WASHINGTON — The U.S. Navy’s new ballistic missile submarine is likely to squeeze General Dynamics’ profit margins, the company’s top executive told analysts this week on its quarterly earnings call.
General Dynamics, which owns Electric Boat in Groton, Connecticut, usually sees 8 percent to 10 percent margins on its boats. But GD’s CEO, Phebe Novakovic, told investors and analysts on its quarterly earnings those margins will be under pressure as they move from just constructing Virginia-class attack submarines to kicking off the Columbia class, the first new ballistic missile submarine in decades.
“As we ramp up on Columbia, we will see some margin compression quite naturally because that will be cost-plus work,” Novakovic said.
“And given the long duration of the shipbuilding contracts and the shipbuilding process itself for any one of these single submarines, that margin compression can [last] for a while, offset of course by increased improvements in our Virginia-class performance, which we have historically shown.”
The first Columbia-class boat will start construction in 2020, Novakovic said, and the company would have more clarity on just how much margin they can eek out of Columbia and Virginia in future years within the next year or two.
Last September, General Dynamics was awarded a $5.1 billion detailed design contract for Columbia, which is destined to replace the Ohio-class ballistic missile subs. The acquisition is slated to cost about $128 billion.
The Government Accountability Office issued a report in December saying the Navy was underplaying the technology risk involved in Columbia and risked significant cost growth in the program as it ironed out the kinks.
The first Columbia is slated to make a patrol in 2031.
David B. Larter was the naval warfare reporter for Defense News. Before that, he reported for Navy Times.