2012 Defense Budget Sparks Changes to Government Programs
After months of budget debate and speculation, President Obama sent the 2012 DoD budget request to Congress on February 14th. The proposed $671 billion budget, which includes $553 billion in discretionary authority for the base budget and $118 billion to support overseas contingency operations (“OCO”), is 5% lower than the 2011 request. The 2012 request was largely in line with Secretary of Defense Robert Gates’ preliminary presentation to Congress in January, where he outlined approximately $80 billion in spending cuts over five years. The relief rally for defense stocks that followed Gates’ January announcement, driven by alleviated uncertainty and relatively conservative program reductions, seems to have now largely run out of steam.
Details of the proposal include reduced F-35 procurement and probation for the STOVL variant, the widely expected cancellation of the USMC Expeditionary Fighting Vehicle (“EFV”), and termination of the SLAMRAAM and Non-Line of Sight Launch programs. The announcement also included positive news for well-positioned firms, as Gates presented plans for several ground and air modernization initiatives, extended F/A-18 procurement, and increased UAV investment. Additionally, the F-35 program modifications and EFV cancellation will be partially offset for contractors by additional F-35 development funding and likely upgrades for the existing USMC amphibious fleet.