From skunk + works. The term originated with Lockheed's unit by that name. As one source reports:
"[L]egend goes that one of Lockheed's engineers asked, "What the heck is Kelly [a Lockheed engineer] doing in there?" "Oh, he's stirring up some kind of brew" was the answer. This brought to mind Al Capp's popular comic strip, Li'l Abner and the hairy Indian who regularly stirred up the brew, throwing in skunks, old shoes, and other likely material to make his 'kickapoo joy juice. Thus, the skunk works was born and named."
-George Tesar, Strategic Technology Management: Building Bridges Between Sciences (2003) p. 117.