Rise of classified revenues creates transparency challenge
- By Ross Wilkers
- Jul 31, 2017
Just about every publicly traded government contractor has a word of caution to investors with an interest in the business’ inner workings: We can’t tell you everything.
In particular, the classified nature of work performed by companies in the federal technology and professional services arena prevents them from giving Wall Street too much of a glimpse into what they do. Many companies include this as a “risk factor” in their annual reports for investors to consider before buying stock in their company.
And this issue of sometimes-low transparency will become even more of an obstacle for anyone trying to evaluate a contractor’s performance, according to a leading government services market analyst and recent comments from many government contracting CEOs.
One factor behind that increase in secrecy is forecasts of higher cybersecurity spending and other areas related to technology and IT, Drexel Hamilton government services analyst Brian Ruttenbur told Washington Technology.
“This is a very difficult sector to follow because so many companies work with the ‘three-letter agencies’ ”, Ruttenbur said. “You can track trends and budgets even if you can’t drill down with the companies.”
Within cyber and other IT areas, Ruttenbur sees a “rising tide of funding” as lawmakers and the White House share a sentiment toward increased spending there.
Many companies have undertaken large acquisitions that involved significant volumes of classified work in cyber and other technology areas. Ruttenbur singled out CACI and Engility in particular as examples of those that “made transformative acquisitions” to grow their classified work.
Comments from CEOs in recent second quarter earnings calls have given clues on how limited they are in what they can say, not just on the nature of the work itself but the company’s financial performance on it.
Northrop Grumman CEO Wes Bush said Wednesday an “increasing fraction of our business may become restricted [as agencies] become a bit more sensitized to the security environment and nature of the threat profile we’re addressing.”
“There are some sensitivities to how much information, even when it comes to percentage types of information, that we can discuss along those lines,” Bush said.
Canada-based space company MacDonald, Dettwiler and Associates will list its shares on the New York Stock Exchange after its acquisition of DigitalGlobe closes. Both moves are part of MDA’s U.S. Access Plan to gain eligibility for classified space contracts but describing growth in that work to Wall Street will be challenging, MDA CEO Howard Lance said Friday.
“We won’t be able to provide a lot of color around that, unfortunately. But we’ll do our best to try and talk about progress,” Lance said.
Vencore’s June filing for an initial public offering also details the deliberate lack of transparency the company will have upon its listing on the NYSE. That “will limit your insight into a substantial portion of our business and therefore may leave you less able to fully evaluate the risks related to that portion of our business,” Vencore’s registration statement reads in part to warn investors.
There are still avenues for investors to determine whether a government contractor is performing well or not. Namely, Ruttenbur pointed to the top- and bottom-line results companies produce every quarter and every year.
“They can’t lie with GAAP accounting,” he said.
Generally accepted accounting principles is the accounting standard adopted by the Securities & Exchange Commission that regulates how publicly traded companies report financial results and balance sheets. GAAP standards aim to help investors and creditors get useful information in order to make decisions about a company’s prospects.
Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at email@example.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.