David Wajsgras - Chief Financial Officer and Senior Vice President William Swanson - Chairman, Chief Executive Officer and Chairman of Executive Committee Marc Kaplan - Vice President of Investor Relations

Cai Von Rumohr - Cowen and Company, LLC Douglas Harned - Bernstein Research Howard Rubel - Jefferies & Company, Inc. George Shapiro - Citi Joseph Nadol - JP Morgan Chase & Co Ronald Epstein - BofA Merrill Lynch Heidi Wood - Morgan Stanley Robert Spingarn - Crédit Suisse AG Samuel Pearlstein - Wells Fargo Securities, LLC Troy Lahr - Stifel, Nicolaus & Co., Inc. Peter Arment - Gleacher & Company, Inc.

Good day, ladies and gentlemen, and welcome to the Raytheon Second Quarter 2010 Results Conference Call. My name is John, and I'll be your coordinator for today. [Operator Instructions] I'd now like to turn the presentation over to your host for today's call, Mr. Marc Kaplan, Vice President of Investor Relations. Mr. Kaplan, please proceed.

Thank you, John. Good morning, everyone, and thank you for joining us today on our second quarter conference call. The results that we announced this morning, the audio feed of this call and the slides that we'll reference are available on our website at raytheon.com. Following the live call, an archive of both the audio replay and a printable version of the slides will be available in the Investor Relations section of our website. With me today are Bill Swanson, our Chairman and Chief Executive Officer; and Dave Wajsgras, our Chief Financial Officer. We’ll start with some brief remarks by Bill and Dave and then we’ll move on to questions. Please limit your questions to one per caller to allow for broader participation. Before I turn the call over to Bill, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance, constitute forward-looking statements. These statements are based on a wide range of assumptions that the company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized at the end of our earnings release and that we discuss in detail in our SEC filing. Bill?

Thank you, Marc. Good morning, everyone. Let me start by saying that our underlying results during the quarter and execution of our strategy continued to show growth for the year. Our strategy is well aligned with our customers' needs and we're well positioned for the future. Bookings in the quarter were solid, and on a year-to-date basis our book-to-bill ratio is greater than one. Our adjusted profit margin came in better than we expected, driven by continued operational improvements. Our adjusted EPS in the quarter was up 11%, and we delivered good cash flow. Overall, the business has performed as we expected. The fundamentals remain strong. As previously reported, we received some disappointing news last week. And as you saw in our press release this morning, we took a charge on the termination of a program with the U.K. Border Agency. Under accounting requirements, the company recognized this charge in Q2. Dave will provide you with a little more color on that, as well as our overall financial performance in the quarter and our full year outlook in just a moment. It's ironic that we received this notification last week after a recent report by the Ministry of Defense in the U.K., our largest customer, ranked us in the top tier of its key suppliers; we're told, the only U.S. company. They highlighted our overall performance and our focus on continuous improvement. We also just wrapped up a successful air show at Farnborough. During the air show we have the opportunity to meet with many of our U.S. and international customers. In fact, we had more customer meetings at Farnborough than ever before, with over 900 meetings including 41 delegations from 34 countries. I was encouraged by what I heard about our company and the level of interest in what we do. And I wanted to share a few of those key highlights in terms of what our customers were interested in. They were focused on our air and missile defense capabilities, especially around Global Patriot, Standard Missile-3, our TPY-2 ground-based radars, significant interest in our unique cyber capabilities, and we generated a lot of excitement with the successful test of our new Phalanx Laser System. We shot down four UAVs during an exercise in June and as we said at the show, it was a good day for lasers and a bad day for UAVs. There was a lot of customer excitement about our use of Radar technology, not only for new aircraft going forward but also to retrofit current aircraft, like our a radar for the F-16. Our U.K. ASTOR program also attracted a lot of attention and we are pleased to have our U.K. MoD customer on-site talking about the success of ASTOR and [ph] Theatre (10:11). In fact, the aircraft did a flyover for the show. We generated a lot of interest in our Air Traffic Management and our Command and Control Solutions. And there were numerous discussions about our Advanced Training Solutions, and many of our customers see them as a way to help reduce their O&M costs. The plane ride home gave me time to reflect on our accomplishments over the past several years. We have successfully reshaped and focused our portfolio and continue to see solid opportunities for future growth. We have the technology and capabilities our customers want, and that enable them to do more with not more. In other word, in my words, the things they need are the things we do and we do them well. Our customers are working to ensure that their budgets are priority-driven, and that programs are meeting expectations on cost, schedule, capability, all of which are key areas of expertise for us. We differentiate ourselves in the market not only based on innovative solutions, but on our performance, and that includes our internal process improvements. These have been attracting positive attention from customers around the world as they look for ways to increase their own organizations’ productivity. We streamlined our IT systems across the company, we've enhanced our shared services organizations, and we've recently announced that we're building a new standard missile production facility at Huntsville, Alabama. We're leveraging state-of-the-art automation to enhance quality and safety and deliver low-cost products to Missile Defense Agency and U.S. Navy customers and our international customers. With that, I want to leave time for questions, so let me wrap up by saying the company's underlying performance in the quarter was solid. We expect to continue to perform well in the second half of the year, and we're optimistic about our future. With that, let me turn it over to Dave.

Okay. Thanks, Bill. I have a few opening remarks and then we'll move on to questions. During my remarks, I’ll be referring to the web slides that we issued earlier this morning. So if everyone could please move to Page 3. As Bill mentioned last week, the U.K.'s home office decided to terminate our efforts on a Border Agency program. This unusual event had an impact both on the second quarter and our full year outlook. Q2 net sales were reduced by $316 million, and income from continuing operations and EPS were reduced by $395 million and $0.71 per share, respectively. To more clearly explain our operating performance, I'll be speaking to our results and outlook on an adjusted basis. And just to clarify, the adjusted results exclude the program termination and the FAS/CAS pension adjustment. The underlying performance of the company during the quarter was strong and our full year outlook remains on track. Adjusted operating margin was 12.6%, up 30 basis points. Adjusted earnings per share of $1.36 was up 11%, driven by strong operational performance as well as capital deployment actions. We generated solid operating cash flow from continuing operations of $400 million, which was better than expected, driven primarily by working capital management. This year's second quarter included $73 million in higher cash tax payments compared to the second quarter of 2009. The company repurchased 8.6 million shares of common stock for $475 million, bringing the year-to-date repurchases to 14.2 million shares for $775 million. Turning to Page 4, let me start by providing some detail on our second quarter results. Our total company bookings for the quarter were $5.9 billion and on a year-to-date basis were $12.4 billion, resulting in a book-to-bill ratio greater than one. In the second quarter, IDS booked $317 million to provide advanced Patriot Air and Missile defense capability for an international customer. IIS booked $80 million on a data and information system contract for NASA. IIS also booked $371 million on a number of classified contracts. Missile Systems booked $234 million for SM-3 for the Missile Defense Agency; $223 million for Phalanx Weapons Systems for the U.S. Navy, U.S. Army and international customers; $150 million for Miniature Air Launched Decoys for the U.S. Air Force; and $123 million for Evolved Sea Sparrow Missiles for the U.S. Navy and international customers. Our NCS business booked $100 million on a Command and Control program for an international customer. SAS booked $160 million on two international tactical radar programs. They also booked $563 million on a number of classified contracts, including $355 million on a major classified program. TS booked $399 million on domestic training programs and $136 million on foreign training programs in support of the Warfighter FOCUS activities. TS also booked $95 million to provide operational and logistic support to the National Science Foundation, Office of Polar Programs. We ended the quarter with a $36 billion backlog. If everyone could please move to Page 5. If you exclude the impact of the termination, our sales were in line with our expectations. IDS, Missile System and NCS net sales were up modestly in the second quarter compared with the same period last year. Space and Airborne Systems had net sales of $1.2 billion in the quarter, up 5% on the strength of their classified business. And finally, Technical Services had second quarter 2010 net sales of $834 million, up 7%, driven by both domestic and foreign training programs. Our diverse portfolio of businesses, all focused on customers’ priority areas, supports continued positive outlook for the company. Moving ahead to Page 6. We delivered strong operational performance in the quarter. Our adjusted operating margin was up 30 basis points. Looking at the business margins, IDS had solid results in the quarter. The 90 basis point increase in margin was primarily due to higher volume on international Patriot programs and improved program performance. Excluding the impact of the program termination, margins at IIS would have been up on a year-over-year basis. Missile Systems margin in the quarter was up 100 basis points, also driven by strong program performance across numerous programs. And NCS margins in Q2 were in line with the same period in 2009. At SAS, you may recall that last year's Q2 margin benefited from a favorable contractual settlement which accounted for about 50 basis points of margin. Second quarter 2010 margin at SAS was in line with our expectations. And finally, TS margin in the quarter was up 200 basis points, primarily due to improved program performance driven primarily by cost efficiencies on various training programs. You should also note that contract modifications impacting scope on certain training programs did have a positive impact on the TS margin in the quarter as well. Overall, our adjusted operating margin continues to be strong. Turning now to Page 7. 2nd quarter 2010 adjusted EPS was $1.36, up 11% and year-to-date was up 14%, primarily driven by operational improvements. If you turn to Page 8, I'd like to comment on our updated outlook for the year. We expect continued growth in sales and adjusted EPS in 2010. As a reminder, we're assuming that the R&D tax credit extension gets passed in 2010 and it’s worth about $4.07 in earnings per share. Moving on to Page 9. We've provided additional color on our outlook for the full year. Overall, our businesses are executing well and our margin profile remains strong. However, we did reduce the outlook for IIS. On Page 10, we provided our outlook on how we see sales, EPS and operating cash flow from continuing operations in the third and fourth quarters. Before we open it up for questions and answers, let me summarize our second quarter performance. The impact of last week's termination of the U.K. Border Agency program obscured what was otherwise another very solid quarter with good sales, EPS and cash flow. Our balance sheet remains very strong, and we're confident about our future. We're well positioned and we expect to continue to deliver solid results for our customers and for our shareholders. With that, we'll open up the call to questions.

[Operator Instructions] Your first question comes from the line of Ron Epstein with Bank of America. Ronald Epstein - BofA Merrill Lynch: Could you give us maybe a feel for the termination of the U.K. contract, maybe in the broader context of just what's going on in terms of austerity and the changing defense environment?

Yes, Ron. It's Bill. Let me get some facts on the table to start with regarding e-Borders. The system went operational in May of '09. That's in our terms, and you'd recognize it as IOC, initial operational capability. The system has been operating since then. We brought online a state-of-the-art facility in March of '10 this year. It's an interagency facility in the U.K., state-of-the-art, an unbelievable sight when you look at it, in what it does with the hundreds if not thousands of people that are being trained. The system’s working. It's providing operational and actionable data. I could probably say it in these terms, thousands of bad guys have been caught that shouldn't have been coming in or going out. And the next operational drop would have been just in a few months in October, and we were all set to do that drop. So I want to make sure everybody understands this is not an issue about Raytheon being able to do the job or perform. It's a different kind of issue that's taking place in the U.K. with some of the issues that they face. I think for me, it was in contrast to what I saw at the air show. We have customers that are looking for innovative solutions to doing things in a different way to give them the capability with not having to do more. And so I just want to contrast it in that I think what I would say is there is a little bit of congestion in the system from a standpoint that we have a lot of things going on. And it probably takes a little longer, but I haven't seen things disappear other than the termination; and those that have been around long enough understand that Raytheon will take all the actions necessary to show that we have done what we said we were going to do. And I won't talk about the litigation strategy in public, but you can expect someone like me to fully defend the company's honor. Ronald Epstein - BofA Merrill Lynch: But do you think it's an indicator, though, of what's going on in the defense backdrop?

No, I think people are trying to understand the economy. I wish I had all the answers for everything, but what we need is the vision, what do we need to do, we have to make hard decisions. If you look at Raytheon, we figured there was going to be a time when budgets wouldn't grow as much and how did we have a portfolio that was in the right area? How did we have the right capabilities? I think we have the right leadership in the company to create value in that regard. And we've got ourselves ready for this. And you've got to be able to be fast and be able to do things. And I don’t think we should paint the whole world the way one country is, each country's going to be different. We see the Mideast with different wants and needs than we see in Europe. And some countries are going to have to make harder decisions. But the one thing I’ve learned, and I kind of relate it to my personal life and anybody that's got home security systems. If they're not working you're going to get them fixed. If you don't get them fixed, you're going to have to face the risk. And my point is, is I don't see nations taking huge risks with protecting their country. That's Bill Swanson's view.

Your next question comes from the line of Peter Arment with Gleacher, Inc. Peter Arment - Gleacher & Company, Inc.: Dave, could you just maybe give us a little bit focus on maybe Q3 in terms of -- you always give us good color on the cadence. It just seems that it’s a little lighter than we were expecting? And maybe, Bill, is it just more timing-related, you’ve talked a lot about the international difficulties in terms of always predicting when the orders or bookings flow through?

We’ll let the oracle go first here.

Well, let me start out by saying, full year guidance, adjusted for the termination, up 3% to 5%, is unchanged and we're comfortable with the full year sales guidance. Now Q3 from a sales standpoint was impacted at some level by the termination of e-Borders. We had expected some level of sales. As a matter of fact in the back half of the year, we had expected in the neighborhood of $100 million to $140 million in sales from e-Borders, split between the two quarters basically evenly. But you were right in the way you phrased your question. The timing on some of the awards between first half and second half does impact the cadence in Q3. So if you're looking at it from an earnings standpoint, there is some impact again relative to the termination and, in particular, the associated period costs of unwinding the program. There's cost and efficiency improvements that we achieved earlier in the year. Some were anticipated for Q3. We were able to move them ahead, which is obviously a plus up for the company. And I guess taking everything together, we're comfortable with the year. The cadence did shift slightly but given everything we're still positive on the outlook.

And regarding predictability of international, I think from my standpoint I’d say that's where there’s little congestion. I think Secretary Gates got it right when he said export control is important. How do we streamline that? I think those of us that are in the business, we see international sales as a great way to help reduce the cost to our U.S. customers. After all, if we're putting a load into our facilities, those loads help absorb some of the overhead, which helps reduce the price. So one of the things that we’re working with and I know AIA is, is how we continue to work that because it's not the fastest system in the world. And I'm not faulting anybody, but if we could cut the time in half that would be huge savings not only to the U.S. but to our international customers because they’re looking for some kind of specificity to when they want something, when can they get approved and when can we start doing it. And we've got a lot of international stuff in the queue here. So the department's trying to designate a lead senior official to go do this. They're also trying to work on a comprehensive program licensing management model, how do we do things in 60 days or so? How do we make sure we protect the things we need to protect? Protecting everything doesn't work. And then the other aspect of it is, how do we get the notification processes done a little bit quicker out of state, into the hills, so that we can make decisions. But right now, I would say there's some congestion in the system. And we're all working really hard to get that through. And then I think we need to understand that the more of our allies that are compatible with us, the less burden it will put on us here in the U.S. I realize I’m highly biased, but for a company that does a lot on the international arena, speeding up this process would be good for us, but it's also good for others. Peter Arment - Gleacher & Company, Inc.: And you mentioned the congestion, but there are also – I think when we were at the air show, we heard about other opportunities, for example, like Poland. Can you just maybe highlight that?

Yes. People -- the good part is, the U.S. and U.S. suppliers, Raytheon and our other partners or others in the industry, we have a good reputation for delivering good products that are affordable, do what they supposed to do and have good growth and they work for a long time. And so that's not lost on our international customers. The thing we've got to do is figure out as a country how we make it easier for them to buy. And they're looking for predictability. And the longer it takes, they don't want to have their countries exposed. It's like my analogy to my home security system. If I can't buy it from somebody, I'm going to go to where I can get it. So it's incumbent on all of us to work this. And I applaud the Department for taking this on. This is a hard topic. It's a little bit like boiling the ocean, but Secretary Gates, the Department and others are making it a priority and we're supporting them in any way we can. But you hit the nail on the head. There were discussions this year. People want products, and I felt good about what they were telling about our products. It was a busy show.

Your next question comes from the line of Rob Spingarn with Credit Suisse. Robert Spingarn - Crédit Suisse AG: Bill, could you -- going back to the U.K. Border thing -- to the extent that you can, can you talk a little bit more about what we read from the Ministry last week, and the fact that Raytheon was -- according to them, the contract's been in breach for a year, and to what extent that makes sense? It's my understanding they're using the system. I think you said earlier, it's working. And now they continue to use it yet they’re not paying for it, or ostensibly they’ve stopped because you’ve been terminated?

Yes, you got it right. And let me tell you -- I'm a little bit of a dinosaur. I've been here going on my 39th year. This is my first one ever like this. And so I don't take it lightly, the company doesn't take it lightly. And we'll go pursue the various options that we have. But you hit the nail on the head. And so other than that, there's not much more I can say. There are always issues that take place during the contract. And both parties work those out. And since I can say that it's been hundreds of thousands of programs that I've worked on, when you have your first one you kind of question -- and you don't really question in the sense when another part of the same country is sitting there, putting accolades on the company. So that's the best way for me to say it. You're smart. You figured it out. Robert Spingarn - Crédit Suisse AG: Has the entire team been terminated?

That we don't know yet. They're going to have to figure out what they're going to go do. I'm sure they're not going to shut the system down. They're getting actionable data. And they're catching bad people. And one of the things I'm proud of is Raytheon has delivered that system. It works. It is state-of-the-art, one of the largest databases in the world. We manage it effortlessly. So I’ll let it go at that. Robert Spingarn - Crédit Suisse AG: Can you give us a little bit of color on the cyber markets, how they’ve evolved, your cyber markets, how those have evolved? Over the past few quarters, you’ve made some acquisitions and are clearly active here. And how should cyber evolve from here? So going back a few quarters to forward a few quarters.

Yes, I think if I go back quite a few quarters, I think -- we've been talking about it for about two and a half years, I think we we’re the first in the market to look at it -- and from my standpoint, understanding the vulnerabilities makes me, I guess a zealot I would call it that way. And so you kind of believe that everybody believes what you do, and that things are going to happen really quick. I think if you look at the administration and others, this started to get a lot of attention, but the attraction didn't happen as quick as what people would have anticipated. For us, we had the three-pronged approach. We wanted to protect ourselves. If you look at the amount of activity, it's probably in the billions that happened to us. And Six Sigma results don't work here, because if you have 4.6 faults per million, people are going to break into everything you have when they can attack you in the billions of attacks. So for us, we wanted to make sure we protected ourselves as part of our strategy, we wanted to make sure whatever we develop we use, which we do. We wanted to make sure that our products had all the right protection in them. We do that and the service aspect of what we could offer our customers in capability is what we're starting to see some traction on now. We've gotten some awards. Some have hit the paper. Some don't hit the paper. For us, we think we're going to be on our plan this year for the kind of growth we anticipated. We still, I think can safely say, find more Zero Day occurrences than anybody else in the industry, and that's relative to the tools we use. And we have the ability to scale because we believe in what we do so we use it here to help us internally. So I would say, in the past we expected it to move quicker. We're a little bit more pragmatic about it today. But there is growth. There’s awards starting to happen. They're small, they may be in the $10 million, $40 million, $50 million, or $100 million, but it’ll probably won’t be until next year that some bigger ones start to happen. But we're okay with the smaller ones. That’s 8,000 programs in this company, that's the way we grow and that's the way we do business. But we see people starting to realize the issue, either in infrastructure, either in products or in other offerings they have. I don't know if that helped. It's a long answer. Robert Spingarn - Crédit Suisse AG: The only other thing I'd ask is, do you have a longer term growth target for this business?

Yes, I think this business is going to grow at double digits for us. That's the way I see it. And nothing's convinced me otherwise that it isn't there.

Your next question comes from the line of Sam Pearlstein with Wells Fargo. Samuel Pearlstein - Wells Fargo Securities, LLC: I don't mean to harp on e-Borders totally, but if you just look at what you’ve been doing in terms of a booking rate, if you x that out now, what does that mean to IIS's margins on a go-forward basis in terms of now and what it might be able to the future?

Sam, this is Dave. We have booked -- if you look at '09 and '10 and you're assuming, say, a couple of hundred million dollars in sales on the top line, $200 million to $250 million, we were booking in the mid-single-digit range from a margin standpoint. We had obviously anticipated over time improving that, given the way we had seen our performance. But I think that's probably point one. Point two, from a cash position, overall we had seen, obviously based on the balance sheet and the cadence of the milestones, we had investments up front, which we had anticipated recovering throughout the program. We had essentially gone operational, like Bill had said, which started to trigger some positive cash flow. But we had still not expected to be in a positive net cash flow position from that program in '10 or '11. Samuel Pearlstein - Wells Fargo Securities, LLC: But should I presume that then you’re assuming that you would not have gotten the collection then in your $2 billion to $2.2 billion operating cash flow this year?

In the $2 billion to $2.2 billion, we've accounted for the cash associated with unwinding the program, which is in the neighborhood of $80 million to $100 million. And we’ve accounted for the lost net cash on the program in the back half of the year. I think the important takeaway here is that we've maintained our overall cash guidance for the company. So there is a cash impact this year and in the near term. But from a cash standpoint, it actually improves in '11.

Let me add, I fundamentally believe IIS is about in the 8% to 9% range going forward as a business. We don't see anything fundamentally changing in the way they do business. Yes, I figured your question is, do we see something fundamentally changing in the way they’re operating going forward? And the answer is no. We seem to be in that range. Samuel Pearlstein - Wells Fargo Securities, LLC: Well part of it was also if it’s booking at a lower rate in the mid-single digits, that eliminating that by itself should help IIS?

Correct.

Yes, that's where I thought you were going. I thought I’d help.

Your next question comes from the line of Troy Lahr with Stifel, Nicolaus. Troy Lahr - Stifel, Nicolaus & Co., Inc.: Dave, I'm wondering if you can just talk a little bit about how much conservatism you have baked into your margins for the full year. It looks like if you look at the most of the segments, you have margins coming down in the back half compared to what they did in the first half. I understand that there's some timing issues and things like that but kind of across the board, can you just help me understand that a little bit?

Sure. I mean each business will have its sort of own backdrop to this. But generally speaking, from a margin standpoint we are comfortable with what we've put out there, and I wouldn't characterize it as aggressive or conservative. As a general statement what I would say is, we were able to pull forward cost efficiency and cost-improvement programs into the first half that might have been anticipated initially in the second half, and that's why you see some margin improvement relative to what we had talked about earlier. That's number one. Number two is, and I mentioned earlier, you do see the impact of the period costs flowing through the P&L in the back half of the year associated with the program termination. There is a little bit of a mixed issue, which more favorably impacted the front half than the back half. Now if you sort of stand back from that, there is some improvement that we are highlighting in some of our businesses, in particular, MCS and TS. So I think standing back, we've taken a measured approach to the outlook. And we’re obviously continuing to pull levers and push hard. But at this stage of the year, we're comfortable with what we've put out there. Robert Spingarn - Crédit Suisse AG: And is the bookings target still $26.5 billion? It seems like you really need a strong second half to still get to that? Is that still on the table?

Yes, that’s still on the table. We said it, we see it. We've got some large international orders are out there that make us have confidence in that number.

Your next question comes from the line of Doug Harned with Sanford Bernstein. Douglas Harned - Bernstein Research: A couple questions on margins. If you look at NCS and Missile Systems, in each case, you’ve gotten some very good margins for the first half. Can you talk about those specifically in terms of mix and in terms of what you're seeing in the second half that could put some downward pressure potentially on the margins?

Well, okay, for Missile Systems both in Q2 and year-to-date, we exceeded our guidance, and essentially that was driven by the timing of the productivity improvements. The back half margins are principally driven by program mix. Relative to NCS, it's sort of the same story. Q2 and year-to-date, slightly higher than guidance. The result of timing and volume relative to performance improvements principally around U.S. Army programs. We did increase overall guidance in NCS by about 20 basis points. Douglas Harned - Bernstein Research: But could you speak to, when you’re looking at a change in mix in the first half or the back half of the year, can you talk about what that change is? Is it programs? Customers? …

We've talked earlier about ramping up on an international classified program in NCS for particular. And there’s always a mix of development and production programs and where they are in the cycle. And obviously there's hundreds of programs, thousands of programs out there, but when you're standing back – and I’m looking at this from a financial perspective -- I think I characterized it the right way. Douglas Harned - Bernstein Research: But if you look longer term at these businesses, are you looking at more typical margins being like the back half or the front half? I mean, is there a way -- are we seeing any kind of a trend here when you’re looking at lower margins in the back of the year? Or is it just sort of quarter-to-quarter shifts?

Yes, I would say it's quarter-to-quarter. Don't read anything into what’s there. I mean when you look at our current off margins other than IIS, I think that range shows you the health and operational cadence of those businesses.

Let me add one thing to that. If you look at IIS from an operational perspective, in the second quarter their margins actually improved. And let me just say it in my words and add to what Bill just commented on, I think the way to think about the margin profile overall is if you look at sort of the full year at a business-by-business level. But again, we're continuing to put a lot of focus on cost improvements and productivity. So we'll see what the next few years brings, but there is a tremendous focus from Raytheon on those areas. Douglas Harned - Bernstein Research: And then if I can, one last thing, it seems that when I listened to you talk today and recently, it seems like the international opportunities may becoming more diverse. I mean IDS Missile Systems have always had quite a few. Are you seeing more in the other units than you have in the past?

Yes, I think so. It’s, at least for me, what our customers are doing, what they see that we're doing, there were more discussions this year at least from my standpoint. I’m one point on the curve so I understand as an engineer I can draw the vector any way I want with one point, but at least I can say the vector for me was going up. And it's across the board. I mean you see it in RTSe, for example. They've got a number of opportunities in the Mideast. And even in Europe, I mean, Europe's got tough financial issues, but we've got things going on there where we expect orders. Now are they huge? No, but you get a number of smaller ones, they add up to a bigger one. So that’s the way we kind of look at it.

Your next question comes from the line of Joseph Nadol with JPMorgan. Joseph Nadol - JP Morgan Chase & Co: Bill, on the e-Borders again, and sorry to harp. But I thought the write-off looked very large compared to the size of the program. You're working capital runs something like 20% of your sales. This was more like double, so it was kind of an order of magnitude different. And I'm wondering if you guys could speak about the Ts and Cs here and your exposure, sort of how this happened, why you have more exposure here than you do presumably in your business overall and are there other – was this a unique program from that standpoint or are there other programs out there where you don’t have a lot of received advance payments to offset against your other working capital?

What I would say is, don't read this one into the other programs. This program -- I'll get you back to what I was saying where we’re ready to make a drop in October. That's three months away. And what you do is your billings are tied to what we call software drops. In this program there are more than one. And so we went operational last May and the next drop was in October, so we've got a work in process that has not been billed and would have been billed, and they elected to do it at this time and I’ll let it go at that, that we feel very strong about our position, and we'll go through this here. Joseph Nadol - JP Morgan Chase & Co: Is the termination related to their interpretation of how that second drop was going?

No. I think, what I would basically say is, someone took the opportunity. Whether that opportunity is correct or not will be sorted out. I will tell you in my opinion, I have been authorized everything I need to be able to go defend the company.

Your next question comes from the line of Cai Von Rumohr with Cohen and company. Cai Von Rumohr - Cowen and Company, LLC: Bill, could you update us briefly on the status of the FCPA review, and give us some color on international Patriot opportunities?

Yes, first on the FCPA. Our self-initiated internal review of certain international operations which we noted in our 10-K is ongoing. We've advised the relevant regulatory authorities of our pending review. And frankly, we have no other comment beyond that information and what we put in our filings. And I am not -- you know me, I don't avoid questions, but that's what it is and that's the way I have to treat it. And the one thing I remind you and everybody else, we’re a good company and we do what's right, and it was self-initiated. On the international Patriot, that was one of the highlights of the show for me. A number of customers we dealt with, Kuwait and Turkey and Israel. Of course, UAE was there. Saudi was there. From our standpoint, we see tremendous opportunity. Probably Saudi will be next in the queue. We've gone through the RSADF there, and we've gone through foreign procurement. And we've got about one more stage to go through in Saudi, and that will happen I hope soon with not too many Os -- since you've been around, you know what that means -- sooner rather than later. And we'll hear probably in the latter part of the year on Turkey, what they decide to do there. Those are all billion dollar contracts from that standpoint. UAE’s going well. We were able to display at the show, no pun intended, the new digital displays in Patriot that, if you've been around the system as long as I have, boy, are they state-of-the-art now. About 2/3 of the system has changed, all updated, new parts, and it's the best around. And so for us, we see other parts of Europe that are interested in that. Japan has continued to buy and is going to upgrade more their systems, so we have that as an international order that recently we booked some activity on Patriot. So I’m encouraged by what I see there. But then again as we make these sales, we've got to be able to put them into the system, get them approved through Congress so we can start.

Your next question comes from the line of Jason [ph] Gursky (51:05) with Citigroup.

Just a quick question on Farnborough and maybe some of the new products that you were talking about [ph] there with customers (51:14). I think you’ve got a new radar system for some fighters, maybe the F-16. Can you talk a little bit about progress you're making on selling that into customers?

Yes, the customers love it. I mean, if you think about it, and I'll try not to get too tech geeky here -- old radars are mechanically scanned. Think of a [ph] McGimble (51:34) that goes back and forth to look over the horizon or to look up or look down depending on where the thread is. This new AESA radars are a fixed plate. The way I like to describe them, think about multiple flashlights on a plate and what the AESA’s allowed to do is these flashlight beams go all over the place and one of them hits the target and so I have multi-scan capability. And that one beam can hit the target, and I can either focus all my energy on it or some of my energy. So mechanically, nothing moves except electrons, which means it has unbelievable reliability. We think we're like the Maytag repairman with these AESAs. They go out there and they don't break. The good part is the cost of them with new capabilities. Our customers can get basically the newest and the best and keep their platforms current. And so what we call our Racer that we're doing for the F-16, everybody’s excited about that, that they can put this new unbelievable higher reliability, probably around the same price, radar on their existing platform. That's the excitement that we see in the marketplace that our newer technologies both forward fit and backward fit. And we think that gives us tremendous opportunities. If I sound excited, I am.

And just, were you able to actually secure any orders or how is that …?

Well what it works is we’re going through flight testing now and let me just say we have tremendous interest. So when we're ready, we're going to be ready.

Your next question comes from the line of George Shapiro with Access 342. George Shapiro - Citi: Dave, I want to look at why the guidance wasn't increased. Because effectively what you did, if I compare your Q3 and Q4 earnings estimates that you had detailed in the Q1 release, with now, you’ve lowered the third quarter by $0.08 -- now I'm using the high end here – to $1.10 from $1.18 and you lowered the fourth quarter by $0.11 to $1.31. So effectively, lowered the second half by $0.19. I mean, in the release you said that e-Borders would be maybe another $0.03 or so, but I'm trying to figure out where the balance of the reduction is coming from.

So, let me just add a little bit of color and clarity, George. So, second half of the year does include period costs and lost program income, both associated with a termination. And you can sort of broad range this. I don't want to give you a point estimate, but you can say $45 million to $65 million, okay? In that range. So that is point one. Point two is, as we talked earlier, when the warrants were exercised as a result of what was going on in the markets, that impacted our EPS outlook by about $0.05. We were able to offset some of that through our repurchase program, but not all of it. So I think taken together, that's really the backdrop as to why we’re not increasing our guidance at this stage. George Shapiro - Citi: So Dave, we're effectively going to see lower margins in the second half because of that. Now is this effect going to continue into next year as well or …?

Let me sort of rephrase what we had talked about just a few minutes ago. I think the way to think about the business from a margin perspective is looking at the full year, okay? There are some timing elements quarter to quarter, first half to second half. A number of things, as you well know, happen at different periods throughout the year. But I would take the full year guidance and assume that as a good baseline for the businesses going forward. George, actually there is one last point. The costs associated with the termination are expected to run out first half, second half of this year and maybe very early into next year. So that would be a little bit of a positive as we move ahead. George Shapiro - Citi: And can you cite what they might be?

Well, that's what I was just saying. I mean, overall, if we're looking at the termination costs from a cash standpoint, we're looking at somewhere, say, $80 million, sort of plus or minus from a period-cost standpoint. Then again, including the program income effect, you might be looking at half to two-thirds of that.

Your next question comes from the line of Howard Rubel with Jefferies. Howard Rubel - Jefferies & Company, Inc.: Bill, I kind of want to push back a little bit on – I mean there's not a question you guys are well positioned, but the environment has changed. And what I don't understand is what kind of message you're getting from the Pentagon when they delay contracts? There's a number of awards that haven't happened yet. There’s a change in terms and conditions. And so on one hand, the operations of the Pentagon are making your life more difficult. And while you're better positioned than most, they say they're not going to reduce profits. I mean, how do you square those two?

I square them in the standpoint of, Howard, probably being here long enough to have seen the movie and seen the ending. But what's happening different is, I'm not faulting our customer whatsoever for what they're going through. They're making the right kind of calls. I mean my analogy is, in Raytheon when we had $13 billion of debt what did we do? I could go through the litany and I won’t on the call but we basically went from $13 billion to being debt free. And we did that by making some really hard [ph] calls (58:17), they don't happen overnight. I think our customers looks at the way they do business and realizes that they can do more. There are hard calls they have to make. They've got to be able to improve the requirements definition and ensure that the requirements and the programs have stability. When you yin and yang them, that burns money one way or another. I’ve waxed eloquently, I’m biased on streamlining the export control. That benefits both of us when we do it. The other thing is they’re trying to promote the efficient use of resources on both sides. Both of us need to do that. I mean one of the things we can figure out is how do we spend less [ph] B&P (59:04) on our proposals? I mean if you have to submit a fixed-price proposal, why do you have to put in hundreds or thousands of pages on a proposal that’s fixed-price. It's competitive as you go through it. So resources can be better. The other thing is we need to eliminate, [ph] govern (59:25) unique processes where practical. Notice I put, where practical, because there are things we do that we don't do on some of our commercial side or with other customers. And the thing I would finally add -- and I give this administration or the DoD great credit -- we're trying to understand the second and third order effects of decisions. That's something I think that has been a huge game changer for Raytheon internally, as we think through things. So when you think about cutting direct labor, the outcome of that could be that you're overheads go up because you don't have as much direct labor base to offset against it and when you do that, don't start whacking people for overheads if the [ph] PCL (1:00:13), total cost level, comes down. That needs to be understood. So when you put in your rules, you got to make sure you understand that effect. The other thing is, if you change the fee rates on make versus buy, you could end up with an outcome that you don't like, which means somebody goes vertically rather than using lower-cost suppliers. So we've got to be careful as we go through this thing. And I think what that does is it does create the congestion. And I think when you look at congestion, do you have a partner you could sit down at the table and talk with to keep things moving. And I would give Ash Carter, Bill Lynn and Secretary Gates credit. They listen. And collectively, we've got to work it shoulder to shoulder, it’s in the best interests of our country, and the way I look at it we have an obligation in our industry to provide the best we can to our war fighters. And how do we do that? As quick as we can. And my last point is, I’m a speed nut. The faster we can get things done, the less cost it will be to Raytheon and the less cost it’ll be to the government. And somehow we've got to develop that mindset by re-setting ourselves and we haven't done that yet. So we've got work to do. I'm encouraged that people are taking it on. The other is [ph] you’d (1:01:36) sit there and say, woe is me. But it’s still, everybody in the building says you perform, you get paid for it. That has not changed. Howard Rubel - Jefferies & Company, Inc.: No, I'm just concerned the policy’s been a blunt instrument and that they’re not going to listen to your experience.

The one thing I can tell you is the nice thing about industry is, we still figure out how to get things done and we still figure out how to have returns that are important to our shareholders. And one of the things I’m proud of is, everybody always asks us about margins. We still have industry-leading margins. It's because we work very hard at it and we continue to do that. And we think given our portfolio and our speed and agility, we’re going to adapt and we're going to adapt quickly. And we intend to do that with our customers. They’re our partners. We've got to do it together. And they’re working with us. Howard, I would say our customers have IT systems. They’re very interested in some of the things we've done across the company in that regard. Our shared services in finance and other places, how do we do it when it's not done there? Our direct to indirect in our company; over the last five years I think we've taken 500 heads out of indirect. That's right out of overhead. Even though we've been growing as a company and our facility utilizations are the highest they've ever been, so our factories and our plants are loaded and we continue to consolidate where we can to cut our costs and make sure we've got good utilization. So we all need to share these best practices, is where I’m coming from.

Your next question comes from the line of Heidi Wood with Morgan Stanley. Heidi Wood - Morgan Stanley: Bill, I want to catch up on how you're thinking strategically, if you don't mind. We've seen you execute on the international opportunities that were core to Raytheon like Patriot. You’ve spoken about adjacent growth strategy and that included border security. And we've seen setbacks like the Saudi border and [indiscernible] (1:03:46) borders now so I want to kind of get caught up on, (a), how do what you’ve seen with these setbacks, how does that change your intent with respect to adjacent growth markets, if at all? And secondly, how do we think about – because I’m very intrigued by the comment you answered in Doug’s question of newer rising international opportunities beyond the core. Where are we going to see you expanding in new international markets going forward?

I think from our standpoint what I see, Heidi, is that I put e-Borders in a category all by itself from a standpoint of, I’ll put it in a political bin rather than a performance bin in that regard. You mentioned Saudi, the borders there. That's a little different story. Our strategy was to do something a little bit different than what others would go do. Clearly, the people we worked with liked what we did. Someone else above them made a different decision. That happens when you compete. So I kind of put it in a different bin. But what we see around the world, is the ability that people want to know what's going on on the border. They need ISR capability. They want to be able to protect ports. They want to be able to do things. They’ll be smaller in scale, maybe $50 million, $100 million, $200 million jobs. Those are okay. We understand them. We've experienced about 23%, 25% growth, let me say 20% to 25%, in our homeland security. We have to make an adjustment for e-Borders. But for me, I still see double-digit growth in homeland security whether it be from a point of view of communications, which is really getting big, which is doing airports -- which is a whole other kind of market -- to being able to do Command and Control in countries. And then other customers are asking us how we net things together so that they can have high fidelity information to make decisions. It's a very active market and we see it in those size of programs as we go ahead. We still see international bookings overall, they’ll probably be in the 28% to 30% range for the year. We still expect our international sales to be around 22% to 24% and the other thing that's growing is, classified is running -- clearly going to be in mid- double digits, probably around 15% or so this year, and sales will probably be about in the same range. So classified, domestic and international, is also growing for us. So lots of pieces. All I can tell you is that when I look at the mosaic it looks pretty good, about what we see and what countries are talking to us about. Heidi Wood - Morgan Stanley: But it sounds like there’s no change in strategy. I mean there’s bumps and bruises along the way as you get an education as to the high and low range of various forms of border control and monitoring, but it looks like that's a core competency you’re going to continue to expand in.

Absolutely, because one of the things we see is that even though there’s tough environments out there, people still need and want some kind of homeland border security or a way to tie it together. And you can almost pick a country and I can almost tell you something – not that I'm going to but -- that we’re doing in a particular country, whether it's Asia, Australia, Europe, the Mideast, there's something going on that fits in this world. It’s a little bit different than -- you've been around enough to know about radars and missiles and the other stuff we do. This is different. And they're good-sized programs. And e-Borders isn't over with yet.

Okay. We’re now at the hour mark. I'd like to close by thanking everyone for joining us this morning. We appreciate your interest in learning more about the company, our recent performance and our outlook. And we look forward to speaking with you again on our third quarter conference call in October. John?

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.