Exelis spinning off government services unit into separate public company

December 15, 2013

McLean-based defense contractor Exelis will become the latest to separate its technology business from its government services work, unveiling a plan last week to spin its services unit into an independent public company by summer.

The move reflects the increased strain facing contractors as Pentagon spending shrinks. Several companies have reacted by separating their services units, which typically have lower profit margins and are more vulnerable to government pricing pressure.

Last year, New York-based L-3 Communications spun off much of its services work into Chantilly-based Engility, while earlier this year, McLean-based Science Applications International Corp. split its company into two pieces: a technology business and a services company.

Executives at Exelis, which itself was spun off from parent company ITT in 2011, said the deal would allow each of the two companies to be more flexible.

“It will enable both companies to maximize potential financial performance,” said David F. Melcher, Exelis’s chief executive, in a call with analysts.

The new unit, now known as Exelis Mission Systems, will be renamed and re-branded. The business has close to 7,000 employees and an estimated $1.5 billion in 2013 revenue.

The new company is to be led by Kenneth W. Hunzeker, a retired three-star Army general who has served as president of Exelis Mission Systems since 2011. Louis J. Giuliano, a former chief executive of ITT who is now an executive at private equity firm Carlyle Group, will be nonexecutive chairman of the new company’s board.

Melcher said the unit’s work is focused on logistics, base operations and network communications, adding that the business significantly restructured in 2013.

“Mission Systems will be one of the largest pure-play military and government services providers in the market,” he said.

The remaining Exelis business will have estimated 2013 revenue of $3.4 billion and about 12,000 employees. Melcher said the new business will be better diversified; about half of its revenue will come from non-U.S. defense agencies, including NASA and the Federal Aviation Administration, as well as international and commercial work.

The spin-off suggests more changes are coming in the industry, said Michael S. Lewis, managing director of the Silverline Group, a defense industry consulting firm. Defense analysts have argued that companies have to get smaller — creating more manageable units.

“There is a consolidation that is coming,” Lewis said. “It has got to occur in the services space first.”

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