Pressure on the Army budget will probably reduce combat vehicle revenue at General Dynamics in the coming years, the company's chief executive said today.
“We believe that combat volume will soften somewhat in the increasingly constrained budget environment faced by the U.S. Army,” Phebe Novakovic said on the company’s quarterly earnings call.
The sharpest cuts could come on the maintenance and sustainment side of the combat vehicle business, she said.
“While we expect that ultimately the funding levels for our programs will be sufficient and relatively stable, we will see some rather dramatic drop-off on [operations and maintenance]-funded accounts,” Novakovic said.
Growth in European sales of the Abrams tank and wheeled combat vehicles could offset declining sales to the U.S. military, she said.
This echoes guidance from the company in recent quarters, that the increasingly tense security environment in Eastern Europe could create more opportunities as countries expand or modernize their armored forces.
The first question that analysts asked company leadership during the earnings call concerned the effect of the situation in Ukraine on the combat vehicle business.
“Speculation about the considerable tension in Eastern Europe and any sort of impact on budgets, is just ill-advised given the high-threat environment,” Novakovic said. “So, we are hopeful for a peaceful resolution, but that is a national security issue for the U.S. and its allies.”
General Dynamics received a $305 million contract to build the M1A2 Abrams for an unspecified foreign customer in the quarter that ended Dec. 31, the company said in its earnings report today.
Romania placed a $555 million order for the Piranha 5 wheeled armored vehicle, which is built by a European division, the company said.
There was no mention during the call of a potentially multibillion-dollar deal that Poland has requested for 250 Abrams tanks.
Three House Republicans, including the ranking member on the House Armed Services Committee, asked the Pentagon on Monday to accelerate approval of an Abrams tank sale to Poland.
“This request has been pending since the summer of 2021 and we believe that it should be accelerated to the maximum extent possible, to help deter Russian aggression,” the letter said.
Novakovic said in October that it could take two years to finalize the details of the sale, and that Poland was interested specifically in the M1A2 SEPv3, the newest version of the tank. The company saw additional combat vehicle sales opportunities in other European countries.
The Defense Department views the tank sale favorably, an official said last month. But the Pentagon has yet to approve the sale, which the Polish government announced more than six months ago.
There has been a long wait for the Polish Abrams deal to be approved, said Roman Schweizer, an analyst at Cowen.
“It’s a little bit surprising that it has taken this long,” Schweizer said. “The FMS process itself can be notoriously slow.”
Negotiations for deals like this happen behind closed doors, so it is difficult to determine why the deal is still pending approval, he said.
The company reported $10.3 billion in revenue for the quarter that ended Dec. 31, an increase of 7.6% over the same period a year before. Net earnings reached $952 million, up 10.7%.
The combat systems segment, which includes ground combat vehicles, saw revenues of $1.9 billion in the quarter, down 3.7% from the year before. Operating earnings for the segment were $281 million.
The marine systems segment, which builds submarines and destroyers for the Navy, made $2.9 billion in revenue, up by 0.5%. Operating earnings in the segment were $235 million.