Defense giant General Dynamics (NYSE:GD) reported surging sales, profits, and free cash flow for the quarter just ended as well as for the first six months of its fiscal year. Its improvement in operations was led by its growing Information Systems and Technology division, which now makes up 36% of the company's total revenues, its highest level ever.

All told, General Dynamics increased its revenues by more than 29% for the first six months of this year as compared with 2003, while its net earnings per share increased 22%. The somewhat slower increase in net earnings is a bit deceptive, though: According to the rudimentary cash-flow calculations General Dynamics provides in its press release, free cash flow has increased more than 44% from $391 million to $572 million. General Dynamics CEO Nicholas Chabraja noted that the company used more than $300 million of this cash to strengthen its balance sheet by buying down its long-term debt. Even so, General Dynamics' net debt (total debt minus cash and equivalents) has surged in the last year, exceeding $2.7 billion. This was caused largely by acquisition and integration activity in the past year, such as the former General Motors (NYSE:GM) defense business, which General Dynamics purchased.

One of the brightest lights for the company is the rebound in its previously struggling Gulfstream commercial aircraft division, which had suffered some substantial downturn in business as the economy soured after 2001. For the first six months, the aircraft segment has seen only a 2% rise in top-line revenues, but an 88% increase in profits. Much of the gain came from an improved management of the manufacturing process as well as General Dynamics' increased control over the resale market of its used jets. In the company's conference call (provided by CCBN; registration required), it noted that the order activity for Gulfstream jets has picked up substantially, and management is fairly excited about the third quarter here.

In 2002, when the Gulfstream problems were at their highest point for the company, the old Fool Rule Maker portfolio swooped in and picked up shares of General Dynamics with the expectation that this business was in a cyclical downswing due to its economic sensitivity. We were a bit early -- the stock, which had lost 40% of its value, lost another 20%. But it has climbed back (and then some!) on its consistent wins in defense contracts -- though it got some bad news last night when the British Air Force awarded a $1.2 billion pilotless plane project to French defense giant Thales instead of a consortium including GD, led by Northrop Grumman (NYSE:NOC). Give Gulfstream, the most valuable nameplate in the private aircraft business, a little tailwind, and you have the makings of a turnaround.

Bill Mann owns none of the companies mentioned in this report. For a look at some great income-generating investments, pick up a free trial of Mathew Emmert's Income Investor today!