General Dynamics 2011 Annual Report Download - page 31

General Dynamics Annual Report 2011 19
BUSINESS ENVIRONMENT
The nation’s engagement in combating threats to U.S. national security
around the world, coupled with the need to equip and modernize U.S.
military forces, drives Department of Defense (DoD) funding requirements.
As a defense contractor, our financial performance is impacted by the
allocation and prioritization of U.S. defense spending. Procurement and
research and development (R&D) budgets, also known as investment
accounts, provide the majority of our U.S. defense revenues.
For fiscal year (FY) 2012, the DoD received funding of $531 billion,
including approximately $177 billion for procurement and R&D. This
funding was approximately $22 billion less than the President’s FY 2012
request due to the Budget Control Act (BCA) of 2011. The BCA, which
became law in August 2011, has two primary parts. The first mandates
a $487 billion reduction to previously-planned defense spending over
the next decade. The second part is a sequester mechanism that would
impose an additional $500 billion of cuts on defense funding between
FY 2013 and FY 2021 if the Congress does not identify a means to
reduce the U.S. deficit by $1.2 trillion. As of February 17, 2012, the
Congress has not identified these required savings. If the Congress does
not identify the required reduction, defense spending would likely sustain
further cuts.
For FY 2013, the President has requested total defense funding
of $525 billion, including $168 billion for investment accounts. In
accordance with the first part of the BCA, the DoD’s five-year spending
plan submitted with the FY 2013 funding request incorporates $259
billion of cuts when compared with the previous five-year plan. However,
the spending plan does not include the impact of sequestration, the
second part of the BCA. Despite these additional cuts, investment
accounts are projected to display modest growth throughout the five-year
period, with procurement funding for mature programs growing and R&D
funding for development programs declining over the period.
Budget expenditures lag congressional funding, with appropriated
money generally awarded over several years. A series of continuing
resolutions over the past year has resulted in a protracted customer
acquisition cycle that negatively impacted the flow of contract awards,
particularly in our shorter-cycle Information Systems and Technology
business group. The threat of further defense spending cuts and the
potential for a fourth-quarter 2012 continuing resolution due to budget
approval delays may further impact contract awards.
While the U.S. budget deficit will continue to influence government
spending decisions, we expect defense funding requirements to continue
to be driven by the following:
• support for the warfighter in the face of threats posed by an uncertain
global security environment, including the DoD’s increased emphasis
on the Asia-Pacific region;
• the number of troops deployed globally, coupled with the overall size
of the U.S. military;
• the need to reset and replenish equipment and supplies damaged and
consumed in Iraq and Afghanistan since 2001; and
• the need to modernize defense infrastructure to address the evolving
requirements of modern-day warfare.
With these budget uncertainties, the long-term success of our U.S. defense
business is enhanced by the relevance of our programs to the military’s funding
priorities, the diversity of our programs and customers within the budget, our
insight into customer requirements stemming from our incumbency on core
programs, our ability to evolve our products to address a fast-changing threat
environment, and our proven track record of successful contract execution.
In addition, the continuing tenuous geopolitical landscape requires
governments around the world to fund weapons and equipment modernization
programs, leading to diverse defense opportunities. We continue to pursue
opportunities presented by international demand for military equipment and
information technologies from our indigenous international operations and
through exports from our U.S. businesses. While the revenue potential can be
significant, international defense budgets are subject to unpredictable issues
of contract award timing, changing priorities and overall spending pressures.
As we broaden the customer base for our defense products around the world,
we expect our international sales and exports to grow.
In our Aerospace group, business-jet market conditions showed further
improvement in 2011, particularly in the large-cabin market. The group
benefitted from increased flying hours across the installed base, improved
new-aircraft order interest and declining customer contract defaults. Continued
investment in new aircraft products is expected to drive Aerospace’s long-term
growth, particularly as the group remains on track to deliver its newest aircraft
offerings, the G280 and the G650, in mid-2012. Similarly, we believe that
aircraft-service revenues provide the group diversified exposure to aftermarket
sales fueled by continued growth in the global installed business-jet fleet.
(Dollars in millions, except per-share amounts or unless otherwise noted)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For an overview of our business groups, including a discussion of products and services provided, see the Business discussion contained in
Part I, Item 1, of this Annual Report on Form 10-K.
2011 Sales by Customer ($33 Billion)
n U.S. government
n Non-U.S. government
n U.S. commercial
n Non-U.S. commercial
69%
9% 12% 10%