Austal reports $115 million in extra LCS costs

HENDERSON, Australia, July 5 (UPI) -- Austal has announced a $115 million downward adjustment to revenue and work in progress for Fiscal 2016 due to higher-than-expected U.S. Navy Littoral Combat Ship costs.

Austal has encountered scheduling and margin pressure in the LCS program following delivery of the USS Jackson last summer, the company's first as prime contractor, the company said in a LCS program and earnings update statement Monday.

"The change of estimate means that too much revenue and profit was attributed to work already completed," Austal said. "Work in progress (WIP) is overstated because additional costs will be incurred to meet the shock standard and US Naval Vessel Rules. This is being written back as a one-off, US$115 million (A$156 million) downward adjustment to revenue and work in progress (WIP) in FY2016."

The Navy accepted delivery of that ship in August.

"The contractual requirement to meet the military shock standard and US Naval Vessel Rules has driven a significantly higher level of modifications to the ship design and cost than previously estimated," the Australian shipbuilder said after preliminary results of the first two physical shock trials for the USS Jackson, or LCS 6.

Austal's review of its $4 billion LCS block buy contract found that implementation of the modifications was successful and will provide "greater certainty about the maturity of the revised baseline design and the cost of construction," the company said.

Design modifications and significant re-work of ongoing construction are being implemented across the other LCS vessels under construction, Austal said.

Austal is working under an 11-ship, $3.5 billion contract.

The shock tests at the center of the cost issues are a contractual obligation that requires the ships to survive the effects of local explosive blasts, Austal said.

"The LCS is the first aluminum trimaran in the world to undergo such an analysis and test," the company said. "The test regime qualifies the vessel's entire class and no further shock trials are expected for subsequent vessels."

The costs of modifying vessels and components that were already built has been exacerbated by the concurrent construction schedule of the other vessels under contract that are at various stages of construction, Austal said.

"Modifications to vessels at an advanced construction phase will be more expensive and difficult to implement than pre-launch modifications or modifications to vessels not yet under construction," the company said.