Aviation electronics specialist Rockwell Collins (NYSE: COL) joined the earnings parade this week, along with Northrop Grumman (NYSE: NOC), Raytheon (NYSE: RTN), and every other defense contractor you can name.

All it takes is a glance at the closing share price to tell you that investors weren't thrilled with the news. Here's why:

The good news first
Rockwell's second-quarter results "beat earnings" soundly, posting a 26% increase in earnings per share ($1.03) on just a 10% increase in sales ($1.2 billion). Rockwell transformed mere respectable sales growth into rip-roaring profits by increasing the margins earned on those sales. Revenues from the commercial segment boosted its operating margin 50 basis points to 23%. Government sales posted a more modest increase of 20 basis points to a 20% operating margin. Mix it all together, and the business as a whole increased its profitability by 40 basis points, to 21.5%.

Sounds good so far, but remember: Rockwell relied heavily on share buybacks to achieve its stellar EPS growth. No harm in that, of course. Everybody is doing it -- defense contracting peers General Dynamics (NYSE: GD), L-3 Communications (NYSE: LLL), Goodrich (NYSE: GR), and Lockheed Martin (NYSE: LMT) all repurchased shares last quarter. But without spending cash on share buybacks, the results wouldn't have looked quite so spectacular.

The bad
Speaking of cash, Rockwell has generated a whole lot less of it so far this year than it did by this time last year. Free cash flow declined 57% to $55 million in the first half, primarily because of higher wage costs and an 18% year-over-year increase in inventories (faster than Rockwell's sales grew, I might add).

The ugly
Finally, the highlight of Rockwell's quarter, in this Fool's view, was management's decision to strengthen its position in the unmanned aerial vehicle (UAV) space by buying Athena Technologies. When this deal was announced back in March, Rockwell did not provide specifics on how much business Athena brought to the table, and how much Rockwell paid to acquire it. Now we know half that equation.

According to its 10-Q filing, Rockwell paid $107 million to acquire Athena. If Athena is generating only $20 million-odd in annual sales, as I estimate, that works out to about four or five times sales that Rockwell anted up -- a pretty penny for a company whose own shares sell for just a little over 2.2 times sales.

And here's the ugly flipside to this penny: Even with the earnings out, and the 10-Q filed, shareholders still have to guess at the revenue information, which is needed to evaluate whether this was a wise use of their capital.

Rock well and Fool on with more:

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