Northrop Grumman [NOC] on Wednesday said its net income rose in the second quarter on pension adjustment as sales fell but the company’s overall performance was better than expected and it raised earnings expectations for the year.

Net income increased 5 percent to $511 million, $2.37 earnings per share (EPS), from $488 million ($2.05 EPS) a year ago, beating Wall Street estimates by 15 cents per share. Free cash flow was $456 million.

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

Northrop Grumman said the quarter benefited from a $79 million improvement in pension adjustments, more than offsetting lower income in its operating segments, a lower share count, and better than expected operating performance. Results a year ago were negatively impacted by a $20 million (8 cents EPS) charge related to a debt payment.

Sales fell 4 percent to $6 billion from $6.3 billion a year ago.

At the top line, the sales decline was driven by the Information Systems segment, followed by Aerospace Systems and Electronic Systems, with only Technical Services able to post a gain. The company attributed the lower sales to declines in the Global Hawk and Fire Scout unmanned aircraft system programs, fewer deliveries of navigation and maritime systems, and infrared countermeasures products, lower volume at a number of Information Systems programs, and lower funding levels related to overseas contingency operations.

Overall segment operating income was down 7 percent to $742 million, driven by double-digit declines at Aerospace and Electronic Systems, and a slight drop at Technical Services. The company attributed the declines to lower sales and differences in program risk retirements. Segment margins were 12.3 percent, down 40 basis points from a year ago.

Based on performance through the first half of the year, Northrop Grumman raised its earnings and margin guidance for 2014, with per share earnings now expected to be between $9.15 and $9.35 versus the prior outlook of between $8.90 and $9.15. Segment margins are now expected to be in the low 12 percent range versus around 12 percent.

Sales are still expected to be between $23.5 billion and $23.8 billion.

Wes Bush, Northrop Grumman’s chairman, president and CEO, said on Wednesday’s earnings call that growth in international business will partially offset declines in domestic spending. There are international opportunities in unmanned and manned aircraft and in cyber security, he said. The company expects about 13 percent of sales this year from international business versus 10 percent in 2013, Jim Palmer, the company’s chief financial officer, said.

While there is some near-term stability in the federal government’s budget as a result of congressional agreement earlier this year on spending plans over the next two years, Bush said the potential impact of a continuing resolution to fund the government this fall combined with the potential for a budget sequester again beginning in 2016 creates uncertainty for the company’s customers. This uncertainty means customers are still “struggling to plan effectively” and are unsure if they should start programs with multi-year timelines, he said.

Total backlog at the end of the second quarter stood at $35.6 billion, down 4 percent from the end of 2013. Orders were $5.3 billion and don’t include a $3.6 billion contract with the Navy awarded in July for the 25 new E-2D Advanced Hawkeye aircraft.