HII [HII] on Thursday reported lower third quarter earnings due to higher taxes and negative impacts from equity investments while sales were up mainly due to an acquisition a year ago and top-line gains in its nuclear shipbuilding segment.

Net income fell 6 percent to $138 million, $3.44 earnings per share (EPS), from $147 million ($3.65 EPS) a year ago, edging consensus estimates by two pennies a share. Sales increased 12 percent to $2.6 billion from $2.3 billion a year ago.

Excluding the revenue boost from the acquisition of Alion Science and Technology a year ago, the sales increase was led by the Newport News Shipbuilding segment on naval nuclear support services for submarines and aircraft carriers, the Columbia-class ballistic missile and Virginia-class Block V attack submarines, a the refueling and overhaul of the aircraft carrier USS

John C. Stennis.

Organic revenue at the Mission Technologies segment, which includes Alion, was up nearly 2 percent.

At the operating level, segment income was up slightly on gains at Newport News and to a lesser degree at Mission Technologies, more than offsetting a decline at Ingalls Shipbuilding. Newport News benefited from $41 million in incentives earned in the Columbia program.

Free cash flow in the quarter was negative $96 million, well below the company’s projections due to timing issues and an $80 million tax payment HII decided to make earlier than expected, Tom Stiehle, HII’s chief financial officer, said on an earnings call. HII is actually boosting its outlook for free cash flow this year to around $350 million versus prior guidance of between $200 million and $250 million primarily due to a delay until 2023 for having to make a repayment on a COVID progress payment, he said.

On Wednesday, HII said its board approved a 5 percent increase in the quarterly cash dividend to $1.24 per share, up 6 cents from the current $1.18 per share.

Orders in the quarter were $2.1 billion and backlog stood at $46.7 billion, down nearly 4 percent from $48.5 billion since the end of 2021.

Chris Kastner, HII’s president and CEO, on the call outlined the ongoing macroeconomic factors hampering the company, “most notably a persistent tight labor market with really no material improvement in general economic conditions.” So far this year, HII has hired 3,600 craftsmen and women toward its full-year goal of 5,000, he said, adding later the company is on track to meet its target.

Meantime, HII is filling labor shortfalls with external lease labor and overtime, he said.

The company is also beset with challenges across its supplier base, “resulting in longer material lead times and inflation,” Kastner said.

HII narrowed its sales guidance for the year to the low end of the prior range with shipbuilding expected to be between $8.2 billion and $8.3 billion versus as high as $8.5 billion. The revenue outlook at Mission Technologies is now around $2.4 billion versus between $2.4 billion and $2.6 billion.

Stiehle said the changed outlook at shipbuilding is due to labor challenges and timing of material receipts, and at Mission Technologies a slow start to the year and the hiring environment.

Projections for shipbuilding margins remain at 8 to 8.1 percent while margins at Mission Technologies are now expected to be around 2.3 percent versus prior guidance of around 2.5 percent due to the lower volume forecast.

In the third quarter, overall segment operating margin fell 70 basis points to 6.3 percent.

The company remains on track with its two remaining key milestones this year, delivery to the Navy of the Arleigh Burke-class destroyer USS Lenah H. Sutcliffe Higbee (DDG-123) and testing—which is underway—of the electromagnetic aircraft launch system for the USS John F. Kennedy (CVN-79), a Ford-class aircraft carrier, Kastner said.

HII didn’t provide guidance for 2023 but Stiehle said the long-term outlook for shipbuilding revenue remains at 3 percent compounded annually. Under normal economic conditions the company would expect incremental improvement in shipbuilding margin but given current circumstance “we’ll need to close out the year to assess risk retirement and operational efficiencies,” he said.

Free cash flow next year is still targeted for between $545 million and $595 million, and between $730 million and $830 million in 2024.