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

Cai Von Rumohr - Cowen and Company, LLC Robert Stallard - RBC Capital Markets, LLC Howard Rubel - Jefferies & Company, Inc. George Shapiro - Citi Douglas Harned - Sanford C. Bernstein & Co., Inc. Heidi Wood - Morgan Stanley Robert Spingarn - Crédit Suisse AG Jason Gursky - Citigroup Inc Samuel Pearlstein - Wells Fargo Securities, LLC Peter Arment - Gleacher & Company, Inc. David Strauss - UBS Investment Bank

Good day, ladies and gentlemen, and welcome to the Raytheon Second Quarter 2011 Earnings Conference Call. My name is Deanna, and I'll be the operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Todd Ernst, Vice President, Investor Relations. Please proceed, sir.

Thank you, Deanna. Good morning, everyone. 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 be referencing are available on our website at raytheon.com. Following this morning's call, an archive about 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 move on to questions. 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 are discussed in detail in our SEC filings. With that, I'll turn the call over to Bill. Bill?

Thank you, Todd. Good morning, everyone. Raytheon delivered a solid quarter with sales, margin and EPS all exceeding our expectations. Our adjusted operating margin was 12.4%, and was driven by our continued focus on performance across the businesses. Year-to-date, adjusted operating margin increased to 12.5%, up 10 basis points compared to 2010. In the quarter, our book-to-bill was a 1.2, driven in part by the Kingdom of Saudi Arabia's decision to upgrade their Patriot System, which we announced at the Paris Air Show in June. This booking once again demonstrates that when it comes to choosing the most advanced integrated air and missile defense systems, global customers continue to look to Raytheon and to Patriot. As you know, an important part of our strategy is to continue to grow our international market. Our presence at the air show reaffirmed our commitment to this strategy and to our international customers. For us, this was a record year at the air show, where we met with approximately 2,100 customers from 63 nations and 44 delegations. It gave me an opportunity to personally meet with many of the delegations and customers. I was encouraged by the conversations. Our cutting-edge technologies, our innovative solutions continue to be well aligned with their evolving requirements, particularly in the areas of air and missile defense, global ISR, Air Traffic Management, Homeland Security and training. I went into the show feeling good about our international opportunities and I left feeling more confident. The threat level around the world remains high and despite competing priorities, our customers continue to place a heightened emphasis on investments in defense and security. From company perspective, we have an excellent pipeline, and the key is to convert these bookings within the planned timeframe. Domestically, our customers work through the quarter to put the extended continuing resolution behind them. The funding recovery was slow to start, but it picked up steam through the quarter. Our efforts to keep programs on cost and on schedule during the CR paid off, and we're able to report domestic revenue ahead of our expectations. Domestic book-to-bill was greater than one in the quarter. We understand that this environment is dynamic. Our customers being asked to do more with no more and is looking for innovative ways to meet what is demanded of them. This is the new reality, and it fits well with our focus on delivering capabilities and solutions that offer more value. We not only see this in our core markets, but we also see examples of this in our growth markets. For example, as we approach the electronic warfare or EW market, from various perspectives, we can apply our capabilities in manipulating RF signals to attack, deny and defend against an adversary. Our products include the ALR-69A, which will go on the new tanker, the KC-46A; the ALR-67 for the 18 E/F and our Miniature Air Launch Decoys, MALD; plus a host of other classified products. The key here is that our EW capabilities are truly a force multiplier for our customers worldwide, allowing them to leverage existing platforms at reduce costs to continue to execute their missions. This is yet another example of how Raytheon's platform-agnostic approach to the market creates values for our customers. Offering innovative solutions to meet customer needs is only part of the equation. Doing so efficiently with the right balance of resources is another. For many years now, we've also, we've been focused on delivering greater value and predictability to our customers and shareholders by improving cost efficiencies and program performance. We've achieved this by leveraging the power of Raytheon's Six Sigma and optimizing our supply chain. Our supply chain initiative is allowing us to streamline our buying processes, reduce costs and increase efficiencies. This focus is producing real savings today, as evidenced by our track record of solid operating results. Going forward, we've redoubled our efforts to reduce costs and are targeting additional opportunities across all areas of expense. Further, we are focusing on enhancing our capital efficiency by reducing our footprint and optimizing our facility utilization. These are just some of the examples of how we're finding more ways to produce savings for our customers and drive incremental returns for our shareholders. We believe this focus is the right approach in the current economic environment. And for us, our track record of achieving cost efficiencies speaks for itself. As I look at the quarter, I see a company that continues to perform well and delivers considerable value for our customers and our shareholders. We remain well positioned in an evolving marketplace. We continue to make targeted investment in growth areas, and are taking the necessary actions to ensure the company remains healthy and competitive. I'm proud of the dedicated natural Raytheon team for rising to the challenge again and again. With that, let me turn it over to Dave.

Okay. Thanks, Bill. I have a few opening remarks, starting with second quarter highlights, and then we'll move on to the questions. During my remarks, I'll be referring to the Web slides that we issued earlier this morning. Okay, if everyone would please turn to Page 3. As Bill noted, we performed well in the second quarter with sales, margin and EPS all exceeding our expectations. Our total company bookings for the quarter were $7.4 billion, resulting in a book-to-bill ratio of 1.2. The strong bookings were driven in part by the previously announced $1.7 billion Saudi Patriot award. Our adjusted EPS of $1.39 also improved over the same period last year, and adjusted operating margin with 12.4%, reflecting continued strong performance across the business. Sales were $6.2 billion, which I'll address further in just a moment. Operating cash flow from continuing operations with an outflow of $91 million for the quarter and on a year-to-date basis, is tracking to our expectations. We are increasing our full year cash flow outlook by $100 million, which I'll address further in a few minutes, along with other updates to our 2011 guidance. During the quarter, the company repurchased 6.4 million shares of common stock to $313 million, bringing the year-to-date share repurchase to 12.5 million shares for $625 million. Turning now to Page 4, let me start by providing some detail on our second quarter results. Our total company bookings for the quarter were $7.4 billion, and on a year-to-date basis, were $12.5 billion. In addition to the $1.7 billion Saudi Patriot booking at IDS, other notable bookings included: $315 million at missile systems for the development of Standard Missile-3 for the Missile Defense Agency and $200 million for the production of Standard Missile-6 for the U.S. Navy; and SAS booked $109 million on an international program. Technical Services booked $612 million for domestic training and $119 million for foreign training programs in support of the Warfighter FOCUS program. TS also booked $100 million for base operations, maintenance and support services in Australia. Backlog at the end of the quarter was a strong $34.5 billion. If you'd now move to Page 5. Sales were slightly above our expectations. By business, IDS had second quarter 2011 net sales of $1.3 billion. The change in IDS sales was primarily due to lower volume on the Zumwalt program, as a result of the revised funding profile, which I spoke about on prior calls. IIS had second quarter 2011 net sales of $752 million compared to $472 million in the second quarter of 2010. As a reminder, last year's net sales included an adjustment related to the U.K. Border Agency program for $316 million. It is worth noting that during the quarter, we filed our counterclaim against the U.K. Border Agency for the collection of receivables and damages in the amount of $800 million. We don't anticipate any change to our reserve position and we don't expect to make any further comment until the final resolution, which isn't expected until mid-2013. Missile Systems had net sales of $1.4 billion. The change was primarily due to lower sales on SM-2, driven by lower plant production build rates. NCS had net sales of $1.1 billion. The change in net sales was primarily due to the planned decline in production of U.S. Army sensor programs. Space and Airborne Systems had net sales of $1.3 billion in the quarter, up 12%, driven by the growth on intelligence, surveillance and reconnaissance systems programs, and international airborne tactical radar program and higher net sales related to Raytheon Applied Signal Technology, which was acquired in the first quarter of 2011. And Technical Services had sales up modestly compared with the same period last year. Moving ahead to Page 6, we are pleased by our overall company margin performance. Our adjusted margin was 12.4%. On a year-to-date basis, our adjusted margin was 12.5%, up 10 basis points over the comparable period in 2010. The strength in our underlying margin was due to our continued focus on execution, as we have discussed on prior calls, and includes the benefits related to our ongoing cost efficiency initiatives. So looking at business margins, NCS margins were up in the quarter compared with the same period last year, the result of solid operating performance. IDS and Technical Services' margins were essentially in line with prior year's Q2. When you look at IIS, if you normalize for the costs related to the U.K. Border Agency program, in both the second quarter of 2011 and the second quarter of 2010, margins were essentially in line at slightly over 8%. Missiles' underlying margins were strong and absorbed $15 million related to a contractual settlement. At SAS, the change in margins was primarily due to the acquisition and integration-related cost for Applied Signal Technology, which impacted SAS' margins by approximately 70 basis points in the quarter. We're very pleased with the performance of AST, the integration is was going well and they are tracking to our expectations. Overall, the company continues to perform well. Turning now to Page 7, second quarter 2011 adjusted EPS was $1.39. The increase was driven by capital deployment actions, specifically share repurchases, and on a year-to-date basis, adjusted EPS was $2.77, up 7% from the same period last year. Okay. If you please turn to Page 8, I'd like to briefly comment on our updated outlook for the year. We've tightened the range for full year 2011 net sales, reducing the high end by $400 million. We now expect sales to be in a range of between $25.5 billion and $25.9 billion. We expect the effective tax rate to be approximately 28.3%. This reflects our recently approved tax-related benefit of $55 million, including interest or $0.15 per diluted share, related to multiple prior years' tax filings. This will be booked in the third quarter. As a result, we've increased our full year GAAP, EPS outlook announcing the range of $4.82 to $4.97 per share. And as I've discussed a few minutes ago, we've increased our guidance for operating cash flow from continuing operations by $100 million to between $2.1 billion and $2.3 billion. Year-to-date cash flow is tracking to our initial guidance that we provided back in January 2011, where the cadence of cash generation was weighted to the second half of the year, largely due to the timing of some specific working capital items. We have one additional payroll period in the second quarter of 2011 compared to 2010, as well as the burn down of some advances on international programs that's expected to be offset in the second half based on recent order activity. Essentially, our view of the cadence of cash flow from operations hasn't changed. However, our confidence in the magnitude of the improvement working capital has, which is driving the increase in our guidance. And as you can see on Page 9, we've reflected the change in our guidance by business. The increase in margin guidance reflects the expected additional benefits of our productivity and efficiency initiatives. Overall, we're pleased with the results of our operational improvements and the margin we have delivered, while at the same time, passing along savings to our customers. On Page 10, we provided some directional guidance on how we currently see the quarterly cadence for sales, EPS and operating cash flow from continuing operations. Before we open it up for Q&A, let me summarize. We saw solid performance in the second quarter and in many areas, exceeded the guidance we provided back in April. We had strong bookings, solid sales in a challenging environment, strong margins and earnings per share. And we've increased our cash flow outlook for the year. Looking ahead, we're well positioned to address the opportunities and also the challenges in our industry with the diverse portfolio of innovative technologies. We remain focused on delivering best value for our customers and our shareholders. This includes making sure the company continues to be proactive and have the right cost structure to operate effectively and efficiently in a dynamic and evolving marketplace. With that, Bill and I will open the call up to questions.

[Operator Instructions] The first question will come from the line of George Shapiro, Access 342. George Shapiro - Citi: David, look -- from the guidance, I mean, you took down several of the sectors by $100 million at the high-end, and it looks like the most of it came out of the fourth quarter. Can you just give the thought process as to what's going on since it's a change for multiple sectors?

Yes, so you'll recall that when we gave initial guidance back in January for the year, we had a range of about $800 million, and it was the widest range, certainly, in recent history. And that's just as a result of what was going on. Midpoint through the year, we have better clarity. I wouldn't say there is anything specific in any of the segments. Again, we have good visibility for the third and fourth quarter. We've been able to tighten up our expectations of the timing of awards and how these will play out from a sales standpoint. So there's nothing remarkable. I just feel that we have a better view of how we're going to close out 2011. I do want to point out one thing. This does not reflect any loss of business. Again, it's just a retiming and a better gauge on how we see things playing out. George Shapiro - Citi: And then a follow-up. My old pet peeve that you effectively beat your own earnings guidance in the quarter by about $0.10. And it looks like in terms of a new distribution of earnings in Q3 and Q4, you took out somewhere around $0.10 in the Q3 and Q4, probably due to the lower sales potential. I mean, is that a fair way to look at it?

Well, let me try to put it a little bit differently, okay? And I had a sense, George, that you might ask me this question. So here's the way I think about it. We improved the first half from an EPS standpoint of say, I don't know, $0.14, $0.15, $0.16. And that was driven by the timing of the cost efficiencies that Bill spoke to earlier and I spoke to a little bit as well. Then we tightened the sales range in the back half of the year for both the third and the fourth quarter, and we offset roughly $50 million of associated earnings, again, principally with the cost efficiencies. So when you stand back from this, we're continuing to drive margins and earnings results from cost efficiencies, as we tighten up the sales guidance from a full year standpoint. It's a first half, second half thing, George.

The next question will come from the line of Sam Pearlstein, Wells Fargo. Samuel Pearlstein - Wells Fargo Securities, LLC: Dave, can you, I guess, talk a little bit about some of the margins and then just look again at that first half, second half issue? Like SAS in particular, how do you get the margins up to that 13.3%, 13.5% level given the 12.7% for the first half? Is that a specific program that we'll see an appropriate adjustment in one quarter? Or is that something different? And then, I guess, at the same time, on NCS, you have the reverse issue, where the second half would imply much lower margins, and can you talk about that?

Right. So SAS continues to perform well. I would say, on virtually every level of the business. So from a margin perspective, specifically, the timing of productivity improvements in that business are second half weighted. Notwithstanding the broader company, from an SAS business perspective, you'll see greater improvements from a productivity standpoint flowing through their financials in the third and fourth quarter. With respect to NCS, the year-to-date margins are higher than guidance, and that was driven by a couple of things, both the productivity and cost efficiency actions that were taken in NCS, as well as mix. They had a fairly strong level of sales in some production programs, and that also helped out margins in the first half. So again it's, I would say, there's nothing too remarkable in either of the businesses. It's simply timing from first half to second half.

And the next question is from the line of Robert Spingarn, Crédit Suisse. Robert Spingarn - Crédit Suisse AG: Dave, did you provide the full year bookings guidance? I don't know if I heard it.

Well, that's a good question, Rob. We actually don't provide formal guidance on bookings. We have a target for bookings that has not changed since our initial guidance of $27.5 billion for the year, plus or minus $500 million. And it's probably important to note that about 30% of that will come from international sales. Let me just ask the next question that you're probably going to -- let me answer the next question that you're probably going to ask me anyway. So from a book-to-bill standpoint, we still expect to close out the year in the 1.06 to 1.08 range, and I suggest that we're biased toward the higher end of that range. Robert Spingarn - Crédit Suisse AG: Okay. So it doesn't really change much, even though the high end of the sales guidance changes a little bit there for the book-to-bill calculation? But it's close. And so Bill, I would ask you, what are the major things on the horizon that get you there? What are the swing factors?

A ton of stuff. Let's see if I can go through them. Probably international is the easiest one. We've got to TPY-2 radars in back half in Q4. Those could be in the, let's say, $800 million to $1 billion range. We've got Patriot in there, whether you're looking at Taiwan or Kuwait. Those are both late in Q4. Totaled up together, those could be, say, in the $1 billion to $2 billion range, as we see it. We've got some missile activity, especially in Paveway, we expect in Q3, early Q4, we have a signed contract that could be in the $500 million to $600 million range. We see air traffic control radars in the $100 million to $200 million in the Q3, Q4. We see missiles worth about another $300 million to $400 million in various orders, various countries, right across both quarters. Training is about $300 million the next 2 quarters. And we expect an announcement some time probably in Q4 on Turkey. And then we'll see where we go from there. As you know, that's a competitive -- a venue that's taking place there. And then we've started talk with Oman on air and missile defense, and that could be in the $1 billion to $2 billion range. So internationally, pretty good. If you look domestically, probably $1 billion worth of missile stuff to go. And the rest is our standard contracts under $50 million, which we have hundreds of them that take place. So that's kind of how we look at the next 2 quarters and what we have in front of us, we've seen good growth internationally. Our bookings in the quarter were 36% international, sales were about 26% of that. And we see the year bookings international probably be in around 30% so it's going to be a little higher, and sales should be about 25%. So there's a lot going on, and as we've said, at the beginning of the year, it hasn't changed. We expect the second half to be busy for us. And, of course, the economic environment puts a cloud over everything. But that isn't stopping us from what we have in front of us, and the air show convinced me that these customers still want what we have. Robert Spingarn - Crédit Suisse AG: And just as a follow-up to that, Bill. The CR that we had and the potential for another one here, how does that enter into the thinking on everything you just said, at least domestically?

That's how we would look at it and our job is to get these things done so we can ramp up quicker. I mean, if you look at it both Dave and I mentioned the Saudi award. We are getting ready to start congressional notification. But from our standpoint, as a company, we've released some funds to get all the planning and orders stacked up and get us ready so that the day we get the greenlight, we've got a lot of preplanning and stuff already in the hopper ready to go rather than start from scratch when that happens. So we're trying to preposition stuff so we've got a good jump on it.

And the next question will come from the line of Heidi Wood, Morgan Stanley. Heidi Wood - Morgan Stanley: Bill, on another topic, I wondered if you would give us a sense about how you're thinking about incumbency. Under Gates, he was pretty a strong proponent of incumbency. And I wonder if you could give us some color on how you think Panetta mayor may not vary. And of course, for you, it cuts both ways. You have both incumbency and you're pushing in some critical areas to oust some incumbents, such as the Aegis system recompete. So can you talk to us a little bit about the strategy for that in a defense budget down cycle?

Yes, incumbency, I mean, I guess, the way we look at it here is competition is a way of life. And what you try and do is get your business sized properly. That's why when you look at us, we proactively manage our headcounts. We manage our facilities and our utilization, so that we can compete on any given day. And once you get behind that eight ball that we all learned from the '90s, it's hard to get around it. And we've learned to stay in front of it. And that's the way we look at competition. And as you say, it goes both ways. But for me, this company competes all the time. I mean, I know you like technology. And if you just look at some of our wins, these are small jobs in the $2 million to $20 million range. But we're winning advanced wireless networks, where we give the individual soldier network radio nodes on the battlefield. So think of it as a soldier's information system. We have advanced cryptographic modernization, where we're providing secure radios; we've 2 contracts there we just got that are worth about $50 million in total; and advanced detectors, advanced human factors, advanced missile programs, advanced sensors for IEDs. I could go on and on. But every day, we compete here. And you're right, it goes both ways. And if you're competitive and you have good processes that can spin quickly on a dime, I think you're ready for competition, and I don't see it changing. Internationally, we compete every day. So when you look at our international growing at high single digits, it's part of our DNA. I guess, that's the way to describe it, Heidi. I don't lose any sleep on it. Heidi Wood - Morgan Stanley: Okay, great.

Did that get what you're looking for? Heidi Wood - Morgan Stanley: Well, I just can't readily recollect in the last 3 or 4 years, any major upsets on -- and it seems that we've seen a repeated pattern of incumbency, again, which is good for you in the areas where you're strong. But I'm just wondering in terms of the attempt to penetrate to the...

Well, Heidi, since you gave me that opening, and how about Small Diameter Bomb, where we expected to lose. I could go through. I just don't want to impugn or any of our competitors when I -- we don't gloat. We just get up everyday and make the donuts here and do our job.

And the next question will come from the line of David Strauss, UBS. David Strauss - UBS Investment Bank: Dave, what was the sales growth number when you adjust for e-Borders and you adjust for AST? What do you see as kind of organic growth in the quarter? Did sales actually decline?

It was around -- if you adjust for e-Borders, it was around flat year-over-year organically. David Strauss - UBS Investment Bank: Okay. And then any sense of what AST contributed in the quarter?

AST in the quarter was -- had about $56 million in sales and roughly $90 million year-to-date, most of it obviously being classified. David Strauss - UBS Investment Bank: Okay. And then following up on that, it looks like the sales guidance implies a bit of a pick up relative to that in the second half. In particular, it looks likes at missiles and NCS. Can you just comment on what gives you guys the confidence that you're going to actually see your sales pickup in the back half of the year relative to what you saw in the first half?

Sure, yes. Well, Bill just mentioned the Small Diameter Bomb II, and that will be ramping up, by way of example. And there's other programs in the missiles group not quite that size, but they're also ramping up from a production standpoint. With respect to NCS, that ramp is based on both some wins. Again, it's a very robust portfolio of a lot of smaller-type programs. Wins that took place in the second quarter, and that we're expecting in the third quarter, when we're expecting to ramp up there as well. We're comfortable with the second half sales guidance. David Strauss - UBS Investment Bank: Okay. Last one for me. At NCS, the 15% margin in the quarter, were there any EAC adjustments, any one-timers in that number there?

No, and maybe I didn't go -- I wasn't quite as clear as I should've been with one of your colleagues. There was some favorable impact from mix, I talked about our production program. And that was both internationally and domestically. And they just did an excellent job with respect to bringing forward some cost productivity and cost efficiency initiatives. So there wasn't anything remarkable there. The only area that I would say that something was sort of a non-recurring, for lack of a better term, was the contractually -- a contractual-related settlement in missile systems. But other than that, there was nothing else in the company.

And the next question will come from the line of Robert Stallard, Royal Bank of Canada. Robert Stallard - RBC Capital Markets, LLC: Bill, I've got a sort of a big picture question for you. I was wondering if your general view of the outlook has deteriorated over the last couple of months, given the situation on the U.S. domestic front. And whether that's having an impact on your decision-making with regard to the deployment of capital?

Well, put in perspective, I think if you look at what's going on as a country, we need to make sure that nation doesn't default on its obligations. We need a balanced plan that reduces the deficits and burns down our national debt. And we need a foundation for true economic growth, in my opinion. It's difficult to do all of this, as we can read in the papers. And the administration and the Congress need to get it done. I personally, I won't speak for the company here. But me, personally, I'm cautiously optimistic that we'll reach a conclusion here in time. And the Senate and the House, in my opinion, have to reach a compromise. And that's the thing we have to get done. Given that as a backdrop, from our point of view, you've seen our forecast. As we go forward, I'll have Dave, comment here on the capital. But from our standpoint, we look at our balance sheet, it's a strong balance sheet. We don't have to do anything different in that regard. We have the strength to invest in ourselves, which we're going to continue to do, because as a company, you go through these cycles, and those that are strong, well run, have invested in themselves in a good portfolio, come out of that period firing on all cylinders. And that's what we expect to do. So that's kind of how I look at it, though, ask David if he's got anything.

Yes, just to echo a little bit of what Bill just mentioned. A few years back, one of the strategic thrusts that Bill put forward was to have an exceptionally solid financial foundation. The balance sheet is very, very healthy. The pension plan is tracking toward being fully funded from a PPA basis of, say, 2013, we should have closed out this year just under 90%. We have been, I think, fairly forward-leaning from a share repurchase program. We've increased dividends for 6 or 7 years in a row now. We have continued to invest in ourselves from a technology standpoint as well as in many other areas, and I don't see that changing going forward. Someone asked earlier about M&A. Bill set out a strategy on M&A, and we've been executing along those lines for the last few years, and we don't see any wholesale changes in that area either. We'll continue to look at acquisitions to fill important technology gaps for the company and add real incremental value to shareholders, looking forward. So again, notwithstanding the environment that we all find ourselves in, I think you can expect Raytheon to continue to deliver for its customers and its shareholders.

And I would add one last thing. The most important thing in times like this is to be transparent. And that's what we try to do more than anything. So what you see is what you get.

And the next question will come from the line of Jason Gursky, Bernstein & Co. Jason Gursky - Citigroup Inc: I'm actually with Citigroup. Two quick questions. I found it curious, Bill, that you mentioned that we started out of the gate pretty slow, with the CR, but things, from an order perspective, have started to accelerate. I was wondering if you just give us a sense of whether that continues today and whether you think the acceleration of orders has progressively gotten better as time has gone by and whether you expect that to continue as we move into the back half of the year? And then one question for Dave. I see that both in the quarter and in the first half of the year, R&D is down a little bit. I was wondering if you could just give us a sense of what the trajectory of that is going to be for the rest of the year?

Okay, thanks. From our standpoint, we see the pace continuing here. The one concern that I might have is that through all these budget drills, that we don't lose our focus on keeping things going. Fortunately, the 2 are somewhat separated now. So I see the domestic continuing to flow in that regard. And the quicker we can get through the current talks here and figure out what we're going to do, both short term, whether it's the House Bill or the Senate Bill between Reid and Boehner here, that the better it will be, as I said, I'm cautiously optimistic that they're going to reach a conclusion here, which will allow people to continue doing what they're doing so we can stay on track. But it's kind of how I look at them. I'm not expecting a change and I'd expect the cadence to keep on going here.

And so, yes, with respect to R&D, it's timing. We actually expect to increase our R&D year-over-year by about 5%. And as a percent of sales, it'll go up to roughly 2.6%, 2.7% range. So it's just timing between second quarter and third quarter. I also think it's important to keep in mind that, that does not include well over $1 billion a year for contracts under the umbrella of CRAD, which is also R&D. So the company's continuing to focus in that area.

And the next question will come from the line of Peter Arment, Gleacher & Company. Peter Arment - Gleacher & Company, Inc.: Bill, I guess, just more of kind of a bigger picture or a philosophical question. When you look at the kind of domestic portfolio, you look at the entire mix of programs that you have. And I think you mentioned in the past something like 8,000 programs or 15,000 contracts. How should we think about your ability to just kind of stay above the trajectory of the DoD budget? I think everyone's expecting kind of a nose down direction, going forward. Is it just the mix that gives you confidence? And maybe you could just give us a little color on that?

Yes, mix helps us also, probably about 60%, 2/3 of our business is DOD. Good balances, international mix on top of that, and then it's a mix of others. For us, I already gave some of the -- where we expect bookings to be this year internationally in the 30% range and sales of 25%. If I look at classified, we expect about 10% of our bookings to be there, sales should be in the 15%, 16% range. We expect double-digit growth in the classified. That's a good market for us. We do extremely well there with our technologies. In the cyber area, we are seeing double-digit growth. We are seeing RFP starting to flow in a more discipline market there. If you think about us, the way I like to describe it is that we have 24 contracts that make up about 25% of our sales. The next 120 contracts make up the next 25%. And then thousands of contracts make up the next 50%. And it's the next thousands of contracts that we see on a daily basis across the gamut, across different customer bases, and that's what we really believe is where the future is because people still need to get things done. And the pressure is, is they're not going to buy new, but they need capabilities and they need solutions to their problems. And at the air show, it was really nice to sit down with our customers and listen to the challenges they're facing and the things we have in our portfolio that are already developed that don't need any new activity that can help them solve their problems, whether it's in Asia or whether it's in the Middle East. So it really is the mix and just the -- if you're a techy like me, you look at our portfolio, it is a candy store. There's a lot in there. Peter Arment - Gleacher & Company, Inc.: Yes. And regarding, I guess, the latest on the cyber front this year, talking about sort of on the bleeding edge here. We've heard a little bit about -- recently, a lot of the contracts opportunities are being bundled into fed IT kind of contracts. And you were -- deliberately did not want to build up a big "Fed IT kind of helpdesk" business. I mean, do you still see that Raytheon is well positioned to get a lot of these cyber contract opportunities? How should we think about that?

Yes, I don't think the bottom is Fed IT. This cyber threat is very sophisticated. It's not your standard ones and zeros business. And what we see are specific efforts in this, and this requires a good architecture thinking. From us, we have to protect ourselves, and everybody can see what's going on in the world there. They've actually brought a lot of attention to this problem. So we look at it in a way that it's causing people to focus on it. We continue to make sure that our products are protected. And then the last aspect here is given what we do in the other 2, it gives us a real natural of understanding, the domain knowledge that's needed to provide the systems or services in this market. So we look at the specific RFPs, that there's only going to be a small cadre of people that can do what's being asked to be done, if that helps.

And the next question will come from the line of Cai Von Rumohr, Cowen and Company. Cai Von Rumohr - Cowen and Company, LLC: Bill, you gave a nice review of your foreign order potentials. I didn't hear in there the potential for missiles and other deals associated with the Saudi F-15 buy or their potential helicopter buy. How big is that number? And was it embedded in the numbers you gave us?

No, it wasn't, Cai. I didn't go through the domestic because there wasn't anything in there that I thought would get somebody's attention. But if you look at it in missiles, we probably got $1 billion to $1.5 billion to go in bookings there, and those are our standard missile, AMRAAM, Paveway, 9Xs, I could go on, but those are laid out, programmed, budgeted, so we expect that. Then you across the gamut of the business, you're right, we've got some F-18s in there, maybe $150 million in that. We've got some training that in Warfighter that could be another $150 million or so. But there's nothing -- it's the standard bread and butter of what we do every quarter, that's why I didn't go through it. But we got it all laid out and it appears to all be on track. Cai Von Rumohr - Cowen and Company, LLC: But so what you're saying, vis-à-vis the items that would be in the Saudi F-15 buy and the Saudi helicopter buy?

We don't have the Saudi helicopter buy in there. Cai Von Rumohr - Cowen and Company, LLC: Okay. So if we take the totality of the Saudi F-15 buy and the Saudi helicopter buy, how big would each of those be to you without kind of going through whether it's missiles or electronics or what it is?

We haven't broken it out that way, and we probably wouldn't talk about it way, Cai, until it's all finished and finalized, given that customer and given we have 2 customers, the platform and the end-item customer. And you know me, I don't like talking about what our international customers are going to go do until it's done. Cai Von Rumohr - Cowen and Company, LLC: Well, is it in your plan? Let me rephrase the question, is it your target?

Yes, I mean, we forecast and factor everything, yes. It's not like we've forgotten it. Cai Von Rumohr - Cowen and Company, LLC: Great. And a question for Dave. Your $15 million contract adjustment, the missiles, what was that about? And can you itemize, were there any other I guess you have to sort them but to be more specific, anywhere else in your business that you had any other pluses or minuses that we would consider sort of special?

No, there wasn't any other items across the company that you might consider, "special." And with respect to the settlement, we're not going to get into that publicly at this point. But again, we see it as an event that took place in the second quarter and not to be repeated in the back half of the year. Cai Von Rumohr - Cowen and Company, LLC: And the last one, we've seen a number of other companies, where we didn't think there was much up-tempo business being impacted, Northrop to be specific. Do you have any -- how big is your up-tempo related business? And what are you seeing? Do you see any incremental risk there?

No, I would actually strongly suggest that there's not a lot of incremental risk there. We've been fairly thoughtful at what we're seeing at the back half of the year and going forward. And that book of business is come down to almost a rounding error from a Raytheon perspective.

And the next question will come from the line of Doug Harned, Sanford Bernstein and Company. Douglas Harned - Sanford C. Bernstein & Co., Inc.: I'd like to talk a little bit about international and the competitive situation. When you look at Turkey, where you've got Russian, Chinese, European systems, and a lot of companies being fairly aggressive in other countries trying to pick up their own business space. How is this playing out for you? Are you seeing more situations where you've got basically tougher terms in terms of putting content in countries, in pricing? Can you talk a little bit about that?

Yes, I think, Turkey, I could wax eloquently there. I mean, if you want to buy a view graph, you can probably buy a view graph. If you want to buy a system that takes 5x the manning or 10x the spares or costs you double in 5 years, then you go by that kind of system. The good news is we're competing with something that's proven. What we always realize is that countries make political decisions, and you don't change your business model because of that. You continue to offer the price that's right or the value that's right, and countries have to decide. Saudi Arabia is a good example of upgrading what they have with a proven system. So we kind of look at it that way. Internationally, the marketplace is the same. We compete and have competed, my whole career, internationally, and it feels about the same. I mean, nothing's really dramatically changed. What we do is we understand the job, we price in the appropriate risk, and we want to make sure that we give our shareholders the returns they expect out of us. And that's why I said earlier, we spent a lot of time proactively managing our expenses and our costs so that we can compete internationally and domestically. The way I'd like to think about it is if you think about 8 years ago, we had about $18 billion in sales with 78,000 employees. Today, we have $25 billion with 72,000 employees. So we continue to get more efficient, we continue to deliver strong margins and so forth. So that's kind of how you have to look at it. One of the things you don't see it in our reviews here, but when we bid a program, we're always very, very conscious of what are the corners here, what cash flow is needed, what margins are needed, what risk we should be taking on, and can we deliver? And that hasn't changed from that standpoint. So I don't know if I'm really answering your question, but the temperature of the water feels about the same to me. Douglas Harned - Sanford C. Bernstein & Co., Inc.: So no greater pressure with respect to margins off bids...

No, we are not sitting here in a bid and we've got to take 10% of way that the company in a position that people would look and say, "What the heck are you guys doing?" I've made the comment. We are we want to be as transparent as we possibly can for our investors. And you expect us to continue to deliver the same kind of returns that we've delivered. Douglas Harned - Sanford C. Bernstein & Co., Inc.: And then if I can, on the domestic side, Dave, you're seeing domestic book-to-bill above one. But if you look down within that and you look at the areas that are stronger versus ones that maybe weaker, how would you see it? I mean, I look at your missiles backlog, it's coming down a little bit, we've seen some pressure on missile systems in the Hack D[ph]. How are you seeing different pieces of that domestic market?

Well, it's not unique to any one product area or any one business. And I mean, we've talked about this 10 different ways. I mean, we have thousands of different programs. And I would say, there is areas of strength and there's areas of focus for the company. We've talked a lot about ISR. I would say that's probably a standout across the company. You saw what SAS delivered in the second quarter from a sales standpoint. Bookings were also very, very strong. And they're not the only business that participate in ISR. I mean, that's across 4 of our business areas. So from that standpoint, from a missile defense standpoint, from an EW standpoint, it's the things that you and others would be familiar with.

And just to chime in here, the back half is a big one for missiles. As I mentioned, we expect $300 million to $500 million of international in missiles. We've already got a signed contract for about $500 million on Paveway that we need to get notified, so we can start off. And then domestically, I mentioned, we've got about $1 billion to $1.5 billion of bookings coming in, in Q3 and Q4. So that's going to build up their backlog as we go into it.

And yes, the next question will come from the line of Howard Rubel, Jefferies. Howard Rubel - Jefferies & Company, Inc.: Dave, if I do the math, I think your organic growth is down maybe 1% or 2% and the sort of the softball part of the question, though, is Bill, if you look at Patriot System today, it's substantially different from when it was when you were going around the world first selling it. So there's 2 parts to this. One is that, what cues are you getting from the market? I mean, if you're down 1% to 2% and the reality is that the world's changed, how are you thinking about positioning the company for virtually no growth or minimal growth? And then are there enough opportunities, like the upgrade of this or the NextGen AMRAAM, that sort of make a difference to beat this market of very little growth?

Yes, I think the way, Howard, is your strategy is not done on a day-by-day basis, as you know, as well as I do. So for us, our strategy has been to make sure that we position ourselves in the right markets. We think we've done that in cyber, we think we've done that in Homeland Security. I think you picked up rightly so recently, EW should be the next growth market. You heard me touch base on that. The way we think of our company and to be able to do things in this environment is that you have to not only move forward, but you have to move backward. And by backward, I mean is how do you keep running the things that are getting old. And some places internationally and domestically won't be able to afford to redo and start new, but they want to capability to make it almost like new, if that makes sense. And so from our standpoint, we look to being able to take systems and make them like they are a new development. And we have a portfolio of everything, from radars to missiles to EO systems to communication that we can go new and we can go backwards to make like new. And that's how we expect to power through this thing and be ready for the next up-cycle as we go. And our technologists are continuing to work on ways to do that. Take radars, for example. Gallium nitride we'll be able to upgrade every phase we've ever built with new technology as we go forward. And I could go through the EO world, the RF world even the C4I world for that matter. And I'm really encouraged by some of the new technologies that I see our teams working on. They are eye watering and orders of magnitude different than what I grew up with. And you're right about Patriot. There is a system that's over 2/3 brand new. And when you see what we're delivering and the capabilities and the upgrades, it's going to be going for a long time, way past me.

So, Howard. Howard this is Dave. Let me just clarify something you have mentioned. When you spoke to the growth rate earlier. What I was suggesting was on a full year basis, we would be around breakeven from a domestic growth standpoint. So we did have a strong book-to-bill in the quarter. But your math is right, we're down around 1%-ish in the quarter on organic growth, domestically. But with the question I was answering, which may not have been exactly the way it was phrased, was on a full year basis.

Okay. Thank you for joining us this morning. We look forward to speaking with you again on our third quarter conference call in October. Deanna?

And ladies and gentlemen, this concludes today's conference call. We'd like to thank you again for your participation. You may now disconnect, and have a great day.