Austal lowers LCS revenue

Austal Limited, whose U.S. unit builds the Littoral Combat Ship, said Monday an extensive review the company undertook found it will cost more than estimated to build the ship to required standards. As a result, it will record a $115 million "downward adjustment to revenue" in fiscal year 2016.

The company said it undertook an "extensive review . . . 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."

That review found that the cost of building the LCS to meet the shock rating standard and U.S. naval vessel rules "is materially more than what was previously estimated," as is the cost of modifying vessels and components the company has already constructed.

"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," the company 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."

Though the associated cost increases will be split with the Navy up to a ceiling price, Austal said the estimate change means too much revenue and profit has been attributed to completed work. Additionally, work in progress is overstated, Austal said. As a result, the company will lower sales and work in progress in FY-16 by $115 million.

"Austal has initiated discussions with the U.S. Navy about increases in design scope that may improve Austal's position," the company added. "Austal has not recognized any value associated with these discussions in its profit calculations due to the preliminary nature of the process."