Mitsubishi Exits Cruise Business; Books $357m Loss

Maritime Activity Reports, Inc.

October 31, 2014

Mitsubishi Heavy Industries, Ltd. (MHI) announced its decision to book an extraordinary loss from its cruise ship business in the company's consolidated financial results for the first half (1H) of the current fiscal year (FY) 2014 (ending March 31, 2015).

Reasons Behind the Extraordinary Loss
In November 2011 MHI received an order for two large-sized cruise ships for the AIDA Cruises brand. As work proceeded, however, difficulties in constructing the prototype became evident. The volume of design work relating to cabins and other areas was vast beyond expectation, and significant design changes were made. The delay in the overall design work caused by these factors not only increased design costs but also made adverse impact on the construction schedule and need for additional material procurement. With this background, the company expected a substantial loss in the project and booked an extraordinary loss of 64,126 million yen in its consolidated financial results for FY2013.

In March 2014 MHI set up a new project management structure and proceeded with construction. In the course of confirming and pursuing the advanced specifications with the customer, however, reconsideration of the basic design concept was required for the overall layout of the ship's public areas, cabins and auxiliary facilities, causing a vast amount of design rework and a significant delay in the design schedule.

Although MHI had assigned additional design resources to the project and taken other measures, in the second quarter (2Q), the company was forced to revise the first ship's construction schedule due to a delay in completing the requisite drawings. Moreover, it has led to a delay on the second ship's work schedule.

As a result, MHI expects further increase of costs due to design rework, rush work to make up for the delays, and procurement of additional materials resulted from the changes to the design specifications.

Booking of the Extraordinary Loss
Under the circumstances, the scale of losses is now expected to significantly exceed the extraordinary loss that was booked to the company's consolidated financial results in FY2013. For this reason, the company has booked an extraordinary loss in the amount of 39,841 million yen in its consolidated financial results for 1H FY2014.

Impact on FY2014 Earnings Forecasts
The extraordinary loss described in the foregoing has been reflected to the company's full-year FY2014 consolidated financial results forecasts included in its 1H FY2014 results statement (Japanese accounting standards) released separately today.

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