Northrop Grumman [NOC] yesterday posted strong earnings results in the third quarter due to solid operating performance and an improvement in recovering pension costs under its government contracts, although sales slipped a bit.

Net income rose 8 percent to $497 million, $2.14 earnings per share (EPS), from $459 million ($1.82 EPS), crushing consensus estimates by 42 cents EPS. Per share earnings were up 18 percent as the company’s stock repurchase program resulted in fewer shares outstanding from a year ago.

Fee cash flow in the quarter was a strong $860 million.

“While declining defense budgets continue to pressure our top line and backlog, the substantial reductions we’ve made to our cost structure, including headcount reductions, facility consolidations and numerous other affordability actions, continue to support strong earnings and cash flow performance,” Wes Bush, Northrop Grumman’s chairman, president and CEO, said on yesterday’s earnings call.

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

Sales fell nearly 3 percent to $6.1 billion from $6.3 billion a year ago. Lower volume related to the F-35 fighter, Global Hawk unmanned aircraft, the ICBM program, integrated logistics and modernization programs, the war-related drawdowns and impact of the sequester on programs managed by the Information Systems segment all contributed to the decline.

Electronic Systems was the lone operating segment to see sales grow, which was due to higher volume for international and combat avionics programs, the company said.

The Aerospace and Technical Services segments generated higher operating income due to favorable adjustments in space and manned military aircraft programs as well as improved performance across several programs and favorable adjustments in Technical Services. Increases at these two segments more than offset a decline in income at Electronic Systems and Information Services.

Orders were $5.9 billion and the company’s backlog at the end of the quarter was $37.5 billion, $3.3 billion less than at the start of the year.

Based on the company’s results so far this year, it raised sales, earnings and cash flow guidance for 2013. Sales are now expected to be $100 million higher at $24.4 billion while per share earnings are projected to be in the range of $8.00 to $8.15 versus the prior guidance of $7.60 to $7.80. Free cash flow prior to any discretionary pension contributions is expected to be $200 million higher at between $1.9 billion and $2.2 billion.

The company didn’t provide guidance for 2014, but Bush said sales are expected to be lower next year while margin rates should remain strong along with free cash flow. Segment margin rates in the quarter were 12.5 percent, up 90 basis points from a year ago. For 2013, Northrop Grumman is forecasting segment margin rates in the low to mid-12 percent range.