Raytheon [RTN] on Thursday reported lower earnings in the first quarter due mainly to a one-time favorable settlement a year ago on an international program and because profits were down in all but one of the company’s operating segments.

Net income in the quarter plunged 22 percent to $429 million, $1.43 earnings per share (EPS), from $551 million ($1.79 EPS) a year ago, still beating analysts’ estimates of $1.38 EPS. A year ago Raytheon’s earnings benefited from a $131 million (42 cents EPS) favorable after-tax settlement on the eBorders border security contract that the United Kingdom Home Office had terminated for default.

There was no favorable adjustment in the first quarter of 2016 that could match the eBorders benefit a year ago.

Raytheon AMRAAM air-to-air missile being fired from F-35 fighter in test in Oct. 2014. Raytheon said the missile program was one of its growth drivers in the first quarter. Photo: Air Force.
Raytheon AMRAAM air-to-air missile being fired from F-35 fighter in test in Oct. 2014. Raytheon said the missile program was one of its growth drivers in the first quarter. Photo: Air Force.

Raytheon’s commercial cyber security segment, Forcepoint, was the only reporting unit that posted higher operating income, $14 million versus nothing a year ago. Forcepoint was created following the acquisition of Websense last May and Stonesoft in January.

Thomas Kennedy, Raytheon’s chairman and CEO, said on an analyst call that Forcepoint’s operating results, which included $136 million in sales, beat the company’s expectations and are on track to meet the growth objectives Raytheon has publicly outlined for the business.

At the other segments profits were down for various reasons including a mix toward lower margin programs, an unfavorable change in incentive fees on a missile defense program, favorable contract resolutions a year ago that didn’t repeat in the recent quarter, and an unfavorable program adjustment in a joint venture for costs to repair defective shelters built by a subcontractor on an international command and control program. Raytheon said it is pursuing recovery of the costs on the international program, which bit $36 million from operating income.

The Missile Systems segment was also hit with a $22 million charge, Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said on the analyst call. He said the charges at Missile Systems and the international program were one-time events and the company doesn’t expect additional financial impacts from either.

The charges, coupled with the lower operating earnings, contributed to a 5.3 percent decline in total operating margins to 10.6 percent. Absent the charges for the shelters and missiles programs, margins would have been a percent higher in the quarter, O’Brien said.

Raytheon also pointed to some other puts and takes that in the aggregate contributed to the earnings decline, including higher pension adjustments and negative accounting adjustments related to the Forcepoint acquisition, some of which was partially offset by an accounting change for stock compensation.

Sales in the quarter were strong, up 9 percent to $5.8 billion from $5.3 billion a year ago as all the company’s operating segments—with Missile Systems leading the way followed by Space and Airborne Systems (SAS)—contributed to the gain.

Raytheon cited the Paveway laser guided bomb and Advanced Medium-Range Air-to-Air Missile (AMRAAM) programs as the revenue drivers at Missile Systems. Kennedy said production is increasing on the latest AMRAAM version, the AIM-120D, and rising operating tempo of United States forces and international customers is also fueling missile demand.

International business was up 17 percent in the quarter and represented 30 percent of total sales, Kennedy said. Domestic sales were up 6 percent and domestic classified business was up 12 percent, he added. Classified business drove strong sales at SAS.

Raytheon matched its strong sales with strong bookings of $6.2 billion for a book-to-bill ratio that approached 1.1 times sales. International customers accounted for 27 percent of orders.

Missile Systems is on a path to improve sales over last year and Kennedy said the outlook is for continued growth. The operating tempo is the primary reason for this outlook, at least into 2017, he said, with help also coming from Pentagon investments into enhancing existing missile capabilities and strong demand for missile defense systems globally.

Raytheon increased its earnings outlook for 2016 due to the stock compensation accounting change, with the new forecast 13 cents higher at between $6.93 and $7.13 EPS. The company maintained its outlook sales and operating cash.

Operating cash flow in the quarter was $325 million and Raytheon spent $400 million on share repurchases. The company also raised its dividend for the 12th straight year during the quarter.

Total backlog at the end of the quarter stood at $34.8 billion with 42 percent from international customers, while funded backlog was $26.2 billion. Total backlog was $99 million higher than at the end of 2015.