Contractor earnings reflect changes in defense spending

Ability to deliver high-tech capabilities to combat insurgencies makes for sound profit

Reports on second-quarter earnings reveal defense contractors that are focused heavily on high-tech capabilities needed for fighting insurgencies are doing better than those more heavily invested in conventional warfare.

Raytheon Co. and Northrop Grumman Corp. reported divergent earnings for the second quarter this week, a development that reflects key changes in the Defense Department’s weapons buying strategies, report Stephen Manning and Stephen Singer of the Associated Press.

Raytheon’s second-quarter earnings rose 15 percent, while Northrop Grumman’s quarterly profits dropped 20 percent.

The defense industry is undergoing seismic shifts as the DOD channels its funds toward technologies and platforms needed for fighting wars in remote places like Afghanistan. The need for high-tech weapons to fight insurgencies means fewer dollars for expensive weapons such as warships, new fighter aircraft, and large ground vehicles.

Defense Secretary Robert Gates stated in April that substantial funding will go to intelligence, surveillance and reconnaissance capabilities necessary to succeed against insurgents. Contractors are closely tracking long-range DOD planning to better position themselves for future contracting opportunities.

Raytheon said it made $489 million in the April-June quarter, up from $426 million in the same quarter last year. As for Northrop Grumman, it earned $394 million, down from $495 million a year ago.

Northrop Grumman was hurt by, among other things, higher estimates of costs to complete several ships being built in its Gulf Coast yards, according to a separate AP story that was published in the Los Angeles Times.

Raytheon attributed its rising sales over the long term to a higher volume from Army programs, as well as other efforts, reported James Schultz in Washington Technology.

Defense contractors should have a sharper picture of defense spending in future years when the Quadrennial Defense Review is submitted to Congress next year.

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