Todd Ernst - Vice President, Investor Relations Thomas Kennedy - Chairman and Chief Executive Officer Toby O’Brien - Vice President, Chief Financial Officer

Robert Spingarn - Credit Suisse Carter Copeland - Barclays Peter Arment - Sterne Agee Robert Stallard - Royal Bank of Canada Jason Gursky - Citi Myles Walton - Deutsche Bank Howard Rubel - Jefferies Hunter Keay - Wolfe Research David Strauss - UBS Richard Safran - Buckingham Research

Good day, ladies and gentlemen and welcome to the Raytheon Q2 2015 Earnings Conference Call. My name is Mark and I will be your operator for today. At this time all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Todd Ernst, Vice President of...

Investor relations. Thank you, Mark. 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 reference are available on our Web site at raytheon.com. Following this morning’s 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 Web site. With me today are Tom Kennedy, our Chairman and Chief Executive Officer; and Toby O’Brien, our Chief Financial Officer. We’ll start with some brief remarks by Tom and Toby and then we’ll move on to questions. Before I turn the call over to Tom, I’d like to caution 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 Tom. Tom?

Thank you, Todd. Good morning, everyone. This morning Raytheon reported solid second quarter operating results. Sales exceeded our guidance increasing by 3% over second quarter 2014. This was driven by IDS and missiles and was primarily organic. With this solid revenue performance, we now see an opportunity for top line growth in 2015. EPS and cash flow also exceeded our expectations in the quarter. This performance demonstrates that our focus on global growth is succeeding. As a result, we have updated our financial outlook to reflect our solid year to date performance and the acquisition of Websense in late May. Toby will walk you through those details in a few minutes. Global demand for advanced technologies drove an 11.9% increase in bookings in the quarter compared to the second quarter 2014. International bookings were particularly strong representing 46% of total bookings, led by the $2 billion Saudi Patriot award as well as a number of missile awards. Domestic bookings were also solid with awards from across our portfolio including Standard Missile 3, Evolved Seasparrow Missile, next generation radars for P-8 maritime aircraft as well as $626 million in classified awards at both SAS and IIS. Given the strength of our overall bookings year to date, we now expect full-year 2015 bookings to be approximately $24.5 billion, plus or minus $500 million. The Raytheon team and I had the opportunity to meet with many of our global customers last month at the Paris Air Show. The feedback reinforced what we have been seeing over the last year. That is many of them are investing in strong defense to deter evolving threats. I would note that compared to the Farnborough Air Show last year, the demand to strengthen the deterrence has increased, particularly from our customers in Eastern Europe, the Middle East and North Africa and the Asia-Pacific region. We see this increased demand reflected in our results. For example, at the end of the second quarter of 2015 approximately 44% of our total backlog was international. A new high for the company. This compares to 38% at the end of the second quarter 2014. Total backlog increased $1.5 billion year-over-year to $34.5 billion. This is important because it sets the stage for growth and provides future margin expansion opportunity. I would like to take a moment to further highlight our missile business. As many of you know, Raytheon is a premier provider of missile and ship defense system. Whether it's for new build or upgrading existing ships, most of them will have one or more Raytheon missile systems solutions on them. Our core product within this domain is our Standard missile family of interceptors. Standard Missile-6, also known as SM-6, is designed to provide over the horizon defense against aircraft and anti-ship cruise missiles. In the second quarter, an SM-6 successfully intercepted a supersonic target in over the horizon test, a key demonstration of the missile's capability. Further SM-6 moved from low rate initial production to full rate production in the second quarter. We also received $143 million booking in the quarter which drove year-to-date bookings for SM-6 to approximately $215 million. Another version of our Standard Missile is SM-3, which is used by the U.S. Navy to intercept short to intermediate range ballistic missile threats. This is one of the company's largest programs. In the second quarter we received a $512 million award for the 1B version of this missile, supporting the ongoing ramp-up in production. The SM-3 1B will be deployed on the U.S. and allied navy ships. It will also be deployed at the end of the year on land in Europe as an integral part on Phased Adaptive Approach missile defense system. The next generation of SM-3 has also taken flight. In the second quarter, SM-3 IIA which we are developing in partnership with Japan, had its first flight test which was successful and is expected to enter production later in the decade. Taken all together, Standard Missile programs have driven over $800 million of bookings year-to-date. Beyond Standard Missile, the missile business segment is also benefitting from significant demand for a wide range of other solutions, including global demand for Paveway and the Evolved Seasparrow missile, which saw strong bookings in the quarter. Our missile portfolio was well-aligned with the evolving priorities of our global customers and that provides a strong foundation for our future growth. Looking at our domestic market from a broader perspective. Defense budget environment remains fluid. While there have been positive signs coming from Washington, there are still differences between Congress and the administration in their approaches to fund fiscal year '16 defense spending. Additional time maybe needed to resolve these differences which increases the probability of another continuing resolution this fall. We have had CRs for the past several years and we would not expect a significant impact on our results should we have another one this year. Now turning to our capital deployment strategy. As part of our balanced approach, we are increasing our expectation for the share repurchase program. We now expect the share repurchase for full year 2015 to be around $1 billion, which represents a $250 million increase both over 2014 and our original expectation for 2015. This follows a 10.7% increase in the dividend in the first quarter and the Websense transaction in May. As I mentioned, we closed on the Websense acquisition in the second quarter and the integration is on track. The combination of Raytheon and Websense is a great fit, allowing us to bring our advanced cyber-security capabilities to government and commercial customers around the world. We welcome Websense employees to the Raytheon team. Overall, I am pleased with our performance in the quarter. The members of our team are proud and passionate about what they do for our global customers, our investors and our company. And the focus and enthusiasm contributed to our success and helped drive our results. I would like to thank the Raytheon team for its hard work and dedication. With that, let me turn it over to Toby. Toby O’Brien: Okay. Thanks, Tom. I have a few opening remarks, starting with the second quarter highlights and then we will move on to questions. During my remarks I will be referring to the web slides that we issued earlier this morning. Okay. If everyone would please turn to Page 3. We are pleased with the solid performance the team delivered in the second quarter with sales, EPS and operating cash flow all better than our expectations. We had strong bookings in the second quarter at $7.6 billion, resulting in a book to bill ratio of 1.3. Sales were $5.8 billion in the quarter, up 3%, led by our IDS business. You should note that with the acquisition of Websense, we have moved away from presenting adjusted numbers but have provided additional information that should help you with your understanding of the financial performance of the company. Our EPS from continuing operations was $1.65, which I will give a little more color on in a few minutes. And operating cash flow of $376 million was better than our prior guidance, driven by the timing of collections. Second quarter 2015 operating cash flow was higher than last year's second quarter primarily due to the timing of required pension contributions and the expected collection of the eBorders settlement with the U.K. Home Office which we resolved in the first quarter 2015, partially offset by higher cash taxes. During the quarter, the company repurchased 1.9 million shares of common stock for $200 million, bringing the year-to-date share repurchase to 4.6 million shares for $500 million. As Tom mentioned, we closed on the Websense transaction on May 29 and formed Raytheon Websense, a new joint venture company that was created through the combination of Websense and Raytheon Cyber Products. The Raytheon Websense segment results have been presented to reflect Raytheon Cyber Product results for all periods and Websense results after the acquisition date. Our full year 2015 guidance, which I will discuss in a few minutes, has been updated to include Websense, as well as improved operating performance for the first half of the year, which I will address further in a few minutes. Turning now to Page 4. Let me start by providing some detail on our second quarter results. Company bookings for the quarter were $7.6 billion an increase over $800 million compared to the second quarter 2014. And on a year-to-date basis were $12.1 billion, an increase of approximately $1 billion over the same period last year. It's worth noting that on a trailing four quarter basis, our book to bill ratio was 1.1 times. For the quarter, international was 46% of total company bookings and on a year-to-date basis was 41%. For the year, we expect international to be in the range of 32% to 35% of total bookings. As Tom just mentioned, we booked several significant awards in the second quarter, including a $2 billion contract for Patriot for the Kingdom of Saudi Arabia. $538 million on the Warfighter FOCUS program. $529 million for Standard. $511 million on Evolved Seasparrow Missile and $363 million Paveway. Backlog at the end of the second quarter was $34.5 billion, an increase of approximately $1.5 billion compared to the second quarter of last year. And on a funded basis, backlog was $25.3 billion, an increase of almost $1.8 billion compared to the last year's comparable quarter. If you now move to Page 5. As I mentioned earlier, for the second quarter 2015 sales exceeded the high end of the guidance range we set in April, primarily due to better than expected performance at IDS and missiles. For the second quarter, our international sales were approximately 30% of total sales and all of our businesses were at or above our expectations. Looking now at sales by business. IDS had second quarter 2015 net sales of $1.7 billion, an increase of approximately 10% compared to the second quarter of 2014. The increase was primarily due to two recent international Patriot awards. It is important to note that the second quarter 2015 included the recognition of additional sales for pre-contract work that had previously been deferred. We now expect full year growth to be closer to 4%. In the second quarter 2015, IIS and missiles had net sales of $1.5 billion and $1.6 billion respectively. In line to slightly up when compared with the same quarter last year. SAS had net sales of $1.4 billion. The change versus last year was driven by volume on international tactical radar systems programs. And for Raytheon Websense, keep in mind that the results for the second quarter of 2015 include Raytheon Cyber Products for the full quarter and Websense results for the month of June. Moving ahead to Page 6. Overall, the company continues to perform well. Our operating margin was 11.1%, both on a total company and the business segment basis. On a year-to-date basis, our operating margin was 13.4% and on a business segment basis was 13.2%. As we discussed on the last few earnings calls, compared to 2014, our margins for 2015 have been impacted by a change in program mix as well as higher IR&D and program investments. We continue to invest in ourselves with the objective of positioning the company for future growth. So looking now at the business margins. The change in margins at IDS was primarily driven by a change in program mix on international Patriot programs nearing completion. Included in IDS operating income in the second quarter of 2015 was an adjusted of $33 million to eliminate all remaining estimated incentive fees related to the air warfare destroyer program due to the shipbuilder extending the planned schedule and related increase in cost to complete its portion of the program. Although Raytheon's performance continues on plan for both a cost and schedule standpoint, the shipbuilder is now estimating an increase in its cost to complete the program which drove the decrease in estimated incentive fees. The change in margin at IIS was primarily driven by a change in program mix. Missiles and SAS margins were down in the quarter compared with the same period last year, primarily driven by higher net program efficiencies in the second quarter of 2014. And at Raytheon Websense, the second quarter 2015 operating margin reflects higher Raytheon Cyber expenses to develop and launch new commercial products compared to the second quarter 2014, as well as approximately $5 million of restructuring cost associated with the combination of Websense and Raytheon Cyber Products. When you normalize for these two items, Raytheon Websense margin would be in the high teens range. Before turning to the next page, I wanted to spend a minute discussing the purchase accounting adjustments and corporate items related to the Websense acquisition. In the second quarter of 2015, we had a deferred revenue adjusted of approximately $10 million and about $8 million for the amortization of acquired intangible assets. In addition, I want to point out that on the corporate line there is approximately $23 million of Websense acquisition related costs. Turning now to Page 7. Second quarter 2015 EPS was $1.65. Better than expected driven by higher sales. Of note, second quarter 2015 included a favorable $0.29 non-cash tax settlement as reflected in our prior guidance, and an unfavorable $0.09 associated with the Websense acquisition. On Page 9, we are updating the company's financial outlook for 2015 to included Websense as well as our improved operating margin to date compared to our prior guidance. We are increasing full year 2015 net sales by $400 million. Of which approximately $300 million is driven by IDS and missiles and approximately $100 million is driven by the Websense acquisition. We now expect our full year 2015 net sales to be between $22.7 billion and $23.2 billion, which is flat to up 2% over 2014. We now expect the EPS impact from the Websense acquisition to be $0.25 dilutive for 2015 compared with the original estimate of $0.48 we provided you back on April 20. This change is driven by the completion of our fair value analysis and as a result we have updated our acquisition accounting adjustments. We have now incorporated this EPS impact into our updated 2015 guidance. Our full year 2015 EPS is now expected to be in the range of $6.47 to $6.62, which were normalized for the acquisition, is an improvement of about $0.05 over our previous guidance. And as a reminder, we have not included in our 2015 guidance the potential extension of the R&D tax credit. As I mentioned earlier, we repurchased 1.9 million shares of common stock for $200 million in the quarter. We are increasing our expected share repurchases for the year and now expect to repurchase approximately $1 billion, an increase of about $250 million from our initial outlook. We have tightened the range on share count and now see our diluted share count to be between 305 million and 306 million shares for 2015. Also we have raised the low end of the range for our 2015 operating cash flow guidance and now see it between $2.5 billion and $2.7 billion. And as you can see on Page 9, we have updated this sales guidance range for three of our businesses and for the addition of Raytheon Websense. We have increased sales at both IDS and missiles to reflect stronger bookings and higher than expected volume to date. At IIS, we adjusted sales to reflect the realignment of Raytheon Cyber Products to the new Raytheon Websense segment. Turning to margin. We have updated the margin guidance range for the company to reflect the Websense acquisition and now see operating margin to be between 13.1% and 13.3% for the full year. At the business segment level, we see business segment operating margin in a range of 13.2% to 13.4% for the full year. It's worth noting that we expect operating margins at Raytheon Websense to be between 9% and 10% for the full year. And excluding acquisition related costs, their margins would be about 17% to 18%. On Page 10, we have provided some directional guidance on how we currently see the quarterly cadence for sales, earnings per share and operating cash flow from continuing operations for the balance of 2015. And on Page 12 we have provided a full year outlook of the Raytheon Websense acquisition accounting adjustments to help you with your long-term modeling. Please note that you will see a significant decline in the deferred revenue adjustment over the period and the amortization of acquired intangible assets will begin to decline more significantly after 2018. We now expect the joint venture to be accretive to GAAP earnings in two to three years, compared to our original expectations of three to four years. Before concluding, with regard to our capital deployment strategy, we expect to continue to generate strong free cash flow and maintain a strong balance sheet going forward. We remain focused on deploying capital to create value for our shareholders and customers. This includes internal investments to support our growth plans as well as returning capital to shareholders through share buybacks and dividends. And as we sit here today, possibly smaller, targeted acquisitions that fit our technology and global growth needs. In summary, if you stand back and look at the quarter, we have solid performance. Bookings were strong with a book to bill ratio of 1.3. Our sales, EPS and operating cash flow from operations were all higher than expected. Based on this performance and our near-term expectations, we increased our guidance for 2015 sales and if you exclude the impact of the Websense transaction, we raised EPS guidance by $0.05. We had strong cash flow generation and have increased our planned share repurchases from approximately $750 million to approximately $1 billion for the year. With that, Tom and I will open up the call for questions.

[Operator Instructions] Your first question comes from the line of Robert Spingarn from Credit Suisse. Please proceed.

Tom, just a question on Websense and the overall commercial cyber strategy. Could you may be put into context what you are seeing there with your expansion into that market just as some of your competitors apparently are exiting.

I am not going to comment on the strategies of other companies but I can tell you that we are very excited about our Websense acquisition and our expansion into the commercial cyber market. The reasons we decided to do this are still solid and sound. We have been doing a very heavy integration effort for the last two months. And several of the reasons, and number one as you can see from reading the paper every day, the cyber threat continues relative to commercial companies as a new company that comes online everyday of having some type of a breach. And so we are continuing to get input and demand signals from commercial companies across the board and their demand is, they are looking for higher end, I would call defense-grade cyber solutions that will continue to -- and we see that increasing in the foreseeable future. So we see a strong demand, strong growth opportunities. But the combination of Raytheon and Websense is what's helping us deliver that high-end defense grade cyber capability.

Okay. And then just as a follow-up to that. Just really on what you just spoke of. Is the thrust of this then really to sell Raytheon's product to Websense or through Websense's organization into the commercial market or also to sell the Websense product. And then what scale do you need to achieve with this segment for this strategy to work for investors?

So first of all this is a two way, I would say winning side in terms of sales. One is, we are working to our sales channels which were initially in the government related world and international government related world. We are opening up those channels to the TRITON product, which is the Websense main platform. It's also allowing us, the commercial channels to go into the commercial world with our SureView product. And we believe we now have scale you will see and as Toby showed you, it's approximately $500 million a year in revenue, and now we have access to the commercial channels that we are going after. And a plus for the TRITON product is now they have access into the defense and also government channels that we had.

Which side of the two way would be the larger opportunity?

I think it goes both ways. We are seeing a pent up demand on the government side for the TRITON platform and we are also seeing a pent up demand on the commercial side for the elements of the SureView product, four main products that dropped into the TRITON platform for up sell. And we are seeing a benefit both ways and we anticipated those synergies and we are seeing those synergies come to fruition.

Your next question comes from Carter Copeland from Barclays. Please proceed.

Just a couple of them. Toby on the AWD program, I wondered if you could just clarify if there is any risk of further financial impact there. Basically you have got that scrubbed to zero. And then the pre-contract revenue recognition, I wondered if you might size that for us? Toby O’Brien: Yes. So first with AWD, the answer is yes, that's scrubbed to zero as you say. The adjustment that we took in the quarter of the $33 million eliminated all of the remaining incentive fees where we were tied to the shipbuilder performance. So we do not anticipate any additional write-offs there relative to AWD. And then related to the pre-contract it was in the $100 million to $150 million range.

Okay. And then just as a follow-up. Obviously, I know you have been talking about IDS margin progression but the guidance implies a pretty big step up in the back half of the year. How should we think about how much of that is trend line to look at going forward and how much might be temporary related to either performance adjustments you expect to see as you hit milestones? Any color you can give us on that would be helpful. Toby O’Brien: Sure. Sure. So I think when you step back from it and we go back to the end of January then again in April, we talked about how at the company level we saw a couple of things driving margins down this year. The unfavorable mix and the higher level of investment. IDS of all the businesses followed by SAS was most impacted by the unfavorable mix. So what we are seeing is consistent with what we had expected to see for the year. That said, the margin in Q2 was in line with our expectations. So even though we had the unfavorable adjustment on AWD, we did see some other performance improvements in the quarter that essentially offset that. That again is consistent with lower margins in the first half of the year. We still expect to ramp up on IDS margins, particularly in Q4 as the overall business mix improved due to the ramp-up of the international awards that we saw at the end of last year and into the early part of this year.

Your next question comes from Peter Arment from Sterne Agee.

Tom, could you give us an update on Germany's decision to go with MEADS. Maybe just, is that is more looked at as a one-off or changes anything on the competitive landscape? How you are thinking about future Patriot awards?

First of all, we continue to work with the German customer. We already have the Patriot system in there and it is going through some upgrades relative to our Configuration-3 Plus. They are upgrading some of the -- all their systems. And they have decided to keep the patriot system operational till 2025. We have, obviously, heard their decision on MEADS but at the same time we continue to work with that customer as we proceed forward. We have not seen any changes relative to any of the competitions we are in or are perceived to be in in the near future that would impact any Patriot opportunities.

Okay. Thank you for that. And, Toby, just quickly. Just on the domestic growth versus international. I think previously you kind of guided to low single-digit down for domestic and up for international. Is that still intact for as we look for 2015? Toby O’Brien: Yes. So for our total year now for domestic, the way to think of it, Peter, is to be flat to down in the low-single digits and for international for the year to be up in the mid-single digits.

Your next question comes from the line of Robert Stallard from Royal Bank of Canada. Please proceed.

Tom, you mentioned the TRITON product at Websense earlier on. I was wondering if you could give us an idea of how the organic growth on that product has been tracking, year to date?

Well, the organic growth has been tracking about in the double-digits on that product. And as we mentioned before on the prior calls, they have two major products. One product is, I would call web filtering, that is declining and being replace by the TRITON platform. So if you look at the TRITION platform itself, it's in double-digit growth year-over-year. Toby O’Brien: Yes, Robert. As we talked about, we only have the month of June in the quarter post-acquisition. But if we look at the full quarter for Websense, TRITON, their bookings would have grown by about 10% on a quarter-over-quarter basis.

Okay. And then, Tom, maybe a bigger picture question. I was wondering if you could comment on what you think the impact to this Iran nuclear deal could be on your customers in the Middle East.

I am not going to get tied up in the politics of it but I can take you back to my statements earlier, that we are seeing an increased demand signal across the board. And it's not just in the Middle East which is what we are seeing in Eastern Europe and also in the Asia Pacific region and it's really for different regions. But it is -- any uncertainty in the geopolitical aspects of those regions, we are seeing an almost immediate reaction from these countries to want to beef up their defense. And I think if you look at this quarter, you will see the results of that in our bookings. And if you also, I did mention it, I know it was one quick line in my opening remarks but we hit an all time high in the company this year and that all time high was in the amount of international backlog and that was 44%. And we didn’t break open any champagne bottles and throw any glasses into the fireplace or anything like that but it is monumental for us to be able to have achieved that. And I think the correlation goes right to this, back that the threat is not going away it's increasing. And we are seeing it across three major regions of the world.

Your next question comes from the line of Jason Gursky from Citi. Please proceed.

I just wanted to follow up on the line of questioning of the last couple of callers there and have you discuss a little bit more about the longer term outlook as you move out into 2020, the back half of the decade here. I know you've talked about this before but it would be, I think, helpful to get some updated thoughts from you on how you view both the domestic and international market playing out over the next couple of years. When do you see a return to growth in your domestic business? And then as you look out into that, as far as 2020, the pipeline that you have on the international side and how you're going to be able to, or if you're going to be able to, sustain the types of growth that you are seeing today as we move out into the latter years of this decade?

So Jess, let me and then I will turn it over to Toby and he can put some numbers behind what I say. Right off the bat, I will just go back to the discussions we have had at, I think in the last call. And we have won some major domestic programs that were in development on right now. One is air missile defense radar the other one is next-generation jammer, FAB-T. We've also won a couple that are still on protest. But the ones we are finishing up, we will be finishing up on development will be in about the '18,'19 timeframe, which then will start going into LRIP and then by '20 going into full rate production. So on the domestic side, we are going to start to see an uptick relative to more production programs coming on line. So I think that’s good on to the domestic front. You are also seeing, based on the budget drills this year, that both the administration and also Congress are aligned with the fact that they believe that the budget needs to increase over the Budget Control Act of 2011 caps. The issue that they are having is how to go off and achieve that increase. But the bottom line is that they are both aligned, the administration and Congress, on the need for the increase. So we feel very positive about some breakthrough here in the next, hopefully next year, relative to '16s budget increasing over the Budget Control Act caps. However, we do have planned to the Budget Control Act caps which are about 1% increase over the fiscal year 2015. So we do see the domestic budget increasing over time. On the international, we talked about some major awards. We were down selected by Poland. That contract will be definitized over the next year and a half on the details, starting ramping up in late 2016 and 2017. So we see that program picking up and hitting the production numbers in about 2020. So again an uplift in the timeframe and taking this into 2025. So overall, both on the domestic and on the international we see a significant pipeline that will take us well beyond 2020. Toby O’Brien: And Jason, I will just kind of jump in there a little bit and add a little to what Tom said. So in addition to the programs transitioning domestically a little bit nearer term, SM-3, with the one being the IIA, will be moving to production. And to answer your question about when we would see a return to growth domestically, right now as best we can tell maybe late next year and if not into '17 for our revenue to start growing domestically. I think what Tom just commented on from the international combined with the 44% backlog that’s international today. That pipeline Tom referred to, the 30% of our sales that were in international, that sets us up nicely for international to grow including into next year. And, obviously, as we said, we now see top line growth this year with our outlook for being flat to up 2%. Previously we had looked at '16 as a return to growth. So we are kind of moving that outlook in a year and we still see year-over-year growth in '16 as well.

It’s a very, I think, a very good picture moving forward.

Yes, it sounds great. Just a quick follow-up question. On margins, Toby, can you talk a little bit about what's going to happen specifically in IDS in the back half that allows you to achieve the full-year guidance? And then, Tom, on the longer term outlook you just talked about with these ramping programs. What did that do to margins for the overall company if you are ramping development and early stage production on those things that you just talked about? Does that put you [indiscernible]?

What I think I will do is, Toby, he just went over on this actually on his discussion before. He will hit the IDS details and then I will kind of give you the bigger picture relative to where we see margins going in the future. Toby O’Brien: Yes. So, Jason, for IDS as we said before, the results so far have been consistent with our expectation given the impact of mix that we have seen there. In the second half, primarily in the fourth quarter is where we expect the uptick and there is really two things that are driving that. The mix, the business mix is going to start to improve with the large international programs, again, that we booked late last year and through the first half of this year, as they continue to move and ramp up through the production cycle. Additionally, we would also expect in the fourth quarter to see more program efficiencies flowing through to the bottom line. And overall we still see the margin outlook for the total year at IDS in the range of 15.1% to 15.3%.

Then relative to margins on the domestic side, we talked about some major development programs we had won and they are now obviously in development. When they start switching into production, we normally see a margin increase due to the fact that we are taking on more risk on the production side on firm type proposals. I mean firm fixed price contracts. We will see an uptick there in the margins but on the international side, as Toby mentioned, we have had some significant bookings here in the last year and a half. The area we are working right now and I think it's a great sign here is we are bringing on more suppliers. We are increasing the number of shifts we have in the factory, adding on days. So we are seeing, essentially getting quite a bit of synergy across these different wins that we had internationally and we do see a margin expansion across those programs as we go into 2016 and beyond. Toby O’Brien: And I think Jason just, if you are looking for a little more color or detail from an IDS perspective, the reason we see that our program efficiency towards the end of the year is the effects of things like strategic sourcing, automation in our factories that are driving efficiencies, again tied to the ramp up of those major production programs that we have referred to before.

Your next question comes from the line of Myles Walton from Deutsche Bank. Please proceed.

Just a quick follow-up on that one. Maybe, Toby, the run rate in the second half of '15, obviously, pretty great if you can get there on IDS. Is that the appropriate way to think about the mix as it's going to look into '16 or is there just a healthy performance in the second half that we should not think about that as a run rate? Toby O’Brien: So let met talk a little bit about IDS, right. So I mentioned in the second quarter they had strong sales growth and part of that was driven by the recognition of the pre-contract work that we talked about earlier. As far as the second half goes for a Q3 perspective, we do expect sales at IDS to be up high single digits in Q3. However, when we get to Q4, we will look to see sales on a quarter-over-quarter basis to be essentially flat compared to last year. Because in the fourth quarter of last year we did have a buildup of inventory that did convert into sales, that makes the comparison a little bit different. I wouldn’t take that as a run rate going into '16, however, but I would expect directionally '16 to be better than '15.

Okay. No, that's really helpful. And then, Tom, at a high level, lot of companies have been looking at their services blend with hardware. Do the two cost structures support themselves from a competitive perspective? And I'm sure you've gone through this exercise and not looking to layer other peoples strategies upon you. But how do you look at that equation where the services market becomes more and more competitive relative to the cost structure that's somewhat required for your hardware sensitive businesses?

No, actually that’s a great question. So first thing to just kind of set the stage. Raytheon never went down the path of getting into Fed IT business. I don’t know if you realize that. So we recognized a long time ago that that was not a business that we wanted to be in, really, because we saw that would eventually get commoditized. So we don’t have any of that effort going on within the company. The services that we do, most of it is associated with our products. So that helps us in maintaining our products, the logistics associated with our products. For example we do a lot of performance-based logistics relative to our products and that’s essentially comes under the umbrella of the services. Then in IIS where most of the traditional services are located, they are leaders in advanced solutions and capabilities and providing cyber services, intelligence, mission support and I would call high consequence training in key markets. And it's not just for the U.S. government, it's also for governments worldwide. So it's a pretty strong business for us. Again, we are not in the Fed IT, never were. So that’s an area that I think it's hard to compare us against some of these other companies that are shedding their services because a lot of that shedding is associated with the Fed IT.

Your next question comes from Howard Rubel from Jefferies. Please proceed.

Toby, I want to know if in some of your other forecasts going forward you're always going to basically understate acquisitions by about 50% of the cost? Because originally, as you indicated, it was going to be $0.48, and here we are looking at about half that. Can you elaborate on what has changed? And as we go forward and look at Websense, the deferred revenue number seems relatively modest versus the balance. What happened? Toby O’Brien: Yes. So just as a reminder, Howard, back in April when we gave the initial estimates, they were preliminary and subject to our final purchase accounting valuation. Part of our process, we had looked at other transactions and there were a range of potentials relative to percentage of assets etcetera. Percentage of purchase price that would be potentially characterized as intangible or the deferred revenue. So we had a range. We didn’t want to come back here and increase the dilution, for lack of a better way to say it. And in the quarter, as we do after, we close on all our acquisitions, we embarked upon the formal fair value analysis. We finalized that here at the end of June and what you see now is the update to reflect that. So it was really nothing more than that.

All right. I am going to talk about Patriot for one second. Tom, you sort of created a Patriot users group with all of your different customers around the world. Could you talk a little bit more about the ideas that you are getting from them that are, I will call it, leading to an ongoing upgrade in the system? And how do you see that playing out?

Well, let me just -- on a baseline element we are proceeding on upgrades of what's called Configuration-3 Plus. That was the upgrade to the Patriot system that was funded by the UAE several years back. We still have 72 fire units out there as opportunities to upgrade to Configuration-3 Plus. So we are off pursuing that element of it. In addition to that and as the user group is looking for us to provide a 360 AESA radar and we have been off working that for several years now and done some significant testing and believe we are in a position to take on contracts for that development of the 360 AESA radar. Right now there is an opportunity to replace 220 Patriot radars with the 360 AESA radar. So significant upgrades there. The other area that we are doing and it's on the international side is, and it's in Qatar, it's a contract to provide an air defense operating center which integrates all air defense systems. I think that will be the next thing that we are seeing with some of these other customers who have other air defense assets. They want them integrated with one common operating picture so that they can get the synergy of having everything together in one place and operated by one operator. So those are the type of upgrades we are pursuing. In many of the cases we already have contracts to start those systems, so we already have the initial customers. And then in some cases we are getting ready to get or first initial customer to move forward with them.

Your next question comes from the line of Hunter Keay from Wolfe Research. Please proceed.

Two questions on content. Can you remind us of your exposures to Sikorsky, however you want to quantify that? I think it's small but just to verify. And how should we think about Raytheon's potential role on long range strike? Haven't really heard a lot about that. Any color on that? Maybe it's too early, maybe not. Anything you want to provide would be great.

Relative to Sikorsky, you are right. We don’t have much content on the Sikorsky products. We have worked a lot with them. I have personally worked with Sikorsky on programs in the past. But right now it's not a significant of our revenue stream. Relative to long range strike, we really can't comment at this time.

Okay. I got you. All right, thanks. And then I think you guys made the comment last quarter, you've made, I think, dozens of cyber acquisitions over the last couple of years. I'm curious to hear what some of the lessons learned would be in terms of the pitfalls? Not necessarily what went right but what went wrong? And what can you take from that, as we look at Websense, in terms of things to avoid in the past that can be applied here at least?

I will tell you what, the lessons learnt led to the acquisition of Websense. And so the lessons were, if we did very well in buying these companies on the government side but we were not achieving any upside relative to the commercial side. And so when we went back and reevaluated the reason why it turned out that we didn’t have the commercial channels. And it takes quite a bit of effort to establish channels to be able to reach out to 30,000 customers versus 20 government customers. That’s the different game. Is wasn’t the technology, an underlying technology, it wasn’t the products, it wasn’t the personnel. It was essentially not having access to the market channels that’s required in the commercial business. And so that was the lesson learnt. And so we took that lesson learned and we went out and we started in 2013 looking at what was the best company out there that we could potentially acquire that would enable us to unlock the capabilities we had from the other acquisitions but into the commercial marketplace. And someone that already had a strong position, already had a new product, a new platform, allowing us to move forward. And so essentially it was the structure of how we implemented those companies. And we right now have -- everything we are seeing, we think we have taken that lesson learned to heart and are making the right inroads into that commercial marketplace.

Your next question comes from David Strauss from UBS. Please proceed.

Toby, did I hear you right where you said Websense would be at high teens margins ex the cost to develop the commercial cyber product and then restructuring it? And if so, how long does it take until you are kind of through that spend to actually report high teens margins at Websense? Toby O’Brien: Yes. So the answer to the first part is, you hear it correct. Without those two items we would be, we said 17% to 18%, part 1. Part 2, relative to the timing of that, so we are always going to be looking to make investments in technology and make sure we are keeping up with the threat there. But if we were to look out over time without that, probably in the '17 timeframe.

And how long are you running on the restructuring side? I mean how much restructuring is there to do here?

The majority of it will be completed this year. There could be a little bit of a tail into early part of next year.

Okay. And then a follow-up. So you've talked about $7 billion, roughly, in Patriot orders. A little bit surprised. I would have thought a fair amount of those orders would come with advanced payments, yet we haven't really seen -- we've actually seen the advanced payment balance go down. Can you just comment on that?

So a couple of those orders were FMS, right, which do not have the advanced payments. What you have really seen here is a timing issue, right. And if I take it back up to a higher level not specific to those orders, we have seen the advance account on the balance sheet, to your point David, fluctuate over time, driven by the timing of those advances and then when they are subsequently liquidated. On average, historically we have run at a rate of about 9% to 10% of sales, okay. At the end of the first quarter, the balance was about $2 billion, to your point as well. Slightly below our five-year average which has been around $2.2 billion. And really the main driver on that was timing. Back last year in the first quarter we had received a significant advance from a customer and we had full liquidated that here to the first quarter of '15. On some of the new awards, we have milestone payments as well that are more weighted towards the back half of the year. That all said, from an overall point of view, we would expect our advances to remain in the range of about 9% of sales this year which is pretty much in line with prior periods in that $2 billion range.

Your next question comes from the line of Richard Safran from Buckingham Research. Please proceed.

A lot has been asked. I just wanted to ask you about some upcoming programs. There's this JSTARS recapitalization program out there. You announced some recent teaming with Bombardier and Lockheed. Northrop recently announced with Boeing. I just want to know, from your perspective, is this indicative that the program is more near term? If you could give us any sense of the timing of the opportunity and some sense of the size? Any color here on this would be helpful because I tend to think this is a rather substantial opportunity for you.

No, we agree with you. You are right. We are teamed with Lockheed and Bombardier on one of the teams for work including sensors and some additional work. We are also providing a radar as a kind of a merchant supplier for the other teams, if they so desire. So we are kind of, have been spending quite a bit of time on this program in ensuring that we wind up with a piece of it moving forward.

Okay. And then just as a follow-up here also. So on your 3-D printing technology, just wanted to get a sense here. Is this applicable to current and future missile programs? Is this technology applicable across the board? Because I know there has been things like trying to get an upgrade here of the Tomahawk etcetera. Or is this more something that you are gearing towards like next generation missile programs, like the next generation land attack weapon?

Let met first tell you why it's important and what it's bringing to the industry. The 3-D printing allows you to essentially build up these very complex assemblies. Multi-part assemblies as one part, one continuous part and therefore improving cost. But it also does something else. In areas where heat is a major issue, it allows the heat transfer capabilities to be significantly enhanced. When you have an assembly with multiple parts that are tied together, you have heat issues at the intersection of those pieces. So by being able to build one continuous, very complex part and you can solve a lot of the heat transfer problems which is very important as we move into the hypersonics area of our missiles.

Okay. We are going to have to leave it there this morning. Thank you for joining us. We look forward to speaking with you again on our third quarter call in October. Mark?

Ladies and gentlemen, thank you for your participation. This concludes your call. You may now disconnect. Have a great day.