"Armor Holdings (NYSE:AH) earnings hotline. Please hold." Drat! If you're anxious to learn how the defense contractor did during its third quarter this year, you've got another two days' worth of Muzak to endure before learning the news. But will it be worth the wait?

What analysts say:

  • Buy, sell, or waffle? Ten analysts follow Armor Holdings, where buy ratings outnumber holds nine to one.
  • Revenues. Thanks to its new acquisition, Stewart & Stevenson Services, Armor Holdings' sales are expected to skyrocket in Thursday's news. On average, analysts are projecting a 44% jump to $646.4 million.
  • Earnings. The acquisition didn't come cheap, though. Back in February, Armor Holdings management advised that the S&S deal would not help the bottom line until 2007. As a result, the consensus is that earnings tomorrow will fall about 16% to $0.62 per share.

What management says:
Last quarter's earnings report outlined the extent of the damage from the S&S acquisition: "additional financing costs, amortization expense and operating losses" related to the buyout reduced the combined profits by $0.11 per diluted share. Loss of interest income from the cash laid out to buy the truck maker cost an additional $0.04. Finally, because the products it sells are generally lower-margin than Armor Holdings' homegrown goods, adding S&S to the mix cut 3.8 percentage points out of the gross margin.

And yet, CEO Robert Schiller pronounced himself "very pleased with the results for the quarter." Although I imagine he had difficulty saying that with a straight face, more credible is his assertion that AH hopes that this year's pain will yield to next year's gain, as S&S becomes "meaningfully accretive to earnings in 2007."

What management does:
So how has S&S's addition affected AH's margin trends? Pretty much as you'd expect. The lower S&S margins kept the now-combined firm's gross on a downtrend, and the plethora of "one-time" charges for this and that stopped operating and net margin revivals cold, pulling both down to levels they haven't seen in at least 18 months.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

26.1

25.4

24.1

23.9

23.6

22.2

Op.

15.8

15.2

14.4

14.8

14.8

13.6

Net

8.4

8.9

8.0

8.1

8.3

7.4
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:
And yet, there is hope for Schiller's predicted "accretion." While it's true that year-to-date sales growth of 35% has been overtaken by cost of goods sold growth of 42%, selling, general, and administrative (SG&A) costs have risen just 16%. So far, Armor Holdings is holding the line on operating costs, and if all the one-time charges do turn out to be indeed one-time (more or less), then I do see hope for the firm improving its operating and net profitability in the future. Combine that with the undeniable sales growth, and this new and improved company could well reward investors next year.

In other news: Earlier this month, Armor Holdings informed investors that it continues to play nice with the Department of Justice (DOJ). The DOJ, which is investigating the use of possibly defective Zylon fibers in bullet-"proof" vests, has for the second time asked the company for permission to "toll" (meaning "stop the clock on") the statute of limitations for its investigation. For the second time in a row, AH agreed to help the Feds out. The DOJ now has until the end of January 2007 to complete its investigation and decide whether to file charges against the company. Yet another issue to keep an eye on.

Competitors:

  • Caterpillar (NYSE:CAT)
  • Ceradyne (NASDAQ:CRDN)
  • Halliburton (NYSE:HAL)
  • Oshkosh Truck (NYSE:OSK)

What else is Armor Holdings up to these days? Teaming up with Lockheed Martin (NYSE:LMT) and going head to head with General Dynamics (NYSE:GD) on a contract to create a 21st century Humvee. Read all about it in "General Dynamics Outflanked?"

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.