The move comes as many in the defense industry are trying to reposition themselves as the government pulls back on spending. Federal agencies have already been making reductions, but a roughly $1 trillion cut that would hit in January could cost more than 2.1 million jobs nationally, according to a new estimate by George Mason University’s Center for Regional Analysis.
In hiving off Engility, L-3 is hoping to shed a unit that traditionally produces smaller profit margins and free up money to spend in other areas.
L-3 will retain its cyber, intelligence and security businesses, which posted $1.5 billion in sales in 2011.
Tony Smeraglinolo, former executive vice president of L-3’s services group and president of the global stabilization and development solutions division of Falls Church-based DynCorp International, becomes Engility’s chief executive.
He said it no longer made sense for L-3 to keep its products and services businesses together. While services businesses generally produce lower margins, they also don’t require the kind of capital investments — such as factories — needed to produce products such as tanks and radios.
“We really truly can distinguish ourselves on a return on invested capital,” Smeraglinolo said. “Will margins be different than a product business? By definition.”
Also, he said, Engility’s split from L-3 will allow it to pursue a broader range of work. Government conflict-of-interest rules — meant to ensure that a company doesn’t, for instance, build a system and then be responsible for testing it—has not allowed L-3’s services unit to compete for contracts that would create a conflict with the company’s other work. Some contractors, including Northrop Grumman, have previously divested their services groups to handle this problem.
“As the government got stricter and stricter . . . it got harder and harder for us to be a [systems engineering and technical assistance] provider at the same time [as] being a products company,” Smeraglinolo said. “We were losing market share; we had to not take a look at certain opportunities.”
Engility — the new name combines the words engineering and agility — has estimated its 2012 revenue as $1.6 billion, a decline from $2.1 billion in sales in 2011. The company has about 9,000 employees.
Facing a more constrained contracting environment, Smeraglinolo said Engility will reduce its costs — the company is looking at reorganizing its divisions to be more efficient — and pursue more contracts.
“We created Engility because of this,” he said. “We saw where this marketplace was going.”
The split is “a reflection of how hypercompetitive the services market has become,” said Byron Callan, a director at Washington-based investment research firm Capital Alpha Partners. The idea is that if Engility “is set up with a much leaner cost structure, it can be more competitive.”