Shares in Australian shipbuilder Austal have fallen sharply after the company said earnings would be hit by cost increases to its $US4 billion contract with the US Navy.
Austal warned on Monday that it expects to book an earnings loss of $116 million to $121 million for the 2016 full financial year, after writing down the value of its work in progress on the Littoral Combat Ships (LCS) for the US Navy by $156 million.
Austal shares were 10.5 cents, or 8.7 per cent, lower at $1.105 at 1226 AEST.
Austal has experienced significant schedule and margin pressure on the LCS program since delivering LCS 6 - its first ship as prime contractor - in August 2015.
Design changes have been made to the combat ships following "shock tests" on LCS 6 undertaken in June 2016.
The shock trials test the vessel's ability to survive a close explosive blast.
Austal said the cost of building the Littoral Combat Ships to meet the shock rating standard and US naval vessel rules was materially more than previously estimated.
Also, the cost of modifying vessels and components already built was more expensive.
"The change of estimate means that too much revenue and profit was attributed to work already completed," Austal said.
"Work in progress is overstated because additional costs will be incurred to meet the shock standard and US Naval Vessel Rules."
Currently, nine ships out of a total of 11 vessels under contract are at various stages of construction.
Two vessels - LCS 6 and LCS 8 - have been delivered.
Austal said the cost increases associated with the revised design would be shared with the US Navy on a 50:50 basis.
Austal chief executive David Singleton said that despite the cost increases for the LCS program, the outlook for the company's US business remained positive.
"We continue to see profitability in the LCS program. That will enhance as new vessels are added to the program," he said.
"We are expecting 13 additional vessels. Those vessels will be priced at a revised level to that which we've seen previously."
Mr Singleton said Austal's order book currently runs out to 2021, but if the US Navy's plans for more vessels continues, Austral expects to add at least a decade of work to well beyond 2030.
Austal expects earnings before interest and tax (EBIT) in the 2017 financial year of $45 million to $55 million.
