The growth of the Aerospace and Defense industry depends largely on the spending outlook of government departments, with the U.S. defense budget being the primary driver. The U.S. is the world's largest aerospace and defense market, and also home to the world's largest military budget. The industry largely depends on U.S. government contracts.

Defense spending is the major source of revenue for the top nine global aerospace and defense companies, with the US accounting for more than 40% of total global defense spending. Given the uncertain macroeconomic environment, not just in the U.S. but also globally, the industry faces the risk of fewer new orders as customers are more likely to postpone or cancel contractual orders and/or payments.

With the U.S. government expected to institute greater austerity in its defense budget going forward, defense companies will need to source more orders from global clients. The geo-strategic significance of the industry and the related heavy export restrictions will come in the way, to some extent, of those marketing efforts by U.S.-based operators.

The U.S. defense budget for 2012 was $645.7 billion, with the base budget at $530.6 billion and $115.1 billion approved for Overseas Contingency Operations ("OCO") as supplementary defense spending, mainly to fund ongoing wars. In February this year, the Department of Defense ("DoD") requested a Pentagon base budget of $525.4 billion for 2013, which is approximately $5.1 billion or 1% less than what is approved for fiscal 2012, with $88.5 billion earmarked for OCO spending.

In early August 2012, the subcommittee recommended $511 billion for DoD's base budget and $93 billion for OCO spending, for a total of $604.5 billion for fiscal 2013.

The general trend is approving an amount less than requested. However, here the government has outstripped OCO spending more than requested. In this case, the money has been transferred from one bill to the other in order to keep the base budget within the budget law's spending limits.

Since the September 2001 WTC and Pentagon attacks, the U.S. government has spent significant amounts on military campaigns overseas. The country has already decided to gradually move out of Afghanistan, and the war in Iraq has finally ended, which is expected to lower its expenditure on foreign campaigns.

However, its clandestine military operations in other nations as part of anti-terrorism operations will continue to add to foreign war expenses. The overall trend in overseas military spending is unmistakably on the downtrend.

OPPORTUNITIES

Acquisition, Merger, Spin-offs and Strategic Alliance

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Aerospace & Defense Stock Overview - Aug. 2012 - Industry Outlook