Austal Announces Full Year Loss Due to LCS Changes

Australian shipbuilders Austal announced a full year loss of $85 million for FY2016 Monday, citing cost overruns for the U.S. Navy's Independence-class littoral combat ship program.

The firm said that its losses "reflected costs of implementing design modifications across the LCS program to meet the US Naval Vessel Rules," changes which were announced during the so-called "shock trials" of the USS Jackson. The explosives tests were intended to evaluate the strength and survivability of the Independence-class platform, and the Navy said that the ship performed well. 

"The impact of the one-off downward adjustment to the LCS program has had on our earnings this year was disappointing, but Austal still has a strong order book and is generating strong cash flows,” CEO David Singleton said. “We now have a much clearer understanding of the design required and margins that will be generated from the remaining LCS vessels." 

The shipbuilder holds contracts for 11 Independence-class ships. When including an up-armored frigate variant and the Lockheed Martin-built Freedom-class ships, the Navy’s LCS order would come to 52 vessels, half built by Austal. The warships are controversial; late last year, Secretary of Defense Ash Carter ordered the Navy to cut the order total to 40 and to select only one shipbuilder and one vessel.  

"Forty is enough," Carter said at an event in March. "The Navy's own war-fighting analysis indicates that, but it is also our priority . . . it allows us to have the right kind of ships, lethality, and to make investments [elsewhere].”

The Navy has openly disagreed with his assessment. 

Austal said that its Australian unit’s earnings were hurt by a drop in activity due to the completion of its eight Cape Class patrol boats for the Royal Australian Navy. The domestic segment effectively broke even for the year. 
 
Its Philippines shipyard reported a small loss, which Austal described as disappointing; the firm has already changed out management and has a remediation plan for next year’s operations. 

The firm is in the enviable position of having more cash on hand than debt by a positive margin of about $50 million – a strong balance sheet in an industry which is weathering a prolonged downturn in commercial orders. 

“Austal is well placed with an order book of $3.4 billion across our three shipyards . . . and significant pipeline opportunities for defence and commercial vessels," Singleton said.