Shock test prep costs put dent in Austal profits

JULY 5, 2016 — The good news from Austal is that there have been “favorable preliminary results” from the three Full Scale Shock Trials of LCS 6 — the first aluminum trimaran in the world to undergo such an analysis and test.

The bad news is that higher than expected costs, many of them related to the contractual requirement to meet the military shock standard and U.S. Naval Vessel Rules, resulted in the shipbuilder yesterday announcing a US$115 million (A$156 million) write of work in progress (WIP) to recognize an increase in the cost of LCS series construction.

Austal had halted trading on the Australian Securities Exchange (ASX) June 30 pending the release of the results of a review of its U.S. shipbuilding operations.After closing at A$1.21 June 30, shares reopened July 4 at .95 cents but closed at A$1.12. As of 4.10 p.m. local time today, they were trading at A$1.10.

In its ASX announcement, Austal said that “the delivery of LCS 6 and 8, completion of preparations for the shock trials of LCS 6 and favorable preliminary results from the first two physical shock trials of LCS 6 which were undertaken in June 2016, have enabled Austal to define a revised baseline design for a shock rated vessel built to U.S. Naval Vessel Rules.”

“Initial findings of the shock trials are that the implementation of these design modifications have been successful, providing Austal with greater certainty about the baseline LCS design and estimated cost of construction, and how that applies across the LCS program.

“Austal has undertaken an extensive review of the LCS program to gain greater clarity on the costs associated with building to the revised baseline design and to quantify the impact across the life of the LCS program and concluded the following:

• The cost of building the Littoral Combat Ships to meet the shock rating standard and US Naval Vessel Rules is materially more than what was previously estimated.
• The cost of modifying vessels and components already constructed to meet the shock standard and US Naval Vessel Rules is materially more than what was previously estimated.
• The cost of modifying vessels and components already built has been exacerbated by the concurrent construction schedule with 10 LCS of a total of 11 LCS under contract at various stages of construction since April 2015.
• 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.”

Read the full announcement HERE

Separately, Austal announced that has been awarded a US$11,239,032 cost-plus-fixed-fee contract modification from the U.S. Navy to provide emergent availability planning and full ship shock trials (FSST) support for tests to be conducted on Littoral Combat Ship USS JACKSON (LCS 6).Specifically, Austal USA will plan for and conduct any “in-between shot” repairs required during the FSST event(s), repair any damage sustained during the FSST period and coordinate the removal of FSST testing equipment and instrumentation following completion of the trials.