Dave Keffer
Corporate Vice President and Chief Financial Officer at Northrop Grumman
Okay. Thanks, Kathy, and good morning, everyone. As you heard from Kathy, we delivered solid results across all key metrics in Q3. We're reaching an inflection point in our sales growth, driven by the strength in the demand environment, our new business performance and our success in hiring and retaining employees. We had another strong quarter for bookings with roughly $8.7 billion in awards. This contributed to a year-to-date book-to-bill ratio of 1.14 and an increase in our full year book-to-bill expectations.
Our Q3 top line results of roughly $9 billion, were up sequentially from Q2, and up about 3% compared with the third quarter of 2021. This acceleration has been driven by our positive hiring trends. We added nearly 1,000 net new employees in Q2, and we added an additional 2,700-plus people in Q3. With continued positive hiring and retention results, we've improved our labor-driven sales visibility, so the supply base is now the key to achieving our full year sales outlook.
We're seeing temporal challenges in the supply chain, as are most others, including longer lead times and higher costs in some areas. Our suppliers are a critical element of the Defense Industrial Base and we're closely monitoring small businesses, who are the most vulnerable to the challenges of this macroeconomic environment, particularly inflation. We're encouraged by recent comments from Congress on this topic, and we're actively working with our customers to help mitigate inflationary effects on our contracts, including those being felt by our suppliers.
Our program execution remained solid in the quarter, with segment margins of 11.2%, reflecting lower net EAC adjustments due in part to the inflationary pressures that we've noted. As costs have remained elevated, we've captured our latest estimates of inflation and opportunities to mitigate it in our EACs. This had a downward effect on our margins in Q3. But year-to-date, our segment margins are 11.7%, and we continue to expect the full year rate to be in the range of 11.7% to 11.9%.
Turning to earnings per share. Our diluted EPS in the quarter were $5.89. The year-over-year earnings decline was driven by nonoperational factors, including lower net pension income, unfavorable returns on our marketable securities, and an insurance settlement for $60 million that was recognized in the third quarter of 2021. Together, these items represented roughly $0.85 of year-over-year EPS headwinds, but as I pointed out, our businesses continue to execute very well in a complex environment.
In terms of cash, we generated outstanding operational cash flows in the third quarter of over $1.3 billion, and we expect Q4 to be even better. This is consistent with our historical pattern of collections and disbursements. In the quarter, we made our third cash tax payment associated -- aided with the R&D amortization law of approximately $220 million, and we continue to expect roughly $1 billion in cash tax payments related to R&D for the full year. Through the end of Q3, we completed over $1 billion in share repurchases, and we're on track for an additional $500 million in the fourth quarter. Now moving to 2022 guidance.
We have not changed our sales, earnings or cash outlooks. The foundation for our strong financial performance starts with the continued demand we're seeing for our products. We're increasing our expectation for book-to-bill again this quarter to greater than one times, which is a significant improvement from our original expectation. Our team has done an outstanding job of serving as a trusted partner to our customers in winning new business.
We're maintaining our original guidance for the top line. And based on year-to-date results, we continue to expect our full year sales to be around the low end of the range, consistent with the trends we described last quarter. Our full year outlook implies Q4 sales of roughly $9.6 billion, which represents excellent sequential and year-over-year growth. As we've noted throughout the year, we anticipate that Q4 will include a strong volume of material receipts across each of our four segments.
We're also maintaining our guidance for the bottom line, including segment OM rate and earnings per share. Given that 2022 sales volume will be around the low end of the range, we expect EPS to be near the low end of its range also. Within our earnings outlook, we're accounting for continued year-to-date pressure on our marketable securities portfolio, offset by an anticipated federal tax rate benefit in Q4. Our marketable securities are down nearly $100 million in 2022, which represents about $0.50 of earnings per share pressure.
But on the income tax line, we've lowered our effective rate expectation from 17% to 15.5%, reflecting progress in resolving matters related to historical filings in one of our businesses. We currently expect those matters to be concluded in Q4, resulting in about $0.50 of EPS benefit that offsets the marketable securities pressure. It's also possible that the tax item could be resolved in Q1, which would shift the benefit from 2022 into 2023. Moving to cash flows.
While we remain optimistic that Congress will repeal or defer the R&D amortization law, we have focused our free cash flow guidance this year on the current tax laws scenario, which is unchanged from last quarter. If the law is deferred or repealed in Q4, we would expect a onetime spike in state taxes recognized in corporate unallocated expense, as well as a cash refund in 2023. Operationally, we're very pleased with the progress we made in cash flows in Q3, bolstering our confidence in the full year outlook.
Next, I'd like to take a few moments to describe the outlook for our pension plans. Most importantly, our current funded status remains strong and roughly unchanged year-to-date, and the cash flow implications of CAS changes over the next several years provide a modest benefit. The GAAP income statement effects I'll describe today are noncash in nature. Year-to-date, our plans have experienced double-digit negative returns and discount rates have risen nearly 250 basis points.
This combination of results will affect our GAAP earnings in future years. So I'd like to take a moment to discuss what our 2023 net pension income would look like under various scenarios. In January, we provided a sensitivity table in our earnings call deck related to changes in discount rates and asset returns on our nonservice FAS pension income.
Based on the high level of volatility, the pension funds have experienced so far this year, I wanted to provide a grid of potential outcomes that also incorporates FAS service expense and CAS costs, which can be found on slide nine of our presentation today. To help calibrate you to this slide, we've highlighted the 2023 pension estimates provided in January, which were based on expected 2022 asset returns of 7.5%, and a year-end discount rate of roughly 3%.
Given the year-to-date asset returns and discount rates at the end of Q3, we would expect significantly lower net FAS pension income in 2023, currently in the range of over $900 million less than our previous projection. As I've described, this lower net FAS pension income is noncash in nature. Over time, higher CAS recoveries would lead to modestly higher cash flow related to our pension. I also wanted to provide additional insights on a high-level financial outlook for 2023.
Note that this is predicated on our current expectations regarding the macro environment. As Kathy said, we expect strong demand to continue into 2023. In terms of hiring and retention trends, as I've now shared a few times, we've seen improvements since the beginning of 2022, and we anticipate that this will remain consistent next year. In the supply chain, where the environment has remained challenging with various delays and disruptions, we project that those challenges will continue throughout 2023.
And with regard to inflation, which has been more persistent in '22 than originally expected, our projections incorporate gradual easing based on the latest industry labor and material indices. As Kathy described, we continue to expect our sales growth to accelerate next year, building on the momentum we've driven in 2022. In total, we expect sales growth in the 4% to 5% range. Based on our low $36 billion expectation for 2022, that would put us in a high $37 billion range for 2023.
Within our segments, we continue to expect Space to remain our fastest-growing business, with sales growing by another $1 billion over 2022. We expect strong sales growth in MS in the mid-single-digit range. And we anticipate sales at AS and DS to be flattish compared with their latest 2022 levels. We also expect to generate solid segment margin rates. As I've described, net EAC improvements are likely to be lighter than usual until inflation begins to normalize.
So we'd expect our segment OM rate, which would otherwise have been projected in the high 11% range next year, to be between the mid-11% and the high 11%. With regard to earnings, pension income will be a noncash headwind as quantified on slide nine. But excluding pension, we expect our earnings per share to grow faster than sales in 2023, driven by continued strong execution and a lower share count. We expect our tax rate to return to its more normal level of around 17% next year. And we continue to generate excellent cash flows with our prior three year cash outlook intact and another year of free cash flow growth expected in 2025.
We anticipate modest increases to our prior capex projections based on the strength of this year's new business wins and backlog growth, offset by corresponding improvements in operating cash flows. We're very proud of the performance we've delivered this year in a continued challenging environment, and we're pleased with our projected growth acceleration in the second half of 2022 and in 2023. With our multiyear cash flow outlook intact, we're looking forward to continuing to create value for our customers and shareholders.
And with that, we're ready for your questions.