Annual Reports Show R&D Down at U.S. Companies

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As the Pentagon continues to emphasize innovation in its budget considerations, top defense contractors reported stagnant or declining research-and-development (R&D) spending as part of their annual reports released the week of Feb. 20.

Lockheed Martin reported a reduction of 8 percent in independent R&D spending for 2011, down to $585 million from $639 million in 2010 and $717 million in 2009.

Northrop Grumman saw a 6 percent decline in independent R&D, as the company spent $543 million, $580 million and $588 million in 2011, 2010 and 2009, respectively.

While defense companies can account for R&D spending differently, most of the funding traditionally comes from the Defense Department through independent R&D, as some research-and-development costs are reimbursed as part of overhead. Internal spending, which is typically included in other figures in financial disclosures, has also been on the decline, experts said.

“It’s hardly a surprise,” said Byron Callan, a market analyst with Capital Alpha Partners. “They don’t just have to answer to the Pentagon. They also have to answer to shareholders.”

Boeing and Raytheon saw stagnant R&D spending overall, while General Dynamics reported an increase, although analysts noted that the financial disclosures do not separate commercial and defense R&D spending for those companies.

Defense executives have cited concern that shareholders do not value R&D because the return on investment is not always readily apparent when companies invest in future technologies. With contractors preparing for expected cuts, R&D has become a target.

Defense Secretary Leon Panetta cited the need for innovative technology as part of Defense Department’s strategy at the budget rollout Feb. 13.

“We’re depending a great deal on being at the technological edge of the future,” Panetta said. “I think we even have to leap forward. If we’re going to deal with the kind of challenges we’re going to face, we’ve got to be smart enough, innovative enough, creative enough to be able to leap forward.”