Todd Ernst - VP, IR Tom Kennedy - CEO Toby O'Brian - CFO

Cai von Rumohr - Cowen and Company Carter Copeland - Barclays Capital Jason Gursky - Citigroup Doug Harned - Sanford C. Bernstein Sam Pearlstein - Wells Fargo Securities George Shapiro - Shapiro Research Hunter Keay - Wolfe Research Howard Rubel - Jefferies Richard Safran - Buckingham Research Group Noah Poponak - Goldman Sachs David Strauss - UBS Robert Spingarn - Credit Suisse Joseph DeNardi - Stifel Nicolaus Myles Walton - Deutsche Bank

Welcome to the Raytheon Second Quarter 2016 Earnings Conference Call. My name is Tawanda and I will be your coordinator for today. [Operator Instructions]. I would now like to turn the call over to Mr. Todd Ernst, Vice President of Investor Relations. Please proceed sir.

Thank you, Tawanda. 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 a slide that will reference, are available on our website 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 website. 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 you regarding our forward-looking statements. Any matters discussed today that are non-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 discuss in detail in our SEC filings. With that I'll turn the call over to Tom. Tom?

Thank you, Todd. Good morning, everyone. I'm very pleased with Raytheon's strong second quarter performance. Our global growth strategy continues to drive our results, with second quarter revenue up 3%. Our operating performance in the quarter was solid with a strong increase in sequential margins and cash flow generation in the second quarter was well above our expectations. Given our performance in 2016 to date and how we're seeing the balance of the year playing out, we're raising our EPS and cash flow guidance for the year. Further, based on strong demand that we're seeing from our global customers, we also have raised our outlook for bookings. Toby will walk you through the details in a few minutes. During the second quarter, I visited a number of country leaders in the Asia-Pacific region. And earlier this month we hosted several hundred customer meetings at the Farnborough Airshow. There was a remarkable level of consistency among these conversations. That is customers are interested in capabilities to address two key missions, one, support global counterterrorism campaigns and two, maintain deterrence in a charged geopolitical environment. More specifically we continue to see strong demand for integrated air missile defense solutions, precision munitions and C5 ISR capability. This demand has been broad-based across the European, MENA and Asia-Pacific regions. Further, this year there's been an added sense of urgency. I can't think of a time when our international pipeline of opportunities was more robust than it is today. Our international model which looks at countries as markets, is paying off. Let me just give you a few examples. One of our larger international opportunities over the next several months is the Qatar upgraded early warning radar. This radar will significantly improve Qatar's long-range situational awareness capabilities and represents a $1 billion opportunity for the Company. This follows on the country's previous order for ten PATRIOT fire units and an air defense operating center. We also see further opportunity in-country for TPY-2 radars as part of a THAAD system later in 2017 or 2018. This is consistent with how we've been thinking about the progression of opportunities in the country for some time. Another large upcoming opportunity for the Company is Poland Patriot which is also progressing well. Government to government negotiations are ongoing and we've achieved key milestones with Polish industry on work share, including signing a letter of intent to work with Poland's largest defense contractor, PGC. We anticipate that this multi-billion dollar opportunity will be awarded sometime in 2017. We also see additional opportunities in Poland, including short-range air defense systems related to our NASAMS product line. Looking at second quarter, our bookings were strong with a book-to-bill ratio of 1.18. Strength in the quarter was driven by the billion-dollar next generation jammer booking at the beginning of the quarter, a nearly $500 million upgrade to Kuwait's six PATRIOT fire units, as well as several notable missile bookings for AIM-9X, Paveway and SM-3. You may recall that we also had a strong bookings in the first which together with our 2Q results drove a year-to-date book-to-bill ratio of 1.13. This strength in bookings lays the foundation for future growth and bolsters our confidence in our outlook. In the second quarter international represented 31% of total Company bookings. I'd also point out that with the Kuwait Patriot booking, this is the second consecutive quarter where we have had a significant award, from the MENA region. At the end of the second quarter, 42% of our total backlog was from international customers. Our sales growth in the second quarter was ahead of our expectations. Domestic sales increased slightly, while international increased approximately 8% in the quarter, showing that our global growth strategy remains on track. Overall, international represented 32% of total sales in the quarter. As we look at future growth drivers for the Company, I would like to take a minute to highlight a couple of our many examples. In the second quarter, we delivered the first air and missile defense radar to the U.S. Navy's Pacific missile range facility ahead of schedule. AMDR is the next-generation integrated air and ballistic missile defense radar for the U.S. Navy's DDT 51 Flight III destroyers and fills a critical capability gap for the surface fleet. This delivery is the latest in a series of milestones achieved for AMDR as it advances through the engineering and manufacturing development phase which is now close to 80% complete. AMDR will soon transition to low rate initial production and remains on track for initial delivery in 2019. Another example of a future growth driver for the Company is Small Diameter Bomb II which we continue to test with the U.S. Air Force. Small Diameter Bomb II features a highly advanced tri-mode seeker which includes infrared imaging, millimeter wave radar and laser guidance to find and attack targets from rages that can exceed 40 Miles. Testing will continue the summer as the program moves through low rate initial production. Small Diameter Bomb II represents a $4 billion opportunity over the lifetime of this franchise program. Before closing, I'd like to take a moment to briefly touch on the FY '17's defense budget. As most of you know, both the House and Senate have marked up their respective bills and there are significant differences between them. these differences will need to be reconciled before the budget is finalized. Given this and the fact that it is election year, we're anticipating that there will be another continuing resolution which will probably extend beyond the election in November. This assumption is considered within our financial guidance range. Overall, I'm very pleased with the team's performance in the second quarter. Simply put we had an outstanding results, a solid growth and strong execution. I want to thank the team for all its efforts which continue to deliver for our Company and global customers. With that, let me turn it over to Toby. Toby O'Brian: Okay, thanks Tom. I have a few opening remarks, starting with the second quarter highlights and then we'll move on to questions. During my remarks, I'll be referring to the web slides that we issued earlier this morning. If everyone would please turn to page 3. We're pleased with the strong performance the team delivered in the second quarter, with bookings, sales, EPS and operating cash flow all better than our expectations. We had strong bookings in the second quarter of $7.1 billion, resulting in a book-to-bill ratio of 1.18. Sales were $6 billion in the quarter, up 3%, led by our space and airborne systems and missiles businesses. Our EPS from continuing operations was $2.38 which I'll give a little more color on in a few minutes. We generated strong operating cash flow of $746 million in the second quarter which was better than our prior guidance, primarily driven by the timing of collections. Second quarter 2016 operating cash flow was higher than last year's second quarter, primarily due to the timing of payments and cash taxes, as well as lower required pension contributions. During the quarter, the Company repurchased 1.6 million shares of common stock for $202 million, bringing the year-to-date share repurchase to 4.8 million shares for $602 million. I want to spend a minute talking about the recent ThalesRaytheonSystems transaction that was concluded at the end of June. Raytheon Thalas concluded an agreement to transition the stakeholder positions each Company held in the TRS joint venture structure. With Raytheon acquiring 100% of the TRS U.S. operations and Thalas acquired 100% of the French operations. As a result of the transaction, Raytheon made a net cash payment to Thalas in the amount of $90 million and recorded a tax-free gain of $158 million at IDS or $0.53 per diluted share in our second quarter financial results. Important to note that we had previously forecast this to occur in the third quarter of this year at about $150 million. I also want to point out that we're raising the EPS and operating cash flow guidance that we provided in April, reflecting our strong performance to date. I'll discuss guidance further in just a few minutes. Turning now to page 4, let me start by providing some detail on our second quarter results. Company bookings for the second quarter were $7.1 billion and on a year-to-date basis were $13.3 billion, an increase of approximately $1.3 billion over the same period last year. It's worth noting that on a trailing four quarter basis, our book-to-bill ratio was 1.11. For the quarter, international was 31% of our total Company bookings and on a year-to-date basis was 29%. For the year, we expect international to be about 35% of total bookings. As Tom just mentioned, we booked several significant awards in the second quarter, including about $1 billion for the next generation jammer program for the U.S. Navy, $574 million on domestic and foreign training programs in support of war fighter focus activities, $487 million to provide advanced Patriot air and missile defense capabilities for Kuwait and approximately $300 million a piece on both AIM-9X, Sidewinder, short range air-to-air missiles and Paveway. Backlog at the end of the second quarter was $35.3 billion and on a funded basis was $26.1 billion, both up approximately $800 million compared to last year's second quarter. We now move to page 5. As I mentioned earlier, for the second quarter 2016, sales exceeded the high end of guidance we set in April, primarily due to timing within the year and better-than-expected performance across several of the businesses. For the second quarter, our international sales were approximately 32% of total sales. Looking now at sales by business. IDS had second quarter 2016 net sales of $1.4 billion. As expected the change in net sales for the quarter was primarily driven by the recognition of previously deferred pre-contract cost on an international Patriot program in the second quarter 2015. In the second quarter 2016, IIS had net sales of $1.6 billion, up 3% compared with the same quarter last year. The increase was primarily due to our cyber security and special mission programs. Missile systems had second quarter 2016 net sales of $1.7 billion. The 6% increase from the second quarter 2015 was primarily due to the Paveway program. SAS had net sales of $1.5 billion. The 9% increase versus last year was driven by higher sales on classified programs. And for Forcepoint, the increase was primarily due to the acquisition of Websense which we completed at the end of May 2015. Moving ahead to page 6. Overall the Company continues to perform well. Our operating margin was 15.9% for the total Company and 14.8% on a business segment basis. It's worth noting that the impact of the TRS gain that I discussed earlier was essentially in-line with our prior expectation and was worth $158 million or about 260 basis points at the Company level for the second quarter of 2016. So looking now at the business margins. The increase in margin at IDS included the results of the TRS transaction. Without the transaction, the IDS margin in the second quarter would've been 15.5%, reflecting their strong operating performance. IIS operating margin was in-line with last year's second quarter. Missiles margin was up 170 basis points in the quarter compared with the same period last year, primarily driven by higher net program efficiencies and a favorable change in program mix in the second quarter of 2016. The decrease in margin at SAS in the quarter, compared with the same period last year, was primarily driven by a change in program mix. And at Forcepoint the second quarter 2016 operating margin was higher than last year's comparable quarter, primarily due to the acquisition of Websense. Forcepoint's Q2 margin improved from Q2 2015 and as expected, was impacted by integration and transition costs. As we discussed on past calls we remain focused on margin improvement going forward. We're continuously looking for ways to lower our cost, enhance our competitiveness and improve affordability for our customers. In the second quarter one of the key drivers of our margin improvement was the payoff from our investment in factory automation and equipment upgrades and we also saw productivity gains from increased operating leverage. Turning now to page 7, second quarter 2016 EPS was $2.38, better than expected, primarily driven by higher sales and productivity as well as from the timing of the TRS transaction which as mentioned earlier, was previously forecast to occur in the third quarter. As expected, second quarter 2016 also included the tax benefit associated with the new accounting standard for stock compensation which we previously adopted in the first quarter, worth about $0.10. Of note, the second quarter 2015 included a favorable $0.29 non-cash tax settlement. On page 8, as I mentioned earlier, we're updating the Company's financial outlook for 2016 to reflect our improved operating performance to date compared to our prior guidance. We still expect our full-year 2016 net sales to be in the range of between $24 billion and $24.5 billion, up 3% to 5% from 2015. The increase is driven by growth in both our domestic and international business. We've increased our full-year 2016 EPS by $0.20 from our prior guidance and now expect it to be in the range of $7.13 to $7.33. The increase is driven by our improved performance in the first half of the year, as well as a slight improvement to the effective tax rate and slightly lower interest expense. Turning to our share repurchase, for the end of the second quarter we repurchased 4.8 million shares of common stock for just over $600 million and continue to see our diluted share count in the range of between 296 million and 298 million shares for 2016, a 3% reduction at the midpoint of the range. Also, based on our strong performance to date, we've increased the range for our 2016 operating cash flow guidance by $100 million and now see it between $2.8 billion and $3.1 billion. And as you can see on page 9, we've included guidance by business. We left the sales unchanged from prior outlook. Looking at margins, we've increased the margin guidance range for the Company and now see operating margin to be in a range of 13.2% to 13.4% for the full-year, up 20 basis points from our prior guidance. At the business segment level, we now see the operating margin in a range of 12.6% to 12.8% for the full-year, driven by higher expected operating margin at IDS and SAS. Before moving on to page 10, given our year-to-date bookings strength and our expectation for a strong back half of the year, we're now raising our full-year 2016 bookings outlook to $26 billion, plus or minus $500 million. This $500 million increase to the prior range is driven by strong demand from our global customers. On page 10, we have provided guidance on how we currently see the third quarter for sales, earnings-per-share and operating cash flow from continuing operations. We still expect third quarter sales to be in a range of just under $6 billion to $6.1 billion, consistent with our prior guidance. EPS from continuing operations is now expected to be in a range of $1.57 to $1.62, lower than our prior guidance due to the timing of the TRS transaction which we had previously forecast in the third quarter. Some of this impact has been offset by the timing of performance improvements previously expected in the fourth quarter. Before concluding, as we have discussed on past earnings calls, with regard to our capital deployment strategy, we expect to continue to generate strong free cash flow and maintain a solid balance sheet at our current credit rating 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 and productivity improvements, as well as returning capital to shareholders through share buybacks and dividends. Making small targeted acquisitions benefit our technology and global growth needs these and from time to time, making discretionary contributions to our pension plans. In summary, if you stand back and look at the quarter, we had strong performance. Our bookings, sales, EPS and operating cash flow from continuing operations were all higher than expected. Based on this performance and our near term expectations, we increased our 2016 guidance for EPS, operating margin and operating cash flow. With that, Tom and I will open up the call for questions.

[Operator Instructions]. Your first question comes from the line of Cai von Rumohr with Cowen and Company. Please proceed.

Given the strength in the quarter really across-the-board and the good cash flow, how come you cut back on your share repurchase from the first quarter and what's your thinking going forward regarding cash deployment? Toby O'Brian: Let me address that one. So we had planned and we front loaded the share repurchase based upon the timing of our cash flows, okay? And we always had Q1 in excess of the balance of the year, where more than halfway through what we had targeted at the beginning of the year. That said related to the repurchase, we still continue to see value in our stock. At our last call we indicated a target of 80% to 90% of free cash flow going back to shareholders. Right now we probably see it maybe at the bottom of that range pending market conditions and if we continue to see strong movement in the stock, we're not going to chase the stock price. Share repurchase will still continue to be a core part of our capital deployment strategy, you know, with the stated goal of reducing the diluted share count over time and that hasn't changed. But we will continue to be disciplined when it comes to the allocation of our capital.

Your next question comes from the line of Carter Copeland with Barclays. Please proceed.

Just a quick clarification for you Toby and a question, Tom. Toby, on the TRS transaction, is there equity income to consider that will be missing going forward? I just was unsure of the accounting implications there but wanted to make sure we all got it modeled correctly. And then for Tom, just on the Forcepoint competitive landscape, I know that during the quarter obviously the purchase of Blue Coat by Symantec. I wondered if you could talk to what implications that has for that marketplace and how you think about the landscape post that announcement? Toby O'Brian: Yes, sure. I'll address, Carter, the TRS one. There are a few moving pieces with the remaining venture going forward that impact both IDS operating income and at the Raytheon level net income, but they essentially offset each other and are not significant to our results so we shouldn't see an impact one way the other going forward.

And on the Forcepoint, you're absolutely correct, Carter. You know, commercial cyber is a dynamic and rapidly evolving environment and you did mention competitive landscape and it's going to continue to shift, Raytheon continues to invest in R&D to ensure that we have the best products and capabilities for customers and that's where we're getting the feedback from our customers on. I would add one thing is that you probably saw that the multiples and valuations for Blue Coat acquisition do reflect the premium value and growth potential that this commercial cyber market currently has. Just a quick status on Forcepoint, we have integrated Websense in with our Raytheon cyber products group. It's substantially complete. It was a seamless transition to the new organization and now we're working to complete the transition of the Stonesoft acquisition into the overall Company and we see considerable upside potential as we move forward based on this business we have put together.

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

Tom and Toby, I was just wondering if you could just walk us through what you think these bookings that you've been getting here over the last year or so tell us about the cadence of revenue. So over the next several years, it's going to be linear growth? Do you have some visibility on when all of these bookings are going to actually convert into some revenue streams? Toby O'Brian: Jason, you know the nature of our business. The majority of these big awards have about a three-year or five-year cycle, in that range. So traditionally, I mean, we lighten up the first year. If it's three year, we lighten up the first year little bit, lighten up the last year and the middle year is the main. But normally it's about a three-year duration in terms of revenue generation out of the majority of the bookings. IIS does have some quick term, one-year type turn business, but majority of the business and a majority of these major awards that we brought in, are three- to five-year type revenue generators.

And I would just add, you know, obviously we're not giving guidance for 2017, but from when you convert that strong pipeline to a financial perspective, the backlog we had entering the year on the heels of a 1.09% book-to-bill, strong book-to-bill through the first six months, strong four quarter trailing book-to-bill, as Tom mentioned in his comment, a pipeline that we haven't seen of this magnitude for quite some time. We expect to continue to grow that top line, taking all that into account into 2017 and drive margin expansion as well.

Your next question comes from the line of Doug Harned with Bernstein. Please proceed.

I'm interested in on the same topic in missiles. Now missiles you've had really nice growth in backlogs, margins have been quite good. Can you comment on the both what it is in the trends in the U.S.-international mix and do you see the growth trajectory in missiles as a secular one or are we seeing kind of a temporary jump up on things like Paveway that we may not see continued growth there in the same way we have?

Let me hit that, Doug, real quick. It breaks into three buckets. The first bucket and I actually mentioned in my prior comments, was the counter-terrorism and that's driving the sales on the precision weapons across-the-board at missiles. The other bucket is deterrence and that's essentially driving a lot of the work relative to our Patriot missiles and our Patriot systems and then the last large bucket is, I would call it and these were the third offset strategy or the future in terms of upgrades to new missiles and capabilities. In the middle bucket on the deterrence, there is a large -- when you saw that in terms of awards on our standard missile product line. The bottom line is, is that missile company is getting significant uptick in each of those three major areas and we should see that going out for a sustained period of time, at least over the next five years. Toby O'Brian: And Doug, I would just a little bit more nearer term, if I take that op tempo bucket around our consumables and then the rest of the business that the other two buckets that Tom described, think of it this way, for the growth this year is split roughly half-and-half between, you know, driven by the op tempo and consumables and the other half through the rest of the business and as Tom said, based upon the demand we're seeing across the board there, we would expect all aspects of the missiles' business to contribute to growth over the next 12 to 18 months.

Your next question comes from the line of Sam Pearlstein with Wells Fargo. Please proceed.

I was wondering if you could talk about the $500 million increase you had in the bookings. Is that any one program or is that across-the-board? And I guess somewhat related is I know there's been an RFI out for the new increment of the next jammer, next-generation jammer, I'm wondering if winning on the first one positions you well for the next one or if it's kind of starting over from the drawing board Toby O'Brian: Let me address the $500 million. The $500 million is multiple opportunities for bookings for the rest of the year. So we're not just hanging our hat on one big award to be able to bring that on board. Relative to next-generation jammer, that program is moving ahead excellently, it's on schedule and we're very happy about the performance of that program. Obviously our customer, the Navy, is also very happy with the performance. We're working with the Navy in terms of the next, I call it next-generation jammer II or another implementation of a next-generation jammer. And we're well on our track I believe to have a solid offering for the Navy on that program.

I think just to add to Tom's point about the $500 million increase, Sam, you know across multiple programs as Tom said, a lot of the, you know, bookings, the favorable bookings we've seen so far is timing, but within SAS is where we see a lot of those opportunities playing out. They've had a real strong first half of the year between the international classified booking in Q1, JPSS and next-gen jammer that we mentioned, so across multiple opportunities. But the growth would mostly be in the SAS business.

Your next question comes from the line of George Shapiro with Shapiro Research. Please proceed.

Yes, I was wondering, Toby, if you could kind of give us what the discount rate impact would be on CAS as if we drew a line today like we've heard from other companies?

Yes George, so at this point it is too soon to predict where we think things will go between now and the end of the year. You know, we will give everyone an updated outlook as we typically do on the third quarter call. That said, let me give you a little bit of insight to a few things. Year-to-date our asset return is about 4 1/2% and due to asset smoothing any type of actual return would have to be significantly different than expected at year end in order to have a meaningful impact on 2017 THAAD CAS and/or net cash. That said, assuming all other assumptions remain the same, every 25 basis points change in our discount rate has about an $80 million impact on 2017 THAAD CAS and net cash would be unchanged because it continues to be based upon a 25-year average discount rate. So a few variables there that you all can use and model but again, with half the year left to go, a little too early to predict what exactly next year may look like and we'll update you hear at the end of October on our third quarter call.

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

Tom, you talked about the $4 billion opportunity for SDB II. I'd kind of like to talk about that program for a minute. I think there's still I believe some unknowns around which planes and maybe specifically which variants of planes will be equipped with that in the future and maybe to that extent which countries have interest depending on cost and other things like test results. So can you share with us some of the assumptions that are behind maybe the install base and adoption that got you to this $4 billion number and would you categories that as either conservative or aggressive as we sit here or is there may be upside to that and when you'll hit it?

So first of all, Small Diameter Bomb II, it's definitely going on the F-35s. So that's going to -- all the F-35s, both the domestic and international, have an opportunity to be able to use that very sophisticated precision weapon. So I think that's the main aircraft now. It also goes on F-15s and F-16s and it's up pretty simple system to integrate on to an aircraft, so we will be working to put that on any aircraft that we're allowed to go put it on. But the bottom line is, is that forecast assumes just the F-35, F-16s and F-15s. A majority of it being domestic, so we have still significant upside from that number on the international marketplace

Your next question comes from the line of Howard Rubel with Jefferies. Please proceed.

I just want talk maybe a little bit about either risk reduction or margin, however you want to define it, but IDS numbers were pretty good, IIS numbers both had very strong revenues and margins and maybe you could talk about where you are on terms of improving some of the risk management and achieving some of the milestones. Because it looks like those were factors in the results. If you could be a little program-specific that would be helpful. Toby O'Brian: Yes, so let me take that and then if Tom wants to add any color he can and I'll start, Howard, with IDS, right? So we've been talking about IDS for a while, but we obviously continue to see opportunities to expand margin further in the second half of the year. You know we did raise our margin guidance based upon the results through the first half of the year, up by about 40 basis points, half of that was because of a little bit higher of gain on the TRS transaction and the other half was from productivity we're seeing because of the leverage of the volume going through our factory, the investments in factory automation equipment upgrades, as we mentioned before. And, you know, I talk about our third quarter guidance and how it was from a timing point of view impacted by TRS moving into Q2, but we did offset -- that was worth about $0.50 -- we did offset about $0.12 of that, primarily driven by further opportunities for net program efficiencies to drive more margin. Those are moving in from Q4 to Q3, not just at IDS but at other businesses. So we feel real good about where we're headed going forward from a margin perspective. We would expect to continue as we've been saying both at the Company level and specifically at IDS, to continue to expand margins going forward beyond 2016 into 2017 as well. From an IIS perspective on the sales, they had a good quarter. Their sales were up to 3%, driven by cyber security and special-mission programs. For the second half, we see their sales in line with last year's second half despite having four fewer workdays and we still expect growth for the year at IIS in the low single digits.

I'll just cap that off, Howard, with the fact that both our Andover plant and IDS and also our Tucson plant, there is -- and on the Tucson plant we tripled production on several of the missiles there without having a significant need to [indiscernible] capital expenditures to be able to do that and also at the IDS plant, because I know you've been at before, the parking lot is overflowing which means there's -- and that's not just a one shift, that's on multiple shifts. So both of those factories are chugging along at very high capacity rates that obviously gives a strong signal and strong support for high margins moving forward.

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

You know I heard the comments at the outset of the call on international in the quarter. I also know you're not giving out a 2017 guide, but I wanted to know if you could talk on maybe expectations or maybe comment directionally on international demand for next year, given the strong bookings you're seeing. And as the second part, earlier this year there were concerns about oil prices, Brexit, things like that, that might do to international demand for defense equipment. Could you maybe comment about those concerns and tell us [indiscernible] systems?

Let me hit on the international side right off the bat here, is that we have 2017, I did mention the Pit Bull and Patriot opportunity and we also have the THAAD TPY-II radar opportunity in 2017 also, 2017/2018. But that's kind of two big ones for 2017, but there are a also significant number of orders for precision munitions that will be coming in, in 2017 and some other areas in terms of missionized aircraft that we believe will be coming in 2017 also. So we believe at bottom line that a strong pipeline of international awards in the 2017 timeframes. Toby O'Brian: And I think, you know, you mentioned Brexit and I'll make more of a general comment rather than specific to your question about international. You know, we don't see any significant impact at all from Brexit. Just to put it in perspective, the British pound is the functional currency for only about 2% of our sales, so not a major impact at all to the Company and to the business. And I think on the Middle East, you know we mentioned the order for Kuwait Patriot upgrade for about $0.5 billion here in the quarter. I think Tom also mentioned in one of his prior comments back in Q1 we had another significant order for about $650 million for an international classified customer and we've been pretty consistent over the last couple years, you know, with our customers, our nations that produce oil, that they have a demand for our products because they're looking to protect their citizens and their sovereignty and we're seen no change to that sitting here today.

Your next question comes from the line of Noah Poponak with Goldman Sachs. Please proceed.

I wondered if you could dive a little deeper into what's driving the booking strength at SAS. It looks like that's been actually the strongest book-to-bill in the first half and I know there's' some nice exposures in their between space and Intel and unmanned and some other growth areas, but if you could get a little more specific there and then related, it looks like the guidance for revenue for the segment implies revenue would decline a little bit in the second half, despite those very good bookings and the trend you're on in the first half, if you could sort of explain that, that would be helpful.

Noah, we'll split the question here. As we talked about earlier, we had a major award in the first quarter and that was at SAS for an international product which set them up for a good year in terms of conversion of that revenue in essentially 2016, 2017 and 2018. They've also done quite well in the classified domain in terms of new awards and of converting those new awards into revenue. They also are working in completing up on the next-generation jammer P&D program which is in full swing, another significant revenue generator for the overall business. And I can tell you they're operating on all cylinders relative to all the other programs that they have in there and it's a good healthy mix. I would call it new programs coming onboard, programs that are I would call it in their mature stage and then programs that are starting to fall off. So they have a very good, I would call it a very healthy mix of programs that should be good revenue generators here for the next five years. Toby O'Brian: And as far as your question on the, you know, the sales in back half of the year, so sales were up 9% in the quarter and 8% year to date, driven by classified programs at SAS. The second half will be driven by both domestic and international classified programs. Obviously they're off to a good start and we see ourselves ending the year closer to the higher end of their sales range. What may be distorting it a little bit here for you is, you know, we give it to you in one of the attachments, our workdays are a little different this year where the back half of the year in Q4 in particular has four fewer workdays than we saw in 2015. If you normalize for that, they would be showing some growth in the low single digits in the second half.

Your next question comes from the line of David Strauss with UBS. Please proceed.

Question on cash. Toby, maybe if you could touch on the major components, specifically contracts in process continues to bill. When does that growth slow or level off and then cash taxes, whether there's been any improvement there in terms of what you're looking for and then the potential to maybe smooth the pension cashette that you've talked about in 2017. Thanks Toby O'Brian: Sure. So let me start with the CIP. You're right, we have seen a build up in our CIP balance. This increase was in line with what we're expecting. It was primarily driven by our sales growth, along with the timing of program milestones and collections, including the ramp-up on some of the more recent awards that we've had last year and into the early part of this year. It's also, you know, important and I would note that our expected cadence is similar this year to prior years, with the buildup of CIP in the first half and then a decrease in the second half, really driven primarily by the timing of certain milestones and collections. If you look forward to the end of the year and I think we talked about this back in Q1, we would expect our CIP balance to be up compared to 2015 but more in line with what our balance was at the end of Q1 of 2016 and this is in-line with our growth profile and again driven by the timing of program milestones. As we move to the back half of 2016 and into 2017, we will continue to focus on driving working capital improvements and cash flow generation across the business. You know, we obviously saw strong cash flow here in the quarter. Some of it was timing, David, right? But some of it was permanent improvement for the year which is why we raised the outlook for the year by $100 million to the new range of $2.8 billion to $3.1 billion. As far as cash taxes go, I think that was your second question, no change from a total year point of view from what we were previously expecting there. We still think cash taxes will be paid a little bit over $900 million for the year. The net of refunds, a little over $750 million for the year as well. I think your third question was around the cash impact in 2017 from the required funding of the pension, you know, so look as we've said previously there, when we hold all the assumptions constant, we see our CAS increasing, going from 2016 to 2017 as we transition fully to harmonization and then remaining relatively flat beyond that. In 2016, the pension cash flow is a bit of an anomaly. It's up from 2015, but then again after 2016, the cash flow from pension, it's still expected to be positive but more as we've said at a normalized rate, plus or minus $700 million, net positive. We do see improved cash flow in our business as programs continue to progress through their life cycles and achieve significant program milestones that will improve the cash position and our continued focus on working capital including cycle time and payment term reductions with our customers will also drive some cash flow which could and will offset part of that increase. You know, as reminder that increase is really driven by the plans coming out of full funding from a PPA point of view and again primarily having to fund the annual-service cost. As we always do, kind of last point here, you know we'll continue to monitor all aspects of the pension and you know, we will consider making it, if it makes economic sense to the Company, to the shareholders, we'll consider making discretionary contributions, you know, before the year's over that could potentially have a further impact on the cash flow profile in 2017 and beyond.

Your next question comes from the line of Robert Spingarn with Credit Suisse. Please proceed.

I guess I missed it the first time but was on another call. I wanted to ask for a clarification or on polling, Tom and then another question, but is it still this Polish competition, is this for a full-up system or is it a shorter range smaller system?

There's actually two pursuits or two programs that polling is pursuing. One is a system that the Patriot system satisfies and as you probably have seen in the press, the minister of defense is moving forward with the Poland acquisition. And so it's working government-to-government and also Raytheon is heavily involved in that procurement. And then there's another program which is being competed and it's a shorter range system that ties directly in with the capabilities of our NASAM system, the system that protects our nation's capital. It's also the system that we sold to Oman and about four other countries outside the United States. So that's the two. We're obviously positioned on Poland Patriot and we're working to make sure that we're in a good position on the short-range system, too.

Your next question comes from the line of Joseph DeNardi with Stifel. Please proceed.

Just on a the IDS guidance, seems like the revenue's ramping up in the back half of the year but margins are coming down a little bit, so can you just talk about some of the puts and takes there and whether the exit rate on the revenue side is a good way to think about IDS growth in 2017?

Yes, so from a revenue point of view, for the total year, we see IDS sales, you know, roughly in line with 2015, with as you said the cadence improving as we move through Q3 and Q4. And that's due primarily to the start up of some new awards this year, as well as the continued ramp-up on some of our international Patriot programs as they move through their normal lifecycle. You know, from a margin point of view, as I said earlier, we still see opportunities for margin expansion. We were pleased with the results in the second quarter. The 15.5% margin that IDS delivered, excluding the TRS gain. As I mentioned, part of that was from accelerating net program efficiencies, profit improvements, from the back half of the year into the second quarter. We see a little bit more of that in the third quarter. We upped the margin guidance by the 40 basis points, half of which was attributable to operating performance, the other half to the gain. And we would expect to continue to see margin improvement at IDS beyond 2016's rate normalized for the TRS gain, we'd expect to see improvement continuing into 2017.

Your next question comes from the line of George Shapiro with Shapiro Research. Please proceed.

Yes, Toby, I just want some clarification. The $0.20 increase in earnings, the way I look at it, maybe $0.03 from the little higher gain in IDS, a $0.05 from taxes. So $0.12 from operations, even though operations you said were $0.20 better in the quarter, so just looking for some reconciliation Toby O'Brian: Yes, so the $0.20 and maybe it's just the definition of the buckets here, so you got the $0.03, right? On the gain, right? That's about $0.03 higher, a $0.05 on tax, about $0.09 from the business operating margins, okay? And then there was, I mentioned interest was a little better, that's about $0.01 and then we had some corporate operating items that was another $0.02. So you can bucket it a lot of ways, but around $0.12 out of that $0.20 from operations and about $0.08 from non-operating items.

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

I was wondering if you could touch on a couple competitions. One is the T-X and your T-100 offering there with Alenia. And kind of the progress you're seeing and the type of relationship you're having where it seems like a relatively low investment but a good way to kind of enter adjacent markets and then the GBSD program, as that kind of gets into gear over the next few years, how your go-to-market strategy is in the context of that as well. Thanks. Toby O'Brian: Miles, what was the second program you were asking about?

Ground-Based Strategic Deterrent.

Okay, let me hit the first one here on T-X competition and a little bit about our approach to the competition. We're treating the program as more than just an airplane, flying an airplane. It's really about preparing the pilots for the mission success in advance and we're looking at for their ability to deal with multi-faceted and increasingly complex battle space and so what we're bringing to the table is our industry-leading capabilities in training and also next-generation mission systems and believe we're well-positioned to provide the Air Force a comprehensive solution to their training needs here. Our offering is the Alenia M-346 in any configuration and it's already training fourth- and fifth-generation pilots from Israel, Singapore, Italy and Poland. It is a complete system and the classroom to simulators to the aircraft, it is operationally proven. It does provide high degrees of confidence in both schedules cost and performance based on its proven capability. Our T-100 solution incorporates also our team's expertise in live virtual constructive training and again that's to drive efficiency and enhance affordability. In terms of timing, it is our understanding that the Air Force does plan to release an RFP by the end of this year and to award a contract by the end of next year. So we're working this very heavily. It's an important program to Raytheon. It's also an important program to the Air Force and we believe we have the best solution on that.

Okay, we're going that leave it there for the day. Thank you for joining us this morning. We look forward to speaking with you again on our third quarter conference call in October. Tawanda?

Ladies and gentlemen, thank you for joining today's conference. That concludes the presentation. You may now disconnect. Have a wonderful day.