What was it John Steinbeck said about plans, mice, and men? And did he mention anything about the defense industry?

Well, he should have
As earnings season progresses, we're seeing the recession take a toll upon defense contractors, an industry that that has -- perversely, as it turns out -- made a point of balancing its core business with sizeable investments in the civilian economy. Boeing's (NYSE:BA) the most obvious example: a world-class defense contractor whose commercial airplanes division is floundering. General Dynamics is another. Wednesday's earnings news revealed a superb defense business there, hobbled by languishing sales of civilian business jets.

And of course, there's Textron (NYSE:TXT). The maker of Bell helicopters, Cessna airplanes, and Shadow unmanned aerial vehicles (UAVs) reported Q3 earnings Tuesday. There's no way to sugarcoat the news: Profits dropped 98%, leaving Textron with a meager 2% of what it had earned just one year ago.

Ouch!
Indeed. But Textron isn't crying. To the contrary, management sounded strangely optimistic. True, revenue is down in every segment but one (Textron Systems). And that segment builds UAVs, a business that everyone is crowding into these days, including L-3 Communications (NYSE:LLL), Lockheed Martin (NYSE:LMT), and Honeywell (NYSE:HON).

In short, Textron probably can't count on beaucoup profits, with so many rivals competing for the same pieces of UAV pie. But management tells us we can count on two things:

  1. Its commitment to extricating itself from a financial morass. No longer interested in being in the same business that sank Bear Stearns, and laid AIG (NYSE:AIG) and Citigroup (NYSE:C) low, Textron shaved another $700 million off its "managed receivables" book in Q3. And just like last quarter, it seems to have avoided taking too big a bath on the divested assets.
  2. Manufacturing free cash flow hitting the promised $300 million to $400 million range. Textron's cash profits give us a touchstone for remembering the firm's true value.

Foolish takeaway
Granted, with Textron's shares now fetching more than four times what they sold for at the March low, there's probably not a whole lot of value left to be captured here. (In fact, if Textron ends the year with anything less than $400 million free cash flow, I'd argue the shares are overvalued.)

But make no mistake: It's not the blowout the headline numbers suggest.

Have any thoughts on Textron or defense in general? Make yourself heard in the comments area below.

Fool contributor Rich Smith owns shares of Boeing. General Dynamics is a Motley Fool Inside Value pick. The Motley Fool has a disclosure policy.