By Calvin Biesecker

Lockheed Martin [LMT] yesterday reported strong fourth quarter net income driven by some of its space, and information and services businesses despite no sales growth.

Still, the earnings trounced Wall Street’s expectations.

Net income increased 10 percent to $799 million, $1.89 earnings per share (EPS), compared to $729 million ($1.68 EPS), beating consensus estimates by 20 cents EPS. As expected, sales remained flat at $10.8 billion. Free cash flow was negative $40 million.

Less than a month into its new fiscal year, Lockheed Martin upgraded its earnings and sales guidance for 2008 due to better than expected sales and performance in its aircraft making business. The earnings outlook was raised by 10 cents EPS on the high and low ends of the range to between $7.05 and $7.25 while sales are expected to be between $41.8 billion and $42.8 billion, a $550 million increase on the low end.

Profit gains were led by the by the Space Systems segment, which increased operating earnings by 28 percent to $236 million on a 170 basis point improvement in margins to 11.1 percent. Strategic missile programs, the United Launch Alliance with Boeing [BA], and NASA’s Orion crew exploration vehicle drove profit growth.

Lockheed Martin’s other main profit driver in the quarter, Information Systems & Global Services (IS&GS), increased operating earnings 21 percent to $275 million as margins increased 120 basis points to 9.7 percent. Profit drivers were information technology programs, mission, combat and aviation solutions activities and international services.

The Aeronautics segment eked out a 1 percent profit increase to $385 million due to increased performance on the F-16 and F-22 fighter programs, despite delivering fewer of those aircraft in the quarter.

At Electronic Systems, profits declined a percent to $360 million on lower sales and performance on ship system activities and certain international air defense programs. Overall, Electronic Systems sales increased 3 percent to $2.9 billion due mainly to higher volume in undersea and tactical systems programs in the Maritime, Systems & Sensors business area.

Segment sales were led by Space Systems, which increased its revenues by 7 percent on the Orion and strategic and missile defense programs.

IS&GS boosted its revenues 6 percent to $2.8 billion on the 2006 acquisition of Pacific Architects & Engineers, last year’s acquisition of Management System Designers, which introduced the company to the healthcare market, mission services and information technology.

Sales at Aeronautics dropped 11 percent on fewer deliveries of F-16 and C-130J aircraft and less work on the F-35 Joint Strike Fighter, which began flight testing last year.

Flight testing of the conventional version of the F-35 will continue and is expected to be augmented by the first flight of the short take-off and vertical landing variant in the second quarter of 2008. Flights of the F-35 avionics test-bed aircraft, which is basically a commercial-type aircraft outfitted with the avionics system for the fighter, are also ongoing.

Despite a seven-month grounding of the F-35 flight test program last year, the aircraft is on schedule or ahead with overall risk reduction on its flight characteristics, Bob Stevens, Lockheed Martin’s chairman, president and CEO, said.

Stevens, like Ron Sugar, his counterpart at Northrop Grumman [NOC], remains bullish on the outlook for defense spending. Stevens expects the Pentagon next month to request an FY ’09 budget of about $513 billion, a 13 percent boost over FY ’08. He expects the investment account–that is the money the Pentagon expects to use to develop and acquire weapons systems–to increase 7 percent in FY ’09 to about $188 billion, excluding any potential funding from supplemental bills to fund the ongoing wars.

For 2007 Lockheed Martin’s net income increased 20 percent to $3 billion ($7.10 EPS) from $2.5 billion ($5.80 EPS) a year ago. Sales increased 6 percent to $41.8 billion from $39.6 billion in 2006. About $6 billion, or 15 percent, of sales was for international customers. Stevens said the company hopes to grow this amount in absolute terms and in percentage terms, suggesting 20 percent as a goal.

Stevens also said that Lockheed Martin will reach its goal of $5 billion in segment operating profits next year, one year ahead of schedule. Operating profits this year are expected to be between $4.7 billion and $4.8 billion.

Free cash flow was $3.3 billion and backlog was the second highest ever in company history at $76.7 billion. Backlog is expected to remain flat, with the possibility for some growth, depending on new contract wins this year.