By Calvin Biesecker

As expected, Northrop Grumman [NOC] yesterday posted steep losses for the fourth quarter and all of 2008 due to a previously announced goodwill impairment charge, although the company’s business sectors turned in solid operating results.

The company swung to a $2.5 billion, $7.76 earnings per share (EPS), net loss in the quarter from $457 million ($1.32 EPS) earned a year ago, due to the non-cash $3.1 billion charge. For the year losses amounted to $1.3 billion ($3.83 EPS) versus income of $1.8 billion ($5.18 EPS) in 2007. The charge stems from decline in the stock market beginning last September and the impact it had on the values of two of Northrop Grumman’s businesses, Shipbuilding and Space Technology (Defense Daily, Jan. 23).

Excluding the charge, earnings from continuing operations were $524 million ($1.57 EPS) in the recent quarter and for the year $1.8 billion ($5.21 EPS). The adjusted per share earnings for 2008 beat the company’s own projections by a penny.

Despite the mixed earnings picture, Northrop Grumman’s sales in the quarter increased 4 percent to $9.2 billion from $8.8 billion, driven by double-digit gains at its Electronics segment and 5 and 6 percent increases respectively at its Information & Services and Aerospace segments.

For the year, sales increased 6 percent to a record $33.9 billion, making Northrop Grumman the second largest defense contractor, according to Ron Sugar, Northrop Grumman’s chairman and CEO. Boeing‘s [BA] defense division, the nation’s third largest defense contractor, had $32 billion in sales in 2008, the same as in 2007. Northrop Grumman’s sales in 2007 were $31.8 billion.

Free cash flow in the quarter was $790 million and a record $2.4 billion for the year.

Sugar said his company’s outlook remains bright with the new Obama administration. He expects a detailed defense budget request to be released in the spring that supports most of Northrop Grumman’s programs. He also highlighted the new administration’s emphasis on cyber security as being an area that Northrop Grumman is an established leader.

That said, Northrop Grumman’s sales guidance for 2009 is $34.5 billion, representing less than a 2 percent increase. The reason for this is due to a dip in shipbuilding activity as work on one aircraft carrier winds down and work on another begins, completion of work in the missiles business, and lower revenues from state and local programs. Northrop Grumman has said previously it is taking a more selected approach to its state and local opportunities.

Earnings from continuing operations in 2009 are expected to range between $4.50 and $4.75 EPS, a drop from 2008 due to net pension adjustment that will be a pre-tax expense of $335 million (65 cents EPS). In 2008 the company earned $263 million from a pension adjustment. Excluding the pension headwind in 2009, earnings from continuing operations are expected to be between $5.15 to $5.40 EPS. Free cash flow is expected to run between $1.9 billion and $2.4 billion.

As to the Northrop Grumman’s future growth prospects, Sugar highlighted the record backlog of $78 billion, a 23 percent increase from a year ago. Key contributors to the increase are $9 billion in planned work on the new aircraft carrier and Virginia-class submarines as well as new work in the Aerospace segment for Navy and international F/A-18 fighters and upgrades for the Air Force B-2 bomber.