Kelsey Ann DeBriyn - Raytheon Co. Thomas A. Kennedy - Raytheon Co. Anthony F. O'Brien - Raytheon Co.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC Richard T. Safran - The Buckingham Research Group, Inc. Sheila Kahyaoglu - Jefferies LLC George D. Shapiro - Shapiro Research LLC Samuel J. Pearlstein - Wells Fargo Securities LLC Jon Raviv - Citigroup Global Markets, Inc. Carter Copeland - Melius Research LLC Seth M. Seifman - JPMorgan Securities LLC Cai von Rumohr - Cowen & Co. LLC

Good day, ladies and gentlemen, and welcome to the Raytheon Second Quarter 2018 Earnings Conference Call. My name is Derek and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Kelsey DeBriyn, Vice President of Investor Relations. Please proceed. Kelsey Ann DeBriyn - Raytheon Co.: Thank you, Derek. 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 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 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 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. Thomas A. Kennedy - Raytheon Co.: Thank you, Kelsey. Good morning, everyone. Raytheon's growth strategy continued to deliver results for our shareholders and customers. In the second quarter sales increased 5.5% and our bookings, sales, EPS, and operating cash flow were all better than expected. We continue to see strong global demand for our advanced solutions. Our book-to-bill ratio in the second quarter was 1.31. This drove an increase in backlog of $3.7 billion year-over-year to a new record backlog of approximately $40 billion. Given these strong results and opportunities we see in the second half of the year we are increasing our bookings outlook for the year by $1 billion driven by strength primarily in our classified business. We are also increasing our sales and EPS guidance for the year. Toby will discuss additional details about our second quarter performance and updates to our guidance in a few minutes. Now let me share some highlights from our domestic business where we saw strong growth in bookings and sales in the second quarter. Domestic bookings were up over 60% year-over-year and domestic sales grew 6.5% in the quarter. For the company, bookings growth in the quarter was driven by classified, which represented over 30% of our total bookings. In fact, we set a new company record for classified bookings in a quarter which more than doubled over the same period last year. We had classified bookings in the quarter of $1.1 billion at SAS, $800 million at IIS and $700 million at Missiles. Classified sales also set a new record in the quarter, up over 20% versus the same period last year. As a reminder, our classified business is important as it often funds technology development that is integral to the long term growth of our future franchises and production awards. Our strength in classified is driven in large part by the need of our domestic customers to address advanced threats and demonstrates Raytheon's alignment to the National Defense Strategy. The increase from the fiscal year 2018 Defense Appropriations Bill is starting to come through in our domestic bookings, especially in classified and we are starting to see some of the increase to sales. But as we said last quarter, we will see a majority of the sales impact starting in 2019 and beyond. To prepare for this growth in classified, in May, Missiles dedicated new facilities as part of its expansion in Arizona. The first buildings are scheduled to be completed this year and include an advanced testing facility. The full expansion is expected to be complete in 2020 to support the development of advanced solutions and includes engineering and manufacturing enhancements, new laboratories and high power computing capabilities. During the quarter we also expanded the content we have on the F-35 fighter jet. In June, Raytheon was selected to develop and deliver the next generation distributed aperture system or DAS for the F-35. The DAS collects and sends high-resolution, real-time imagery to the pilot's helmet display from six infrared cameras mounted around the aircraft. With the ability to detect and track threats from any angle, the F-35 DAS gives pilots unprecedented situational awareness of the battle space. Our DAS system enhances capability and reliability versus the prior system. We have been developing this technology over the past few years, which will be applicable to other aircraft including the rotorcraft market. And in April, Raytheon and the U.S. Navy completed the final development test to integrate the Joint Standoff Weapon C onto the F-35 variant. This keeps these low-cost, air-to-ground missiles on track for full deployment in 2019. The JSOW glide weapon uses a GPS inertial navigation system with an imaging infrared seeker that can identify and track targets autonomously. JSOW C can eliminate the toughest high-value land targets at ranges greater than 70 nautical miles, day or night and in adverse weather conditions. Also in April we completed developmental testing on the Small Diameter Bomb II, also known as StormBreaker. This is a key step toward bringing this new capability to our domestic and international markets. U.S. government operational testing is scheduled to be completed later this year. StormBreaker can eliminate a wider range of targets with fewer aircraft, reducing the pilot's time in harm's way. (6:26) detects, classifies and tracks targets even in adverse weather conditions from standoff ranges. Raytheon and the U.S. Air Force have completed aircraft integration for the F-15E and have begun integration activities for the F/A-18E and F and the F-35B with the U.S. Navy. Also during the quarter, the U.S. Navy selected the Naval Strike Missile for over-the-horizon defense of littoral combat ships and future frigates. NSM is a fifth-generation long-range precision strike weapon that can find and destroy enemy ships at distances up to 100 nautical miles away. The missile is offered by Raytheon in partnership with Kongsberg. And because it's already a proven and operational solution, NSM saves the U.S. billions of dollars in development costs. The contract includes options which if exercised would bring the contract value to approximately $850 million. NSM is a new missile franchise for Raytheon, and our goal is to replace the existing domestic and international inventory of Harpoon and other international surface-to-surface missiles, making NSM a multibillion-dollar franchise opportunity. Turning to international, last week at the Farnborough International Air Show, we hosted over 800 meetings with a wide range of global customers. Having spoken personally to customers at the show, as well as on other customer visits, I can tell you that demand for our advanced solutions is strong and growing across Europe, Asia-Pacific and MENA as nations look to protect their sovereignty, deter adversaries and acquire counterinsurgency/counterterrorism capabilities. We have a strong pipeline of international booking opportunities ahead. In May, we booked over $300 million on our first award with Romania to purchase our combat-proven Patriot air and missile defense system. The next award is expected in 2019, and additional follow-on awards to complete the program are expected to be booked in 2020 and 2021. We continue to see the total Raytheon Romania Patriot opportunity to be around $2 billion. Our other international Patriot opportunities remain on track as well. We still expect Sweden to sign the LOA with the U.S. government to purchase our Patriot air and missile defense system in the second half of 2018. This paves the way for the U.S. government to begin contract negotiations with Raytheon for a booking in 2019. The Sweden Patriot opportunity for Raytheon is expected to be around $1 billion. For our Poland Patriot opportunity, we still anticipate a booking for Phase I in 2019 and Phase II in 2020. The Phase I opportunity for Raytheon is expected to be over $1 billion, with the total Raytheon Poland Patriot opportunity to be around $5 billion. Turning to Washington, we are pleased that Congress is moving forward with the fiscal year 2019 funding bills including Defense. The fiscal year 2019 request is consistent with the newly revised BCA caps and will keep DOD modernization funding at about the same elevated level of fiscal year 2018. We continue to see congressional support for the National Defense Strategy modernization priorities where Raytheon has strong core capabilities. I want to close by underscoring one of the foundations of our success, and that is our culture of innovation. This reflects the fact that we are a technology company, and for generations our global team has been pushing the bounds of what's possible. The awards and opportunities I mentioned earlier are just some of the most recent examples of our innovation in action. And last month, we were the proud recipient of the 10 millionth patent in U.S. history, one of Raytheon's more than 13,000 active patents. I want to thank the Raytheon team for continuing to champion a culture of innovation, which helps us to create the trusted, innovative solutions we are known for around the world. With that, I'll turn the call over to Toby. Anthony F. O'Brien - Raytheon Co.: 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 are 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 $8.7 billion, resulting in a book-to-bill ratio of 1.31. Sales were $6.6 billion in the quarter, up 5.5% led by our IIS and Missiles businesses. Our EPS from continuing operations was $2.78, better than our guidance and an increase of 47.1% year-over-year. I'll give a little more color on this in just a moment. We generated strong operating cash flow of $1.2 billion in the second quarter, which was also better than our prior guidance primarily due to favorable collections and lower net cash taxes of approximately $250 million related to the discretionary pension plan contribution that we'll make in the third quarter 2018. I'll discuss this further in a few minutes. During the quarter the company repurchased 1.9 million shares of common stock for $400 million, bringing the year-to-date share repurchase to 3.8 million shares for $800 million. And based upon our strong performance to-date I want to point out that for the second time this year we are raising the full year 2018 outlook for sales and EPS. We are also raising the full year 2018 outlook for bookings, as well as making other updates, primarily for pension and tax related items. 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 $8.7 billion, which were $2.2 billion or 33% higher than the same period last year. And on a year-to-date basis, bookings were $15 billion, which were $2.8 billion or 23% higher than the comparable period last year. It's worth noting that on a trailing four quarter basis our book-to-bill ratio was 1.18 and our bookings were a record $30.5 billion over that same period. As Tom mentioned, these strong bookings position the company well for future growth. For the quarter, international was 21% of our total company bookings and on a year-to-date basis was 31%. For the year, we expect international to be about 35% to 37% of total bookings. Backlog at the end of the second quarter was a record $39.9 billion, up over $3.7 billion or 10% compared to last year's second quarter. Approximately 40% of our backlog is comprised of international programs. We now move to Page 5. For the second quarter 2018, sales were above the high end of the guidance we set in April primarily due to better than expected performance at our IIS business. For the second quarter our international sales were approximately 31% of total sales. And as we mentioned on past calls we expect sales for the company to accelerate throughout the year with a stronger second half driven by our bookings over the past several quarters. Looking now at sales by business. IDS had second quarter 2018 net sales of $1.5 billion, up 4% compared with the same quarter last year. The increase from Q2 2017 was primarily driven by higher sales on an international Patriot program that was awarded in the first quarter of 2018. In the second quarter 2018 IIS had net sales of $1.7 billion. The 8% increase compared with Q2 2017 was primarily due to higher net sales on classified programs, the DOMino cyber program and the Air and Space Operations Center Weapon System program. And as we've previously discussed, we expect IIS growth rate to moderate in the back half of the year due to the planned ramp down and transition on the Warfighter FOCUS program. Missile Systems had second quarter 2018 net sales of $2.1 billion, up 8% compared with the same period last year. The increase was driven by higher net sales on classified programs. We expect the growth rate at Missiles to be stronger for the balance of the year. SAS had net sales of $1.6 billion, in line with last year's second quarter. As a reminder, we see growth in the second half of the year at SAS. And for Forcepoint, sales were up 7% compared with the same quarter last year. We expect the growth rate will continue to accelerate across the next two quarters as indicated by bookings strength in the second quarter of $148 million, up 29% versus the same period last year. Overall we're pleased with our total company sales which grew 5.5% in the quarter. Moving ahead to Page 6. Overall we delivered solid margin performance in the quarter. Our operating margin in the quarter was 16.6% for the total company and 11.7% on a business segment basis and as expected, lower than last year's second quarter primarily due to mix. So looking now at margins by business. IDS second quarter 2018 operating margin was strong at 17.3%, which benefited from productivity improvements as well as favorable mix versus Q2 of 2017. IIS operating margin was up slightly compared to last year's second quarter. The decrease in margin at Missiles in the quarter compared with the same period last year was primarily driven by an expected change in mix. We see Missiles' operating margin improving in the back half of the year. As expected, SAS margin was lower in the quarter compared with the same period last year, primarily driven by a change in program mix and other performance in the second quarter of 2018. And at Forcepoint as we discussed on past calls, operating income was negative for the quarter. This is due to an increase in operating cost to support Forcepoint's long-term growth. We expect Forcepoint's operating income to be positive in both the third and fourth quarters of 2018. Turning now to Page 7, second quarter 2018 EPS was $2.78, higher than last year's second quarter primarily due to the favorable impact of tax reform and the tax impact from the third quarter 2018 discretionary pension plan contribution. It's worth noting the discretionary pension plan contribution was not included in our prior guidance and I'll discuss it further in a moment. In addition, second quarter EPS was better than our guidance primarily due to higher sales volume, timing and the tax impact of the previously mentioned discretionary pension plan contribution. On Page 8 we've provided you with a 2018 financial outlook walk to bridge our prior guidance from April to our current guidance. As I mentioned earlier, we are increasing our full year 2018 guidance for sales and EPS to reflect our improved operating performance as well as for tax and pension related items. Let me take you through each of these items. In operations, we increased the sales range by $200 million, driven by higher domestic orders primarily in the classified area. This increase contributes about $0.05 to 2018 full year EPS. Next, there are a couple of pension related items to discuss. First, a $1.25 billion pre-tax discretionary pension plan contribution will be made by September 15, 2018 using cash on hand. As a reminder, we have discussed making a potential discretionary pension plan contribution on past calls. Since the decision was made in the second quarter 2018, a $95 million net tax benefit was recorded in the second quarter which had a favorable impact to the effective tax rate for the full year of 310 basis points and a favorable EPS impact of $0.33. In addition, as a result of the discretionary pension plan contribution, I want to point out that our outlook for operating cash flow from continuing operations was reduced for the full year 2018 by approximately $1 billion. This reduction is the net impact of the third quarter 2018 $1.25 billion discretionary pension plan contribution, favorably offset by lower net cash taxes of approximately $250 million related to that contribution. Moving on, some of the company's pension plans purchased a group annuity contract to transfer to an insurance company nearly $1 billion of outstanding pension benefit obligations related to certain U.S. retirees and beneficiaries of some of our non-CAS covered and previously discontinued operations. This transaction closed on July 17, 2018. In connection with this transaction an unfavorable non-cash, non-operating pension settlement charge of $288 million pre-tax, $228 million after tax, will be recognized in the third quarter 2018, primarily related to the accelerated recognition of actuarial losses in those plans. This will have a favorable impact to the effective tax rate for the full year of 30 basis points and an estimated unfavorable EPS impact of $0.79 in both the third quarter and full year 2018. This transaction will have no impact to our operating cash flow from continuing operations. To summarize, this transaction reduces and de-risks about $1 billion of pension obligation. Lastly, due to other tax improvements, we see a favorable impact to the effective tax rate for the full year of 410 basis points primarily related to various tax planning initiatives and further refinement of the estimated impact of the new tax law passed in December 2017. This has an estimated favorable EPS impact of $0.48 for the full year 2018. To summarize, we now expect our full year 2018 net sales to be in the range of between $26.7 billion and $27.2 billion, up 5% to 7% from 2017. The year-over-year increase is driven by growth in both our domestic and international business. We have lowered our effective tax rate to reflect the discretionary pension plan contribution, pension plan annuity transaction and other tax improvements that I just discussed. We now expect our effective tax rate to be approximately 10.5% for the year. We've increased our full-year 2018 EPS by $0.07 from our prior guidance and now expect it to be in a range of $9.77 to $9.97. As discussed, the increase is driven by our improved operational performance in the second quarter, as well as the improvement to the effective tax rate, largely offset by the unfavorable noncash, nonoperating $0.79 impact of the pension plan annuity transaction. Moving to operating cash flow from continuing operations, as a result of the discretionary pension plan contribution discussed earlier, we are updating our 2018 operating cash flow outlook to be between $2.6 billion and $3 billion. Similar to last year, our cash flow profile is more heavily weighted toward the fourth quarter due to the timing of program milestones and collections on some of our larger contracts. It's worth noting that based on the third quarter 2018 $1.25 billion discretionary pension plan contribution, we would expect to see an improvement in operating cash flow from continuing operations in 2019 and 2020. As I sit here today, holding all pension related assumptions from our January call constant, we would expect the gross funding required for the pension to decrease by an estimated $1 billion over 2019 and 2020 combined. I'd also note that the discretionary pension plan contribution and the pension plan annuity transaction will have no impact on our CAS recovery in 2019 and 2020. I would add again, holding all pension-related assumptions from our January call constant, as a result of the two pension transactions we would expect a roughly $100 million favorable net impact to nonoperating pension expense over 2019 and 2020 combined. And as we have done in the past, we will provide a further update to the gross funding required and other pension assumptions on our fourth quarter 2018 call in January. On Page 9, we've provided you with our standard updated 2018 financial outlook, most of which I just discussed. I do want to point out that we tightened our diluted share count to be approximately 287 million shares for 2018. And as you can see on Page 10, we've included guidance by business. We've increased the full-year sales outlook at both Missile Systems and IIS and for the total company to reflect the combination of stronger bookings and sales performance to-date and second half expectations. Now turning to margin, we've increased the range and expect higher full-year operating margin performance for IDS, IIS and SAS. The strong year-to-date results exceeded our prior estimates. We lowered the range of our full-year operating margin guidance for Missiles, driven by the change in program mix and a change in the timing of an expected favorable resolution of a contractual matter. At the business segment level, we continue to see operating margin in a range of 12.5% to 12.7% for the full year. And at the company level, we continue to see total operating margin to be in a range of 17.1% to 17.3% for the full year. Before moving on to Page 11, as I mentioned earlier, we are now raising our full-year 2018 bookings outlook to a range of $28.5 billion to $29.5 billion. This reflects a $1 billion increase to the prior range and is driven by strong demand from our domestic customers, primarily in the classified area. On Page 11 we have provided guidance on how we currently see the third quarter of 2018. We expect our third quarter sales to be in a range of a little under $6.6 billion to $6.7 billion, and we expect EPS from continuing operations for Q3 to be in a range of $1.88 to $1.93, which includes the unfavorable $0.79 impact of the pension plan annuity transaction. For EPS, when modeling the second half effective tax rate, you can think of the third quarter as similar to the second quarter, maybe a bit lower, and the fourth quarter as similar to the first quarter, maybe a bit lower there as well. And for operating cash flow we expect Q3 to be an outflow in a range of $1.07 billion to $870 million. As a reminder, the outflow is due to the third quarter 2018 $1.25 billion discretionary pension plan contribution. Before concluding, I'd like to spend a minute on our capital deployment strategy. As we said on the call in April, we expect to continue to generate strong cash flow and maintain a strong balance sheet that provides us with financial flexibility. We remain focused on deploying capital in ways that create value for our shareholders and customers. This includes internal investment to support our growth, paying a sustainable and competitive dividend, reducing our share count, making targeted acquisitions that fit our technology and global growth needs and making discretionary contributions to the pension. 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. We increased our full year 2018 sales and EPS outlook for the second time this year and increased our bookings outlook by $1 billion. We took actions to de-risk our pension and remain well-positioned for continued growth. With that, Tom and I will open up the call for questions.

Our first question will come from the line of Rob Spingarn, Credit Suisse. Robert M. Spingarn - Credit Suisse Securities (USA) LLC: Good morning. Thomas A. Kennedy - Raytheon Co.: Good morning, Rob. Anthony F. O'Brien - Raytheon Co.: Hi, Rob. Robert M. Spingarn - Credit Suisse Securities (USA) LLC: Tom, I wanted to ask you about the DAS win and F-35. It seems the program is constantly looking to lower cost and increase value. The predecessor, the incumbent did a no bid there on the basis at least from their perspective that the value wasn't there. So how do we reconcile that with your win? And are there future opportunities? It sounds like the EW system and maybe the C&I could come up for recompete? Thomas A. Kennedy - Raytheon Co.: Let me just kind of set the stage here, the system that we offer is a system that's been under development at Raytheon in the last several years, but we have had this DAS product for many years. I think what's different with this EO-DAS solution it's using our latest technology, which is giving us two I would say competitive advantage. One, this new technology gives us significantly higher performance than the technology that was used to develop the original system, which – the technology stake in the ground was back in 2001. So that probably makes a lot of sense that new technology would be a lot better than the old technology. That's one. But the other area that it gives us a significant benefit for is cost. This new technology has allowed us to significantly reduce the cost of these type of products, so we were able to bring to the marketplace a system that had twice the performance and about half the cost of the systems and technology that were developed back in the 2000s. And that's a technology that we've been developing over the years in other product areas such as electronic warfare, ICNIA, radars, and constantly trying to do two things with the technology. One is obviously increase the performance, but at the same time, really try to lower the cost. And I think that's the big difference here.

Your next question will come from the line of Doug Harned, Bernstein. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: Good morning. Thomas A. Kennedy - Raytheon Co.: Hi, Doug. Anthony F. O'Brien - Raytheon Co.: Good morning, Doug. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: Can you talk a little bit about Missile Systems. And you took down the margin guidance a little bit. But if you had not had the contractual issue that you described, what would the margin guidance have been? I'm trying to understand how we should think about the long-term margins at Missile Systems which have been quite good. You've got quite a large backlog there, so I would expect it would give you good visibility into what the longer term margin performance should be? Anthony F. O'Brien - Raytheon Co.: Yeah, Doug, it's Toby. Let me walk you through that. So we did reduce the margin outlook really based upon two factors. One, we talked about for the quarter good strength in domestic and especially classified volume and that's what drove the bookings outlook for the year. A big portion of that is related to Missiles. So the way to think about the change in the margin for the year, the mix because of higher classified volume is about 20 basis points of the change. And then the balance of it or 30 basis points is related to the timing of what we expect to be a favorable resolution of a contractual matter that we had assumed in the back half of 2018 moving out of the year. I'll just add a little bit of color. I won't get into it in detail or the specifics of it but only to say we're making progress with it. And to put it in the right context, there's no downside to this. This is not a problem. We don't have anything recorded on the books for it. It's only upside to Missiles once that ultimate resolution takes place. So again, it's worth about 30 basis points of margin. So the way you can think of it for the year, we would have adjusted for the mix. So about not quite but close to half of the margin decrease would have still taken place because of the mix. And then going forward as we've talked about in the past, Missiles has it going across all elements of their portfolio. A little bit more heavily here in the near term on the front end with the development work as I just talked about. But they do have a good balance of production work and that's part of what we expect to help drive the margin up in the back half of the year, especially given the strong bookings they saw at the end of 2017 which will be ramping up in the back half here of 2018. So going forward, broad portfolio, good mix of development work, E&D type of work, production work. And we're always focused on trying to drive the margins up the classified work just at times in a good way presents some headwind because as you know that's what develops technology that leads to future production and future franchises.

The next question will come from the line of Richard Safran, Buckingham Research. Richard T. Safran - The Buckingham Research Group, Inc.: Tom, Toby, Kelsey, good morning. How are you? Thomas A. Kennedy - Raytheon Co.: Good morning, Rich. Kelsey Ann DeBriyn - Raytheon Co.: Morning. Anthony F. O'Brien - Raytheon Co.: Good morning. Richard T. Safran - The Buckingham Research Group, Inc.: So I'd like to ask you a bit more about your comments about those really impressive bookings and the 1.3 book-to-bill in the quarter and also your comment, Tom, about the classified. First off, Tom, I'm not sure I heard but I think you kind of quantified the trend in classified versus unclassified. I think you said they doubled. Was that correct? And I was wondering how you see that trending for the rest of the year and maybe into 2019? And what I'm looking for is to see if classified is going to grow significantly more than unclassified bookings? And then finally here, does – is the general rule that classified contracts come with higher margins than unclassified, does that still hold? Thomas A. Kennedy - Raytheon Co.: Let me start off. We did have an unprecedented year – quarter relative to classified. And for the second quarter the classified bookings were 31% of our total second quarter bookings but the volume was up year-over-year from Q2 2017 169%. So it's definitely a significant increase in classified bookings. Classified sales in the second quarter were 20% of our total sales and that volume was up over 21% from Q2 2017. So – and so the reason is why? Well, we talked about on the last call that the budget and I talked about it on this call, the budget is up and the modernization budget is up 19% year-over-year. And so we're starting to see the impact of that coming through the bookings line and a lot of it is coming in through the classified area. And the reason it's coming through the classified area is the third element or third bucket that I – terminology I use of the National Defense Strategy is all about catching up with the peer threat. And to catch up with the peer threat significantly new capabilities are required across multiple domains, domains of space, the domains of air and the domain of land surface. And so we are seeing these classified awards come in at a much higher rate than we've had in the past years again due to the 19% increase. Just real quick back, you did state that you thought that the classified program margins were higher than the unclassified. It's actually the reverse. The classified bookings are generally associated with programs that are we call CRAD, contract research and development programs and/or E&D engineering, manufacturing and development programs. Those programs tend to be cost share programs with the government. And because of the cost share nature of the contracts tend to have lower fee structures and resulting margins but the bottom line is those programs are integral to our business model. They are essentially the seed corn for future franchises. And as you know that's one of the strong points of Raytheon is the numerous strong franchises that we have across all domains.

The next question is going to come from the line of Sheila Kahyaoglu, Jefferies. Sheila Kahyaoglu - Jefferies LLC: Hi, good morning, everyone and thank you. Thomas A. Kennedy - Raytheon Co.: Good morning. Anthony F. O'Brien - Raytheon Co.: Good morning, Sheila. Sheila Kahyaoglu - Jefferies LLC: I appreciate the commentary on Missile Systems, but can we think about mix with the broader portfolio and how we think about it over the medium term, if you can give us some color there? Anthony F. O'Brien - Raytheon Co.: Yes, Sheila. It's Toby. I'll start and then if Tom wants to jump in here and add anything he can. So when we talk about mix and we relate it to our programs, we generally think of it, programs with sales volume at either higher or lower from period to period that we're comparing to. And obviously because of those particular programs' margin rate, the profit and the sales volume can weigh in on the business either favorably or unfavorably. Most often it's the mix if you will, between development and production work. And we see that at generally speaking all of our businesses other than IIS isn't dramatically impacted by that. Tom just talked about on the prior question the nature of the classified or the CRAD volume and that really goes across all of our businesses. The cost type work in the near term it does present margin headwinds. Obviously, the contract phase right where we are at any given point in time in the execution of a contract relative to risk retirement, opportunity realization, which is generally as we've talked about in the past more in the middle towards the end of contracts. Again, that goes across all of our businesses. And also domestic versus international, right? The mix and the volume there, primarily more impacting IDS and Missiles, but also to a lesser degree SAS. And I think when you think about it big picture and from a trend point of view, we've talked about how we've been working to incrementally improve our margins. You see that this year with about a – the 12.5% to the 12.7% and 20 basis point increase at the midpoint of the range over last year. We talk about these incremental increases because while the mature part of the portfolio with the production programs, the international programs continues to perform well, in a good way we're seeing some headwinds from more of a mix relative to the classified work. And a lot of that, as Tom just said, ties back to the NDS and where the focus is there, especially in that third bucket that he referred to. So there's a balance there that we're working through. And obviously in Missiles in particular in this quarter they've got a lot more classified cost type work and that trend is continuing through the year.

The next question will be from the line of George Shapiro, Shapiro Research. George D. Shapiro - Shapiro Research LLC: Hello? Thomas A. Kennedy - Raytheon Co.: Hi, George. George D. Shapiro - Shapiro Research LLC: Hi. I guess pursuing Missiles just a little more, Toby and what you've been saying. To kind of get to the margin range, even though you lowered it, you got to get the Missile margins near 14% in the second half versus 11.4% in the first half. Anthony F. O'Brien - Raytheon Co.: Yeah. George D. Shapiro - Shapiro Research LLC: So what changes sufficiently in the mix in the second half to get there? And then just on the other side, IDS margin's got to come down pretty significantly in the second half. Now it came down in 2Q, but what changes there to get the margin to come down so? Thanks. Anthony F. O'Brien - Raytheon Co.: Yeah, sure. Yeah, no. Your math is right, George. At Missiles we do expect a ramp up in the margin in the back half of the year, 13.6% to 14% as you said. There's a couple factors that are driving this. One, on the FEMA mix, that mix turning a little bit more favorable in the back half of the year. We expect higher volume on our production programs compared to the first half. There is some inventory we're expecting to be relieved to a few of our second half higher margin awards that are in our outlook, as well as improved productivity driven by improved operating leverage as the business continues to grow, benefits from factory automation that we've talked about in the past. And then as I mentioned a little bit earlier to Sheila's question, at Missiles we expect some retirement of risk, especially on a few international programs. And it's the combination of all those that would cause us to see the margin ramp up in the back half into the high 13% approaching 14%. On the flip side of the coin at IDS, IDS had another solid quarter, and certainly for the first half a real strong performance. We did increase their outlook by 30 basis points for the year. As we've discussed before, the risk retirement on programs, the quarter in which the risk is retired, is where the retroactive benefit occurs. IDS had risk retired on a few programs both in the second quarter and the first half, and part of that was timing. And we just see the cadence or the pace of that lower than it was in the first half, right? We still expect strong margin performance, roughly around 16%, for the back half of the year, and that's pretty consistent with where their margin was last year, but overall very pleased with the margin performance at IDS.

Your next question will come from the line of Sam Pearlstein, Wells Fargo. Samuel J. Pearlstein - Wells Fargo Securities LLC: Good morning. Thomas A. Kennedy - Raytheon Co.: Good morning, Sam. Samuel J. Pearlstein - Wells Fargo Securities LLC: I wanted to go back to Missile Systems once again. But just looking at the bookings strength, I guess what I'm trying to understand is really do you think your win rate is increasing? Or is it simply that your products are what's in demand given the current threat environment? Because certainly your missiles competitor is showing similar strength, and I'm just trying to understand how you define market share, whether you're holding your own or just you're in the right place? Thomas A. Kennedy - Raytheon Co.: So, Sam, I'll take that upfront. I think it's both, based on when we peel the onion and then look inside. The bottom line is we are winning quite a few programs. This last one was the Naval Strike Missile. Brand new missile franchise for us, which will be a multimillion-dollar franchise moving forward. So that's one example. And on the other side we are also bringing onto production several new or upgraded franchise missiles. One is – we mentioned there was a JSOW C, which is a new variant of JSOW which has a significant demand signal pull in the U.S. and we'll eventually have it in the international marketplace. And we are also completing the development of another missile, the Small Diameter Bomb II, which will be transitioning into full rate production. And that will start to see significant volume and obviously margin increases in the fact that it's in a production type run. So the bottom line is two things are going on. One is we're winning new franchises. And the second thing is we had multiple missiles that were I would call in development and then the final testing stages that are now transitioning from either into LRIP or from LRIP into production. And so we're starting to see larger volume. Anthony F. O'Brien - Raytheon Co.: And, Sam, I'd just add bigger picture at the company level relative to the competitive win rates, we continue to be very pleased with the performance across the company in all the businesses. Historically we've run in the 70% range give or take and we're seeing similar results so far this year again across all of our business – Missiles included but across all of our businesses, all within that 70% range, so strong performance there.

Your next question will be from the line of Jon Raviv, Citi. Jon Raviv - Citigroup Global Markets, Inc.: Hey, good morning, everyone. Thomas A. Kennedy - Raytheon Co.: Good morning, Jon. Anthony F. O'Brien - Raytheon Co.: Good morning. Jon Raviv - Citigroup Global Markets, Inc.: Toby, can you give us a sense for the – some of the pension decisions that you made in terms of what kind of return metrics do you see? Why did you choose to do the annuity contract now? And then also appreciating that CAS does not change, how do you think about the CAS mechanics sort of beyond 2020? What's it sensitive to and how it might trend over the long term? Thank you. Anthony F. O'Brien - Raytheon Co.: Yeah, so let me maybe start with that last part first, Jon, and then I'll come back to the beginning part of your question. So from a CAS point of view, I think the simple way to think of it is that for the next, say, five or six years, the CAS recovery – we expect it to be roughly in line with our 2018 expectation, okay? And then after 2018 we anticipate to have, from an overall pension point of view, positive cash flow out until the 2026 timeframe, right, holding all assumptions constant. So I think very positive news and somewhat predictable as far as the CAS goes. Related to the two pension actions that we took in the quarter, certainly related to the discretionary, we've been talking on and off that we'd been evaluating that. If you recall we put a $1 billion discretionary contribution into the plan at the end of last year. We made this additional contribution decision in June. The contribution's being made in the third quarter in part to leverage the benefit of getting the deduction at the 35% rate on the 2017 tax return. And it helps work relative to the funding of the plan. So that one was kind of straightforward. On the annuity that we enacted here in the quarter, two independent transactions. We just saw an opportunity in the marketplace based upon some other activity to – in a appropriate way, right, that continues to provide benefit security for our pensioners, to de-risk our liability, right, and reduce our liability in a very economical way. We're doing this with a solid insurer. We are continuing to follow our goal of operating our business effectively and this de-risking and reducing the obligation is consistent with that.

Your next question will be from the line of Carter Copeland, Melius Research. Carter Copeland - Melius Research LLC: Good morning, gentlemen. Thomas A. Kennedy - Raytheon Co.: Good morning, Carter. Carter Copeland - Melius Research LLC: Just a quick clarification on the pension piece, Toby, not to let you off the hook totally yet. It sounds like the transfer, you get rid of the liability side. What happens to the associated assets with those plans? Anthony F. O'Brien - Raytheon Co.: So we – as part of the transfer we funded that with assets out of the plan. Carter Copeland - Melius Research LLC: Okay. Okay. That's what I figured. I just wanted to make sure. So you will get – you will lose in the future years the expected returns on those plan assets but you won't have any of the actuarial amortization associated with it? Anthony F. O'Brien - Raytheon Co.: Correct. Right. Carter Copeland - Melius Research LLC: Okay. Anthony F. O'Brien - Raytheon Co.: Yes. Carter Copeland - Melius Research LLC: All right. And then just, Tom, briefly. Just because it seems to be on the tip of everybody's tongue. And I know you guys have been particularly growth focused for a while but given that we might actually have budget passage and authorization passage on time for once and folks are looking at higher levels of funding, when you take a step back and just look from a business development standpoint what the opportunity funnel looks like out of there? Is it materially different today than say six months ago? Or nine months ago? Or any color you can provide us on how you're thinking about that. Thanks. Thomas A. Kennedy - Raytheon Co.: I'll take it. I think, I would say it's significantly different than over a year ago in terms of demand signal. Demand signal is global. We are seeing significant demand signal in Europe. A lot of that is for deterrence type products like our integrated air missile defense systems, a la the Patriot system. And we're also seeing strong demand in the MENA region. That demand signal is coming in for again defensive type systems, deterrence systems like the Patriot System but also our NASAMS system, seeing significant demand signals for that. And then eventually the THAAD system is going to be – make a inroad into the MENA region also. So we're getting that kind of demand signal. In Asia-Pacific region it's also the whole area of deterrence and that area is demand signals for our Patriot systems and also our standard missiles both in Japan and also in South Korea. And we come back to the U.S. The biggest change in U.S. is the classified. And again that – the element of the third bucket of the National Defense Strategy which is the need for the United States to catch up to our peer threats and the U.S. government is taking that seriously, Congress is taking that seriously and providing the funding required to make that happen. And that is one of the major reasons that our classified bookings have been up significantly this quarter.

Your next question will be from the line of Seth Seifman, JPMorgan. Seth M. Seifman - JPMorgan Securities LLC: Thanks very much, and good morning. Thomas A. Kennedy - Raytheon Co.: Good morning. Seth M. Seifman - JPMorgan Securities LLC: I think – I apologize if you guys addressed this. But in IIS as you look forward on the Warfighter FOCUS contract I think you guys recently were selected for one piece of the follow on. And so maybe if you could talk about how that fits into your overall plan for that contract and the coming decline? Anthony F. O'Brien - Raytheon Co.: Yeah, sure, Seth. This is Toby. I'll take a crack at that. So I think we've talked about in the past that the guidance for this year and you can read beyond this year, right are – always assumed that we'd have a planned decline on Warfighter as we transition the program primarily in the second half of this year to new contract vehicles. So again there's no change in the negative way to our guidance range for IIS this year. We were selected as one of three large businesses for the portion of the program called ETSC, which at a high level is related to the international aspect of the program. We're also on one of the five small business set aside teams for that part of the follow on program as well. So between both of those positions we feel we can be very competitive on that future scope. I think it's important when you think of IIS as I talked about in my opening comments, they saw strong growth in the quarter. And for the year, even excluding Warfighter FOCUS, right we are looking at call it mid-single digit growth for the rest of the business between their classified business, their cyber business. As an example, right they're starting to make up for and offset that business. So IIS is more than Warfighter and that's what we're expecting to continue to carry them into the future as well as the portions of Warfighter we continue to execute.

Your next question will be from the line of Cai von Rumohr, Cowen & Company. Cai von Rumohr - Cowen & Co. LLC: Yes, thank you very much. To maybe follow up on Carter's question, could you update us a little bit on where we stand regarding your opportunities for THAAD and (57:33) in the international arena? And also, given that the president has been pressuring NATO to spend more money and at the same time basically beating them over the head in terms of tariffs, what impact do you expect those two initiatives to have on your business? Are you seeing anything today? Thanks. Anthony F. O'Brien - Raytheon Co.: So maybe I'll take the second part of that relative to the NATO and the tariffs. I mean we're not seeing any impact today nor do we expect the tariffs will have an impact, certainly not a direct impact even when we look forward into the supply chain and if there was any potential concern there. We don't think there's anything of a material point of view. Relative to NATO specifically, Cai, Tom talked about we booked the Romania Patriot order. Just as a update for everybody, the Patriot Poland LOA was signed. We are working towards getting on the first phase of that contract, a little north of $1 billion sometime in 2019. That program is still $5 billion overall with the second phase in 2020. We told you last time around, Sweden had selected Patriot. And we expect them to sign their LOA in the back half of the year contract next year for $1 billion. My whole point there is not seeing anybody backing off of what they were interested in and committed to before, all because they continue to want to have a deterrent against the threat from that perspective. As far as our TPY-2 radars, which are part of the THAAD system, the opportunity in KSA for us is a $3 billion to $4 billion opportunity. We look for the LOA on that to be signed here in the back half of the year with the, potentially an initial award of a few hundred million dollars with the follow on, the majority of it in 2019. There's an opportunity in Qatar for THAAD, again with our early warning with the TPY-2 radar as part of that in the plus or minus $1 billion range, maybe out in the 2020 timeframe. So, strong demand for our products. Kelsey Ann DeBriyn - Raytheon Co.: So that's all the time we have today. Thank you for joining us this morning. We look forward to speaking with you again on our third quarter conference call in October.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation vision. You may now disconnect. Have a great day.