Benefiting from a favorable tax settlement, pension income, improved operating performance and the repurchase of its stock, Northrop Grumman [NOC] on Wednesday reported a strong financial start to 2014 with a hefty rise in earnings despite a fall in sales.

Net income increased 18 percent to $579 million, $2.63 earnings per share (EPS), versus $489 million ($2.03 EPS) a year ago, walloping consensus estimates of $2.15 EPS. The results included a $51 million (23 cents EPS) benefit from a partial resolution of some of the company’s prior tax returns.

Northrop Grumman Chairman, President and CEO Wes Bush. Photo: Northrop Grumman
Northrop Grumman Chairman, President and CEO Wes Bush. Photo: Northrop Grumman

Northrop Grumman also benefited from higher pension income and its ongoing share repurchase program lowered the overall stock count, helping to boost per share earnings. At the segment level, income rose a percent to $757 million on improved operating performance as the segment margin rate jumped 60 basis points to 12.9 percent.

Operating income gains at the Aerospace Systems and to a lesser extent the Technical Services, segments outweighed declines at Electronic Systems and Information Systems.

Sales fell 4 percent to $5.8 billion from $6.1 billion on single-digit declines in all of the company’s segments. The company recorded $4.9 billion in orders.

Sales related to the company’s programs associated with United States military forces in war zones continue to decline, Wes Bush, the company’s chairman, president and CEO, said on the earnings call. International business growth is partially offsetting declines in U.S. business, he said, a trend that is expected to continue.

There is increasing interest from a number of potential foreign customers in the company’s high-altitude long-endurance unmanned aircraft systems but timing is difficult to predict, Jim Palmer, Northrop Grumman’s chief financial officer, said. Bush said there are also opportunities overseas for the E-2C Hawkeye airborne warning aircraft, the F-35 fighter, for which Northrop Grumman is a major supplier, and in general across all of the company’s sectors.

Northrop Grumman increased its earnings guidance for the year to between $8.90 and $9.15 EPS, up from the prior outlook of between $8.70 and $9 EPS, due to the strong operating performance in the first quarter and the tax benefit, Palmer said. Sales are still projected to be between $23.5 billion and $23.8 billion.

Free cash in the quarter was a $462 million outflow, but the company still expects to generate between $1.7 billion and $2 billion in free cash flow this year.

Backlog at the end of the quarter stood at $36.2 billion, down $800 million since the end of 2013, due to the timing of awards in the Aerospace Systems segment.