Austal’s US boss resigns amid probe over navy contract

A regulatory probe into Australian shipmaker Austal’s $11.4b combat vessel project for the US Navy has taken a scalp with the resignation of the company’s US boss.

Austal has made changes after cost overuns on its combat vessel project.

A regulatory probe into Australian shipmaker Austal’s $11.4b combat vessel project for the US Navy has taken a scalp with the resignation of the company’s US boss.

Western Australian-based Austal said it had accepted the resignation of its US president Craig Perciavalle following the completion of the company’s external investigation into cost overuns on the project. A separate probe by US regulatory authorities and the Australian Securities and Investments Commission (ASIC) is ongoing.

Shares of ASX-listed Austal sank 11.5 per cent to $2.18 on Tuesday after the resignation was announced. Former Honeywell executive Rusty Murdaugh will replace Mr Perciavalle as interim president while a permanent candidate is sought.

Austal announced in January 2019 that it was assisting US regulatory authorities, including the Department of Justice and the Securities and Exchange Commission, in relation to cost overruns to build the US Navy’s Littoral Combat Ships.

The investigations centred on the company’s decision in 2016 to write back profits following additional construction costs required to meet US naval vessel standards, allocation of labour hours for the project and procurement of ship components.

The company said on Tuesday that it was satisfied that it had appropriately adjusted its revenue and profit following changes made to complete the remaining vessels in the program. Austal said it was aware of “isolated instances” of misallocation of labour hours between vessels in the early stages of the program.

It also conceded certain valves on some the ships did not meet all of the required military specifications but contactual clams in relation to the issue had been resolved with the Navy.

Austal was engaging with US regulatory authorities on their investigation but it was not known what action, if any, they would take following the completion of their probe. The company said last year it was not aware of any wrongdoing.

“The company is confident that the proactive steps it has already implemented to strengthen internal reporting and compliance practices will be taken into account in determining whether there are any potential consequences arising from matters identified by the investigation,” the company said. Comment has been sought from the Department of Justice and the SEC.

The Independence-variant littoral combat ship USS Gabrielle Giffords (LCS 10) conducts routine operations in the South China Sea, last year.

Founded in 1988, Austal is Australia’s largest defence exporter with shipyards in Australia, the US, the Philippines and Vietnam. It has built more than 300 vessels for more than 100 commercial and defence operators in 54 countries.

Austal said its relationship with the US Defence Department remained strong and it had already expanded its compliance and governance practices in the US.

“This demonstrates the seriousness with which Austal is taking this issue and its determination to meet and exceed its global risk and compliance responsibilities,” the company said in a statement to the Australian Stock Exchange.

Austal said the vessels had cost more to construct than originally anticipated due in large part to additional measures to ensure they could withstand shocks, such as underwater explosions, in combat conditions. “The company announced a one-off write back of WIP (work in progress) in July 2016 to fully reflect these additional costs,” the company said.

The company, which will report its half-yearly results on Friday, warned last year that the investigation could lead to civil or criminal penalties along with debarment from future US Government contracts. It said its financial provisions were based on an assumption that the matter does not proceed beyond an investigation.

“Any of these potential changes could have a material adverse effect on consolidated financial position, results of operations, or cash flows,” the company said in its 2020 annual report

Austal has built and delivered 13, $600m Littoral Combat Ships for the US Navy, with another eight contracted and in various stages of construction.

The last vessel, the USS Mobile, was delivered to the navy from the company’s shipyard in Mobile, Alabama, in December. The 127m trimaran-hulled ships can carry two helicopters and travel at 40 knots.