McLean-based defense contractor Exelis recently completed the spinoff of its services unit, making it the latest government contractor to reorganize itself to better compete in a constrained federal spending environment.
Exelis, created out of the separation of industrial company ITT in 2011, announced the decision to separate its services business late last year. The new publicly traded company, called Vectrus, is based in Colorado Springs.
The company’s move to break off its services unit is part of a larger trend among government contractors to position themselves favorably in times of reduced budgets. The strategy for many companies is to free themselves up to focus on what they perceive as their core area of business, said Michael Lewis, managing director of McLean-based Silverline Group.
In 2012, L-3 Communications created Engility, a technology services company based in Chantilly. L-3 kept its cyber, intelligence and security businesses while Engility focused on software support, consulting and management services.
Similarly, Science Applications International Corp. spun off an information technology services unit and rebranded itself as Leidos to focus on the engineering and commercial health-care business. In 2010, defense giant Northrop Grumman also spun off a part of its services unit to create TASC, another Chantilly company.
Services companies generally have low profit margins and are affected by government pricing pressures, so it makes sense to separate them from other parts of a company.
In addition, the division of markets means that there is less competition for resources within the same company, Lewis said.
When the spinoff was announced, Exelis noted that it would enable both companies to compete more effectively in their own markets.
Exelis is a $4.8 billion aerospace and defense company that makes products such as electronic warfare systems used aboard military jets and ships, and physical components for warplanes such as the F-35 Lightning II or commercial aircraft such as the Boeing 787 Dreamliner. The company also makes communications systems for NASA and imagery software used in scientific and spy satellites. The split allows Exelis to focus on the manufacture and maintenance of those products, company executives said.
“We are becoming a smaller company, little bit more focused as a result of this spinoff,” David Melcher, the company’s chief executive, told investors in an earnings call.
For Exelis, another key benefit of the split is its diversified customer base, an Exelis spokesman said. That’s because the company wants to expand its presence in the commercial and international markets, he said.
Many government contractors have started chasing commercial markets or international clients to make up for the slowdown in domestic business.
With the split becoming official Sept. 27, Defense Department contracts are set to make up about half of Exelis’s revenue, down from 70 percent, the spokesman said. The remaining half is divided among civilian government agencies such as NASA, foreign governments and commercial customers.
Vectrus, with sales of about $1 billion, will operate as a “pure play” services provider. The company is working in three areas: logistics and supply-chain management, network communications, and managing infrastructure such as vehicles, warehouses and military bases for the Defense Department.
Vectrus isn’t starting from scratch, but it does have to build a brand of its own. Kenneth W. Hunzeker, a retired three-star Army general, is chief executive of the business. He was the leader of Exelis Mission Systems, as Vectrus was known before the split.
The leadership team’s plan is to expand Vectrus’s work within the Defense Department and also cut costs to be more competitive, executives said at a recent investor conference.
Exelis now has 10,000 employees, while Vectrus has nearly 6,000.
Editor’s note: An earlier version of this story said L-3 Communications created a spinoff named Engility last year. The company was created in 2012. This version has been updated.
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