Tucson-based Raytheon Missile Systems stands to reap the benefits of another big boost in U.S. defense spending in fiscal year 2019, as demand for its missile-defense interceptors and other weapons grows.
The Pentagon in its recently released budget request for fiscal 2019 shows healthy increases in orders for some of Raytheon’s biggest programs.
And that’s on top of increases in 2017 and 2018 that helped propel the parent company Raytheon Co. and the local missile unit to record sales last year.
“These are very big increases, and though the pace of the funding is hard to predict, the bottom line here is that Raytheon is going to be a big beneficiary,” said Loren Thompson, chief operating officer of The Lexington Institute, a nonprofit think tank based in Arlington, Virginia.
“What this means for Tucson is that a lot more missiles are going to be built.”
Raytheon is getting ready, with construction underway on a plant expansion at its Tucson International Airport site. In late 2016, the company said it plans to spend upwards of $400 million in new construction and add nearly 2,000 jobs to meet growing demand for its weapons systems.
Raytheon saw record sales of more than $25 billion companywide last year, with net sales at Missile Systems growing 10 percent to $7.8 billion.
Those 2017 revenues flowed largely from earlier appropriations, but a new wave of cash is expected to flow when the fiscal 2018 budget is formalized.
President Trump signed a $700 billion defense authorization bill for fiscal 2018 in December, including a base budget of $626 billion and overseas war funding of $66 billion. But Congress must still pass a formal appropriations bill — now five months after the Oct. 1 start to the federal fiscal year.
Until then, the Pentagon is operating under a continuing budget resolution through March 23, but the armed services can spend money below last year’s levels on existing programs, Thompson said.
The Pentagon’s fiscal 2019 budget request, which calls for $617 billion in base funding and $69 billion in war funding, includes big increases for missile defense and other big Raytheon programs.
Thompson said the increases are good for defense contractors but are not sustainable in the long run because the spending spree is adding trillions of dollars to the national debt.
“The question is, how long is this going to last?” he said. “This could be the shortest military buildup in history.”
Officials of Raytheon Missile Systems, which generally doesn’t comment on pending budget matters, did not respond to a request for comment.
But Raytheon Co. CEO Tom Kennedy said recently that support in Congress is unwavering.
“For the U.S. defense budget, we continue to see strong congregational backing for missile defense, cyber and other areas where Raytheon has a leadership position,” Kennedy said on a conference call with analysts in late January.
MISSILE DEFENSE BUMP
The U.S. Missile Defense Agency is requesting a fiscal 2019 budget of $9.9 billion, up from $8.5 billion for fiscal 2018, to meet “increasingly capable missile threats.”
As a main supplier of missile-defense interceptors and radars, Raytheon stands to gain from increases in a range of programs.
Raytheon Missile Systems makes the Standard Missile-3 interceptors used by the mainly ship-based Aegis Ballistic Missile Defense System and the space kill vehicle for the Ground-based Midcourse Defense system. Other Raytheon units make most missile-defense radars and an interceptor used in the Patriot system.
Raytheon Missile Systems also has developed smaller interceptors based on its air-to-air missiles for Israel’s Iron Dome and David’s Sling missile-defense systems.
The MDA has requested $926 million in fiscal 2019 for the Ground-based Midcourse Defense system, a system of large land-based interceptors designed to bring down long-range ballistic missiles in space. The request includes procurement and deployment of 20 additional interceptors at Fort Greely, Alaska.
The agency also is looking to spend $561 million to develop a new kinetic kill vehicle — which destroys targets by sheer impact — to replace Raytheon’s Exoatmospheric Kill Vehicle on the ground-based interceptors.
MDA wants to spend $708 million in fiscal 2019 to buy 37 SM-3 IB missiles and six SM-3 IIAs for the ship-based deployment around Europe and $15 million for a land-based Aegis Ashore site in Poland.
Over the next five years, the MDA plans to order 204 SM-3 IB missiles and 39 SM-3 IIAs. The agency also wants to spend more than $400 million developing new radars, including a sea-based radar built by Raytheon.
A missile-defense advocate said the MDA budget needed to grow to meet emerging threats such as North Korea, which in November launched a missile experts say was capable of hitting the U.S. mainland.
“I think the support level is the highest it’s ever been, because of the North Korean threat,” said Riki Ellison, chairman of the Missile Defense Advocacy Alliance.
Ellison said the MDA has slowed planned buys of the ground-based interceptors as they await the revised kill vehicle, so the agency is focusing on development of Raytheon’s SM-3 Block IIA, a larger, faster version of previous SM-3 versions that was co-developed with Japan.
“They should be some very happy employees in Tucson, because they’re going great guns over there,” said Ellison.
But there is still much work to be done, especially after a SM-3 Block IIA failed to hit its target in a test off Hawaii in late January, following a successful intercept test in February 2017 and a failure last June that was blamed on human error.
The MDA has mounted a failure review to find out what went wrong with the latest test, which cost $130 million.
Ellison believes the cause will turn out to be something simple to fix, based on his conversations with officials.
“With testing, you’re going to need a lot in there, and more in case it fails,” Ellison said. “That’s why you fire two missiles at something.”
But he said he remains confident the nation’s current missile-defense systems can meet the threat and predicted the SM-3 Block IIA will become the MDA’s go-to interceptor.
“That thing’s going to go, and they’re going to be moving big production numbers of them,” Ellison said.
The Navy has proposed halting new buys of Raytheon’s Tomahawk cruise missile — the nation’s primary first-strike weapon — instead turning to recertification and upgrades to about 4,000 Tomahawks currently in inventory while it seeks to develop a next-generation replacement.
The Navy proposed a production stoppage in 2015 but Congress stepped in to order more Tomahawks.
Now, the Navy proposes spending about $20 million in fiscal 2019 on a “smart shutdown” of the Tomahawk production line.
And the Navy plans to spend more than $534 million to upgrade the existing 3,992 Tomahawks through 2023, starting with 87 in fiscal 2019 at a cost of $28 million.
But Raytheon also will work into 2019 to build 196 new Tomahawks, under a $260 million contract awarded in November using fiscal 2017 and 2018 funds.
Raytheon also is working to develop a Maritime Strike Tomahawk that can hit moving ships, under an initial $119 million contract awarded last year.
The Pentagon has proposed significant buys of several other Raytheon weapon systems for fiscal 2019, including:
- Standard Missile-6: $692.4 million for 125 of the multipurpose air defense missile for the Navy, same quantity at a slightly lower cost than 2018;
- Small Diameter Bomb II: Proposed $370 million contract for development and procurement of 1,260 copies of the slender, all-weather glide bomb for the Air Force and Navy, up from $255.7 million for 550 missiles in fiscal 2018;
- AIM-9X Sidewinder: $293 million for 447 missiles for the Air Force and Navy, down slightly from 2018;
- Rolling Airframe Missile: $122.5 million for 120 copies of the small ship-defense missile, double the 2018 buy;
- Javelin anti-tank system: $317 million for 714 of the shoulder-fired missiles, produced by a Raytheon-Lockheed joint venture, plus $31 million for 75 for war use.
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