Strong operating results combined with a boost from its pension plans led to higher sales and earnings at Raytheon [RTN] in the third quarter, the company said on Thursday.

Net income climbed 18 percent to $529 million, $1.79 earnings per share (EPS), from $447 million ($1.47 EPS), topping consensus estimates by 13 cents per share. The bottom line was bolstered by higher segment operating income, a favorable pension recovery that added 23 cents EPS versus 9 cents EPS gain a year ago, and a lower share count.

Segment operating margins held steady at 12.5 percent while overall margins, including the favorable pension adjustment, increased 130 basis points to 13.4 percent.

Raytheon Chairman and CEO Tom Kennedy. Photo: Raytheon
Raytheon Chairman and CEO Tom Kennedy. Photo: Raytheon

Sales in the quarter increased 4 percent to $6 billion from $5.8 billion a year ago with 32 percent of the revenue from international customers, a 7 percent jump from a year ago, Thomas Kennedy, Raytheon’s chairman and CEO, said on the company’s earnings call. Domestic sales were up 3 percent, he said, with classified work up 5 percent.

Free cash flow was $512 million.

At the operating level, the income gains were led by primarily by the Missile Systems and Integrated Defense Systems segments due to a combination of higher sales and program efficiencies. The Intelligence, Information and Services segment also reported higher operating income.

Sales were higher at Space and Airborne Systems, Missile Systems, IIS and the Forcepoint cyber security segment on an international classified program, Paveway laser guided bombs and AMRAAM air-to-air missiles, cyber security products and services for the federal government, and a small cyber-related acquisition in January.

Raytheon’s order flow in the quarter was particularly strong, with bookings of $6.9 billion, nearly 1.2 times sales. International business accounted for 21 percent of the orders, Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said on the call.

Backlog stood at $35.8 billion with $25.7 billion of it funded, up nicely from a total of $33.6 billion a year ago, $24.4 billion of which was funded.

Based on year-to-date results, Raytheon raised its earnings guidance to between $7.28 and $7.38 EPS versus the prior outlook of between $7.13 to $7.33 EPS. The company narrowed its sales guidance to between $24.2 billion and $24.5 billion, up $200 million from the previous low end of the range.

Bookings for the year are expected to be between $26 billion and $27 billion, $500 million above the previous forecast and $1 billion higher than projected during the company’s first quarter earnings call in April.

Kennedy and O’Brien provided a high-level outlook for 2017 with sales expected to be up between 3 to 5 percent from the mid-point of the 2016 guidance, driven by gains in domestic and international business. Orders are expected to exceed sales and segment operating margins are also expected to rise.

Kennedy said that global “demand signals” are the strongest he has ever seen for capabilities in counter-terrorism and counter-insurgency, deterrence-type systems such as aircraft and missile defense and related radar, and in the case of the Defense Department to recapitalize aging systems with new technologies to stay ahead of potential enemies.

Raytheon’s top priority for its investments is for organic growth followed by returning cash to shareholders through dividends and share repurchases, Kennedy said. The company remains on the lookout for small acquisitions to “fill technology and market gaps to augment our defense and commercial cyber security capabilities,” he added.

Kennedy said the Forcepoint segment, which includes the company’s legacy commercial cyber security capabilities, last year’s Websense acquisition and two smaller acquisitions, had 18 percent organic growth in the quarter. Overall, Forcepoint’s sales were up 31 percent to $149 million in the quarter.

Forcepoint is “performing well and on track to meet its 2016 objectives,” Kennedy said. The business has a strategic plan that outlines areas where it can provide market leadership, including advanced insider threat systems, a rapidly growing area, he said.

Forcepoint’s strategy calls for “penetrating” large and very large commercial enterprises, which will help it attain long-term growth, Kennedy said.