Lockheed Martin [LMT] on Monday reported strong financial results in its second quarter driven by higher sales and non-operating improvements, continuing momentum from the first quarter and the company lifted its earnings outlook for the year.

Net income rose 12 percent to $1.8 billion, $6.52 earnings per share (EPS) from $1.6 billion ($5.79 EPS) a year ago, missing consensus estimates by a penny per share. Sales increased 5 percent to $17 billion from $16.2 billion a year ago on gains at all four operating segments.

At the operating level, income was down a percent due to steep decline at the Aeronautics segment—the only segment to report lower profit—which was stung by a one-time $225 million loss on a classified program stemming from performance issues. The company said it did a comprehensive review of the program during the quarter and “determined that estimated total costs to complete the program are expected to exceed the contract price.”

The classified program loss chomped 61 cents EPS off the bottom line. Despite the charge, Lockheed Martin’s top executive said the program holds long-term promise.

“Our customer is highly attracted to the capabilities that we are developing on their behalf and we’re committed to delivering these capabilities and that the long-term potential of this solution is significant for the company,” James Taiclet, the company’s chairman, president and CEO, said during an earnings call.

Segment operating margin fell 60 basis points to 11.4 percent in the quarter versus a year ago.

Of the three business segments posting an operating profit, the Space segment led the way with strong double-digit gains driven by the Space-Based Infrared System and Next Generation Overhead Persistent Infrared (NG OPIR) satellite programs, the United Launch Alliance joint venture with Boeing [BA], and hypersonic development programs. Lockheed Martin also touted gains in its UH-60 Black Hawk, Combat Rescue Helicopter and CH-53K helicopter programs at Rotary and Mission Systems and a partial reversal of previous charges at Missiles and Fire Control.

The company benefited from higher sales, improved recovery of pension expenses, a lower share count, and the absence of non-cash impairment charge related to an investment an international maintenance and repair center that dented earnings a year ago. Lockheed Martin has divested its interest in the center.

All four operating segments contributed to the top line gain, led again by Space. The company highlighted an atomic weapons joint venture in the United Kingdom, NG OPIR, hypersonic development programs, helicopters, a Canadian navy ship program, the Army Tactical Missile System and Long Range Anti-Ship Missile, the Special Operations Forces Global Logistics Support Services program, and the F-16 and F-35 fighter programs.

Free cash flow in the quarter was $950 million and total backlog stood at $141.7 billion, down nearly 4 percent from $147.1 billion since the end of 2020.

For the remainder of the year, Lockheed Martin raised its earnings guidance while leaving the outlook for sales and cash flow intact. Earnings are now forecast to be 30 cents per share higher at between $26.70 and $27 EPS. The latest increase is on top of a 40 cents EPS raise the company provided in April in its first quarter results.

The boost in the earnings outlook is driven by program performance and risk retirements, cost reductions, investment gains, and accelerated repurchases of the company’s stock.

On the earnings call, Bernstein aerospace and defense analyst Doug Harned asked Taiclet how the company can achieve mid-single digit sales growth in the coming years amid a relatively flat outlook for U.S. defense spending and a backlog that has been flat the past 18 months as mature production programs plateau. Taiclet responded that the company’s 21st Century Warfighter concept, which he outlined a year ago shortly after taking the helm at Lockheed Martin, will position it for growth.

Taiclet said, “we’re going to use that to make our current and future platforms way more competitive, way more attractive using network effect to get more value for money for the government and seeing how the budget can shift our way…irrespective of how much the topline grows.”

The 21st Century Warfighter concept includes partnering with the commercial sector, such as telecommunications and technology companies, to accelerate the use of artificial intelligence, 5G communications, edge computing, autonomy, additive manufacturing, and other technologies on the battlefield. It also means taking advantage of the company’s existing platforms, like the F-35 fighter, for network effects to better links sensors and shooters across all warfighting domains.

Taiclet said the fifth-generation F-35 is a “much more valuable platform when you take advantage of the network effect that it can deliver by connecting sensors across domains, adding 5G.mil capability to our comms system so that we can communicate it to satellites directly, etcetera. You end up getting a whole network effect with the value to the defense enterprise and a deterrent value is going to go up by implementing this to our technology roadmap over the next number of years to our existing systems.”

There is still potential growth ahead in F-35 production and sustainment, including from international demand, Ken Possenriede, Lockheed Martin’s chief financial officer, said on the call. Other growth drivers in the near to mid-term include the Army’s Future Vertical Lift program, the Marine Corps CH-53 helicopter program, the F-16 fighter, the company’s Skunk Works classified business unit, space programs, hypersonic weapons, and international demand for integrated air and missile defense, he said.

Possenriede said that Lockheed Martin’s classified business is growing faster than its unclassified work.

Taiclet also said Lockheed Martin still expects to close its proposed acquisition of rocket maker Aerojet Rocketdyne [AJRD] in the fourth quarter and noted that the company continues to respond to the Federal Trade Commission’s second request for information related to the deal.

The proposed acquisition mirrors a similar deal by Northrop Grumman [NOC] for the former Orbital ATK in June 2018. That deal provided Northrop Grumman with a key supplier of solid rocket motors for various rockets and missiles but was permitted only after Northrop Grumman agreed to maintain the merchant supplier status of the rocket business.

The FTC is now assessing how well the merchant supplier status of Northrop Grumman’s rocket business is faring. On top of that, the Biden administration is closely scrutinizing proposed mergers and acquisitions across all industries out of concern that major deals are limiting competition.