General Dynamics, Raytheon profits rise

Profit outlooks for defense contractors have turned murky as Congress faces down President Bush over defense funding and the war in Iraq, and the Pentagon subjects contractors to greater scrutiny over performance.

General Dynamics Corp. and Raytheon Co. on Wednesday posted modestly higher first-quarter earnings that beat Wall Street's expectations, but the two companies were reluctant to raise their profit outlooks for the full year, citing unusually high uncertainty over future Pentagon funding.

"The results are becoming more mixed for contractors," said Philip Finnegan, a defense analyst at the Fairfax, Va.-based Teal Group. "It's no longer the unmitigated positive environment we saw in the past. It's still positive, but there are clouds on the horizon."

General Dynamics, the fourth-largest Pentagon contractor, posted a 16 percent profit increase for the January-through-March period on improved results from its private jet, information technology and military vehicle units.

The Falls Church, Va.-based company reported net earnings of $434 million, or $1.06 per share, up from $374 million, or 92 cents per share, in the year-ago quarter. Revenue rose 14 percent to $6.3 billion from $5.5 billion.

Earnings from continuing operations rose to $440 million, or $1.07 per share, narrowly beating the consensus forecast of analysts surveyed by Thomson Financial, who expected a profit of $1.05 per share from continuing operations.

The first-quarter profit at Raytheon, the fifth-largest Pentagon contractor, rose 21 percent on strong sales of missiles and battle operations communications systems, and improving results at an aircraft unit that Raytheon sold last month.

Waltham, Mass.-based Raytheon said net income was $346 million, or 76 cents per share, compared with $287 million, or 64 cents per share, in last year's first quarter. Sales at the 73,000-employee company rose 6 percent to $4.93 billion from $4.66 billion.

Not counting a profit gain at discontinued operations including Raytheon Aircraft Co., Raytheon's profit was $314 million, or 69 cents per share, beating analysts' consensus estimate of 63 cents per share.

Raytheon and General Dynamics reported higher profits a day after two larger contractors, Lockheed Martin Corp. and Northrop Grumman Corp., posted gains.

But both those companies disappointed investors as Lockheed sales fell short of expectations and Northrop delivered lower than forecast earnings because of a strike at one of its shipyards.

On Wednesday, Raytheon reaffirmed its earlier outlook for companywide earnings of $2.85 to $3 per share for 2007, even though it boosted its profit forecast at a fast-growing unit that develops battle coordination and surveillance systems.

William Swanson, Raytheon's chairman and chief executive, told analysts in a conference call he was holding off on raising the company's overall forecast because of uncertainty over delays in funding from a supplemental Pentagon spending bill now before Congress.

Amid a standoff between President Bush and congressional Democrats over Iraq spending, the Pentagon is shifting money among services and accounts, including drawing down funds earmarked for other later purposes. Meanwhile, the Defense Department has said it plans to ask Congress to approve the temporary reprogramming of $1.6 billion from Navy and Air Force pay accounts to the Army's operating account. And the $70 billion that Congress provided in September for military operations in Iraq and Afghanistan has mostly run out.

General Dynamics Chief Executive Nicholas Chabraja cited the same reasons as Raytheon's Swanson on Wednesday as he stuck with the forecast his 81,000-employee company offered in January for 2007 earnings of $4.60 per share on revenue of $26.3 billion. Analyst consensus pegs yearly earnings at $4.74 on $26.5 billion in revenue.

"There is enough uncertainty in the budget and supplemental environments that it is a little foolhardy" to give updated guidance, he said.

Shares of General Dynamics fell 68 cents to close at $79.39 on the New York Stock Exchange, where they have traded between $61.69 and $81.28 in the past year.

Shares of Raytheon rose 35 cents to end at $55 on the NYSE, near the top end of the stock's 52-week range of $42.51 to $55.80.

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AP Business Reporter Stephen Manning contributed to this report from Washington.