* Company sees strong Q2 orders, rise in backlog
* Second-quarter EPS rises to $1.88 from $1.81
* Revenue dropped, but operating margins rose
* Further budget cuts could hit earnings, revenues (New throughout, updates with details from earnings call, analyst comments)
By Andrea Shalal-Esa
July 25 (Reuters) - U.S. defense contractor Northrop Grumman Corp reported higher-than-expected quarterly earnings on Wednesday and raised its forecast for the full year, citing a spate of new orders and strong cash generation.
Northrop, which builds Global Hawk unmanned surveillance planes, radars and electronic systems, said second-quarter profit fell to $480 million from $520 million a year earlier. Earnings per share rose to $1.88 from $1.81 because of a reduction in outstanding stock.
Analysts polled by Thomson Reuters I/B/E/S had expected far lower earnings per share of $1.61.
Revenue fell to $6.27 billion from $6.56 billion, but operating margins rose to 12.5 percent from 12.0 percent.
Northrop repurchased 4.9 million common shares during the second quarter for about $295 million, but said $1.1 billion in additional share repurchases were still authorized.
Northrop Chief Executive Officer Wes Bush said the company was increasing its earnings outlook to a range of $7.05 to $7.25 a share from its earlier forecast of $6.70 to $6.95, after what he called “an outstanding quarter in a challenging environment.”
He cited a “robust level of new business capture,” noting that new business orders of $8.8 billion increased the company’s total backlog to $41.5 billion.
But he said an additional $500 billion in across-the-board U.S. defense budget cuts due to take effect in January would result in lower earnings, sales and cash flow. The cuts would come on top of $487 billion in defense cuts already slated to take effect over the next decade.
He said sequestration and other budget scenarios all called for a heightened focus on innovation, cost reductions and customer affordability initiatives, actions the company had already taken to improve its performance.
Bush said he felt confident that unmanned systems, cybersecurity, intelligence and logistics would remain key priorities for the U.S. government, regardless of what happened -- areas in which he said Northrop was well-positioned.
The chief executive said all four business segments -- aerospace, electronic systems, information systems and technical services -- generated segment operating income roughly equal to last year’s second quarter despite lower sales.
Cash was also a highlight for the quarter, Bush said, noting that cash from operations totaled $876 million.
He said the company raised its quarterly dividend by 10 percent in the quarter, and viewed maintaining a competitive dividend payout ratio as a priority.
Chief Financial Officer Jim Palmer said the company would benefit from a federal pension relief measure included in recent highway legislation.
He said as a result, Northrop’s mandatory contributions would decrease by about $1.5 billion on a pre-tax basis from 2013 to 2016, with the deferred contributions to be paid back over the following five to six years.
He said the company could use some of the resulting additional cash flow to voluntarily fund its pension plans.
Bush also highlighted management changes announced earlier in the week, including the appointment of Linda Mills to a new position of corporate vice president, operations.
Mills, currently president of the company’s information systems sector, will be replaced in that post by Kathy Warden, who heads the cyber intelligence division within that sector.
Thomas Vice, now corporate vice president and head of the technical services sector, will move to become president of the aerospace systems sector, replacing Gary Ervin, who is retiring.
He will be replaced at technical services by Christopher Jones, who currently heads the logistics division.
Gloria Flach will become corporate vice president and president of the electronic systems sector, replacing James Pitts, who is also retiring.
Mark Caylor will become corporate vice president and president of enterprise shares services, while David Perry will become corporate vice president and chief global business development officer. (Reporting by Andrea Shalal-Esa in Washington; Editing by Lisa Von Ahn and David Gregorio)