Good day, ladies and gentlemen, and welcome to the Raytheon First (sic) [Second] Quarter 2019 Earnings Conference Call. My name is Shannon and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to Ms. Kelsey DeBriyn, Vice President of Investor Relations. Please proceed.

Thank you, Shannon. 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 onto 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 and the proposed merger with UTC 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. And with respect to the proposed merger and related matters in the registration statement on Form S-4 filed by UTC with the SEC on July 17th 2019. With that, I'll turn the call over to Tom.

Thank you, Kelsey. Good morning, everyone. Raytheon delivered very strong operating performance in the second quarter; sales increased 8.1% and our bookings, sales, operating margin, EPS and operating cash flow all exceeded our expectations. We continue to see strong global demand for advanced solutions. Our book-to-bill ratio in the second quarter was 1.32, this drove an increase in backlog of $3.3 billion year-over-year to a new record backlog of over $43 billion. Given these strong results, the opportunities we see in the second half of the year and the strength of our domestic bookings we are increasing our bookings outlook for the year by $1.5 billion. Our 2019 bookings performance positions us well for continued growth in the future. Also, we are increasing our outlook for sales, operating income, EPS and operating cash flow for the year. Toby will discuss additional details and that our second quarter performance and increases the guidance in a few minutes. This strong quarter with a healthy book-to-bill ratio and record backlog is clear evidence that we are making the right investments, in the right innovative technologies to position the Company for strong growth in the future. Additionally, I want to take a few minutes to discuss the breadth of Raytheon's franchises and the strength of our advanced and innovative technologies that are positioning the Company for this future growth. As we think about our franchises, we not only extend them by refreshing their technology, we also seek to take them internationally to broaden our markets. This has been our strategy with our combat proven Patriot franchise were during the quarter, we continue to make progress on international opportunities. In May, we booked almost $500 million on our next phase award with Romania to purchase Patriot. Additional follow-on awards to complete the program are expected…

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 2. We are pleased with the very strong performance the team delivered in the second quarter with bookings, sales, operating margin, EPS and operating cash flow all better than our expectations. We had record bookings in the second quarter of $9.5 billion resulting in a book-to-bill ratio of 1.32, and ended the quarter with a record backlog of $43.1 billion. Sales were $7.2 billion in the quarter, up 8.1% with growth across all of our businesses. Our EPS from continuing operations was $2.92 better than our guidance and an increase of 5% year-over-year. I'll give a little more color on this in just a moment. We generated strong operating cash flow of over $800 million in the second quarter, which was also better than our prior guidance primarily due to favorable collections. During the quarter, the company repurchased 1.7 million shares of common stock for $300 million bringing the year-to-date share repurchase to 4.4 million shares for $800 million. I want to point out that under the merger agreement with United Technologies, we are restricted from repurchasing shares, I will discuss this further a little later. At a high level, we are increasing our full-year 2019 outlook for sales, operating income, EPS and operating cash flow, as well as making other updates. I'll provide more color on guidance in a few minutes. And as Tom mentioned earlier, we are raising our bookings outlook by $1.5 billion for the full-year. Turning now to Page 3. Let me start by providing some detail on our second quarter results.…

[Operator Instructions] The first question comes from the line of David Strauss with Barclays. Your line is open.

Tom, could you touch on Missiles the performance here in the quarter and the changes that you've put in place there? Did those things, kind of, take hold faster than you thought. Just an overall update on the progress there? Thanks.

So David. Thanks for the question. I think number one is the issues that Missiles are not as significant as I think some folks think. But we did put, we did change out some leadership, we put in our team to and we have some of the call program management, best practices. We went in and audited all their programs relative to those. Made some, I would call it, was more tune ups across the board, but we think Missiles is a strong company we think it has a lot of upside potential in the future and we were just putting our normal, I would call it best practices in place on program management. We've done and we did some deep dive and some of the programs that had some of the issues and put corrective actions in on those. And the other thing we have a lot of development activities going on, we're really trying to accelerate those development activities and get those into production as soon as possible, the main reason is to drive higher margin positions. And the other big area and this is a future thing for another uplift for Missiles is, they are right now, they are in the midst of negotiating two five-year multi-years; one is on the Standard Missile-6 and the other is on the SM-3 and that'll be a big plus to and obviously increased - significantly increasing the factory base for over about a period of seven years. So we're very upbeat about Missiles, I think they have a lot of upside to go, we're going to continue to press and driving them in that direction.

Our next question comes from Sheila Kahyaoglu with Jefferies & Company. Your line is open.

Tom, I just wanted to follow-up on your remarks at the Paris Air Show with regards to the state of the business, you touched on it a little bit. But over the next decade, maybe if you could expand on how you see that going above and just given the S-4, it seems like you have a very robust business profile on a stand-alone basis. So it didn't quite jive with those comments?

Yes, so let me clarify the comments in Paris. First, as you saw from the strong performance this quarter, and also obviously defined in the S-4. We grew over 8% and achieved record backlog levels, and so bottom line is, Raytheon is very well positioned even as a stand-alone company, and we are well positioned for the next 10 years, 20 years and 50 years and beyond. At Paris, I was trying to convey something and that was really, it was really about the fact that, if we were to stop and I mean stop investing in IRAD and stop our CapEx efforts at Raytheon, it would eventually limit our growth potential and it was really under the auspices that we're in, and the environment we are today that it's a time where the DoD customers increasing its research development budgets and the spending of those budgets to support next generation systems. So as, you know, over the years - several years we have increased our internal investing in research and development, and also our CapEx to position the company for this future growth. And as a result, Raytheon is very well positioned even as a stand-alone company; for example, over the last few years, we won numerous franchises and accelerated our sales growth. And so bottom line is, let me be very clear here on this one, we are very confident about the proposed merger with United Technologies and how that combination will even further enhance value for our shareholders, customers and employees. But even as a stand-alone company Raytheon is very well positioned for the next 20 years and beyond.

Our next question comes from Myles Walton with UBS. Your line is open.

I was hoping you could comment on two things; one, is just update us on the export licenses for the precision weapons. I imagine, you probably have them by now; and the second would be on the lower tier Air Missile Defense Sensor. The contract structure there is a rapid acquisition, and I guess the contractor is expected to self-fund about a third of it. Is that accomplished in your R&D profile and is that allowable expense back to the customer. Thanks.

I'll start on the first one around the PGMs. So you're right, we recently did receive approved licenses from the State Department for about $1.2 billion worth of the PGMs that were previously awarded, but not - had not yet received our export approval, and we're now in the process of coordinating delivery of the completed product with our Mid-East customers. So some good progress there over the last couple of months.

And on the lower tier system, I think it's really - and you probably know we are significantly pursuing that system, and we've been spending in several years developing the technologies for the - let me call it the way LTAMDS system. We believe we're very well positioned for that capability and to provide it the Army and so that they can be able to defend the most challenging complex in the integrated attacks. As I mentioned in my remarks, we did participate in the sense-off, I believe we put our best foot forward on that and provided the degree capability and actually demonstrated it at the sense-off. It was a wildfire environment, so we had a track life targets, we are able to demonstrate our unique technology that we brought to the game here at White Sands, and it was over a two-week demonstration period. And we have delivered our proposal you're right, the contract structure is something called it another transactional and it's a OTA and it does have a requirement for 30%, the content that can be provided by non-traditional contractors. And so, and that's the - there is, so there's two elements to that and we are working with non-traditional contractors and having them involved in helping us on that program. Bottom line, we're confident that solution that we provided for LTAMDS and - sometime in the September timeframe the Army said that they're going to make that final selection.

The next question comes from Seth Seifman with JPMorgan. Your line is open.

I wanted to ask a quick question about the S-4 and so we look at the data in there we're kind of looking at 5-ish percent growth out in 2022 and 2023. And when we look at the investment account budget for fiscal '20 that's been submitted, and probably consistent with the budget deal announced this week, it's flat to slightly up in the investment account maybe something kind of similar in '21. Based on your visibility and your programs domestically and internationally, would that kind of flat to slightly up investment accounts in '20 and '21 be consistent with that 5% growth in '22 and '23?

Yes, Seth. It's Toby. Let me take a crack at that here. So I think if you step back from the S-4, while we hadn't previously quantified anything we've been pretty consistent in saying that based upon at many points in time where our backlog was, our bookings outlook, the alignment with both domestic and international customer needs. We saw that we were going to be able to continue to grow the company beyond in this case 2019 for the next three or four years, right? So S-4 is directionally consistent with that type of commentary that we provided in the past. The other thing, I would point out here, right? We have been continuing to make our investments, both from an R&D point of view or capital point of view in ways that aligned with customer priorities as dictated by the NDS and clearly as have been funded through the last few budget cycles, especially in the RDT&E account. I think, you know, more importantly, it's worth noting that since the date of the projections in the Form S-4, right? We are increasing our 2019 sales guidance that we just talked about this morning, as well as because of the increase in our bookings, the expected backlog that would have entering 2020, which gives us a high degree of confidence in our ability to continue to grow the company at or beyond levels that we - that you see in the S-4.

Our next question comes from Cai von Rumohr with Cowen and Company. Your line is open.

So, one of your competitors mentioned that they have 3.5 billion of orders for hypersonic missiles about five or six programs. Could you update us on your position in hypersonics and your backlog with respect to both offensive and defensive hypersonics. Thanks so much.

Yes, Cai, let me, cover that. I mean as we've discussed in the past, both hypersonics and counter hypersonics are the areas we continue to invest in for future growth and participate in DoD programs in that area. And we're actively working multiple hypersonics, encounter hypersonics programs, for example, we have the Hawk system, the Tactical Boost Glide, and we're also participating in the Navy's Conventional Prompt Strike and also the Army's long range hypersonic weapons programs, and also some other classified hypersonic and also counter hypersonic program. So it is becoming a big part of our portfolio moving forward, and there's really three main categories including the air breathing hypersonics weapons and that's the Hawk program and as we discussed on past calls, this program is successfully executing, it did complete a free jet two testing at NASA's Langley 8 foot in a high temperature tunnel, and then final analysis though show a great comparison between the predictions and test results, and so it's substantiating our system range performance predictions and putting us toward on the next step. And you probably saw in the press, we have signed agreement with Northrop, we are working with them on developing and producing the next generation Scramjet combustors and to help power the Raytheon's air breathing hypersonic weapons. The second category is the hypersonic boost glide weapons they call them TBGs or Tactical Boost Glide and ground-launched hypersonic boost glide weapons back in February of this year. DARPA did award Raytheon and TBG contract and so we're off and working on effort. And we're also developing several counter hypersonic weapons and also the entire integrated counter hypersonic kill chain; including the sensors and as I mentioned, on the calls, we really believe that the counter hypersonic market is actually larger than the hypersonic market for multiple reasons; one, is it not only doesn't include the weapons to counter the hypersonic weapons, but it also includes the entire kill chain communications and sensors. And so Raytheon continues to build this presence in both the hypersonic encounter hypersonic market, we're continuously and strategically investing in some of these top technology areas to make sure that we have the right solutions to bring forward to in the future competitions in both the hypersonic and counter hypersonic area. And as we mentioned, there are multiple potential revenue synergies also with the proposed merger with the UTC from some of their complementary technologies relative to hot areas of engines in the materials required to it use in those areas. And so we see those complementary technology solutions helping us even further in our hypersonic areas.

And Cai, let me just add a little bit on the financial side of things, right? So, especially in the area of, kind of, hypersonics right, that gets across all elements of our company. Okay, not just our missiles business and as you can imagine there are parts of that, that are classified or highly classified. So we're a little constrained on what we can, kind of, put out there. What I can tell you as it relates to our missiles business only right, relative to the work that they're doing on the vehicles and related to hypersonics. We'd expect revenue in the aggregate about $300 million this year and for a growing backlog. Their backlog grew here in the second quarter, compared to first and would expect that to continue, certainly for the next 12 months to 18 months.

Our next question comes from George Shapiro with Shapiro Research. Your line is open.

I noticed that operations in the quarter by year-end numbers were up $0.23 by mine, and I had above estimates guide $0.15, Toby. But for the year, you're only raising it by $0.09. So I assume, it means the second half you're expecting somewhat weaker performance in this quarter took some from the second half. And the other quick questions I have is the missile margin guide still requires north of 12% in Q3 and Q4. So just want to comment on that. And on the other side that requires a sharp reduction on the IIS margin in the second half? Thanks.

So let me start with the overall company level EPS. I mean as I said earlier, we're pleased with the increase of the $0.24, prior to the merger related impacts, right, that were offset by $0.11 of expenses and $0.03 from a higher share count that netted to the $10 and we're extremely pleased with our performance in the quarter. We had several of the business is outperforming our expectations. Some of this is timing as you alluded to, I think timing between Q3 and Q2 and it does give us confidence in the overall guidance in the outlook for the year. As I said at IIS with their strong performance in Q2 and their expected performance in the back half combined with their volume and margin that's where they - the flow-through of that $0.10 to the total year is primarily driven by, in addition to the improvements we saw in corporate, and some of the non-operating items. So overall, we're pleased with it, but timing is really the way to think of it right, that we saw some strong performance in the quarter from a margin point of view, some improvements we expected in the second half primarily Q3 moving into the second quarter. So missile specifically again, we're pleased with the 11.4% margin that they delivered here in Q2, it was ahead of what we were expecting. As you pointed out, you're right, we continue to see their margins increasing and improving in the back half of the year. The combination of some new and anticipated production awards will be ramping up from a total year basis, we expect better productivity and overall missile's margins about in line with 2018 at the midpoint of the range - in the midpoint of the range of 11.5% to 11.9%. So from an IIS point of view, clearly, they've had a outstanding start to the year with their performance, including in Q2. We did raise their guidance by another 20 basis points to the 8.2% to 8.4% of the range. And yes, we do expect the margin in the back half is going to be a little bit lower driven by mix and again the timing of some of the performance improvements they saw accelerated into Q2 versus Q3.

Our next question comes from Ronald Epstein with Bank of America Merrill Lynch. Your line is open.

Can you talk to a bit, how you think about kind of two - how does BBN fit-in, in your view given the combined or it seems like that [indiscernible] how do you guys had? And then two, commercial offset so when you're doing your international work and your offsets all of a sudden you have a much larger portfolio of things that you could offset with? How do you think about that?

Let me talk about the first thing is, you're right, Ron, yes we between the two companies, we have a powerhouse of technology. One of the areas with some of our technology concentrated is BBN, which is kind of our research on does a significant amount of work with DARPA, and a lot of technology, I would call futuristic technology development has been kind of our leader in artificial intelligence and machine learning for us, and in several other key areas. Right now that system is connected directly into our four businesses and their advanced programs area as a very tight coupling. So we try to do it, even though we're developing advanced technology, we try to tie that back directly to our mission areas, so that we can accelerate the development of that technology into the solutions that we provide for our customers. And that is a model that we are going to take forward into the merger as we move forward, we're going to ensure that we don't break that and moving forward. We have some organizational construct works that we're doing, because United Technology is also has a research group that does work and it's also connected into their businesses. So the end game is to essentially try to drive the synergies with all this technology that we're developing. In a way that we can actually make this kind of technology one plus one equals three, and we're looking at accelerants by combining this technology in these different areas. But the bottom line is, there is a significant amount of opportunity in the technology area, and then the technology is complementary and where we're trying to work that organizational construct, so we make sure we maximize the benefits of that to both companies in the merger.

And I think Ron, on your second comment and Tom can jump in here and add some color, that's another synergy opportunity around the offsets clearly having more capability to put forward to satisfy what our international customers are looking to do relative to localization and developing indigenous capability is an key area that will be working some planning around, and then post merger figuring out how to take full advantage of the capabilities that United Technologies Aerospace businesses will bring to the table, and give us more avenues to satisfy and fulfill offsets.

And your next question comes from Peter Arment with Baird. Your line is open.

Toby, if I just circle back on ISS margins, it wasn't clear to me why is it just all related to the Warfighter ramp down that why you're seeing margins come down pretty significantly in the second half. I know you've - that's a very strong performance in the first half, but what exactly are we seeing there? Thanks.

Yes, you know, it's two or three things, right? The Warfighter volume reduction is part of it and that is definitely more pronounced in the back half of the year, significantly more pronounced in the back half of the year than it was in the first half. And part of the strength of their margin here in the quarter at the 9.1% was their productivity improvements and they were able to accelerate some from the second half into the second quarter from Q3 to Q2. And then to a lesser degree, they do have some general mix with other programs that have a lower margin and a heavier revenue contribution in the second half. But that all said overall, they are performing well, hitting on all cylinders, we raised their margin again, we're more than confident in their margins going forward. And I know it wasn't a specific part of your question, but I would tell you and we've touched on this at times on past calls, when folks have asked. Based upon the portfolio in IIS and depending upon mix of their business, including as they work to capture more international work at especially around cyber. This is a business that could approach 9% margins, depending upon how things line up. So the team there is doing a great job and we're very pleased with their performance.

Our next question comes from Carter Copeland with Melius Research. Your line is open.

Just kind of quick two part are on and just to follow-up on the hypersonics discussion. I wondered from what's increasingly in the public domain on the hypersonics versus counter hypersonics it looks there's a lot more funding and effort on the counter on the hypersonics front and counter hypersonics, and I wondered if that's consistent with what you've seen in your portfolio or if there is a classified dynamic there that makes those a lot more equal in size. And then I know on prior calls, Tom you've emphasized counter hypersonics is a - perhaps the bigger of the two opportunities for you. And I just wondered when you think about the elements of that, whether it's traditional radars and traditional air missile defense, things of that nature, which are really kind of core capabilities of your company today. How the UTC transaction helps in the counter hypersonics realm or if sort of off on that, any color there would be great?

Yes. So, number one, let me set this straight. I mean, the hypersonics is a big element for the Department of Defense and are pushing that forward. But I can also tell you that they are fairly a very large effort relative to counter hypersonics and there's activities going on there a lot of that is in the classified areas. I can't get into a lot of details, but what I can tell you is the counter hypersonics efforts across every one of our four businesses. IIS, SAS, missiles and even IDS. And then reason is, it requires a solution for the entire fire control chain to be able to go detect the threat and then make your decision on what you're going to do with that threat, and then track that threat, all the way through its flight path and then interdict somehow to destroy that threat. And the elements to go through the counter hypersonics, it just more parts and therefore more parts ones that being more things to develop and integrate, and so that's why it's really a bigger and that's why I use the word that it's a larger market for us relative to our entire business. In any case bottom line is we are heavily participating in both and we believe the future will help us even further. And then relative to UTC, I mean, they're helping us and they will take - will be able to help us once we close relative to their technology especially into high temperature materials into inlets or hypersonic engines in that area, and they will also do have some high-end sensors that we don't have and we don't participate in areas that potentially could help us in that fire control chain.

Our next question comes from Robert Stallard with Vertical Research. Your line is open.

Tom a quick question for you on the merger. Have you been surprised by the sort of feedback that you've been getting from investors?

Well, we've - it depends on the - interest on the investors, I've been getting a lot of positives from investors across the board. I think so lot of our investors do see exactly the benefits of the merger moving forward. And I think the area - whole area of technology and being able to combine the - I would call the power - powerhouse companies relative to their technology areas, and bring it to bear on an entire front moving forward has been very, very well taken by our investors, who understand the details of the companies and the technologies that they are developing. So we - most of the stuff we've been hearing is pretty positive.

Go ahead.

And Rob, would just add in going back to the original announcement and I think we've talked about this. So this wasn't a combination that was rumored, right? So clearly people were not expecting it, we continue to engage with our investors as they have more questions about the deal, and I think what people are, from a financial point of view, starting to really understand the long-term cash flow generation potential for this business. The incremental free cash flow growth we talked about the $18 billion to $20 billion of capital being returned to shareholders in the first three years. We put a number out there of about $8 billion in 2021, which would kind of be the first full year based upon a mid 2020 close. We've also put a little more color around that, that's conservative by plus or minus $1 billion, so I think people are getting their head around it, right. It's got something for everybody, it's not that long-term strategic play underpinned by the complementary technologies, the revenue synergies that, as Tom mentioned in his opening remarks - we believe we're going to be measured in the billions. It's got the synergies that would provide shareholders to benefit that from the near-term and then all the elements, I won't repeat them from a financial perspective around the cash flow generation of the Raytheon Technologies Company.

Shannon, we have time for one more question, please.

Your next question is from Pete Skibitski with Alembic Global. Your line is open.

Tom, could you talk about some of these smaller programs at missiles that you have going on. I hate to get too far into the weeds, but I think they're interesting and kind of emerging - this scenarios for the military. One is just Coyote, do you announced a contract here this quarter for, not huge, but not small either. In this FEAVR radar and this Hawk whole program, could you give us some color on some of those and maybe you can talk about the market size. They just sound pretty interesting.

Yes, I'll talk about the Coyote first, actually that's a bright - really bright super bright star for missiles, that was an - did an acquisition of a small company back in 2015, and it had a - this UAV on it. And then the reason is we went into the acquisition, I think was about $7 million. Today there is some technology in swarming - UAV swarming technology. And so we were able to take that system and integrated into some of our other solutions that we're doing to co-create, we call it now Coyote system. And then integrated that with one of our radars are kind of call it our KuRFS radars to create a new system called Hauler, Hauler that was just IOC by the United States Army, and the Army is buying these systems for counter-UAS, so this UAS actually goes off in attacks other UAS and kill them and it's been, it's actually, it's very - it's a lower cost systems. So it's a way of killing lower cost the UAS, and it's in - and I think the Army is going off and going to be buying quite a few of those. So it's a very, very great program there. The other I would call a contract that I would like to bring up that in the area of missiles, is they are pursuing a program called Precision Strike Missile and that is a new system for then really a brand new franchise for us moving forward. We're very positive on that system, it's a system that is required by the Army to replace their attack him system and move that up to a longer range, but within the INF treaty, which may end, and on August 2nd, so if that happens, there will be more activity in this area and more upside and potential for the missile company in that arena.

That's all the time we have. Thank you for joining us this morning, we will look forward to speaking with you again on our third quarter conference call in October.

Ladies and gentlemen, this concludes Raytheon second quarter 2019 earnings call. Thank you for joining and have a wonderful day.