Sound the bugle and bang the drums. It's once again time for General Dynamics (NYSE:GD) to form ranks and get ready for review. The defense contracting powerhouse reports its Q3 2006 earnings Wednesday at -- when else? -- the crack of dawn.

What analysts say:

  • Buy, sell, or waffle? Twenty-two analysts march to the beat of General Dynamics. Fourteen of them say you should buy the stock; the rest say "hold."
  • Revenues. On average, they expect sales to increase 17% to $6.3 billion .
  • Earnings. . and for profits to grow just a bit slower at 15%, to $1.06 per share.

What management says:
Never one for verbosity or hyperbole, CEO Nicholas Chabraja summed up Q2 2006 performance thusly: "General Dynamics once again has delivered strong results."

And how. With 16% sales growth and a 20% rise in profits, the firm came close to matching its stellar Q1 performance, and closed out the first half with profits growth outpacing sales growth by a full 10 percentage points. Chabraja further noted that the firm's cash generation "continues to meet our expectations," and predicted $4.15 per share in GAAP net profits for this fiscal year.

What's more impressive than the 26% year-to-date profit growth against 16% sales growth? The fact that these are pure GAAP numbers -- no pro forma nonsense here, folks. Like many other public companies, General Dynamics only began expensing stock options two quarters ago, which means that this year's first-half results were dragged down by options expensing. That they compare so favorably to last year's results despite the drag must be considered impressive.

What management does:
Thanks to the strong operating earnings of the last two quarters, the General's operating margin now sits comfortably above its year-ago spot. As for the net, it looks even better -- but as I pointed out back in July, this is due to an anomalous, one-time profit from discontinued operations recorded in Q2, so take the 7.8% trailing net margin you see below with a grain of salt. It's almost certain to start ebbing back in subsequent quarters.

Margins %

4/05

7/05

10/05

12/05

4/06

7/06

Op.

10.2

10.2

10.3

10.3

10.7

10.9

Net

6.7

6.8

6.8

6.9

6.8

7.8
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
General Dynamics makes a point of providing that most Foolish of financial metrics -- free cash flow -- when reporting its quarterly results. But despite providing the raw numbers and a laconic observation that they "[met] our expectations" last quarter, Chabraja didn't take the opportunity to point out that as impressive as the GAAP numbers were, the company's free cash flow performance was stronger still.

Once again, GAAP net profits were up 26% year over year. But free cash flow for the first half of the year came in at $676 million. For the record, that's a whopping 44% better than last year. Why not emphasize that point? Perhaps out of modesty -- or perhaps because first-half free cash flow isn't really indicative of where the firm will wind up at year-end. General Dynamics typically generates strong free cash flows in all of its quarters, but historically, the great bulk of the cash shows up in Q4. For that reason, while it's certainly a metric to monitor, don't get too worried if Wednesday's news shows less than 44% growth. The important quarter for this metric is Q4 and Q4 alone.

Competitors:

  • Boeing (NYSE:BA)
  • L-3 (NYSE:LLL)
  • Lockheed Martin (NYSE:LMT)
  • Northrop Grumman (NYSE:NOC)
  • Raytheon (NYSE:RTN)
  • Rockwell Collins (NYSE:COL)

What did we expect out of General D last quarter, and what did it produce? Find out in:

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Fool contributorRich Smithdoes not own shares of any company named above. The Fool has a disclosure policy.