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General Dynamics reports first financial fallout from business with Saudi Arabia after Khashoggi killing

The General Dynamics Land Systems factory is seen in London, Ontario, in October. (Chris Helgren/Reuters)

An international dispute between Canada and Saudi Arabia is holding up hundreds of millions of dollars in armored-vehicle payments that were promised to U.S. defense giant General Dynamics, executives disclosed recently in a call with investors. It’s an early sign that U.S. arms manufacturers are not immune to backlash over doing business with Saudi Arabia in light of its role in a long-running humanitarian crisis in Yemen and the slaying of Washington Post columnist Jamal Khashoggi.

U.S. arms manufacturers have struggled to reassure investors that their Saudi business is safe in the months since Khashoggi, a U.S. resident and critic of the Saudi ruling family, was killed at the hands of the Saudi state.

In the United States, policy has fallen largely in their favor. President Trump has stubbornly resisted calls to curtail U.S. arms sales with Saudi Arabia. And no legislation has emerged from Congress that would fundamentally alter the U.S.-Saudi security partnership, despite growing awareness of the humanitarian situation in Yemen amid a Saudi-led military campaign there.

But events unfolding in Canada are materially hurting the Falls Church, Va.-based defense giant’s finances as it awaits payment under a $13 billion armored-vehicle contract.

General Dynamics chief executive Phebe Novakovic said in a Jan. 30 call with investors that cash flow for the company’s land systems business unit was “significantly impacted” by “diplomatic contretemps” between Canada and its unnamed “customer," referring to a Canadian arms deal with Saudi Arabia. A General Dynamics spokesman declined to elaborate Monday.

“Our payment issue got caught up in a larger international political issue, diplomatic issue,” Novakovic told investors. “While we got some payment last year, those diplomatic contretemps slowed the payment that we otherwise anticipated.”

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For the better part of a year, Canadian leaders have straddled a fine line between calling out Saudi human rights abuses — something that has differentiated Prime Minister Justin Trudeau’s administration from that of Trump — and mollifying a Saudi regime that has been known to retaliate sharply against its critics.

“Having [the dispute] show up in a quarterly earnings call shows you this conflict has more legs to it than it appeared to initially,” said Andrew Hunter, a defense industry expert with the Center for Strategic and International Studies. “What we don’t know is, does this deal rupture? Or is it something the two countries are going to get past?”

Relations between Canada and Saudi Arabia soured in early August when the Canadian Foreign Ministry expressed concern at the arrest of women’s rights activists there, imploring the Saudis in English and Arabic tweets to “immediately release” them.

The Saudi government appeared to take immediate offense. It quickly expelled the Canadian ambassador, suspended scholarships for Saudi students in Canada and sanctioned Canadian business interests.

But it wasn’t until Oct. 16 that Trudeau, facing pressure at home and abroad over Canada’s arms sales to the kingdom in the weeks after Khashoggi’s killing, first said his government would look for a way out of the armored-vehicle deal. The $13 billion contract was negotiated by the previous Conservative government.

Trudeau said in an interview with Canada’s CTV that his government would “try and see if there is a way of no longer exporting those vehicles” to Saudi Arabia, citing the Khashoggi killing.

"The murder of a journalist is absolutely unacceptable, and that’s why Canada from the very beginning had been demanding answers and solutions on that,” Trudeau said.

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General Dynamics responded with a warning that Canada will suffer “billions of dollars of liability” if it backs out of the deal.

In a Jan. 10 town hall appearance in Regina, Saskatchewan, Trudeau said his administration was still looking for a way out of the contract but emphasized the need to honor the government’s commitments. He also cited the need to protect jobs at a General Dynamics factory in Ontario.

“When the government changes, Canada as a country of the rule of law needs to respect its contracts,” Trudeau said. “We are looking into the export permits, and we are looking for ways to demonstrate that this is not entirely in keeping with what Canadians want, particularly given recent impacts. But it also is a question of the folks who because of this contract have jobs in London, Ontario — good engineering jobs that they felt were secure, that they were building their families on — and now are possibly in a more challenging position.”

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As of Jan. 31, General Dynamics had not received hundreds of millions of dollars’ worth of payments for the armored vehicles, something that took a sharp toll on the company’s finances in the most recent quarter.

The issue caused the company’s cash flow to fall short of expectations by about $600 million, analysts from Vertical Research Partners wrote in a note to investors. JPMorgan Chase analysts said the delayed payments had cost General Dynamics $500 million to $600 million. And a Jan. 31 report in the Wall Street Journal noted that Saudi Arabia owed more than $1 billion for the vehicles, suggesting the impact could be even larger.

In conversations with investment analysts, General Dynamics executives appeared confident that Trudeau will not cancel the armored-vehicles contract. As for the missing cash, they referred to it as a “timing issue” that should resolve itself within months.

“This is a valid contract. All parties have repeatedly and recently attested their commitment to honor that contract,” Novakovic told investors. “The Canadian government fully understands the importance of our high-end manufacturing and engineering talent in Ontario.”