Austal Confirms Investigation into its Market Announcements

Australian ferry and defense shipbuilder Austal is cooperating with an Australian probe into market disclosures it made in 2015 regarding cost overruns on LCS-6, the Littoral Combat Ship USS Jackson. Austal builds one of the U.S. Navy's two LCS variants, the aluminum-hulled Independence-class ships.

In a filing released through the Australian Stock Exchange on Thursday, Austal confirmed that it is "assisting an investigation by ASIC (the Australian Securities and Investments Commission) into market announcements . . . with respect to earnings from its Littoral Combat Ship program." Its American division, Austal USA, confirmed Friday that it is also cooperating with the U.S. Navy in an unspecified investigation. Local media reported that officials from the Department of Defense, the NCIS and the Defense Criminal Investigative Service were spotted at the Austal USA yard in Mobile, Alabama. 

Austal became the prime contractor for the Independence-class LCS variant for the third hull in the series, the USS Jackson. The company experienced margin and schedule pressures during her construction, but in mid-2015 it indicated that it was using lessons-learned from its first vessel to improve margins on follow-on ships. Jackson was commissioned on December 5, 2015; five days later, Austal warned investors that its ability to increase productivity on the follow-on vessels was not as high as expected, and that its U.S. shipyard's earnings in FY2016 would likely be lower than the previous year. By December 14, the firm's stock price had fallen by a third. 

After commissioning, USS Jackson began U.S. Navy shock trials as the representative vessel for her class. On June 30, 2016, after the preliminary trials, Austal entered into a trading halt and issued an earnings announcement. The firm cautioned that it would have to increase its cost estimate for follow-on hulls due to "design changes required to achieve shock certification and U.S. Naval Vessel Rules." 

10 contracted ships were already in various phases of construction at the time of the announcement, and Austal anticipated "significant modifications to vessels already nearing completion" in an "extensive rework program." LCS 6, 8, 10 and 12 would all require at least 4,000 specific modifications each. The expense amounted to a $115 million writeoff and a full-year loss groupwide for FY2016. 

After USS Jackson completed her third and last shock trial in July 2016, Austal announced that the testing program had been a success, and it reported that the U.S. Navy was satisfied with the results. However, in competing testimony later that year, the Department of Defense's director of operational testing reported that shock trials for both LCS classes had been conducted at "reduced severity" due to concerns about the possibility of damage to components. The Navy is now seeking to phase the two LCS classes out of production in favor of a more conservative frigate design.