Dave Keffer
Corporate Vice President and Chief Financial Officer, Northrop Grumman Corporation at Northrop Grumman
Thanks, Kathy, and good morning, everyone. As Kathy described, we generated another strong quarter of results. The business is well positioned in growing segments of the market, and we're delivering key capabilities that address our customers' missions. As macroeconomic conditions improve, and pension and tax cash flow headwinds reverse over the next few years, we have a great opportunity to create value for shareholders through substantial cash flow growth, consistent with our long-term strategy.
Taking a look at our demand metrics, we ended the third quarter with a record backlog of $84 billion, bolstered by several new competitive awards. And as a result, we now expect our full year book-to-bill ratio to be well over one times. Turning to the top line. We continue to build on our momentum from the first half of the year, with overall sales growth of 9% in the third quarter.
This includes growth in all four of our segments for the second straight quarter as our teams continue to ramp up new wins, add new talent and manage through continued pressures in the supply chain. At the segment level, Aeronautics posted sales growth of 90%, driven by higher volume on manned aircraft programs. DS grew by 6% on continued strength in their missile defense and armaments portfolios, including IBCS, GMLRS and HAKM. Mission Systems continued to generate rapid growth of restricted sales in the Network Information Solutions business, driving their top line up 7%. In Space again delivered double-digit sales growth as a result of the continued ramp on programs like GBSD, NGI, OPIR and several in the restricted domain.
Moving to segment margins. We're pleased with these bottom line results in a dynamic environment. In total, segment operating income grew by 8% compared to the third quarter of last year. As we expected, we delivered an incremental improvement in our segment OM rate from earlier quarters this year, expanding to 11.1% in Q3. Program performance remained strong across the portfolio. Our Aeronautics and Defense businesses generated a healthy volume of favorable EAC adjustments through efficient execution and risk retirements. MS margins were down slightly as mix shifted to more cost-type development efforts, particularly in their restricted portfolio.
In that space, given the rapid backlog growth we've experienced, strong execution and program performance are our top priorities. Space margins improved by 80 basis points this quarter compared to Q2. Diluted EPS in the third quarter were $6.18, up 5% from the prior year. The increase was driven by higher sales and segment performance, along with a lower share count. We also recognized a gain from the sale of an Australian minority investment in Q3 that we described on prior calls and included in our guidance.
Partially offsetting these items was lower net pension income of roughly $1 per share, a nonoperational impact consistent with the first two quarters. Q3 was a strong period for cash generation with free cash flow of nearly $900 million. On a year-to-date basis, this brings us to nearly $500 million of free cash flow, well ahead of where we were at this time last year. We continue to remain disciplined in managing our working capital, and we saw improvements in these accounts across the company in Q3. With respect to cash taxes, the IRS recently provided additional guidance on the amortization of research and development expenditures under Section 174 of the tax code.
This guidance did not change our interpretation of the provision. But upon finalizing our 2022 tax returns, we lowered our estimates for Section 174 cash taxes based on applicable R&D costs that were below our original estimates. Offsetting the lower 174 taxes is an increase in other tax items, the net result of which is a multiyear cash tax forecast that is roughly unchanged. Moving to 2023 guidance. I'll begin with a few updates to our segment estimates as shown on Slide seven in our earnings deck. First, based on the strength of our year-to-date results, we now expect modestly higher sales in our Aeronautics business in the mid- to high $10 billion range.
This represents a return to growth this year at AS, a year earlier than expected, and continues to assume that we will be awarded the first LRIP lot on the B-21 program in the fourth quarter after first flight. The Air Force said in September at the AFA Conference, we are progressing through ground testing, and we're on track to enter flight testing this year in line with the program baseline schedule. And we are again increasing our top line expectations for our Space segment based on new wins and continued strength in this business.
We now expect 2023 sales of approximately $14 billion, which represents year-over-year sales growth of 14%. For operating margin rate, we're projecting a slightly lower operating margin rate at MS to reflect their year-to-date trend line. Other segments are unchanged. At the enterprise level, we're increasing our sales guidance by another $400 million and now expect 2023 sales of approximately $39 billion. This represents year-over-year growth of roughly 6.5%. We are maintaining our guidance for segment operating income. Year-to-date trends would indicate figure towards the lower half of that range, and we're reaffirming our estimates for EPS and free cash flow. Next, I'll build on Kathy's comments on our 2024 outlook. Sales growth has accelerated sooner than we expected in 2023, and we continue to project growth at all four of our business segments next year. We expect segment margins in the low 11% range, and we continue to project improvement over time as we see benefits from the stabilizing macro environment, our cost efficiency initiatives, and our business mix improvements.
We continue to anticipate capex to be roughly consistent as a percentage of sales in 2024 before declining in 2025 and beyond. And shareholder returns will remain a top priority for our free cash flow deployment, including returning at least 100% of free cash flow to shareholders next year. Given the volatility in the financial markets, I'd also like to provide a quick update on our pension plans. Our funded status is now above 100% as of the end of Q3. And we continue to expect minimal required cash contributions over the next several years. This is a discriminator for us that supports our affordability and competitiveness as well as our capital deployment optionality.
Given that our GAAP earnings per share are affected by net pension income, as we did last year, we have provided a pension income sensitivity table for 2024 on Slide nine. Our forecast in early 2023 was predicated on asset returns of 7.5% and a discount rate of roughly 5.5%. Through September 30, financial market movements have led to a roughly 50 basis point increase in discount rates and a year-to-date asset return of 1% to 2%. This combination of results would reduce net FAS pension income and increased CAS recoveries from our prior projections.
Based on the sensitivities highlighted on the slide, the net result would be an impact to 2024 GAAP EPS of roughly $0.50 compared to our initial outlook provided in January. Keep in mind that FAS pension income is noncash in nature. Higher CAS estimates would provide a modest benefit to our cash flows but could have a modest downward impact on EACs in the quarter in which they are updated, consistent with this year's pattern. Speaking of cash flow, we continue to see a path to grow our cash flows at a greater than 20% CAGR next year and through 2025 with further expansion in the following years. As is our practice, we'll provide our latest multiyear outlook for free cash flows on the January earnings call. We remain confident in the long-term value creation opportunity from free cash flow expansion and disciplined capital deployment through the rest of the decade.
With that, let's open the call up for questions.
