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WASHINGTON — Two of the nation's biggest military contractors reported divergent second-quarter earnings Thursday, results that come as the defense industry begins to sort out the impact of shifting priorities in Pentagon weapons buying strategies.
Military electronics maker Raytheon Co. said its second-quarter earnings rose 15 percent while Northrop Grumman Corp., best known for its Navy shipbuilding operations, reported a 20 percent drop in quarterly profits.
They follow reports earlier this week from Boeing Co. and Lockheed Martin Corp. that also suggested that the once reliable sector is getting harder to predict.
With the military fighting two wars and Pentagon budgets on a steady upward rise, defense companies regularly posted huge gains in profits and rosier earnings forecasts during recent quarters. Even as the rest of the economy tumbled last fall, military contractors, with the federal government as their primary customer, were a relative safe haven.
But under priorities outlined in April by Defense Secretary Robert Gates, the Pentagon is focusing more spending on weapons needed to fight the insurgencies it faces in places like Afghanistan. That means less of an appetite for the big weapons used to fight conventional wars, like giant warships, expensive fighter jets and hulking Army vehicles. The Pentagon is expected to give further details on its future strategy this summer.
"We are seeing a leveling off of the defense industry," said Paul Nisbet, an analyst with JSA Research.
Defense firms are still trying to figure out the long-term impact of the changes in defense spending. Some have shown up on company balance sheets already — Lockheed, for example, saw $3 billion taken out of its backlog by two program cancellations. Lockheed's stock was punished Tuesday after it didn't raise its 2009 outlook and lowered its operational profit forecast. That same day, the Senate voted down an attempt to add money for new $140-million-apiece F-22 fighter jets made by Lockheed.
Raytheon said Thursday that it believes it is well-positioned for the military's new direction. The company makes a wide range of sensors, radar systems, unmanned flying vehicles and missiles that it said can fit neatly into the new focus on high tech warfare.
"We feel that over the next couple of years, Raytheon will continue to be front and center," said David Wajsgras, the Waltham, Mass.-based company's chief financial officer.
Raytheon said it earned $489 million, or $1.23 per share, in the April-June quarter, up from $426 million, or 99 cents per share, in the same quarter last year.
Sales rose 4 percent to $6.13 billion from $5.87 billion a year ago. The sales gains came in five of Raytheon's six business units.
The results beat the profit predictions of analysts polled by Thomson Reuters, who expected $1.13 per share. Raytheon's sales came in just shy of the $6.18 billion consensus prediction.
Raytheon also raised its outlook for 2009 by a nickel to a range of $4.60 to $4.75 per share. Wall Street foresees $4.73 per share in earnings.
Los Angeles-based Northrop was more cautious, choosing to hold to its 2009 outlook and saying it was still trying to digest the effects of the new Pentagon strategy.
Company Chief Executive Ronald Sugar said the review of defense spending by the Pentagon and Congress "will give us a better understanding of the administration's longer-term priorities and plans."
Spending decisions are "a balancing act between addressing dangerous national security threats and fiscal spending constraints," he said.
The company, which makes military aircraft and defense electronics, said Thursday it earned $394 million, or $1.21 per share, down from $495 million, or $1.44 per share, a year ago. Revenue rose 4 percent to $8.96 billion from $8.63 billion a year ago.
Excluding a gain of $64 million, or 13 cents per share, for legal matters, and a $105 million charge, or 21 cents per share, for cost increases to ships under construction at Gulf Coast shipyards, Northrop Grumman said it would have earned $1.29 per share.
That matched the average earnings expectation by analysts surveyed by Thomson Reuters. Earnings estimates typically exclude one-time items.
Northrop's revenue beat analysts' forecast of $8.68 billion.
The company reiterated its 2009 outlook of $4.65 to $4.90 per share, which is below analysts' forecast of $4.96 per share.
Shares of Raytheon rose 76 cents, or 1.7 percent, to close at $45.75 Thursday, while Northrop's stock fell 87 cents, or 1.9 percent, to $46.26.
