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Director's Report

ASC PTY LTD AND ITS CONTROLLED ENTITIES
DIRECTOR’S REPORT
For the year ended 30 June 2019

Your directors present their report on the consolidated entity (referred to hereafter as the “Group” or the “consolidated entity”) consisting of ASC Pty Ltd (the Company) and the entities it controlled at the end of, or during, the year ended 30 June 2019.

Directors

The following persons were directors of the Group during the entire financial year up to the date of this report:

Bruce James Carter
Dr Rosalind Vivienne Dubs
Paul John Rizzo
Loretta Anne Reynolds
Joycelyn Cheryl Morton
Hon Gary Gray AO
Stuart Paul Whiley

Geoffrey Roland Rohrsheim was appointed a director on 15 March 2019.

Principal activities

The principal activities of the Group during the course of the financial year ended 30 June 2019 are set out below.

No significant change in the nature of these activities occurred during the year.

Collins Class Submarine related activities:
The major submarine related activities include maintenance, design development, engineering and upgrading of six submarines for the Royal Australian Navy (RAN). These activities were undertaken for the Collins Class Submarine under the In Service Support Contract (ISSC).

Hobart Class Air Warfare Destroyer (AWD) related activities:
ASC is the main shipbuilder for the construction of the three AWDs for the Commonwealth of Australia (CoA). ASC is part of the Alliance Based Target Incentive Agreement (ABTIA) with other members of the AWD Alliance: the CoA represented by the Capability Acquisition and Sustainment Group (CASG) and Raytheon Australia. The ABTIA commits the alliance members to work as an integrated team to deliver the RAN's next generation warships.

Offshore Patrol Vessel (OPV) related activities:
ASC is a subcontractor to Luerssen Australia for the construction of the first two of 12 Arafura Class OPVs in South Australia.

Consolidated result

The consolidated profit of the Group for the financial year attributable to the shareholders of ASC Pty Ltd was $30,272,000 (2018: $31,996,000) after provision for income tax expense of $12,857,000 (2018 : $13,728,000).

Review of operations

Collins Class Submarine related activities:
The Company is currently in the second year of performance period three of the ISSC.

Hobart Class Air Warfare Destroyer (AWD) related activities:
Ship two (HMAS Brisbane) has been provisionally accepted by the customer in July 2018 and will exit its warranty period in July 2019. Ship three achieved Combat Systems light off in September 2018. It is expected to enter its Builders Sea Trials in July 2019 in preparation for its delivery in December 2019.

In previous years, a decision was made by the directors that it was probable that the forecast of the cost to complete the three AWDs would exceed contract revenues. As such, an expected loss was recognised in line with the former Australian Accounting Standard AASB 111 Construction Contracts and from 1 July 2019 AASB 15 Revenue from Contracts with Customers, The expected loss has been reviewed in the current period based on management's most recent forecast. A loss on this contract before tax of $24.5m has been recognised to date.

Offshore Patrol Vessel (OPV) related activities:
ASC executed a contract with Luerssen Australia on 14 November 2018 under which ASC is subcontracted to construct the first two of 12 Arafura Class OPVs in South Australia. ASC has commenced production activities.

Dividends - ASC Pty Ltd
The Directors declared an unfranked final dividend of $5.8m on 30 August 2019 for the year ended 30 June 2019.

Dividends paid during the financial year were as follows:

2019 $'000

2018 $'000

Final dividend for the year ended 30 June 2018 paid on 30 October 2018

14,100

10,900

Interim dividend for the year ended 30 June 2019 paid on 29 April 2019

12,400

5,100

Special dividend

500

-

27,000

16,000

On 13 December 2018, ASC Ply Ltd transferred the ownership of ASC Shipbuilding Pty Ltd to the CoA by way of an in-specie dividend. The net assets of ASC Shipbuilding on transfer were $98,000, which was the value attributed to the dividend. On 27 June 2019, an additional payment of $416,000 was made as a separation adjustment.

State of affairs
A new company, ASC OPV Shipbuilder Pty Ltd, was established on 10 August 2018. This company executed a contract with Luerssen Australia on 14 November 2018 under which ASC OPV is subcontracted to construct the first two of 12 Arafura Class OPVs in South Australia.

On 13 December 2018, ASC Pty Ltd transferred the ownership of ASC Shipbuilding Pty Ltd to the Commonwealth by way of an in specie dividend. This followed the Commonwealth announcement in June 2018 that “the Future Frigates would be designed by BAE Systems and built by ASC Shipbuilding at the Osborne Naval Shipyard. To ensure that BAE Systems is fully responsible and accountable for the delivery of the Future Frigates, ASC Shipbuilding will become a subsidiary of BAE Systems.”

Environmental regulation
The operations of the Group and the Company are subject to environmental regulation under both Commonwealth and State legislation in relation to activities undertaken on our sites in South Australia and Western Australia.

The Group is committed to achieving a high standard of environmental performance consistent with the requirements of AS/NZS ISO 14001:2016 Environment Management Systems (EMS), which forms part of ASC's corporate management system. All of the Group sites, comprised of the South Australian and Western Australian submarine facilities and the South Australian shipbuilding facility, have accreditation for AS/NZS ISO 14001:2016 Environment Management Systems.

The Group has complied with all applicable environmental regulations and site specific environmental license requirements. There was one environmental incident in the reporting period requiring official regulatory notification. However, this event did not result in material or significant environmental harm to the local environment.

Events subsequent to the end of the reporting period
There are no other matters that have arisen between the end of the financial year and the date of this report, including any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the economic entity, the results of those operations, or the state of affairs of the Group, in subsequent financial periods.

Likely developments
The AWD program will be delivered in the 2019/20 financial year. Construction activities for the OPV's will increase significantly, with the start of consolidation of the first OPV and start of production and keel laying for the second OPV.

Directors benefit
Since the end of the previous financial year, no director of the Group has received, or become entitled to receive, any benefit (other than reimbursement of expenses and the aggregate amount of remuneration received or due and receivable by directors shown in the consolidated accounts) because of a contract made by the Group, its controlled entities or a related body corporate with the director or with a firm of which the director is a member, or with an entity in which the director has a substantial interest.

Indemnification and insurance of directors and officers
a. Indemnification
The Group has agreed to indemnify the current and previous directors and officers of the Group for all liabilities to another person (other than the Group or a related body corporate) that may arise in their capacity as directors and officers of the Group and its controlled entities, except where the liability arises out of the conduct involving a lack of good faith. The agreements stipulate that the Group will meet, to the extent permitted by law, the full amount of any such liabilities, including costs and expenses.

b. Insurance premiums
Since the end of the previous financial year the Group, its directors and officers have paid insurance premiums in respect of directors' and officers' liability insurance contracts for current and former directors and officers, including executive officers of the Group and directors, executive officers and secretaries of its controlled entities. The insurance premiums cover directors and officers for actual losses incurred in their capacity as directors and officers of the Group, which are not indemnified by the Group and which the director or officer becomes legally obligated to pay on account of certain claims made against him/her individually or otherwise. The terms of the insurance policy prohibit disclosure of the amounts of the premium payable.

Lead auditor's independence declaration
The Auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out in Independent Auditor's Report.

Rounding of amounts
The consolidated entity is of a kind referred to in Instrument 2016/191, issued by the Australian Securities and Investment Commission, relating to the 'rounding off' of amounts in the financial report. Amounts in the financial report have been rounded off to the nearest thousand dollars in accordance with the Instrument unless otherwise stated.


Signed in accordance with a resolution of directors.

Bruce James Carter Signature

Bruce James Carter
Director

Stuart Paul Whiley Signature

Stuart Paul Whiley
Director

Adelaide
25 September 2019