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Northrop Grumman Knocked

There seems to be a lot of tsk-tsking going on over Northrop Grumman's (NYSE: NOC  ) Q3 results, released Tuesday, particularly over a certain litigation-related charge the firm incurred. I'm here to say it's not as bad as it seems -- or rather, not bad in the way everyone seems to think.

Yes, Northrop settled a lawsuit with the Department of Justice, resulting in an after-tax charge to earnings of $0.20 per share. Yes, that hurt the firm's Q3 results. But that's no cause for worry going forward. On the contrary, by settling its dispute over microelectronic parts produced by its 2002 acquisition, satellite-maker TRW, Northrop has put this issue to rest once and for all. It's right there in the word, folks: "settlement." The dispute is settled. The amount of the charge, too. This one won't recur.

More serious, in my view, were Northrop's "revenue misses" -- current, near-future, and farther out -- which appear to threaten its cash-production goals. Wall Street wanted to see $7.7 billion out of Northrop this week, but the most the firm could muster was $7.4 billion in sales. Coming so close to year-end, that $300 million shortfall convinced management to cut its own full-year revenue guidance; it now predicts $30.2 billion in annual sales (and no more than $4.25 a share in earnings). It went on to say that next year, sales will likely come in between $31 billion and $32 billion, with profits in the range of $4.65 to $4.90 per share. Again, both of these estimates fell short of expectations. Personally, I think the real reason for the price decline lies in these forward projections -- not last quarter's $0.20 charge.

And the cash?
As you'll recall from last week's Foolish Forecast, on Tuesday we were most interested in seeing evidence that Northrop would fulfill its promise to generate $2.3 billion to $2.6 billion in operating cash flow this year. The company gave us some good news, some bad news, and some fishy news on that front.

Pre-earnings, cash flow was looking pretty anemic at just $523 million. But with the additional $962 million in cash generated in Q3 (up 8% from last year), the company made substantial progress toward that goal -- that's the good news. The bad news is that at the rate Northrop has been going year to date, it was still on course to generate only $2 billion by year-end, well shy of its goal.

And here we get to the fishy part. With mid-$2 billion cash production looking less and less likely, management announced that the "recent" passage of the Pension Protection Act of 2006 -- more than two months ago -- convinced it to pay $800 million into its pension fund in Q4. This reduced its cash from operations target to a range of from $1.5 billion to $1.8 billion. And yes, your math is right: Northrop has already met that goal by generating $1.5 billion year to date. Looks to me like the company saw failure on the horizon, and decided to preemptively "declare victory and go home."

Don't stop there. Find out how Northrop's defense-contracting peers did last quarter. We've covered:

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Fool contributorRich Smithdoes not own shares of any company named above.

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