By Calvin Biesecker

Northrop Grumman [NOC] yesterday reported strong profit gains in each of its business sectors due to higher sales and improved performance although net income was flat due to a substantial gain recorded a year ago on the sale of stock in TRW Automotive [TRW].

All four of the company’s segments posted double-digit increases in operating earnings, led by the Ships business, which boosted profits by 18 percent to $142 million on a 19 percent increase in sales to $1.8 billion. Profits were driven by the higher volume, improved performance, completion of certain contract work, a $62 million pre-tax insurance recover related to the impact of Hurricane Katrina on the company’s Gulf Coast shipyards, and a $23 million pre-tax gain on the reorganization of the former AMSEC joint venture.

Unlike General Dynamics [GD], which is forecasting tremendous growth for its shipbuilding business over the next few years, Northrop Grumman didn’t offer a forecast beyond the current year. In 2008 Ships sales are expected to be up slightly, Jim Palmer, Northrop Grumman’s chief financial officer, said.

In the quarter, Ships’ higher sales were driven by the range of platforms the company is building for the Navy.

The Electronics segment boosted earnings by 16 percent to $234 million on an 8 percent rise in sales to $1.9 billion. Improved performance, coupled with risk reduction on several programs, contributed to the higher profits. Sales were up on electro-optical targeting and infrared countermeasures programs, communications and intelligence, surveillance and reconnaissance programs, and navigation systems.

Aerospace segment profits increased 13 percent to $211 million on a scant 1 percent increase in sales to $2.2 billion. Sales were down on several aircraft programs such as the F-35, EA-18G and E-2D Advanced Hawkeye, which are transitioning from development to production while volumes were up on classified and civil space programs.

In the Information & Services segment, Northrop Grumman’s largest, profits climbed 12 percent to $256 million on an 11 percent jump in sales to $3.3 billion. Higher sales, improved performance and favorable contract adjustment led to the earnings gain. The acquisition of Essex Corp., missile defense, C3, intelligence and technical services and the Nevada Test Site programs drove revenues.

For the quarter net income was flat at $454 million, $1.31 earnings per share, versus $453 million ($1.28 EPS) a year ago. Earnings from continuing operations in the fourth quarter were also flat at $457 million ($1.32 EPS), nipping consensus expectations by one cent. A year ago, the company recorded a $111 million pre-tax gain on the sale of shares in TRW Automotive. Sales increased 10 percent to $8.8 billion from $8 billion a year ago. Overall operating margins were up 80 basis points to 8.6 percent and free cash flow was $432 million.

For 2007 net income was up 16 percent to $1.8 billion ($5.12 EPS) versus $1.5 billion ($4.37 EPS) a year ago, while sales increased 6 percent to $32 billion from $30.1 billion. Free cash flow was a record $2.1 billion and backlog stood at $64.1 billion.

In 2008 Northrop Grumman expects sales to increase about 3 percent to $33 billion with earnings from continuing operations between $5.50 and $5.75 EPS. Free cash flow is expected to be between $1.9 billion and $2.3 billion.

Risky development programs, as well as the post-Katrina fallout, that have at times hindered Northrop Grumman’s past earnings, are settling down, Wes Bush, the company’s president and chief operating officer, said. The company expects to retire risk this year on the electronic warfare upgrade programs for a foreign F-16 program and is hoping to do the same with an airborne warning and control aircraft program for Australia by the third quarter.

As for the defense budget outlook, the company doesn’t see the peak in sight for defense budgets, Ron Sugar, Northrop Grumman’s chairman and CEO, said. He added that his company doesn’t have significant exposure to the war supplemental appropriations should that spending begun to drop if the United States begin to withdraw forces from Iraq.