RTX Corporation (RTX) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Raytheon Second Quarter 2012 Earnings Conference Call. My name is Deanna and I'll be the operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Please go ahead.

Thank you, Deanna. Good morning, everyone. Thank you for joining us today on our second quarter conference call. The results 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 Bill Swanson, our Chairman and Chief Executive Officer; and Dave Wajsgras, our Chief Financial Officer. We'll start with some brief remarks by Bill and Dave, and then move on to questions. Before I turn the call over to Bill, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance, constitute forward-looking statements. These statements are based on a wide range of assumptions that the company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized at the end of our earnings release and are discussed in detail in our SEC filings. With that, I'll turn the call over to Bill. Bill?

Thank you, Todd. Good morning, everyone. Raytheon reported strong or solid second quarter operating performance, driven by great execution across the company. I'm pleased with our performance in the quarter. We continue to focus our efforts on driving efficiencies across the operations and leveraging our portfolio of advanced technologies to capture new business. Bookings were solid in the quarter, with a book to bill of over 1.0, driven largely by our domestic and classified business. Notable bookings include awards for the Exoatmospheric Kill Vehicle, Standard Missile-6, domestic and foreign training and several classified contracts. Funded backlog increased by over $600 million year-to-date and by approximately $2.1 billion compared to the second quarter of 2011. Our international pipeline remains robust. At Farnborough International Airshow earlier this month, I had the opportunity to meet with a number of our international customers. And what I can tell you is that there was considerable interest in Raytheon solutions from a broad set of both existing and new customers. Overall at this year's show, we hosted 30 delegations and had over 600 meetings within a short time frame. I'm encouraged by what I've heard from our international customers. They continue to look to us for solutions in the areas of missile-defense, radars, ISRs, cybersecurity, Air Traffic Management and training. In the international market, we continue to set the pace among our peer companies, and in the quarter, international represented approximately about 25% of our total sales. I'd like to take a few minutes to highlight an important achievement in the quarter. Our Standard Missile-3 had 2 successful intercept tests, one on May 9 and the other on June 27. These intercepts, which have been compared to a bullet hitting a bullet outside the atmosphere, demonstrate a critical capability for the United States and our allies.…

Okay, thanks, Bill. I have a few opening remarks starting with second quarter highlights and then we'll move onto questions. During my remarks, I'll be referring to the web slides that we issued earlier this morning. So if everyone could please move to Page 3. As Bill noted, we did perform well in the quarter. Our adjusted EPS of $1.55 was up 13%, driven by continued operational improvement and capital deployment actions. Adjusted operating margin was 13.6%, up 130 basis points compared to last year's second quarter, reflecting strong performance across the company. For the quarter, total bookings were $6.2 billion and sales were $6 billion, both of which I'll discuss further in just a moment. We are increasing our full year EPS guidance and cash flow outlook, which I'll address further in a few minutes along with other updates for 2012. During the quarter, the company repurchased 4 million shares of common stock for $200 million, bringing the year-to-date share repurchase to 11.9 million shares for $600 million. If you move to Page 4, let me start by providing some detail on our second quarter results. Our total company bookings for the quarter were $6.2 billion, and on a year-to-date basis were $11.3 billion. As I mentioned previously, we continue to see the order book back-end loaded this year and as a result, we expect the book-to-bill to expand. We estimate a full year book-to-bill range of between roughly 1x and 1.05x. Notable bookings included $687 million at missile systems for the EKV contract for the Missile Defense Agency. MS also booked $348 million for Tomahawk for the U.S. Navy and international customers and $302 million for the production of Standard Missile-6 for the U.S. Navy. Technical Services booked $568 million for domestic training and $90 million for foreign…

[Operator Instructions] The first question comes from the line of Joe Nadol, JPMorgan. Joseph Nadol - JP Morgan Chase & Co, Research Division: Wanted to get a little color, if you wouldn't mind, David, just on the cumulative adjustments in the -- for performance in the quarter, what are you going to disclose in your Q? And is there anything you're going to call out in particular in terms of programs? And whatever you can tell us about IDS in particular would be helpful.

Okay, so, right. The Q will have all the disclosure that you just suggested. The EAC adjustments, I think this is what you're getting at, in the second quarter, were about $175 million, a little under a $60 million improvement from the second quarter last year. That was driven by a couple of key factors, but there's obviously a multitude of adjustments given our 8,000 programs and 15,000 contracts. From a missile systems standpoint, they improved about $21 million as the result of improvements in a land combat systems program. There was also material and other cost efficiencies in the international tactical radar product area at SAS. On a year-to-date basis, the EAC adjustments amount to about 2.6% of revenue. So in general, we run about 2% to 2.5% of EAC adjustments relative to sales, that's been the historical pattern over the last 4 or 5 years. The first half was on the higher end of the range. We do expect it to be lower in the back half. That's primarily driven by the acceleration of cost efficiencies that I mentioned earlier, much of these were originally planned for the back half of the year. I do want to point out something else on the margin profile because it's driven by a number of different factors. You have the mix of programs, meaning the stage of completion, international versus domestic, development versus production, and fixed price versus cost by contract. So if you're looking at the margin going forward, you need to consider all of these factors. From a business perspective, the opportunities are weighted toward our production and international programs over our cost and service type programs. So a way to think about this might be, if you look at Technical Services or IIS, these businesses have a higher mix of cost and service programs so they don't offer the same level of opportunities as some of the other businesses. Now for IDS specifically, the strength of the second quarter margins were due to continued focus on execution, again, some of which we had expected in the third and fourth quarters. We also achieved better-than-expected results on a few performance milestones. IDS did exceed our internal performance targets on some international programs, and again, we don't see this recurring in the back half of the year. Given the order book, particularly in the international area, we do see stronger volume from IDS and continued solid performance, particularly from factory operations.

The next question comes from the line of Doug Harned, Sanford Bernstein. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: Could you talk a little bit about international orders for the year and what you see as the timing over the next 2 quarters? And then related to that, Bill, you talked about Farnborough in some of the international discussions you had, could you talk about what you're hearing with respect to events in the Middle East and how that might affect demand for different capabilities that you have now?

Sure, be happy to. I'll run through a few international. Notification on Kuwait is taking place as we speak. We expect approval of that by the end of August. Kuwait will be for 2 to 4 fire units, roughly. We're figuring the first tranche at about $1 billion there. Turkey, because of what's going on in Syria, and so forth, was supposed to have their decision this summer. It looks like it'll be at the latter part of this year so we expect to hear their decision now at the latter part of Q4. Oman will be purchasing a ground-based system that’ll probably be in $1.5 billion range. We expect that Q4 time frame, maybe Q1. We have precision munitions, in the category of Paveway, we expect about $500 million cumulative in Q4 there. Air traffic control radar is probably $200 million to $300 million between now and the end of the year. We expect missiles, TOW, SM and the other things we build, probably around $500 million, plus or minus $100 million for that. Training in the $150 million to $200 million. And international C4I, we finished negotiations in an area there and we expect that one to probably be in the Q3, early Q4 time frame. So as you can see, a rich pipeline there. The airshow was interesting for us, it was a great opportunity for me. I always call it a target rich environment because all our customers are there, and you get to spend time with them in a different kind of atmosphere, and talk about some of their problems. Clearly, for the Mideast, missile-defense is important whether you look at Saudi, UAE, Qatar, Oman, those are all areas for us that have interest in providing air defense for a number of reasons given the issues they have in that part of the world. You didn't mention the Pacific Rim, that's also very active for us when you look at the threats that they have and various countries either trying to disrupt navigation or control navigation on the seas there. So that has an effect internationally. It also has an effect domestically as people try and think about keeping the United States out of the shipping lines. So for us, we look at both of those areas and what they were talking to us about right in our wheelhouse. And they come to us to help them provide full solutions, not just products. So that's one of our strengths. So I felt very good about the airshow this year. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: As you look at this, I mean these issues have been there for some time, I'm just curious. The discussions you're having now, have you seen any change in the last 6 months?

Yes. I would say the changes were pulling out of Iraq, Afghanistan. So the U.S. has had a big presence there for the last, what, 10 years. And if the U.S. is pulling out then various countries realize that they have to do more and I think they're thinking about that and taking action very seriously.

Your next question comes from the line of Howard Rubel, Jefferies. Howard A. Rubel - Jefferies & Company, Inc., Research Division: Bill, you've talked about the challenging environment, you talked about international a little bit. Can you sort of talk about how else you've changed the aperture of the company? And also, can you discuss how you are going to be able to take advantage of sort of these, I'll call it, lower cost efficiencies going forward so that you share fairly with your customer as opposed to give it all back?

Yes. I think, Howard, I'd describe it in a number of ways. It really -- I think your question goes to the heart of sequestration and we've got 5 months to avoid it, between today and first part of January. We’ve spent time assessing the various outcomes that could take place, where the cuts would come from. When you look at all of that, for us, I think I've said it before, I'm not in charge of the administration, I'm not in charge of Congress, but what we all are in charge of here is our own destiny. So how do we make sure our program performance is flawless? How do we shorten our timelines? How do we reduce our costs? How do we keep our focus on companywide productivity and efficiency? And we do it across the board. I think Dave done a nice rundown or summary of that from our design activity to supply chain to our factories. And for that, that makes us better. We compete every day and for us, we believe we have to do that in best value which means our technology and innovation has to be the best. But we also have to have the right cost structure. And what I learned from the '90s is you need to get ahead of that and I think that's what we're doing. And from that standpoint, the department will either take 3 courses of action when they do this: They'll take a peanut butter approach, they might have a programmatic plus peanut butter or they might be able to do it on a project basis. The one thing I know, the Secretary of Defense needs all the flexibility he can have because his strategy matches the funds the way they are today. So if you…

Well, what'd you want me to say? Howard A. Rubel - Jefferies & Company, Inc., Research Division: Well, no, it's not what I want you to say. I mean, the only pushback I have is these are terrific margins today, maybe just a little bit differently. They're terrific margins today, and if you can deliver a 1.05 book-to-bill, are we kind of seeing that you're being able to position yourself to grow a little bit of the business, putting aside the sequester issue, so that you could actually show improvements all-in as we look out rather than hit a wall?

Yes. Howard, I don't think we're hitting a wall, if that's the question. And from our standpoint, when I went through the international, that gives us opportunities. We still have to work hard, manage the programs. As you know and others know, international always has risk, and the way you perform is to retire the risk. I think this company does very good at that, given our large international base and given our returns. So one thing I got out of Farnborough that I can -- that I took home is that our customers are confident when they do business with us, we are going to deliver and give them the product they want. That kind of confidence and that kind of trust and respect, you can't buy.

The next question comes from the line of George Shapiro, Shapiro Research.

42, LLC: Dave, I got my usual couple of questions here. What was the international growth year-over-year in the quarter? The classified growth and how much did classified account for sales? And then what happened to domestic?

So look, from a domestic and foreign standpoint, we said this early on that we are weighted to the back half of the year and we're continuing to track to that pace and cadence. In the second quarter, international sales were down about 5%, again, as expected given the ramp up of the international orders that we received in the back half of '11. So again, it is in line with what we had talked about on previous earnings calls. From a domestic standpoint, we were down about 2.5% on the quarter. So on the first half, the company is down about 3% in sales. Now moving forward, domestic, we expect in the back half of the year to be about break even, plus or minus 2%. And from an international standpoint, we see sales growth of 8% to 12%. This was mentioned just a moment ago, we do see the book-to-bill for the year from a company perspective to be between about 1 and 1.05. International, as a subset of that, will be about 1.1 to 1.17. So again, we do see continued growth from an international perspective and domestic continues to perform fine.

Dave, let me jump in here a little bit to provide a year-end. We expect international bookings to be 28% to 30% for the year, and the sales, as Dave mentioned, to be around 26% which means the volume will be up about 3% to 5%. And on the classified side, so far this year, bookings have been running about 21%. We expect the year to be around 15% but we expect the growth in classified to be about 20%. So we're feeling pretty good about the classified side of the business.

42, LLC: And the classified in the second quarter, was that up also about this 20% you're expecting for the year?

Now, George, from just a pure sales standpoint, the classified was down about 2.5%, in line with the other domestic business. But again, we expect that to pick up in the back half of the year. We booked just under $1 billion in classified sales at 2 businesses in the second quarter, so again, that business continues to remain healthy.

And the next question comes from the line of Jason Gursky, Citi.

Dave, I wanted to spend a few minutes on pension, if you wouldn't mind. I think you mentioned in your prepared remarks that perhaps as much as 1/3 of the EPS guide up was related to pension. So I was wondering if you could provide a bit more detail on that. And then the second question, also on pension is just some commentary from you around CAS Harmonization, the ruling went into effect at the end of last year. We've got, since February 27, the ability of the industry to begin passing on higher rates to the government. So I was wondering if you could just give us an update on how that process is working for you and whether you're passing those higher CAS comps on and everything is going as planned.

Sure. So in 2012, the FAS/CAS adjustment is expected to be just under $285 million. Looking further out, there are a number of variables that impact the adjustment and the funding requirements. As you know, these include the discount rate, the return on assets and some other actuarial assumptions, and the new CAS harmonization rules, as well as the new pension funding stabilization law. So while the discount rate environment is currently lower than it was at the end of 2011, our -- the FAS/CAS is not adjusted for 2012 and it's difficult at this point to predict how that plays out in 2013. As a general rule of thumb for Raytheon, every 25 basis point change in the discount rate has roughly a $60 million impact on the FAS/CAS adjustment. It's probably important to note as well that the re-timed contribution levels resulting from the Pension Funding Stabilization Law do increase the FAS/CAS expense adjustment by between $60 million and $80 million. But again, a lot of these variables, other variables have to be considered when you're projecting that out. So let me just get a little more specific. Like I said a moment ago, the 2012 FAS/CAS adjustment doesn't change. For 2013, given the 8.75% return on asset assumption, as well as a 5% discount rate assumption, we see the FAS/CAS adjustment going from what we had projected before at about $45 million to just over $100 million. And it's difficult to predict after that at this point. Again, this will all be subject to change as we close out the year. From a cash standpoint, these are essentially re-timed contributions into the pension plan. On a gross level, that impacted the contributions by roughly $500 million in '12, and about $400 million in '13. After you take into account the contract reimbursement and tax impact of those contributions, it impacts the company from a cash flow standpoint of about $100 million in 2012 and about $300 million next year. Lastly, you asked about CAS harmonization, that impacts us favorably by about $200 million in 2014 and improves from there over the next few years, 2015, '16, '17. We are continuing to focus on our cost efficiencies and productivity. I spoke about that earlier, Bill addressed it earlier, and we will remain very competitive from that perspective.

Okay. And just to follow up, I think in your prepared remarks, you mentioned that this year's EPS guidance, 1/3 was related to pension? I'm not sure that I caught exactly how that might be.

Well, yes, there's a -- from the tax standpoint, the cap on the domestic manufacturing deduction is adjusted as a result of the pension contributions. Following that, the tax posture from the company was improved.

The next question comes from the line of Sam Pearlstein, Wells Fargo.

I was wondering if you could talk about one of the businesses, in particular, which is SAS, in terms of just what's going on that's different there in that you saw year-over-year growth there, where everybody else has been declining? And the margins are coming in well ahead, and really why should they soften as we go into next year? And they also had a nice increase in orders as well, so just talk a little bit about what's happening at SAS.

Well, sure. This is actually something we've been talking about for a while. The demand for our international tactical radar programs continues to be strong and there is increasing demand for the ISR sensors that support the growing requirements for full motion video in theater. So the product lineup at SAS is healthy across-the-board. The classified business continues to be strong. And from an operational perspective, Rick Hughes and the team out there continue to do an excellent job from a contract execution standpoint. There's nothing new from a perspective of where we were seeing the business about 6 months ago.

Okay. And then just as a follow-up, Dave, you've talked about that we were going to see a moderation in the buyback activity as the year progressed. Is this a good run rate that you're comfortable with for the remainder of the year or do we see it step down further as we start to head into the risk of a CR and the sequestration?

So we've updated our full year diluted share count guidance. I'd rather not get specific on the dollar spend on buyback. I think what's important is that we continue to have an overall balanced capital deployment strategy. Bill and I see that as the best approach for driving shareholder value over the long term. We do continue to see strong cash flow. We've performed well, historically. If you look at the 2-year average, we're still about $2 billion a year from an operating cash flow generation standpoint on a normalized basis. And we continue to invest in all the right areas from a company perspective. It's probably worth noting, again, that we did increase the dividend in the first quarter, 16% and that was our eighth consecutive dividend increase here at Raytheon.

The next question comes from the line of Robert Stallard, Royal Bank of Canada.

Bill, you mentioned allusion to what happened to the early '90s in the last defense expansion. We saw quite a lot of defense consolidation in that period. I was wondering if you were seeing other people maybe in a distressed situation looking to sell at this stage, whether you might be interested in picking up something?

For us, our M&A strategy has been about the same. We continue to pursue targets that -- technologies that augment our strategic position, and we continue to pursue this strategy. For us, we think it's the best one for shareholders. The difference between now and the '90s is the '90s had a lot of consolidation at the top and our customers have been pretty explicit on what they expect on the top. The mid-tier and lower tier, there hasn't been a -- I think, your question is more on the reflection of the prices and what's out there. I think most companies still view that they have beachfront property and that it hasn't moved into suburban property yet.

The next question comes from the line of David Strauss, UBS.

Could you give us an update on DDG 1000? I think you guys had talked about it coming down pretty significantly this year but then ramping back up in '13 and '14? Is that how things still look?

Yes, I think so. The -- we're working with the Navy now to finish out the third ship and get that under contract. I think that the good news is the lead ship is doing well. The software, the hardware, at least, from our end, has come together nicely. And up at the shipyard, they're making progress, building this for ship and all of us associated with it feel pretty good about where it's going. We think it's a game changer. What people need to remember is the manpower on this ship is about 1/3 of what we're using today. So in a constrained environment, having a ship that operates with 150 personnel, plus or minus a few, and has the capabilities of the DDG 1000 is a good thing. And so we can't wait for it to get in the water and do its thing. And the new CNO has spoken very highly about this ship given what the environment we're staring into. The -- no change in plans, other than we see a reaffirmation of what we told you by the actions of the Navy.

Okay. Sorry, so up $100 million to $200 million for the program the next couple years?

From where we are in '12, I would say, if you look at it over a 3-year period, that's about right.

Okay. And then as a follow-up, Dave, in terms of -- you have this slide where you break out sales and EPS expectations by quarter. Could you specifically comment on the fourth quarter? Obviously, you're talking about sales bouncing back there, I know the comp's easy but then it looks like you're implying a pretty low margin in the fourth quarter. Is there anything special that's going on in the fourth quarter that would see margins drop off as far as what you're implying?

No, it's really addressed with the timing of these cost improvement actions that we had talked about. When we began the year, we had scheduled some of these to be completed as we closed out 2012, and we were able to pull those forward into the front half of the year. So there's nothing remarkable going on from an operational standpoint and it's really timing within the 4 quarters.

Your next question will come from the line of Robert Spingarn, Credit Suisse North America. Robert Spingarn - Crédit Suisse AG, Research Division: I have a couple of questions. Bill, if I could throw one to you, and then one for Dave. I think the Secretary, Secretary Panetta met with industry leadership on Monday. Did he have a message on a 1-year sequestered delay? Meaning that is he in fact, looking to shift toward near-term relief in lieu of a compromise on the more difficult to negotiate 10-year plan?

I think he outlined a number of scenarios. One of those scenarios could be, could we take the time, depending on what happens in November, to be able to think through this issue? And one way to do that is to pay down part of the first year. If you pay down part of the first year, that buys you 12 months. The Secretary would like a couple years to be able to redo the strategy, to fit into the funding that this is what we're going to go do. The problem is that -- and I'll say it this way, sequester is self-imposed. We put this crisis on ourselves. It's not a natural disaster, something that happened. We picked a date and we picked a process that was horrible to both sides. What people haven't written about is what happens outside of DoD? What happens to Education or Labor or the State Department or the other agencies in the government, and people have not realized that in aerospace, we'll probably affect about 2 million jobs out there; our own plus jobs that have the multipliers. Our economy doesn't need another reset just when we're trying to get through this. So the Secretary's philosophy is, is that we need the time to go through this thing, 24 months would be nice, but if we could do 12 months, that gives us the time and let's buy down part of the requirement early. So he just outlaid the various options and reiterated that this affects the industrial base, as well as affecting the department. Both of them are outcomes that he doesn't want because the strategy that we have today, he can do what he's been asked to do. You take $55 billion out, that gets split. The way it's defined, it affects him and affects others, and we need to think through this horrible thing that we've done with sequester. Robert Spingarn - Crédit Suisse AG, Research Division: Was there any sense that this other approach is getting any traction?

Yes. If you go to Washington and you talk to the leadership, my take is the preponderance, if not all, don't want this to happen. The real problem is, is when you ask what the solution is, you don't get it. But I think more and more people are thinking through, can we get to the $1.2 trillion or $1.4 trillion? If we can't get there, can we at least get to the first year and buy it down and give us some time to think about it. And the hard part is, is come November, people aren't sure about the results. And so that kind of keeps everybody from doing something. And then if you think of the period between November and January, there aren't that many working days in Congress, and what's on their plate is a full year's worth of work that has to be done in 18 or 20 days. So the probability of that happening isn't there. And so my opinion, we're going to see a CR. CR will probably be like last year's CR, at least that's the way we planned for it. But within that CR, they could do things in an ominous bill that could take down and pay down the first year's worth of savings that are needed. So it's still a jump ball. I wish I could tell you the answer. All I can tell you is the discussions are more along the line that nobody wants it to happen but I can't give you the solution. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. And the CR comment leads me into the question for Dave which is -- and this came up in a prior question, which is there's a lot happening here in the back end of the year. You've got potentially fewer days but a lot of cash flow coming and if you could speak to that, is there any risk here that cash has difficulty flowing out of the Pentagon and receivables billed? And if you could speak specifically to your revenue guidance on MTS? Because given the army pressure, I'm wondering how that recovers so that you get better than half your sales in the back end of the year.

Okay. From a cash standpoint, we are confident with the guidance we provided this morning. We continue to work very well with the customer and I don't see any meaningful risk from a cash flow guidance perspective for the back half of the year. NCS is performing fine. We do have expectations for the back half of the year with respect to international bookings, as well as domestic. Some of the international specifics Bill spoke to earlier, there's a C4I program that's currently being finalized, and we expect that award here in the near term. There's virtual simulation programs that we've discussed and some other Homeland Security programs. The book-to-bill, and this is important, we expect to be in the range of 1.05 to 1.1. Again, we remain confident with the guidance for NCS, a strong leadership there from Dan Crowley, and we, from an overall company perspective, are very comfortable with what we addressed earlier today.

The next question comes from the line of Myles Walton, Deutsche Bank.

Dave, first a clarification question, and you answered a pension question pretty fully but just wanted a kind of a detailed clarification. The December or January slide you put out had about $1.5 billion of required pension contribution for the '13 and '14 each, what happened to that as the result of the Transportation Bill?

Okay. So the -- it's difficult to speak beyond '13. But from a gross basis, the contributions came down in '12 by about just under $500 million and just under $400 million or say around $400 million for '13. It's probably more important to see how that ultimately impacts the company. So when you take the contract reimbursement and the after-tax basis of the contributions, the shift is an improvement of about $100 million in cash flow for 2012 and $300 million in cash flow for 2013. So just one more note here, pension contributions from a tax standpoint are on a different timeframe, so you address 2013 pension contributions that are made through September in your 2012 tax return.

See, and I thought that was a straightforward clarification. No, that's a good answer. Bill, the real question for you is on the planning that the DoD would do as they look to submit their, essentially their initial comps to OMB for passback. I mean what kind of scenarios are they going to get from OMB? And what kind of trial balloons rhetoric do you expect to have to deal with over the next 3 to 6 months? Or are they simply not going to plan the -- see the sequestration as a scenario?

OMB has basically stated, I think, that they are not going to provide guidance till after the election. So for us, we're going to be in, I guess you might call it, the Never-Never Land and have to react to the press of what's written on this subject. But until there's guidance from OMB in the interpretation of the law, then it makes it really hard. So from our standpoint, we've read the law, the Budget Control Act. The Budget Control Act actually goes back to 1985, for those of us that have been around that long, to Gramm-Rudman, to when that was implemented. And if you look at it, it basically says that at the controllable level, at the R1s and P1s, there's probably 2,500 programs that are controllable. After that stage, it probably -- the department has discretion, but that's my opinion, that's not OMB's opinion. So when you look at it, that's why I said it's probably a combination of a percentage cut and then it's discrete after that. But that's Bill Swanson's opinion and OMB will tell OSD what to do. What I think people lose sight of, and this is also my opinion, this is not a DoD issue. This is a federal issue. It's a federal issue in a sense that it affects all the government and the cuts come out of the entire government. DoD is just more active because they do and have a real budgeting process that goes through this because the size and the nature of labor and material that they control. And other agencies don't have material, they have labor. So the cuts will have to be interpreted in how they do it. So it is a complicated problem and my bottom line answer is, I don't expect anything on guidance till after the election. That's why I think the Hill is talking more about what did they do and do we buy some time here so we can think through this, if that helps.

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

Yes. Thank you. This concludes today's conference. Thank you again for your participation. You may now disconnect and have a great day.