Northrop Grumman 2012 Annual Report Download - page 34

NORTHROP GRUMMAN CORPORATION
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Political and Economic Environment
The U.S. Government continues to face substantial fiscal and economic challenges that affect funding for its non-
discretionary and discretionary budgets. Part I of the Budget Control Act of 2011 (Budget Control Act) provided for
a reduction in defense budgets by at least $487 billion over a ten year period. Part II provided the potential for
substantial additional reductions, through a process known as “sequestration.” The President's proposed fiscal year
(FY) 2013 budget represented a slight decline for defense from FY 2012. While Congress has not passed a FY 2013
budget, it did pass a six-month continuing resolution that funds the U.S. Government through March 27, 2013. This
continuing resolution restricts new starts and provides for discretionary spending levels that represent a slight
increase over the FY 2012 budget. It is unclear whether annual appropriations bills will be passed during FY 2013.
The U.S. Government may operate under a continuing resolution for all of FY 2013, restricting new contract or
program starts for that year.
The American Taxpayer Relief Act of 2012 was enacted in January 2013. It addressed a number of tax code
provisions and certain spending issues but left in place the sequester (although delaying its implementation to March
1, 2013) and did not address other fiscal matters such as the debt ceiling. The nation's debt ceiling is currently
expected to be reached during the first half of 2013. Congress and the Administration continue to debate these issues
and the terms of a possible national fiscal approach. The outcome of that debate could have a significant impact on
future defense spending plans. While the President's proposed FY 2014 budget is scheduled for release in February
2013, its delivery may be delayed given these unresolved broad fiscal matters.
The Congressional budget process to finalize FY 2013 defense spending also has been marked by continued
uncertainty and significant debate, increasing the possibility of sequestration occurring. As noted above, the Budget
Control Act calls for additional substantial defense spending reductions through sequestration, if Congress is unable
to agree on a budget that conforms with the Budget Control Act requirements. Should sequestration, as currently
mandated, be implemented in March 2013, absent any other changes, we expect it would have serious negative
consequences for the security of our country, the defense industrial base, including Northrop Grumman, and the
customers, employees, suppliers, investors, and communities that rely on the companies in the defense industrial
base.
There continues to be much uncertainty also regarding how sequestration would be implemented, if it were to go
into effect. There are many variables in how the law could be applied that make it difficult to determine the specific
impacts. However, we expect that sequestration, as currently provided for under the Budget Control Act, would
result in lower revenues, profits and cash flows for our company.
Members of Congress are discussing various options to address sequestration's automatic spending cuts. While we
cannot predict the outcome of these efforts, it is likely that budget decisions made in this environment will have
long-term consequences for our company and the entire defense industry.
In addition to fiscal and budgetary constraints, we expect defense spending to be affected by the drawdown of U.S.
force levels tied to current major overseas deployments and other shifts in defense missions and priorities. As overall
defense spending declines, the Department of Defense (DoD) is continuing to re-evaluate the role and structure of
the U.S. military. In 2012, the DoD announced a new defense strategy intended to guide its priorities and budgeting
decisions. The guidance calls for the U.S. military to project power globally and operate effectively in all domains,
including cybersecurity, and it places particular emphasis on Asia Pacific as an area of strategic focus.
We believe that spending on recapitalization, modernization and maintenance of defense, intelligence, and homeland
security assets will continue to be a national priority. Future defense spending is expected to include the
development and procurement of new manned and unmanned military platforms and systems along with advanced
electronics and software to enhance the capabilities of existing individual systems and provide real-time integration
of individual surveillance, information management, strike, and battle management platforms. We expect significant
new competitive opportunities to include long range strike, missile defense, command and control, network
communications, enhanced situational awareness, satellite systems, restricted programs, cybersecurity, technical
services and information technology contracts, as well as numerous international and homeland security programs.
See Risk Factors located in Part I, Item 1A for a more complete description of risks we face.