Raytheon, defense companies cash in on ‘unprecedented’ wave of classified spending

WASHINGTON - Some of the biggest defense contractors - including United Technologies Corp. merger partner Raytheon Co. - are making more money than ever from classified military and intelligence programs, top executives told investors last week, as competition with China and Russia drives a wave of secret spending one analyst called 'unprecedented in recent history.”

Executives from Northrop Grumman and Raytheon Co. reported double-digit growth in classified defense business over the past year.

Raytheon Co. and UTC, parent of Collins Aerospace, Cedar Rapids's largest employer, announced plans in June 2019 to merge.

The deal, valued at $135 billion, would create one of the globe's largest aerospace companies and the second-largest defense company, just behind Lockheed Martin Corp.

The UTC-Raytheon merger, expected to be finalized by the first half of this year, still requires approval by U.S. regulators. The newly created parent, to be called Raytheon Corp., will be headquartered in the Boston area.

Northrop Grumman chief executive Kathy Warden told analysts that 'restricted” work - a term that refers to classified programs - saw a double-digit increase over 2018.

It now accounts for more than a quarter of the company's $33.8 billion in 2019 sales, she said.

Buying priorities

She attributed the change to a shift in the agencies' buying priorities.

'Our customers are increasingly focused on rapidly evolving multi-domain peer threats in areas like space, hypersonics and missile defense,” Warden said in a call with investors.

'Our growing share of restricted work demonstrates that our customers are turning to Northrop Grumman for these capabilities.”

Hypersonics was one of the key reasons cited by Raytheon chief Thomas Kennedy for wanting the merger with UTC.

'Technology is a foundation for the entire company, and then upon that we build a commercial business and a defense business,” Kennedy said in June.

In 2017, the Pentagon announced it would de-emphasize fighting terrorism to focus its resources on competing with hostile nations for military dominance, an endeavor that includes developing new advanced weaponry, finding new ways to protect spy satellites from harm and embracing artificial intelligence.

That effort has benefited from a 16 percent increase in military spending between 2016 and 2019.

Analysts say the current surge actually started in the final years of the Obama administration. An analysis of publicly available budget data by Todd Harrison, an analyst with the Center for Strategic and International Studies, found that classified research and development funding increased by about 52 percent between 2015 and 2020.

'We've seen a substantial increase in recent years that we have not seen in quite a while,” Harrison said, calling the increase 'unprecedented in recent history.”

Raytheon's Kennedy said his company's classified work reached a record in 2019 after growing 17 percent over the previous year.

Classified programs now account for about a fifth of the company's $29 billion in annual sales, he said.

He said classified work is 'seed corn” for Raytheon Co., using an agricultural term that refers to saving part of one year's harvest to seed the next one.

'For Raytheon is, the greater the amount of classified work we have, the stronger our future will be and our ability to generate new franchises that last for decades to come,” Kennedy said.

Secret projects

Secret projects are highly sought after in the Beltway's insular defense industry. They tend to be subject to less oversight from Congress and the public.

The simple fact that the details are limited to a small community of security-cleared individuals can shut out unwanted competition.

'Classified programs typically are less vulnerable to criticism by members of Congress, by the media and by outside commentators,” said Loren Thompson, a defense consultant with the not-for-profit Lexington Institute.

He added that the requirement to get a security clearance tends to limit the competition to a small group of companies.

'There is no way that a French company could compete with Lockheed Martin (for a classified contract) because they will never be cleared to do the work,” Thompson said.

'That probably applies to most of Silicon Valley also.”

Some officials say too much of the military's information is classified.

'We're just so over-classified it's ridiculous, just unbelievably ridiculous,” said Gen. John Hyten, vice chairman of the Joint Chiefs of Staff, at a recent event hosted by the Air Force Association.

Hyten added he thinks over-classification could be holding the Pentagon back, adding he is working with Defense Secretary Mark Esper and others to 'push down the classification to where it makes sense.”

'I think this year we're going to have some significant improvement in that so we can actually share some very important things with our allies, with industry,” Hyten said.