Northrop Grumman [NOC] on Thursday reported lower net income due to a combination of operating and non-operating factors while sales edged higher largely on the strength of its booming space business.

Net income fell 14 percent to $915 million, $5.89 earnings per share (EPS), from nearly $1.1 billion ($6.63 EPS) a year ago, trailing consensus estimates by 22 cents per share. Sales grew 3 percent to $9 billion from $8.7 billion a year ago.

The earnings decline stemmed from lower operating earnings and margin, lower pension income, and negative returns on marketable securities related to benefit plans and other non-operating assets. Segment operating margins fell 70 basis points to 11.2 percent largely due to inflationary pressures.

At the operating level, Space Systems was the only segment with higher income, up a percent, and drove the company’s increase in sales, up 18 percent on a host of programs including Ground Based Strategic Deterrent (GBSD), Next Generation Interceptor, the GEM63 rocket motor in support of Amazon’s satellite communications network, the Space Development Agency’s transport and tracking satellite layers, classified efforts and NASA’s Commercial Resupply Services.

The main segment driver for the decline in operating earnings was Defense Systems, down 10 percent, on lower sales and lower than expected profit adjustments in the Battle Management and Missile Systems area due to inflationary pressure.

Free cash flow was strong at $1.1 billion and orders of $8.7 billion were solid and the company now expects bookings for the year to exceed sales due to strong defense budgets and competitive wins, Kathy Warden, Northrop Grumman’s chairman, president and CEO, said on the company’s earnings call. Backlog at the end of the quarter stood at $79.6 billion, up nearly 5 percent from $76 billion at the end of 2021.

Supply chain disruptions and labor availability continue to be a challenge. Nevertheless, the company has seen improvements in hiring, particularly in the third quarter, but the labor market “remains tight for critical skills,” Warden said.

The positive hiring trends helped drive the improved sales in the third quarter and are key to the company meeting its sales outlook this year and growing sales further in 2023, Dave Keffer, Northrop Grumman’s chief financial officer, said on the earnings call.

Supply chain challenges are causing longer lead times and higher costs in some areas, Keffer said.

The company is driving efficiencies, focusing on performance, and monitoring its small suppliers, the two executives said.

Guidance for 2022 remains intact, although sales and earnings guidance are projected to be at the low end of the outlook. Prior guidance for sales was between $36.2 billion and $36.6 billion and earnings between $24.50 and $25.10 EPS. Adjusted free cash flow is still pegged at between $1.5 billion and $1.8 billion.

Keffer provided rough guidance for 2023, with sales up 4 to 5 percent in the high $37 billion range, helped by the positive hiring and employee retention trends. At the segment level, Space Systems will continue to lead the way with an additional $1 billion of sales—nearly $500 million from GBSD—followed by Mission Systems, which is projected to grow in the mid-single digits, he said. Sales at the Aeronautics and Defense Systems segments are expected to be “flattish,” he said.

Supply chain delays and disruptions are expected to continue throughout 2023, Keffer and Warden said.

Pension income is expected to be at least $900 million lower next year, a non-cash headwind against earnings, Keffer said, and inflation will continue to pressure costs, which in turn will weigh on operating margin, he said. The company expects operating margin in 2023 to be in the mid-to-high 11 percent range, he said. Absent the inflationary pressures, margins next year would be expected in the high 11 percent range, he said.

Excluding the lower-than-expected pension income, per share earnings will outpace sales growth “driven by continued strong execution and lower share count,” Keffer said.