General Dynamics executives recorded a "good year in a difficult environment," with record growth in the company's Marine Systems sector, but said labor and supply chain problems remain a significant challenge for submarine production.
During the company’s fourth-quarter earnings call on Wednesday, CEO Phebe Novakovic said revenue growth in General Dynamics’ marine systems business is expected to remain flat in 2023 due to “supply chain constraints” in the Virginia-class submarine program, with a return to growth anticipated in 2024 and 2025.
Novakovic attributed this “annual variability” experienced by Electric Boat, the company’s submarine-building subsidiary, largely to the lasting influence of COVID which continues to contribute to workforce challenges.
“COVID had a profound impact on many aspects of our lives but a particularly lasting one on the workforce. We have labor discontinuities throughout the United States and we also experienced something that we had not anticipated, an abnormally large retirement of experienced workers,” she told investors.
“In a business that is heavily manpower-dependent, these impacts had a disproportionate effect on additional schedule variance,” she continued.
General Dynamics is working closely with the Navy on these challenges, which will require incremental improvements over time, Novakovic said. She added the company is seeing stabilization in the workforce and improving labor dynamics.
“This year will give us a bit of a chance to further sequence the velocity of the material coming into Electric Boat,” she said. “I would note that the submarine industrial base delivered two submarines last year, we’re going to deliver two more this year. So, I think maintaining that cadence of delivery is important.”
Recently, Navy officials have expressed frustration with the slow pace of Virginia-class submarine deliveries and maintenance.
Novakovic also said the lead ship in the Columbia-class submarine program is 30% complete and is ahead of contract schedule. Electric Boat, one of two primary contractors for the program along with HII’s Newport News Shipbuilding, received a $5.1 billion contract modification in December for Build II of Columbia construction.
Yesterday, government auditors released a public version of a sensitive report indicating that the Navy lacks necessary schedule risk oversight for the Columbia program that could result in delays for both Columbia and Virginia submarines.
Despite challenges with submarine construction, General Dynamics reported record revenue and operating earnings for its marine systems portfolio, which includes shipbuilders NASSCO and Bath Iron Works in addition to Electric Boat. According to Novakovic, marine systems revenue has grown from $8 billion in 2017 to $11 billion in 2022 -- an annual growth rate of 5.3%.
GD also showed a largely positive fourth quarter and 2022 performance across its aerospace, combat systems and technologies sectors. The company saw overall revenue, operating earnings and net earnings grow in both the fourth quarter and 2022 as a whole.
Novakovic also shared an optimistic forecast going forward due to hopes of increasing funding from the Defense Department.
“Our forecast comes from our operating plan. It is conservative as it must be in this environment of unpredictable financing from government. However, the threat environment suggests increases in defense spending. In short, I see more opportunity than risk in our forecast,” she said.