AUSTAL LIMITED — Annual Report 2015

Aug 25, 2015

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A U STAL LIMITED 2015 ANN U AL RE P ORT

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 Remuneration Report ............................................................................................................................................... 15 Auditor independence and non-audit services ......................................................................................................... 33 Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2015 ....... 34 Consolidated statement of financial position as at 30 June 2015 ............................................................................ 35 Consolidated statement of changes in equity for the year ended 30 June 2015 ..................................................... 36 Consolidated statement of cash flows for the year ended 30 June 2015 ................................................................ 37 Notes to the financial statements ............................................................................................................................. 38 Directors’ declaration ............................................................................................................................................... 96 Independent audit report to the members of Austal Limited .................................................................................... 97 Shareholder information ........................................................................................................................................... 99 Corporate governance statement ............................................................................................................................ 99 Corporate Directory ................................................................................................................................................ 100

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GHAGHA-1 – ONE OF TWO 45M FAST CREW BOATS BUILT FOR ABU DHABI NATIONAL OIL COMPANY (ADNOC)

1 | AUSTAL LIMITED ANNUAL REPORT 2015

Index to the notes to the financial statements

Basis of prep aration ....... ..................... .................... .................... ..................... .................... .................... ................	Basis of prep aration ....... ..................... .................... .................... ..................... .................... .................... ................	Basis of prep aration ....... ..................... .................... .................... ..................... .................... .................... ................	38
Note	1 .	Corpor ate Informatio n ................... ..................... ..................... ...................... ..................... .................	38
Note	2 .	Basiso f preparation ...................... ..................... ..................... ...................... ..................... .................	38
Current year performance ................... .................... .................... ..................... .................... .................... ................			45
Note	3 .	Operat ing segments ..................... ..................... ..................... ...................... ..................... .................	45
Note	4 .	Revenu e ................. ...................... ..................... ..................... ...................... ..................... .................	49
Note	5 .	Other i ncome and ex penses ......... ..................... ..................... ...................... ..................... .................	50
Note	6 .	Earning s per share . ...................... ..................... ..................... ...................... ..................... .................	52
Note	7 .	Reconc iliation of net profit after tax to net cashf lows from ope rations ......... ..................... .................	53
Note	8 .	Dividen ds paid andp roposed ....... ..................... ..................... ...................... ..................... .................	54
Note	9 .	Income and other tax es ................ ..................... ..................... ...................... ..................... .................	55
Capital struc ture ............. ..................... .................... .................... ..................... .................... .................... ................			59
Note	1 0.	Casha nd cash equiv alents ........... ..................... ..................... ...................... ..................... .................	59
Note	1 1.	Interes t bearing loan s and borrowi ngs ............... ..................... ...................... ..................... .................	60
Note	1 2.	Contrib uted equity an d reserves ... ..................... ..................... ...................... ..................... .................	62
Note	1 3.	Govern ment grantsr elating to ass ets ................ ..................... ...................... ..................... .................	64
Working cap ital		.............. ..................... .................... .................... ..................... .................... .................... ................	65
Note	1 4.	Tradea nd other rece ivables ......... ..................... ..................... ...................... ..................... .................	65
Note	1 5.	Constru ction contrac ts in progress .................... ..................... ...................... ..................... .................	67
Note	1 6.	Invento ries and work in progress .. ..................... ..................... ...................... ..................... .................	67
Note	1 7.	Tradea nd other pay ables ............. ..................... ..................... ...................... ..................... .................	68
Infrastructur e &		other ass ets ............... .................... .................... ..................... .................... .................... ................	69
Note	1 8.	Propert y, plant ande quipment ...... ..................... ..................... ...................... ..................... .................	69
Note	1 9.	Intangi ble assets ..... ...................... ..................... ..................... ...................... ..................... .................	72
Note	2 0.	Collate ral ................ ...................... ..................... ..................... ...................... ..................... .................	75
Other liabiliti es ............... ..................... .................... .................... ..................... .................... .................... ................			76
Note	2 1.	Provisio ns ............... ...................... ..................... ..................... ...................... ..................... .................	76
Financial ris k manageme nt ................. .................... .................... ..................... .................... .................... ................			78
Note	2 2.	Fair va lue measurem ents ............. ..................... ..................... ...................... ..................... .................	78
Note	2 3.	Financ ial risk manag ement ........... ..................... ..................... ...................... ..................... .................	82
Note	2 4.	Derivat ive financial in struments an d hedging .... ..................... ...................... ..................... .................	86
Unrecognise d items ....... ..................... .................... .................... ..................... .................... .................... ................			88
Note	2 5.	Commi tments and co ntingencies .. ..................... ..................... ...................... ..................... .................	88
Note	2 6.	Events after the bala nce date ....... ..................... ..................... ...................... ..................... .................	88
The Group,	management and related parties ......... .................... ..................... .................... .................... ................		89
Note	2 7.	Parent interests in su bsidiaries ..... ..................... ..................... ...................... ..................... .................	89
Note	2 8.	Related party disclos ure ............... ..................... ..................... ...................... ..................... .................	89
Note	2 9.	Key ma nagement pe rsonnel comp ensation ....... ..................... ...................... ..................... .................	89
Note	3 0.	Shareb ased paymen ts ................. ..................... ..................... ...................... ..................... .................	90
Note	3 1.	Parent entity ........... ...................... ..................... ..................... ...................... ..................... .................	95

2 | AUSTAL LIMITED ANNUAL REPORT 2015

Chairman’s report

It is my pleasure to present the 2015 Annual Report to you on behalf of the Board of Austal Limited.

The past 12 months represented another year of embedding sustainable operational improvements from FY2014 and further strengthening of the balance sheet through the generation of cash and repayment of debt.

Highlights from the year are as follows:

• $1.4 billion Group Revenue exceeded initial guidance of $1.2 billion and subsequent guidance of $1.35 billion.

• Concluded the sale of the 102 metre stock trimaran to Condor ferries and used part of the proceeds to repay debt.

• Maintained a strong focus on cash generation which was also used to repay debt.

• Littoral Combat Ship (LCS) 6 completed acceptance trials with the US Navy and delivery occurred post balance date. LCS 6 is the first LCS that Austal has built as prime contractor.

• Confirmed funding for the final two Littoral Combat Ships under the original contract with the US Navy.

• The US Navy added an option for an additional LCS (LCS 26) under the existing contract.

• Secured new shipbuilding contracts with an undisclosed Asian operator and Caspian Marine Services from Azerbaijan.

• Increased the EBIT contribution and EBIT margin of the Service and Sustainment business in the USA.

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 $53.156 million in FY2015, compared to $31.859 million in FY2014. FY2015 earnings before interest, tax, depreciation and amortisation were (EBITDA) $109.069 million for the year compared to $79.338 million in FY2014.

• The improvement in earnings was driven by stronger shipbuilding margins in Australia and one off non-cash foreign exchange gains relating to inter-company loans. These loans have now been converted to equity.

• Revenue for the year grew by 26 per cent from $1,122.863 million in FY2014 to $1,414.888 million.

• US operations were the largest contributor to revenue, delivering $1,119.703 million (FY2014: $933.615 million) and $58.429 million in earnings before interest and tax (EBIT) (FY2014: $61.682 million) as Austal continued to perform work on its major LCS and Joint High Speed Vessels (JHSV) contracts for the US Navy.

• Australian operations delivered another improvement in results as construction of the Cape Class Patrol Boat fleet nears completion with $211.808 million in revenue (FY2014: $241.912 million) and $31.774 million EBIT (FY2014: $16.684 million).

• Philippines Operation reported a $0.992 million EBIT (FY2014: $2.703 million).

• Group net debt was reduced to $6.094 million (FY2014: $71.496 million) after generating operating cash flow of $110.434 million.

Financial summary

Year ended 30 June Revenue* EBITDA Depreciation Amortisation EBIT Net Interest (Expense) / Income Operating Profit Before Tax Tax (Expense)/Benefit Operating Profit After Tax % EBIT/Revenue Basic Earnings Per Share ($ per share) Net Assets Return on Invested Capital (%)	2015 2014 $’000 $’000 1,414,888 $ 1,122,863 $ 109,069 $ 79,338 $ (22,736) $ (21,593) $ (1,530) (2,180) 84,803 $ 55,565 $ (4,110) (8,421) 80,693 $ 47,144 $ (27,537) $ (15,285) $ 53,156 $ 31,859 $ 6.0% 4.9% 0.16 $ 0.09 $ 512,399 $ 433,232 $ 10.8% 9.1%

*Excludes other income

EBIT and EBITDA are non-IFRS measures. The information is unaudited but is extracted from the audited financial statements. EBIT is used to understand segment performance and EBITDA is used by management to understand cash flows within the group.

3 | AUSTAL LIMITED ANNUAL REPORT 2015

Board and Executive management

Jim McDowell joined the Board as an Independent Director in December 2014 and brings extensive defence industry experience to the team.

The Executive management team has remained stable and focussed on executing strategic initiatives.

People

Finally I would like to thank and acknowledge our employees for their consistent loyalty and hard work during the year that has made our achievements possible. I extend my thanks to shareholders for your ongoing support of Austal. It is immensely pleasing to continue to deliver improved operational and financial performance to drive shareholder value.

Strategy and governance

The Board has continued its active engagement in reviewing the development of Group strategy proposed by Executive management.

The annual review of the Group’s risk management framework was conducted with involvement by the Audit and Risk committee and Remuneration and Nomination committee to ensure that the necessary controls and governance are in place, fit for purpose and amended as required.

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John Rothwell AO Chairman

Austal has demonstrated success in leveraging its intellectual property in high speed ferries and defence vessels to penetrate adjacent markets, with the recent contracts for high speed crew transfer vessels into UAE and Azerbaijan exemplifying the initiative.

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AUSTAL USA

4 | AUSTAL LIMITED ANNUAL REPORT 2015

Chief Executive Officer’s report

Record Revenue and Profit

Austal delivered record NPAT of $53.156 million from record revenue of $1.4 billion in FY2015, which was underpinned by significant profit generation in the USA and Australia segments.

A major milestone was achieved in the USA with LCS 6 completing acceptance trials in June and delivery to the US Navy being completed post balance date in August 2015.

LCS 6 is the first of the LCS that Austal has delivered as prime contractor to the US Navy.

Completion of LCS 6 was more difficult than planned, which will also impact LCS 8 and 10, and this has been reflected in a reduction in USA EBIT margin in FY2015. Substantial knowledge has been garnered from the completion of LCS 6 that will deliver improved performance in the construction of future ships.

Strong generation of cash has further strengthened the balance sheet and supported the return to dividends (1 cent interim dividend and a final dividend of 3 cents, bringing the year to a total of 4 cents) after a three year hiatus.

Strategy

The strong profit is testament to sustained focus on the core strategy.

Balance sheet gearing was reduced year on year with a substantial reduction in net debt from $71.496 million to $6.094 million. This was achieved through strong operational cash generation and the sale of the 102 m trimaran ferry to Condor Ferries in the UK.

The USA is a core market for Austal and the US Navy’s commitment to the LCS program is articulated by the shipbuilding plan for a total fleet of 52 LCS (to be renamed fast frigate after LCS 32) and is being realised with the appropriation of funds for LCS 22 & 24 by US Congress and a contract extension to include an eleventh ship (LCS 26) which is expected to be funded in FY2016.

The confirmation of LCS 22 & 24 added ~ US$700 million to the order book which secures work through CY2020.

The USA segment has achieved significant milestones in the development of a substantial vessel sustainment business with maintenance planning and execution contracts awarded and $1,119.703 million of revenue being generated in FY2015.

Efficient and hence productive completion of the Cape Class Patrol Boat fleet for the Australian Border Force demonstrates the benefits that can

flow from continuous shipbuilding activities. This perfectly aligns with the Federal Government’s recent Shipbuilding Policy announcement (August 2015) to transition into a continuous surface shipbuilding procurement pattern with > $40 billion of new shipbuilding projects scheduled over the next decade.

Austal’s growth has been underpinned by the core skill of its people to innovate and to apply new technologies in the commercial world to generate an economic return.

This skill is a critical enabler to our strategy of expanding into new or adjacent products and customer markets.

The benefits of this strategy are already being realised and are exemplified by projects such as the High Speed Support Vessel (HSSV) contract for the Royal Navy of Oman, and the award of contracts to three customers for high speed crew transfer vessels for the oil and gas industry.

Technology transfer to the Philippines Operation and integration of the Philippines into the supply chain for the Group has increased the competitiveness of the Group.

Prudent cash management is embedded in decision making to ensure a balanced approach to operational activities, investment in future growth and capital management. This will enhance Austal’s ability to deliver on the record amount of work in progress and strategic objectives.

Strategic objectives for the year ahead are productivity enhancements and cost reduction initiatives across the Group, growing the Sustainment business and growth in the Australian market.

People

Our Values of Excellence, Customer, Integrity and Teamwork are unchanged and continue to be the basis for many tangible and sustainable business successes throughout the year.

There has been an increased focus on Human Resources Strategy with succession planning reviewed and developed across the top 3 tiers of management and critical skill areas, and capability development and recruitment to deepen the talent pool. This has presented a new round of opportunities for many employees to grow and the organisation is stronger and more sustainable as a result.

There will be focus on increased female participation in the workplace as a core diversity initiative in the year ahead.

5 | AUSTAL LIMITED ANNUAL REPORT 2015

I thank all o f our employ e es and othe r stakeholder s for their ha r d work, devotion to excellence, c ommitment and loyalty.

Outlook

The order b o ok stands a t $3.1 billion a t 30 June 2015 which sustains work through CY2020.

The longevi t y of the LCS and JHSV s h ipbuilding programs in the USA is c lear with confirmation of orders, awa r d of contrac t extensions, Congressio n al funding f o r the confirm a tion / award of co n tracts in fut u re years, inv e stment in fleet sustainment capability, and US N avy investment in research a n d developm e nt to increase th e capability of both the LC S and JHSV platforms to meet future r equirements.

The Australian Federal G overnment’s recent policy anno u ncement to s ustain Austr a lian shipbuilding capability th r ough contin u ous shipbuilding procuremen t and acceler a tion of the Offshore Pa t rol Vessel c o ntract, and future frigate prog r am to replac e the ANZA C fleet, represent s u bstantial op p ortunities fo r Austal in Australia.

Austal’s de m onstrated p e digree in pe n etrating domestic and export markets and evolution into a successful p rime contractor for two m a jor US Navy progr a ms (LCS & JHSV) that will represent approximat e ly 15% of th e US Navy fl e et, place the Group i n good stead to compete f o r the Offshore Pa t rol Vessel a n d ANZAC fl e et replacemen t programs.

The lower Australian doll a r has increased the competitive n ess of the A u stralian bus i ness by reducing th e cost of Australian content in export markets.

A weaker A U D also impr o ves the translation and repatriation o f earnings f r om the USA and Philippines b usiness unit s .

The Middle E ast is a thir d core marke t and we continue to p ursue sever a l credible in i tiatives.

Austal main t ains a watching brief on t h e commercial ferry market in Europe and Asia with several sales leads in es t ablished ma r kets. Austal has c ommitted a m odest inves t ment to applying cle a n fuel technologies to fu r ther innovate ou r product off e ring. The lo w cost base in the Philip p ines means that Austal i s well positioned t o seize upon opportunitie s if they eventuate.

Austal is p u rsuing man y opportunities in core markets, which reflects a healthy outlook and the low Australian dollar pl a ces the Gro u p in a highly competitiv e position.

The streng t h of the ord e r book and t h e sustained operational improveme n ts will transl a te into greater ca s h generatio n which enable prudent capital ma n agement, in v estment in s trategic growth initi a tives and re t urns to shar e holders.

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Andrew Bellamy Managing D irector and C hief Execut i ve Officer

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LCS 6 – USS J ACKSON

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Aremiti Ferry 2 – built in the Phhilippines

6 | AUSTAL LIMITED ANNUAL REPORT 2015

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	2015 2014 $'M $'M 1,119.703 $ 933.615 $ 58.429 61.682 5.2% 6.6%

Austal’s US operations were the most significant contributor to the Group result again in FY2015.

EBIT was ~ $2 million lower and EBIT margin reduced year over year from 6.6% to 5.2% as a result of issues arising from LCS 6, which is the first LCS Austal is building as prime contractor. There will be a flow on impact to LCS 8 and 10 due to the staggered but concurrent production of the three vessels.

The ability to generate a substantial business unit EBIT whilst absorbing lower margin results on LCS 6 demonstrates the resilience of the business and the benefit of having a broad portfolio of projects under construction at any one point in time. 17 vessel construction projects contributed to profit generation in FY2015.

The total USA workforce was maintained within the target range of 4,100 – 4,200 with a sharp focus on skills development and identifying and exploiting opportunities for productivity improvements which is continuing to drive Austal along the learning curve of the two vessel programs.

Stringent cash management is embedded in management decision making and capital expenditure was restricted to sustaining activities in FY2015.

Two more vessels were added to the order book after funds for LCS 22 & 24 - the ninth and tenth LCS under the US$3.5 billion contract – were appropriated by Congress in March 2015. These projects added a further ~ US$700 million to the order book and secured funding for the LCS program through CY2020.

The US Navy also extended the existing block buy contract to include an additional option for LCS 26 which is expected to be funded by Congress in FY2016.

The addition of the option for LCS 26; an eleventh ship under the block buy contract; demonstrates the US Navy’s strong support for the high performance,

low cost LCS and is consistent with their stated plans to build a total fleet of 52 ships across two variants.

US Congress also appropriated funds for an eleventh JHSV during FY2015 which is expected to result in an extension of the original block buy contract for 10 ships. It is anticipated that a contract modification for the award of JHSV 11 will occur during FY2016.

There was significant progress in both major programs during the year from a construction perspective.

JHSV 4, USNS Fall River was delivered in September 2014 after successfully completing acceptance trials in July 2014, JHSV 5, USNS Trenton was launched in September 2014 and delivered in April 2015, JHSV 6, USNS Brunswick was christened and launched in May 2015.

The JHSV programme is progressing well with a mature vessel design and a stabilised bill of materials. Exploiting productivity initiatives is the major focus to drive the business along the learning curve which takes cost out of the programme.

USS Jackson (LCS 6) – the first LCS being built by Austal as the prime contractor under the 10-vessel contract, completed US Navy acceptance trials in June 2015 and delivery to the US Navy was completed post balance date in August 2015.

Six additional LCS are at various stages of construction. USS Montgomery (LCS 8) is preparing for sea trials later this year while USS Gabrielle Giffords (LCS 10) was recently christened. USS Omaha (LCS 12) is preparing for launch in CY2015 and final assembly is well underway on USS Manchester (LCS 14). Modules for USS Tulsa (LCS 16) and USS Charleston (LCS 18) are both under construction. The first cutting of metal for USS Cincinnati (LCS 20) is scheduled for later this year.

Austal has grown revenue and earnings from Sustainment activities with the award of the LCS Planning Yard Contract in FY2015 H1 to the Bath Iron Works / Austal team. Austal is already delivering work packages under new contracts, is negotiating teaming agreements for additional scopes of work and is developing its strategy for increased global reach of Austal vessels deployed by the US Navy.

Australian operations

Year ended 30 June Revenue EBIT EBIT Margin	2015 2014 $'M $'M 211.808 $ 241.912 $ 31.774 16.684 15.0% 6.9%

7 | AUSTAL LIMITED ANNUAL REPORT 2015

Austal’s Australian operations delivered another significant increase in EBIT and EBIT margin in FY2015.

This result was again driven by efficient construction of the $330 million Cape Class Patrol Boat (CCPB) fleet in the Henderson shipyard for Australian Border Force. The efficiencies extracted over the four year construction period demonstrate the benefits from continuous shipbuilding with a mature vessel design.

CCPB 3 – 6 were all delivered to the Australian Border Force during FY2015. CCPB 7 was delivered subsequent to balance date and the final vessel is due to be delivered in August 2015.

CCPB 1 and 2 returned to the Henderson shipyard for their first major dockings since delivery to the customer in FY2013 and FY2014 respectively, as part of the 5 years in service support contract for the entire CCPB fleet.

Design and construction of the two 72 metre High Speed Support Vessels (HSSV) for the Royal Navy of Oman continued to advance and will sustain construction activity into late CY2016.

Austal entered into a contract with Caspian Marine Services from Azerbaijan to construct a 70 metre fast crew boat to service oil and gas exploration and production platforms operated by the State Oil Company of Azerbaijan and British Petroleum (BP).

The 30 knot, 150 passenger catamaran will be jointly built in Austal’s Philippines and Henderson shipyards with delivery expected in Australia in CY2016. The project will support deeper integration of supply chain and production activities between the two shipyards.

Philippines operations

Year ended 30 June Revenue EBIT EBIT Margin	2015 2014 $'M $'M 38.743 $ 33.767 $ 0.992 2.703 2.6% 8.0%

The Philippines Operations completed the customisation of the 102 m trimaran ferry that was sold to Condor ferries in August 2014, completed construction of a 26 metre wind farm vessel which was delivered to the United Kingdom in the second quarter of FY2015 and substantially constructed two high speed crew transfer vessels for an oil and gas customer in the United Arab Emirates. Both vessels were contractually delivered to the customer post balance date.

The award of another two high speed crew transfer vessels added ~ US$25 million to the Philippines order book and provides contracted work through FY2016.

The award of four orders for high speed crew transfer vessels across the last two financial years demonstrates further diversification of Austal’s

customer markets and application of intellectual property to new products.

Philippines Operations continued to support Sustainment activities by providing personnel to undertake docking of Austal vessels in Europe.

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.

Components were manufactured and shipped from the Philippines to Australia during FY2015 and this approach is now a core element of the construction strategy for current vessel orders.

Austal is pursuing several credible leads with existing high speed vessel operators in Europe for large vehicle passenger ferries with a focus on green energy systems. The Philippines Operations is well established to exploit these market opportunities if they are realised.

Safety performance

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.

Our goal of Zero Harm means no injuries to anyone, ever and whilst the target is aspirational, it remains a target to strive for.

The Shipbuilders Council of America (SCA) recognised Austal USA’s ongoing commitment to safety with an Award for Improvement in Safety for CY2014 recognising a year on year reduction in the total recordable incident rate of 10% or more.

The SCA is a US national trade association that represents 41 companies that own and operate over 120 shipyards across the USA.Austal reports safety performance in accordance with AS1885.1.

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107.0
60.1 65.8
38.9
17.8 14.3 16.0 19.7 21.7 14.1
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
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 2.10
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Lost Time Injury Frequency Rate
(per million hours worked)
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8 | AUSTAL LIMITED ANNUAL REPORT 2015

Directors’ report

The Board of Directors of Austal Limited submit their report for the year ended 30 June 2015.

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.

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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.

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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.)

Dario resigned as a Director on the 30 October 2014.

9 | AUSTAL LIMITED ANNUAL REPORT 2015

Jim McDowell – Independent Director

Jim brings a strong, relevant industry background to Austal, with more than 30 years of experience in the defence and aerospace sectors. He was most recently Chief Executive Officer at BAE Systems Saudi Arabia operations. Prior to this, Jim was Chief Executive Officer at BAE Systems Australia where he oversaw a significant expansion of its operations.

Jim joined BAE Systems in 1996 and held senior management positions prior to his CEO roles. Before commencing at BAE Systems, Jim worked for 18 years at aerospace company Bombardier Shorts in legal, commercial, and marketing positions.

Jim left BAE Systems Saudi Arabia in 2013 to return to Australia. He has taken a strong interest in the continuing education sector, and is currently Chairman of the Australian Nuclear Science and Technology Organisation. Jim is a Non-Executive Director at Codan Limited. Jim is Chancellor elect of the University of South Australia.

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Jim holds a Bachelor of Laws from the University of Warwick in England.

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).

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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.

10 | AUSTAL LIMITED ANNUAL REPORT 2015

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.

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Giles is currently a Non-Executive Director of Decmil Group Limited, LogiCamms Ltd and Macmahon Holdings Limited.

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.

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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.

11 | AUSTAL LIMITED ANNUAL REPORT 2015

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 John Rothwell Andrew Bellamy Dario Amara David Singleton Giles Everist Jim McDowell		Number
	Ordinary Shares 32,200,745 478,474 - 28,600 20,000 -	Options^ Performance Rights^^ - - 280,000 666,703 - - - - - - - -

^This represents options granted from the Employee Option Share Plan (ESOP) (refer to Note 30 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 30 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 $53.156 million after income tax (FY2014: $31.859 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

A dividend of 1 cent per share was paid after the FY2015 half year results (FY2014 Half year: Nil) and a further dividend of 3 cents per share has been proposed for FY2015 (FY2014: Nil).

Significant events after the balance date

A fully franked dividend of 3 cents per share (FY2014: Nil) has been proposed.

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 2015

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 2015.

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 30 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

The parent entity has agreed to indemnify its auditors, Ernst & Young, to the extent permitted by law, 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:

Number of meetings held Number of meetings attended: John Rothwell Andrew Bellamy Dario Amara1 David Singleton Giles Everist Jim McDowell2		Meeting
	Austal Limited Board 6 6 6 2 6 6 3	Nomination & Audit & Risk Remuneration Committee Committee 4 3 - 3 - - 1 - 3 3 4 3 2 -

1. Dario Amara retired as a director of the Company (and Chairman of the Audit & Risk Committee) on 30 October 2014. Giles Everist replaced him as Chairman of the Audit & Risk Committee.

2. Jim McDowell was appointed as a director on 31 December 2014 and has attended all Board meetings since his appointment. He joined the Audit & Risk Committee in February 2015 and has attended all Audit & Risk Committee meetings since his appointment.

13 | AUSTAL LIMITED ANNUAL REPORT 2015

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 Nomination and Remuneration Dario Amara[2] David Singleton[1] Giles Everist[1] Giles Everist David Singleton John Rothwell Jim McDowell

1. Designates the Chairman of the committee.

2. Designates resigned during the year

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.

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Cape Class Patrol Boats

14 | AUSTAL LIMITED ANNUAL REPORT 2015

Remuneration Report

This Remuneration Rep o rt for the ye a r ended 30 June 2015 ou t lines the re m uneration ar r angements o f the Company a n d the Group in accordan c e with the r e quirements o f the Corpor a tions Act 20 0 1 (the Act) a nd its regulations. This informa t ion has bee n audited as r equired by s e ction 308(3 C ) of the Act.

The Remun e ration Report is present e d under the f ollowing sec t ions:

1.	Mess age from the Nomination& Remunerat ion Committe e (NRC) ...... .................... .................... ................	16
2.	Perso ns coveredb y this report .................... .................... ..................... .................... .................... ................	17
3.	Remu neration gov ernance fram ework ands trategy ........ ..................... .................... .................... ................	18
	I. Nomination & Remunerati on Committee Charter ...... ..................... ...................... ..................... .................	18
	II. Share Tradin g Policy ...... ...................... ..................... ..................... ...................... ..................... .................	18
	III. Executive R emunerationC onsultant En gagement Po licy ............... ...................... ..................... .................	18
	IV. Remuneratio n Framework .................... ..................... ..................... ...................... ..................... .................	19
4.	Execu tive KMP re munerationp olicy ............ .................... ..................... .................... .................... ................	19
	I. Structure .... ..................... ...................... ..................... ..................... ...................... ..................... .................	19
	II. Base Remun eration KMP ..................... ..................... ..................... ...................... ..................... .................	20
	III. Short Term Incentive (STI ) Plan Policy. ..................... ..................... ...................... ..................... .................	22
	IV. Long Term I ncentive (LTI) Plan Policy .. ..................... ..................... ...................... ..................... .................	23
5.	Non-E xecutive Dir ector remune ration .......... .................... ..................... .................... .................... ................	25
	I. Application . ..................... ...................... ..................... ..................... ...................... ..................... .................	25
	II. Remuneratio n structure .. ...................... ..................... ..................... ...................... ..................... .................	25
	III. Fees ........... ..................... ...................... ..................... ..................... ...................... ..................... .................	25
	IV. No terminati on benefits ... ...................... ..................... ..................... ...................... ..................... .................	25
6.	Remu neration ofK MP .............. .................... .................... ..................... .................... .................... ................	26
7.	Equity instruments held by KMP .................. .................... ..................... .................... .................... ................	27
	I. FY2012 Opt ions vestingd uring the peri od ................. ..................... ...................... ..................... .................	27
	II. FY2014 Per formance Rig hts Vesting .... ..................... ..................... ...................... ..................... .................	27
	III. FY2015 Per formance Rig hts Grant ....... ..................... ..................... ...................... ..................... .................	28
	IV. FY2016 Per formance Rig hts Grant ....... ..................... ..................... ...................... ..................... .................	29
	V. Share rights granted durin g the period. ..................... ..................... ...................... ..................... .................	30
	VI. Options and rights holding s .................. ..................... ..................... ...................... ..................... .................	30
	VII. Shareholdin gs ................. ...................... ..................... ..................... ...................... ..................... .................	30
8.	Group Performanc e .................. .................... .................... ..................... .................... .................... ................	31
9.	Other related matt ers ............... .................... .................... ..................... .................... .................... ................	31
	I. Board comp osition .......... ...................... ..................... ..................... ...................... ..................... .................	31
	II. Details of co ntractual prov isions for KM P .................. ..................... ...................... ..................... .................	31
	III. Loans to KM P ................. ...................... ..................... ..................... ...................... ..................... .................	31
	IV. Other transa ctions with KM P ................ ..................... ..................... ...................... ..................... .................	32
	V. Use of Indep endent Remu neration Con sultants ........ ..................... ...................... ..................... .................	32

15 | AUSTAL LIMITED ANNUAL REPORT 2015

1. Message from the Nomination & Remuneration Committee (NRC)

Dear Share h older,

Austal has e mbarked up o n a two yea r journey to f u lly review, r e calibrate an d align key m a nagement p ersonnel (KMP) remuneration gov e rnance, poli c ies and pra c tices. This p rocess began in FY2015, and is expe c ted to be completed i n FY2016, al t hough it ma y take some w hat longer for all the changes to be ev i dent as old p ractices are phased out.

The NRC h a s been focu s sed on reviewing a num b er of areas of policy impl e mentation in the compan y during the last financia l year. The f o cus has be e n primarily o n executive a nd non-executive remun e ration, revie w ing outcomes fr o m the implementation of the Long Te r m Incentive ( LTI) and Sh o rt Term Incentive plans and ensuring that all of th e se are prop e rly aligned t o positive sh a reholder out c omes using clear and ch a llenging obj e ctives. In order to car r y out this ac t ivity, the Co m mittee has t a ken inputs from several p arties, inclu d ing from proxy advisers and major i n stitutional in v estors follo w ing the publi c ation of last year’s remu n eration repo r t. The Com m ittee has also commi s sioned detailed analysis f rom an Inde p endent Re m uneration Expert which f u rther built on the inputs from last ye a r.

The NRC recognises tha t Austal is a s ophisticated business th a t operates fr o m Australia a cross a glo b al footprint and in one o f the most technically de m anding indu s tries in the w orld. The c o mpany, in t h e last few years, has used its considerable int e llectual property predomi n antly in alu m inium multi h ulled vessel s , to build on its position in the fast f e rry and work boat industr y in to the worldwide Defence industry. Austal has b een a reliab l e and on time deliver e r of vessels to the Australian federal g overnment producing, m o st recently, t h e new Cap e Class vessels on t i me and to s p ecification. T hese capa b ilities have c r eated the pl a tform on wh i ch Austal ha s become the only for e ign owned d e signer and c onstructor o f frontline an d support vessels for the U S Navy, a m atter which is comment e d on at leng t h in this rep o rt. The sign i ficance of this is that the A ustal busin e ss now oper a tes globally, in demandi n g markets with highly sophisticated cu s tomers and therefore its leadership must be drawn from equally high quality individuals who a r e selected, s upported an d remunerated accordingl y .

The focus f o r Austal is to ensure that e xecutive pa y and incenti v e schemes tread a fine li n e between t h e demands of global rol e s and shareholder expectations incre a singly set b y a comparis o n to the bro a der market. Our policy is to judge ba s e pay again s t a peer gro u p of industri a l and servic e sector com p anies of a si m ilar size, a c cepting that the Australi a n market ha s few peers t o Austal. W h ilst we have set a base p a y guideline a t the 50[th] pe r centile of this group, w e have also deemed it a p propriate to m ove toward s a structure where the lo n g and short term incentive el e ment of pay is calibrated at the 75[th] p e rcentile of the peer group. We believ e that this str u cture ensures tha t a focus on a chieving str e tching short t erm targets is achieved w hilst ensurin g that critical positioning for the long e r term succ e ss of the co m pany is mai n tained.

The remun e ration report describes th e progressiv e changes th a t have been reviewed du r ing the last financial year and are bei n g implemented during th e FY2016 ye a r. We now b elieve that m uch of the st r uctural change has been implemente d and the Co m mittee’s att e ntion will fo c us on the ta r gets being s e t and meas u red for its e x ecutives an d the impact t h is is having o n the comp a ny perform a nce.

The Commi t tee is also r e sponsible fo r nomination s which inclu d e for the Bo a rd and the C hairman. This year the Committee w elcomes Ji m McDowell t o the Board. Jim was mo s t recently th e CEO of BA E Systems i n Saudi Arabia and p rior to that w as the CEO o f BAE Syst e ms, Australi a which inclu d es its shipb u ilding and s u pport business. T he appointm e nt recognis e s the contin u ed and incr e ased empha s is of Defen c e in Austal’s business both now a n d in the future. The Com m ittee contin u es to support the compa n y Chairman who, as a fo u nder of the business, h a s a unique, d etailed and e ssential insi g ht into the b usiness and continues to make a significant contribution beyond that w hich would be deemed a s normal.

The Board a ppreciates t h e continued and strong s u pport of sh a reholders at t he 2014 AG M . Given the significant efforts of th e Board to re v iew and improve remune r ation gover n ance and pr a ctices, and t o consult wit h stakeholder s and engag e with their vi e ws, as well a s noting the excellent pe r formance of the Compan y , the Board looks forwa r d to the cont i nued support of sharehol d ers for the R emuneratio n Report resolution at the 2 015 AGM.

Yours since r ely,

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David Singl e ton

Chairman, N omination a n d Remuner a tion Commit t ee

16 | AUSTAL LIMITED ANNUAL REPORT 2015

Remuneration report (audited)

2. Persons covered by this report

This report covers all Key Management Personnel (KMP) as defined in the Accounting Standards, including all Directors, as well as those Executives who have specific responsibility for planning, directing, and controlling material activities of the Group.

The KMP for the year ended 30 June 2015 were as follows:

Executive Directors
Mr Andrew Bellamy	Chief Executive Officer and Managing Director since February 2011
Executives with no Director duties
Mr Greg Jason	Group Chief Financial Officer since January 2013
Mr Brian Leathers	Chief Financial Officer USA since February 2008
Mr Craig Perciavalle	President USA since November 2012
Mr Joselito Turano	President Philippines since December 2012
The following person ceased to be executive KMP of Austal during FY2015:
Mr Graham Backhouse	President Australia until April 2015
Non-Executive Directors
Mr John Rothwell	Chairman since 1998
	Member of the Nomination & Remuneration Committee since December 1998
Mr David Singleton	Independent non-executive director since December 2011
	Chairman of the Nomination & Remuneration Committee since September 2012
	Member of the Audit & Risk Committee since February 2012
Mr Giles Everist	Independent non-executive director since November 2013
	Chairman of the Audit & Risk Committee since October 2014
	Member of the Nomination & Remuneration Committee since February 2014
Mr Jim McDowell	Independent non-executive director since December 2014
	Member of the Audit & Risk Committee since February 2015
The following person ceased to be a non-executive director during FY2015:
Mr Dario Amara	Independent, non-executive director until October 2014

17 | AUSTAL LIMITED ANNUAL REPORT 2015

3. Remuneration governance framework and strategy

I. Nomination & Remuneration Committee Charter

The role and responsibilities of the committee are outlined in the Austal Nomination & Remuneration Committee Charter (the Charter), which is available on the Austal Website.

The role of the Nomination & Remuneration Committee is to ensure that appropriate remuneration policies are in place which are designed to meet the needs of the Company and to enhance corporate and individual performance.

The Committee also oversees the implementation of the policies in setting remuneration and performance objectives related to the STI and LTI plans.

The remit of the Nomination & Remuneration Committee also includes succession planning and a significant development in this area has been led by the CEO and overseen by the Board.

The Committee has overseen a significant renewal of the Board as the company enters into a new phase of its development with two new non-executive Directors appointed over the last 19 months.

Under the Charter, the Nomination & Remuneration Committee is to be composed of at least three members with the majority being independent directors.

II. Share Trading Policy

The Share Trading Policy of Austal is available on the Austal website. It contains the standard references to insider trading restrictions that are a legal requirement under the Corporations Act, as well as conditions associated with good corporate governance. To this end the policy specifies “Closed Periods” during which “Restricted Persons” must not trade in the securities of the Company, unless written permission is provided by the Board following an assessment of the circumstances.

All equity based remuneration awards which have vested are subject to the Group’s Share Trading Policy.

III. Executive Remuneration Consultant Engagement Policy

Austal has adopted an executive remuneration consultant (ERC) engagement policy which is intended to manage the interactions between the Company and ERCs. This is intended to ensure independence of advice and ensure that the Nomination & Remuneration Committee has clarity regarding the extent of any interactions between management and the ERC. This policy enables the Board to state with confidence that advice received has been independent. The Policy states that ERCs are to be approved and engaged by the Board before any advice is received and that such advice may only be provided to a non-executive director. Any interactions between management and the ERC must be approved and overseen by the Nomination & Remuneration Committee, this includes the collection of factual internal records (e.g. superannuation paid or allowances and benefits etc.).

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IV. Remuneration Framework

Austal is committed to responsible remuneration practices. The need to reward the Company’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:

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----- Start of picture text -----

Governance Individual Remuneration Individual Remuneration Remuneration Structure
Determination and Instruments
Principles: Principles: Principles: Principles:
Clearly defined and documented Reward Group annual Total Remuneration based Provide the appropriate
governance procedure performance measured relative approach balance of fixed and variable
to its planned key performance remuneration consistent with
Independent Remuneration indicators Facilitate competitiveness by the position and role in the
Committee paying competitive remuneration Group
Business performance aligned levels for comparable roles and
Independent Remuneration experience, subject to Significant portion of variable
Consultant Recognize and reward teamwork performance remuneration deferred and
and development of the culture of aligned with the long-term
Annual assessment of the organisation Promote meritocracy by performance of the Group
Remuneration Policy recognizing individual
Award and differentiate based on performance, with a particular Promote ethical behaviour
individual performance and emphasis on contribution, ethics and do not create incentives
contributions. and safety to expose the Group to
inappropriate risk
Equal remuneration opportunity
----- End of picture text -----

4. Executive KMP remuneration policy

I. Structure

The following outlines the policy that applies to executive KMP and executive directors:

• Total Remuneration Packages (TRP) should be composed of:

• Base Package (inclusive of superannuation, allowances, benefits and any applicable fringe benefits tax (FBT) as well as any salary sacrifice arrangements)

• Short term incentive (STI) which provides a reward for performance against annual objectives

• Long term incentive (LTI) which provides an equity-based reward for performance against indicators of shareholder benefit or value creation, over a three year period

• Internal TRP relativities and external market factors should be considered

• TRPs should be structured with reference to market practices and the particular circumstances of the Company where appropriate.

19 | AUSTAL LIMITED ANNUAL REPORT 2015

II. Base Remuneration KMP

• Base Packages should be set with reference to the market practice of ASX listed companies at the P50[*] level.

• TRPs at Target bonus levels (being the Base Package plus incentive awards intended to be paid for targeted levels of performance) should be set in the P50 to P75 range of the relevant market practice to create a strong incentive to achieve targeted objectives in both the short and long term.

• Remuneration will be managed within a range to allow for the recognition of individual differences such as individual experience, knowledge or competency with which they fulfil a role (a range of +/- 20% is generally targeted in line with common market practices).

• The Base Packages of the KMP executives fall within or below the P50 +/- 20% policy range. Adjustments to some individuals will be made over a 2 year period to bring them into line in some cases where remuneration of the KMP falls below the target.

• The term P50 refers to the median where 50% of the comparator group are above the level and 50% are below.

i. Base Remuneration – CEO

The structure of Base Remuneration for the CEO has been changed during FY2015.

The previous structure provided for the following base remuneration for the CEO:

• Fixed cash remuneration

• Fixed share based remuneration equal to 30% of the Fixed cash remuneration payable twice per annum based on the volume weighted average closing price of ASB shares in each 6 month period.

The Board resolved to amend the previous structure with effect from 1 January 2015 to simplify the Fixed remuneration structure. These changes reflect general market practice and more effectively align the CEO’s remuneration with stakeholder comments received last year.

A new base remuneration consisting solely of cash was set post year end for the period 1 January 2015 to 30 June 2015 which is equal to the previous Fixed cash remuneration plus the cash equivalent of the Fixed share based remuneration. This structure will be maintained in the FY2016 financial year.

ii. Peer group benchmarking

Austal has undertaken a detailed benchmarking of its remuneration levels and structure throughout the KMP comparing to a relevant benchmark group with the assistance of its ERC:

• The benchmark group is composed of 20 companies (listed below) with 10 companies larger and 10 companies smaller than Austal’s market capitalisation

• The group is limited to the Industrial & Service Sector (excludes, energy, resources, materials and financials which tend to have different remuneration structures to the Industrial & Service sector)

• The group is limited to companies with approximately one half to double the market capitalisation of the Austal (noting that the Australian listed market is small making it challenging to select a relevant group of companies that are similarly sized)

• Companies that are most comparable in terms of industry sector and market shall be preferentially included

20 | AUSTAL LIMITED ANNUAL REPORT 2015

iii. Peer group list of companies

Company	Industry Group
McMillan Shakespeare Limited	Industrials
Monadelphous Group Limited	Industrials
APN News and Media Limited	Consumer
Transfield Services Limited	Industrials
GWA Group Limited	Industrials
iSentia Group Limited	Information Technology
Bega Cheese Limited	Consumer
Amcom Telecommunications Limited	Telecommunication Services
ERM Power Limited	Utilities
Vocus Communications Limited	Telecommunication Services
Credit Corp Group Limited	Industrials
Tassal Group Limited	Consumer Discretionary
NEXTDC Limited	Information Technology
Tox Free Solutions Limited	Industrials
UGL Limited	Industrials
Bradken Limited	Industrials
Skilled Group Limited	Industrials
Programmed Maintenance Services Ltd	Industrials
Collection House Limited	Industrials
Ruralco Holdings Limited	Consumer Discretionary

The results of the FY2015 peer group analysis for CEO remuneration as presented by Austal’s ERC is depicted in the table below and compared to that actually paid to the Austal CEO.

Component Base Remuneration Total Remuneration Package	Peer Group Results Percentile Austal CEO 25 50 75 FY2015 628,000 $ 906,000 $ 1,316,000 $ 1,051,347 $ 1,259,000 $ 1,654,000 $ 2,102,000 $ 1,492,451 $

The Remuneration and Nomination Committee formed the following conclusions from the assessment of Base Packages undertaken in FY2015:

• The CEO's Base Package (inclusive of salary sacrificed equity) fell within the Company's policy range of P50 +/- 20%, based on the benchmark described above.

• No change will be made to the CEO's Base Package in FY2016 on the basis that the base remuneration is at the upper end of the P50 + 20%.

21 | AUSTAL LIMITED ANNUAL REPORT 2015

III. Short Term Incentive (STI) Plan Policy

The short term incentive policy of the Company dictates that an annual component of the KMP executives’ remuneration will be aligned to the individual and Company performance. The principles of the plan are that

• STI should be aligned with clear and measurable targets which are set at the start of the financial year. Targets will be aligned with the achievement of the company’s business plan.

• The STI should be paid in cash.

• The STI should have a weighting in the remuneration mix that is no greater than the LTI to ensure an adequate balance in focus between short and long term objectives.

• STI payments will be made at the end of the financial year and after the full year accounts have been approved by the Board.

The Board undertook a review of the Austal STI policy during FY2015 through the Remuneration and Nomination Committee by requesting a benchmarking review to be undertaken by its ERC. The report recommended that the STI scheme should become a bigger component of both the CEO’s and KMPs’ annual remuneration but that performance targets at the threshold payout level should become more challenging. These recommendations were based on rigorous benchmarking against similar companies and were adopted by the Board and are outlined in this report below.

i. Purpose

The purpose of the STI Plan is to incentivise Senior Executives to deliver and outperform key performance indicators (KPIs) and annual business plans. This is intended to lead to sustainable superior returns for shareholders and to modulate the cost of employing Senior Executives, such that the cost of employment reflects the performance of the company.

ii. Measurement Period

The measurement period for STI awards is aligned with the financial year of the Group.

iii. Key Performance Indicators

KPIs are customised for each KMP and reflect the nature of their roles, whilst creating shared objectives where appropriate.

Weightings are applied to the KPIs selected for each participant to reflect the relative importance of each KPI.

KPIs set for the CEO in FY2015 were as follows:

Key Performance Indicator FY2015 Group EBIT FY2015 Group Net Cash Flow FY2015 Group New Vessel Orders Group Strategy Development & Execution Implementation of Business Improvement Initiatives Total	Relative Weight 23.3% 23.3% 23.3% 20.0% 10.0% 100.0%	Performance STI Achieved Estimated 100.0% 23.3% 100.0% 23.3% 100.0% 23.3% 66.7% 13.3% 66.7% 6.7% 90.0% 90.0%

22 | AUSTAL LIMITED ANNUAL REPORT 2015

iv. Target and maximum award

Target and maximum awards are applied to base remuneration. The Board retains discretion in the application of the STI scheme to ensure that outcomes match overall Group achievement and can defer payments where it believes this to be appropriate.

Position CEO Group Chief Financial Officer President USA Chief Financial Officer USA President Australia President Philippines	Incumbent Mr Andrew Bellamy Mr Greg Jason Mr Craig Perciavalle Mr Brian Leathers Mr Graham Backhouse2 Mr Joselito Turano	FY2015 FY2016 Target Maximum Estimated1 Forfeited Target Maximum 33% 50% 45% 5% 50% 100% 20% 30% 27% 3% 30% 60% 40% 60% 5% 55% 30% 60% 30% 45% 4% 41% 30% 60% 20% 30% 30% 0% N/A N/A 20% 30% 8% 22% 15% 30%

1. The final STI for FY2015 will be paid to KMP in FY2016.

2. Mr Graham Backhouse resigned on 21 April 2015

IV. Long Term Incentive (LTI) Plan Policy

The long term incentive plan policy of the Company is that an annual component of remuneration of executives should be at-risk and based on equity in the Company. This is intended to ensure that executives hold a stake in the Company and to align their interests with those of shareholders.

The board undertook a review of the LTI plan following its initial 2 years of operation and implemented a number of changes. The purpose was to ensure that the scheme continued to drive long term executive performance as well as meet normal industry practice. Notable changes were made to award levels which are depicted in section ix on page 24 and the Total Shareholder Return (TSR) measure has been changed from an absolute TSR to an indexed TSR (iTSR) following market feedback as described in section v on page 23 and amended weighting of performance measures from TSR 30% / ROIC 70% to iTSR 40% / ROIC 60%.

i. Purpose

The purpose of the LTI Plan is to incentivise Senior Executives to deliver Group performance that will lead to sustainable superior returns for shareholders and to modulate the cost of employing Senior Executives.

ii. Form of incentive

The LTI should be based on Performance Rights that vest based on an assessment of performance against objectives. No dividends are payable or accrued on Performance Rights which are unvested.

iii. Measurement period

The Company instituted a transitional arrangement for the LTI scheme for FY2014 and FY2015 performance rights grants which was explained in the FY2014 Annual Report.

The standard measurement period from FY2016 onwards will be three years.

iv. Measures of long term performance

The Company will use two long term performance measures:

• TSR which the Board believes best reflects internal measures of performance

• ROIC which the Board believes best reflects external measures of performance

v. Total Shareholder Return Measure (TSR)

The Board believes that TSR is the measure that has the strongest alignment with shareholders. It is recognised however that absolute TSR is influenced by overall economic movements, and therefore future grants of LTI will be offered to executives that vest based on indexed TSR (iTSR).

iTSR determines the shareholders returns of Austal relative to the market rather than capturing the absolute performance of the Group.

23 | AUSTAL LIMITED ANNUAL REPORT 2015

A relative peer group TSR was considered however it was not possible to identify a comparator group of companies that was statistically robust enough to be meaningful. The Board was concerned that this would undermine the link between executive performance and reward outcomes and therefore decided to adopt the iTSR measure.

iTSR will apply to future grants of LTI from FY2016 based on a comparison of Austal’s TSR against the S&P All Ordinaries Accumulation index “XAOAI”.

vi. Return on Invested Capital Measure (ROIC)

Senior Executives are faced with significant and long term business development and project based challenges. Therefore, the LTI is also linked to the achievement of ROIC growth objectives that will lead to value creation for shareholders. This measure is considered the best measure of long term performance from an internal perspective by recognising the long term nature of investment in fixed assets necessary in a shipbuilding business.

ROIC is calculated by dividing the Net operating profit after tax by Net Assets (excluding Cash, Debt, Derivatives and Tax Accounts).

Actual ROIC results are compared against internal targets set by the Board.

vii. Vesting of Performance Rights

The Performance Rights for each employee vest at the end of the measurement period, subject to meeting the performance hurdles.

viii. Holding period

A one year holding period applies to shares that are awarded as a result of Performance Rights vesting.

ix. Target and maximum award

Target and maximum awards are applied to base remuneration.

Position CEO Group Chief Financial Officer President USA Chief Financial Officer USA President Australia President Philippines	Incumbent Mr Andrew Bellamy Mr Greg Jason Mr Craig Perciavalle Mr Brian Leathers Mr Graham Backhouse1 Mr Joselito Turano	FY2015 Grant Vesting FY2016 Grant Vesting Target Maximum Target Maximum 25.0% 50.0% 50.0% 100.0% 17.5% 35.0% 35.0% 70.0% 17.5% 35.0% 35.0% 70.0% 17.5% 35.0% 20.0% 40.0% 17.5% 35.0% N/A N/A 17.5% 35.0% 20.0% 40.0%

1. Mr Graham Backhouse resigned on 21 April 2015

24 | AUSTAL LIMITED ANNUAL REPORT 2015

5. Non-Executive Director remuneration

I. Application

The Non-executive Director Remuneration Policy applies to non-executive directors (NEDs) of the Company in their capacity as directors and as members of committees.

II. Remuneration structure

Remuneration is composed of:

• Board fees

• Committee fees

• Superannuation

• Other benefits (if appropriate)

III. Fees

i. Fee cap

Remuneration will be managed within the aggregate fee limit (AFL) or fee pool approved by shareholders of the Company which is currently $3,000,000.

ii. Chairman

Remuneration for the current Chairman of the Board reflects his continued high level of contribution to the company and the Board. The fee level is reviewed every year and has been reduced from $300,000 to $250,000 per annum effective from 1 February 2015.

iii. Non-executive director fees

Board fees paid for membership of the Board, inclusive of superannuation and exclusive of committee fees will be set with reference to the 50[th] percentile of the market of comparable ASX listed companies (as previously described for executive remuneration).

iv. Committee fees

Committee fees recognise additional contributions to the work of the Board by members of committees. They are similarly referenced to the benchmark group as above.

IV. No termination benefits

Termination benefits are not paid to NEDs by the Company.

25 | AUSTAL LIMITED ANNUAL REPORT 2015

6. Remuneration of KMP

Year ended 30 June 2015 Non-executive directors John Rothwell Dario Amara2 David Singleton Giles Everist Jim McDowell3 Executive directors Andrew Bellamy Other key management person Greg Jason Craig Perciavalle Brian Leathers Graham Backhouse4 Joey Turano	Short-Term Benefits	Post Employment Benefits	Long Term Benefits	Termination Benefits - $ - - - - - $ - $	Share Based Payments Long Term Fixed Incentive - $ - $ - - - - - - - - 209,560 $ 63,316 $ - $ 66,840 $ - 57,748 - 46,939 - - - 15,827 209,560 $ 250,670 $	% % Share Based Performance Total Payments related 279,167 $ - - 31,000 - - 90,000 - - 98,300 - - 42,500 - - 1,459,394 18.7 29.3 529,564 $ 12.6 30.8 711,668 8.1 12.6 470,382 10.0 13.3 401,735 - 18.5 349,811 4.5 11.2 4,463,521 $	% % Share Based Performance Total Payments related 279,167 $ - - 31,000 - - 90,000 - - 98,300 - - 42,500 - - 1,459,394 18.7 29.3 529,564 $ 12.6 30.8 711,668 8.1 12.6 470,382 10.0 13.3 401,735 - 18.5 349,811 4.5 11.2 4,463,521 $
	Short Other Salary & Term Monetary Fees Incentive1 Benefits	Super- annuation / Social Security	Leave
	279,167 $ - $ - $ 28,311 - - 82,192 - - 98,300 - - 38,813 - - 733,522 $ 363,922 $ - $ nel 314,269 $ 96,447 $ - $ 515,500 32,239 22,038 341,906 15,582 8,580 217,651 74,186 - 253,270 23,379 26,002	- $ 2,689 7,808 - 3,687 18,783 $ 18,783 $ 84,143 57,375 15,164 31,333	- $ - - - - 70,291 $				- - - - - - - - - - 18.7 29.3 12.6 30.8 8.1 12.6 10.0 13.3 - 18.5 4.5 11.2
			33,225 $ - - 16,742 -
				- -
				77,992 - 77,992 $
	2,902,901 $ 605,755 $ 56,620 $	239,765 $	120,258 $

1 Represents the amount accrued for but not paid by the Group for services performed in FY2015.

2 Mr Dario Amara resigned on 30 October 2014

3 Mr Jim McDowell joined the Board of Directors on 31 December 2014

4 Mr Graham Backhouse resigned on 21 April 2015

Year ended 30 June 2014

Non-executive directors John Rothwell Dario Amara David Singleton Giles Everist2 Executive directors Andrew Bellamy Other key management perso Greg Jason Craig Perciavalle Brian Leathers Graham Backhouse Joey Turano	Short-Term Benefits	Post Employment Benefits	Long Term Benefits	Termination Benefits	Share Based Payments Long Term Fixed Incentive - $ - $ - - - - - - 271,369 $ 56,658 $ - $ 45,819 $ - 30,250 - 26,714 - 6,288 - 5,388 271,369 $ 171,117 $	% % Share Based Performance Total Payments related 318,182 $ - - 93,000 - - 95,000 - - 55,833 - - 1,404,891 23.3 22.8 455,587 $ 10.1 26.7 558,598 5.4 15.3 397,338 6.7 17.9 393,608 1.6 23.6 267,690 2.0 12.3 4,039,727 $
	Short Other Salary & Term Monetary Fees Incentive1 Benefits	Super- annuation / Social Security	Leave
	290,577 $ - $ - $ 84,932 - - 86,758 - - 50,989 - - 726,842 $ 263,040 $ - $ nnel 286,763 $ 75,840 $ - $ 430,591 54,972 14,021 298,379 44,454 3,370 249,204 86,427 - 226,151 27,421 7,877	27,605 $ 8,068 8,242 4,844 17,774 $ 17,774 $ 28,764 24,421 25,460 853	- $ - - - 69,208 $ 29,391 $ - - 26,229 -	- $ - - - - $ - $ - - - -
	2,731,186 $ 552,154 $ 25,268 $	163,805 $	124,828 $	- $

1 Represents the amount accrued for but not paid by the Group for services performed in FY2014.

2 Mr Giles Everist joined the Board of Directors in November 2013

26 | AUSTAL LIMITED ANNUAL REPORT 2015

7. Equity instruments held by KMP

• I. FY2012 Options vesting during the period

i. FY2012 Options Grant

280,000 options were granted to KMP in FY2012, who were still employed by Austal at 30 June 2015.

Further information on the options is set out in Note 30

ii. Options vesting

KMP Options from the FY2012 grant that vested in FY2015 are detailed below.

Name Greg Jason Craig Perciavalle Brian Leathers	Award year 2012 2012 2012	Options granted 140,000 70,000 70,000	Grant date 20 Dec 2011 20 Dec 2011 20 Dec 2011	Fair value per option at award date 0.618 $ 0.618 0.618	Vesting date 20 Dec 2014 20 Dec 2014 20 Dec 2014	No. vested No. forfeited during year during year 140,000 - 70,000 - 70,000 -

II. FY2014 Performance Rights Vesting

• i. FY2014 Performance Rights Grant

• 789,085 performance rights were granted to KMP in FY2014, who were still employed by Austal at 30 June 2015.

ii. Measurement Periods

There were two measurement periods for the performance rights granted in FY2014 as outlined in the LTI transition plan that was depicted in the FY2014 Annual Report:

• 1 July 2013 – 30 June 2015 for 50% of the Performance Rights

• 1 July 2013 – 30 June 2016 for 50% of the Performance Rights

iii. FY2014 Grant Performance Criteria

The ROIC and TSR performance criteria relating to the FY2014 grant of performance rights to KMP are detailed below.

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----- Start of picture text -----

Measure Weight Threshold Vesting % Performance
Austal 30% <= 15% 0% At or below Threshold
Absolute TSR Pro-rata
(CAGR) 15% < TSR < 25% 50% Target
Pro-rata
>= 25% 100% Stretch or Above
ROIC 70% 6.0% 0% At or below Threshold
Pro-rata
8.0% 50% Target
Pro-rata
10.0% 100% Stretch or Above
Total 100%
----- End of picture text -----

27 | AUSTAL LIMITED ANNUAL REPORT 2015

iv. Vesting of Performance Rights from the FY2014 Grant

The actual TSR performance for the first measurement period from 1 July 2013 – 30 June 2015 vesting of performance has been calculated to be 167%.

The actual ROIC performance for the first measurement period from 1 July 2013 – 30 June 2015 vesting of performance will be calculated using the FY2015 audited accounts. The estimated ROIC performance in the first measurement period from 1 July 2013 – 30 June 2015 is 10.0%.

The estimated number of performance rights from the first measurement period for the FY2014 grant that will vest and lapse as a result of the actual Group performance is detailed below. The final number of performance rights that will vest and lapse will be calculated using the FY2015 audited accounts. Auditor sign off of the accounts occurs after the accounts are prepared and approved by the Board of directors, hence the actual calculation cannot be prepared before the Auditor sign off occurs.

Actual Result Award Weight Vesting % Employee Andrew Bellamy CEO Greg Jason CFO Craig Perciavalle President USA Brian Leather CFO USA Joselito Turano President Philippines Total		Measure	Measure	ment Period	1
	Rights Granted 287,313 125,345 168,675 114,235 93,517 789,085	Maximum Vesting % Rights 50% 143,656 50% 62,672 50% 84,337 50% 57,117 50% 46,758 50% 394,540		Es	timated Vesting
		% 50% 50% 50% 50% 50% 50%		ROIC 10.0% 100% 70% 70% 100,559 43,870 59,035 39,981 32,730 276,175	TSR Total 167% 100% 100% 30% 100% 30% 100% 43,096 143,655 18,801 62,671 25,301 84,336 17,135 57,116 14,027 46,757 118,360 394,535

1. Graham Backhouse forfeited 108,130 Performance rights upon his resignation in April 2015.

III. FY2015 Performance Rights Grant

i. FY2015 Performance Rights Grant

Performance rights granted to KMP in FY2015 are depicted in the table below.

Name Andrew Bellamy Greg Jason Craig Perciavalle Brian Leathers Graham Backhouse1 Joey Turano Total	Grant date 30 Oct 2014 21 Oct 2014 21 Oct 2014 21 Oct 2014 21 Oct 2014 21 Oct 2014	Performance rights granted 379,390 109,288 142,692 99,885 104,027 73,130 908,412	Fair value per Value of performance awards at right grant date 0.46 $ 176,383 $ 0.43 47,371 0.43 61,850 0.43 43,295 0.43 45,090 0.43 31,698 405,687 $

1. Graham Backhouse forfeited 104,027 Performance rights upon his resignation in April 2015.

28 | AUSTAL LIMITED ANNUAL REPORT 2015

ii. Measurement Periods

There are two measurement periods for the performance rights granted in FY2015 as outlined in the LTI transition plan that was depicted in the FY2014 Annual Report:

• 1 July 2014 – 30 June 2016 for 25% of the Performance Rights

• 1 July 2014 – 30 June 2017 for 75% of the Performance Rights

Performance rights can vest in two tranches at the completion of each of the two measurement periods.

iii. FY2015 Grant Performance Criteria

The ROIC and TSR performance criteria relating to the FY2015 grant of performance rights to KMP are detailed below.

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----- Start of picture text -----

Measure Weight Threshold Vesting % Performance
Austal 30% <= 15% 0% At or below Threshold
Absolute TSR Pro-rata
(CAGR) 15% < TSR < 25% 50% Target
Pro-rata
>= 25% 100% Stretch or Above
ROIC 70% 6.9% 0% At or below Threshold
Pro-rata
7.8% 50% Target
Pro-rata
8.8% 100% Stretch or Above
Total 100%
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IV. FY2016 Performance Rights Grant

i. FY2016 Grant Performance Criteria

The ROIC and iTSR performance criteria relating to the prospective FY2016 grant of performance rights to KMP are detailed below.

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----- Start of picture text -----

Measure Weight Threshold [1] Vesting % Performance
Indexed TSR 40% <= 100% 0% At or below Threshold
Pro-rata
100% < iTSR < 200% 50% Target
Pro-rata
>= 200% 100% Stretch or Above
ROIC 60% 8.0% 0% At or below Threshold
Pro-rata
10.0% 50% Target
Pro-rata
12.0% 100% Stretch or Above
Total 100%
----- End of picture text -----

1. 100% is equal to the average TSR of companies included in the XAOAI Index as defined above.

29 | AUSTAL LIMITED ANNUAL REPORT 2015

V. Share rights granted during the period

Details of share rights provided as fixed remuneration to key management personnel are shown below. Further information is set out in Note 30.

Name	Period earned	Grant date 30 Oct 2014 30 Oct 2014	Granted 92,602 68,598 161,200	Fair value per share Fair value 1.30 $ 120,383 $ 1.30 89,177 209,560 $
Andrew Bellamy Andrew Bellamy Total	FY2015 H1 FY2015 H2

VI. Options and rights holdings

30 June 2015 Directors Andrew Bellamy Options Share Rights Performance Rights Executives Greg Jason Options Performance Rights Craig Perciavalle Options Performance Rights Brian Leathers Options Performance Rights Graham Backhouse1 Options Performance Rights Joey Turano Options Performance Rights		Options and rights holdings	Balance at Vested and 30 June 2015 Exercisable Unvested 280,000 280,000 - 68,598 68,598 - 666,703 - 666,703 437,500 437,500 - 234,633 - 234,633 250,000 250,000 - 311,367 - 311,367 239,000 239,000 - 214,120 - 214,120 - - - - - - - - - 166,647 - 166,647
	Balance at 30 June 2014 280,000 227,634 287,313 437,500 125,345 250,000 168,675 239,000 114,235 - 108,130 - 93,517	Granted as Remuneration Forfeited Exercised - - - 161,200 - (320,236) 379,390 - - - - - 109,288 - - - - - 142,692 - - - - - 99,885 - - - - - 104,027 (212,157) - - - - 73,130 - -

VII. Shareholdings

30 June 2015 Non - Executive Directors John Rothwell Dario Amara2 David Singleton Giles Everist Executives Andrew Bellamy Greg Jason Craig Perciavalle Brian Leathers Graham Backhouse1 Joey Turano Total	Balance at 30 June 2014 32,200,745 50,000 28,600 50,000 566,928 - - - - - 32,896,273	FY2015 Movements Share Performance Rights Options rights Exercised exercised vested Disposed - - - - - - - (50,000) - - - - - - - (30,000) 320,236 - - (408,690) - - - - - - - - - - - - - - - - - - - - 320,236 - - (488,690)	Balance at Net Movement 30 June 2015 - 32,200,745 (50,000) - - 28,600 (30,000) 20,000 (88,454) 478,474 - - - - - - - - - - (168,454) 32,727,819

1 Mr Graham Backhouse resigned on 21 April 2015

2 Mr Dario Amara sold his share on the 11 May 2015 and resigned on 30 October 2014

None of the shares held by key management personnel are held nominally.

30 | AUSTAL LIMITED ANNUAL REPORT 2015

8. Group Performance

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----- Start of picture text -----

EPS (cents per Annual Average
share) Share Price
18 $3.00
16
$2.50
14
12 $2.00
10
$1.50
8
6 $1.00
4
$0.50
2
0 $0.00
FY10 FY11 FY12 FY13 FY14 FY15
Basic EPS Annual Average Share Price
----- End of picture text -----

9. Other related matters

I. Board composition

The Nomination and Remuneration sub-committee reviews the structure, size and composition of the Board annually, taking inputs from investors and other independent advisors received during the year into account. The sub-committee has recommended that the current practice of maintaining 3 independent Non-Executive Directors on the Board should remain following the FY2015 review.

The process to ensure that the skills at Board level are appropriate to the business needs has continued with the appointment of Jim McDowell. 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.

II. Details of contractual provisions for KMP

Name Andrew Bellamy Greg Jason Craig Perciavalle Brian Leathers	Employing company Austal Limited Austal Limited Austal USA LLC Austal USA LLC	Contract Duration Unlimited Unlimited Unlimited Unlimited	Termination Notice Period
			Company Executive 3 months 3 months 12 weeks 12 weeks 0 months 0 months 3 months 0 months

1. 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. Executives are not entitled to this termination payment in the event of termination for serious misconduct or other nominated circumstances.

2. 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.

III. Loans to KMP

There were no loans to Directors or other key management personnel at any time during year ended 30 June 2015.

31 | AUSTAL LIMITED ANNUAL REPORT 2015

IV. Other transactions with KMP

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.

V. Use of Independent Remuneration Consultants

The Company established policies and procedures governing engagements with external remuneration consultants to ensure that KMP remuneration recommendations were free from undue influence from the KMP to whom they relate.

The NRC engaged Godfrey Remuneration Group Pty Limited as a remuneration consultant for the year ended 30 June 2015 to provide recommendations in relation to KMP remuneration.

KMP Remuneration

$34,000 +GST

Review of long term incentive plan, procedures, rules etc. in light of $12,000 + GST regulatory changes and assistance with drafting the Remuneration Report and advice regarding stakeholder engagement on remuneration matters.

End of Remuneration Report

32 | AUSTAL LIMITED ANNUAL REPORT 2015

Auditor independence and non-audit services

The Directo r s received t h e following declaration fr o m the auditor of Austal Limited.

Ern s t & Young Tel: + 6 1 8 9429 2222 11 M ounts Bay Road Fax: + 61 8 9429 2436 Per t h WA 6000 Austr a lia ey.co m /au GP O Box M939 Perth W A 6843

Auditor’s I ndepende n ce Declar a tion to th e Directors of Austal L imited

In relation to o ur audit of the financial report of Austal Lim i ted for the fin a ncial year end e d 30 June 201 5 , to the best o f my knowledge an d belief, there h ave been no c o ntraventions o f the auditor i n dependence r e quirements of t he Corporati on s Act 2001 or any applicabl e code of profe s sional conduc t .

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Ernst & Young

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Robert A Kirk b y Partner 25 August 20 1 5

A member firm of Ernst & Young Global Limited Liability limited by a sc h eme approved under Pr o fessional Standards Le g islation

Non-audit services

Non-audit s e rvices provi d ed by the e n tity’s auditor , Ernst & Young, during th e year, are d i sclosed in N o te 5. The Directors ar e satisfied th a t the provisi o n of non-au d it services i s compatible w ith the gen e ral standard of independen c e for audito r s imposed b y the Corpor a tions Act 20 0 1. The nature and scope of each type of non-audit service pro v ided means t hat auditor i n dependenc e was not co m promised.

Signed in a c cordance wi t h a resolutio n of Director s .

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John Rothw e ll Chairman 25 August 2015

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An d rew Bellam y Ex e cutive Direc t or and Chief Executive O f ficer

33 | AUSTAL LIMITED ANNUAL REPORT 2015

Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2015

Continuing operations Revenue Cost of sales 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 Total comprehensive income for the year Total comprehensive income attributable to: Owners of the parent Non-controlling interests Total Earnings per share ($ per share) - 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	Notes 4 5 5 9 6 6	2015 ’000 1,414,888 $ (1,296,909) 117,979 $ 31,504 $ (49,124) (14,674) (4,992) 80,693 $ (27,537) $ 53,156 $ 53,225 $ (69) 53,156 $ (31,886) $ (9,183) 12,622 (28,447) $ 57,922 $ (1,851) 56,071 $ 27,624 $ 80,780 $ 80,849 $ (69) 80,780 $ 0.16 $ 0.15	2014 ’000
			1,122,863 $ (1,028,599)
			94,264 $ 21,913 $ (51,895) (8,396) (8,742)
			47,144 $ (15,285) $
			31,859 $
			31,548 $ 311
			31,859 $
			17,231 $ (20,705) 865
			(2,609) $ (4,075) $ 217
			(3,858) $
			(6,467) $
			25,392 $
			25,081 $
			311
			25,392 $
			0.09 $ 0.09

The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.

34 | AUSTAL LIMITED ANNUAL REPORT 2015

Consolidated statement of financial position as at 30 June 2015

Assets Current Assets Cash and cash equivalents Restricted cash Trade and other receivables Inventories Prepayments Derivatives Total Non - Current Assets Collateral 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 Equity attributable to owners of the parent Non - controlling interests Total Equity	Notes 10 10 14 16 23 & 24 20 14 23 & 24 18 19 9 17 23 & 24 11 21 13 9 15 23 & 24 11 21 13 9 12	2015 2014 ’000 ’000 138,413 $ 74,428 $ 10,055 9,532 104,342 95,753 339,703 328,142 6,321 4,054 106 2,701 598,940 $ 514,610 $ 3,600 $ 2,917 $ 157 1,020 1,925 1,968 9 5,787 442,522 366,500 9,637 9,473 14,089 9,022 471,939 $ 396,687 $ 1,070,879 $ 911,297 $ (223,497) $ (183,570) $ (21,337) (1,972) (146,904) (13,192) (33,830) (33,704) (3,244) (3,550) (7,493) (10,980) (26,177) (29,062) (462,482) $ (276,030) $ (14,737) $ (2,229) $ (7,658) (142,264) (1,139) (1,023) (63,722) (49,892) (8,742) (6,627) (95,998) $ (202,035) $ (558,480) $ (478,065) $ 512,399 $ 433,232 $ 112,523 $ 111,598 $ 55,846 27,292 343,798 294,041 512,167 $ 432,931 $ 232 $ 301 $ 512,399 $ 433,232 $

The consolidated statement of financial position should be read in conjunction with the accompanying notes.

35 | AUSTAL LIMITED ANNUAL REPORT 2015

Consolidated statement of changes in equity for the year ended 30 June 2015

Equity at 1 July 2013 Comprehensive Income Profit for the year Other Comprehensive Income Total Transfers between reserves Other equity transactions Shares issued Cost of share-based payments Total Equity at 1 July 2014 Comprehensive Income Profit for the year Other Comprehensive Income Total Other equity transactions Shares issued Dividends Cost of share-based payments Total Equity at 30 June 2015	Foreign Currency Employee Cash flow Common Asset Issued Reserved Retained Translation Benefits Hedge Control Revaluation Capital Shares1 Earnings Reserve Reserve Reserve Reserve Reserve ’000 ’000 ’000 ’000 ’000 ’000 ’000 ’000 120,940 $ (9,612) $ 258,560 $ 8,455 $ 6,211 $ 11,077 $ (15,925) $ 27,491 $ - $ - $ 31,548 $ - $ - $ - $ - $ - $ - - - (3,858) - (2,609) - - - $ - $ 31,548 $ (3,858) $ - $ (2,609) $ - $ - $ - $ - $ 3,933 $ 3,008 $ (1,508) $ 301 $ - $ (5,734) $ 270 $ - $ - $ - $ - $ - $ - $ - $ - - - - 383 - - - 270 $ - $ - $ - $ 383 $ - $ - $ - $ 121,210 $ (9,612) $ 294,041 $ 7,605 $ 5,086 $ 8,769 $ (15,925) $ 21,757 $ - $ - $ 53,225 $ - $ - $ - $ - $ - $ - - - 56,071 - (28,447) - - - $ - $ 53,225 $ 56,071 $ - $ (28,447) $ - $ - $ 543 $ 382 $ - $ - $ (443) $ - $ - $ - $ - - (3,468) - - - - - - - - - 1,373 - - - 543 $ 382 $ (3,468) $ - $ 930 $ - $ - $ - $ 121,753 $ (9,230) $ 343,798 $ 63,676 $ 6,016 $ (19,678) $ (15,925) $ 21,757 $	Total ’000 407,197 $ 31,548 $ (6,467) 25,081 $ - $ 270 $ 383 653 $ 432,931 $ 53,225 $ 27,624 80,849 $ 482 $ (3,468) 1,373 (1,613) $ 512,167 $	Non Controlling Interest ’000 (10) $ 311 $ - 311 $ - $ - $ - - $ 301 $ (69) $ - (69) $ - $ - - - $ 232 $	Total Equity ’000 407,187 $ 31,859 $ (6,467) 25,392 $ - $ 270 $ 383 653 $ 433,232 $ 53,156 $ 27,624 80,780 $ 482 $ (3,468) 1,373 (1,613) $ 512,399 $

1. Reserved shares are in relation to the Austal Group Management Share Plan

The consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

.

36 | AUSTAL LIMITED ANNUAL REPORT 2015

Consolidated statement of cash flows for the year ended 30 June 2015

Notes Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received 4 Interest paid 5 Income tax received / (paid) Net cash from / (used in) operating activities 7 Cash flows from investing activities Receipts of infrastructure government grants Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Purchase of intangible assets Proceeds from sale of intangible assets Net cash from / (used in) investing activities Cash flows from financing activities Repayment of borrowings Loans received Equity dividends paid Net cash from / (used in) financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents Cash and cash equivalents at beginning of year Net foreign exchange differences Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at end of year 10

2015 2014 ’000 ’000 1,420,738 $ 1,112,844 $ (1,287,677) (1,046,868) 882 321 (4,992) (8,742) (18,517) (15,927) 110,434 $ 41,628 $ 4,986 $ 4,506 $ 2,355 24,611 (28,126) (11,884) (1,053) (1,263) - 3,002 (21,838) $ 18,972 $ (40,575) $ (114,238) $ 9,449 24,917 (3,468) - (34,594) $ (89,321) $ 54,002 $ (28,721) $ 83,960 $ 107,703 $ 10,506 4,978 54,002 (28,721) 148,468 $ 83,960 $

The consolidated statement of cash flows should be read in conjunction with the accompanying notes.

37 | AUSTAL LIMITED ANNUAL REPORT 2015

Notes to the financial statements

Basis of preparation

Note 1. Corporate Information

The financi a l report of th e Austal Limi t ed Group of Companies (the Group) f o r the year e n ded 30 Jun e 2015 was authorised f o r issue in a c cordance wi t h a resolutio n of the Dire c tors on 25 A u gust 2015. Austal Limit e d is a limite d liability company incorp o rated and d o miciled in Australia whos e shares are p ublicly traded on the Australian s tock exchange. The princip a l activities of the Group d u ring the year were the d e sign, manuf a cture and s u pport of high performanc e aluminium v essels. The s e activities are unchange d from the pr e vious year.

Note 2. Basis of preparation

i. Introduction

The f i nancial repo r t is a gener a l-purpose fin a ncial report, which has been prepare d in accordance with the requi r ements of the Corporatio n s Act 2001 a nd Australian Accounting Standards.

The f i nancial repo r t has also b e en prepared on a histori c al cost basis , except for d e rivative financial instr u ments and l a nd and buildings that hav e been mea s ured at fair value.

The f i nancial repo r t is presented in Australi a n dollars an d all values a r e rounded t o the nearest thousand dolla r s ($’000) unl e ss otherwis e stated und e r the option a vailable to t h e Group un d er ASIC Cla s s Order 98 / 0 100. The G r oup is an en t ity to which t he class ord e r applies.

The f i nancial repo r t presents t h e figures of t h e consolida t ed entity onl y , unless oth e rwise state d . Austal Limit e d is a for pr o fit entity.

ii. Reporting structure

The n otes to the consolidated financial stat e ments have been divided into 8 main s ections whi c h are sum m arised as fo l lows:

Current year performance

This s ection focuses on the re s ults and perf o rmance of t h e Group, in c luding profit a bility, earnings per share and c ash generati o n, and the r e turn of cash to sharehol d ers via divid e nds.

Capital structure

This s ection focuses on the long term fundi n g of the Gro u p including c ash, interes t bearing loa n s and borro w ings, contri b uted equity a nd reserve s and govern m ent grants.

Working capital

This s ection focuses on shorte r term workin g capital con c epts such a s trade and o ther receiva b les and paya b les, constru c tion contrac t s in progres s , inventories including work in progres s .

Infrastructure & other assets

This s ection focuses on proper t y, plant & e q uipment as w ell as intangible assets o f the Group.

Other liabilities

This s ection focuses on provisi o ns such as e mployee benefits and future warranty costs.

38 | AUSTAL LIMITED ANNUAL REPORT 2015

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 (the Group) for the year ended 30 June 2015.

Subsidiaries are all of 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 adjusted to comply with Group policy and generally accepted accounting principles in Australia for consolidation purposes. All intercompany balances, transactions, unrealised gains and losses resulting from intra-Group transactions and dividends have been eliminated in full in preparing the consolidated financial statements.

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. The parent will assess whether any indicators of impairment of the carrying value of the investment in the subsidiary exist upon receipt of dividend payments from subsidiaries. An impairment loss is recognised to the extent that the carrying value of the investment exceeds its recoverable amount where such indicators exist.

iv. Foreign currency transactions and translation

Both the functional and presentation currency of Austal Limited and its Australian subsidiaries are Australian dollars (AUD). The Company determines the functional currency for each entity within the Group 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 (USD).

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 reporting 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.

39 | AUSTAL LIMITED ANNUAL REPORT 2015

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 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 2014:

• AASB 2012-3 AASB 2012-3 Amendments to Australian Accounting Standards - Offsetting Financial Assets and Financial Liabilities 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.

• Interpretation 21 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.

• 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.

• 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.

• 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 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 B makes amendments to particular Australian Accounting Standards to delete references to AASB 1031 and also makes minor editorial amendments to various other standards.

• AASB 2014-1 Part A -Annual Improvements 2010–2012 Cycle AASB 2014-1 Part A: This standard sets out amendments to Australian Accounting Standards arising from the issuance by the International Accounting Standards Board (IASB) of International Financial Reporting Standards (IFRSs) Annual Improvements to IFRSs 2010–2012 Cycle and Annual Improvements to IFRSs 2011– 2013 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'.

• 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.

40 | AUSTAL LIMITED ANNUAL REPORT 2015

• 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.

• Amendments to Australian Accounting Standards - Part B AASB 2014-Part B makes amendments in relation to the requirements for contributions from employees or third parties that are set out in the formal terms of the benefit plan and linked to service.

• Defined Benefit Plans: Employee Contributions (Amendments to AASB 119) The amendments clarify that if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the related service is rendered, instead of attributing the contributions to the periods of service.

• Amendments to AASB 1053 – Transition to and between Tiers, and related Tier 2 Disclosure Requirements [AASB 1053] The Standard makes amendments to AASB 1053 Application of Tiers of Australian Accounting Standards to:

• clarify that AASB 1053 relates only to general purpose financial statements;

• make AASB 1053 consistent with the availability of the AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors option in AASB 1 First-time Adoption of Australian Accounting Standards;

• clarify certain circumstances in which an entity applying Tier 2 reporting requirements can apply the AASB 108 option in AASB 1; permit an entity applying Tier 2 reporting requirements for the first time to do so directly using the requirements in AASB 108 (rather that applying AASB 1) when, and only when, the entity had not applied, or only selectively applied, applicable recognition and measurement requirements in its most recent previous annual special purpose financial statements; and

• specify certain disclosure requirements when an entity resumes the application of Tier 2 reporting requirements.

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 9: Financial Instruments:

AASB 9 (December 2014) is a new Principal standard which replaces AASB 139. This new Principal version supersedes AASB 9 issued in December 2009 (as amended) and AASB 9 (issued in December 2010) and includes a model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting.

AASB 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.

The final version of AASB 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.

Amendments to AASB 9 (December 2009 & 2010 editions and AASB 2013-9) issued in December 2013 included the new hedge accounting requirements, including changes to hedge effectiveness testing, treatment of hedging costs, risk components that can be hedged and disclosures.

41 | AUSTAL LIMITED ANNUAL REPORT 2015

AASB 9 includes requirements for a simpler 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.

Consequential amendments were also made to other standards as a result of AASB 9, introduced by AASB 2009-11 and superseded by AASB 2010-7, AASB 2010-10 and AASB 2014-1 – Part E.

AASB 2014-7 incorporates the consequential amendments arising from the issuance of AASB 9 in Dec 2014.

AASB 2014-8 limits the application of the existing versions of AASB 9 (AASB 9 (December 2009) and AASB 9 (December 2010)) from 1 February 2015 and applies to annual reporting periods beginning on after 1 January 2015.

AASB 2014-3 Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations [AASB 1 & AASB 11] (effective 1 July 2016):

AASB 2014-3 amends AASB 11 to provide guidance on the accounting for acquisitions of interests in joint operations in which the activity constitutes a business. The amendments require:

• (a) the acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in AASB 3 Business Combinations, to apply all of the principles on business combinations accounting in AASB 3 and other Australian Accounting Standards except for those principles that conflict with the guidance in AASB 11; and

• (b) the acquirer to disclose the information required by AASB 3 and other Australian Accounting Standards for business combinations.

This Standard also makes an editorial correction to AASB 11.

AASB 2014-4 Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to

AASB 116 and AASB 138) (effective date 1 July 2016):

AASB 116 and AASB 138 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.

42 | AUSTAL LIMITED ANNUAL REPORT 2015

The amendment 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.

AASB 15 Revenue from Contracts with Customers (effective date 1 July 2017):

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

Early application of this standard is permitted.

AASB 2014-5 incorporates the consequential amendments to a number Australian Accounting Standards (including Interpretations) arising from the issuance of AASB 15.

AASB 2014-9 Amendments to Australian Accounting Standards – Equity Method in Separate Financial Statements:

AASB 2014-9 amends AASB 127 Separate Financial Statements, and consequentially amends AASB 1 First-time Adoption of Australian Accounting Standards and AASB 128 Investments in Associates and Joint Ventures, to allow entities to use the equity method of accounting for investments in subsidiaries, joint ventures and associates in their separate financial statements.

AASB 2014-9 also makes editorial corrections to AASB 127.

AASB 2014-9 applies to annual reporting periods beginning on or after 1 January 2016. Early adoption permitted.

AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture:

AASB 2014-10 amends AASB 10 Consolidated Financial Statements and AASB 128 to address an inconsistency between the requirements in AASB 10 and those in AASB 128 (August 2011), in dealing with the sale or contribution of assets between an investor and its associate or joint venture.

The amendments require:

• (a) a full gain or loss to be recognised when a transaction involves a business (whether it is housed in a subsidiary or not); and

• (b) a partial gain or loss to be recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary.

AASB 2014-10 also makes an editorial correction to AASB 10.

AASB 2014-10 applies to annual reporting periods beginning on or after 1 January 2016. Early adoption permitted.

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AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012–2014 Cycle (effective date 1 July 2016):

The subjects of the principal amendments to the Standards are set out below:

AASB 5 Non-current Assets Held for Sale and Discontinued Operations:

Changes in methods of disposal – where an entity reclassifies an asset (or disposal group) directly from being held for distribution to being held for sale (or vice versa), an entity shall not follow the guidance in paragraphs 27–29 to account for this change.

AASB 7 Financial Instruments: Disclosures

Servicing contracts - clarifies how an entity should apply the guidance in paragraph 42C of AASB 7 to a servicing contract to decide whether a servicing contract is ‘continuing involvement’ for the purposes of applying the disclosure requirements in paragraphs 42E–42H of AASB 7.

Applicability of the amendments to AASB 7 to condensed interim financial statements - clarify that the additional disclosure required by the amendments to AASB 7 Disclosure–Offsetting Financial Assets and Financial Liabilities is not specifically required for all interim periods. However, the additional disclosure is required to be given in condensed interim financial statements that are prepared in accordance with AASB 134 Interim Financial Reporting when its inclusion would be required by the requirements of AASB 134.

AASB 119 Employee Benefits

Discount rate: regional market issue - clarifies that the high quality corporate bonds used to estimate the discount rate for post-employment benefit obligations should be denominated in the same currency as the liability. Further it clarifies that the depth of the market for high quality corporate bonds should be assessed at the currency level.

AASB 134 Interim Financial Reporting

Disclosure of information ‘elsewhere in the interim financial report’ - amends AASB 134 to clarify the meaning of disclosure of information ‘elsewhere in the interim financial report’ and to require the inclusion of a cross-reference from the interim financial statements to the location of this information.

AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 (effective date 1 January 2016)

The Standard makes amendments to AASB 101 Presentation of Financial Statements arising from the IASB’s Disclosure Initiative project. The amendments are designed to further encourage companies to apply professional judgment in determining what information to disclose in the financial statements. For example, the amendments make clear that materiality applies to the whole of financial statements and that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. The amendments also clarify that companies should use professional judgment in determining where and in what order information is presented in the financial disclosures.

AASB 2015-3 Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality (effective date 1 July 2015)

The Standard completes the AASB’s project to remove Australian guidance on materiality from Australian Accounting Standards.

44 | AUSTAL LIMITED ANNUAL REPORT 2015

Current year performance

Note 3. Operating segments

Year ended 30 Jun Revenues External cust Inter-segmen Finance inco Total Segment result EBIT Finance inco Finance expe Total Depreciation Balance sheet Segment ass Segment liab Year ended 30 Jun Revenues External cust Inter-segmen Finance inco Total Segment result EBIT Finance inco Finance expe Total Depreciation Balance sheet Segment ass Segment liab Inter-segment re e 2015 omers t me me nses and amortisation ets ilities e 2014 omers t me me nses and amortisation ets ilities venues, investments,

Australia ’000 191,373 $ $ 20,435 - 211,808 $ $ 31,774 $ $ - - 31,774 $ $ (1,057) $ $ 130,101 $ $ (78,731) Australia ’000 153,886 $ $ 88,026 - 241,912 $ $ 16,684 $ $ - - 16,684 $ $ (1,606) $ $ 192,119 $ $ (174,198) receivables and paya USA Philipp ’000 ’000 1,119,703 3 $ - 8 - 1,119,703 38 $ 58,429 $ - - 58,429 $ (18,692) ( $ 818,670 42 $ (438,942) (2 USA Philipp ’000 ’000 933,615 32 $ - - 933,615 33 $ 61,682 2 $ - - 61,682 2 $ (17,937) $ 662,948 22 $ (456,424) (15 bles are eliminatedo ines Unallocated ’000 0,584 72,189 $ ,159 - - 882 ,743 73,071 $ 992 (4,106 $ - 882 - (4,992 992 (8,216 $ 1,449) (3,068 $ ,376 108,960 $ 1,435) (58,322 ines Unallocated ’000 ,758 2,609 $ 1,009 - - 321 ,767 2,930 $ ,703 (27,211 $ - 321 - (8,742 ,703 (35,632 $ (972) (3,258 $ ,261 151,467 $ ,263) (43,809 n consolidation. Elimination / Adjustments ’000 157 $ (28,594) - (28,437) $ ) (2,286) $ - ) - ) (2,286) $ ) - $ (29,228) $ ) 38,950 Elimination / Adjustments ’000 (326) $ (89,035) - (89,361) $ ) 1,707 $ - ) - ) 1,707 $ ) - $ (117,498) $ ) 211,629 Total ’000 1,414,006 $ - 882 1,414,888 $ 84,803 $ 882 (4,992) 80,693 $ (24,266) $ 1,070,879 $ (558,480) Total ’000 1,122,542 $ - 321 1,122,863 $ 55,565 $ 321 (8,742) 47,144 $ (23,773) $ 911,297 $ (478,065)

45 | AUSTAL LIMITED ANNUAL REPORT 2015

Analysis of Unallocated Revenue Construction and service Sale of stock vessel H270 Charter vessel revenue Finance income Other Total Segment result Profit / (loss) on foreign exchange Net profit / (loss) on sale of shipyard Write down of inventory Corporate overheads Sales & marketing costs Charter vessel profit Finance income Finance expenses Total Segment assets Cash and restricted cash Property, plant and equipment Inventories Derivatives Deferred tax assets Other Total Segment liabilities Deferred tax liabilities and income tax payable Interest bearing loans Derivatives Intercompany payables Deferred Income Creditors & provisions Total

2015 2014 ’000 ’000 8,606 $ - $ 61,500 - 2,083 2,419 882 321 - 190 73,071 $ 2,930 $ 13,461 $ (1,888) $ - 3,582 - (13,361) (10,654) (8,618) (7,156) (7,312) 243 386 882 321 (4,992) (8,742) (8,216) $ (35,632) $ 48,312 $ 26,777 $ 44,057 45,914 181 59,159 741 8,388 14,162 9,293 1,507 1,936 108,960 $ 151,467 $ (16,210) $ (17,203) $ - (12,062) (36,074) (4,201) - 282 - (6,490) (6,038) (4,135) (58,322) $ (43,809) $

One customer in the USA segment generated revenue of $1,119.703 million during FY2015 (FY2014: $933.615 million) and one customer in the Australia segment generated revenue of $97.485 million during FY2015 (FY2014: $100.814 million).

Revenue from external customers by geographical location of customers North America Europe Asia Australia Middle East Other Total	2015 2014 $’000 $’000 1,141,457 $ 938,618 $ 69,701 20,150 - 15,034 112,375 124,842 85,251 - 5,222 23,898 1,414,006 $ 1,122,542 $

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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	2015 2014 $’000 $’000 375,450 $ 300,842 $ 22,237 17,744 13,296 15,187 41,175 42,200 452,158 $ 375,973 $ 442,521 $ 366,500 $ 9,637 9,473 452,158 $ 375,973 $

i. Identification of reportable segments

The Group is organised into three business segments for management purposes based on the location of the production facilities, related sales regions and types of activity.

The Chief Executive Officer who is the Chief Operating Decision Maker (CODM) monitors the performance of the business segments separately for the purpose of making decisions about the allocation of resources and 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 Group’s reportable segments are USA, Philippines and Australia:

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. The Philippines segment also provides support to other segments not just manufacturing for external buyers.

iii. Aggregation of segments

No operating segments are aggregated.

iv. 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.

47 | AUSTAL LIMITED ANNUAL REPORT 2015

v. 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

• Finance revenue and costs

• Taxation

• Assets held for sale

• Derivatives

• Commercial vessel charter contracts

The Group sold Hull 270, a 102 metre trimaran ferry to Condor Ferries during the period. The vessel was sold for $61.500 million and is presented in the Unallocated segment. The vessel was included in Unallocated segment assets at 30 June 2014.

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Note 4. Revenue

Revenue Constructionc Charter revenu Interest fromo Total ontract revenue e ther unrelated partie s	$ $ 2015 ’000 1,390,326 $ 23,680 882 1,414,888 $ 2014 ’000 1,105,089 17,453 321 1,122,863

i. Recognition and measurement

Revenue is recog n ised and m e asured at fai r value of th e consideration received o r receivable to the extent that i t is probable t hat the economic benefit s will flow to the Group an d that the re v enue can be measured relia b ly. The follo w ing specific recognition c riteria must a lso be met before revenu e is recognised:

Construction and service contract revenue

Cons t ruction and s ervice contr a ct revenue i s brought to a ccount based on percent a ge of completion which is cal c ulated base d on actual c o sts incurred as a proportion of estima t ed total con t ract costs. Cont r act costs ar e recognised a s an expen s e as incurre d and revenu e is recognis e d only to th e extent of the c o sts incurred where it is p r obable that t he costs will be recovere d and the contract outcom e cannot be mea s ured reliably during the term of the co n tract.

The e stimated tot a l contract costs are deter m ined prior t o commence m ent and re- e valuated ev e ry month there a fter for the p urposes of r e cognising c o nstruction c o ntract reven u e. Construc t ion contract revenue is adjusted in the ev e nt of a chan g e to the cost of completi o n during the life of the co n tract and re v enue is reco g nised for the remaining life of the cont r act based u p on the adjusted value.

Charter revenue

Char t er revenue i s operating r e ntals receiv e d on charter of vessels a n d is recogni s ed when the control over the ri g ht to revenue is achieve d .

Interest income

Revenue is recog n ised as inte r est accrues u sing the eff e ctive interes t method. T h is is a method of calculating the amortised cost o f a financial asset and allocating the i n terest income over the relevant period using the effectiv e interest rate, which is th e rate that ex a ctly discoun t s estimated f uture cash r e ceipts throu g h the expected life of the financial as s et to the net carrying am o unt of the financial asset.

ii. Significant accounting judgements and estimates

Construction contract revenue and expected construction profits at completion.

The a ssessment o f constructio n contract re v enue in acc o rdance with the Group’s a ccounting p o licies requi r es certain e s timates to b e made of tot a l contract revenues, total contract co s ts and the c u rrent perc e ntage of co m pletion.

Cont r act revenue a nd contract costs are re c ognised as r e venue and e xpenses re s pectively by r eference to the s t age of completion of the c ontract activ i ty at the bal a nce sheet d a te (“percent a ge-of-completion meth o d”) when th e outcome of a constructi o n contract c a n be estimated reliably. C ontract reve n ue is reco g nised to the e xtent of contract costs in c urred that are likely to b e recoverable when the outcome of a cons t ruction contr a ct cannot b e estimated r e liably.

Man a gement hav e made estimates in this area, which if ultimately in a ccurate will i m pact the le v el of reve n ue recognis e d in the Con s olidated St a tement of C o mprehensiv e Income of F Y2015 and b eyond. The p ercentage o f completion is calculated o n actual co s ts over the sum of actual costs plus projected costs to complete the contract a nd profit is r ecognised fr o m commen c ement of th e project.

49 | AUSTAL LIMITED ANNUAL REPORT 2015

Note 5. Other income and expenses

Other income and Government in Training reimb (Loss) / gain o Gain on dispos Net foreign exc Sale of scrap Rental income Other income Total Finance costs Interest paid to Total Depreciation and Depreciatione Amortisation Total Employee benefits Wages and sa Superannuatio Share basedp Workers’ comp Annual leavee Long service le Total Employee ben Auditor's remuner Amounts recei An audit or rev Total Amounts recei An audit or rev Other services Total expenses frastructure grants ursement grants n disposal of propert al of intangible asse hange gains unrelated parties amortisation xcluding impairment laries n ayments ensation costs xpense ave expense efits listed above inc ation ved or due and recei iew of the financial r ved or due and recei iew of the financial r in relation to the ent y, plant and equipme ts ludes expenses that vable by Ernst & You eport of the entity an vable by related prac eport of the entity an ity and any other ent nt are disclosed in cost ng Australia for: d any other entity int tices of Ernst & You d any other entity int ity in the Group of sales he Group ng for: he Group

2015 ’000 3,373 $ 7,915 (371) - 12,994 5,167 - 2,426 31,504 $ (4,992) $ (4,992) $ (22,736) $ (1,530) (24,266) $ (337,501) $ (4,822) (1,373) (10,085) (14,553) (45) (368,379) $ 2015 $ (293,409) $ (293,409) $ (550,900) $ - (550,900) $ 2014 ’000 3,643 $ 8,079 3,582 903 (495 3,802 198 2,20 21,913 $ (8,742 $ (8,742 $ (21,593 $ (2,180 (23,773 $ (284,218 $ (3,840 (383 (7,640 (8,294 (239 (304,614 $ 2014 $ (317,270 $ (317,270 $ (320,220 $ (1,302 (321,522 $ ) 1 ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

50 | AUSTAL LIMITED ANNUAL REPORT 2015

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 accounting policies related to amortisation of intangible assets in Note 19.

Employee benefits

Refer to accounting policies for employee benefits in Note 21.

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.

Sale of goods and scrap

Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer. Risk and rewards of ownership are considered passed to the buyer at the time of delivery of the goods to the customer.

ii. Foreign exchange gains & losses included in profit and loss

Foreign exchange gains and losses included in profit and loss includes:

• Fair value adjustments on non-derivative financial assets such as foreign currency denominated loans.

• Fair value 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.

51 | AUSTAL LIMITED ANNUAL REPORT 2015

Note 6. Earnings per share

Net profit after tax Net profit attribu Weighted average Weighted avera Effect of dilution Options Performan Weighted avera Earnings per shar Basic earnings Diluted earnings table to ordinary equ number of ordinary ge number of ordina ce Rights ge number of ordina e per share per share ity holders of the pa shares ry shares (excluding ry shares (excluding rent from continuing reserved shares) for reserved shares) ad operations basic earnings pers justed for the effecto hare f dilution $’000 Number Number Number Number $ / share $ / share

2015 53,225 $ 342,383,958 310,571 1,831,326 344,525,855 0.16 $ 0.15 $ 2014 31,548 $ 342,042,581 294,589 399,105 342,736,275 0.09 $ 0.09 $

i. Measurement

Basi c earnings pe r share amo u nts are calc u lated by divi d ing net profi t for the year attributable to ordinary equit y holders of t h e parent by the weighte d average nu m ber of ordin a ry shares o u tstanding d u ring the year.

Dilut e d earnings p er share am o unts are cal c ulated by di v iding the net profit attribu t able to ordinary equity hold e rs of the par e nt by the weighted avera g e number o f ordinary sh a res outstan d ing during the year plus the w eighted aver a ge number o f ordinary s h ares that would be issue d on the con v ersion of all t he dilutive pote n tial ordinary s hares into ordinary shar e s.

ii. Information concerning the classification of securities

Options

Options granted t o employees under the Austal Group M anagement S hare Plan a n d Employee Share Option Plan are c o nsidered to b e potential o rdinary shar e s and have b een include d in the dete r mination of diluted earnings p e r share to t h e extent that they are dilutive. The options have no t been includ e d in the deter m ination of basic earning s per share. D etails relating to the opti o ns are set o u t in Note 30.

5,87 0 ,500 options granted und e r the afore m entioned plans are not in c luded in the calculation of diluted earni n gs per shar e because th e y are not co n sidered to b e dilutive. (F Y 2014: 9,09 7 ,740). Thes e options could potentially dilute basic e a rnings per s h are in the fu t ure.

Performance rights

Performance right s granted to e xecutives u n der the Gro u p’s Long Te r m Incentive P lan are incl u ded in the calculation of dilut e d earnings p er share as t he conditions would hav e been met a t balance sh e et date. The right s are not incl u ded in the d e termination o f basic earn i ngs per share. Further in f ormation ab o ut the perfo r mance right s is provided in Note 30. Ther e have been n o other tran s actions invo l ving ordinar y shares or p o tential ordin a ry shares b e tween the repor t ing date an d the date of c ompletion o f these finan c ial statements.

52 | AUSTAL LIMITED ANNUAL REPORT 2015

Note 7. Reconciliation of net profit after tax to net cash flows from operations

Net profit after tax Adjustments for: Depreciation an Net (gain) / loss Net (gain) / loss Share based pa Net exchanged Government gra Total Changes in assets (Decrease) / inc Income tax (c Workers’ com Warranty Employee ben Other provisio (Increase) / dec (Increase) / dec (Increase) / dec (Increase) / dec (Decrease) / inc (Decrease) / inc (Decrease) / inc (Decrease) / inc Total Net cash (outflow d amortisation on disposal of prope on disposal of intan yments ifferences nts income and liabilities: rease in provisionsf urrent and deferred) pensation insurance efits ns rease in trade & othe rease in inventories rease in prepayment rease in other financ rease in trade ando rease in progress pa rease in derivativea rease in governmen ) / inflow from opera rty, plant and equipm gible assets or: r receivables s ial assets ther payables yments in advance ssets & liabilities t grants ting activities ent

2015 ’000 53,156 $ 24,266 $ 457 - 1,373 (15,067) (4,986) 6,043 $ 5,753 $ 6,225 (1,863) (1,015) (3,105) 4,483 (11,561) (2,224) - 56,506 (2,885) (393) 1,314 2014 ’000 31,859 $ 23,776 $ (3,582) (903) 383 254 - 19,928 $ (7,905) $ (1,222) 65 2,530 3,092 5,970 (58,646) 2,703 4,141 49,757 7,272 (17,916) -

51,235 $ 110,434 $ (10,159) $ 41,628 $

==> picture [116 x 92] intentionally omitted <==

53 | AUSTAL LIMITED ANNUAL REPORT 2015

Note 8. Dividends paid and proposed

i. Dividends on ordinary shares

Frank Dividen Decl Prop Opening Fran Fran Move Closing ing credit b ds on Ordinary Sha ared and paid during osed and not recogn Balance king credits that aros king credits distribute ment Balance alance res the year (Fully frank ised as a liability (Fu e from the payment d ed dividend (1 cents lly franked dividend( of income tax instalm per share)) 3 cents per share)) ents during the year	201 ’00 $ (1 $ 201 ’00 $ $ $ $ 5 201 0 ’00 (3,468) $ 0,408) $ 5 201 0 ’00 933 $ 6,425 $ (1,487) 4,938 $ 5,871 $ 4 0 - - 4 0 583 350 - 350 933

ii. Franking credit balance

54 | AUSTAL LIMITED ANNUAL REPORT 2015

Note 9. Income and other taxes

i. Income tax expense

Major co Consoli Curr C A T Defe R A T Tota Other C Curr C Tota Other eq Curr C D Tota A recon Acco Inco A O B U U U A O T Inco mponents of tax ex dated Profit & Loss ent Income Tax urrent income tax ch djustments in respec otal rred Income Tax elating to origination djustments in respec otal l income tax (expen omprehensive Inco ent and deferred inc urrent and deferredg l (expense) / benefit uity items ent and deferred inc apital raising costs eferred gains on rev l (expense) / benefit ciliation between ta unting profit / (loss me tax at the Group djustment for Austal ther foreign tax rate ranch (profit) / loss S section 199 dome tilisation of research nrealised foreign exc djustments in respec ther non-assessable otal Adjustments me tax (expense) / b pense for the years arge t of current income ta and reversal of temp t of deferred income se) / benefit me (OCI) ome tax related ite ains and losses onf charged to OCI ome tax related ite aluation of property, charged to other e x expense and the ) before income tax ’s statutory income USA statutory incom differences stic manufacturing de and development an hange losses on inte t of current and defe or non-deductible ite enefit reported in t ended 30 June 201 x of the previous ye orary differences tax of the previousy ms charged or cred oreign currency cont ms charged or cred plant and equipment quity product of accounti from continuing op tax rate of 30% (20 e tax rate of 36.9% ( duction d other tax offsets an rcompany loans rred income tax of th ms he statement of com 5 and 2014 are: ar ear ited directly to OCI racts and consolidati ited directly to othe ng profit before inc erations 14: 30%) 2014: 36.9%) d credits e previous year prehensive income on adjustments r equity items ome tax multiplied b y

2015 ’000 (22,912) $ 4,047 (18,865) $ (3,916) $ (4,756) (8,672) $ (27,537) $ 10,771 $ 10,771 $ - $ - - $ the Group’s appl 80,693 $ (24,208) $ (2,876) $ (462) 2 351 227 (83) (709) 220 (3,329) $ (27,537) $ 2014 ’000 (13,224) $ 7,863 (5,361) $ (1,549) $ (8,375) (9,924) $ (15,285) $ 1,082 $ 1,082 $ - $ - - $ icable income tax ra 47,144 $ (14,142) $ (2,289) $ 1,145 (865) 1,313 543 306 (513) (783) (1,143) $ (15,285) $ te is as follows:

55 | AUSTAL LIMITED ANNUAL REPORT 2015

ii. Analysis of temporary differences

Deferred income tax - USA Deferred tax assets Trade & other receivables Payables Provisions Grant liabilities Losses available for offset against future taxable income Research and development tax credits Work Opportunity tax credits Charitable donations Inventories Total Deferred tax liabilities Property, plant and equipment Inventories Total Deferred tax assets / (liabilities) - Net 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 Losses available for offset against future taxable income Research and development and other tax offsets Total Deferred tax liabilities Property, plant and equipment Inventories Deferred gains and losses on foreign currency contracts Total Deferred tax assets / (liabilities) - Net Deferred tax expense / (income) booked to Consolidated Profit & Loss	Statement of Fina	ncial Position 2014 ’000 477 $ 17,205 5,014 18,374 5,092 19 - 33 - 46,214 $ (36,916) $ (276) (37,192) $ 9,022 $ 3,827 $ 284 4,859 - 539 218 - 9,727 $ (3,404) $ (11,655) (1,295) (16,354) $ (6,627) $		Consolidated P	rofit & Loss
	2015 ’000 585 $ 7,418 3,317 21,150 - - 1,558 40 168 34,236 $ (42,978) $ - (42,978) $ (8,742) $ 1,774 $ 800 3,918 10,609 358 231 - 17,690 $ (3,350) $ - (251) (3,601) $ 14,089 $			2015 ’000 - $ 12,393 2,568 1,264 5,655 23 (1,410) - (168) 20,325 $ (2,113) $ (276) (2,389) $ 17,936 $ 2,055 $ (515) 938 - 176 (13) - 2,641 $ (53) $ (11,660) (192) (11,905) $ (9,264) $ 8,672 $	2014 ’000
					(150) $ 8,518 (865) 2,027 3,771 3,879 413 - -
					17,593 $ (2,291) $ (1,571)
					(3,862) $
					13,731 $
					(581) $ (176) (915) 2,306 (83) (218) 204
					537 $ (318) $ (3,644) (382)
					(4,344) $
					(3,807) $
					9,924 $

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

56 | AUSTAL LIMITED ANNUAL REPORT 2015

• 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.

• 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. The possibility of default was assessed to be remote at the balance date.

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.

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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.

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.

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Capital structure

Note 10. Cash and cash equivalents

Current Cash at bank a Restricted cash Total Cash per Ca 1. Unutilised GoZ nd in hand 1 sh Flow Statement one Bond funds may only be spent on tho se capital wor	$ $ ks pro 2015 ’000 138,413 $ 10,055 148,468 $ jects that were speci 2014 ’000 74,428 9,532 83,960 fically identified in th e documentation issu ed to investors.

i. Recognition and measurement

Cash and short-term deposits in the statem e nt of financi a l position comprise cash a t bank and in hand and short - term deposi t s with an ori g inal maturity of three mo n ths or less. Cash and cash equivalents co n sist of cash a nd cash eq u ivalents as defined abov e , net of cash held as a guar a ntee for the p urposes of the Cash Flo w Statement.

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Note 11. Interest bearing loans and borrowings

Current Revolving Cred Finance Lease Bank Loan (un Go Zone Bond Total Non - Current Go Zone Bond Finance Lease Total Total it Facility s (3) secured) (1) s (2) s (2) s (3)	2015 ’000 - $ (1,7 - (145,1 (146,9 $ - $ (7,6 (7,6 $ (154,5 $ 2014 ’000 (12,0 $ 91) - (1,1 13) - 04) (13,1 $ (142,2 $ 58) - 58) (142,2 $ 62) (155,4 $ 00) 92) 92) 64) 64) 56)

1. The Bank lo a n was payable by instalments until October 2014, with a n average variabl e interest rate of 4. 3 % in FY2015. 2. The Go Zon e Bonds of US$111.740 million are variable rate demand bonds that are wr a pped by Letters of Credit that are proovided under the S F A. The Go Zone Bonds matu r e on 1 May 2041 w hilst the Letters of Credit mature on 3 1 December 2015. The Bonds are payable in US dollarss with an average effective interest rate of approximately 2.8% in F Y 2015. 3. The Finance leases are used t o fund mobile equipment and a plot of land in Austal US A . The leases have a term of 5 years aand incurred intere s t at an average rate of 1.7% in FY2015.

i. Recognition and measurement

All lo a ns and borr o wings are initially recogn i sed at the fair value of th e considerati o n received l e ss directly attrib u table transaction costs. I n terest-beari n g loans and borrowings a re subsequ e ntly measur e d at amor t ised cost using the effect i ve interest m ethod.

Gain s and losses a re recognis e d in the stat e ment of co m prehensive income when the liabilitie s are dere c ognised.

ii. Go Zone Bonds

The G ulf Opportu n ity Zone Bo n ds (Go Zon e Bonds or G Z B) are a for m of indebte d ness that w a s authorised by th e US Federal Governmen t to incentivise private inv e stment in infrastructure i n geographic a l areas that were affected by H urricane Ka t rina in 2005. Austal qualified to borro w US$225.00 0 million with a 30 year matu r ity to invest in the develo p ment of shi p building infr a structure in A ustal USA b etween FY2 0 08 & FY2013. Go Z o ne Bonds a r e tax-exempt municipal b o nds in the U nited States and attracte d an average coupon rate of 0. 0 43% in FY2 0 15. GZB bo n dholders ar e secured by l etters of cre d it issued by A ustal’s ban k ing syndicate with a m aturity date o f 31 Decem b er 2015 and hence all lia b ilities relating to the SFA agreement have been disclosed as curren t at the repor t ing date. Th e average co s t of the letters of credit in FY2015 was 2 .30%. Aust a l has redee m ed (repaid) a cumulative amount of ~ US$112 milli o n of GZB fu n ds and owe s US$111.740 milli o n at 30 June 2015. Aust a l has the option of redee m ing the outs t anding GZB balance, in w hole or in p a rt, at any time during the term o f the indebt e dness with a 30 day noti c e to bondho l ders. Austal may choose t o redeem these bonds at or be f ore 31 December 2015 or may exten d the debt by o btaining an extension to t he letters of credit prior to th a t date.

Aust a l is in the pr o cess of re-fi n ancing the S yndicated F a cility with th e intention of extending / r e newing the letter s of credit se c uring the G Z B by a mini m um term of t hree years. A mandated l e ad arranger has been appo i nted and a t e rm sheet ha s been signe d . Full docu m entation is being prepare d and financial close is expe c ted to occur early in FY2 0 16.

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iii. Banking facilities

Facilities used at reporting date Revolving Credit Facility (1) Finance Leases (2) Bank Loan (unsecured) (3) Go Zone Bonds (4) Contingent Instrument Facility (5) Total Facilities unused at reporting date Revolving Credit Facility (1) Finance Leases (2) Bank Loan (unsecured) (3) Go Zone Bonds (4) Contingent Instrument Facility (5) Total Total Facilities Available Revolving Credit Facility (1) Finance Leases (2) Bank Loan (unsecured) (3) Go Zone Bonds (4) Contingent Instrument Facility (5) Total

2015 2014 ’000 ’000 - $ (12,000) $ (9,449) - - (1,192) (145,113) (142,264) (79,965) (41,605) (234,527) $ (197,061) $ (50,000) $ (38,000) $ (3,220) - - - - - (20,035) (58,395) (73,255) $ (96,395) $ (50,000) $ (50,000) $ (12,669) - - (1,192) (145,113) (142,264) (100,000) (100,000) (307,782) $ (293,456) $

1. The Revolving Credit Facility is provided under a Syndicated Facility Agreement (SFA) which was executed on 19 July 2013. The maturity of the SFA is 31 December 2015. Funds borrowed under the Revolving Credit Facility in FY2015 incurred an average variable interest rate of 4.5%.

2. The Finance leases are used to fund mobile equipment and a plot of land in Austal USA. The leases have a term of 5 years and incurred interest at an average rate of 1.7% in FY2015

3. The Bank loan was payable by instalments until October 2014, with an average variable interest rate of 4.3% in FY2015

4. The Go Zone Bonds of US$111.740 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 2.8% in FY2015.

5. 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 25).

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.

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Note 12. Contributed equity and reserves

Ordinary Shares o 1 July Shares issuedd 30 June Reserved Shares 1 July Movement in Re 30 June Net n Issue uring the year served shares	Shar	es 201 346,17 37 346,54 (4,35 (4,35 342,19 4 3,195 1,738 4,933 0,601) - 0,601) 4,332		’000
	201 346,54 3 346,92 (4,35 33 (4,0 342,9 5 4,933 78,518 3,451 0,601) 5,062 15,539) 07,912			$ $ $ $ $ $ $ 2015 121,210 $ 543 $ 121,753 $ (9,612) $ 382 $ (9,230) $ 112,523 $ 2014 120,940 270 121,210 (9,612) - (9,612) 111,598

i. Recognition and measurement Ordinary shares

Ordi n ary shares a r e classified a s equity. In c remental co s ts directly a t tributable to t he issue of n ew shares or op t ions are sho w n in equity a s a deducti o n, net of tax, from the proceeds of the new shares o r options. Ordi n ary shares h a ve no par v a lue and the c ompany do e s not have a limited amo u nt of authorised capital. Fully paid ordinar y shares carr y one vote p e r share and c arry the righ t to dividend s .

Reserved shares

Own equity instru m ents which a re issued a n d held by a t rustee under Austal Grou p Managem e nt Share Plan a re classifie d as reserved shares and a re deducted from equity. No gain or l o ss is recognised in the state m ent of com p rehensive in c ome on the purchase, s a le, issue or c ancellation o f the Group’ s own equity instr u ments. Refe r to Note 30 f o r more infor m ation in rel a tion to the A u stal Group M anagement Share Plan.

ii. Movements in ordinary share capital

Ordinary 1 Jul CEO Divid 30 Ju Shares on Issue y - Mr Andrew Bellamy end reinvestment pla ne n	Shares
	2015 346,544,933 320,236 58,282 346,923,451 2014 346,173,195 371,738 - 346,544,933

The m ovement in ordinary sha r es during ye a r ended 30 J une 2015 is comprised o f shares issued as part of Mr A n drew Bella m y’s contract o f employme n t as well as a Dividend Reinvestment plan. Mr A n drew Bella m y’s FY2014 e mployment c ontract shares were issu e d on 17 No v ember 2014 and FY2015 H1 s h ares were issued on 2 F e bruary 2015 . (Refer to th e Remuneration Report o n page 15). The volume weig h ted average price (VWA P ) on which t h e shares were issued wa s $1.04 for 2 2 7,634 shares and $1.31 for 9 2 ,602 shares. A dividend r e investment p lan (DRP) w as introduced during FY 2 015. 58,282 additional shar e s were issu e d under the D RP during F Y2015 at a p rice of $1.72 per share.

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iii. Nature & purpose of reserves

Foreign currency translation reserve (FCTR)

This reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.

Employee benefits reserve

This reserve is used to record the value of equity benefits provided to employees and Directors as part of their remuneration. Refer to Note 30 for further details of share based payment plans for the Group.

Cash flow hedge reserve

This reserve records the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge.

Common control reserve

This reserve represents the premium paid on the acquisition of the minority interest in a controlled entity.

Asset revaluation reserve

This reserve is used to record increases in the fair value of land and buildings.

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Note 13. Government grants relating to assets

Deferred Grant Inc Current Infrastructur Total Non - Current Infrastructur Total Total Movements in Opening Balanc Grants rece Amortised to Exchange ra Closing Balance ome e Development e Development Grants e ived during the year the P&L te adjustment	$ $ $ $ $ $ $ $ 2015 ’000 (3,244) $ (3,244) $ (63,722) $ (63,722) $ (66,966) $ (53,442) $ (4,986) $ 3,673 (12,210) (66,966) $ 2014 ’000 (3,550) (3,550) (49,892) (49,892) (53,442) (57,015) - 3,643 (70) (53,442)

i. Recognition and measurement

Aust a l has receiv e d grants fro m various go v ernment bo d ies in Alaba m a to fund th e infrastructu r e required for th e expansion o f the Group’s USA oper a tions in Mobile, Alabama. The f a ir value of grants related to assets ar e credited to a deferred in c ome liability account and is released to pr o fit and loss o ver the expected useful li f e of the rele v ant asset. The f a ir value of grant related t o expense it e ms, are rec o gnised as in c ome over th e periods ne c essary to matc h the grant o n a systematic basis to th e costs that it is intended t o compensat e .

Government gran t s are only re c ognised wh e n received o r when there is reasonable assurance that the grant will be recei v ed and all a t taching con d itions will be complied wit h .

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Working capital

Note 14. Trade and other receivables

Current Trade amounts Allowance ford Total Non - Current Trade amounts Total Total owing by unrelatede oubtful debts owing by unrelatede ntities ntities	$ $ $ $ $ 2015 ’000 104,431 $ (89) 104,342 $ 157 $ 157 $ 104,499 $ 2014 ’000 95,842 (89) 95,753 1,020 1,020 96,773

i. Recognition and measurement

Trad e receivables which are within the nor m al credit ter m s are recog n ised and ca r ried at origin a l invoice amo u nt less an allowance for a ny uncollecti b le amounts. An allowan c e for doubtf u l debts is m a de when there is objective e vidence tha t the Group w ill not be abl e to collect the debts. Ba d debts are w ritten off when identified.

ii. Impaired trade receivables

Indivi d ual receiva b les which ar e known to b e uncollectible are written off by reduci n g the carryi n g amount direc t ly. The other receivables a re assesse d collectively t o determine whether the r e is objectiv e evidence that a n impairment has been incurred but n o t yet been i d entified. For t hese receiv a bles the estimated impairment losses are recogni s ed in a sepa r ate impairm e nt allowanc e account. T h e Group considers that there is evidence o f impairmen t if any of the following in d icators are present:

• significant financial difficulties of the d ebtor

• probability t hat the debt o r will enter bankruptcy or financial reo r ganisation, a nd

• default or delinquency i n payments ( m ore than 90 days overdue).

Receivables for w h ich an impa i rment provis i on was reco g nised are w r itten off against the provi s ion when there is no expect a tion of reco v ering additional cash. Impa i rment losse s are recogni s ed in profit o r loss within o ther expenses. Subsequ e nt recoveri e s of amo u nts previous l y written off a re credited a gainst other expenses.

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iii. Allowance account for doubtful debts

Trade receivables of an initial value of $0.089 million (FY2014: $0.089 million) were impaired and fully provided for at 30 June 2015. Movements in impairment allowance account are detailed below:

Provision for Doubtful Debts 1 July Charge for the Year Utilised Movement 30 June	2015 2014 $’000 $’000 (89) $ (1,387) $ (60) $ (89) $ 60 1,387 - $ 1,298 $ (89) $ (89) $

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

2015 ’000 2014 ’000	Days 0-30 31-60 61-90 90+ 99,155 $ 1,623 $ 177 $ 3,633 $ 89,580 $ 4,430 $ 435 $ 2,417 $	Impaired Total (89) $ 104,499 $ (89) $ 96,773 $

Receivable balances are monitored on an ongoing basis. A major percentage of the trade and other receivables comprises Government institutions and the credit quality is deemed to be of a high quality.

The full trade and other receivables excluding the impairment is deemed to be recovered within the next 12 months.

v. Fair values of current trade and other receivables

The carrying amount of the receivables is assumed to be the same as their fair value due to their short term nature.

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Note 15. Construction contracts in progress

Work in Progress Construction re less Progressp Total due fromc Progress Paymen Construction re less Progressp Total due to cus Total due from / (t venue recognised to ayments received & ustomers ts Received in Adva venue recognised to ayments received & tomers o) customers date receivable nce date receivable	$ $ $ $ $ 2015 ’000 5,636,779 $ (5,299,051) 337,728 $ 266,437 $ (292,614) (26,177) $ 311,551 $ 2014 ’000 3,603,494 (3,275,969) 327,525 204,322 (233,384) (29,062) 298,463

i. Recognition and measurement

Cons t ruction work in progress is valued at c ontract cost incurred to d a te, plus profit recognised to date, less any p rovision for a nticipated fu t ure losses a n d progress b illings. Con s truction profi t s are recog n ised on the perc e ntage of co m pletion basi s . Percentag e of completi o n is determi n ed by refere n ce to actual costs to date a s a proporti o n of estimat e d total contr a ct costs.

ii. Significant accounting judgements and estimates Refe r to Note 4 fo r details of e s timates mad e regarding c onstruction c ontracts.

Note 16. Inventories and work in progress

Inventories Work in progres Other stock Total s	Not 15 es	2015 ’000 33 $ 33 $ 2014 ’000 7,728 32 $ 1,975 9,703 32 $ 7,525 617 8,142

i. Recognition and measurement

Stoc k and finishe d goods are valued at the l ower of cost and net reali s able value, w here costs include prod u ction overheads. Cost of s tock is dete r mined on th e weighted a v erage cost b asis.

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Note 17. Trade and other payables

Current Trade & otherp Total ayables owed to unre lated entities1	No tes	2015 ’000 (223, $ (223, $ 2014 ’000 497) (183 $ 497) (183 $ ,570) ,570)

1. Trade payab l es are unsecured, n o n-interest bearing a n d are normally settl e d on 45 day terms.

i. Recognition and measurement

Trad e payables a n d other pay a bles are car r ied at amorti s ed costs an d represent li a bilities for g o ods and servi c es provided to the Group prior to the e nd of the fin a ncial year that are unpai d and arise when the Grou p becomes o b liged to ma k e future pay m ents in res p ect of the purchase of th e se goods and services.

ii. Fair value of trade and other payables

The c arrying amo u nts of trade a nd other pa y ables are a s sumed to be the same a s their fair val u es, due to their s hort-term n a ture.

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Infrastructure & other assets

Note 18. Property, plant and equipment

i. Net carrying amount

Balance Gros at fai at co Accu NetC Balance Gros at fai at co Accu NetC 1 July 2014 s carrying amount r value st mulated Depreciation arrying Amount 30 June 2015 s carrying amount r Value st mulated Depreciation arrying Amount & Impairment & Impairment	Freehold Land & Buildings ’000 316,78 $ 16,40 (29,37 303,81 $ 389,02 $ 13,83 (45,17 357,69 $ Plant & Equipment ’000 6 - $ $ 4 122,974 0) (61,114) 9 61,859 $ $ 6 - $ $ 8 155,590 3) (82,461) 0 73,128 $ $ Capital WIP T ’000 ’0 - 3 $ 822 1 - ( 822 3 $ - 3 $ 11,704 1 - (1 11,704 4 $ otal 00 16,786 40,200 90,486) 66,500 89,025 81,132 27,635) 42,522

ii. Reconciliation of movement for the year

Balance Addit Trans Dispo Depr Exch Total Balance Addit Trans Dispo Depr Exch Total Balance 1 July 2013 ions fer in / (out) sals eciation charge for th ange Adjustment 1 July 2014 ions fer in / (out) sals eciation charge for th ange Adjustment 30 June 2015 e year e year

Freehold Land & Buildings ’000 323,87 $ 2,26 $ 7,93 (16,76 (8,70 (4,78 (20,05 $ 303,81 $ 4,95 $ (1,15 (2,13 (9,46 61,67 53,87 $ 357,69 $ Plant & Equipment ’000 8 71,894 $ $ 9 5,230 $ $ 0 (205) 6) (1,611) 7) (12,886) 5) (563) 9) (10,035) $ $ 9 61,859 $ $ 5 12,816 $ $ 4) 2,118 9) (658) 5) (13,271) 4 10,264 1 11,269 $ $ 0 73,128 $ $ Capital WIP T ’000 ’0 4,145 3 $ 4,385 $ (7,725) - ( - ( 17 (3,323) ( $ 822 3 $ 10,355 $ (964) (15) - ( 1,506 10,882 $ 11,704 4 $ otal 00 99,917 11,884 - 18,377) 21,593) (5,331) 33,417) 66,500 28,126 - (2,812) 22,736) 73,444 76,022 42,522

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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.

The carrying amount would be as follows if land and buildings were measured using the cost model.

Land & Buildings valued using cost model Cost Accumulated Depreciation & Impairment Net Carrying Amount	2015 2014 ’000 ’000 379,023 $ 297,012 $ (57,933) (40,311) 321,090 $ 256,701 $

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 at the end of each financial year if appropriate.

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. 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 in assessing value in use.

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-generating 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 the statement of comprehensive income.

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.

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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

Impairment of non-financial assets

The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. As part of the assessment, the Group considered impairment triggers including observable indications, significant market, technological, economic or legal changes that have occurred, significant decreases in market interest rates or market rates of return, the market capitalisation of the Group compared to the net assets of the Group, evidence that any major asset or process is obsolete or damaged and other evidence from internal reporting. There were no impairment triggers which were identified and therefore no specific impairment test was required for assets excluding goodwill.

Goodwill is tested annually for impairment regardless of whether impairment triggers are identified. The key assumptions used to determine the recoverable amount for the Australia cash-generating unit (CGU) are disclosed and further explained in Note 19.

viii. 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 22.

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Note 19. Intangible assets

Balance 1 July 201 Additions Amortisation for Disposals Exchange Adjus Total Balance 30 June 2 Balance 1 July 201 Cost Accumulated Am Net Carrying Am Balance 30 June 2 Cost Accumulated Am Net Carrying Am 4 the year tment 015 4 ortisation & Impairm ount 015 ortisation & Impairm ount ent ent	$ $ $ $ $ $ $ $ Computer Software G ’000 3,010 $ 1,053 $ (1,530) - 641 164 $ 3,174 $ 13,195 $ (10,185) 3,010 $ 15,767 $ (12,593) 3,174 $ oodwill T ’000 6,463 $ - $ - - - - $ 6,463 $ 6,463 $ - 6,463 $ 6,463 $ - 6,463 $ otal ’000 9,473 1,053 (1,530) - 641 164 9,637 19,658 (10,185) 9,473 22,230 (12,593) 9,637

i. Recognition and measurement

Intan g ible assets a cquired sep a rately are in i tially measu r ed at cost a n d subseque n tly carried a t cost less any a ccumulated a mortisation a nd any acc u mulated impairment loss e s. Internally generated i n tangible asse t s, excluding c apitalised d e velopment c osts, are not capitalised a nd expendit u re is charge d against profit or loss in th e year in which the expen d iture is incur r ed.

The u seful lives o f intangible a s sets are assessed to be e ither finite o r indefinite. I n tangible as s ets with finite lives are am o rtised over t h e useful life and assess e d for impair m ent whenev e r there is an indication that t h e intangible asset may b e impaired. T he amortisa t ion period a n d the amorti s ation method for an intan g ible asset w i th a finite us e ful life are r e viewed at le a st once per financial yea r . Changes in the expe c ted useful life or the exp e cted pattern of consumpt i on of future e conomic be n efits embodied in the asse t are account e d for by changing the a m ortisation pe r iod or meth o d, as appro p riate, which is a change in ac c ounting esti m ate. The a m ortisation e x pense on in t angible asse t s with finite lives is recognised in the state m ent of com p rehensive in c ome in the e xpense category consist e nt with the f u nction of th e intangible asse t .

A su m mary of the policies applied to the Gr o up’s intangi b le assets is a s follows:

Research and development costs

Research costs a r e expensed a s incurred. D evelopment expenditure on an individual project is recognised as a n intangible a s set when th e Group can d emonstrate:

• t he technical feasibility of c ompleting t h e intangible asset so that it will be av a ilable for us e or sale

• i ts intention t o complete a n d its ability t o use or sell the asset  h ow the ass e t will genera t e future eco n omic benefits  t he availability of resourc e s to complet e the asset  t he ability to m easure reli a bly the expenditure durin g development

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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. 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 for the purpose of impairment testing, 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. An impairment loss is recognised when the recoverable amount of the CGU is less than its carrying amount. Impairment losses relating to goodwill cannot be reversed in future periods.

Goodwill allocated to a cash-generating unit that has a partial disposal of the operation within that unit is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances 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 Australia segment (refer to Note 3 for details).

The Group tests whether goodwill is recoverable on an annual basis. The recoverable amount of Austal Australia 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. Management has concluded that no impairment charge is required as a result of this analysis.

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iii. Significant accounting judgement and estimates

Recoverable amount of the Australia CGU

The recoverable amount of the Australia CGU is determined based on value in use calculations using five year cash projections from financial budgets that are approved by senior management. The following table sets out the key assumptions:

	Budget period gross margins1 2015 2014	Growth rate beyond budget period2 Discount rate3 2015 2014 2015 2014
Australia	17-20% 10-15%	0.0% 5.0% 13.0% 15.0%

1. Budgeted gross margin

2. Weighted average growth rate used to extrapolate cash flows beyond the budget period

3. The Group has applied post-tax discount rates to discount the forecast future attributable post-tax cash flows in performing the value-in-use calculations for the Australia CGU. 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 Austal Australia 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.

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Note 20. Collateral

==> picture [299 x 49] intentionally omitted <==

----- Start of picture text -----

2015 2014
’000 ’000
Collateral
Collateral [1] $ 3,600 $ 2,917
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1. Legal requirem e nt in the USA to provide cash collateral to ensure that worke r s' compensation clai m s will be paid if the y eventuate.

i. Recognition and measurement Colla t eral in the statement of fi n ancial positi o n comprise s cash at bank with an ori g inal maturity of twelve mont h s or more.

ii. Prior year restatement

The $ 2.917 millio n was disclos e d as cash a n d cash equi v alents in th e FY2014 an n ual report.

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Other liabilities

Note 21. Provisions

Provisions at 30 Ju Arising during th Utilised Unused amount Effects of foreig Movement Provisions at 30 Ju ne 2014 e year s reversed n exchange ne 2015	Employee Benefits ’000 (13,72 $ (59,20 $ 56,62 68 2,90 1,01 $ (12,70 $ Workers' Compensation ’000 3) (8,144) $ $ 4) (14,604) $ $ 7 19,799 8 942 4 (12,362) 5 (6,225) $ $ 8) (14,369) $ $ Warranty Ot ’000 ’0 (6,575) $ (4,924) ( $ 4,829 2,010 (52) 1,863 $ (4,712) $ her To 00 ’0 (6,285) ( $ 132,368) (2 $ 129,403 2 710 5,360 3,105 $ (3,180) ( $ tal 00 34,727) 11,100) 10,658 4,350 (4,150) (242) 34,969)

2014 Current Non-Current Total 2015 Current Non-Current Total	Employee Benefits ’000 (12,70 $ (1,02 (13,72 $ (11,56 $ (1,13 (12,70 $ Workers' Compensation ’000 0) (8,144) $ $ 3) - 3) (8,144) $ $ 9) (14,369) $ $ 9) - 8) (14,369) $ $ Warranty Ot ’000 ’0 (6,575) $ - (6,575) $ (4,712) $ - (4,712) $ her To 00 ’0 (6,285) ( $ - (6,285) ( $ (3,180) ( $ - (3,180) ( $ tal 00 33,704) (1,023) 34,727) 33,830) (1,139) 34,969)

i. Recognition and measurement

Provi s ions are recognised when the Group h as a presen t obligation (legal or cons t ructive) as a result of a past e vent, it is pr o bable that an outflow of r esources e m bodying eco n omic benefi t s will be req u ired to settl e the o b ligation and a reliable es t imate can b e made of th e amount of t h e obligation. Provi s ions are dis c ounted usin g a current p r e-tax rate th a t reflects th e risks specifi c to the liabil i ty if the effec t of the time v alue of mon e y is material. The i n crease in th e provision due to the pa s sage of time is recognise d as a financ e cost when d iscounting is us e d.

ii. Information about individual provisions and significant accounting estimates

Wages, salaries, vested sick leave, work safe bonus and other short term benefits

Liabilities for wag e s and salari e s, including n on-monetar y benefits an d accumulati n g sick leave expected to be w h olly settled w ithin 12 mo n ths of the re p orting date a re recognised in other pa y ables in respect of empl o yees’ servic e s up to the r eporting dat e . They are m easured at t he amounts e xpected to b e paid whe n the li a bilities are s e ttled.

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Long service and annual leave

The Group does not expect its long service leave and annual leave benefits provision to be settled wholly within 12 months of each reporting date. The Group recognises a liability for long service measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows.

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. A dividend of 1 cent per share was issued for the half year 31 December 2014 and a dividend of 3 cents is proposed and not recognised as a liability for the year ended 30 June 2015 (FY2014: 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 that is chartered to the US Military Sealift Command, to return the vessel to a passenger ferry specification. This is consistent with the comparative period.

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LCS 2 – USS INDEPENDENCE

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Financial risk management

Note 22. Fair value measurements

i. Financial assets and financial liabilities

The G roup holds the following f inancial inst r uments:

		Derivatives used for hedging at fair value	Assets at amortised cost	Assets at amortised cost	Total
Financia l Assets	Notes	’000	’000		’000
2015
C ash and cash equiva lents	10 10 14 23 10 10 14 23 Notes 17 23 11 17 23 11	- $	$ 138,413		138,413 $
R estricted cash		- - 115	10,055		10,055
T rade & other receivab les			104,499		104,499
F orward exchange con tracts			-		115
T 2014 otal		115 $	$ 252,967		253,082 $
C R T F ash and cash equiva estricted cash rade & other receivab orward exchange con lents les tracts		- $ - - 8,488	$ 74,428 9,532 96,773 -		74,428 $ 9,532 96,773 8,488
T Financia 2015 T otal l Liabilities rade & other payable s		8,488 $ Derivatives used for hedging at fair value ’000 - $	$ $ 180,733 Assets at amortised cost ’000 (223,497)		189,221 $ Total ’000 (223,497) $
F I orward exchange con nterest bearing borrow tracts ings		(36,074) -	- (154,562)		(36,074) (154,562)
T 2014 T otal rade & other payable s		(36,074) $ - $	$ $ (378,059) (183,570)		(414,133) $ (183,570) $
F orward exchange con tracts		(4,201) -	-		(4,201)
I nterest bearing borrow ings			(155,456)		(155,456)
T otal		(4,201) $	$ (339,026)		(343,227) $

The G roup’s expo s ure to vario u s risks asso c iated with the financial instruments is d iscussed in Note 23. The m aximum ex p osure to cre d it risk at the end of the r e porting period is the carr y ing amount o f each class of fin a ncial asset m entioned a b ove.

The f a ir value of assets and lia b ilities held at amortised c ost is descri b ed in the as s ociated not e referenced in th e table above .

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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. The Group has classified its financial instruments into the three levels prescribed under the accounting standards to provide an indication about the reliability of the inputs used in determining fair value. An explanation of each level follows underneath the table.

Recurring fair value measurement		Level 1	Level 2	Level 3	Level 3	Total
Balance 30 June 2015	Notes	’000	’000	’000		’000
Financial assets
Derivatives used for hedging Financial liabilities Derivatives used for hedging	23 23	- $ - $	115 $ (36,074) $	- $ - $		115 $ (36,074) $
Balance 30 June 2014
Financial assets Derivatives used for hedging Financial liabilities Derivatives used for hedging	23 23	- $ - $	8,488 $ (4,201) $	- $ - $		8,488 $ (4,201) $

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.

The Group enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings. Foreign exchange forward contracts are valued using valuation techniques, which employs the use of market observable inputs. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates, yield curves of the respective currencies, currency basis spreads between the respective currencies, interest rate curves and forward rate curves of the underlying commodity. All derivative contracts are fully cash collateralised, thereby eliminating both counterparty and the Group’s own nonperformance risk. The fair value of derivative asset positions at 30 June 2015 is net of a credit valuation adjustment attributable to derivative counterparty default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness assessment for derivatives designated in hedge relationships and other financial instruments recognised at fair value.

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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. 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 for financial instruments that are recognised at fair value on a recurring basis.

All of the resulting fair value estimates are included in level 2.

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. The reversal is recognised in profit or loss for financial assets measured at amortised cost.

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. The Group has classified its assets and liabilities measured at fair value into the three levels prescribed under the accounting standards to provide an indication about the reliability of the inputs used in determining fair value.

		Level 1	Level 2	Level 3		Total
Balance 30 June 2015	Notes	’000	’000	’000		’000
	18 18
Land & buildings		- $	- $	357,690 $		357,690 $
Balance 30 June 2014
Land & buildings		- $	- $	303,819 $		303,819 $

There were no transfers between any of the levels for recurring fair value measurements during the year.

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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.

For the revaluation of Land & Buildings in June 2012, the Group changed its accounting policy for the measurement of land and buildings to the revaluation model. The Group engaged CB Richard Ellis and Knight Frank to determine the fair value of its land and buildings for USA and Australia respectively. Both firms are accredited independent valuers.

The last independent revaluation was performed on 29 June 2012.

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 Land - Mobile Buildings - Mobile	Fair value at 30-Jun-15 '000 US$11,000 US$304,242	Unobservable inputs Selection of land with similar approximate utility Consumed economic benefit/ obsolescence of asset Cost per square foot floor area (ft2)	Range of inputs Relationship of (probability- unobservable inputs weighted average) to fair value US$1.69 - US$2.04 Higher value of similar land (US$1.70) per ft2 increases estimated fair value 2.22% Greater consumption of economic benefit or increased obsolescence lowers fair value. US$100 - $211 ($185) Higher cost per ft2 per ft2 increases fair value.
Land - Henderson Buildings - Henderson	A$8,800 A$22,900	Selection of land with similar approximate utility Consumed economic benefit/ obsolescence of asset Cost per square meter floor area (m2)	$200-220 ($210) per m2 Higher value of similar land increases estimated fair value 2.50% Greater consumption of economic benefit or increased obsolescence lowers fair value. $500 - $1,750 ($998) Higher cost per m2increases per m2 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. The recoverable amount of an asset is determined if an impairment trigger exists. The recoverable amount of the asset is the higher of fair value less costs to sell and 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 in assessing value in use.

The recoverable amount is determined for the cash-generating unit to which an asset belongs for an asset that does not generate largely independent cash inflows, 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.

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Note 23. Financial risk management

This note e x plains the G r oup’s expos u re to financi a l risks and h ow these ris k s could affe c t the Group’ s future financial pe r formance. C u rrent year p r ofit and loss information h as been included where r elevant to a d d further context.

Risk Market risk - in Market risk - in Market risk - fo Credit risk Liquidity terest rate terest rate reign currency	Exposure aris ing from	Monitoring Sensitivity Sensitivity Cash flow Sensitivity Ageing ana ratings Rolling cas analysis analysis forecast, analysis lysis, credit h flow forecasts Managemen Interest rate Interest rate Forward fore contracts, Fo options Monitoring cr Availability o lines and bor t swaps swaps ign exchange rward currency edit allowances f committed cred rowing facilities
	Long-term bor Cash Future comme recognised fin denominatedi Cash, short te and derivative Borrowings, tra financial instru rowings at varia rcial transaction ancial assets an n functional curr rm deposits, trad financial instrum de payables an ments ble rates s, d liabilities not ency e receivables ents d derivative

Objectives and policy

Ultimate responsibility fo r identificatio n and control of financial risks rests with the Board o f Directors. The Board reviews and agrees policies for mana g ing each of t he risks ide n tified below, including he d ging cover o f foreign currency, cr e dit allowances, and futur e cash flow f o recast proje c tions.

Details of th e significant a ccounting p o licies and methods adop t ed, including the criteria f o r recognitio n , the basis of measure m ent and the basis on whi c h income a n d expenses are recognis e d, in respec t of each cla s s of financial asset, finan c ial liabilities a nd equity in s trument are disclosed in the relevant n otes to the f inancial stat e ments.

Market risk

i. Capital management

The G roup’s polic y is to maintain a strong a n d flexible c a pital base to provide inve s tor, creditor and market confi d ence to sus t ain future de v elopment o f the busines s . The Grou p monitors th e return on c a pital, which the G roup defines as total shareholders’ eq u ity attributa b le to members of Austal L imited. The Board deter m ines the le v el of dividen d s to shareh o lders.

The G roup monitors statement of financial p osition stren g th and flexi b ility using ca s h flow forec a st analysis and d etailed budg e ting proces s es. The gro s s gearing ratio is monitored and main t ained at a le v el that does not li m it the Grou p ’s growth op p ortunities a n d is in line w ith peers an d industry no r ms.

Ther e were no ch a nges in the G roup’s appr o ach to capital managem e nt during th e year. Risk m anagemen t polici e s and proc e dures are es t ablished wit h regular mo n itoring and r e porting.

Neither the Group nor any of it s subsidiarie s are subject t o externally imposed capital requirem e nts, other than n ormal banking requirem e nts.

ii. Interest rate risk exposure

The G roup’s expo s ure to mark e t interest ra t es relates pr i marily to the Group’s lon g -term debt o b ligations and i n vestment in cash funds. The G roup constantly analyse s its interest r a te exposure. Consideration is given t o potential r e newals of existi n g positions a nd alternati v e financing s tructures.

The G roup had th e following v a riable rate b o rrowings an d interest rat e swap contr a cts outstan d ing at the end o f the reporti n g period.

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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	2015 2014 ’000 ’000 54,909 $ 35,325 $ 93,559 48,635 148,468 $ 83,960 $ - $ (13,192) $ (154,562) (142,264) (154,562) $ (155,456) $ (6,094) $ (71,496) $

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 material impact on other components of equity as a result of changes in interest rates. The sensitivity analysis below 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 FY2015 observations.

==> picture [295 x 59] intentionally omitted <==

----- Start of picture text -----

2015 2014
’000 ’000
Post tax gain / (loss)
+1% (100 basis points) $ (198) $ (686)
-1% (100 basis points) 198 686
----- End of picture text -----

iii. Interest rate risk strategies, policies and procedures

The cash, debt, bank covenants and interest cover ratio of the Group are forecasted and monitored on a monthly basis in order to forecast and monitor the interest rate risk. A variable interest rate is maintained because repayments are carried out as soon as practicable, where a fixed interest rate is less flexible. The interest rate movement is currently immaterial.

iv. Foreign currency risk

Refer to Note 24 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 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 and EUR.

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 the functional currency of each cash generating unit.

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

• using financial instruments (refer to Note 24).

Sales contracts are negotiated based at the current market rate on the contract signing date. The Group seeks to mitigate significant foreign currency exposures in contract tenders by incorporating rise and fall clauses for exchange rate movements between the date of price calculation to the date the contract becomes effective.

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Known foreign exchange transaction exposures, which result from normal operational business activities, are hedged utilising financial instruments.

Tax profit and equity would have been affected as illustrated in the table below had the AUD, USD and EUR moved relative to one another at balance date with all other variables held constant:

Judgement of reasonable possible movements USD / AUD +10% -10% EUR / AUD +10% -10% EUR / USD +10% -10%	Post taxprofit higher /(lower) 2015 2014 ’000 ’000 (854) $ (4,727) $ 854 4,727 1 $ 2 $ (1) (2) - $ 4,515 $ - (4,515)		Equity higher /(lower)
	2015 ’000 (854) $ 854 1 $ (1) - $ -		2015 2014 ’000 ’000 3,679 $ 17,106 $ (5,011) (17,106) 868 $ (1,769) $ (1,061) 1,769 5,420 $ 4,515 $ (5,420) (4,515)

Derivative financial instruments such as forward currency contracts and currency options are utilised to eliminate foreign currency exposures. 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 24.

v. 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. 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 to manage this risk. The Group undertakes investments in short term deposits, term deposits or negotiable certificates of deposit in order to achieve this objective.

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.

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The Group’s exposure to counter party credit default risk arising from the other financial assets of the Group, which comprise cash and cash equivalents and certain derivative instruments, is 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 24.

Cash and term deposits are predominantly held with two tier one Australian financial institutions, which are considered to be low concentrations of credit risk.

vi. Liquidity risk

The liquidity position of the Group is managed to ensure sufficient liquid funds are available to meet 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 is in the process of finalising a new syndicated banking facility. The Syndicated Facility Agreement (SFA) matures 31 December 2015 and hence all liabilities relating to the SFA agreement have been disclosed as current at the reporting date.

The contractual maturities of financial liabilities, including interest payments are as follows:

Balance 30 June 2015 Derivative financial assets / (liabilities) Outflow Inflow Net derivative financial assets / (liabilities) Non Derivative financial liabilities Trade & other payables Go Zone Bond facility (i) Finance lease Total	Carrying Amount ’000 (251,112) $ 215,243 (35,869) $ (223,497) $ (145,113) (9,449) (378,059) $	Contractual Years to maturity Cash 0 - 1 1 - 2 2 - 5 > 5 Flows ’000 ’000 ’000 ’000 ’000 (160,799) $ (76,004) $ (21,362) $ - $ (258,165) $ 139,341 63,872 17,957 - 221,170 (21,458) $ (12,132) $ (3,405) $ - $ (36,995) $ (223,497) $ - $ - $ - $ (223,497) $ (145,525) - - - (145,525) (1,785) (3,597) (3,297) - (8,679) (370,807) $ (3,597) $ (3,297) $ - $ (377,701) $

(i) Go Zone Bonds are classified with 0 to 1 year to maturity because the letters of credit wrapping the bonds mature on 31 December 2015.

Balance 30 June 2014 Derivative financial assets / (liabilities) Outflow Inflow Net derivative financial assets / (liabilities) Non Derivative financial liabilities Trade & other payables Bank loan (unsecured) Go Zone Bond facility Revolving credit facility Total	Carrying Amount ’000 (377,752) $ 381,863 4,111 $ (183,570) $ (1,192) (142,264) (12,000) (339,026) $	Contractual Years to maturity Cash 0 - 1 1 - 2 2 - 5 > 5 Flows ’000 ’000 ’000 ’000 ’000 (154,468) $ (161,766) $ (81,962) $ (172) $ (398,368) $ 155,193 165,183 82,129 172 402,677 725 $ 3,417 $ 167 $ - $ 4,309 $ (183,570) $ - $ - $ - $ (183,570) $ (1,217) - - - (1,217) - (150,171) - - (150,171) (12,019) - - - (12,019) (196,806) $ (150,171) $ - $ - $ (346,977) $

The Group had $50.000 million (FY2014: $38.000 million) of unused credit facilities available for its immediate use at balance date (refer to Note 11). The Group also has a total of $138.413 million (FY2014: $74.427 million) in cash and cash equivalents, which it is able to use to meet its liquidity needs.

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Note 24. Derivative financial instruments and hedging

The Group i s exposed to the risk of a d verse move m ents in the A ustralian D o llar, US Doll a r and Euro relative to each other a rising from r e ceipts from e xport sales a nd the purc h ase of com p onents for c o nstruction.

The Group u ses derivati v e financial instruments s u ch as forwar d exchange c ontracts an d forward currency options to hedge its risks associ a ted with foreign currency fluctuations. These contr a cts are mat c hed to highl y probable receipts an d payments a n d they are timed to matu r e when the r eceipts and p ayments ar e scheduled to be received an d made.

i. Recognition and measurement

Derivative financi a l instrument s are stated a t fair value o n the date on which a deri v ative contract is entered into a nd are subs e quently rem e asured at fa i r value. Derivatives are c arried as as s ets when th e fair value is positi v e and as lia b ilities when the fair valu e is negative. Any g ains or loss e s arising fro m changes in the fair valu e of derivativ e s are taken t o the statement of profit and l o ss, except f o r those that q ualify as ca s h flow hedg e s, which are taken to ca s h flow hedg e reserve in other comprehen s ive income.

The f a ir value of f o rward curre n cy contracts is calculated by referenc e to current f o rward exchange rates for contr a cts with sim i lar maturity p rofiles. Credit risk has been included i n foreign cur r ency contra c ts.

The G roup’s deriv a tives are ca t egorised in l e vel 2 of the valuation hierarchy, beca u se their fair v alue has been calculated u s ing valuatio n techniques w here the in p uts that hav e a significa n t effect on th e valuation are d i rectly or indi r ectly based o n market o b servable dat a .

ii. Hedge designation

• For t h e purposes o f hedge acc o unting, hed g es are classified as:  f air value he d ges when th e y hedge th e exposure to changes in the fair value o f a recogni s ed asset or l iability or an unrecognise d firm commi t ment other t h an foreign currency risk; or

• c ash flow he d ges when they hedge ex p osure to va r iability in cash flows that i s attributable either to a p articular ris k associated w ith a recog n ised asset o r liability or foreign excha n ge risks on firm c ommitment s .

The G roup formally designates and docum e nts the hedge relationshi p to which th e Group wish e s to apply hedg e accounting and the risk managemen t objective a n d strategy fo r undertakin g the hedge at the inception of a hed g e relationship.

The d ocumentation includes id e ntification o f the hedging instrument, t he hedged it e m or transa c tion, the natur e of the risk b eing hedge d and how th e entity will a s sess the he d ging instrum e nt’s effectiv e ness in offse t ting the exp o sure to changes in the h e dged item’s f air value or c ash flows at t ributable to t h e hedged risk.

Such hedges are e xpected to b e highly effe c tive in achieving offsetting changes in fair value or cash flows and a re assessed on an ongoi n g basis to d e termine that they actuall y have been h ighly effecti v e throughou t the fi n ancial repor t ing periods for which the y were desig n ated.

iii. Fair value hedge accounting

Fair v alue hedges are hedges o f the Group’ s exposure t o changes in the fair valu e of a recognised asset or liabili t y or an unre c ognised fir m commitmen t other than f o reign excha n ge rate risk, or an identif i ed portion of such an asset, lia b ility or firm c o mmitment t h at is attribut a ble to a particular risk an d could affect profit or loss. The carryin g amount of a hedged ite m is adjusted f or gains and losses attrib u table to the risk being hedg e d, the deriv a tive is reme a sured to fair value and g a ins and loss e s from both are taken to t he state m ent of com p rehensive in c ome.

The G roup discon t inues fair value hedge a c counting if the hedging in s trument exp i res or is sol d , terminated or ex e rcised, the h edge no lon g er meets th e criteria for h edge accou n ting or the G roup revoke s the designation. Any a djustment t o the carryin g amount of a hedged fina n cial instrum e nt for which the effective inter e st method is used is amo r tised to the s tatement of c omprehensi v e income. A mortisation m ay begin as soon as an adj u stment exis t s and shall begin no later than when t h e hedged it e m ceases to be adjusted for c h anges in its f air value attributable to the risk being h edged.

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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. The amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability when the hedged item is the cost of a nonfinancial 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 the AUD value of the significant forward foreign exchange agreements and forward currency options by currency. 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.

USD / AUD less than 3 months 3 - 12 months > 12 months Total EUR / AUD less than 3 months 3 - 12 months > 12 months Total USD / EUR less than 3 months 3 - 12 months > 12 months Total GBP / AUD less than 3 months 3-12 months > 12 months Total		201	5	Sell '000 (607) $ (1,008) (262) (1,877) $ (424) $ (10,850) (5,069) (16,343) $ (1,138) $ (30,913) (45,486) (77,537) $ (74) $ (165) (77) (316) $		20	14
	Average Forward Rate 0.8398 0.8847 0.8661 0.7343 0.6904 - - - - - 0.5263 0.5533	Buy '000 2,843 $ 85,792 29,081 117,716 $ 477 $ 445 - 922 $ - $ - - - $ - $ 1,820 1,580 3,400 $	Average Forward Rate 0.8286 0.7720 0.7644 0.6664 0.6111 0.5933 1.2313 1.3407 1.3772 0.5223 0.5563 0.5056		Average Forward Rate 0.9603 0.9167 0.8775 0.6608 0.7403 0.7343 - - - - 0.5640 0.5511	Buy '000 897 $ 80,868 131,794 213,559 $ 1,809 $ 203 477 2,489 $ - $ - - - $ - $ 1,637 3,265 4,902 $	Average Forward Rate 1.0012 0.9599 0.9713 - 0.6400 0.6089 1.3322 1.3709 1.3941 0.6222 0.6126 0.5548	Sell '000
								(249) $ (3,436) (86)
								(3,771) $
								- $ (1,382) (22,285)
								(23,667) $
								(782) $ (59,448) (85,849)
								(146,079) $
								(36) $ (115) (552)
								(703) $

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. All outstanding transactions under an ISDA agreement are terminated in certain circumstances, for example, when a credit event such as a default occurs. 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.

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Unrecognised items

Note 25. Commitments and contingencies

i. Commitments

The G roup entitie s may have potential financial liabilities that could arise from hist o rical comm e rcial contr a cts. No mat e rial losses are anticipate d in respect o f any of thos e contingenc i es. The fair v alue discl o sed (if any) is the Directors’ best esti m ate of amou n ts that woul d be payable by the Grou p to settle thos e financial lia b ilities.

						2015		2014
						’000		’000
Operatin g lease commitme nts
Futu re minimum rentals payable under non -cancellable leases as at 30 June are a s follows
With in one year					$	(2,153)	$	(1,395)
After one year but not mo re than five years						(478)		(1,744)
Tota l					$	(2,631)	$	(3,139)
Capital leases
With in one year					$	(1,792)	$	-
After one year but not mo re than five years						(7,658)		-
Tota l					$	(9,450)	$	-
Capital commitments
Mob ile Equipment - USA						(2,088)	$	(72)
Tota l					$	(2,088)	$	(72)
Guarant ees
Bank performance guaran tees (i)					$	(79,965)	$	(41,605)
(i) The bank performa nce guarantees		ar e secured by a mort gage over the land			and buildings and
floating charges ov er cash, receivable			s, work in progress	and plant and equip ment.

ii. Other contingent liabilities excluded from the above include:

The p arent comp a ny has guar a nteed the p e rformance o f certain cont r act obligatio n s of a subsi d iary.

Aust a l received n o tice of Arbitr a tion procee d ings initiate d by a comm e rcial custom e r in FY2013. The claim is in r espect of co n sequential damages aris i ng from a w a rranty defec t . The shipb u ilding contract between the p a rties specifi c ally exclude s consequen t ial damages in relation to warranty de f ects. The c o mpany inten d s to defend t he claim.

Note 26. Events after the balance date

A fully frank e d dividend o f 3 cents per share (FY2 0 14: Nil) has b een propos e d.

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The Group, management and related parties

Note 27. Parent interests in subsidiaries

The consoli d ated financi a l statement s include the f inancial stat e ments of Au s tal Limited a nd the subsi d iaries listed in the follow i ng table.

Company Austal Cyprus Ltd Austal Egypt LLC Austal Holdings Inc Austal Hull 130 Cha Austal Muscat LLC Austal PhilippinesP Austal Service Darw Austal Service Pty Austal Ships Pty Lt Austal Systems Pty Austal UK Ltd Austal USA LLC Hydraulink (NT) Pty Austal Middle East KM Engineering (N Oceanfast LuxuryY Oceanfast Pty Ltd Seastate Pty Ltd rtering LLC ty Ltd in Pty Ltd Ltd d Ltd Ltd Pty Ltd T) Pty Ltd achts Pty Ltd	Country of Incorporation Cyprus Egypt USA USA Oman Australia Australia Australia Australia Australia United Kingd USA Australia Australia Australia Australia Australia Australia om	Eq uity Interest
		2015 2014
		1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 00% 100% 00% 100% 00% 100% 00% 100% 00% 100% 00% 100% 80% 80% 00% 100% 00% 100% 00% 100% 00% 100% 00% 100% 80% 80% 00% 100% 80% 80% 00% 100% 00% 100% 00% 100%

100% owned by A ustal Service Dar w in Pty Ltd, which itself is 80% owne d* by Austal Service Pty Ltd.

Note 28. Related party disclosure

It is Group p olicy that all t ransactions w ith related p arties are c o nducted on c ommercial t e rms and conditions. No related p arty transactions occurre d with the co n solidated entity other tha n the remun e ration of Dir e ctors and Key Manag e ment Perso n nel and the m atters discl o sed in this r e port.

Note 29. Key management personnel compensation

Short-term employe Post-employmentb Termination benefi Long term benefits Share-based paym Total e benefits enefits ts ent	2015 ’000 3,5 $ 2 1 4 4,4 $ 2014 ’000 66 3, $ 40 78 - 20 60 64 4, $ 309 164 125 442 040

Detailed re m uneration di s closures ar e provided in t he Remune r ation Report commencin g on page 15.

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Note 30. Share based payments

i. Long Term Incentive Plan

The l o ng term inc e ntive plan p o licy of the C o mpany is th a t an annual component o f remunerati o n of exec u tives should be at-risk and based on e quity in the C ompany. T h is is intende d to ensure t h at exec u tives hold a stake in the C ompany an d to align their interests wi t h those of s h areholders.

The b oard also undertook a re v iew of the L T I scheme following its initial 2 years o f operation. The purpose was t o ensure tha t the scheme continued to drive long t e rm executiv e performanc e as well as m eet normal industry practice. A number of changes we r e implemented most not a bly to the a w ard levels as shown belo w in this secti o n. In additi o n, following s ignificant m a rket feedba c k, the TSR a w ard measu r e has been chan g ed from an a bsolute TS R to a relative TSR or iTS R .

Purpose

The p urpose of th e LTI Plan is to incentivis e Senior Exe c utives to deliver Group p e rformance t h at will lead to su s tainable su p erior returns for sharehol d ers and to m odulate the c ost of emplo y ing Senior E xecutives.

Form of incentive

The L TI should b e based on P e rformance R ights that ve s t based on a n assessme n t of perform a nce against obje c tives

Measurement period

The C ompany ins t ituted a tran s itional arran g ement for the LTI schem e for FY2014 and FY201 5 which was explained in the F Y 2014 Annu a l Report. The s tandard me a surement period from FY 2 016 onwards will be thre e years.

Measures of long term performance

The C ompany will use two lon g term perfor m ance meas u res:

 TSR which the board believes best r e flects intern a l measures o f performan c e  ROIC whic h the board believes best r eflects external measure s of perform a nce

Performance hurdles

The g ranting of p e rformance ri g hts is tied e x clusively to o verall Grou p performanc e , measured against ROI C and TSR ta r gets set peri o dically by t h e Board. Th e targets will b e based on G roup performance, rathe r than busin e ss unit perfo r mance in or d er to maxim i se alignmen t with shareh o lder interests; Performance right s will not ves t unless thes e hurdles, ar e met. Perfo r mance hurdles will be m e asured over a pre s cribed period determine d by the Boar d . The p erformance h urdles for ri g hts granted i n FY2014 a n d FY2015 a r e as follows:

Return on Invested Capital (ROIC) measure

Seni o r Executives are faced with significant and long ter m business development a nd project based chall e nges, theref o re the LTI s h ould also b e linked to th e achieveme n t of ROIC gr o wth objectives that will lead t o value crea t ion for shareholders. Thi s measure is considered the best mea s ure of long term perfo r mance from an internal perspective b y the Board and by major s takeholders .

ROI C is calculate d by dividing t he Net oper a ting profit af t er tax exclusive / Net As s ets (excluding Cash, Debt, Derivatives a nd Tax Acc o unts).

Actu a l ROIC results are comp a red against i n ternal targe t s.

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Total Shareholder Return (TSR) measure

TSR has the strongest alignment with shareholders is TSR, however it is recognised that absolute TSR is influenced by overall economic movements, therefore future grants of LTI will be offered to executives that vest based on indexed TSR (iTSR).

iTSR determines the performance of the Group relative to the entire market rather than capturing the absolute performance of the Group.

A relative TSR was considered however it was not possible to identify a comparator group of companies that was statistically robust enough to be meaningful and the Board was concerned that this would undermine the link between executive performance and reward outcomes.

iTSR will apply to future grants of LTI from FY2016 based on a comparison of Austal’s TSR against the S&P All Ordinaries Accumulation index “XAOAI”

Vesting of Performance Rights

The Performance Rights for each employee 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.

Performance rights that do not vest will lapse.

Holding period

A one year holding period applies to shares that are awarded as a result of Performance Rights vesting.

Rights issued and valuation

1,173,456 (FY2014: 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) Fair value of right at grant date	FY20	15 che 2 21 Oct 2014 1.04 $ 40% 2.60% Nil Nil 3 0.65		FY2014
	Tran			Tranche
	1 30 Oct 2014 1.04 $ 40% 2.60% Nil Nil 3 0.70			1 2 18 Nov 2013 13 Dec 2013 0.70 $ 0.84 $ 40% 40% 2.90% 2.80% Nil Nil Nil Nil 3 3 0.34 0.44

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 ESOP 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.

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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 ESOP Outstanding at the beginning of the year Exercised during the year Forfeited during the year Outstanding at the end of the year Exercisable at the end of the year	201	5 WAEP 2.52 $ - $ 2.15 2.53 $		2014
	Number 6,531,736 - (210,000) 6,321,736 6,321,736			Number WAEP 7,190,486 2.49 $ - - $ (658,750) 2.23 6,531,736 2.52 $ 2,826,736

Share options outstanding at the end of the year have the following expiry dates and exercise prices:

Tranche 2 3 4 5 8 9 Total	Grant date 13-Sep-07 24-Oct-07 10-Sep-08 03-Nov-09 27-Sep-10 21-Oct-11	Expiry Date 13-Sep-14 24-Oct-14 10-Sep-15 03-Nov-16 27-Sep-17 21-Oct-18	3.60 $ 3.60 2.40 2.95 2.34 2.15 Exercise Price	No. of share options atyear end
				Outstanding Exercisable 311,236 311,236 140,000 140,000 725,500 725,500 1,505,000 1,505,000 1,925,000 1,925,000 1,715,000 1,715,000 6,321,736 6,321,736

iii. Austal Group Management Share Plans (AGMSP)

The trustee holds a total of 4,015,539 shares at balance date on behalf of the plans represented by:

• 398,539 shares allocated under Plan 1 and Plan 2 with a weighted average price of $1.33 each, with no contractual life, and

• 3,617,000 shares 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. 20% of a participant’s shares will become eligible to be transferred after this period provided that 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 12month 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.

• The shares must be sold and the loan (if any) repaid upon termination of employment or contract arrangements.

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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:

Summary of options granted under AGMSP Outstanding at the beginning of the year Granted during the year Exercised during the year Forfeited during the year Outstanding at the end of the year	2015 2014 ’000 ’000 1,066 1,351 - - (335) - - (285) 731 1,066

All remaining options were fully vested and exercisable throughout the year

iv. CEO fixed remuneration share rights issue

The structure of Base Remuneration for the CEO has been changed post balance date.

The previous structure provided for the following base remuneration for the CEO:

• Fixed cash remuneration

• Fixed share based remuneration equal to 30% of the fixed cash remuneration. The number of shares are based on the volume weighted average closing price of ASB shares in each 6 month period.

• The fair value of the share rights has been determined based on the Company share price at the grant date of 30 October 2014, being the date of the 2014 annual general meeting at which the share rights were approved.

Name	Period earned	Grant date	Granted 92,602 68,598 161,200	Fair value per share Fair value 1.30 $ 120,383 $ 1.30 89,177 209,560 $
Andrew Bellamy Andrew Bellamy Total	FY2015 H1 FY2015 H2	30 Oct 2014 30 Oct 2014

The Board resolved to amend and simplify the fixed remuneration structure subsequent to the year end, to reflect general market practice.

A new base remuneration consisting solely of cash was set post balance date for the period 1 January 2015 to 30 June 2015. The fixed cash remuneration was increased by 30% of the previous fixed cash remuneration. The increase in the fixed cash remuneration was equal to the previous share based fixed remuneration.

The FY2015 H1 share rights provided as fixed remuneration have been converted into shares. The FY2015 H2 share rights will not be converted into shares due to the cash settlement subsequent to the year end.

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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).

Equity settled benefits have been provided to senior management and Directors under the following plans in the current and prior years:

• The Austal Group Management Share Plan (AGMSP)

• Employee Share Option Plan (ESOP)

• The Long Term Incentive Plan (LTI Plan)

• CEO shares

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.

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 in valuing equity-settled transactions. The number of entitlements included in expense recognition is adjusted to an estimate of the ultimate number of entitlements expected to vest where non-market performance conditions must be satisfied.

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 because 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.

An expense is recognised as if the terms had not been modified. An expense also 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.

An equity settled award that is cancelled 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, cancelled awards and new awards are treated as if they were a modification of the original award if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, 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.

vi. Recognised share-based payment expenses

The expense recognised for share based payments during the year is shown in the table below:

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2015 2014
’000 ’000
Share Based Payments Expense
Expense arising from equity-settled share-based payment transactions $ (1,373) $ (383)
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Share Based Payments Expense

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Note 31. Parent entity

Information r elating to A u stal Limited, the Parent e n tity, is detailed below:

Balance sheet Assets Current Non - Curren Total Liabilities Current Non - Curren Total Net Assets Equity Contributed Employee b Asset revalu Cash flow h Retained ea Total Income Net Profit /( Total Compr t t Equity enefits reserve ation reserve edge reserve rnings Loss) after tax ehensive Income	$ $ $ $ $ $ $ $ 2015 ’000 108,498 $ 297,056 405,554 $ (46,392) $ (18,307) (64,699) $ 340,855 $ 112,523 $ 7,685 8,246 (20,184) 232,585 340,855 $ 2,928 $ (25,519) 2014 ’000 239,735 176,776 416,511 (28,135) (19,980) (48,115) 368,396 111,598 6,750 8,247 8,675 233,126 368,396 39,563 39,563

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Directors’ declaration

I state in accordance with a resolution of the Directors of Austal Limited, 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 at 30 June 2015 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, 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 at the date of this declaration.

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 2015.

On behalf of the Board.

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John Rothwell AO Chairman 25 August 2015

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LCS 2 – USS INDEPENDENCE

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Independent audit report to the members of Austal Limited

Ernst & Young Tel: +61 8 9429 2222 11 Mounts Bay Road Fax: +61 8 9429 2436 Perth WA 6000 Australia ey.com/au GPO Box M939 Perth WA 6843

Independent audit report to members of Austal Limited

Report on the financial report

We have audited the accompanying financial report of Austal Limited, which comprises the consolidated statement of financial position as at 30 June 2015, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year.

Directors' responsibility for the financial report

The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 2, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards.

Auditor's responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report.

A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation

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Opinion

In our opinion

• a. the fina n cial report of A ustal Limited is in accordanc e with the Cor p orations Act 2 0 01, including:

• i. gi v ing a true and fair view of the consolidated e ntity's financi a l position as a t 30 June 2015 and of its perf o rmance for th e year ended o n that date; an d

• ii. c o mplying with A ustralian Accounting Standa r ds and the Co rp orations Reg u lations 2001; a nd

• b. the fina n cial report als o complies wit h International F inancial Rep o rting Standar ds as disclosed i n Note 2.

Report on t h e remunera t ion report

We have audi t ed the Remun e ration Report included in the directors' rep o rt for the year e nded 30 June 2 015. The dire c tors of the company are r esponsible for the preparatio n and presenta t ion of the Re m uneration Rep o rt in accordance with section 300A of the Corporations A ct 2001. Our r esponsibility i s to express an o pinion on the Remuneration R eport, based o n our audit conducted in accordance w i th Australian A uditing Stand a rds.

Opinion

In our opinion , the Remuner a tion Report of A ustal Limited f or the year en d ed 30 June 2015, complies w ith section 30 0 A of the Corporations A ct 2001.

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Robert A Kirk b y Partner Perth 25 August 20 1 5

A member firm of E r nst & Young Global Limi t ed Liability limited by a scheme approved under Professional Standards Legislation

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Shareholder information

The following information was extracted from the Company’s register at 13 August 2015.

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 shares issued capital
	1,566 750,375 0.22% 1,915 5,182,203 1.49% 700 5,344,876 1.54% 755 19,735,927 5.69% 69 315,910,070 91.06%
	5,005 346,923,451 100.00%

Twenty largest shareholders

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20	Shareholder HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Ltd Austro Pty Ltd RBC Investor Services Australia Nominees Pty Limited Onyx (WA) Pty Ltd BNP Paribas Noms Pty Ltd Mr Vincent Michael O’Sullivan Austal Group Management Share Plan Pty Ltd Garry Heys & Dorothy Heys RBC Investor Services Australia Nominees Pty Limited UBS Nominees Pty Ltd Mr William Robert Chambers Mirrabooka Investments Limited Lavinia Shipping Ltd Mossisberg Pty Ltd Bond Street Custodians Limited Navigator Australia Ltd Warbont Nominees Total	Number of % of Total Substantial holders issued capital shareholder 82,088,257 23.66% Yes 60,697,725 17.50% Yes 37,347,233 10.77% Yes 34,937,510 10.07% Yes 32,200,745 9.28% Yes 12,779,593 3.68% 8,317,570 2.40% 5,807,717 1.67% 4,164,000 1.20% 4,015,818 1.16% 2,844,670 0.82% 2,730,973 0.79% 2,644,953 0.76% 2,325,650 0.67% 2,000,000 0.58% 2,000,000 0.58% 1,922,000 0.55% 1,594,718 0.46% 1,517,257 0.43% 1,374,717 0.40% 303,311,106 87.42%

Voting rights

All ordinary shares issued by Austal Limited carry one vote per share without restriction.

Corporate governance statement

The Company has elected to post its Corporate Governance Statement on its website in accordance with ASX Listing Rule 4.10.3. The Corporate Governance Statement can be found at the following URL: www.austal.com/corporategovernance.

99 | AUSTAL LIMITED ANNUAL REPORT 2015

Corporate Directory

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JHSV 1 - USNS Spearhead

Directors

Executive Directors

Andrew Bellamy

Non-Executive Directors

Giles Everist Jim McDowell John Rothwell David Singleton

Auditors

Ernst & Young

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JHSV 2 - USNS Choctaw County

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JHSV 3 - USNS Millinocket

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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

JHSV 4 - USNS Fall River

100 | AUSTAL LIMITED ANNUAL REPORT 2015