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 2020
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
Stuart Paul Whiley
Geoffrey Roland Rohrsheim
The Hon Gary Gray AO was a director from the beginning of the financial year until his resignation on 11 March 2020.
The principal activities of the Group during the course of the financial year ended 30 June 2020 are set out below. No significant change in the nature of these activities occurred during the year.
CCSM related activities:
The major submarine related activities include maintenance, design development, engineering and upgrading of six submarines for the RAN. These activities were undertaken for the CCSM under the ISSC.
Hobart Class 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 CASG and Raytheon Australia. The ABTIA commits the alliance members to work as an integrated team to deliver the RAN's next generation warships.
OPV related activities:
ASC is a subcontractor to Luerssen Australia for the construction in SA of the first two of 12 Arafura Class OPVs in SA.
The consolidated profit of the Group for the financial year attributable to the shareholders of ASC Pty Ltd was $22,557,000 (2019: $30,272,000) after provision for income tax expense of $9,683,000 (2019: $12,857,000).
Review of operations
CCSM related activities:
The Company completed the third and final year of PP3 of the ISSC and is currently in negotiations with CASG for entry into PP4 commencing financial year 2020/21.
Hobart Class AWD related activities:
Production has been completed for delivery of Ship 3 (Sydney) in December 2019. ASC, together with the Alliance, continues to close out obligations relating to the current scope of deliverables, primarily the warranty and delivery certificate scopes.
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) 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 $21.1m has been recognised to date.
OPV related activities:
Production on the first OPV continues, with the engine room capping completed in September 2019 and half ship consolidation completed in April 2020. Production on the second OPV commenced on June 2019, with ASC achieving contractual keel laying in November 2019 and first block join completed in April 2020.
As at 30 June 2020, the program is approximately 44.1% complete. Due to the terms and conditions within the contract, management has assessed that the program is loss making.
In accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets and AASB 15 Revenue from Contracts with Customers, a loss provision of $10.7m has been recognised in the year ended 30 June 2020. This reflects management's assessment of the costs required to fulfil the remaining obligations under the contract less any expected Contract Change Proposal received from the customer.
Dividends - ASC Pty Ltd
The Directors declared an unfranked final dividend of $3.2m on 27 August 2020 for the year ended 30 June 2020.
Dividends paid during FY19/20
Final dividend for the year ended 30 June 2019 paid on 29 October 2019
Interim dividend for the year ended 30 June 2020 paid on 29 April 2020
State of affairs
The resilience of the workforce was demonstrated in early 2020, with the emergence of the COVID-19 global pandemic. The health and well-being of employees was of utmost importance and a leadership team was established to ensure business continuity. The appropriate policies and procedures were implemented in corporate and shipyard environments to mitigate the potential risk and enable employees to carry out their roles effectively.
The pandemic has had a significant global economic impact, however the procedures implemented by the Group have ensured an uninterrupted schedule for the CCSM and OPV Programs during the period. Although certain costs have increased, COVID-19 has not had a significant impact on the supply chain nor the Group’s principal activities for the year ended 30 June 2020.
The Group will continue to monitor the impact of COVID-19 and proactively manage to reduce the risk of disruption to submarine availability.
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 SA and WA.
The Group is committed to achieving a high standard of environmental performance consistent with the requirements of AS/NZS ISO 14001:2016 EMS, which forms part of ASC's corporate management system. All of the Group sites, comprised of the SA and WA submarine facilities and the SA shipbuilding facility, have accreditation for AS/NZS ISO 14001:2016 EMS.
The Group has complied with all applicable environmental regulations and site specific environmental license requirements.
Events subsequent to the end of the reporting period
On 22 July 2020, the Australian Taxation Office (ATO) issued Taxation Determination TD 2020/6 (TD 2020/6) which outlines the ATO’s views regarding the application of certain aspects of the demerger relief provisions in Division 125 of the Income Tax Assessment Act 1997 (Cth). TD 2020/6 applies both retrospectively and prospectively and, as a consequence, there is now some uncertainty as to whether demerger relief applied to certain restructures of the ASC Group undertaken by its Shareholder. ASC is currently assessing whether TD 2020/6 could have any impact in this regard.
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
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 on page 37.
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.