Huntington Ingalls Industries [HII] on Thursday reported a steep drop in net earnings in the third quarter due mainly to pension headwinds and to a lesser degree by costs related to the recent acquisition of government services provider Alion Science & Technology.

Sales in the quarter increased 1 percent to $2.3 billion driven by the Alion acquisition, which closed in August and contributed $163 million to the top line. Otherwise, sales were flat at the Newport News Shipbuilding segment, down at the Ingalls Shipbuilding segment on lower volume on the Coast Guard’s National Security Cutter and Navy DDG-51 destroyer and amphibious assault ships, and divestitures in the Technical Solutions segment that Alion is now part of.

HII said in July when it announced an agreement to acquire Alion that it expects the business to generate about $1.6 billion in sales in 2022. That guidance is unchanged, Tom Stiehle, HII’s chief financial officer, said on the company’s earnings call.

Net income tumbled 34 percent to $147 million, $3.65 earnings per share (EPS), from $222 million ($5.45 EPS) a year ago. Excluding pension impacts, adjusted earnings in the quarter were $3.58 EPS versus $3.73 EPS, smashing consensus estimates by 58 cents per share.

At the operating level, income was up $1 million to $163 million due to strong performance at Newport News on higher risk retirements for work on the refueling and overhaul of the Navy’s aircraft carrier USS George Washington and the Block IV Virginia-class submarine program.  Overall segment margin remained level at 7 percent.

In addition to the pension headwinds, HII’s bottom line was also dented by $15 million in non-recurring, pre-transaction expenses related to the Alion deal.

For 2021, HII now expects shipbuilding sales of about $8.2 billion, which is at the low end of its prior guidance of between $8.2 billion and $8.4 billion, and operating margin still pegged at between 7.5 percent and 8 percent. Supply chain disruptions leading to material shortages, primarily at Ingalls, reduced sales by about $40 million in the third quarter and these challenges “could persist” in the fourth quarter, Stiehle said.

There are no labor issues at the moment that are impacting work on programs, Stiehle said.

There are concerns that with a looming deadline set by President Biden for federal contract employees to be vaccinated against COVID-19 that work will suffer if some workers refuse to be vaccinated. Mike Petters, HII’s president and CEO, said about 75 percent of the company’s workforce is vaccinated, noting that there was a “tremendous uptick in the last 30 days” of employees getting the vaccine.

Biden on Thursday announced a delay in the vaccine mandate from Dec. 8 until Jan. 4, 2022, giving contractors more time to work with their employees on becoming vaccinated.

The outlook for the Technical Solutions business is sales of about $1.4 billion in 2021, up $300 million from the prior guidance of $1 billion due to the Alion acquisition. Delays in unmanned systems contract awards continue to pressure the top line and these awards are now expected in early to mid-2022, Chris Kastner, HII’s chief operating officer, said on the call.

The margin outlook for Technical Solutions is now about 2.5 percent versus previous guidance of between 3 and 5 percent due to amortization impacts related to the Alion deal.

HII expects free cash flow this year of between $300 million and $350 million, up from the prior outlook of between $150 million to $250 million, due to delays in having to repay progress payments that were accelerated by the government early in the pandemic.

Free cash flow in the quarter was strong at $277 million. HII tallied about $600 million in orders in the quarter and backlog stood at $50.1 billion, up 9 percent from $46 billion at the end of 2020.

On Wednesday, HII said it is increasing its quarterly dividend to $1.18 per share, up nearly 4 percent from the current $1.14 per share.