Tom Bell
Chief Executive Officer at Leidos
Thank you, Stuart, and good morning, everyone. It's really good to be with you today. I'm pleased to report another strong quarter for Leidos this morning, a quarter of record revenue, earnings, cash flow, bookings, and backlog. Revenue grew 9% year-over-year this quarter, our fastest revenue years, and well ahead of the pace implied in our guidance. Customer demand remained robust across all three of our segments, and we are proud of the work that we accomplished with our customers to deliver on important missions.
Non-GAAP EPS was up 28% year-over-year, with an adjusted EBITDA margin of 11.5%. Cash management and collections were even stronger. Operating cash flow of $795 million was already in excess of our existing full-year guidance of at least $700 million. As a result of this quarter's strong performance and the momentum established in our second quarter, we are raising our 2023 financial guidance across all measures.
This quarter's results and our improved outlook were driven by the substantial progress the team has made delivering on our performance initiatives articulated during our last call. First, instituting a promises made, promises kept culture here at Leidos; second, analyzing and improving acquisition performance; third, enhancing business development performance and backlog quality; and fourth, sharpening Leidos' strategy.
Let me speak to each of these initiatives in turn. First, we're executing well on creating a promises made, promises kept culture here at Leidos, challenging ourselves to consistently deliver on the expectations we set for ourselves, and ensuring that we're having candid conversations about what is working and what can be improved. We're taking decisive actions to reallocate resources and course correct when needed. The team understands that creating this culture is not a one-and-done or twice-as-nice event, but rather a quarter-by-quarter disciplined drumbeat.
Second, we're taking definitive actions to enhance performance, drive predictability, and de-risk our Dynetics and Security Products, or SES, businesses. In Dynetics, we're in the final stages of business integration across all financial, contracts, supply chain, manufacturing, and HR systems. This will result in full proactive management visibility into the business, better business efficiency, and a better employee experience. We've added significant engineering and program management expertise to Dynetics to better serve our customers throughout critical programs of record.
The growth outlook for Dynetics is strong in the three priority areas I identified in our last quarter. In Hypersonics, we're ramping up production rates, while looking to improve effectiveness and lower costs. In small satellite payloads, we have all four wide field of view tracking layer Tranche 0 payloads in orbit. Moreover, we're executing on Tranche 1, and recently submitted our proposal for Tranche 2.
In Force Protection, we're tracking toward government-level development testing of IFPC Enduring Shield in early 2024, and we're making progress on the persistent surveillance needs of the Army and Marine Corps.
In SES, we saw improvement in the quarter on revenue and margin coupled with strong bookings. We bolstered our supply chain resiliency and took costs out of the business to create more predictability. At the same time, consistent with the promises laid out last quarter, the team has critically evaluated the business to identify unprofitable product lines and unfavorable geographies, and we've updated our sales projections to better reflect current customer buying behavior. Based on these candid evaluations and proactive measures to right-size the business, we are taking a non-cash pre-tax charge of $688 million.
As previously disclosed, the market has changed since the SD&A acquisition and won't return to pre-pandemic levels as fast as previously expected. As a proof point, the TSA Administrator testified to Congress recently that the rollout of CT at the checkpoint would not be completed until 2042 at current funding levels. Broadly, customers are delaying recapitalization decisions and holding on to existing machines longer. With this as a backdrop, the team has moved to right-size the business, discontinue sales of an unprofitable product line, and exit numerous higher risk, lower return geographies.
We remain committed to the overall security products market where we offer differentiated, technology-driven solutions. Security concerns will be just as if not more pervasive going forward, providing a long-term growth opportunity for Leidos. This includes the regulated aviation and ports and border markets, as well as commercial infrastructure security and loss prevention markets. The definitive actions we have now taken will better position our security business to grow from here in both margins and earnings.
We also made progress on our third initiative, delivering exceptional business development performance in the third quarter. $7.9 billion in awards is a new quarterly high watermark for Leidos. Our book-to-bill ratio in the quarter of 2.0 brings our year-to-date and trailing 12-month ratios to 1.2. But more important to me, our $38 billion of backlog is now $4 billion larger than last quarter's and supports our growth and margin objectives. This is what I was referring to last quarter when I mentioned growing our total backlog over time with quality wins.
Let me touch on a few of those quality wins this quarter, which demonstrate the ways Leidos provides differentiated solutions to meet [Technical Issues]. The largest win was the Army Common Hardware Systems 6th Generation, known as CHS-6, which is a single-award IDIQ with a potential value of $7.9 billion over 10 years. Through technology, we'll be streamlining and optimizing complex supply chains and transforming logistics to be resilient to supply chain disruptions and cyber risks. Because we offered the Army a truly differentiated solution, this award was not protested and task orders are already beginning to flow. Please note, because of the nature of IDIQ contracts, CHS-6 did not contribute to our record Q3 bookings and backlog that I mentioned earlier.
We also had two large recompete awards in our Intelligence Group that secure our portfolio for years to come. On a $900 million contract to support and enhance Department of Homeland Security Networks, we'll enable cross-agency intelligence sharing and secure collaboration while delivering capabilities like quantum-resistant cryptography, AI operations, robotic process automation, and classified cloud service integration. On a $700 million contract to provide prototype and technology development support to a long-time customer, we'll identify emerging technologies and develop new tools, techniques, and cyber capabilities to enhance their mission.
My final call-out is a $125 million contract to defend Army weapons systems from cyber electromagnetic activities. This award builds on the R&D and field testing we've been doing for years, and it's another example of Dynetics' ability to transition from prototypes to fielded capability. You'll notice that cyber is a common theme on each of these wins. Cyber attacks are a persistent vexing problem for our customers, and Leidos is a top provider of full spectrum capabilities and services.
In keeping with our approach of anticipatory technology investment, we continue to focus on addressing the next generation of cyber threats with emphasis in zero trust, quantum-proof encryption, network defense, and cyber physical systems. We also anticipated the convergence of cyber and AI, what we call cognitive cyber, years ago. We've matured a number of technologies and capabilities in this area into pilots that defend against AI-based cyber attacks. As a key driver of our business development strategy, we'll continue to invest in differentiators in areas of critical importance to our customers.
Fourth, we're executing a multi-phase strategic sharpening under the effort we call Leidos Next, a robust journey to unlock the next level of technological innovation, the next level of execution and performance, and the next level of customer success. The goal of Leidos Next is to create a company with a much clearer and even more inspiring vision, our new North Star. We want to become the best company in the world at solving a core set of problems for our customers and the best employer in the world, hiring and retaining the most talented people in order to do this. This is the essence of Leidos Next.
As an enabler of Leidos Next, we will be simplifying our organizational structure to promote operational excellence, allow for faster decision-making, and more tightly align our business around key technology discriminators. This more focused, capability-oriented structure will better enable us to create clear, differentiated growth strategies for each market we serve, allow for more targeted and efficient investment in the highest areas of potential, and enable repeatable solutions to drive profitable growth. Each new sector has ample room for expansion, while benefiting from the collective strength and scale of our $15 billion company.
Beginning in 2024, we'll operate in five sectors that are focused on specific, defined capability sets we bring to our customers. Health and Civil will deliver customer solutions with unique capabilities in the areas of public health, care coordination, life and environmental sciences and transportation. National security will combine all our technology-enabled services and mission software capabilities for defense and intel customers in the area of cyber, logistics, security operations, and decision analytics.
Commercial and international will combine our existing SES, Commercial Energy, UK, and Australian businesses. Digital Modernization will bring together our IT operations and digital transformation programs. This will allow us to serve all our digital transformation customers with better scale and speed brought about by better repeatability of best-in-class solutions with greater efficiency.
And lastly, Defense Systems will combine elements of Dynetics and our prior defense business to develop and produce advanced space, aerial, surface, and subsurface manned and unmanned defense systems. By streamlining the organization and encouraging decision-making at the appropriate levels, we'll be more efficient and responsive to market changes and customer needs.
I'm also upgrading several existing executive leadership team positions. We'll centralize strategy, business development, marketing, communications, government relations, all in one value stream under a new Chief Growth Officer. As such, we'll rejuvenate our customer-centric business approach. Our new Chief Performance Officer position will spearhead program execution to ensure that we keep our commitments to customers, as well as drive cost efficiencies through world-class supply chain management, IT delivery, and real estate portfolio management.
Lastly, our Chief Technology Officer will now also lead LInC, the Leidos Innovation Center, adding even more emphasis on [Technical Issues] innovation and development and making a profound organization-wide commitment to discovering, developing and deploying market differentiating technology golden bolts. We're placing technology innovation at the forefront of our sharpened Leidos Next North Star strategy. Later this week, we'll announce our sector presidents and those who will serve in these key positions.
Finally, as I mentioned on our last call, a key element to our approach going forward will be disciplined resource allocation, both internally and externally. Internally, last quarter, we acted to refine our investment strategy toward those areas [Technical Issues] best overall value to the enterprise. Our BD teams have removed opportunities that do not have a clear path to an acceptable market and are reallocating our resources and realigning our pipeline to better achieve top and bottom-line growth for Leidos.
Externally, as promised, our team deployed capital during the third quarter towards debt reduction to reach and slightly surpass our previously announced target leverage ratio of 3 times gross debt to EBITDA. After reaching this milestone, and with near-term acquisitions not a priority for this business, I recommend it and the Board of Directors approved the first increase in our dividend in over two years. Shareholders of record on December 15th will receive a dividend of $0.38 a share, a 6% increase over our past dividend.
Our strong balance sheet enables us to deploy additional capital to shareholder returns. With a stock price that does not fully capture our earnings and cash generation power, we expect share repurchase to be a primary focus for excess cash in the near term. And as we look to the future, we expect earnings and cash to grow and remain committed to this disciplined capital management and deployment policy.
In closing, we're building momentum with two successful quarters as we work toward ending 2023 in a position of strength. Our Q3 results speak to our ability to focus, grow the business, grow earnings and generate robust cash conversion. I'm very excited about our new organizational alignment for 2024, our new North Star coming into focus, and indications of the full potential of this business becoming evident.
With that, I'll turn the call over to Chris for more detail on our financial performance and updated outlook.
