By Calvin Biesecker

General Dynamics [GD] yesterday posted strong third quarter financial results due to surging sales and earnings at its Aerospace and Combat Systems segments and the company upped its earnings guidance for 2007.

GD’s shipbuilding business also continued its solid performance, boosting earnings and margins despite a scant increase in sales. The results at the Aerospace, Combat Systems and Marine segments more than offset a relatively flat performance at the Information Systems and Technology (IS&T) business.

Net income jumped 25 percent to $546 million, $1.34 earnings per share (EPS), compared to $438 million ($1.08 EPS) a year ago, besting consensus estimates by nine cents per share. Margins increased 50 basis points to 11.7 percent. Sales rose 13 percent to $6.8 billion from $6.1 billion a year ago.

GD expects its net earnings for this year to be between $5 and $5.05 EPS, 15 cents higher than it projected at the end of the second quarter. The company said it isn’t ready to provide guidance for 2008.

At Combat Systems operating profits climbed 39 percent to $228 million and sales rose 37 percent to $1.9 billion, driven by growth across its product lines, Nicholas Chabraja, GD’s chairman and CEO, said on yesterday’s earnings call. The Mine Resistant Ambush Protected vehicle, tanks and Stryker wheeled vehicle programs led the growth surge and gains were also recorded in soldier protection systems, ammunition and the company’s European land business operations, he added.

Combat Systems margins expanded 20 basis points to 12.2 percent but are expected to retreat to the mid-11 percent range in the fourth quarter, Chabraja said. Still, the segment expects upward of $700 million more in sales in the fourth quarter over the third and a big rise in operating profits as well, he said.

The business jet market continues to fuel GD’s sales and earnings, logging a 37 percent increase in operating profits to $226 million and a 21 percent boost in sales to $1.3 billion on higher aircraft deliveries. Moreover, the segment continues to improve its performance as margins increased by 2 percent to 17.2 percent. Those margins are likely to decline somewhat in the fourth quarter, Chabraja said.

Chabraja attributed the margin gains on productivity improvements and to a lesser extent on strong pricing across its mix of aircraft. He said improved productivity is allowing Gulfstream, which is the business jet division, to increase the number of manufactured aircraft per year.

Business jet demand is so high that customers who are now just beginning the ordering process for some Gulfstream aircraft will have to wait until the second half of 2010 and even into 2011 to receive their planes, Chabraja said. He expects this lag time to eventually temper some of the order rates.

Similar to the second quarter, the Marine business turned in profits that outpaced sales growth. Operating profit in the segment increased 8 percent to $110 million on a 2 percent increase in sales to $1.2 billion and margins expanded 40 basis points to 8.8 percent. A year ago margins benefited from contract close-out work on a commercial tanker program. This time around margins expanded on cost reductions in the Virginia-class submarine program and an uptick in ship repair work, Chabraja said.

Later yesterday, Ron Sugar, Northrop Grumman‘s [NOC] chairman and CEO, said the cost reductions that are recurring in the Virginia-class submarine program will hopefully lead to the Navy deciding to build two vessels per year instead of one as is now the case. GD and Northrop Grumman are partners in developing and building the submarines.

The lone blemish in the quarter was IS&T, which posted a 2 percent decline in profits to $254 million on relatively flat sales. Until this year IS&T has grown rapidly, fueled to a large extent by acquisitions. Chabraja said the business is cyclical and that some defense funds here have been diverted to support the war effort. But he said orders outpaced sales in the quarter and that there is plenty of potential business activity related to this business.

Chabraja wouldn’t guess if IS&T would have organic growth next year but said the “order book suggests this.” Still, this depends on whether funds get released, he added.

Total backlog at the end of the third quarter was $46.5 billion, compared to $44.6 billion three months ago. Free cash flow in the quarter was $1.6 billion.