Raytheon 2012 Annual Report Download - page 38

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officials estimate that such sequestration would reduce funding for the DoD by approximately $45 billion in FY 2013 and
nearly $500 billion over the FY 2013 - FY 2021 period, relative to long-term plans provided as part of the DoD's FY 2013
budget request.
Both Administration officials and senior congressional leaders have indicated their desire to avoid sequestration, and agreed
to delay the commencement of sequestration from the originally scheduled date of January 2, 2013 until the current date of
March 1, 2013. However, it remains uncertain whether sequestration will be averted fully or in part, or delayed further, due
to the overall fiscal constraints of the U.S. Government and the difficulty of enacting relevant legislation. As a result, a broad
range of potential outcomes for the DoD budget in FY 2013 and future years remains possible at this time, with the specific
outcome depending upon decisions and legislation that will need to be agreed upon by the Administration and Congress. In
addition, there are potential changes in how sequestration could be implemented that will determine the impacts that may
result, and officials in both the Administration and Congress have indicated that the DoD may be given more flexibility than
the BCA currently provides. As a result, the specific impact of sequestration, if any, as well as any other potential actions on
U.S. Government spending and future DoD budgets and our programs are unknown at this time and we are unable to predict
the effect any of the foregoing would have on our future financial performance and outlook. Nonetheless, in the event that
sequestration does go into effect, or if other actions are taken to significantly reduce the DoD budget, it is possible that such
reductions and related cancellations or delays affecting our existing contracts or programs could have a significant impact on
the operating results of our business.
With respect to U.S. defense priorities, the DoD issued strategic guidance in January 2012 regarding its priorities for the next
ten years. The DoD guidance identified the primary missions of the U.S. armed forces and the capabilities expected to be
critical to future success, including intelligence, surveillance and reconnaissance (ISR), missile defense, electronic warfare,
unmanned systems, special operations forces, interoperability with allied forces and cybersecurity. Although the actual impact
of implementation of the strategic guidance on the DoD budget and our programs is uncertain, we believe that we continue
to be well positioned to support and provide many of these critical and enduring missions and capabilities.
U.S. Government sales, excluding foreign military sales, accounted for 73% of our total net sales in 2012. Our principal U.S.
Government customer is the DoD. Although DoD funding has grown substantially since FY 2001, when it was approximately
$300 billion, given the current budget environment, future domestic defense spending levels are difficult to predict and may
decline over the next several years. A number of additional factors potentially impacting the DoD budget include the following:
– External threats to our national security, including potential security threats posed by terrorists, emerging nuclear states
and other countries;
– Support for on-going operations overseas, including Afghanistan, which will require funding above and beyond the DoD
base budget for their duration;
– Reductions as a result of sequestration, or lesser reductions as an alternative to sequestration;
– Disruptions to federal appropriations from default, a government shutdown, or a year-long continuing resolution (CR);
– Cost-cutting measures implemented by the DoD, such as the “Better Buying Power" initiative, to ensure more efficient
use of its resources in order to sufficiently fund its highest priorities;
– Priorities of the Administration and the Congress, including but not limited to deficit reduction, which could result in
changes in the overall DoD budget and various allocations within the DoD budget; and
– The overall health of the U.S. and world economies and the state of governmental finances.
Congress has not yet made a final appropriation for the DoD for FY 2013. The DoD is scheduled to operate until March 27,
2013 under the terms of a CR. The CR caps funding, on an annualized basis, for the DoD base budget at 0.6% over the FY
2012 approved base budget of $531 billion. However, since the FY 2012 base budget is greater than the Administration's
request of $525 billion for FY 2013, we do not expect funding for the CR to exceed the requested amount for FY 2013. The
Administration's request for the DoD FY 2013 base budget represents a reduction of 1% from the prior year's approved amount
and reflects the constrained budget environment. Although the Administration's long-term plan, published in February 2011,
contemplates a modest increase in DoD funding for future years, the results of deficit reduction actions or changes in priorities
by the Administration and/or Congress could reduce these projections.
Overseas Contingency Operations (OCO) in Afghanistan (and before they were concluded, in Iraq), have largely been funded
apart from the DoD base budget to better maintain visibility and oversight of war costs. Under the CR, OCO funding for FY
2013 is $88 billion. This is lower than the $115 billion enacted for FY 2012 OCO activities, due to reduced operations in
Afghanistan and conclusion of operations in Iraq. Looking forward, OCO funding is expected to continue to decline as troops