HII [HII] on Thursday posted lower net income in the first quarter due to lower risk retirements at its shipbuilding segments while the company’s sales were higher due to an acquisition last year.

Net income dipped 5 percent to $140 million, $3.50 earnings per share (EPS), from $148 million ($3.68 EPS) a year ago, but still topped consensus estimates by 28 cents per share. Sales increased 13 percent to $2.6 billion from $2.3 billion a year ago, driven by the acquisition last August of technology services provider Alion Science and Technology.

The surge of the Omicron variant of COVID-19 did create headwinds for HII in the first two months of the quarter, making it difficult to hire and retain employees, Chris Kastner, the company’s president and CEO, said on an earnings call. HII’s suppliers are also facing challenges, he said.

“Moreover, our suppliers are being impacted by the same shortage of labor as well as inflation issues, which risk of delays and deliveries of key materials for our shipbuilding programs,” Kastner said. “We’re aggressively working these challenges with our suppliers and our customers.”

In March, worker attendance at the shipyards returned to normal although hiring plans for the year are “a bit behind,” he said, adding that “labor is a watch item for us as we move through the year.”

Segment operating margin slipped to 6.8 percent from 8.4 percent.

At the operating level, the largest driver of the decline in earnings was the Newport News Shipbuilding business due to lower risk retirement on the Virginia-class submarine program. At the Ingalls Shipbuilding segment operating income was down on lower risk retirement on the amphibious assault ship LHA 8 Bougainville

and the DDG-51 destroyer Jack H. Lucas.

HII continues to target the completion of the refueling and complex overhaul of the carrier USS George Washington (CVN 73) for later this year but “we are evaluating some risks to the schedule on that,” Tom Stiehle, the company’s chief financial officer, said on the call.

Mission Technologies, which was formerly named Technical Solutions, posted higher operating income on higher sales, which were up on the strength of the Alion deal.

Sales were lower in both shipbuilding segments due to lower revenue on DDG-51 programs, aircraft carriers and naval nuclear support services.

HII kept its outlook for 2022 intact, with sales still in the range of $8.2 billion to $8.5 billion and shipbuilding flat year over year. Shipbuilding margin will be in the 8 to 8.1 percent range. Sales at Mission Technologies are expected to be around $2.6 billion and operating margin around 2.5 percent.

Free cash flow this year is forecast to be between $300 million and $350 million. In the first quarter, free cash was a $16 million outflow. Between 2020 and 2024, HII continues to expect to generate $3.2 billion in free cash flow, Stiehle said.

HII recorded $2 billion in orders in the quarter and backlog stood at $47.9 billion, down a percent from $48.5 billion at the end of 2021. Kastner said that contract awards for Mission Technologies were slow in the quarter due to the continuing budget resolution that delayed awards.