dramatically reduced across the board in January 2013 with an attendant impact upon procurement of products and services. While the impact of sequestration is yet to be determined, automatic across-the-board budget cuts would approximately double the amount of the ten-year $487 billion top line reduction already reflected in the defense funding over a ten-year period, with a $52 billion reduction occurring in the government’s fiscal year 2013. The resulting automatic across-the-board budget cuts in sequestration would have significant consequences to our business and industry. There would be disruption of ongoing programs and initiatives, facilities closures and personnel reductions that would severely impact advanced manufacturing operations and engineering expertise, and accelerate the loss of skills and knowledge, directly undermining a key provision of the new security strategy, which is to preserve the industrial base. 

The Administration’s spending priorities were released on February 13, 2012 with the submission of the President’s Budget Request for fiscal year 2013. The government’s 2013 fiscal year runs from October 2012 to September 2013. Every year, Congress must approve or revise the proposals contained in the President’s annual budget request through enactment of appropriations bills and other policy legislation, which then require final Presidential approval. The outcome of the federal budget process has a direct effect on our business. 

## Department of Defense Business 

The passage of the Budget Act signaled the end of ten years of growth in the DoD base budget and imposed specific caps on security and non-security spending beginning in fiscal year 2013. The fiscal year 2013 request of $525 billion for the DoD base budget is the first to reflect the reduced spending levels imposed by the Budget Act and is consistent with its caps on discretionary spending. The fiscal year 2013 request represents a decline of about 1% below the fiscal year 2012 DoD baseline appropriated level of $531 billion. Preliminary insights into national security funding priorities for fiscal year 2013 and beyond were revealed on January 26, 2012 by Secretary of Defense Leon Panetta, which were consistent with the fiscal year 2013 budget request. Specifically, the defense spending proposal estimates DoD base budgets that are essentially flat in real terms from fiscal year 2013 through fiscal year 2017. 

In prior years, the Administration has requested and Congress has provided funds for U.S. military operations in Afghanistan and Iraq, and other unforeseeable contingency or peacekeeping operations, through a separate Overseas Contingency Operations (OCO) funding outside of the base DoD budget. The OCO funding for fiscal year 2012 totaled $115 billion, and the Administration has requested $88 billion for fiscal year 2013. This significant reduction reflects the completion of U.S. military operations in Iraq in 2011. Our net sales historically have not been significantly dependent on overseas contingency or supplemental funding requests, and therefore, we continue to focus our attention on the DoD’s base budget for support and funding of our programs. 

In December 2011, Congress passed an omnibus appropriations act for fiscal year 2012 to finance all U.S. Government activities through September 30, 2012, the end of its fiscal year. This full year method of financing eliminated much of the uncertainty and inefficiency in procurement of products and services that characterized the first quarter of the government’s fiscal year 2012 when the operations of the federal government were financed through a series of continuing resolution temporary funding measures. As we begin 2012, presidential election year activities will likely mean a shortened session for Congress that will have to address the annual spending bills but also broader and more contentious policy issues associated with sequestration and tax policy. Given the complexity and sensitivity of these issues, Congress may resort to returning for a lame duck session after the November 2012 elections in order to deal with these more contentious issues. 

The fiscal year 2013 budget proposal reflects the Administration’s new national security strategy and is consistent with the lower spending levels imposed by the Budget Act. Despite the reduced defense spending levels in the President’s fiscal year 2013 budget proposal, we believe our broad mix of programs and capabilities continue to position us favorably to support the current and future needs of the DoD and our programs are well supported in the fiscal year 2013 budget request. This view was strongly supported by the Secretary of Defense’s initial public release of elements of the fiscal year 2013 defense budget request on January 26, 2012. For example, the budget supports continuation of all three variants of the F-35 and still maintains the same ultimate inventory objective of 2,443 aircraft for the U.S. Government as last year, although ramp up of production will be slowed due to budgetary constraints in the near term to allow for more testing and to minimize design changes impacting production aircraft. Additionally, the Secretary’s preliminary release specifically cited continued support for systems where we are the prime contractor or a major subcontractor such as the Global Positioning Satellite program, the Advanced Extremely High Frequency system, the Space-Based Infrared System, Phased Adaptive Approach missile defense system, DDG-51 AEGIS destroyer, and continued operation of the U-2 manned ISR aircraft. 

