Public companies balance disclosure, secrecy around growing classified work

Publicly-traded government contractors have a delicate balancing act regarding their obligations to give investors their full financial picture but also keep classified work for customers largely under wraps.

With that said, two of the largest GovCon companies were asked about their footprints in the classified domain during respective earnings calls on Thursday and both peeled at least one onion layer back, but only to a point.

During Raytheon’s likely final earnings call, CEO Tom Kennedy sized up for investors the company’s book of classified business as it prepares to merge with United Technologies Corp. in early April.

Classified revenue made up for nearly 20 percent of the company’s total $29.2 billion in revenue last year, while 22 percent of its overall $12 billion in bookings were of the classified variety and set a company record.

The kinds of bookings the company cannot talk much about grew 17 percent year-over-year. But in a response to one analysts' question about it, Kennedy was glad to talk about what those kinds of contracts do for Raytheon.

“Classified work is the seed corn for our future franchises. This classified work allows us to take our technical capabilities, resources and (intellectual property), and work hand in glove with our customers to evolve the next set (of) franchises that will enable our customers to meet their mission needs,” Kennedy said.

“The greater 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.”

Northrop Grumman also on Thursday disclosed at least the size of its classified portfolio, or what it calls restricted, even if specifics are not to be discussed.

CEO Kathy Warden told analysts that restricted work made up for around 25 percent of the company’s $33.8 billion in revenue last year, while restricted awards hit $11 billion and $7 billion of that was in the space domain. Northrop reported $45.2 billion in total net awards for last year.

“Our customers are increasingly focused on rapidly evolving multi domain peer threats in areas like space, hypersonics and missile defense,” Warden said. “Our growing share of restricted work demonstrates that our customers are turning to Northrop Grumman for these capabilities.”

Back to the Raytheon-UTC merger. A second item of investor focus and speculation is whether the commercial cyber business Forcepoint will make its way to the future Raytheon Technologies. Raytheon acquired 80 percent ownership of what was then Websense in 2015 from Vista Equity Partners and confirmed it has now acquired the remaining 20 percent stake from Vista. 

Analysts and other market watchers singled out the future Forcepoint as an item to watch as the Raytheon-UTC merger gets closer and a possible divestiture as portfolio reshaping becomes part of the combined company’s agenda.

Greg Hayes, CEO of UTC and future chief executive for what will be Raytheon Technologies, said in a Tuesday earnings call that a portfolio review is a certainty and “there will be places where we might elect not to invest and to cash out” along with areas “where we might want to double down.”

“Obviously at the end of the day, we still want to monetize the (Forcepoint) asset, we’re going to do that in a smart way and evaluate all of our options,” Raytheon Chief Financial Officer Toby O’Brien said Thursday. “The whole software security market continues to trade pretty favorably here and as we move along we’ll be looking to do what makes the most sense for the company and shareholders around that."