General Dynamics announced this morning that it was laying out about $360 million in order to buy MRAP and tactical vehicle maker Force Protection—a move that would add about 3,000 MRAPs to GD’s portfolio of M1A1 and A2 tanks, Strykers, and add to the partnership the two companies had already forged to produce Force Protection’s Cougar MRAP.
Michael Moody, Force Protection chief executive, said in a conference call with reporters on Monday that while the company's business model was solid, its business has begun to see signs of stress as “countries across the globe are reducing their military spending and, in particular, are cutting down on the acquisition of new products and services.” Ominously, he added that “this reduction in defense spending, combined with general national budget uncertainty, presents a challenging environment for smaller companies such as ourselves.”
Still, Force Protection “built a strong business” on “servicing and sustaining” the fleet of over 3,000 MRAPs it has sold worldwide, and racked up net sales of $143.6 million in the third quarter of 2011 (versus $176.3 million in the third quarter of 2010), and sales of $377 million for the year (down from $488 million at the same time last year).
Still, due to the timing of orders, Moody expects the rest of the year to finish strong, and despite bemoaning the global vehicle market, the company is finalizing an order with the U.K. for 200 of its Ocelot tactical vehicles, as well as “a contract for service and sustainment of the U.S. Army's fleet of route clearance and MRAP vehicles, Canada's requirement for vehicles and long-term service as part of its TAPV program, and Australia's Land 121 Phase 4 and REDFIN vehicle programs,” Moody said.
In other words, General Dynamics isn’t adopting a sick puppy. It’s buying entrance into the lucrative service and sustainment element of the MRAP family of vehicles, a market General Dynamics wasn’t much involved in.
So while Moody is right to say that new vehicle orders are likely too slow, the real money to be made over the next several years will be in the reset and refit market (as I wrote about at length recently in DTI). And his move puts GD right in the middle of the market.