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By Mike Stone and Ankit Ajmera
July 26 (Reuters) - Tomahawk missile maker Raytheon Co on Thursday raised its earnings forecast for 2018 and reported stronger than expected results, but its shares fell on investor concerns about lower cash flow for the year.
Raytheon shares sank 3.4 percent to $190.77 in early trading due to a $1.25 billion pension contribution that reduced 2018 free cash flow. Shares had earlier risen in premarket trading.
Many companies have funded pension obligations to take advantage of a cut in the U.S. corporate tax rate to 21 percent from 35 percent. Raytheon's pension funding exploits last year's tax cut legislation and will nearly halve the company's 2018 effective tax rate to about 10.5 percent, down from prior guidance of 18 percent.
"Because of the timing of this contribution, making it here in the third quarter, we are able to deduct it at the prior statutory rate of 35 percent on our 2017 tax return giving us a financial benefit," Chief Financial Officer Toby O'Brien told Reuters in an interview on Thursday.
As a result of the pension contribution, the Waltham, Massachusetts-based company expects 2018 operating cash flow from continuing operations of between $2.6 billion and $3 billion, down from $3.6 billion to $4 billion it forecast earlier.
Raytheon will also take a non-cash pension settlement charge of $288 million in the third quarter of 2018, resulting in earnings per share reduction of 79 cents.
"We transferred close to $1 billion in pension obligations to an insurance company," O'Brien said. "It is a very good deal for both the company's shareholders and equally as important for our pensioners."
The contributions reduce Raytheon's future pension funding obligations.
The maker of Paveway laser-guided bombs and SM-3 anti-ballistic missiles slightly raised its yearly earnings forecast thanks in part to a lower tax rate, derived from pension contribution benefits.
It expects 2018 earnings from continuing operations of between $9.77 and $9.97 per share, up from a previously forecast range of $9.70 to $9.90 per share. Two cents of that higher amount is due to taxes and the other 5 cents due to operational improvements in the quarter, O'Brien said.
Raytheon expects annual sales of between $26.7 billion and $27.2 billion, the company said, some $200 million higher than its prior forecast.
Revenue rose 5.5 percent to $6.63 billion in the second quarter ended July 1, on higher sales in its missile systems business, its biggest.
Income from continuing operations attributable to common stockholders rose to $2.78 per share in the second quarter, from $1.89 per share a year earlier, helped chiefly by lower taxes.
Analysts, on average, had expected quarterly earnings of $2.35 per share, and revenue of $6.51 billion, according to Thomson Reuters I/B/E/S.
The results come as Raytheon, like other U.S. defense contractors, including Lockheed Martin and Boeing Co , benefit from stronger global demand for fighter jets, tanks and other weapons.
Raytheon is also expected to gain from higher U.S. defense spending under President Donald Trump's administration. (Reporting by Mike Stone in Washington and Ankit Ajmera in Bengaluru; Editing by Sai Sachin Ravikumar and Bernadette Baum)