By Calvin Biesecker

Streaking along so far this year, General Dynamics [GD] yesterday reported strong second quarter financials driven by higher earnings, sales and margins at each of its operating segments.

The strong results, coupled with an equally impressive first quarter, led GD to significantly boost its earnings guidance for 2008 to between $6 and $6.05 earnings per share (EPS) versus the previous expectations of $5.55 to $5.65 EPS announced in January. GD Chairman and CEO Nicholas Chabraja on yesterday’s earnings offered sales guidance of between $29.5 billion and $29.7 billion for the year and said operating margins would exceed 12 percent.

Net income in the quarter increased 25 percent to $641 million, $1.60 earnings per share (EPS), compared to $513 million ($1.26 EPS) a year ago, aided by a $35 million (9 cents EPS) gain due to a favorable tax settlement. Excluding the tax benefit, GD’s earnings still beat consensus estimates by 7 cents EPS.

Sales increased 11 percent to $7.3 billion from $6.6 billion a year ago. Free cash flow was $910 million.

The Combat Systems, Aerospace and Marine Systems segments all achieved double-digit increases in operating profits and sales.

Combat Systems benefited from increased demand within the armored vehicle, tank and ammunition programs and to a lesser degree from weapons systems, Chabraja said. Growth in ammunition was across the board but especially pronounced in medium caliber and in a big order received by one of the company’s Canadian business units, he said. Productivity improvements helped drive margin and profit gains, he added. There were no one-time items that boosted the segments results, he said.

Higher earnings and sales at the Aerospace business jet segment were driven by increased aircraft deliveries, pricing, productivity improvements and product mix, Chabraja said. Second half sales will be even higher than the first half and margins are expected to nudge up a bit more as well, he added.

Initial orders for Gulfstream’s latest business jet, the G650, are strong and the company has been collecting deposits that will boost free cash flow in the third quarter, Chabraja said. G650 orders so far have been split relatively evenly between North American and international customers.

The shipbuilding segment was boosted by growth at all of GD’s shipyards and profits benefited from improved performance in the West Coast operations on higher volume, Chabraja said.

Chabraja said it remains unclear how the Navy’s recent decision to halt production of the DDG-1000 next-generation destroyer program in favor of continuing production of the current DDG-51 destroyers will play out (Defense Daily, July 23). It could mean less volume but higher margins. However it works out, Marine Systems is still expected to be the company’s fastest growing segment over the next several years, he said.

GD and Northrop Grumman [NOC] earlier this year each received production contracts for the DDG-1000s. The companies also build the DDG-51s under a dual-source arrangement with the Navy.

Information Systems and Technology posted single-digit earnings and sales gains, all of it organic, and Chabraja said that sales should be even higher in the second half of the year.

GD’s total backlog increased $5.5 billion to $55.3 billion since the end of the first quarter, driven by surging demand at Gulfstream.