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Leidos Holdings Inc (LDOS 2.10%)
Q3Â 2018 Earnings Conference Call
Oct. 25, 2018, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to Leidos Q3 2018 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Kelly Hernandez, Senior Vice President of Investor Relations. Please go ahead.
Kelly Hernandez -- Investor Relations
Thank you, Brock, and good morning, everyone. I'd like to welcome you to our third quarter 2018 earnings conference call. Joining me today are Roger Krone, our Chairman and CEO; Jim Reagan, our Chief Financial Officer; and other members of the Leidos Management Team.
Today, we will discuss our results for the quarter ending September 28, 2018. Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our Company strategy. Jim will follow with a discussion of our financial performance and our guidance expectations. After these remarks from Roger and Jim, we'll open the call for your questions.
Today's discussion contains forward-looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Finally, during the call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in the press release that we issued this morning and is also available in the presentation slides. The press release and presentation, as well as the supplementary financial information file are provided on the Investor Relations section of our website at ir.leidos.com.
With that, I'll turn the call over to Roger Krone.
Roger Krone -- Chairman and Chief Executive Officer
Thank you, Kelly and thank you all for joining us this morning for our third quarter 2018 earnings conference call. Our results in the quarter demonstrate a continued build of our growth trajectory, both in the short-term and in the long term, as evidenced by revenue and bookings strength.
Revenues grew 1.8% sequentially and inflected to growth on a year-over-year basis as well, up 2.9%. Awards were very strong in the quarter with $4.6 billion of net bookings in the quarter, resulting in a book to bill of 1.8. The highest level we've had in the last three years. We ended the quarter with a record total backlog position of more than $20 billion, up 15% from the prior year quarter.
Margins remained comfortably above our long-term target with adjusted EBITDA margins of 10.8% in the quarter, bringing our year-to-date levels to 10.6%. Our commitment to translating our revenue and profit growth into cash, together with ongoing efforts to optimize our balance sheet assets allowed for a very strong quarter in cash generation well ahead of our expectations. This higher level of cash generation resulted in a strong ending cash and cash equivalents position of $515 million exiting the quarter and has not only given us confidence to raise our expectations for cash from operations for the year, but also allowed us to return more excess cash to our shareholders.
During the quarter, we repurchased an additional $62 million of shares, bringing our year-to-date total to a $162 million. Year-to-date we have deployed close to $400 million of cash in a combination of share repurchase, dividend payment and debt payments. Of the cash deployed, nearly half was directed to share repurchases. We remain committed to deploying our excess cash in this thoughtful and disciplined manner as we have done in the past.
The macro-environment has been mostly positive with the end of the government fiscal year resulting in a strong level of awards across all of our segments. Some highlights include, a new $620 million single award IDIQ vehicle with United States Air Force to provide single point integration services for F-16 fighter jet avionics shops. We are proud to serve as the non-manufacturing support integrator for the Air Forces avionics shops and look forward to supporting this critical mission. We were also selected by the Social Security Administration to support its Office of Software Engineering programs, which has a mission to improve the ability to deliver better software, faster and more economically.
Under this task order, we will apply our technical expertise in support of full lifecycle software development and agencies IT modernization efforts, which will improve services to the American public. Awards from our intelligence customers during the quarter were significant as we were awarded about $2 billion on programs across the intelligence community. More in this one quarter than we were awarded in either full year 2016 or 2017.
The significant growth in awards for us in this area far outpaces even the robust budget growth levels indicated in the most recently available national intelligence and military intelligence program budgets. Beyond the strength and award activity at the end of the government's fiscal year, there were additional positive developments in the broader markets.
Defense base funding increases for '19 were approved for a 3.2% increase versus fiscal '18 levels, with R&D up more than the overall increase. Our DoD exposure aligns more with the base budget R&D and O&M line items and the approved levels further our confidence in our future growth. In the broader market, although the defense budget levels are a positive factor, the outlays for fiscal year '18, which were more directly correlated to contracted revenues ended the year below expectations. In that not all available budget authority was spent in the fiscal year.
At year-end DoD outlays were up 5.3% compared to fiscal year '17 versus the 9% to 10% approved budget authority increases. In areas where we have notable exposure defense outlays were up more than the average. Federal, civil agencies, also under spent their approved budget authority levels by nearly $73 billion. Outlays at year-end for these agencies increased less than 1% over fiscal year '17 levels. This did manifest in headwinds for us in the quarter as some expected program ramps occurred more slowly than we anticipated, slipping more revenue to the right. We view this largely as timing rather than a reduction in expected revenue on these programs. Beyond this, we are still optimistic about the growth in our business, given our strong book-to-bill and backlog position and the increased level of takeaway and new business wins that will continue to drive our revenue run rate higher.
We have seen good success in hiring to support the ramp of our new business wins and takeaways, with close to 2,000 new hires added in the third quarter. As we have discussed, hiring activity is critical to our ability to develop -- to deliver on our growth plans. While we are pleased with the level of hiring, we have begun to feel some impact from the tight labor market as the structural unemployment across the country is at historic lows. This had a regulating effect on our growth in the third quarter and we expect likely into the fourth quarter as well. To counterbalance this, we continue to focus on making Leidos the employer of choice in our industry, through a combination of creating the right culture, offering competitive compensation and benefits and career advancement opportunities for our employees.
To this end, we were honored to be included in Forbes inaugural America's Best Employers for Women's List, which was announced during the quarter and recognizes our commitment to embracing talent with different perspectives and from various backgrounds. As we regularly examine our organization to ensure that we are optimally structured to support our long-term growth strategy, we made the decision to reorganize internally effective the first day of fiscal 2019 into four business groups; Civil, Defense, Health, and Intelligence. We have had a commitment to investing in our talent and growing leaders from within. And with that said, I am proud to reiterate the leaders of these groups whom I believe will lead their teams to excel in their served markets. The Civil Group will continue to be led by its current President Angie Heise. The Defense Group will be led by Gerry Fasano. Gerry was most recently the Chief Business Development and Strategy Officer and led the team to the improved success of our new business capture efforts. The Health Group will continue to be led by its current President Jon Scholl. Vicki Schmanske has been appointed President of the new Intelligence Group.
Vicki has more than 30 years of experience, spans responsibilities across all four of our market areas with roles and systems engineering, software, and information systems development, program management and enterprise IT services. One other notable change is Gerry Fasano has moved into a new role. We have appointed Roy Stevens in his place as the Chief Business Development and Strategy Officer. Prior to this Roy served as the Senior Vice President of Business Development within the old Defense and Intelligence Group working with our military and intelligence community customers both in the United States and abroad.
We are confident that these changes will allow us to better execute the strategies in our core markets, increase our agility through increased focus on our customers and improve our success in the market and ultimately drive value for our shareholders. With that, let me hand the call over to Chief Financial Officer, Jim Reagan for more details on the quarter and our guidance.
James Reagan -- Chief Financial Officer
Thank you, Roger, and thanks everyone for joining us on the call today. I'll start by adding some context to our consolidated results the highlights of which Roger has already shared with you. The sequential and year-over-year increase in consolidated revenues were driven by the ramp up of recent program wins most notably items USF, ACE-IT, and the SENS3 takeaway programs. This growth reflects our ability to quickly capture and activate new hires to drive volumes on these new programs. Adjusted EBITDA margin in the quarter of 10.8% was fairly consistent decreasing just 10 basis points compared to both the prior quarter and prior year.
This stable consolidated margins primarily reflect the higher level of program write ups in our Civil segment, offset by lower margin levels on the new program ramps as we have discussed previously. On a year-to-date basis, our adjusted EBITDA margin of 10.6% keeps us comfortably above our guidance range and our long-term target of over 10%. Net interest expense of 35 million was largely in line with our expectations. Non-GAAP diluted EPS from continuing operations was $1.14 up 20% from the prior year, primarily reflecting the lower corporate tax rate.
Weighted average share count declined 1 million shares from the prior quarter to 153 million reflecting our share repurchase activity. Share count exiting the quarter was 152 million fully diluted shares. Cash flow from operations during the quarter was very strong at $371 million, reflecting 200% conversion of non-GAAP net income to free cash. In addition to higher profit, stable collection and some balance sheet monetization all drove the strong cash. Days sales outstanding remained in line with the prior quarter's level at 64 days, reflecting the strong collections at the end of the government fiscal year as expected.
Additionally during the quarter and in conjunction with our term loan restructuring, we were able to monetize our outstanding interest rate hedges, replacing them with new instruments, which reflects the term extension. This generated $60 million in cash proceed, which are reflected in cash flows from operations. We continue to hold a fixed floating debt ratio of 70:30 at the end of the quarter. Additional cash items impacting the quarter include the receipt of $40 million on our outstanding promissory note, which is reflected in cash flows from investing activities as well as $15 million in payments on our outstanding debt and $62 million of share repurchase activity reflected in cash flows used in financing activities.
As Roger detailed the strong bookings already, I would add some additional context to you about the composition of awards that the composition of awards has shifted notably from the prior quarter. Nearly a half of the awards booked in Q3 represent new work for Leidos. So these are either takeaway wins from competitors or new program wins. The weighting of these types of awards has increased notably each quarter throughout the year, which combined with the 15% increase in our total backlog position over the past year furthers our confidence in future growth.
Now, let me share some highlights from our segments. Note that the changes to our organization structure that Roger discussed will be effective starting the first quarter of FY '19 and we don't anticipate an impact to our reportable segment structure. First, revenues in the Defense Solutions segment were up 4% from the prior year as ramping volumes from recent program wins offset completion of certain contracts. Sequentially, revenues were roughly flat as these ramps were offset by a lower level of materials volume on certain contracts. Bookings in the Defense Solutions segment during the quarter were at the highest level since the formation of the segment with $2.7 billion in net bookings resulting in a third quarter book-to-bill of 2.2. Awards were particularly robust in our Intel business with $2 billion in gross awards from our classified customers. On a trailing 12 month basis, this segment book-to-bill is 1.5 pointing to a nice growth trajectory in this business into next year.
Results in our Civil segment were particularly robust in the quarter, both in terms of revenue growth and margin performance. Civil segment revenues increased 7.3% sequentially and 5.3% from the prior year reflecting strength across the portfolio, including the ramp up of recent new program wins, higher volumes on existing programs and a higher level of net profit write-ups from risk retirement and recoveries on certain programs. Non-GAAP operating margins in our Civil segment hit a new high watermark in the quarter at 13.3% up 300 basis points sequentially and more than 200 basis points from the prior year period. This increase primarily reflects the positive impact of the write-ups mentioned earlier, which more than offset the negative impact of the initial phase of new program ramps. Given the one-time nature of these write-ups and the higher expected mix of early phase program revenues, we don't anticipate this level of margin moving forward.
Our Civil segment generated roughly $850 million in net bookings during the quarter, leading to a book-to-bill of 1.0. These bookings were awarded from a diverse set of customers, including the Transportation Security Administration, the FAA and the IRS. Now onto our Health segment. Revenues declined 4.3% year-over-year and 1.6% sequentially. During the quarter we experienced customer driven scheduled delays on existing programs and procurement delays on other awards that we had expected would offset contract completions in the quarter. And while these effects were disappointing, we view these as timing items and expect to recognize these revenues throughout the fourth quarter and into 2019.
Non-GAAP operating margins in the Health segment decreased 220 basis points compared with the prior year and 350 basis points sequentially reflecting the lower revenues as well as the mix shift within the business. The Health segment delivered a very strong book-to-bill of 2.3 in the third quarter, a robust leading indicator of the growth that we expect from this business. Some of the procurement delays mentioned earlier were resolved late in the quarter, driving the 1 billion of net bookings, which reflect wins within the Social Security Administration, the Defense Health Agency, and the Centers for Medicare & Medicaid Services to name a few. Trailing 12-month book-to-bill for the Health segment of 1.2 positions us well to grow this business.
Now onto guidance. After evaluating the third quarter results and the expected fourth quarter program activity we are revising our guidance for 2018 as follows. We expect revenues for the year to come in between $10.1 billion and $10.3 billion, at the midpoint relatively flat with 2017. And while we're disappointed by the slower than anticipated ramp of some of our programs, we are still confident in our growth trajectory. The midpoint of our revenue range implies a fourth quarter revenue run rate, which is up 5.4% year-over-year. This accelerating growth combined with our strong book-to-bill year-to-date and particularly the heavy weighting of new business and takeaway wins in the third quarter give us confidence and stronger revenue growth in 2019.
We are narrowing our expected range for non-GAAP diluted EPS around the midpoint of our prior range at $4.20 to $4.40. This includes an estimated interest expense of $140 million, which is at the higher end of our prior range of $135 million to $140 million. We're also narrowing our adjusted EBITDA margin range to 10.2% to 10.4%, up slightly at the midpoint. And finally, we are increasing our operating cash flow guidance by a $100 million to at or above $775 million. This increase is primarily driven by the strong cash performance year-to-date as well as a $50 million reduction in expected cash flows for restructuring and integration costs related to the IS&GS acquisition.
We will continue to thoughtfully execute against our capital deployment philosophy that we've consistently indicated in the past, balancing investment for growth, regular quarterly dividends, debt paydown and share repurchase to enable an optimal cost of capital while also driving increased value for our shareholders. And as we've indicated more recently, and in light of our strong cash position exiting the quarter, beyond our commitment to the dividend and investing internally for growth, we view share repurchase as the most likely avenue for incremental capital deployment absent potential M&A.
In conclusion, we are pleased with our increased backlog as the most forward-looking indicator of our revenue growth, but we are also disappointed that the timing has shifted slightly to the right causing us to lower our revenue outlook for the full year. We will continue to focus on increasing value for our shareholders and we're working hard to deliver revenue growth, profitability and best-in-class cash flow generation.
With that Brock, now let's open it up to take questions.
Questions and Answers:
Operator
Thank you, sir. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) The first question today comes from Cai von Rumohr of Cowen and Company. Please go ahead.
Cai von Rumohr -- Cowen and Company, LLC -- Analyst
Yes, thanks so much and great performance guys. So, maybe give us a little bit more color on the revenue delays, which programs it was, when you expect those to pick up with specific reference perhaps to the GENESIS program?
Roger Krone -- Chairman and Chief Executive Officer
Great, hey, thanks, Cai. So, our guidance is as Jim said, sort of implies flat full year to full year. But, as I'm sure you noticed, we're showing growth in Q3 and the implied guidance for Q4 is significantly higher, frankly above 5%. What we found is we've reached our inflection point. We've got growth in third and fourth quarter, but, lower level of government outlays resulted in slower ramps on programs, all right, and those would be programs that were new, right.
Some scheduled delays on existing programs and I know you're always interested in GENESIS, so, I'll come back to that. And then, as I said in my remarks, we probably are starting to see a little bit of tightening in the job market, although we're really been pleased with our hiring, we just need to think about that going forward whether we can hire or continue to hire at that rate. And that's why we elected to lower our guidance a bit. On the DHS GENESIS program, we did begin the wave deployment in Q3 at new sites. And I'm sure you read about that, but despite that, there have been some delays in the program as a result of customer decisions to ensure that the IT infrastructure in some of the DHA sites is ready for deployment. They're going to be thoughtful in creating their roll-out schedule, they will convert all of their sites as they anticipated in the program. The size of the program, the funding on the program is still intact.
We're proud of our performance. There is always reports that come out. We had an IOT&E report that came out during the quarter, which is very similar to the report that we had earlier, which iterated that change is hard in installing new IT systems in older environments is the challenge that we all thought it was. Frankly, we really like getting these reports, it's good data for us as we get ready to deploy more broadly across the DHA environment.
And I would highlight, it usually doesn't come out in these reports that the benefits and enhancements delivered to customers as a result of the GENESIS program improved patient care, they are seeing more patients, improvement in clinical efficiencies. For instance, there were 1,300 duplicative lab orders that were caught by the DHA's GENESIS system and improvements in safety, which we're excited about. We increased the new fill on prescriptions in the pharmacies at those facilities.
So, again, Cai, we're confident about what '19 looks like and we're excited about next year. And although we didn't fully anticipate some of these changes and activities and slowdowns in the quarter, we do expect deployment on DHMSM to ramp up in '19 and beyond as we always have. And we expect the flow-through of our book-to-bill and our backlog to give us a very, very nice fiscal year '19. Thanks for your question.
Cai von Rumohr -- Cowen and Company, LLC -- Analyst
Thank you.
Operator
The next question comes from Robert Spingarn of Credit Suisse. Please go ahead.
Robert Spingarn -- Credit Suisse -- Analyst
Good morning. Thanks, Roger. Hi, wanted to follow up on Cai's question there. So, what's the right way to calibrate the 40% growth implied in the year-to-date 1.4 book-to-bill to revenue growth next year? If that's the right period for those bookings to fall, obviously there is a longer duration to those awards, but what's the rule of thumb?
Roger Krone -- Chairman and Chief Executive Officer
It's a great question here, and of course, we don't necessarily give that kind of detailed guidance. And Rob, you're really good at taking our book-to-bill and making an estimate of what the duration is and building that into your model. I just like to point to the macro environment, you can't have a book-to-bill greater than 1 quarter-over-quarter and not print growth.
The average duration in our backlog is in a couple of years. So, again, you've got a great model and you flow it through. But, I would I think emphasize maybe for some of those who haven't followed us, is that, it's not instantaneous. So, we win a program and we're able to book it into backlog, especially if it's a new win or takeaway that we need to go, transfer people in the program, hire new people, often move into a new facility and the ramp-up can be six months to a year. And so, having a great third quarter implies things well beyond first quarter in '19.
James Reagan -- Chief Financial Officer
Yeah, and Rob, I would add to that, the fact that -- just to reemphasize, the second and third quarter in terms of just the trend of the make up of the new awards that comprise book-to-bill have been increasingly moving away from some recompetes that were part of kind of the normal schedule award cycle, but more into new work to Leidos as well as takeaways from competitors. And that improves our own visibility into our growth targets for next year.
Previously, we have talked about our growth rates beyond 2018 being above 3% and the numbers that we're looking at for Q3 awards and our year-to-date number certainly point to higher confidence in achieving or over achieving on those numbers. We'll have more details on that in our fourth quarter call. The one of the thing I would tell you is that the duration of our backlog has shortened slightly, which points to a bit of a faster burn rate on the existing backlog.
Robert Spingarn -- Credit Suisse -- Analyst
Yeah, I don't want to put pressure on you because it sounds like a 3% hurdle at some point here is pretty doable. The other thing I wanted to ask you about the backlog and you've touched on this earlier, but from a margin standpoint, how do you think about the business you're putting into the backlog? And if you could reflect on the labor tightening element of that as well?
Roger Krone -- Chairman and Chief Executive Officer
Yeah, so, the work that's going into backlog, there is a lot of work that is confidently in the double-digit margin area. We're able to shape more contract awards into fixed unit price. But I would also, to be clear, there is still a lot of work that's being awarded in high single-digit margin area. So, when we take a look at the balance of existing and new work, we're still talking about work that on an EBITDA basis balances out to north of 10%. We are continuing our work around optimizing our cost structure, which will translate into continuing a pretty competitive cost structure for new bidding, and also our ability to continue driving margins competitively above 10%.
Robert Spingarn -- Credit Suisse -- Analyst
Okay. And then just one quick housekeeping one. The $60 million interest rate swap expiration that you'd contemplated in your previous OCF guidance, is that the main driver of the increased guide?
Roger Krone -- Chairman and Chief Executive Officer
Yeah, well, that's one part of it. But we're also doing I think a great job of optimizing our billing process. As you know, I have to give credit to the people that run the back office and have done a great job of putting us on to a single billing platform from the four different platforms we had as we came together with IS&GS. So, good program performance means that customers pay you faster and when you build them faster, those things combine to good OCF performance. But I do have to tell you that monetizing that -- the cash -- the interest rate swap was not contemplated in our original guidance and that's part of the driver for the bump up of $100 million.
Robert Spingarn -- Credit Suisse -- Analyst
Right, OK. Okay, thanks for clarifying.
James Reagan -- Chief Financial Officer
Thanks Rob.
Operator
The next question comes from Ed Caso of Wells Fargo Securities. Please go ahead.
Rick Eskelsen -- Wells Fargo -- Analyst
Hey, good morning. It's Rick Eskelsen on for Ed. Roger, I was hoping you could go back and talk just a little bit more about your comment that the clients kind of underspent the budgets and that the outlays have been a little bit slower. If you can just talk more broadly about client behavior and whether you think that changes now as we enter the next government fiscal year with the national budget in place and it seems like clients had been more confident entering this year than in past years.
Roger Krone -- Chairman and Chief Executive Officer
Well, overall, they are more confident and they are upbeat Rick. But I think you have to look at it customer by customer, because it's really different within the Department of Defense versus outside the Department of Defense and we found DoD probably more confident and more willing to spend to their authorized and appropriated levels. And we have been talking about this throughout the year. Those agencies outside of DoD as they looked at the effect of sequester and are trying to predict what will happen to them in '19 and frankly in '20. I think they have been more reticent to spend to their fully obligated levels. And indeed we saw evidence of that in the third quarter. So, that means they're spending about flat to past year, which is still good for us.
And in the areas where we compete, modernization of infrastructure, IT, O&M the spending has been solid, but not at level of the top line growth in their budget. And we don't -- I don't really expect to see a big change in that in '19. We will all be informed a little bit here in two weeks as we get through the election and we understand what the administration is going to do as they look beyond '19 to '20. The good news is, we got a lot of bills passed at the end of fiscal year '18. And so, for many, many of our agencies they'd got certainty for '19. So, we don't have the CR overhang that we usually have. I think that will help, but we're trying to temper that enthusiasm with the reality of how the budgeting process works for our customer.
Rick Eskelsen -- Wells Fargo -- Analyst
Thank you. Very helpful. Just a follow-up on the -- also you talked about the hiring impact, it sounds like you guys still feel like you're doing OK on the hiring, but you're seeing maybe signs of tightening. I guess, curious if that has anything to do with security clearances and maybe if you can go a little bit more into sort of what you're doing on the hiring front? I know in the past you've talked about external referrals and things like that. Thanks.
Roger Krone -- Chairman and Chief Executive Officer
Yeah. Okay. A couple of questions there. Let me start with the one that is an industrywide initiative. This is on security clearances and we have engaged with AIA and PSC and our associated companies in open discussion with both OPM and the Department of Defense and the Intel community. And I know that Deputy Secretary Shanahan has taken this on as a personal initiative.
We are cautiously optimistic that certainly on renewals, if not on initial clearances that things will get better, but it is still a problem. And it takes a long time, especially like for a college hire to get them through the clearance process. And for many of our programs that require a clearance, it does make it more difficult to hire. We will say, overall, we're still pleased with the number of people who want to come to work at Leidos, we're very pleased with our percentage of offers that are actually accepted, but it's a workflow process from when we write a acquisition to when we actually have that person on-site working on a program is you know a period of better than a couple of months.
And so, as we have got to get our rexs (ph) written in anticipation of the programs, we've got to hand that to our staffing organization. By the way, which does a great job. And as you mentioned, we are looking at all opportunities, employee referrals, bonuses for hiring your friend and things like that, things that you're probably seeing in the industry at large. And our hiring has continued even in October at a very, very nice clip. We just look at the economy at large and what's going on to employment. And we want to pass on that there is a bit of concern, we're about at structurally zero unemployment and that's going to, at some point, make it more difficult for us to hire or hire at the rate at which we did.
Rick Eskelsen -- Wells Fargo -- Analyst
Thank you very much.
Roger Krone -- Chairman and Chief Executive Officer
You're welcome.
Operator
(Operator Instructions) Our next question comes from Krishna Sinha of Vertical Research Partners. Please go ahead.
Krishna Sinha -- Vertical Research Partners -- Analyst
Hi, thanks. So, just to kind of simplify the math here. If I look at your guidance, your sales guidance, you pulled that down by about $250 million at the midpoint. Can you just talk about how much of that you're expecting to flow through in 4Q and how much of that overflows into 2019?
James Reagan -- Chief Financial Officer
Well, hi, Krishna, this is Jim. I -- the way we think about the fourth quarter is that, certainly a piece of that will flow into 4Q, although the run rate is a little bit lower than what was implicit in our prior guidance. With that said, about 5.5% year-over-year growth in Q4 is something that we're pointing at and what we're pleased with as well as the sequential growth that we're seeing there. Adding to that, record backlog and book-to-bill for the past quarter, when we think about what we've said before what our aspirations are for '19. While we haven't been specific about what the growth rate is, saying that it's north of 3% we're more than confident about being able to achieve that objective.
Roger Krone -- Chairman and Chief Executive Officer
Yeah, Krishna, I think your question was of the $250 million, is that lost or is it deferred. And what we said in our prepared remarks, we reiterate here is, it's primarily timing, is it's not associated with programs that we thought we're going to win that we have lost, it might have been the case a couple of years ago. What we see here are slower ramps, customers who have the money, have the top line and are not spending it. And so, we're pleased about the implications that that has for '19. But I would also comment that, although we have a lower top line, our bottom line has continued to stay very strong. And of course that's led to a terrific cash generation in the quarter as well.
Krishna Sinha -- Vertical Research Partners -- Analyst
Okay. And kind of to that point, Roger, I mean, you talked about -- I think last quarter you talked about a 7% go-get target to hit the revenue guidance for, you know, that you had set out previously. Obviously that didn't happen because of the timing, but how did you perform on that 7% go-get target through 3Q?
Roger Krone -- Chairman and Chief Executive Officer
Yeah, I'll give a summary then Jim can touch on the numbers. I think on our go-get our win, we actually exceeded that. I mean I think we're really, really pleased that our capture efforts performed better than expected where the disappointment is, we won the program we had an expectation of when that program would start to turn into revenue and how fast it would ramp up. And in point of fact, although we have won the program, the customer may have delayed by a couple of weeks when they want to start the program and the, if you will, the rate of growth in the program.
So, we did talk about our need to win, and we're very, very pleased with our team and their ability to win the programs. We are disappointed is that customers have not been as enthusiastic about starting those programs and increasing the level of spend.
Krishna Sinha -- Vertical Research Partners -- Analyst
Okay. And just one more question on cash flow, obviously you had a good cash flow result and you pulled the guidance up for the year, it looks like some of that cash flow just drop through to the balance sheet. And I'm wondering, it sounds like, you're pretty aggressive on the buyback or you want to be -- why didn't we see more buyback in the quarter since the cash flow was so strong in the quarter. And what's the kind of level of balance sheet cash that you want to maintain going forward?
James Reagan -- Chief Financial Officer
Krishna, this is Jim. When we think about the amount of cash that we want to hold on to the balance sheet, for operations, it's roughly $200 million number. And then as we think about -- in addition to that, if we have near-term M&A targets in mind, we might squirrel away some of that. With that said, I think that if we had a stronger visibility into the cash flush that was going to happen at the end of the quarter from the government, if that had happened sooner we probably would have had a little bit more buyback. And -- but as you know around the middle of September, we end up kind of going into a blackout on stock buyback.
And with that said, we would have been precluded from doing anything at the end of September. I think that, what you're hearing from us is that, with the cash that we've got, we're confident that we will be able to get back into the market some-time during the fourth quarter.
Krishna Sinha -- Vertical Research Partners -- Analyst
Okay, that's great. I'll jump back in the queue. Thanks.
Roger Krone -- Chairman and Chief Executive Officer
Thanks.
Operator
The next question is from John Raviv of Citigroup. Please go ahead.
Jon Raviv -- Citi -- Analyst
Hey, good morning team.
Roger Krone -- Chairman and Chief Executive Officer
Hey good morning Jon.
Jon Raviv -- Citi -- Analyst
First on the cash flow. The new guidance $775 million, you mentioned that it benefits from a couple, a couple of things, the interest, the swap and also the AIT cost. Just sort of big picture, well, how do you see that, what do you think it's sort of sustainable operating cash flow for this business going forward. To what extent should operating cash flow grow with earnings next year or not. And related to that is, you know, what -- how you see CapEx trending going forward? Thank you.
James Reagan -- Chief Financial Officer
Yeah, well, you know that, we'll certainly be very specific on what we're thinking of operating cash flow when we have our Q4 call. But the way to think about how to model that, Jon, is that, we like to think that a 100% of the non-GAAP net income will end up in the operating cash flow number. And simply put it's EBITDA less interest and CapEx. And the level of CapEx that we're seeing for '18, we expect will come down in '19. Yeah, absent some potential one-time items that relate to specific programs, we are always thinking about how to reduce the investment in non-cash working capital, reducing our investment in real estate and things that aren't directly connected to generating new business.
Roger Krone -- Chairman and Chief Executive Officer
And Jon, I would add to that and I'm sure you've read that in the press releases, we're pretty much through the integration cash and that is really exciting for us. You know that ends up if you will accumulate now on the balance sheet. And so, as we've tried to in past calls, is to say, the IS&GS integration is behind us and we're now at a more normative levels, which we would have talked about a couple of years ago. And our ability to convert our operations to cash from operations. And so, we're really excited about what '19 looks like.
Jon Raviv -- Citi -- Analyst
Thanks. I'll stick to one.
Operator
The next question is from Noah Poponak of Goldman Sachs. Please go ahead.
Gavin Parsons -- Goldman Sachs -- Analyst
Hey, so it's Gavin on for Noah, good morning everyone.
Roger Krone -- Chairman and Chief Executive Officer
Hey Gavin.
Gavin Parsons -- Goldman Sachs -- Analyst
Just wanted to follow-on Jon's questions there. Obviously there are couple of one-time tailwinds to free cash this year, and you got the interest swap settlement. But I think you're building some working capital ahead of growth, looks like headcount might even be up more than revenue DSOs and DPOs a little bit better, but not a ton. But you've got that $60 million of transaction and integration that doesn't repeat in higher level of CapEx. So, what if that doesn't reverse or what of those are tailwind versus a headwind next year?
Roger Krone -- Chairman and Chief Executive Officer
Well the -- in term -- did you say headwind instead of tailwind for next year?
Gavin Parsons -- Goldman Sachs -- Analyst
Yeah, which of those are headwinds versus tailwinds and kind of it seems like you have more tailwinds than headwinds going into next year.
Roger Krone -- Chairman and Chief Executive Officer
Well, one thing we've been able to do through the back end of this year and will probably help us more into the early part of next year is continued optimization of our tax position. So, on a GAAP basis, you'll see that our effective tax rate is pretty low in the quarter. And some effective tax planning is helping us there. And so, you'll see us kind of moving some non-cash working capital out of the deferred tax accounts and into the bank account for the early part of next year, that's one tailwind. We're also working and this will not be necessarily working capital, but as we continue to optimize our real estate portfolio we'll be selling some assets there and using that cash to consolidate real estate facilities in the Washington area and fund some of the build out of our new facility right here in Reston.
So we're doing those things that you won't see those in the operating cash flow number, you'll see those down in the investing cash flow numbers in Q4 and early into next year to help us again take less productive assets off the balance sheet.
Gavin Parsons -- Goldman Sachs -- Analyst
Okay, great. And then on the government customer kind of hesitant to spend dollars, what does it take for them to actually really ramp up and spend more and are they concerned about mid terms or sequestration, did they just not have the infrastructure to spend the dollars and kind of what does it take for them to actually really get to the authority increase amount?
James Reagan -- Chief Financial Officer
Yeah Gavin, it's, I think a bit of all of the above. And I think it will -- the appropriations will get released as they check off each one of those. Let's get through the mid-terms, let's get an understanding of what '20 is going to start to look like. The President will come out with a skinny budget right after the first of the year. If you're an agency head, you don't want to spend up in '19 to see sequester comes back -- sequester caps comeback in '20. So, as becomes more clear what the '20 budget will look like then they will lead spend in '19 into an expected budget in '20.
And no, your last comment was, do they have the infrastructure and well, if they have to start a new program they need to have a program manager and they need to step up a contracts office and things like that. There's probably a little bit of that. I think most of this is, they probably didn't completely anticipate with the raising of the sequester caps, the defense and non-defense would see the increase in budget. And so, they've been a little thoughtful in actually spending to that level to make sure that it was real and that was sustainable through '19 and '20.
Gavin Parsons -- Goldman Sachs -- Analyst
Do you get a bit of a sense that there is going to be a dollar shift from readiness toward modernization?
Roger Krone -- Chairman and Chief Executive Officer
I know not, I think it's going to continue to be balanced. I've heard we -- we concluded in the quarter the Air Force Association event and we just finished the Association of United States Army. And so, we get to interface with the high level customers and their mission capable rate, the availability of their hardware to do mission on any given day isn't where they want it to be. And so, we are seeing increased spending in operations and maintenance while they are thinking through their longer-term recapitalization efforts. And of course in the Air Force, they're buying -- they're going to be buying F-35s, they just released the contract for TX.
The Navy is going through their fleet modernization thoughts. They have a new submarine program, which they're investing in, right. And the Army continues to look at their vehicle programs. So I think they're going to balance that hardware with increased spend in O&M. And the good news for us in that is, where do they create obligation authority and they do it by making their operations more efficient, by spending on IT modernization, digital transformation and move to the cloud. And that's really good for us because that's in -- among the O&M and the other things we do in R&D helping our customers operate more efficiently is centre in our wheelhouse.
Gavin Parsons -- Goldman Sachs -- Analyst
Great. Thanks so much.
James Reagan -- Chief Financial Officer
Thank you.
Operator
(Operator Instructions) Our next question comes from Shelia Kahyaoglu of Jefferies. Please go ahead.
Shelia Kahyaoglu -- Jefferies -- Analyst
Hi, good morning guys.
Roger Krone -- Chairman and Chief Executive Officer
Hi Shelia. Good morning.
Shelia Kahyaoglu -- Jefferies -- Analyst
Just the one question, just make sure it has 15 parts to it. So, and can you just touch upon the F-16 sustainment contract and social security when -- where these part of the takeaway wins you mentioned earlier in your prepared remarks. And just given the fairly sizable task order values kind of the contract step up. And if you could just touch upon the two recompetes you have in 2019 please?
James Reagan -- Chief Financial Officer
Sure, Sheila, this is Jim, I'll start with the SSA win. The SSA win is actually work that we are already doing. It was one that was targeted to be taken away by a competitor, we held onto it. We're pleased with that outcome. The F-16 work, that was a takeaway from a competitor. And it was work that our Air Force customer and we're real pleased to be taking away something that really exploits our technical capabilities very, very well.
In terms of what that means for next year, obviously with that takeaway as well as the other ones, it points to, like I said before, better than 3% growth and we'll get more specific about that. Let me say one more thing to foot stomp the fact that we are continuing to be very pleased with the level of win rate -- win rates that we're experiencing on these takeaways and new business awards. We are unlike it's a proof-point to the changes that we've made in business development and our cost structure that we're getting what we think is probably at least if not better than our fair share of these takeaways in new business. Thanks Shelia.
Shelia Kahyaoglu -- Jefferies -- Analyst
Can you just touch upon the recompetes, is that possible?
James Reagan -- Chief Financial Officer
Oh yeah, we do have a couple of large recompetes next year. As we've said before, probably our largest one is the work with the Department of Energy up at Hanford that RFPs dropped. We're working on that proposal and we're confident that given the past performance that we're experiencing there in our relationship with the customer that we'll be able to retain that work. But we're not taking anything for granted, we're working very hard to make sure that we're delivering innovation and competitive cost structure for that deal.
Shelia Kahyaoglu -- Jefferies -- Analyst
Great. Thanks.
James Reagan -- Chief Financial Officer
Okay.
Operator
The next question is from Joe DeNardi of Stifel. Please go ahead.
Jon Ladewig -- Stifel Nicolaus -- Analyst
Hey guys, this is Jon ladewig for Joe DeNardi. First, hey guys, given some of the recent commentary from President Trump calling for lower government spending in FY '20 both on the civilian and on the defense side, does that change your view on how long this defense cycle lasts. How do you guys kind of interpreted these comments?
Roger Krone -- Chairman and Chief Executive Officer
Let's see. I appreciate the question kind of one that we thought someone might ask. I think you need to do the math on what was base budget in OCO and what the administration is trying to do is to drive to a base budget without the OCO, but I think what he is trying to do as much as I can interpret his words is to, set an expectation that it can't grow at the level that it did in '18 and '19 forever.
And I would tell you from our standpoint, we've always sort of took that into account and a more metering of top line is what was in our expectations. If you do the math, you look at debt, you look at where the federal budget is going, being fiscally thoughtful I think is actually a good thing. It's a good thing for the country and by way, the budget is certainly significantly big enough for many companies like Leidos to be successful at the current -- at the current funding level.
Jon Ladewig -- Stifel Nicolaus -- Analyst
The only other question I would kind of ping you guys with is, what's your win rate?
James Reagan -- Chief Financial Officer
We don't like talking about specifics on win rates. We're very happy to talk about what those trends look like though. And especially in light of how many competitors that we see on some of these big programs that we've been awarded, you would think that those win rates on new or takeaway work would be in on a good day in the 30s, but we're experiencing better than win rates -- better than the number like that in both of those categories. And certainly the trend, I think, that the upward trend that we're seeing on win rates is what is translating into the book-to-bill that you're seeing here. And again, it comes back to first and foremost, delivering a proposal with innovation in it and delivering a proposal that has because we can innovate, we can provide a cost point that is also competitive.
Jon Ladewig -- Stifel Nicolaus -- Analyst
All right, thank you guys.
Roger Krone -- Chairman and Chief Executive Officer
Thank you Jon.
Operator
Our next question is from Joseph Thompson of SunTrust. Please go ahead.
Joseph Thompson -- SunTrust -- Analyst
Hey guys, this is Joseph Thompson on for Tobey Summer at SunTrust. I have one question about the platform and product related work. How much did this type of work contribute in third quarter and how much do you expect they can contribute going in '2019? Thank you.
James Reagan -- Chief Financial Officer
It is really hard to answer that question to be fair, Joe. I think (inaudible) well what's related to platforms? We think of it more along, you know, our set of technical core competencies. And I think that, you know, for example, the new work we're doing for the Air Force on the F-16 program is a little bit different from and refreshingly different from kind of our biggest power alley in IT modernization. But clearly our ability and our competitiveness in IT modernization is probably the biggest single driver of our growth prospects and book-to-bill for the coming year.
Roger, you have anything to add to that?
Roger Krone -- Chairman and Chief Executive Officer
No, I would just reiterate, Jim, what you said is that, we tend to classify our work against our technical core competencies, which are differentiators and we don't, you know, unlike maybe one of the large OEMs that look at platform and services, we don't manufacture a lot of platforms, we do some. We tend to cut our business and think about our pursuits more from a capability standpoint. So -- thanks, Joe.
Operator
That's all the time we have for questions today. I would now like to turn the call back to Kelly Hernandez for closing remarks.
Kelly Hernandez -- Investor Relations
Thank you Brock and thank you all for you interest in Leidos. We look forward to updating you again on our next call. Thanks and have a great day.
Operator
This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.
Duration: 60 minutes
Call participants:
Kelly Hernandez -- Investor Relations
Roger Krone -- Chairman and Chief Executive Officer
James Reagan -- Chief Financial Officer
Cai von Rumohr -- Cowen and Company, LLC -- Analyst
Robert Spingarn -- Credit Suisse -- Analyst
Rick Eskelsen -- Wells Fargo -- Analyst
Krishna Sinha -- Vertical Research Partners -- Analyst
Jon Raviv -- Citi -- Analyst
Gavin Parsons -- Goldman Sachs -- Analyst
Shelia Kahyaoglu -- Jefferies -- Analyst
Jon Ladewig -- Stifel Nicolaus -- Analyst
Joseph Thompson -- SunTrust -- Analyst
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