558,598 9.8 - Greg Jason Brian Leathers 308,822 75,840 - - 17,774 7,332 - 45,819 455,587 16.6 - 298,379 44,454 3,370 - 24,421 - - 26,714 397,338 11.2 - $ 2,877,084 $ 552,154 $ 25,268 $ - $ 115,046 $ 27,688 $ - $ 442,486 $ 4,039,726 (*) Represents the amount accrued for but not paid by the group for services performed in FY14. (1) Giles Everist joined the Board of Directors in November 2013 Year ended 30 June 2013 Non-executive directors Short-Term Benefits Other Monetary Benefits Cash Bonus** Non Monetary Benefits Salary & Fees Post Employment Benefits Long-Term Benefits Share Based Payments Super- annuation Employee Leave Termination Benefits Equity Settled Total % Performance Related % Options John Rothwell (1) $ 363,636 $ - $ - $ - $ - $ - $ - $ - $ 363,636 - - John Poynton (1)(2) 90,000 - - - - - - - 90,000 - - Dario Amara David Singleton Executive directors 93,000 - - - - - - - 93,000 - - 85,000 - - - - - - - 85,000 - - Andrew Bellamy 750,405 76,690 175,342 - 19,595 - - 150,590 1,172,622 14.0 14.0 Michael Atkinson (3) 327,750 - - - - - - 60,337 388,087 15.5 15.5 Other key management personnel Joey Turano (4) 108,251 - 2,027 10,246 - - - - 120,524 - - Graham Backhouse (5) 130,264 9,663 - - 11,724 - - - 151,651 - - Craig Perciavalle (6) 332,024 - 17,296 - - - - 40,444 389,764 10.4 10.4 Greg Jason(7) Brian Leathers 295,263 12,485 - 1,119 18,330 - 74,594 401,791 19.2 19.2 330,331 - 6,084 - - - - 39,336 375,751 10.5 10.5 Richard Simons (8) 124,949 - - - 16,424 - 332,647 (123,048) 350,972 (35.1) (35.1) Charles McGill (9) 258,981 - - - 19,807 - - (7,790) 270,998 (2.9) (2.9) $ 3,289,854 $ 98,838 $ 200,749 $ 11,365 $ 85,880 $ - $ 332,647 $ 234,463 $ 4,253,796 ** Represents cash bonus paid for services performed in FY2013 and paid in FY2014. (1) Mr John Rothwell's and Mr John Poynton's fees were exclusive of GST (2) Mr John Poynton resigned on the 28 June 2013 (3) Mr Michael Atkinson retired on the 30 June 2013 (4) Mr Joey Turano was appointed to President Philippines on the 5 November 2012 (5) Mr Graham Backhouse was appointed to President Australia on the 3 December 2012 (6) Mr Craig Perciavalle was appointed to President USA on the 13 December 2012 (7) Mr Greg Jason was appointed to the position of Chief Financial Officer on the 15 January 2013 (8) Mr Richard Simons' remuneration for 2013 includes a termination payment following his resignation on the 2 October 2012 (9) Mr Charles McGill's employment ceased on the 28 March 2013 24 | AUSTAL LIMITED ANNUAL REPORT 2014 9. Details of contractual provisions for KMP Name Employing Company Andrew Bellamy Greg Jason Austal Limited Austal Limited Graham Backhouse Austal Ships Pty Ltd Joey Turano Craig Perciavalle Brian Leathers Austal Philippines Pty Ltd Austal USA LLC Austal USA LLC Contract Duration Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited Termination Notice Period Company Executive 3 months 12 weeks 12 weeks 2 months (3) 0 months 3 months 3 months 12 weeks 12 weeks 3 months 0 months 0 months 1. 2. Termination provisions – Austal may choose to terminate the contract immediately by making a payment equal to the Group Notice Period fixed remuneration in lieu of notice. In the event of termination for serious misconduct or other nominated circumstances, executives are not entitled to this termination payment. On termination of employment, executives will be entitled to the payment of any fixed remuneration calculated up to the termination date, any leave entitlement accrued at the termination date and any payment or award permitted under the remuneration policy. 3. Termination period is accrued at a rate of 1 month per year of service. 10. Options granted or vested during the period Details of options over ordinary shares in the Group provided as remuneration to key management personnel under the Employee Share Option Plan (ESOP) are shown below. Further information on the options is set out in Note 29. Name Award year Options granted Grant date Fair value per option at award date Vesting date No. vested during year No. forfeited during year Andrew Bellamy Greg Jason Craig Perciavalle Brian Leathers 2011 2011 2011 2011 140,000 140,000 70,000 70,000 28 Sep 2010 28 Sep 2010 28 Sep 2010 28 Sep 2010 $ 0.840 $ 0.840 $ 0.840 $ 0.840 28 Sep 2013 28 Sep 2013 28 Sep 2013 28 Sep 2013 140,000 140,000 70,000 70,000 - - - - 11. Performance rights granted or vested during the period Details of performance rights for shares in the Group provided as remuneration to key management personnel under the Long Term Incentive Plan (LTIP) are shown below. Further information on performance rights is set out in Note 29. Name Andrew Bellamy Greg Jason Craig Perciavalle Brian Leathers Graham Backhouse Joey Turano Performance Fair value per Value of Award year rights granted Grant date performance right awards at grant date Vesting date No. vested during year No. forfeited during year 2014 2014 2014 2014 2014 2014 287,313 18 Nov 2013 $ 0.59 $ 168,193 18 Nov 2016 125,345 18 Nov 2013 $ 0.59 $ 73,377 18 Nov 2016 168,675 13 Dec 2013 $ 0.73 $ 123,065 13 Dec 2016 114,235 13 Dec 2013 $ 0.73 $ 83,346 13 Dec 2016 108,130 18 Nov 2013 $ 0.59 $ 63,299 18 Nov 2016 93,517 18 Nov 2013 $ 0.59 $ 54,745 18 Nov 2016 - - - - - - - - - - - - 12. Shares granted or vested during the period Details of shares in the Group provided as remuneration to key management personnel under fixed remuneration are shown below. Further information is set out in Note 29. Name Grant date Number issued Number vested Fair value per share Andrew Bellamy 27 Nov 2013 371,738 371,738 $ 0.73 25 | AUSTAL LIMITED ANNUAL REPORT 2014 13. Equity instruments held by key management personnel The tables included in this section of the report show the number of:    options over ordinary shares in the Group performance rights to shares granted under the LTIP, and shares in the Company that were held during the financial year by key management personnel of the Group, including their close family members and entities related to them. Options and performance rights Options and rights holdings Balance at beginning Granted as Exercised (options)/ Net Change of year Remuneration Vested (rights) Other Balance at end of year Vested and Exercisable Unvested 30 June 2014 Directors Andrew Bellamy Options Performance Rights Executives Graham Backhouse Options Performance Rights Greg Jason Options Performance Rights Brian Leathers Options Performance Rights Craig Perciavalle Options Performance Rights Joey Turano Options Performance Rights 280,000 - - - 437,500 - 239,000 - 250,000 - - - - 287,313 - 108,130 - 125,345 - 114,235 - 168,675 - 93,517 - - - - - - - - - - - - - - - - - - - - - - - - 280,000 287,313 - 108,130 437,500 125,345 239,000 114,235 250,000 168,675 - 93,517 280,000 - - - 297,500 - 169,000 - 180,000 - - - - 287,313 - 108,130 140,000 125,345 70,000 114,235 70,000 168,675 - 93,517 All vested options are exercisable at the end of the year. Shareholdings 30 June 2014 Non - Executive Directors John Rothwell Dario Amara Giles Everist David Singleton Executives Andrew Bellamy Graham Backhouse Greg Jason Brian Leathers Craig Perciavalle Joey Turano Balance at Granted as Options 30 June 2013 remuneration exercised rights vested Net Change Balance at Other 30 June 2014 Shareholdings Performance 32,200,745 50,000 - 28,600 - - - - 799,958 371,738 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 50,000 - 32,200,745 50,000 50,000 28,600 (604,768) 566,928 - - - - - - - - - - (554,768) 32,896,273 Total 33,079,303 371,738 None of the shares held by key management personnel are held nominally. 26 | AUSTAL LIMITED ANNUAL REPORT 2014 14. Loans to key management personnel There were no loans to Directors or other key management personnel at any time during year ended 30 June 2014. 15. Other transactions with key management personnel There were no transactions involving key management personnel other than compensation and transactions concerning shares, performance rights and options as discussed in other sections of the remuneration report. 27 | AUSTAL LIMITED ANNUAL REPORT 2014 Auditor i independ dence and d non-aud dit servic ces e following de eclaration fro om the auditor r of Austal Lim mited. The director rs received th Non-audit s services Non-audit se directors are independenc service prov ervices provid e satisfied tha ce for auditor vided means t ded by the en at the provisio rs imposed by that auditor in ntity’s auditor, on of non-aud y the Corpora ndependence , Ernst & You dit services is ations Act 200 e was not com ng, during the compatible w 01. The natur mpromised. e year, are di with the gener re and scope isclosed in No ote 5. The of ral standard o of non-audit of each type Signed in ac ccordance wit th a resolution n of directors s. ___ And Exe __________ __________ y drew Bellamy tor and Chief ecutive Direct __________ ___ Executive Of fficer _________ John Rothwe Chairman __________ ell __________ _________ 26 August 2 014 28 | AUSTA AL LIMITED ANN NUAL REPORT 2014 Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2014 Continuing operations Revenue Cost of sales – construction contracts Cost of sales – services Chartering expenses Gross Profit Other Income and expenses Administration expenses Marketing expenses Finance costs Profit before income tax Income tax benefit / (expense) Profit after tax Profit attributable to: Owners of the parent Non-controlling interests Total Other comprehensive income Amounts that may subsequently be reclassified to profit and loss: Cash flow hedges: - Gain / (loss) on cash flow hedges taken to equity - Gain / (loss) recycled out of equity - Income tax benefit / (expense) - Net Foreign currency translations - Gain / (loss) taken to equity - Income tax benefit / (expense) - Net Other comprehensive income for the period, net of tax Notes 2014 ’000 2013 ’000 4 5 5 9 $ 1,122,863 $ 899,491 (990,413) (767,858) (24,119) (30,970) (14,067) (8,502) $ 94,264 $ 92,161 $ 21,913 $ 29,337 (51,895) (71,212) (8,396) (9,989) (8,742) (13,571) $ 47,144 $ 26,726 $ (15,285) $ 9,016 $ 31,859 $ 35,742 $ 31,548 $ 35,870 311 (128) $ 31,859 $ 35,742 $ 17,231 $ 10,644 (20,689) (18,604) 849 2,388 $ (2,609) $ (5,572) (4,075) $ 11,516 217 7,506 $ (3,858) $ 19,022 $ (6,467) $ 13,450 Total comprehensive income for the year $ 25,392 $ 49,192 Total comprehensive income attributable to: Owners of the parent Non-controlling interests Total Earnings per share ($ per share) $ 25,081 $ 49,320 311 (128) $ 25,392 $ 49,192 - basic for profit for the year attributable to ordinary equity holders of the parent - diluted for profit for the year attributable to ordinary equity holders of the parent 6 6 $ 0.09 $ 0.12 0.09 0.12 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 29 | AUSTAL LIMITED ANNUAL REPORT 2014 Consolidated statement of financial position as at 30 June 2014 Notes 2014 ’000 2013 ’000 Assets Current Assets Cash and cash equivalents Restricted cash Trade and other receivables Inventories Prepayments Derivatives Total Non - Current Assets Other financial assets Trade and other receivables Prepayments Derivatives Property, plant and equipment Intangible assets and goodwill Deferred tax assets Total Total Assets Liabilities Current Liabilities Trade and other payables Derivatives Interest-bearing loans and borrowings Provisions Government grants Income tax payable Progress payments received in advance Total Non - Current Liabilities Derivatives Interest-bearing loans and borrowings Provisions Government grants Deferred tax liabilities Total Total Liabilities Net Assets Equity Contributed equity Reserves Retained earnings 10 10 14 16 23 14 23 18 19 9 17 23 11 20 13 9 15 23 11 20 13 9 12 12 12 $ 77,345 $ 38,030 9,532 69,673 95,753 102,743 328,142 277,888 4,054 7,653 2,701 7,749 $ 517,527 $ 503,736 $ - $ 4,141 1,020 - 1,968 - 5,787 1,651 366,500 399,917 9,473 12,526 9,022 22,647 $ 393,770 $ 440,882 $ 911,297 $ 944,618 $ (183,570) $ (133,813) (1,972) (12,193) (13,192) (243,614) (33,704) (25,128) (3,550) (4,221) (10,980) (24,537) (29,062) (21,790) $ (276,030) $ (465,296) $ (2,229) $ (4,885) (142,264) (1,163) (1,023) (2,217) (49,892) (52,794) (6,627) (11,076) $ (202,035) $ (72,135) $ (478,065) $ (537,431) $ 433,232 $ 407,187 $ 111,598 $ 111,328 27,292 37,309 294,041 258,560 Equity attributable to owners of the parent $ 432,931 $ 407,197 Non - Controlling Interests $ 301 $ (10) Total Equity $ 433,232 $ 407,187 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 30 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Consolidated statement of changes in equity for the year ended 30 June 2014 Issued * Reserved Retained Benefits Hedge Control Reval'n Capital Shares Earnings ’000 ’000 ’000 FCTR ’000 Reserve Reserve Reserve Reserve ’000 ’000 ’000 ’000 Total ’000 Employee Cash flow Common Asset Non Controlling Interest ’000 Total Equity ’000 Equity at 1 July 2012 $ 41,373 $ (9,612) $ 222,690 $ (10,568) $ 4,948 $ 16,649 $ (15,925) $ 27,491 $ 277,046 $ - $ 277,046 Comprehensive Income Profit for the year $ - $ - $ 35,870 $ - $ - $ - $ - $ - $ 35,870 $ (128) $ 35,742 Other Comprehensive Income - - - 19,023 - (5,572) - - 13,451 - 13,451 Total $ - $ - $ 35,870 $ 19,023 $ - $ (5,572) $ - $ - $ 49,321 $ (128) $ 49,193 Other equity transactions Shares issued Transaction costs Cost of share-based payments Acquisition of Subsidiary $ 77,891 $ - $ - $ - $ - $ - $ - $ - $ 77,891 $ - $ 77,891 (1,823) - 3,499 - - - - - - - - - - 1,263 - - - - - - - - - - (1,823) 1,263 3,499 - - 118 (1,823) 1,263 3,617 Total $ 79,567 $ - $ - $ - $ 1,263 $ - $ - $ - $ 80,830 $ 118 $ 80,948 Equity at 1 July 2013 $ 120,940 $ (9,612) $ 258,560 $ 8,455 $ 6,211 $ 11,077 $ (15,925) $ 27,491 $ 407,197 $ (10) $ 407,187 Comprehensive Income Profit for the year $ - $ - $ 31,548 $ - $ - $ - $ - $ - $ 31,548 $ 311 $ 31,859 Other Comprehensive Income - - - (3,858) - (2,609) - - (6,467) - (6,467) Total $ - $ - $ 31,548 $ (3,858) $ - $ (2,609) $ - $ - $ 25,081 $ 311 $ 25,392 Transfers between reserves $ - $ - $ 3,933 $ 3,008 $ (1,508) $ 301 $ - $ (5,734) $ - $ - $ - Other equity transactions Shares issued $ 270 $ - $ - $ - $ - $ - $ - $ - $ 270 $ - $ 270 Cost of share-based payments - - - - 383 - - - 383 - 383 Total $ 270 $ - $ - $ - $ 383 $ - $ - $ - $ 653 $ - $ 653 Equity at 30 June 2014 $ 121,210 $ (9,612) $ 294,041 $ 7,605 $ 5,086 $ 8,769 $ (15,925) $ 21,757 $ 432,931 $ 301 $ 433,232 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. *Reserved shares are in relation to the Austal Group Management Share Plan. 31 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Consolidated statement of cash flows for the year ended 30 June 2014 Cash flows from operating activities Notes 2014 ’000 2013 ’000 Receipts from customers Payments to suppliers and employees Interest received Interest paid Income tax received / (paid) GST refunds / (payments) Net cash from / (used in) operating activities $ 1,112,844 $ 894,029 (1,043,939) (930,149) 321 2,231 (8,742) (13,571) (15,927) (10,580) - 2,172 $ 44,557 $ (55,868) 4 5 7 Cash flows from investing activities Receipts of government grants $ 4,506 $ 4,763 Proceeds from sale of property, plant and equipment 24,611 9,351 Proceeds from the sale of assets held for sale Purchase of property, plant and equipment Purchase of intangible assets Proceeds from sale of intangible assets Acquisition of subsidiary / investment - 6,898 (11,884) (21,265) (1,263) (3,478) 3,002 - - (2,914) Net cash from / (used in) investing activities $ 18,972 $ (6,645) Cash flows from financing activities Proceeds from issue of shares net of transaction costs $ - $ 75,065 Repayment of borrowings Loans received Equity dividends paid Settlement of derivatives (114,238) (93,368) 24,917 50,244 - - (12) 32,227 Net cash from / (used in) financing activities $ (89,333) $ 64,168 Net increase / (decrease) in cash and cash equivalents $ (25,804) $ 1,655 Cash and cash equivalents Cash and cash equivalents at beginning of year Net foreign exchange differences $ 107,703 $ 104,751 4,978 1,297 Net increase / (decrease) in cash and cash equivalents (25,804) 1,655 Cash and cash equivalents at end of year 10 $ 86,877 $ 107,703 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 32 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Notes to o the finan ncial stat ements Basis of f preparat tion Note 1. Corporate Information The financia authorised fo al report of the or issue in ac e Austal Limit ccordance wit ted Group of th a resolution Companies ( n of the direc the Group) fo tors on 26 Au or the year en ugust 2014. nded 30 June e 2014 was Austal Limite traded on th ed is a limited e Australian s d liability com stock exchan pany incorpo ge. orated and do omiciled in Au stralia whose e shares are p publicly The principa performance al activities of e aluminium v the Group du vessels. Thes uring the yea se activities a r were the de re unchanged esign, manufa d from the pre acture and su evious year. upport of high Note 2. Basis of pr reparation i. Introd duction The fi requir inancial repor rements of th rt is a genera e Corporation al-purpose fina ns Act 2001 a ancial report, and Australia which has b n Accounting een prepared Standards. d in accordan ce with the The fi instru inancial repor uments and la rt has also be and and build een prepared ings that have on a historic e been meas cal cost basis, sured at fair v , except for de alue. erivative fina ncial The fi dollar 98/01 inancial repor rs ($’000) unle 00. The Gro rt is presente ess otherwise oup is an entit d in Australia e stated unde ty to which th an dollars and er the option a e class order d all values ar available to th r applies. re rounded to he Group und o the nearest der ASIC Clas thousand ss Order The fi Limite inancial repor ed is a for pro rt presents th ofit entity. he figures of th he consolidat ted entity only y, unless othe erwise stated d. Austal ii. Repo orting structu ure The n summ notes to the c marised as fol onsolidated f llows: financial state ements have been divided into 8 main s sections whic ch is Curre ent year perf formance This s return via div section focus n to sharehold vidends. es on the res ders via earn sults and perfo ings per shar formance of th re and cash g he Group, inc generation, an cluding profita nd the return ability and the of cash to sh e resultant areholders Capit tal structure This s borrow section focus wings, contrib es on the lon buted equity a g term fundin and reserves ng of the Grou s and governm up including c ment grants. cash, interest t bearing loan ns and Work king capital This s payab section focus bles, construc es on shorter ction contract r term working ts in progress g capital conc s, inventories cepts such as including wo s trade and o rk in progress other receivab s. bles and Infras structure & o other assets This s section focus es on propert ty, plant & eq quipment as w well as intang ible assets of f the Group. Other r liabilities This s section focus es on provisio ons such as e employee be nefits, warran nty costs etc. 33 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Financial risk management This section focuses on the Groups’ approach to financial risk management, fair value measurements and foreign exchange hedging and the associated derivative financial instruments. Unrecognised items This section focuses on commitments and contingencies that are not recognised in the financial statements and events occurring after the balance date. The Group, management and related parties This section focuses on the corporate structure of the Group, parent entity data, key management personnel compensation and related party transactions. iii. Basis of consolidation The consolidated financial statements comprise the financial statements of Austal Limited and its subsidiaries as at and for the year ended 30 June each year (the Group). Subsidiaries are all those entities over which the Group has power over the investee, exposure or rights to variable returns from its involvement with its investee and the ability to use its power over the investee to affect its returns. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether a Group controls another entity. Financial statements of foreign controlled entities presented in accordance with overseas accounting principles are, for consolidation purposes, adjusted to comply with Group policy and generally accepted accounting principles in Australia. In preparing the consolidated financial statements, all intercompany balances, transactions, unrealised gains and losses resulting from intra-Group transactions and dividends have been eliminated in full. Subsidiaries are fully consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which control is transferred out of the Group. Investments in subsidiaries held by Austal Limited are accounted for at cost in the separate financial statements of the parent entity less any impairment charges. Dividends received from subsidiaries are recorded as a component of other revenues in the statement of comprehensive income of the parent entity, and do not impact the recorded cost of the investment. Upon receipt of dividend payments from subsidiaries, the parent will assess whether any indicators of impairment of the carrying value of the investment in the subsidiary exist. Where such indicators exist, to the extent that the carrying value of the investment exceeds its recoverable amount, an impairment loss is recognised. iv. Foreign currency transactions and translation Both the functional and presentation currency of Austal Limited and its Australian subsidiaries is Australian dollars (A$). Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance date. All exchange differences arising from the above procedures are taken to the statement of comprehensive income. The functional currency of the USA and the Philippines Operations is United States dollars (US$). As at the reporting date, the assets and liabilities of the overseas subsidiaries are translated into the presentation currency of Austal Limited at the rate of exchange ruling at the balance date and the statement of comprehensive income is translated at the average exchange rates for the period. The exchange differences arising on the translation are taken directly to a separate component of equity. The deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the statement of comprehensive income on disposal of a foreign entity. v. Statement of compliance The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board. 34 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED vi. New and amended standards adopted by the Group The accounting policies adopted are consistent with those of the previous financial year except for changes in accounting policies due to implementation of new and amended standards adopted by the Group as discussed below. The adoption of these standards has impacted the Group’s accounting policies and required disclosures in the notes to the financial statements but did not have any effect on the financial position or performance of the Group. The Group has applied all new and amended accounting standards and interpretations effective from 1 July 2013:       AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, AASB 128 Investments in Associates and Joint Ventures, AASB 127 Separate Financial Statements and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards AASB 2013-3 Amendments to Australian Accounting Standards – Transition Guidance and other amendments which provides an exemption from the requirement to disclose the impact of the change in accounting policy on the current period AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 AASB 119 Employee Benefits (revised 2011) and AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 (September 2011) AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle, and AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities vii. Pronouncements issued and not effective A number of Australian Accounting Standards and Interpretations have been issued or amended but are not yet effective. A full assessment of the impact of all the new or amended Accounting Standards and interpretations issued but not effective has not yet been completed. The pronouncements relevant to the Group which have not been adopted by the Group are as follows: AASB 2012-3: Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities: AASB 2012-3 adds application guidance to AASB 132 Financial Instruments: Presentation to address inconsistencies identified in applying some of the offsetting criteria of AASB 132, including clarifying the meaning of “currently has a legally enforceable right of set-off” and that some gross settlement systems may be considered equivalent to net settlement. The effective date for the Group will be from 1 July 2014. Interpretation 21: Accounting for Levies This Interpretation confirms that a liability to pay a levy is only recognised when the activity that triggers the payment occurs. Applying the going concern assumption does not create a constructive obligation. The effective date for the Group will be from 1 July 2014. AASB 9: Financial Instruments: On 24 July 2014 The IASB issued the final version of IFRS 9 which replaces IAS 39 and includes a logical model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, however, the Standard is available for early application. The own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. 35 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED The final version of IFRS 9 introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected losses on a more timely basis. The AASB is yet to issue the final version of AASB 9. A revised version of AASB 9 (AASB 2013-9) was issued in December 2013 which included the new hedge accounting requirements, including changes to hedge effectiveness testing, treatment of hedging costs, risk components that can be hedged and disclosures. AASB 9 includes requirements for a simplified approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes are described below. a. Financial assets that are debt instruments will be classified based on (1) the objective of the entity's business model for managing the financial assets; (2) the characteristics of the contractual cash flows. b. Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. c. Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. d. Where the fair value option is used for financial liabilities the change in fair value is to be accounted for as follows:  The change attributable to changes in credit risk are presented in other comprehensive income (OCI)  The remaining change is presented in profit or loss AASB 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. This change in accounting means that gains caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognised in profit or loss. AASB 2013-3: Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets AASB 2013-3 amends the disclosure requirements in AASB 136 Impairment of Assets. The amendments include the requirement to disclose additional information about the fair value measurement when the recoverable amount of impaired assets is based on fair value less costs of disposal. The effective date for the Group will be from 1 July 2014. AASB 2013-4: Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting (AASB 139) AASB 2013-4 amends AASB 139 to permit the continuation of hedge accounting in specified circumstances where a derivative, which has been designated as a hedging instrument, is novated from one counterparty to a central counterparty as a consequence of laws or regulations. The effective date for the Group will be from 1 July 2014. AASB 2014-1 Part A - Annual Improvements 2010–2012 Cycle: Amendments to Australian Accounting Standards - Part A - Annual Improvements to IFRSs 2010–2012 Cycle Annual Improvements to IFRSs 2010–2012 Cycle addresses the following items:  AASB 2 - Clarifies the definition of 'vesting conditions' and 'market condition' and introduces the definition of 'performance condition' and 'service condition'. 36 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED     AASB 3 - Clarifies the classification requirements for contingent consideration in a business combination by removing all references to AASB 137. AASB 8 - Requires entities to disclose factors used to identify the entity's reportable segments when operating segments have been aggregated. An entity is also required to provide a reconciliation of total reportable segments' asset to the entity's total assets. AASB 116 & AASB 138 - Clarifies that the determination of accumulated depreciation does not depend on the selection of the valuation technique and that it is calculated as the difference between the gross and net carrying amounts. AASB 124 - Defines a management entity providing KMP services as a related party of the reporting entity. The amendments added an exemption from the detailed disclosure requirements in paragraph 17 of AASB 124 for KMP services provided by a management entity. Payments made to a management entity in respect of KMP services should be separately disclosed. The effective date for the Group will be from 1 July 2014. AASB 2014-1 Part A - Annual Improvements 2011–2013 Cycle: Amendments to Australian Accounting Standards - Part A - Annual Improvements to IFRSs 2011–2013 Cycle Annual Improvements to IFRSs 2011–2013 Cycle addresses the following items:   AASB13 - Clarifies that the portfolio exception in paragraph 52 of AASB 13 applies to all contracts within the scope of AASB 139 or AASB 9, regardless of whether they meet the definitions of financial assets or financial liabilities as defined in AASB 132. AASB40 - Clarifies that judgment is needed to determine whether an acquisition of investment property is solely the acquisition of an investment property or whether it is the acquisition of a group of assets or a business combination in the scope of AASB 3 that includes an investment property. That judgment is based on guidance in AASB 3. The effective date for the Group will be from 1 July 2014. AASB 1031: Materiality The revised AASB 1031 is an interim standard that cross-references to other Standards and the Framework (issued December 2013) that contain guidance on materiality. AASB 1031 will be withdrawn when references to AASB 1031 in all Standards and Interpretations have been removed. AASB 2014-1 Part C issued in June 2014 makes amendments to eight Australian Accounting Standards to delete their references to AASB 1031. The amendments are effective from 1 July 2014. AASB 2013-9: Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments The Standard contains three main parts and makes amendments to a number Standards and Interpretations. Part A of AASB 2013-9 makes consequential amendments arising from the issuance of AASB CF 2013-1. Part A of the amendments was effective for the Group from 1 July 2013 and did not have any effect on the financial position or performance of the Group. Part B makes amendments to particular Australian Accounting Standards to delete references to AASB 1031 and also makes minor editorial amendments to various other standards. The effective date for the Group of Part B of the amendments will be from 1 July 2014. Part C makes amendments to a number of Australian Accounting Standards, including incorporating Chapter 6 Hedge Accounting into AASB 9 Financial Instruments. The effective date for the Group of Part C of the amendments will be from 1 July 2015. 37 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) IAS 16 and IAS 38 both establish the principle for the basis of depreciation and amortisation as being the expected pattern of consumption of the future economic benefits of an asset. The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The IASB also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be rebutted in certain limited circumstances. The effective date for the Group will be from 1 July 2016. IFRS 15 In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, which replaces IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations (IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue—Barter Transactions Involving Advertising Services) The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: (a) Step 1: Identify the contract(s) with a customer (b) Step 2: Identify the performance obligations in the contract (c) Step 3: Determine the transaction price (d) Step 4: Allocate the transaction price to the performance obligations in the contract (e) Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation The effective date for the Group will be from 1 July 2017. Early application of this standard is permitted. 38 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Current y year perf e formance Note 3. Operating s segments Australia ’000 USA U 000 ’0 Philippine s Unallocated Ad djustments ’000 ’000 ’000 Total T ’000 El imination / Year ended 30 June e 2014 Revenues External custo omers $ 153,886 $ 933,615 $ 32,75 58 $ 2,609 $ (326) $ 1 ,122,542 t Inter-segment Finance incom me Total Segment result EBIT Finance incom me Finance expe nses 88,026 - - - 1,00 09 - - 4,682 (89,035) (4,361) - 321 $ 241,912 $ 933,615 $ 16,684 $ 61,682 $ 33,76 67 $ 2,70 03 $ 7,291 $ (93,722) $ 1 ,122,863 $ (27,211) $ 1,707 $ 55,565 - - - - - - 4,682 (13,271) (4,361) 4,529 321 (8,742) Total $ 16,684 $ 61,682 Depreciation a and amortisation $ (1,606) $ (17,937) $ 2,70 03 $ (97 72) $ (35,800) $ 1,875 $ 47,144 $ (3,258) $ - $ (23,773) $ 577,205 $ (543,236) $ 911,297 $ 192,119 $ 662,948 $ 22,26 61 (174,198) ( 456,424) (15,26 63) (142,867) 310,687 (478,065) Australia ’000 USA U 000 ’0 Philippine s Unallocated Ad djustments ’000 ’000 ’000 Total T ’000 El imination / Balance sheet Segment asse ets Segment liabi lities Year ended 30 June e 2013 Revenues External custo omers $ 105,294 $ 747,739 $ 33,05 57 $ 11,160 $ 10 $ 897,260 t Inter-segment Finance incom me 38,764 - - - 6,92 29 - 2,333 2,231 (48,026) - - 2,231 Total $ 144,058 $ 747,739 $ 39,98 86 $ 15,724 $ (48,016) $ 899,491 $ (25,894) $ 8,799 $ 38,066 $ 41 $ 50,100 $ 5,02 20 - - - - - - 2,231 (13,571) - - 2,231 (13,571) Total $ 41 $ 50,100 Depreciation a and amortisation $ (1,030) $ (18,708) $ 5,02 20 $ (70 08) $ (37,234) $ 8,799 $ 26,726 $ (4,063) $ - $ (24,509) $ 421,830 $ (269,870) $ 944,618 $ 146,387 $ 604,650 $ 41,62 21 (91,355) ( 517,244) (36,96 60) (72,492) 180,620 (537,431) Segment result EBIT Finance incom me Finance expe nses Balance sheet Segment asse ets Segment liabi lities Inter-segment rev venues, investments, re eceivables and payabl es are eliminated on c onsolidation. 39 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Analysis of Unallocated Revenue Sale of stock yacht Rental revenue Charter vessel revenue Finance income Other Total Segment result Profit / (loss) on foreign exchange Net profit / (loss) on sale of shipyard Net profit / (loss) on sale of stock yacht Write down of inventory Corporate overheads Sales & marketing costs Rental profit Charter vessel profit Finance income Finance expenses Total Segment assets $ - $ 9,302 - 2,333 2,419 1,858 4,682 2,231 190 - $ 7,291 $ 15,724 $ (1,888) $ (10,024) 3,582 4,839 - (4,327) (13,361) - (8,618) (11,163) (7,312) (8,007) - 2,333 386 455 4,682 2,231 (13,271) (13,571) $ (35,800) $ (37,234) Intercompany receivables $ 193,148 $ 150,883 Other financial assets (investment in subsidiaries) 232,860 91,306 Cash and restricted cash Property, plant and equipment Inventories Derivatives Deferred tax assets Other Total Segment liabilities 26,777 70,698 45,914 48,904 59,159 46,297 8,388 13,742 9,023 - 1,936 - $ 577,205 $ 421,830 Deferred tax liabilities and income tax payable $ (17,293) $ (34,525) Interest bearing loans Derivatives Intercompany payables Deferred Income Other Total (12,062) (17,470) (4,201) (12,194) (99,044) - (6,490) - (3,777) (8,303) $ (142,867) $ (72,492) One customer in the USA segment generated revenue of $938.618 million during FY2014 (FY2013: $736.084 million) and one customer in the Australia segment generated revenue of $100.814 million during FY2014 (FY2013: $59.233 million). Revenue from external customers by geographical location of customers North America Europe Asia Australia Other Total 2014 $’000 2013 $’000 $ 938,618 $ 746,560 20,150 14,887 15,034 35,478 125,163 86,806 23,898 15,760 $ 1,122,863 $ 899,491 40 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Non-current assets, other than financial instruments, prepayments and deferred tax assets Geographical location North America Asia Europe Australia Total Composition Property, plant and equipment Intangible assets Total $ 300,842 $ 317,799 17,744 13,495 15,187 16,977 42,200 64,172 $ 375,973 $ 412,443 $ 366,500 $ 399,917 9,473 12,526 $ 375,973 $ 412,443 i. Identification of reportable segments: For management purposes the Group is organised into three business segments based on the location of the production facilities, related sales regions and types of activity. The Chief Executive Officer monitors the performance of the business segments separately for the purpose of making decisions about resources to be allocated and of assessing performance. Segment performance is evaluated based on operating profit or loss. Finance costs, finance income and income tax are managed on a Group basis. ii. Reportable segments: The reportable segments were USA, Philippines, Ships, Service and Systems in FY2013. Service and Systems and Ships have been included under Australian Operation for FY2014 because the two business units were integrated into one operation. Prior year comparative information has been restated to reflect the change of segment structure. The Group’s reportable segments are as follows: Australia The Australia business manufactures high performance aluminium defence vessels for markets worldwide, excluding the USA and provides training and on-going support and maintenance for high performance vessels and includes the chartering of a vessel to the US Navy’s Military Sealift Command. USA The USA manufactures high performance aluminium defence vessels for the US Navy and provides training and on-going support and maintenance of these performance vessels for the US Navy. Philippines The Philippines business manufactures high performance aluminium commercial vessels for global markets excluding the USA. iii. Accounting policies and inter-segment transactions The accounting policies used for reporting segments internally are the same as those utilised for reporting the accounts of the Group. Inter-entity sales are recognised based on an arm’s length pricing structure. 41 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iv. Unallocated The following items and associated assets and liabilities are not allocated to operating segments as they are not considered part of the core operations of any segment:         Cost of Group services Corporate overheads Revenue from property leased to other Group segments Finance revenue and costs Taxation Assets held for sale Derivatives Commercial vessel charter contracts 42 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 4. Revenue 201 14 ’00 0 20 013 000 ’0 Revenue Construction co ontract revenue $ 1,0 69,190 $ 849,514 e Charter revenue Service revenu e Interest from ot ther unrelated parties Total i. Reco ognition and measureme nt 17,453 35,899 321 15,459 32,287 2,231 $ 1,12 22,863 $ 899,491 Reve that it reliab nue is recogn t is probable t bly. The follow nised and me that the econ wing specific easured at fair omic benefits recognition c r value of the s will flow to t criteria must a e consideratio he Group and also be met b on received or d that the rev efore revenue r receivable t venue can be e is recognise o the extent measured ed: Cons struction con ntract revenu ue Const costs truction contr incurred as a ract revenue a proportion o is brought to of estimated t account on a total contract costs. a percentage of completion n basis, base d on actual The e estimated tota after. In the e therea contra act revenue is . value al contract co event of a cha s adjusted ac sts are determ ange to the co ccordingly and mined prior to ost of comple d the remaini o commencem etion during th ng life of the ment and eva he life of the c contract is ca aluated every contract, the c alculated on t y month construction the adjusted Wher incurr of the re the contrac red and wher e costs incurre ct outcome ca e it is probab ed. annot be mea le that the co asured reliably osts will be re y, contract co covered, reve osts are recog enue is recog gnised as an gnised only to expense as o the extent Chart ter revenue Chart the rig ter revenue is ght to revenu s operating re e is achieved entals receive d. ed on charter of vessels an nd is recognis sed when the control over Servi ice revenue Servic as a p contra recov ce revenue is proportion of act costs are vered, revenu s brought to a estimated tot recognised a e is recognis account on a p tal contract co as an expense ed only to the percentage o osts. Where t e as incurred e extent of the of completion the contract o d and where it e costs incurr basis, based outcome cann t is probable t red. d on actual co not be measu that the cost osts incurred ured reliably, will be Sale of goods an d scrap Reve the bu goods nue is recogn uyer. Risk an s to the custo nised when th nd rewards of omer. he significant f ownership a risks and rew are considere wards of owne d passed to t ership of the the buyer at t goods have p the time of de passed to elivery of the Intere est income Reve calcu using throug nue is recogn lating the am the effective gh the expec nised as inter ortised cost o e interest rate ted life of the rest accrues u of a financial , which is the financial ass using the effe asset and all e rate that exa set to the net ective interest ocating the in actly discount carrying amo t method. Th nterest incom ts estimated f ount of the fin his is a metho me over the re future cash re ancial asset. d of levant period eceipts 43 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED ii. Significant accounting judgements and estimates Construction contract revenue and expected construction profits at completion. The assessment of construction contract revenue in accordance with the Group’s accounting policies requires certain estimates to be made of total contract revenues, total contract costs and the current stage of completion. Contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the balance sheet date (“percentage-of-completion method”) when the outcome of a construction contact can be estimated reliably. Contract revenue is recognised to the extent of contract costs incurred that are likely to be recoverable when the outcome of a construction contract cannot be estimated reliably. Management have made estimates in this area, which if ultimately inaccurate will impact the level of revenue recognised in the Consolidated Statement of Comprehensive Income of FY2014 and beyond. The percentage of completion is calculated on actual costs over the sum of actual costs plus projected costs to complete the contract and profit is recognised from commencement of the project. 44 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED 2014 ’000 2013 ’000 $ 3,643 $ 4,763 8,079 6,754 3,582 115 903 - (495) 9,381 3,802 500 198 2,822 2,201 5,002 $ 21,913 $ 29,337 $ (8,742) $ (13,571) $ (8,742) $ (13,571) $ (21,593) $ (21,914) (2,180) (2,595) $ (23,773) $ (24,509) $ (284,218) $ (218,106) (3,840) (4,534) (383) (1,733) (7,640) (6,246) (8,294) (7,254) (239) 232 $ (304,614) $ (237,641) 2014 $ 2013 $ $ (317,270) $ (262,881) - - $ (317,270) $ (320,220) (1,302) - $ $ - (33,000) (295,881) (297,118) - - $ (321,522) $ (297,118) Note 5. Other inco me and expe enses Other income and expenses Government gra ants Training reimbu ursement Gain on dispos al of property, plant an nd equipment Gain on dispos s al of intangible assets Net foreign exc change gains Sale of scrap Rental income Other income Total Finance costs Interest paid to unrelated parties Total Depreciation and a amortisation Depreciation ex xcluding impairment Amortisation Total Employee benefits expense Wages and sal aries Superannuation n Share based pa ayments Workers’ comp ensation costs Annual leave ex xpense Long service le eave expense Total Auditor's remunera ation Amounts receiv ved or due and receiva able by Ernst & Young g for: An audit or revi ew of the financial rep port of the entity and a any other entity in the Group Other services in relation to the entity y and any other entity in the Group Tax advice Total Amounts receiv vable or due and recei ivable by related pract tices of Ernst & Young g for: An audit or revi ew of the financial rep port of the entity and a any other entity in the Group Other services in relation to the entity y and any other entity in the Group Tax advice Total 45 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED i. Recognition & measurement The following recognition and measurement criteria must be met before the following specific items are recognised in profit or loss: Government grants relating to expense items Government grants are recognised when there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. A grant is recognised as income when it relates to an expense item. The grant income is recognised over the periods necessary to match the grant to the costs that it is intended to compensate. Impairment of assets No impairment charge was recognised by the Group during the period. Refer to Note 19 for details regarding Impairment testing of goodwill and intangible assets with indefinite useful lives. Finance costs Finance costs directly attributable to the acquisition, construction or production of a qualifying asset (i.e. an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are capitalised as part of the cost of that asset. All other finance costs are expensed in the period they occur. Finance costs include interest payments, amortisation of capitalised loan origination costs and other costs that an entity incurs in connection with the borrowing of funds. Depreciation and amortisation Refer to accounting policies for depreciation disclosed in note 18, and to note 19 for accounting policies related to amortisation of intangible assets. Employee benefits Refer to accounting policies for employee benefits in note 20. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Operating lease payments are recognised as an expense in the statement of comprehensive income on a straight-line basis over the lease term. ii. Foreign exchange gains & losses included in profit and loss Foreign exchange gains and losses included in profit and loss includes:  Mark to market adjustments on non-derivative financial assets such as foreign currency denominated loans.  Mark to market adjustments on foreign currency hedge instruments designated as fair value hedges.  Foreign currency gains and losses on cash flow hedges that were deemed to be ineffective during the accounting period. 46 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 6. Earnings p per share Net profit after tax Net profit attribut table to ordinary equity y holders of the paren nt from continuing oper rations Weighted average number of ordinary s shares Weighted averag ge number of ordinary y shares (excluding res served shares) for bas sic earnings per share Effect of dilution Options Performanc ce Rights Weighted averag ge number of ordinary y shares (excluding res served shares) adjuste ed for the effect of dilu ution e Earnings per share Basic earnings p per share Diluted earnings per share i. Meas surement 2014 2013 $’00 00 $ 31,548 $ 35,870 Num mber 3 342,042,581 2 97,166,499 Num mber Num mber Num mber 294,589 399,105 522,537 - 3 342,736,275 2 97,689,036 $ / s share $ / s share $ $ 0.09 0.09 $ $ 0.12 0.12 c earnings per y holders of th r share amou he parent by unts are calcu the weighted ulated by divid d average num ding net profit mber of ordina t for the year ary shares ou attributable t utstanding du o ordinary uring the Basic equity year. Dilute holde the w poten ed earnings p ers of the pare weighted avera ntial ordinary s per share amo ent by the we age number o shares into o ounts are calc ighted averag of ordinary sh rdinary share culated by div ge number of hares that wo es. viding the net f ordinary sha uld be issued profit attribut ares outstand d on the conv table to ordin ding during th version of all t ary equity e year plus the dilutive ii. Inform mation conc cerning the c classification n of securitie es Optio ons Optio Optio dilute determ ns granted to n Plan are co d earnings pe mination of b o employees onsidered to b er share to th asic earnings under the Au be potential o he extent that s per share. D stal Group M ordinary share they are dilu Details relatin Management S es and have b tive. The opti g to the optio Share Plan an been included ons have not ons are set ou nd Employee d in the deter t been include ut in Note 29 Share rmination of ed in the 9,097 earnin could 7,740 options ngs per share potentially d granted unde e because the ilute basic ea er the aforem ey are not con arnings per sh mentioned pla nsidered to b hare in the fut ns are not inc be dilutive. (FY ture. cluded in the Y2013: 9,139 calculation o 9,165). These f diluted e options Perfo ormance righ hts Perfo calcu includ is pro rmance rights lation of dilute ded in the det ovided in Note s granted to e ed earnings p termination of e 29 executives un per share ass f basic earnin nder the Grou suming all out ngs per share up’s Long Ter tstanding righ e. Further info rm Incentive P hts will vest. T ormation abou Plan are inclu The rights are ut the perform uded in the e not mance rights There report e have been n ting date and no other trans d the date of c sactions invol completion of lving ordinary f these financ y shares or po cial statement otential ordina s. ary shares be etween the 47 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Reconciliat tion of net p rofit after tax x to net cash h flows from operations 2014 ’000 2013 ’000 $ 31,859 $ 35,742 Note 7. Net profit Adjustments for: Depreciation and d amortisation $ 23,776 $ 24,509 (3,582) (903) 383 12 254 114 - 1,263 - - $ 19,940 $ 25,886 $ (7,905) (33,697) 1,695 65 2,530 3,092 5,970 (58,646) - 2,703 4,141 49,757 7,272 (17,916) - 526 3,989 32 2,488 (6,553) (84,359) (4,312) - - 5,187 (5,498) - 4,701 $ (7,242) $ (117,496) $ 44,557 $ (55,868) 2014 ’000 2013 ’000 Net (gain) / loss on disposal of proper rty, plant and equipme ent Net (gain) / loss on disposal of intangi ble assets Share based pay yments Ineffective hedge e gains/losses Net exchange di fferences Total Changes in assets and liabilities: (Decrease) / incr r: rease in provisions for Income tax (cu urrent and deferred) Workers’ comp pensation insurance Warranty Employee ben efits Other provision ns (Increase) / decr rease in trade & other receivables (Increase) / decr rease in inventories (Increase) / decr rease in other assets (Increase) / decr rease in prepayments (Increase) / decr rease in other financia al assets (Decrease) / incr rease in trade and oth her payables (Decrease) / incr rease in progress pay yments in advance (Decrease) / incr rease in derivative ass sets & liabilities (Decrease) / incr rease in government g grants Total Net cash (outflow)/ /inflow from operatin ng activities Note 8. Dividends paid and pro oposed Divid dends on ord s dinary shares Dividend ds on Ordinary Share es i. ii. Final franked dividend (cen nts per share) - - Final franked dividend $ - $ - Frank king credit b balance Opening g Balance Frank king credits that arose e from the payment of income tax instalmen ts during the year 2014 ’000 2013 ’000 $ 58 83 $ 35 50 $ - $ 3 583 Frank d king credits distributed - - Move ement Closing Balance 48 | AUSTA AL LIMITED ANN NUAL REPORT 2014 $ 35 50 $ 93 33 $ 3 583 $ 3 583 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 9. Income and s d other taxes i. Incom me tax expen nse Major co omponents of tax exp pense for the year s ended 30 June 2014 and 2013 are: Consolid dated Profit & Loss Curre ent Income Tax Current income tax cha C arge Adjustments in respect A of current income tax x of the previous year Defe rred Income Tax Relating to origination a R and reversal of tempor rary differences Adjustments in respect A of deferred income ta r ax of the previous year Total l income tax (expens se) / benefit Other Co omprehensive Incom me (OCI) Curre ent and deferred inco ome tax related item s charged or credite d directly to OCI Current and deferred ga C ains and losses on for reign currency contrac cts and consolidation a adjustments Total l (expense) / benefit c charged to OCI Other eq quity items Curre ent and deferred inco ome tax related item s charged or credite d directly to other eq quity items Capital raising costs C Deferred gains on reva D luation of property, pla ant and equipment Total l (expense) / benefit c charged to other equ uity 2014 ’000 2013 ’000 $ $ (13,224) $ (13,334) 7,863 8,686 $ $ (1,549) $ (8,375) 5,128 8,536 $ $ (15,285) $ 9,016 $ $ 1,082 $ $ 1,082 $ $ - - $ $ - $ $ $ $ (9,894) (9,894) 784 - 784 A reconc ciliation between tax x expense and the pr oduct of accounting profit before income e tax multiplied by th e Group’s applicable e income tax rate is a as follows: $ $ 47,144 $ $ (14,142) $ $ (2,289) 1,145 (865) 1,313 543 306 (513) (783) $ $ (1,143) $ $ (15,285) $ $ $ $ $ 26,726 (8,018) (809) (960) 1,714 1,077 - 2,730 17,222 (3,940) 17,034 9,016 Acco ounting profit / (loss) before income tax fr rom continuing oper rations Incom me Tax at the Group ’s statutory income t tax rate of 30% (2013 3: 30%) Adjustment for Austal U A USA statutory income tax rate of 36.9% (201 12: 36.9%) Other foreign tax rate d O differences B ranch (profit) / loss US section 199 domest U tic manufacturing dedu uction Research and developm R ment and other tax off fsets and credits Unrealised foreign exch U hange losses on interc company loans Adjustments in respect A of current and deferre ed income tax of the p previous year Other non-assessable o O ms or non-deductible item T otal Adjustments Incom me tax expense / (be enefit) reported in the e statement of compr rehensive income 49 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED ii. Analysis of temporary differences Statement of Financial Position Statement of Comprehensive Income 2014 ’000 2013 ’000 2014 ’000 2013 ’000 Deferred income tax - USA Deferred tax assets Payables Provisions Losses available for offset against future taxable income Research and development tax credits Work Opportunity Tax Credits Charitable donations $ 17,680 $ 27,631 $ 9,768 $ 21,175 5,014 5,092 19 - 34 2,919 8,713 3,641 456 34 (2,051) 3,577 3,662 413 - 906 2,398 (308) 67 2 Total $ 27,839 $ 43,394 $ 15,369 $ 24,240 Deferred tax liabilities Property, plant and equipment Inventories Total $ (18,541) $ (18,900) $ (65) $ (124) (276) (1,847) (1,571) (1,847) $ (18,817) $ (20,747) $ (1,636) $ (1,971) Deferred tax assets - Net $ 9,022 $ 22,647 $ 13,733 $ 22,269 Deferred income tax - Australia Deferred tax assets Trade & other receivables Payables Provisions Deferred gains and losses on foreign currency contracts Undeducted s.40-880 costs Undeducted borrowing costs Losses available for offset against future taxable income Research and development and other tax offsets $ 3,827 $ 3,247 $ (581) $ - 284 4,859 - 539 - 218 - 108 3,927 2,304 625 - - 202 (176) (932) 2,304 (84) - (218) 202 (3,153) (213) 13,921 627 (62) (1,053) 202 Total $ 9,727 $ 10,413 $ 515 $ 10,269 Deferred tax liabilities Property, plant and equipment Inventories Deferred gains and losses on foreign currency contracts $ (3,404) $ (6,189) $ (319) $ (129) (11,655) (1,295) (15,300) - (3,645) 1,295 (1,570) - Total $ (16,354) $ (21,489) $ (2,669) $ (1,699) Deferred tax assets - Net $ (6,627) $ (11,076) $ (2,154) $ 8,570 Deferred tax (expense) / income booked to Statement of Comprehensive Income $ 11,579 $ 30,839 iii. Recognition and measurement Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance date. Deferred income tax is provided on all temporary differences at the balance date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except:   when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or when the taxable temporary differences associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. 50 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED    deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised except: when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or when the deductible temporary differences is associated with investments in subsidiaries, associates and interests in joint ventures in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary The carrying amount of deferred income tax assets is reviewed at each balance date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of comprehensive income. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. iv. Tax consolidation Austal Limited (‘the Company’) is the head entity in a tax-consolidated Group comprising the Company and its 100% owned Australian resident subsidiaries. The implementation date of the tax consolidated system for the tax-consolidated Group was 1 July 2002. Members of the Group have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly owned subsidiaries on a pro-rata basis. The agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At the balance date, the possibility of default was remote. v. Tax effect by members of the tax consolidated Group The current and deferred tax amounts for the tax-consolidated Group are allocated among the entities in the Group using a stand-alone taxpayer approach whereby each entity in the tax-consolidated Group measures its current and deferred taxes as if it continued to be a separately taxable entity in its own right. Deferred tax assets and deferred tax liabilities are measured by reference to the carrying amounts of the assets and liabilities in each entity’s statement of financial position and their tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses assumed by the head entity from the subsidiaries in the tax consolidated Group are recognised in conjunction with any tax funding arrangement amounts (refer below). The Group recognises deferred tax assets arising from unused tax losses of the tax-consolidated Group to the extent that it is probable that future taxable profits of the tax-consolidated Group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses assumed from subsidiaries are recognised by the head entity only. The members of the tax-consolidated Group have entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated Group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability (asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity. No amounts have been recognised as tax consolidation contribution/distribution adjustments in preparing the accounts for the parent company for the current year. 51 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED vi. Significant accounting judgements and estimates Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective counties in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences in interpretation may arise for a wide variety of issues depending on the conditions prevailing in the respective domicile of the Group companies. Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. vii. Other taxes Revenues, expenses and assets are recognised net of the amount of GST except:  when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and  receivables and payables, which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross profit basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority, are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. 52 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Capital s structure Note 10. Current Cash and c cash equival ents 20 014 ’0 00 20 13 ’00 00 Cash at bank an nd in hand $ 77,345 $ 38,030 Total Restricted cash: Unutilised Go Zo one Bond funds (i) Cash and term d deposits (ii) Total $ 77,345 $ 38,030 $ 9,532 $ 11,617 - 58,056 $ 9,532 $ 69,673 Total Cash per Cas sh Flow Statement $ 86,877 $ 1 07,703 (i) Unutilised Go Zo one Bonds may only b be spent on those capi ital works projects tha at were specifically ide entified in the documen ntation issued to inves stors. (ii) Comparitive bala ance represented part tial proceeds from the FY2013 capital raisin g that were used in FY Y2014 to retire Go Zo ne debt. i. Reco ognition and measureme nt Cash short- and short-te -term deposit rm deposits i ts with an orig n the stateme ginal maturity ent of financia y of three mon al position co nths or less. mprise cash a at bank and i n hand and For th equiv he purposes o valents as def of the Cash F fined above, n Flow Stateme net of cash he nt, cash and eld as a guar cash equival rantee. ents consist o of cash and c cash 53 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 11. Interest be aring loans and borrowi ngs Current Revolving Cred it Facility Multi-Option Fa cility (1) Equipment line (2) Bank Loan (uns secured) (3) Go Zone Bonds s (4) Total Non - Current Bank Loan (uns secured) (3) Go Zone Bonds s (4) Total Total 2014 ’000 2013 ’000 $ (12,000) $ - - - (1,192) - (8,000) (22,283) (8,357) (204,974) $ (13,192) $ (243,614) $ - $ (1,163) (142,264) - $ (142,264) $ (1,163) $ (155,456) $ (244,777) 1. Cash advanc 2. The Equipme 3. The Bank loa 4. The Go Zone approximatel 5. The loans an ce was provided un ent line was closed an is payable by ins e Bonds are variabl ly 3.7% in FY2014. nd facilities incur int n facility. der the Multi Optio at 30 June 2014. stalments until Octo e rate demand bon terest at various ave erage rates betwee en 4% and 5%. ober 2014, with an a nds and mature on average variable in 1 May 2041 and ar nterest rate between re payable in US do n 4.1% to 4.7% in F ollars with an averag FY2014. age effective interes st rate of i. Reco ognition and measureme nt All loa attribu amort ans and borro utable transa tised cost usi owings are in ction costs. In ng the effecti itially recogni nterest-bearin ive interest m ised at the fa ng loans and method. ir value of the borrowings a e consideratio are subseque on received le ently measure ess directly ed at Gains derec s and losses a cognised. are recognise ed in the state ement of com mprehensive i ncome when the liabilities s are ii. Go Zo one Bonds The G autho areas matur FY20 Gulf Opportun orized by the s that were aff rity to invest i 13. nity Zone Bon US Federal G ffected by Hu n the develop nds (Go Zone Government t rricane Katrin pment of ship e Bonds or GZ to incentivise na in 2005. Au pbuilding infra ZB) are a form private inves ustal qualified astructure in A m of indebted tment in infra d to borrow U Austal USA b dness that we astructure in g US$225M with between FY20 ere geographical h a 30 year 008 & Go Zo of 0.0 syndi was 3 one Bonds ar 054% in FY20 cate with a m 3.677%. re tax-exemp 014. GZB bon maturity date o t municipal bo ndholders are of 31 Decemb onds in the U e secured by l ber 2015. The United States letters of cred e average cos and attracted dit issued by A st of the lette d an average Austal’s bank rs of credit in coupon rate king FY2014 Austa June al has redeem 2014. med (repaid) a a cumulative amount of ~ US$90M of G GZB funds an nd owes US$1 135M at 30 Austa term o or bef to tha al has the opt of the indebte fore 31 Dece at date. ion of redeem edness with a mber 2015 o ming the outst a 30 day notic r may extend tanding GZB ce to bondhol d the debt by o balance, in w lders. Austal obtaining an whole or in pa may choose t extension to t art, at any tim to redeem th the letters of e during the t ese bonds at credit prior 54 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iii. Banking facilities Facilities used at reporting date Revolving Credit Facility (1) Multi-Option Facility (2) Equipment Line (3) Bank Loan (unsecured) (4) Go Zone Bonds (5) Contingent Instrument Facility (6) Other unsecured facility 2014 ’000 2013 ’000 $ (12,000) $ - - - (1,192) (142,264) (41,605) - (34,933) (22,283) (9,470) (204,974) - (50) Total $ (197,061) $ (271,710) Facilities unused at reporting date Revolving Credit Facility (1) Multi-Option Facility (2) Equipment Line (3) Bank Loan (unsecured) (4) Go Zone Bonds (5) Contingent Instrument Facility (6) Other unsecured facility $ (38,000) $ - - - - - (58,395) - (56,567) - - - - - Total $ (96,395) $ (56,567) Total Facilities Available Revolving Credit Facility (1) Multi-Option Facility (2) Equipment Line (3) Bank Loan (unsecured) (4) Go Zone Bonds (5) Contingent Instrument Facility (6) Other unsecured facility $ (50,000) $ - - - (1,192) (142,264) (100,000) - (91,500) (22,283) (9,470) (204,974) - (50) Total $ (293,456) $ (328,277) 1. The Revolving Credit Facility is provided under a new Syndicated Facility Agreement (SFA) which was executed on 19 July 2013. The maturity of the SFA is 31 December 2015. Funds were borrowed under the Revolving Credit Facility in FY2014 with an average variable interest rate of 4.5% in FY2014. 2. Cash advance and contingent instruments were provided under the Multi Option facility until 19 July 2013 when the facility was closed and replaced with the SFA. 3. The Equipment Line was transferred into the SFA at 19 July 2013 and then repaid and closed at 30 June 2014. 4. The Bank Loan is payable by instalments until October 2014, with an average variable interest rate of 4.8% in FY2014. 5. The Go Zone Bonds of US$ 135.040 million are variable rate demand bonds that are wrapped by Letters of Credit that are provided under the SFA. The Go Zone Bonds mature on 1 May 2041 whilst the Letters of Credit mature on 31 December 2015. The Bonds are payable in US dollars with an average effective interest rate of approximately 3.7% in FY2014. 6. The Contingent Instrument Facility is used to support letters of credit (excluding the letters of credit supporting the Go Zone Bonds), performance bonds and other financial and non-financial guarantees (refer to note 23). iv. Fair value of borrowings The fair values of all classes of borrowings are not materially different to their carrying amounts since the interest payable on those borrowings is either close to current market rates or the borrowings are of a short- term nature. 55 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 12. Contribute d equity and d reserves Shares ’000 2014 2013 4 2014 2013 Ordinary Shares on n Issue 1 July 346,173,1 195 188,193,00 07 $ 120 0,940 $ 41 ,373 Shares issued du uring the year 371,7 738 157,980,18 88 $ 270 $ 79 ,567 30 June 346,544,9 933 346,173,19 95 $ 12 1,210 $ 120 ,940 Reserved Shares 1 July Options exercise d 30 June (4,350,6 601) (4,350,60 01) $ 9,612) (9 $ (9 ,612) - - - $ - $ - (4,350,6 601) (4,350,60 01) $ 9,612) (9 $ (9 ,612) Net i. ii. iii. 342,194,3 332 341,822,59 94 $ 11 1,598 $ 111 ,328 Reco ognition and measureme nt Ordin nary shares Ordin or opt nary shares ar tions are show re classified a wn in equity a as equity. Inc as a deductio cremental cos on, net of tax, sts directly at from the pro ttributable to t ceeds of the the issue of n new shares o new shares or options. Ordin nary shares ha ave no par va alue and the c company doe es not have a limited amou unt of authori sed capital. Fully paid ordinary y shares carry y one vote pe er share and c carry the right t to dividends s. Rese rved shares Own e Plan a statem instru equity instrum are classified ment of comp uments. ments which a d as reserved prehensive inc are issued an shares and a come on the nd held by a t are deducted purchase, sa trustee under from equity. ale, issue or c Austal Group No gain or lo cancellation o p Manageme oss is recogn of the Group’s ent Share ised in the s own equity Refer r to Note 29 fo or more inform mation in rela ation to the Au ustal Group M Management Share Plan. Move ements in ord dinary share e capital The e Mr An Remu issued entire movem ndrew Bellam uneration Rep d was $0.83 ent in ordinar my on 26 Nove port on page per share. ry shares dur ember 2013 a 16) The volum ring year ende as part of his me weighted ed 30 June 2 contract of e average pric 014 is compr mployment. ( ce (VWAP) on rised of share (Refer to the n which the sh es issued to hares were Natur re & purpose s e of reserves Forei ign currency y translation reserve The fo of the oreign curren e financial sta ncy translation atements of fo n reserve is u oreign subsidi used to record iaries. d exchange d differences ar rising from the e translation Empl loyee benefit ts reserve This r their r reserve is use remuneration ed to record t n. Refer to No the value of e ote 29 for furt equity benefits ther details of s provided to f share based employees a d payment pla and directors ans for the G as part of roup. 56 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Cash h flow hedge reserve This r determ reserve recor mined to be a rds the portion an effective h n of the gain edge. Comm mon control reserve or loss on a h hedging instru ument in a ca ash flow hedg ge that is This r reserve repre esents the pre emium paid o Asse t revaluation n reserve n the acquisit tion of the mi nority interes st in a controll led entity. This r reserve is use ed to record i ncreases in t the fair value of land and b buildings. Note 13. Governmen nt grants rel ating to asse ets Deferred Grant Inc ome Current 2014 ’000 2013 ’000 Infrastructure e Development $ (3,550) $ (4,221) Total Non - Current $ (3,550) $ (4,221) Infrastructure e Development $ (49,892) $ (52,794) Total Total $ (49,892) $ (52,794) $ (53,442) $ (57,015) i. Reco ognition and measureme nt Austa for the al has receive e expansion o ed grants from of the Group’ m various gov s USA opera vernment bod ations in Mobi dies in Alabam le, Alabama. ma to fund the e infrastructur re required When releas n the grant re sed to profit a lates to an as and loss over sset, the fair v the expected value is credi d useful life o ted to a defer f the relevant rred income l t asset. liability accou unt and is When the gr n the grant re rant on a syst lates to an ex tematic basis xpense item, s to the costs it is recognis that it is inten ed as income nded to comp e over the per pensate. riods necessa ary to match Gove grant rnment grant will be receiv ts are only rec ved and all at cognised whe ttaching cond en received o ditions will be or when there complied with is reasonabl h. e assurance that the 57 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Working g capital Trade and other receiv ables Note 14. Current Trade amounts o owing by unrelated en ntities – construction c ontracts Allowance accou unt for doubtful debts Total Non - Current Trade amounts o owing by unrelated en ntities Total Total i. Reco ognition and measureme nt 20 014 000 ’0 20 13 ’00 00 $ 95,842 $ 1 04,130 (89) (1,387) $ 95,753 $ 1 02,743 $ 1,020 $ - $ 1,020 $ - $ 96,773 $ 1 02,743 Trade amou there when e receivables unt less an all is objective e identified. which are wi owance for a evidence that thin the norm any uncollectib t the Group w mal credit term ble amounts. will not be able ms are recogn An allowanc e to collect th nised and car ce for doubtfu e debts. Bad rried at origina ul debts is ma d debts are w al invoice ade when written off ii. Impa ired trade re eceivables Individ direct that a impai evide dual receivab tly. The other an impairmen rment losses nce of impair bles which are receivables a t has been in are recognis rment if any o e known to be are assessed curred but no sed in a separ of the followin e uncollectibl d collectively t ot yet been id rate provision ng indicators a e are written to determine dentified. For t n for impairme are present: off by reducin whether ther these receiva ent. The Grou ng the carryin re is objective ables the esti up considers ng amount e evidence mated that there is    significant f inancial diffic ulties of the d debtor probability t that the debto or will enter ba ankruptcy or financial reor rganisation, a and default or d elinquency in n payments (m more than 90 days overdu e). Rece there ivables for wh is no expecta hich an impai ation of recov irment provisi vering additio ion was recog nal cash. gnised are wr ritten off agai inst the provis sion when Impai amou irment losses unts previousl s are recognis ly written off a sed in profit o are credited a or loss within o against other other expens expenses. es. Subseque ent recoverie es of 58 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iii. Allowance account for doubtful debts Trade receivables of an initial value of $0.089 million (FY2013: $2.198 million) were impaired and fully provided for at 30 June 2014. Movements in the provision for impairment of receivables are detailed below: Provision for Doubtful Debts 1 July Charge for the Year Utilised Unused amounts reversed Movement 30 June 2014 $’000 2013 $’000 $ (1,387) $ (1,863) $ (89) $ (414) 1,387 - 890 - $ 1,298 $ 476 $ (89) $ (1,387) The allowance for doubtful debts has been created in relation to specific debtors whose debts were past due. The Group is currently negotiating payment arrangements with these debtors, however there is objective evidence that these debts are impaired. iv. Ageing analysis of current trade & other receivables at 30 June 0-30 31-60 61-90 90+ Impaired Total Days 2014 2013 ’000 $ 89,580 $ 4,430 $ 435 $ 2,417 $ (89) $ 96,773 ’000 $ 94,422 $ 3,452 $ 677 $ 5,579 $ (1,387) $ 102,743 Receivable balances are monitored on an ongoing basis. v. Fair values of current trade and other receivables Due to the short term nature of the current receivables, their carrying amount is assumed to be the same as their fair value. 59 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 15. Constructi on contracts s s in progress 20 014 ’0 00 20 13 ’00 00 Work in Progress Construction rev venue recognised to d ate $ 3,6 603,494 $ 2,5 503,102 less Progress pa ayments received & re eceivable (3,2 275,969) (2,2 225,910) Total due from c customers 327,525 3 $ 277,192 2 $ Progress Payment ts Received in Advan nce Construction rev venue recognised to d ate less Progress pa ayments received & re eceivable 204,322 2 $ $ 49,848 (2 233,384) (71,638) ( Total due to cust tomers $ (29,062) (21,790) ( $ Total due from / (to o) customers 298,463 2 $ 255,402 2 $ i. ii. Reco ognition and measureme nt Const any p perce date a truction work provision for a entage of com as a proportio in progress i anticipated fut mpletion basis on of estimate s valued at c ture losses an s. Percentage ed total contra contract cost i nd progress b e of completio act costs. ncurred to da billings. Cons on is determin ate, plus profi struction profit ned by referen it recognised ts are recogn nce to actual to date, less nised on the costs to Signi ificant accou unting judge ments and e estimates Refer r to Note 4 for r details of es stimates made e regarding c construction c contracts. Note 16. Inventories Work in progress s Other stock Total Inventories s and work in n progress Notes 2014 ’000 2013 ’000 15 $ 327,525 5 $ 2 277,192 7 617 6 696 $ 2 328,142 $ 8 277,888 i. Reco ognition and measureme nt Stock produ k and finished uction overhe d goods are v ads. Cost of s alued at the l stock is deter lower of cost rmined on the and net realis e weighted av sable value, w verage cost b where costs i basis. nclude 60 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Trade and other payab les Note 17. Current Trade & other pa ayables owed to unrela ated entities (i) Total Notes 2014 ’000 2013 ’000 $ ) (183,570) $ (133,813) $ ) (183,570) $ (133,813) (i) Trade payabl es are unsecured, non n-interest bearing and are normally settled o on 45 day terms. i. Reco ognition and measureme nt Trade servic Group e payables an ces provided p becomes ob nd other paya to the Group bliged to mak ables are carr prior to the e ke future paym ried at amortis end of the fina ments in resp sed costs and ancial year th pect of the pu d represent lia at are unpaid rchase of the abilities for go d and arise w ese goods an oods and hen the d services. ii. Fair v value of trad e and other payables The c their s carrying amou short-term na unts of trade a ature. and other pay yables are as ssumed to be the same as s their fair valu ues, due to 61 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Infrastru ucture & o other ass ets Note 18. Property, p plant and equ uipment i. ii. Net c carrying amo ount Balance e 1 July 2013 Gross s carrying amount at fair r Value at cos st Accu mulated Depreciation & Impairment Freehold Land & Plant & Capi tal Buildings Equipment ’000 ’000 P WIP 0 ’000 Total ’000 $ 332,695 $ $ - $ - $ 332,69 95 - 127,250 (8,817) (55,355) 4,599 4 (455) 131,84 49 (64,62 27) Net C Carrying Amount $ 323,878 $ $ 71,895 4,144 4 $ $ 399,91 7 Balance e 30 June 2014 Gross s carrying amount at fair r Value at cos st Accu mulated Depreciation & Impairment $ 316,786 $ $ - $ - $ 316,78 86 16,404 122,974 (29,370) (61,114) 822 - 140,20 00 (90,48 86) Net C Carrying Amount $ 303,819 $ $ 61,859 $ 822 $ 366,50 00 Reco onciliation of f movement f for the year Freehold Land & Plant & Capi tal Buildings Equipment ’000 ’000 P WIP 0 ’000 Total ’000 $ 273,700 $ $ 67,630 $ 29 9,053 $ 5,573 $ $ 14,270 1,422 1 $ 29,585 (43) (310) (430) (8,817) (12,642) - 23,880 - 3,376 (29 9,275) - (455) 324 3,076 3 $ 50,178 $ $ 4,264 $ (24 4,908) $ 370,38 83 $ 21,26 65 - (47 73) (21,91 4) - 32 24 30,33 32 $ 29,53 34 $ 323,878 $ $ 71,894 4,145 4 $ $ 399,91 7 $ 2,269 $ $ 5,230 4,385 4 $ 7,930 (16,766) (8,707) (4,788) (205) (1,611) (12,886) (560) 7,724) (7 - - 16 $ 11,88 84 1 (18,37 77) (21,59 93) (5,33 32) $ (20,062) $ $ (10,032) $ 3,323) (3 $ (33,41 7) $ 303,816 $ $ 61,862 $ 822 $ 366,50 00 Balance e 1 July 2012 Addit ions Trans sfer (in / out) Dispo osals Depre eciation charge for the e year Impai irment Excha ange Adjustment Total Balance e 1 July 2013 Addit ions Trans sfer (in / out) Dispo osals Depre eciation charge for the e year Excha ange Adjustment Total Balance e 30 June 2014 62 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iii. Recognition and measurement Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Land and buildings are measured at fair value less accumulated depreciation on buildings and any impairment losses recognised after the date of revaluation. Valuations are performed frequently to ensure that the fair value of a revalued asset does not differ materially from its carrying value. If land and buildings were measured using the cost model, the carrying amount would be as follows: Land & Buildings valued using cost model Cost Accumulated Depreciation & Impairment Net Carrying Amount 2014 ’000 2013 ’000 $ 404,029 $ 313,594 (84,191) (38,517) $ 319,838 $ 275,077 Any revaluation surplus is recorded in other comprehensive income and hence credited to the asset revaluation reserve in equity, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the statement of comprehensive income, in which case, the increase is recognised in the profit and loss. A revaluation deficit is recognised in the statement of comprehensive income except to the extent that it offsets an existing surplus on the same asset recognised in the asset revaluation reserve. Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. iv. Depreciation Depreciation is calculated on a straight-line or diminishing value basis over the estimated useful life of the asset. The following useful lives have been adopted as follows:   Buildings – over 20 to 40 years Plant and equipment – over 2 to 10 years The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end. v. Impairment The carrying values of plant and equipment are reviewed for impairment at each reporting date, with recoverable amount being estimated when events or changes in circumstances indicate the carrying value of the asset may be impaired. The recoverable amount of plant and equipment is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, recoverable amount is determined for the cash-generating unit to which the asset belongs, unless the asset’s value in use can be estimated to be close to its fair value. An impairment exists when the carrying value of an asset or a cash-general unit exceeds its estimated recoverable amount. The asset or cash-generating unit is then written down to its recoverable amount. Impairment losses on plant and equipment are recognised in profit or loss. The asset or cash-generating unit that suffered an impairment is tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. 63 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED vi. De-recognition and disposal An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the profit and loss in the year the asset is derecognised. vii. Key judgements and accounting estimates Estimation of useful lives of assets The estimation of the useful lives of assets has been based on historical experience. In addition, the condition of the assets is assessed at least once per year and considered against the remaining useful life. Adjustments to useful life are made when considered necessary. Revaluation of land and buildings Information about the valuation of land and buildings is provided in Note 21.iii. 64 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 19. Intangible assets Co omputer Developm ment S oftware ’000 s Costs ’000 Goodwill ’000 Total ’000 Balance 1 July 201 3 $ 4,931 $ 1 ,132 $ 6,463 $ 12,526 Additions Amortisation for t the year Disposals Exchange Adjust tment Total $ 729 $ 534 $ - $ 1,263 (2,012) (601) (37) (168) (1 ,498) - - - - (2,180) (2,099) (37) $ (1,921) $ (1 ,132) $ - $ (3,053) Balance 30 June 20 014 $ 3,010 $ - $ 6,463 $ 9,473 Balance 1 July 201 3 Cost $ 13,953 $ 1 ,200 $ 6,463 $ 21,616 Accumulated Am mortisation & Impairme nt (9,022) (68) - (9,090) Net Carrying Am ount $ 4,931 $ 1 ,132 $ 6,463 $ 12,526 Balance 30 June 20 014 Cost $ 13,195 $ - $ 6,463 $ 19,658 Accumulated Am mortisation & Impairme nt (10,185) - - (10,185) Net Carrying Am ount $ 3,010 $ - $ 6,463 $ 9,473 i. Reco ognition and measureme nt Intang asset Intern expen gible assets a ts are carried nally generate nditure is cha acquired sepa at cost less a ed intangible arged against arately are ini any accumula assets, exclu profit or loss itially measur ated amortisa uding capitalis in the year in red at cost. F ation and any sed developm n which the e Following initia accumulated ment costs, ar xpenditure is al recognition d impairment re not capitali s incurred. n, intangible losses. sed and useful lives of The u lives are amo finite that th he intangible gible asset wi intang cted useful lif expec t are accounte asset counting estim in acc statem ment of comp t. asset f intangible as ortised over th asset may be ith a finite use fe or the expe ed for by cha mate. The am prehensive inc ssets are ass he useful life e impaired. T eful life are re ected pattern nging the am mortisation ex come in the e essed to be e and assesse The amortisat eviewed at lea of consumpti mortisation per xpense on int expense cate either finite or ed for impairm tion period an ast at each fin ion of future e riod or metho tangible asset gory consiste r indefinite. In ment wheneve nd the amortis nancial year-e economic ben od, as approp ts with finite l ent with the fu ntangible ass er there is an sation metho end. Change nefits embodi priate, which is ives is recog unction of the sets with indication d for an es in the ed in the s a change nised in the e intangible A sum mmary of the policies appl ied to the Gro oup’s intangib ble assets is a as follows: Rese arch and de velopment c costs Resea recog arch costs ar gnised as an i re expensed a intangible ass as incurred. D set when the Development Group can d expenditure emonstrate: on an individ ual project ar re      the technical t its intention to i h how the asse t the availabilit the ability to m t feasibility of c o complete an et will generat y of resource measure relia completing th nd its ability t te future econ es to complete ably the expe he intangible to use or sell nomic benefit e the asset nditure during asset so that the asset s g developme nt it will be ava ailable for use e or sale 65 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED The asset is carried at cost less any accumulated amortisation and accumulated impairment losses following initial recognition of the development expenditure as an asset. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. Amortisation is recorded in costs of sales. The asset is tested for impairment annually during the period of development. Other intangibles Other intangible assets are initially measured at cost and amortised on a straight-line basis over the estimated useful life of the asset. Impairment testing is conducted annually. The following useful lives have been adopted as follows:   Computer software – straight-line over 2.5 years Development costs – straight line over 5 years Goodwill Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed in a business combination. Goodwill is measured at cost less any accumulated impairment losses after initial recognition. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the Group’s cash-generating units that are expected to benefit from the combination from the acquisition date, irrespective of whether other assets or liabilities acquired are assigned to those units. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or Group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods. Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstance is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained. ii. Impairment testing of goodwill and intangible assets with indefinite useful lives Goodwill acquired through business combinations has been allocated to the Darwin CGU, which is part of the Australia segment. (Refer to Note 3 for details.) The Group tests whether goodwill is recoverable on an annual basis. The recoverable amount of Darwin CGU has been determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering a five-year period. It was concluded that the recoverable amount is greater than the carrying amount. As a result of this analysis, management has concluded that no impairment charge is required. 66 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iii. Significant accounting judgement and estimates Recoverable amount of the Darwin CGU The recoverable amount of the Darwin CGU is $15 million and is determined based on value in use calculations using cash from projections from financial budgets approved by senior management covering a five year period. The following table sets out the key assumptions: Budget period gross margins (1) 2014 2013 Darwin 10-15% 10-15% Growth rate beyond budget period (2) 2014 5.0% 2013 5.0% Discount rate (3) 2014 2013 15.0% 10.5% (1) Budgeted gross margin (2) Weighted average growth rate used to extrapolate cash flows beyond the budget period (3) In performing the value-in-use calculations for the Darwin CGU, the group has applied post-tax discount rates to discount the forecast future attributable post-tax cash flows. The equivalent pre-tax discount rates are disclosed above. Management determined budgeted gross margin based on past performance and its expectation for the future. The growth rate beyond the budgeted period is consistent with the long term average growth rate of the ship building industry. The discount rate used reflects specific risks relating to the Australian ship building industry. iv. Sensitivity to changes in assumptions The estimated recoverable amount of the Darwin CGU is significantly greater than the carrying value of the assets within the CGU. No reasonably foreseeable changes in any of the key assumptions are likely to result in an impairment loss. 67 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Other lia abilities Note 20. s Provisions Employee Workers' Benefits Compensation W Warranty ’000 ’000 ’000 Other ’000 Total ’000 Provisons at 1 J uly 2013 $ (11,193) $ (6,449) $ (6,510) $ (3,1 93) $ (27,345) ) Arising during the year Utilised Unused amou unts reversed Effects of fore eign exchange $ (14,912) $ (5,400) $ (5,314) $ (6,2 204) 12,648 (102) (164) 3,648 - 57 5,249 - - 2,8 827 269 2 16 Movement $ (2,530) $ (1,695) $ (65) Provisions at 30 June 2014 $ (13,723) $ (8,144) $ (6,575) $ (3,0 092) $ (6,2 285) $ ) (31,830) 24,372 167 (91) ) $ ) (7,382) $ ) (34,727) Employee Workers' Benefits Compensation W Warranty ’000 ’000 ’000 Other ’000 Total ’000 $ (10,088) $ (6,449) $ (6,510) $ (2,08 1) $ (25,128) (1,105) - - (1,11 2) (2,217) $ (11,193) $ $ (6,449) $ (6,510) $ (3,19 3) $ (27,345) $ (12,700) $ (8,144) $ (6,575) $ (6,28 5) $ (33,704) (1,023) - - - (1,023) $ (13,723) $ $ (8,144) $ (6,575) $ (6,28 5) $ (34,727) 2013 Current Non-Current Total 2014 Current Non-Current Total i. ii. Reco ognition and measureme nt Provis past e the ob sions are rec event, it is pro bligation and ognised whe obable that a a reliable est n the Group h n outflow of r timate can be has a present resources em e made of the t obligation (l mbodying econ e amount of th egal or const nomic benefit he obligation. tructive) as a ts will be requ result of a e uired to settle Provis effect sions are disc t of the time v counted using value of mone g a current pr re-tax rate tha . ey is material at reflects the e risks specific c to the liabili ity if the The in is use ncrease in the ed. e provision d ue to the pas ssage of time is recognised d as a finance e cost when d discounting Inform mation abou ut individual provisions a and significa ant accountin s ng estimates Wage es, salaries, vested sick leave, work safe bonus and other sh hort term ben nefits Liabil be se servic liabilit ities for wage ettled within 1 ces up to the ties are settle ed. es and salarie 2 months of t reporting dat es, including n the reporting te. They are non-monetary date are reco measured at y benefits and ognised in oth the amounts d accumulatin her payables expected to ng sick leave in respect of be paid when expected to employees’ n the Long g service leav ve The li prese the re obliga emplo paym terms iability for lon ent value of ex eporting date. ations. This re oyees attainin ments are disc s to maturity a g service lea xpected futur . Assumption equires estim ng the service counted using and currencie ve is recognis re payments t ns are formula mation of futur e period requ g market yield es that match, sed in the pro to be made in ated when de re wage and s ired to qualify ds at the repo , as closely a ovision for em n respect of s etermining the salary levels a y for long serv orting date on s possible, th mployee bene ervices provid e Group’s lon and the proba vice leave be national gove he estimated f efits and mea ded by emplo g service lea ability of curre enefits. Expec vernment bon future cash o sured as the oyees up to ve ent cted future ds with outflows. 68 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Dividends A provision for dividends is not recognised as a liability unless the dividends are declared, determined or publicly recommended on or before the reporting date. No provision for dividends has been recognised as at 30 June 2014. (FY2013: nil). Warranties Provision for warranty is made upon delivery of the vessels based on the estimated future costs of warranty repairs on vessels. Workers’ compensation insurance A provision for workers’ compensation insurance is recognised for the expected costs of current claims and claims incurred but not reported at the balance date. Other Other includes a provision for refitting a military vessel to return it to a passenger ferry specification. This is consistent with the comparative period. 69 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Financia al risk ma anagemen nt Note 21. Fair value m measuremen nts i. Finan ncial assets and financia al liabilities The G Group holds t he following f financial instr ruments: Financia al Assets Notes Derivatives used for hedging at fair h value ’000 Assets at A ortised cost amo ’000 Total T ’000 2014 Cash and equivalents C Restricted cash R Trade & other receivabl T les Forward exchange cont F tracts Total T 2013 Cash and equivalents C Restricted cash R Trade & other receivabl T les Forward exchange cont F tracts 10 10 14 23 10 10 14 23 $ - - - 8,488 $ 77,345 $ 77,345 9,532 95,753 - 9,532 95,753 8,488 $ 8,488 $ 182,630 $ 191,118 $ - - - 9,400 $ 38,030 69,673 102,743 - $ 38,030 69,673 102,743 9,400 Total T $ 9,400 $ 210,446 $ 219,846 Financia al Liabilities 2014 Derivatives used for hedging at fair h value ’000 Lia amo abilities at ortised cost ’000 Total T ’000 Notes s Trade & other payables T Forward exchange cont F tracts nterest bearing borrow In ings borrowings Total T 2013 s Trade & other payables T Forward exchange cont F tracts nterest bearing borrow In ings borrowings 17 23 11 17 23 11 $ - $ (183,570) $ (183,570) (4,201) - - (155,456) (4,201) (155,456) $ (4,201) $ (339,026) $ (343,227) $ - $ (133,813) $ (133,813) (17,078) - - (244,777) (17,078) (244,777) Total T $ (17,078) $ (378,590) $ (395,668) The G maxim financ Group’s expos mum exposur cial asset me sure to variou re to credit ris ntioned abov us risks assoc sk at the end ve. ciated with th of the reporti he financial ins ng period is t struments is d the carrying a discussed in amount of eac e note 22. The ch class of The fa in the air value of a ssets and liab . e table above. bilities held a t amortised c cost is describ bed in the ass sociated note e referenced 70 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Recognised fair value measurements - fair value hierarchy This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level follows underneath the table. Recurring fair value measurement Balance 30 June 2014 Notes Level 1 ’000 Level 2 ’000 Level 3 ’000 Total ’000 Financial assets Derivatives used for hedging 23 $ - $ 8,488 $ - $ 8,488 Total $ - $ 8,488 $ - $ 8,488 Financial liabilities Derivatives used for hedging 23 $ - $ (4,201) $ - $ (4,201) Total $ - $ (4,201) $ - $ (4,201) Balance 30 June 2013 Financial assets Derivatives used for hedging 23 $ - $ 9,400 $ - $ 9,400 Total $ - $ 9,400 $ - $ 9,400 Financial liabilities Derivatives used for hedging 23 $ - $ (17,078) $ - $ (17,078) Total $ - $ (17,078) $ - $ (17,078) There were no transfers between any of the levels for recurring fair value measurements during the year. Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1. Level 2: The fair value of financial instruments that are not traded in an active market (for example, over- the-counter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. The instrument is included in level 2 if all significant inputs required to fair value an instrument are observable. Level 3: The instrument is included in level 3 if one or more of the significant inputs is not based on observable market data. Valuation techniques used to determine fair values Specific valuation techniques used to value financial instruments include:    the use of quoted market prices or dealer quotes for similar instruments the fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date the fair value of the remaining financial instruments is determined using discounted cash flow analysis. For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. All of the resulting fair value estimates are included in level 2. 71 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED ii. Impairment – Financial Assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset which is measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows, discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in Groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in profit or loss. Impairment testing of trade receivables is described in note 14. iii. Non-financial assets and liabilities Recognised fair value measurements - fair value hierarchy This section explains the judgements and estimates made in determining the fair values of the non-financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its assets and liabilities measured at fair value into the three levels prescribed under the accounting standards. An explanation of each level is provided in note 21 (i). Balance 30 June 2014 Notes Level 1 ’000 Level 2 ’000 Level 3 ’000 Total ’000 Property, plant and equipment Land & buildings 18 $ - $ - $ 303,819 $ 303,819 Total $ - $ - $ 303,819 $ 303,819 Balance 30 June 2013 Property, plant and equipment Land & buildings 18 $ - $ - $ 323,878 $ 323,878 Total $ - $ - $ 323,878 $ 323,878 There were no transfers between any of the levels for recurring fair value measurements during the year. Valuation techniques used to determine fair values The Group engages independent accredited valuation specialists on a periodic basis to determine the fair values of these assets. The Group reviews market indicators in the interim periods to ensure that the carrying value of revalued property is not materially different from fair value. The last revaluation was performed on 29 June 2012. 72 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Valuation inputs and relationships to fair value The following table summarises the quantitative information about the significant unobservable inputs used in recurring level 3 fair value measurements. Description Fair value at 30 June 2014 '000 Land - Mobile US$ 11,000 Unobservable inputs Selection of land with similar approximate utility Range of inputs (probability-weighted average) Relationship of unobservable inputs to fair value US$1.69 - US$ 2.04 (US$1.70) per ft2 Higher value of similar land increases estimated fair value Buildings - Mobile US$ 304,242 Consumed economic benefit/ obsolescence of asset 2.22% Greater consumption of economic benefit or increased obsolescence lowers fair value. Land - Henderson Buildings - Henderson Cost per square foot floor area (ft2) US$100 - $211 ($185) per ft2 Higher cost per ft2 increases fair value. A$ 8,800 Selection of land with similar approximate utility $200-220 ($210) per m2 Higher value of similar land increases estimated fair value A$ 22,900 Consumed economic benefit/ obsolescence of asset 2.50% Greater consumption of economic benefit or increased obsolescence lowers fair value. Cost per square meter floor area (m2) $500 - $1,750 ($998) per m2 Higher cost per m2 increases fair value. iv. Impairment – non-financial assets Significant accounting judgements The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. These include product and manufacturing performance, technology, economic and political environments and future product expectations. If an impairment trigger exists, the recoverable amount of the asset is determined. The recoverable amount of the asset is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs, unless the asset’s value in use can be estimated to be close to its fair value. Impairment exists when the carrying value of an asset or a cash-general unit exceeds its estimated recoverable amount. The asset or cash-generating unit is then written down to its recoverable amount. Impairment testing of property, plant and equipment, goodwill and other intangible assets is described in Note 18 and Note 19 respectively. 73 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 22. Financial r isk managem ment xplains the Gr rformance. Cu roup’s exposu urrent year pr ure to financia rofit and loss al risks and h information h how these risk has been incl ks could affec uded where r ct the Group’s relevant to ad s future dd further This note ex financial per context. Risk Market risk - interest rate Market risk - y foreign currency Credit risk Liquidity Exposure a arising from Mea asurement Management Long-term b borrowings at vari able rates Sen sitivity analysis Interest rate sw waps Future comm Recognised liabilities no currency mercial transactio d financial assets t denominated in ons, and functional Cash, short receivables instruments term deposits, tra and derivative fin ade nancial Borrowings, derivative fin , trade payables a nancial instrumen and nts Cas Sen h flow forecast, sitivity analysis n Forward foreign racts, exchange contr ncy Forward curren options Age Cred ing analysis, dit ratings Monitoring cred allowances dit Roll fore ing cash flow casts Availability of committed cred and borrowing facilities dit lines Objectives and policy Ultimate res Committee u risks identifie projections. ponsibility for under the aut ed below, inc r identification hority of the B cluding hedgin n and control Board. The B ng cover of fo of financial r Board reviews oreign currenc isks rests wit s and agrees cy, credit allo h the Audit & policies for m wances, and & Risk Manage managing eac future cash f ement ch of the flow forecast Details of the of measurem asset, financ e significant a ment and the cial liabilities a accounting po basis on whic and equity ins olicies and m ch income an strument are ethods adopt nd expenses disclosed in ted, including are recognise the relevant n the criteria fo ed, in respect notes to the f for recognition t of each clas financial state n, the basis ss of financial ements. Market risk i. Capit tal managem ment The G confid the G determ Group’s policy dence to sust Group defines mines the lev y is to mainta tain future dev as total shar vel of dividend in a strong an velopment of eholders’ equ ds to shareho nd flexible ca f the business uity attributab olders. apital base to s. The Group ble to membe provide inves p monitors the rs of Austal L stor, creditor e return on ca Limited. The and market apital, which Board The G and d not lim Group monito detailed budge mit the Group ors statement eting process p’s growth opp of financial p ses. The gros portunities an position streng ss gearing ra nd is in line w gth and flexib tio is monitor with peers and bility using cas ed and maint d industry nor sh flow foreca tained at a lev rms. ast analysis vel that does There policie e were no cha es and proce anges in the G edures are est Group’s appro tablished with oach to capit h regular mon al manageme nitoring and re ent during the eporting. e year. Risk m t management Neithe than n er the Group normal bankin nor any of its ng requireme s subsidiaries ents. s are subject t to externally imposed cap ital requireme ents, other 74 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED ii. Interest rate risk exposure The Group’s exposure to market interest rates relates primarily to the Group’s long-term debt obligations and investment in cash funds. The Group constantly analyses its interest rate exposure. Consideration is given to potential renewals of existing positions and alternative financing. At the end of the reporting period, the Group had the following variable rate borrowings and interest rate swap contracts outstanding: Financial Assets Cash and cash equivalents Australian variable rate interest US variable rate interest Total Financial Liabilities Interest bearing loans and borrowings Australian variable rate interest US variable rate interest Total Net Exposure 2014 ’000 2013 ’000 $ 35,324 $ 18,320 51,553 89,383 $ 86,877 $ 107,703 $ (13,192) $ (17,520) (142,264) (227,257) $ (155,456) $ (244,777) $ (68,579) $ (137,074) Profit or loss is sensitive to higher/lower interest income from cash and cash equivalents and interest expenses on borrowings as a result of changes in interest rates. There would be no impact on other components of equity as a result of changes in interest rates. The below sensitivity analysis shows the impact on post tax profit had a 1 percentage point movement in interest rates occurred. 1 percentage point was deemed to be a reasonable level of volatility based on FY2014 observations. Post tax gain / (loss) +1% (100 basis points) -1% (100 basis points) 2014 ’000 2013 ’000 $ (686) $ (1,371) 686 1,371 75 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iii. Foreign currency risk Refer to Note 23 for Derivatives. The Group is exposed to currency risk on sales, purchases or components for construction that are denominated in a currency other than the respective functional currencies of the Group entities, primarily the Australian Dollars (AUD) for the Australian operation and US Dollars (USD) for the US operation. The currencies in which these transactions primarily are denominated are AUD, USD, GBP and Euro. The Group’s objective in relation to foreign currency risk is to minimise the risk of a variation in the rate of exchange used to convert foreign currency revenues and expenses and assets or liabilities to AUD. The Group attempts to limit the exposure to adverse movement in exchange rates in the following ways:    negotiation of contracts to adjust for adverse exchange rate movements; use of natural hedging techniques; and using financial instruments (refer to Note 23). Sales contracts are negotiated based at the current market rate on the contract signing date. Where there is a tender involving significant foreign currency exposure, the Group seeks to cover that exposure by a rise and fall clause for exchange rate movements between the date of price calculation to the date the contract becomes effective. Known foreign exchange transaction exposure, which result from normal operational business activities are hedged. Tax profit and equity would have been affected as illustrated in the table below had the Australian Dollar, US Dollar and Euro moved relative to one another at balance date with all other variables held constant: Judgement of reasonable possible movements Post tax profit (higher / (lower) Equity (higher / (lower) 2014 ’000 2013 ’000 2014 ’000 2013 ’000 USD / AUD +5% -5% EUR / AUD +5% -5% EUR / USD +5% -5% $ 4,727 $ 3,316 $ 17,106 $ 3,764 (4,727) (3,316) (17,106) (3,764) $ 2 $ 17 $ (1,769) $ (1,172) (2) (17) 1,769 1,172 $ 4,515 $ - $ 4,515 $ - (4,515) - (4,515) - Derivative financial instruments such as forward currency contracts and currency options are purchased to eliminate the currency exposures so as to maintain a properly hedged position. Timing gaps are mitigated using foreign currency accounts or financial instruments such as swaps. It is the Group’s policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness. Trading is specifically prohibited. The financial impact of the derivative instrument is incorporated into the cost of goods acquired or the sales proceeds. General hedges are not undertaken. Foreign currency contracts designated as cash flow hedges to mitigate the movements in foreign exchange rates are outlined in Note 23. 76 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iv. Credit risk The Group trades only with recognised, creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures, which are conducted internally. The Group, while exposed to credit related losses in the event of non-performance by counterparties to financial instruments, does not expect counterparties to fail to meet their obligations given their credit ratings. The Group minimises concentrations of credit risk and the risk of default of counterparties in relation to cash and cash equivalents and financial instruments by spreading them amongst a number of financial institutions. It is the Group’s policy to minimise the risk that the principle amount will not be recovered and the risk that funds will not be available when required whilst at the same time obtaining the maximum return relative to the risk. To manage this, it is the Group’s policy to restrict its investment of surplus cash funds to financial institutions with a Standard and Poor credit rating of at least A-2, and for a period not exceeding 180 days. The Group undertakes investments in 11am / 24 hour call deposits, term deposits or negotiable certificates of deposit in order to achieve this objective. In addition, vessel sales contracts are structured to ensure that the Group will be paid on delivery of the vessel through the following measures:    obtaining progress payments from the client to cover the cost of the construction; or obtaining a letter of credit from a credible bank to cover payment of the contract; or obtaining a minimum payment of 20% of the contract price and a letter from the bank or financial institution providing finance to the customer that funding has been arranged for the balance of the purchase price. With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents and certain derivative instruments, the Group’s exposure to credit risk arises from default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. The maximum exposure to credit risk at the reporting date is disclosed in Note 10 and Note 23. Cash and term deposits are predominantly held with two tier one Australian financial institutions, which are considered to be low concentrations of credit risk. 77 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED v. Liquidity risk The liquidity position of the Group is managed to ensure sufficient liquid funds are available to meet our financial commitments in a timely and cost-effective manner. It is the Group’s policy to continually review the Group’s liquidity position including cash flow forecasts to determine the forecast liquidity position and maintain appropriate liquidity levels. Austal was in the process of finalising a new syndicated banking facility at the last reporting date (30 June 2013). Execution of the new facility was achieved subsequent to the last reporting date on 19 July 2013 which provides credit until 31 December 2015 and enabled the reclassification of a significant portion of current liabilities as non- current liabilities in the current accounting period. The following are the contractual maturities of financial liabilities, including interest payments: Balance 30 June 2014 Derivative financial assets / (liabilities) Carrying Amount ’000 0 - 1 ’000 Years to maturity 1 - 2 ’000 2 - 5 ’000 > 5 ’000 Contractual Cash Flows ’000 Outflow Inflow $ - $ (154,468) $ (161,766) $ (81,962) $ (172) $ (398,368) - 155,193 165,183 82,129 172 402,677 Net derivative financial assets / (liabilities) $ - $ 725 $ 3,417 $ 167 $ - $ 4,309 Non Derivative financial liabilities Trade & other payables Bank loan (unsecured) Go Zone Bond facility (i) Revolving Credit Facility Total $ (183,570) $ (183,570) $ - $ - $ - $ (183,570) (1,192) (142,264) (12,000) (1,217) - - (150,171) (12,019) - - - - - - - (1,217) (150,171) (12,019) $ (339,026) $ (196,806) $ (150,171) $ - $ - $ (346,977) (i) Go Zone Bonds are classified with 1 - 2 years to maturity because the letters of credit wrapping the bonds mature on 31 December 2015. Balance 30 June 2013 Derivative financial assets / (liabilities) Carrying Amount ’000 0 - 1 ’000 Years to maturity 1 - 2 ’000 2 - 5 ’000 > 5 ’000 Contractual Cash Flows ’000 Outflow Inflow $ - $ (155,105) $ (59,776) $ (33,307) $ - $ (248,188) - 162,502 62,111 38,019 - 262,632 Net derivative financial assets / (liabilities) $ - $ 7,397 $ 2,335 $ 4,712 $ - $ 14,444 Non Derivative financial liabilities Trade & other payables Bank loan (unsecured) Equipment line (secured) Go Zone Bond facility Total $ (133,813) $ (133,813) $ - $ - $ - $ (133,813) (9,470) (22,283) (204,974) (8,529) (23,174) (377,151) (1,177) - - - - - - - - (9,706) (23,174) (377,151) $ (370,540) $ (542,667) $ (1,177) $ - $ - $ (543,844) The Group had $38.000 million (FY2013: $56.567 million) of unused credit facilities available for its immediate use at balance date (refer to Note 11). The Group also has a total of $77.345 million (FY2013: $38.030 million) in cash and cash equivalents, which it is able to use to meet its liquidity needs. 78 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 23. Derivative financial ins struments an nd hedging The Group is each other a s exposed to arising from re the risk of ad eceipts from e dverse movem export sales a ments in the A and the purch Australian Do hase of comp ollar, US Dolla ponents for co ar and Euro r onstruction. relative to The Group u to hedge its receipts and received and uses derivativ risks associa d payments an d made. ve financial in ated with fore nd they are ti struments su ign currency med to matur uch as forward fluctuations. re when the r d exchange c These contra receipts and p contracts and acts are matc payments are d forward curr ched to highly e scheduled t rency options y probable o be i. ii. Reco ognition and measureme nt Such entere value derivative fin ed into and a is positive an nancial instrum are subsequen nd as liabilitie ments are sta ntly remeasur es when the fa ated at fair va red at fair val fair value is ne alue on the da lue. Derivativ egative. ate on which a ves are carrie a derivative c ed as assets w contract is when the fair Any g cash gains or losse flow hedges, es arising from are taken to m changes in the statemen the fair value nt of compreh e of derivative hensive incom es, except for me. r those that q ualify as The fa contra air value of fo acts with simi orward curren ilar maturity p ncy contracts profiles. Cred is calculated it risk has be by reference en included in e to current fo n foreign curr orward excha rency contrac nge rates for cts. The G calcu direct Group’s deriva lated using va tly or indirectl atives are cat aluation tech y based on m tegorised in le niques where market observ evel 2 of the e the inputs th vable data. valuation hie hat have a sig rarchy, as the gnificant effec eir fair value h ct on the valu has been ation are Hedg ge designatio on For th he purposes o of hedge acco ounting, hedg ges are class ified as:   f fair value hed liability or an l dges when the unrecognised ey hedge the d firm commit e exposure to tment other th changes in t han foreign c he fair value o urrency risk; of a recognis or sed asset or cash flow hed c particular risk p commitments c dges when th k associated w s. ey hedge exp with a recogn posure to var nised asset or riability in cas r liability or fo h flows that is reign exchan s attributable nge risks on fi either to a rm At the relatio strate e inception of onship to whi egy for undert f a hedge rela ch the Group taking the hed ationship, the p wishes to ap dge. Group forma pply hedge ac ally designate ccounting and s and docum d the risk man ments the hed nagement ob ge bjective and documentatio e of the risk b tting the expo n includes ide being hedged osure to chan entification of d and how the ges in the he f the hedging e entity will as edged item’s f instrument, t ssess the hed fair value or c the hedged ite dging instrume cash flows att em or transac ent’s effective tributable to th ction, the eness in he hedged The d nature offset risk. Such and a the fin hedges are e are assessed nancial report expected to b on an ongoin ting periods f be highly effec ng basis to de for which they ctive in achie etermine that y were design nated. ving offsettin they actually g changes in y have been h fair value or highly effectiv cash flows t ve throughout iii. Fair v value hedge accounting Fair v liabilit such loss. attribu both a value hedges ty or an unrec an asset, liab For fair value utable to the are taken to t are hedges o cognised firm bility or firm co e hedges, the risk being he the statement of the Group’s m commitment ommitment th e carrying am dged, the der t of comprehe s exposure to t other than fo hat is attributa mount of the h rivative is rem ensive incom o changes in oreign exchan able to a part edged item is measured to f e. the fair value nge rate risk, icular risk and s adjusted for fair value and e of a recognis or an identifi d could affec r gains and lo d gains and lo sed asset or f ied portion of t profit or osses osses from The G or exe desig intere as so for ch Group discont ercised, the h nation. Any a est method is on as an adju hanges in its f tinues fair va hedge no long adjustment to used is amor ustment exist fair value attr lue hedge ac ger meets the o the carrying rtised to the s ts and shall b ibutable to th ccounting if th e criteria for h g amount of a statement of c egin no later e risk being h e hedging ins hedge accoun hedged finan comprehensiv than when th hedged. strument expi nting or the G ncial instrume ve income. A he hedged ite ires or is sold Group revokes ent for which Amortisation m em ceases to d, terminated s the the effective may begin be adjusted 79 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iv. Cash flow hedge accounting Cash flow hedges are hedges of the Group’s exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and the foreign exchange risks on firm commitments and that could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in other comprehensive income, while the ineffective portion is recognised in the profit and loss. Amounts taken to other comprehensive income are transferred to the profit and loss when the hedged transaction affects profit or loss, such as when hedged income or expenses are recognised or when a committed and future sale or the asset is consumed. When the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non- financial asset or liability. Amounts previously recognised in equity are transferred to the profit and loss if the forecast transaction is no longer expected to occur. Amounts previously recognised in equity will remain in equity until the forecast transaction occurs if the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked. v. Summary of forward foreign exchange contracts The following table summarises by currency the Australian dollar value of the significant forward foreign exchange agreements and forward currency options. Foreign currency amounts are translated at rates current at the reporting date. The ‘buy’ amounts represent the Australian dollar equivalent of commitments to purchase foreign currencies, and the ‘sell’ amount represents the Australian dollar equivalent of commitments to sell foreign currencies. 2014 2013 Average Forward Rate Average Forward Rate Sell '000 Buy '000 Average Forward Rate Average Forward Rate Sell '000 Buy '000 0.9603 $ 897 1.0012 $ 249 1.0305 $ 81 0.9215 $ 6,507 0.9167 80,868 0.9599 3,436 1.0139 492 0.9593 95,628 0.8775 131,794 0.9713 86 0.6303 1,034 0.9190 29,231 $ 213,559 $ 3,771 $ 1,607 $ 131,366 0.6608 $ 1,809 - $ - 0.5511 $ 153 0.7445 $ 53 0.7403 203 0.6400 1,382 0.5434 310 0.7992 130 0.7343 477 0.6089 22,285 0.5311 476 0.8019 2,640 $ 2,489 $ 23,667 $ 939 $ 2,823 - $ - 1.3322 $ 782 0.9296 $ 34,825 0.9529 $ 24,824 - - 1.3709 59,448 - - 0.9584 17,976 - - 1.3941 85,849 - - 0.9813 26,146 $ - $ 146,079 $ 34,825 $ 68,946 - $ - 0.6222 $ 36 0.6360 $ 116 - $ - 0.5640 1,637 0.6126 115 0.6222 154 0.5897 1,715 0.5511 3,265 0.5548 552 0.6047 365 0.5548 4,902 $ 4,902 $ 703 $ 635 $ 6,617 - $ - - $ - 0.9730 $ 836 0.9584 $ 522 0.5851 1,682 - - 0.9407 12,346 - - 0.6160 2,026 - - 0.9275 2,584 - - $ 3,708 $ - $ 15,766 $ 522 - $ - 5.6830 $ 192 - $ - - $ - - - 5.6138 2,334 - - - - - - 5.4524 1,469 - - - - $ - $ 3,995 $ - $ - USD / AUD less than 3 months 3 - 12 months 13 months or greater EUR / AUD less than 3 months 3 - 12 months 13 months or greater USD / EUR less than 3 months 3 - 12 months 13 months or greater GBP / AUD less than 3 months 3-12 months 13 months or greater Total USD / GBP less than 3 months 3-12 months 13 months or greater Total SEK / AUD less than 3 months 3-12 months 13 months or greater Total 80 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED vi. Offsetting financial instruments The Group presents its assets and liabilities on a gross basis. Derivative financial instruments entered into by the Group are subject to enforceable master netting arrangements such as International Swaps and Derivatives Associations (ISDA) master netting agreement. In certain circumstances, for example, when a credit event such as a default occurs, all outstanding transactions under an ISDA agreement are terminated. The termination value is assessed and only a single net amount is payable in settlement of all transactions. The amounts set out in the table above represent the derivative financial assets and liabilities of the group that are subject to the above arrangements and are presented on a gross basis. 81 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Unrecog gnised ite ems Note 24. Commitme ents and con tingencies i. Comm mitments The G contra disclo those Group entities acts. No mate osed (if any) i e financial liab s may have p erial losses a s the director bilities. otential finan re anticipated rs’ best estim cial liabilities d in respect o ate of amoun that could ar of any of those nts that would ise from histo e contingenci d be payable b orical comme ies. The fair v by the Group ercial value p to settle Operatin ng lease commitmen nts Futu re minimum rentals Withi in one year payable under non-c cancellable leases as s at 30 June are as fo ollows After one year but not more e than five years Total Capital c commitments Build dings USA Guarant tees Bank k performance guarant tees (i) 4 2014 ’000 2013 ’000 $ 1,395) (1 $ (1 ,125) (1 1,744) (1 ,496) $ 3,139) (3 $ 2,621) (2 $ (72) $ (16) $ (41 1,605) $ (26 6,933) (i) The bank performa and buildings and fl equipment. nce guarantees and G oating charges over  Go Zone Bonds are s cash, receivables, wo ecured by a mortgag ork in progress and p ge over the land  plant and  ii. Other r contingent t liabilities ex xcluded from m the above include: The p parent compa any has guara anteed the pe erformance of f certain contr ract obligation ns of a subsid diary. Austa is in r the pa intend al received no respect of con arties specific ds to defend t otice of Arbitra nsequential d cally excludes the claim. ation proceed amages arisi s consequent dings initiated ing from a wa tial damages d by a comme arranty defect in relation to ercial custome t. The shipbu warranty def er in FY2013 uilding contra fects. The co . The claim ct between ompany Note 25. Events afte er the balanc ce date The Group a million. announced th he completion n of the sale o of Hull 270 (10 02 m stock ve essel) on 20 A August 2014 for $61.500 82 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED The Grou up, mana agement a and relate s ed parties Note 26. Parent inte erests in sub bsidiaries The consolid in the followi dated financia ing table. al statements s include the f financial state ements of Aus stal Limited a and the subsid diaries listed Company Austal Cyprus Ltd Austal Egypt LLC Austal Holdings Inc Austal Hull 130 Cha artering LLC Austal Muscat LLC Austal Philippines P Pty Ltd Austal Service Darw win Pty Ltd Austal Service Pty L Ltd Austal Ships Pty Ltd d Austal Systems Pty Ltd Austal UK Ltd Austal USA LLC Hydraulink (NT) Pty y Ltd* Image Marine Pty Lt td KM Engineering (NT T) Pty Ltd* Oceanfast Luxury Y Yachts Pty Ltd Oceanfast Pty Ltd Seastate Pty Ltd Country of Incorporation Equity Int terest 2014 2013 Cyprus Egypt USA USA Oman Australia Australia Australia Australia Australia United Kingdom USA Australia Australia Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 80% 100% 100% 100% 100% 100% 80% 100% 80% 100% 100% 100% 100% 100% 100% 100% 100% 100% 80% 100% 100% 100% 100% 100% 80% 100% 80% 100% 100% 100% Austal Limited is t *100% owned by A the ultimate parent Austal Service Darw of the Group and is win Pty Ltd, which s incorporated in Pe itself is 80% owned erth, Western Austr d by Austal Service ralia. Pty Ltd. Note 27. Related pa rty disclosu re It is Group p policy that all t transactions w with related p parties are co onducted on c commercial te erms and con ditions. No related p Personnel re party transact emuneration a ions occurred and the matte d with the con ers disclosed nsolidated en in this report tity other than t,. n Directors’ a and Key Mana agement Note 28. Key manag gement pers onnel compe ensation Short-term employe ee benefits Post-employment be enefits s Termination benefits Long term benefits Share-based payme ent Total 2014 ’000 2013 ’000 $ 3,454,506 $ 3,600,806 115,046 - 27,688 442,486 85,880 332,647 - 234,463 $ 4,039,726 $ 4,253,796 Detailed rem muneration dis sclosures are e provided in t the Remuner ration report c commencing on page 16. 83 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 29. Share base s ed payments i. Long g Term Incen tive Plan The e the 20 below respo establishment 012 Annual G w) and aims to onsibilities wit t of the Austa General Meet o reward KMP thin the Group al Limited Lon ing. The plan P with the iss p so as to: ng Term Incen n replaced the sue of perform ntive Plan (LT e previous Em mance rights c TIP) was appr mployee Shar commensurat roved by sha re Option Plan te with their p reholders at n (refer position and   attract and impact the g retain except growth and p ional employe rofitability of t ees (‘key em the Group; ployees’) tha t have the ca apacity to sign nificantly align key em reward key mployees’ be employees fo haviour towa or sustained c rds the growt contributions th and profita to business s bility objectiv success. ves of the Gro oup; and Struc cture The p by the performance r e Remunerat rights may be ion Committe e granted to K ee. KMP and exe cutives in acc cordance with h the LTIP rul les and set The te issued at lea erms of each d following th ast 12 months offer to parti he vesting of a s, although th cipate in the any performa e holder will b LTIP may diff ance rights wi be entitled to ffer depending ll generally b any dividend g on the relev e subject to a ds paid during vant KMP role a restriction o g that restricte e. Shares on trading for ed period. Entitle result ement to perf ts to sharehol formance righ lders, thereby hts under the y ensuring tha LTIP is base at the objectiv ed solely on m ves of KMP a measures whic and sharehold ch deliver im ders are align proved ned. Perfo ormance hur rdles The g ROIC rather Perfo a pres granting of pe C and TSR tar r than busine rmance rights scribed perio erformance rig rgets set perio ess unit perfor s will not vest d determined xclusively to o ghts is tied ex he Board. The odically by th der to maximi rmance in ord e hurdles, are t unless these d. d by the board overall Group e targets will b ise alignment e met. Perfor p performance be based on G t with shareho rmance hurdl e, measured Group perfor older interest es will be me against mance, s; easured over The p performance h hurdles for rig ghts granted i in FY2014 ar re as follows: Retur rn on Investe ed Capital (R ROIC) measu ure 70% o target for the target reduc than t of the perform t over the pre e full entitlem ts for FY2013 ces progressiv the threshold mance rights escribed perio ment of perform 3 is included w vely as ROIC target over t that vest und od as per the mance rights within the Re C steps down he prescribed der the LTIP w definition of R under this as muneration r such that the d period. will be tied to ROIC in the R spect of the L eport on com e performance the achievem Remuneration LTI Plan. An e mmencing pag e rights will no ment of an ave n Report. To example of th ge 16. The LT ot vest if ROI erage ROIC be eligible e ROIC t TI entitlement IC is less Total Shareholde er Return (TS SR) measure 30% o for the target entitle is less itself consid of any LTI aw e full entitlem ts for the FY2 ement reduce s than the thr is not enough ders this to b ward will depe ment of perform 2013 grant is es progressive reshold target h to meet the be consistent end on the ac mance rights included with ely as TSR st t over the pre hurdle requir with its objec chievement of under this as hin the Remu teps down su escribed perio red for perfor ctive of improv f TSR levels p spect of the L neration repo uch that the p od. Maintenan mance rights ving returns t prescribed by LTI Plan. An e ort commenci erformance r nce of existing under this m o shareholde y the Board. T example of th ng on page 1 rights will not g TSR perfor measure. The ers. To be eligible e TSR 6. The LTI vest if TSR rmance in Board 84 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Rights issued and valuation 1,049,022 performance rights were issued during the year. The Group uses the Monte Carlo model to value the performance rights. The following table lists the inputs to the valuation model used: Performance Rights Valuation Inputs Grant date Spot price ($)* Expected volatility (%) Discount rate (%) Dividend yield (%) Staff turnover Expected life of option (years) Tranche 1 2 18 Nov 2013 13 Dec 2013 $ 0.70 $ 0.84 40% 2.90% Nil Nil 3 40% 2.80% Nil Nil 3 ii. Employee Share Option Plan (ESOP) The ESOP was established in 2006 and replaced by the LTIP in 2012. No options have been issued under this plan since December 2011. The ESOP aimed to reward executives and senior managers with the issue of share options commensurate with their position and responsibilities within the Group. The Group used Total Shareholder Return (TSR) as the performance hurdle for the ESOP. Summaries of options granted under ESOP The following table illustrates the movement in share option holdings and weighted average exercise prices (WAEP) during the year: Summary of options granted under ESOP Number WAEP Number WAEP 2014 2013 Outstanding at the beginning of the year 7,190,486 $ 2.49 8,273,611 $ 2.46 Granted during the year Exercised during the year Forfeited during the year - - (658,750) $ - - 2.23 - - (1,083,125) $ - - 2.25 Outstanding at the end of the year 6,531,736 $ 2.52 7,190,486 $ 2.49 Exercisable at the end of the year 4,606,736 2,826,736 Share options outstanding at the end of the year have the following expiry dates and exercise prices: Tranche Grant date Expiry Date Exercise Price No. of share options at year end Exercisable Outstanding 2 3 4 5 8 9 10 Total 13-Sep-07 24-Oct-07 10-Sep-08 03-Nov-09 27-Sep-10 21-Oct-11 20-Dec-11 13-Sep-14 24-Oct-14 10-Sep-15 03-Nov-16 27-Sep-17 21-Oct-18 20-Dec-18 3.60 3.60 2.40 2.95 2.34 2.15 2.15 311,236 140,000 725,500 1,505,000 1,925,000 1,785,000 140,000 6,531,736 311,236 140,000 725,500 1,505,000 1,925,000 - - 4,606,736 85 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iii. Austal Group Management Share Plans (AGMSP) The trustee holds a total of 4,350,601 shares at balance date on behalf of the plans represented by:   733,539 shares allocated under Plan 1 and Plan 2 with a weighted average price of $1.33 each, with no contractual life, and 3,617,062 share that are unallocated. Plan 1 The Group established the first Austal Group Management Share Plan (Plan 1) in 1998 so that directors and key managers could participate in owning shares in the Company. The features of the Plan are:        Austal offered loans to participants for up to 100% of the purchase consideration for their shares on a limited recourse basis. The shares were made available to the participants at market value. The Board determined the number of shares that were made available to each participant. The shares are required to be held by a trustee on behalf of the participant. Shares may not be transferred to a participant for at least 12 months. After this period, 20% of a participant’s shares will become eligible to be transferred provided any loan in respect of these shares has been repaid. An additional 20% will become eligible to be transferred to the participant at the end of each 12-month period thereafter on the same terms, so that a participant may hold 100% of the shares at the end of 5 years. Dividends on shares held under the Plan must be applied to pay interest on the loans. Participants with an interest in shares under the Plan have full voting rights. Interest on the loans is charged at a fixed rate of 6%, or such other rate as determined by the Board. Upon termination of employment or contract arrangements the shares must be sold and the loan (if any) repaid. Plan 2 & 3 Two additional share plans were established by the Group in 2000. (Plan 2 and Plan 3) All three plans are fundamentally similar in terms of operation with two main points of distinction being:   The interest on loans offered under Plan 1 is calculated as 6% per annum, whilst the interest on loans offered under Plan 2 and Plan 3 is calculated as 60% of any dividends paid on any shares acquired by the person to whom the loan was made. The definition of an ‘Eligible Person’ differs across the three plans. Plan 2 specifies an Eligible Person as a person who is employed as a Manager and Plan 3 specifies an Eligible Person is a person who is a contractor supplying services as a ‘Contract Worker’. As a point of distinction, Plan 3 does not require the Contract Worker to be in a management position whilst Plan 1 (which covers contractors and employees) and Plan 2 (employee only) specifies that an Eligible Person is a person who is a manager within the Austal Group. Although they are described as shares offered to the director or employee, they are in substance ‘options’ due to the limited recourse nature of the loan provided. Refer below for a description of the accounting for equity settled share based payments. Details of the movement in the number of options issued under the Austal Group Management Share Plan are shown below: 2014 ’000 2013 ’000 Summary of options granted under AGMSP Outstanding at the beginning of the year 1,351 1,351 Granted during the year Exercised during the year Forfeited during the year Outstanding at the end of the year All remaining options were fully vested and exerciseable throughout the year - - (617) 734 - - - 1,351 86 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED iv. CEO fixed remuneration share issue 23% of the CEO’s fixed remuneration is provided in shares which are subject to an 18 month holding period from the date at which the shares are released to the CEO and no performance condition exists as it is considered part of his base remuneration. 371,738 shares were issued during the year. The fair value of the shares was determined using the closing price on the grant date. The Board is recommending that the issue of shares, which form part of the CEO’s base salary, will be made in 2 equal instalments through the year immediately after the publication of the interim and full year accounts. The number of shares to be issued will be calculated based on the 6 month volume weighted average price (VWAP) of the shares immediately preceding the issue. The Board considers that this best reflects the intention of paying a proportion of the CEO’s salary as shares but avoids the administrative issues of issuing monthly as is the case for the cash component. This arrangement is subject to shareholder approval at the 2014 Annual General Meeting. v. Recognition and measurement - equity settled transactions The Group provides benefits to employees (including executive directors and key management personnel) of the Group in the form of share-based payments, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). There are currently two plans in place to provide these benefits, which extend to senior management and directors:   The Austal Group Management Share Plan (AGMSP); and The Long Term Incentive Plan (LTI Plan). The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by an external valuer using a Monte Carlo model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Austal Limited (market conditions) if applicable. Where non- market performance conditions must be satisfied, the number of entitlements included in expense recognition is adjusted to an estimate of the ultimate number of entitlements expected to vest. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting period). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of awards that, in the opinion of the directors of the Group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. The statement of comprehensive income charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. Shares in the Group held by the AGMSP are classified and disclosed as reserved shares and deducted from equity. 87 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED vi. Reco ognised shar re-based pay yment expen nses The e expense reco gnised for sh are based pa ayments durin ng the year is shown in thee table below: Share B Based Payments Expe ense Expe ense arising from equit ty-settled share-based ns d payment transaction 2014 ’000 2013 ’000 $ (383) $ (1,263) Note 30. Parent enti ity Information r relating to Au ustal Limited, the Parent en ntity, is detail ed below: Balance sheet Assets Current nt Non - Curren Total Liabilities Current nt Non - Curren Total Net Assets Equity Contributed E Equity Employee be enefiit reserve Asset revalua ation reserve Cash flow he edge reserve Retained ear rnings Total Income 2014 ’000 2013 ’000 $ 239,735 $ 290,917 176,776 112,054 $ 416,511 $ 402,971 $ (28,135) $ (46,052) (19,980) (27,741) $ (48,115) $ (73,793) $ 368,396 $ 329,178 $ 111,598 $ 111,328 6,750 8,247 8,675 233,126 3,887 14,162 11,340 188,461 $ 368,396 $ 329,178 Profit / (Loss ) after tax Total Compre ehensive Income $ 39,563 $ 39,563 840 840 88 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Note 31. Business c combination s No business s combination ns have taken n place within the Group in n the year end ded 30 June 2 2014. The Group a subsidiary A considered t acquired an 8 Austal Service to be materia 80% interest i e Darwin Pty L l for the Grou n KM Engine Ltd in the com up. ering (NT) Pt mparative yea ty Ltd and Hy ar ended 30 J draulink (NT) June 2013. Th ) Pty Ltd thro he transactio ugh its n was not Accounting f below. for business c combinations s in previous p periods has b been done in accordance w with the acco unting policy i. Acco ounting for b usiness com mbinations Busin busin acqui forme intere ness combina ess combina sition date fa er owners of t est in the acqu ations are acc tion shall be air values of th the acquiree a uiree. counted for us measured at he assets tran and the equit sing the acqu fair value, wh nsferred by th ty issued by th uisition metho hich shall be he acquirer, th he acquirer, a d. The consid calculated as he liabilities in and the amou deration trans s the sum of t ncurred by th unt of any non sferred in a he he acquirer to n-controlling For e fair va ach business alue or at the s combination proportionate n, the acquire e share of the r measures th e acquiree's i he non-contro dentifiable ne olling interest et assets. t in the acquir ree either at Acqui isition-related d costs are ex xpensed as in ncurred, and i included in ad dministrative expenses. When appro the G includ n the Group a opriate classif Group’s opera des the separ acquires a bus fication and d ting or accou ration of embe siness, it ass designation in nting policies edded deriva esses the fin n accordance s and other pe atives in host ancial assets with the cont ertinent cond contracts by t and liabilities tractual terms itions as at th the acquiree. s assumed fo s, economic c he acquisition . or conditions, n date. This business com equity interes mbination is a st in the acqui achieved in st iree is remea tages, the ac sured to fair v quisition date value at the a e fair value of acquisition da f the acquirer' ate through pr 's previously rofit and If the held e loss. Any c acqui be an chang be rem contingent con sition date. S n asset or liab ge to other co measured un nsideration to Subsequent c bility will be re omprehensive ntil it is finally o be transferr hanges to the ecognised in a e income. If th settled within red by the acq e fair value of accordance w he contingent n equity. quirer will be f the continge with AASB 13 t consideratio recognised a ent considerat 9 either in pro on is classified at fair value at tion which is rofit and loss d as equity, it t the deemed to or as a t should not Good contro gain i consid dwill is recogn olling interest s recognised deration trans nised if the ag t is in excess in profit and sferred. Refe ggregate of th of the net ide loss if the fai r to Note 19 f he considerati entifiable asse ir value of the for additional ion transferre ets acquired e net assets a information o ed and the am and liabilities acquired is in on goodwill re mount recogn s assumed. A excess of the ecognised by ised for non- lternatively a e aggregate the Group. Acqui isitions prior t to July 2009 w were account ted for using the purchase e method of a accounting. 89 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Directors’ declaration In accordance with a resolution of the directors of Austal Limited, I state that: In the opinion of the directors:  The financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including:   Giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the year ended on that date; and Complying with Accounting Standards (including the Australian Accounting Interpretations) and Corporations Regulations 2001.  The financial Statements and notes also comply with International Financial Reporting Standards as disclosed in Note 2. In the opinion of the directors, as at the date of this declaration, there are reasonable grounds to believe that the consolidated entity will be able to pay its debts as and when they become due and payable. This declaration has been made after receiving the declarations required to be made to the directors in accordance with sections 295A of the Corporations Act 2001 for the financial period ending 30 June 2014. On behalf of the Board. John Rothwell AO Chairman 26 August 2014 JHSV 3 & LCS 4 90 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Corporate governance statement Austal Limited, its Board of directors and senior management are committed to the best practices of corporate governance, ethical standards and risk management and the Group’s approach to corporate governance is summarised in this section of the report. This Corporate Governance Statement should be read in conjunction with the Directors’ Report on page 9. The Board of Austal Limited is responsible for guiding and monitoring of the consolidated entity on behalf of shareholders. The Board’s Audit and Risk subcommittee is tasked with the oversight and management of the Group’s corporate governance policies and procedures. The Austal Limited Corporate Governance Statement is now structured to specifically align with the ASX Corporate Governance Council’s (the Council) Principles and Recommendations, which are as follows: Principle 1. Lay solid foundations for management and oversight Principle 2. Structure the board to add value Principle 3. Promote ethical and responsible decision making Principle 4. Safeguard integrity in financial reporting Principle 5. Make timely and balanced disclosure Principle 6. Respect the rights of shareholders Principle 7. Recognise and manage risk Principle 8. Remunerate fairly and responsibly Principle 1 – Lay solid foundations for management and oversight The Board gives direction and exercises judgment in setting the Group’s objectives and overseeing their implementation. Responsibility for the operation and administration of the Group is delegated by the Board to the CEO and the executive management team. The Board ensures that this team is appropriately qualified and experienced to discharge their responsibilities and has in place procedures to assess the performance of the CEO and the executive management team. The Board’s functions include:  adopting a Strategic Plan for the Group, including general and specific goals and reviewing actual results against that plan, which is aimed at meeting stakeholders’ objectives and managing business risk;  establishing and maintaining policies directed to ensuring that the Group complies with the law and conforms to the highest standards of financial and ethical behaviour;  reviewing the Group’s reporting systems and internal controls (both operational and financial) together with appropriate monitoring of compliance activities to determine these systems and controls are adequate and appropriate;  ensuring that significant risks are identified, assessed, appropriately managed and monitored;  the appointment, performance assessment and, if necessary, removal of members of the executive management team;  determining and implementing appropriate delegations of authority from the Board to the management to enable their respective functions to be effectively carried out;  agreeing key performance indicators (both financial and non-financial) with management and monitoring progress against these indicators; and  reporting to shareholders. The performance of key executives is reviewed regularly against both measurable and qualitative indicators. Each year the Nomination and Remuneration Committee assesses the performance of key executives. The performance criteria against which they are assessed are aligned with the financial and non-financial objectives of the Group. 91 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Principle 2: Structure the Board to add value To ensure that the Board is well equipped to discharge its responsibilities it has established guidelines for the nomination and selection of directors and for the operation of the Board. Any proposed new director is nominated by the Nomination and Remuneration Committee and approved by the Board prior to being appointed. The appointment is until the next General Meeting of shareholders at which time the shareholders are required to approve the appointment. In accordance with the Council’s Recommendation 2.1, a majority of the Board are independent directors. The Board is made up of a Non-Executive Chair, one Executive director and three independent Non-Executive directors. As a result the Board considers those independent directors have a material impact on Board matters and the Group’s direction, and are therefore able to ensure that management acts in the best interests of the Group. The directors believe that the Board is well balanced, with a mix of expertise that ensures value for shareholders. Each year the Nomination and Remuneration Committee conducts a performance assessment for each Board member against both measurable and qualitative indicators. The performance criteria against which directors are assessed are aligned with the financial and non-financial objectives of the Group. Directors whose performance is consistently unsatisfactory may be asked to retire. The performance of the directors was assessed during the year in accordance with the above process and the Board is satisfied with the performance of the Company’s directors. Independence The Council guidelines provide that directors are considered to be independent when they are independent of management and free from any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with – the exercise of their unfettered and independent judgement. In the context of director independence, the Board considers ‘materiality’ from both the Group’s and the individual director’s perspective. The determination of materiality is based on the Council’s guidelines which include:  whether a director is a substantial shareholder of the Company, or affiliated with a substantial shareholder of the Company;  whether the director is employed or has previously been employed by the Company, the nature of that employment and the period (if any) between ceasing employment and commencing as a director;  whether the director has been a member or principal of an organisation that has provided services or consulted to the Group within the last 3 years;  whether the director is, or is affiliated with a material supplier to or customer of the Group; and  whether the director has a material contractual relationship with the Group other than as a director. The above matters, along with any other qualitative factors which point to the actual ability of the Director to have an influence in shaping the direction of the Group, are considered when determining each director’s independence. Based on the above criteria, the Board considers the following directors are independent: Name Position Dario Amara David Singleton Giles Everist Non-Executive Director Non-Executive Director Non-Executive Director Austal’s Non-executive Chairman is not classified as independent (as the term is used in the Council’s recommendations), however he is a founding director of the Company and possesses extensive Australian shipbuilding experience, from which Austal’s shareholders continue to benefit. Mr Rothwell has made a significant contribution to the development of the shipbuilding industry in Australia and continues to draw on his broad experience to add value to the Group. The Chairman’s position is reviewed regularly by the Nomination and Remuneration Committee. Following the most recent review and in light of the above unique skills and experience he brings to the Group, it remains the Board’s opinion that Mr Rothwell is the best candidate to Chair the Company. Directors are required to disclose any actual or potential conflicts or material personal interests on their appointment to the Board. These disclosures are required to be kept up to date. Directors with material personal interests in matters that are before the Board are excluded from consideration of the matter and from related voting processes. All directors are entitled to seek independent professional advice at the Group’s expense if required. 92 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Outside directorships The number of outside directorships held by directors is considered as part of his or her appointment and retention. Unless exceptional circumstances apply, the Group follows the Council’s guidelines for acceptance of outside directorships by Executive and Non-Executive Directors. None of the Company’s current directors have outside directorship commitments that exceed the Council’s guidelines. Nomination and Remuneration Committee The Nomination and Remuneration Committee has 3 members, comprised of two independent directors and the Non-executive Chairman. The Nomination and Remuneration Committee is chaired by David Singleton, an independent director. The Committee reviews and makes recommendations to the Board in relation to candidates for vacant Board positions, remuneration of directors and key executives, Board evaluation processes and succession planning. The Nomination and Remuneration Committee’s functions are described in its charter, which is reviewed and updated regularly and published on the Group’s website. Principle 3: Promote ethical and responsible decision-making Ethical standards and performance The Board acknowledges the need for continued maintenance of the highest standards of corporate governance practice and ethical conduct by all directors and employees of the Austal Group. The Group has adopted a Director Code of Conduct under which directors are expected to:  act honestly and in good faith;  exercise due care and diligence in fulfilling the functions of their office;  use their powers to act in the best interests of the Group as a whole;  avoid conflicts and make full disclosure of any possible conflict of interest;  comply with the law;  be independent in judgement and ensure all reasonable steps are taken to be satisfied as to the soundness of Board decisions;  encourage the reporting and investigating of unlawful and unethical behaviour; and  comply with the share trading rules and other Group policies. The Group also has an Employee Code of Conduct that applies to all employees across the Austal Group. The Employee Code of Conduct contains requirements that are similar to those contained in the Director Code of Conduct, adjusted to reflect the different roles and expectations arising out of various positions of employment within the Group. Share trading policy Directors and key management personnel are required to comply with the Group’s share trading policy, which may from time to time be adjusted by the Board and applies in addition to legislative requirements and the ASX Listing Rules. The Group’s share trading policy is published on its website and includes:  a restriction on trading in securities of Austal Limited shares to the period of four months following the release of half yearly and preliminary final reports. Directors and executive managers are also restricted from trading in Austal Limited shares for 24 hours following any announcement by the Company to the ASX;  any director or executive manager intending to buy or sell shares in the Company or any company in which the Company has an interest is required to notify the Chairman or the Company Secretary of his/her intentions before proceeding with the transaction; and  directors, managers and staff are not permitted to deal in the Company's securities if they are in possession of material information which is not available to the share market, but if it were, may impact the value at which the securities are traded. 93 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Diversity at Austal Austal recognises that developing a diverse workforce is critical in building its organisational capability and maintaining a high level of performance, and values the distinctive skills, experiences and perspectives each individual brings to the workplace. The Group is committed to ensuring all employees are treated with respect and given equal opportunities for employment and development, and the Board has adopted an Equity and Diversity policy which can be found on the Group’s website. Among other things, the Group’s diversity policy:  articulates how the Group considers diversity within the workforce will make a valuable contribution towards the Group’s continuous improvement and the achievement of goals; and  sets out the Board’s commitment to promoting a corporate culture which embraces diversity. The Group’s ability to achieve diversity within the workforce is restricted by the industry in which it operates, the significant majority of which is male. As there is a limited number of women who hold the particular fabrication, welding and production skills required by the bulk of the Group’s workforce, the ability to meet targets for gender diversity is necessarily restricted. In accordance with the Group’s Code of Conduct, employment and remuneration are based on merit, qualifications, skills and experience so that equally qualified personnel can be confident of their standing in the Group, and value to the Group, regardless of their gender, racial background, age, religious beliefs or other values. The Board therefore has not set specific targets for diversity requirements, but focuses on improving diversity through workplace practices such as:  the employment of international workers through 457 visas, and assistance in domiciling those workers in Australia upon visa expiry;  employment of personnel with particular needs (for example, persons with hearing impairments), both through the Commonwealth Rehabilitation Service and through direct recruitment ;  offering flexible working hours; and  employment of part time workers: The Group emphasises equal opportunity for employment. While there are currently no female Board members, in light of the sector in which the Group operates, women are relatively well represented in other roles. Women currently occupy professional, management and senior management roles across the business in the following numbers: Business unit Australia Operations US Operations Philippines Operations % of Senior management roles filled by women % of management roles filled by women % of professional roles filled by women 21% 4% 13% 14% 19% 16% 33% 23% 35% The Group has obtained certification of compliance with the Workplace Gender Equality Act 2012 (Cwlth) from the Federal Government’s Workplace Gender Equality Agency. A copy of the gender diversity report that the Group submitted to the agency can be found on the Group’s website. The Board will continue to embrace diversity within the Group’s workforce as the Group and its activities grow and appropriately skilled candidates are available. 94 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Principle 4: Safeguard integrity in financial reporting Audit and Risk Management Committee The Company’s Audit & Risk Management Committee has 3 members, all of whom are independent Non- executive directors. The Audit & Risk Management Committee is chaired by Dario Amara. The Committee also obtains advice on corporate governance and related financial matters from an independent academic consultant who attends Committee meetings as required. The Audit & Risk Management Committee’s functions are described in its charter, which is reviewed and updated regularly and published on the Group’s website. They include:    reviewing the Group’s financial reporting processes to ensure the integrity, accuracy and timeliness of the Group’s financial accounts; reviewing the internal controls, policies and procedures the Group uses to identify and manage business risks; the policies and procedures for ensuring compliance with relevant regulatory and legal requirements, and good corporate governance practice;  ensuring compliance with statutory reporting responsibilities;  assessing the effectiveness of the management of business risk and reliability of management reporting; and  reporting any significant deficiencies in the above to the Board. In addition to the above, the Audit & Risk Management Committee (in accordance with its Charter) annually reviews the performance of the external auditor on behalf of the Board, focussing particularly on:    the scope and rigour of the audit; the quality of the service provided, considered form the shareholders’ point of view; and the independence of the auditor. If the Board considers a change in auditor is necessary, it will make a recommendation to shareholders to do so. Such recommendation would be the subject of shareholder approval in a General Meeting. Principle 5: Make timely and balanced disclosure Continuous disclosure Austal Limited has established written policies and procedures on information disclosure. The focus of these procedures is on compliance with ASX disclosure commitments and improving access to information for all investors. The objective is to ensure information announced by the Company is timely, factual, clear and contains all information relevant to shareholders and potential investors. The Chief Executive Officer, with oversight from the Audit & Risk Committee, has responsibility for:  making sure that the Group complies with continuous disclosure requirements;  overseeing and co-ordinating disclosure of information to the stock exchange, analysts, brokers, shareholders, the media and the public; and  educating directors and staff on the Group’s disclosure policies and procedures and raising awareness of the principles underlying continuous disclosure. The Company releases all price sensitive information through the ASX, whether as part of regulatory reporting such as financial results, directors interests and changes in shareholdings, or other operational information that is relevant to shareholders or anyone considering investment in the Company. 95 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Principle 6: Respect the rights of shareholders Shareholder communication policy The Board is ultimately responsible for ensuring that the shareholders are informed of all major developments affecting the Group’s state of affairs. Information is communicated to shareholders through: the Annual Report;   the interim financial report;  disclosures made to the ASX;  notices and explanatory memoranda of the Annual General Meeting (AGM); and  the AGM. The Company posts all ASX announcements on its website immediately after they are published by ASX and maintains that information on the website for 4 years. Announcements include the full content of all presentations made to analysts and industry conferences, which are lodged with ASX and published prior to the presentation being given. It is Company policy for the auditor’s lead engagement partner to be present at the AGM in the event of questions about the conduct of the audit, the preparation and content of the auditors’ report, accounting policies adopted by the Group or auditor independence. The Company’s legal adviser is also present at the AGM. Principle 7: Recognise and manage risk Risk management and internal compliance and control The Board determines the Group’s ‘risk profile’ and reviews internal processes and procedures to satisfy itself that management has developed and implemented a thorough system of risk management and internal control. The Board delegates responsibility for undertaking and assessing risk management and internal control effectiveness to management, however it retains ultimate responsibility for this function and therefore requires management to regularly assess internal compliance, risk management and control procedures and report back to the Board on the efficiency and effectiveness of those procedures. The Group’s process of risk management and internal compliance and control includes:  continuously identifying and measuring risks that might impact upon the achievement of the Group’s goals and objectives, and monitoring the environment for emerging factors and trends that affect these risks;  formulating risk management strategies to manage identified risks, and designing and implementing appropriate risk management policies and internal controls; and  monitoring the performance, and continuously improving the effectiveness of risk management systems and internal compliance and controls.  The risk management programme addresses risks under the following categories:  business risks inherent to the shipbuilding industry;  operating risks associated with sales, design and production; financial risks; and   specific vessel risks. The Board oversees regular assessment of the effectiveness of risk management and internal compliance and control. In the past year, a focus on financial risk has led to the revision and updating of several risk management policies regarding treasury management, financial accounting, financial risk management and taxation and the employment of additional resources to ensure these issues are continually addressed and policies improved. The Board is satisfied with the executive’s approach to and management of the risks faced by the business, based on the measures adopted for addressing those risks. The Board receives monthly updates from management about the financial status of the Group and its controlled entities. The Board is comfortable that the declarations made by the CEO and CFO in accordance with s295A are based on a sound process. To ensure the appropriate level of confidence in this process, executives across the business are required to make similar declarations to the CEO before the declaration is made to the Board. 96 | AUSTAL LIMITED ANNUAL REPORT 2014 REPORT TO THE MEMBERS OF AUSTAL LIMITED Principle 8: Remunerate fairly and responsibly It is the Group’s objective to provide maximum stakeholder benefit from the retention of a high quality Board and executive team by remunerating directors and key executives fairly and appropriately with reference to relevant employment market conditions. The Group has implemented and will maintain a responsible, performance-based remuneration policy that is aligned with the long-term interests of its shareholders as set out in more detail in the Remuneration Report found at page 16. The key objectives of the remuneration policy are to:  strike the right balance between meeting shareholders’ expectations, paying our employees competitively, and responding appropriately to the regulatory environment;  motivate executives to pursue the long term success of the Group; and  clearly demonstrate the relationship between executives’ performance and remuneration, and the alignment of those 2 factors. The Group’s approach to remuneration, including the structuring of executive remuneration and the role of incentives, is set out in detail in the Remuneration Report. Only executives and employees are eligible to participate in the Group’s incentive schemes (whether those schemes are based on STI, LTI or employee share plans). Non-executive directors are paid a fixed fee which does not include equity-based remuneration, in order to maximise the benefit of their independence and eliminate the potential for conflicts of interest to arise. 97 | AUSTAL LIMITED ANNUAL REPORT 2014 REPOR RT TO THE M MEMBERS O OF AUSTAL L LIMITED Independ dent aud it report t to the me embers of f Austal L Limited 98 | AUSTA AL LIMITED ANN NUAL REPORT 2014 REPOR RT TO THE M MEMBERS OOF AUSTAL LLIMITED 99 | AUSTAAL LIMITED ANN NUAL REPORT 2014 SHAREHOLDER INFORMATION Shareholder information The following information was extracted from the Company’s register as at 22 August 2014. Distribution of shares 1 - 1000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Total Number of Number of % of Total holders units Issued Capital 1,406 1,914 708 834 72 697,036 5,339,322 5,499,713 22,981,871 312,026,991 0.20% 1.54% 1.59% 6.63% 90.04% 4,934 346,544,933 100.00% Twenty largest shareholders Rank Shareholder Number of % of Total holders Issued Capital 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Ltd Austro Pty Ltd Navigator Australia Ltd Onyx (WA) Pty Ltd Mr Vincent Michael O’Sullivan UBS Nominees Pty Ltd RBC Investor Services Australia Nominees Pty Limited Austal Group Management Share Plan Pty Ltd BNP Paribas Noms Pty Ltd Garry Heys & Dorothy Heys Mr William Robert Chambers Mirrabooka Investments Limited Lavinia Shipping Ltd Mossisberg Pty Ltd Lujeta Pty Ltd Kenny Nominees (NT) Pty Ltd Gregory McKechnie Total Substantial shareholders Rank Shareholder 1 2 3 4 5 6 HSBC Custody Nominees J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Ltd Austro Pty Ltd Navigator Australia Ltd Voting rights 55,850,870 54,921,985 41,721,882 32,841,970 32,200,745 27,870,610 9,817,570 8,650,000 6,699,324 5,535,282 4,355,531 3,948,971 2,844,670 2,625,650 2,550,000 2,280,000 1,883,945 1,300,000 1,240,783 1,112,575 16.12% 15.85% 12.04% 9.48% 9.29% 8.04% 2.83% 2.50% 1.93% 1.60% 1.26% 1.14% 0.82% 0.76% 0.74% 0.66% 0.54% 0.38% 0.36% 0.32% 300,252,363 86.66% Number of % of Total holders Issued Capital 55,850,870 54,921,985 41,721,882 32,841,970 32,200,745 27,870,610 16.12% 15.85% 12.04% 9.48% 9.29% 8.04% All ordinary shares issued by Austal Limited carry one vote per share without restriction. 100 | AUSTAL LIMITED ANNUAL REPORT 2014 CORPORATE DIRECTORY Corporate directory Directors Executive Directors Andrew Bellamy Non-Executive Directors John Rothwell Dario Amara David Singleton Giles Everist Auditors Ernst & Young The Ernst & Young Building 11 Mounts Bay Road Perth 6000 Western Australia Company Secretary Adrian Strang Registered office 100 Clarence Beach Road Henderson 6166 Western Australia Telephone: +61 8 9410 1111 Facsimile: +61 8 9410 2564 Share registry Advanced Share Registry Services 110 Stirling Highway Nedlands 6009 Western Australia Telephone: +61 8 9389 8033 Facsimile: +61 8 9389 7871 Cape Byron Launch of Cape Sorell Cape Byron 101 | AUSTAL LIMITED ANNUAL REPORT 2014

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