Lockheed Martin 2013 Annual Report Download - page 33

For GFY 2013, which ended on September 30, 2013, sequestration resulted in a $37 billion reduction to the defense
budget in addition to reductions as a result of the discretionary spending limits already imposed under the Budget Control
Act. The impacts of sequestration in GFY 2013 were less than originally expected due to congressional actions that reduced
the cuts as well as the DoD’s ability to allocate a portion of the reductions to prior year unobligated balances and multi-year
investment appropriations. Accordingly, we have experienced minimal impacts to date.
In December 2013, Congress and the Administration enacted the Bipartisan Budget Act of 2013 (Bipartisan Budget
Act). Notably, the Bipartisan Budget Act increased the limits on discretionary spending for GFY 2014 and GFY 2015
imposed by the Budget Control Act, among other fiscal changes. In particular, the Bipartisan Budget Act allows for
approximately $63 billion of additional funding, including approximately $22 billion and $9 billion for defense spending
during GFY 2014 and GFY 2015, respectively, and similar amounts for nondefense programs over the same period. The
revised defense spending limits are set at approximately $520 billion for GFY 2014 and approximately $521 billion for GFY
2015. This agreement allows for more certainty in the budget planning process and provides the DoD the flexibility to better
address its priorities. However, the Bipartisan Budget Act retains the lower spending limits, including the across-the-board
spending reduction methodology, for GFYs 2016 through 2021 as provided for in the Budget Control Act. As a result, there
remains uncertainty regarding how sequester cuts beyond GFY 2015 will be applied as the DoD and other agencies may have
significantly less flexibility regarding how to allocate cuts in future years. While we have not yet seen the specific budget
allocations by program, we continue to believe that our portfolio of products will continue to be well supported in a
strategically focused allocation of budget resources.
On January 17, 2014, the U.S. Government passed its GFY 2014 budget to finance all activities through September 30,
2014, the end of its current fiscal year, after operating under continuing resolution temporary funding measures from
October 1, 2013 to January 18, 2014. The budget provides discretionary defense spending at levels consistent with the
planned defense spending limits in the Bipartisan Budget Act and eliminated much of the uncertainty and inefficiency in
procuring products and services under the continuing resolution. Under continuing resolutions, partial-year funding is
available at prior year levels, subject to certain restrictions, but new spending initiatives are not authorized.
Other Matters
While the recent budget actions provide a more measured and strategic approach to addressing the U.S. Government’s
fiscal challenges, sequestration remains a long-term concern. If not further modified, sequestration could have significant
negative impacts on our industry and company in future periods. There may be disruption of ongoing programs, impacts to
our supply chain, contractual actions (including partial or complete terminations), potential facilities closures, and thousands
of personnel reductions across the industry that will severely impact advanced manufacturing operations and engineering
expertise, and accelerate the loss of skills and knowledge. Sequestration, or other budgetary cuts in lieu of sequestration,
could have a material negative effect on our company as would any failure to address issues raised by the debt ceiling.
Additionally, we are seeking to lessen our dependence on contracts with the U.S. Government by focusing on expanding into
adjacent markets close to our core capabilities and growing international sales but may not be successful in this strategy.
Despite the continued uncertainty surrounding U.S. Government budgets, the investments and acquisitions we have
made in recent years have sought to align our businesses with what we believe are the most critical national priorities and
mission areas. The possibility remains, however, that our programs could be materially reduced, extended, or terminated as a
result of the U.S. Government’s continuing assessment of priorities, changes in government priorities, the implementation of
sequestration (particularly in those circumstances where sequestration is implemented across-the-board without regard to
national priorities), or other budget cuts in lieu of sequestration. Additionally, decreases in production volume associated
with sequestration, or other budget cuts in lieu of sequestration, will increase unit costs making our products less affordable
for both our domestic and international customers. Sequestration may also result in significant rescheduling or termination
activity with our supplier base. Such activity could result in claims from our suppliers, which may include both the amount
established in any settlement agreements, the costs of evaluating the supplier settlement proposals, and the costs of
negotiating settlement agreements. Furthermore, sequestration, or other budgetary cuts in lieu of sequestration, could result
in severance charges. We expect costs associated with claims from our suppliers and severance charges will be recovered
from our customers.
Generally, we expect that the impact of sequestration or other budget reductions in lieu of sequestration on our operating
results will lag in certain of our businesses with longer cycles such as our Aeronautics and Space Systems business segments,
and our products businesses within our MFC and MST business segments, due to our production contract backlog. However,
our businesses with smaller, short-term contracts are the most susceptible to the impacts of budget reductions, such as our
IS&GS business segment and certain services businesses within our MFC and MST business segments.
25