David Melcher, president, ITT Defense Electronics and Services, photographed in his office in McLean, VA on Friday, February 13, 2009. (Sheila Vemmer/Staff) (Sheila Vemmer/Staff / Army Times Publishing Co.)
WASHINGTON — McLean, Va.-based contractor Exelis, itself a 2011 spin off from ITT, announced Wednesday that it would be spinning off its military and government services business focused on facilities management, logistics and network communications.
The new company, whose name has yet to be determined but will be composed of Exelis’ Mission Systems division, will have nearly 7,000 employees from the company’s total of about 19,000, and is intended to gain its independence in the summer of 2014, the company said in a press release. The new, leaner Exelis will focus on surveillance and intelligence solutions, and will represent approximately $3.4 billion in revenue. Exelis brought in $5.5 billion in 2012.
“For us this has always been a good strong business, great return on invested capital business, and they’ve shown a capacity when opportunity has presented itself to grow,” Exelis CEO David Melcher said via phone shortly after the announcement. “I think this business is going to do fine on its own.”
Melcher said that he expects the new Mission Systems company will have limited pension liability, and that the debt distribution of company debt is still being determined.
After the split Exelis, which in 2012 gained 77 percent of its revenue from defense will be closer to a 50-50 split between defense and commercial sales, Melcher said. That’s been a trend in the last several years, as companies have looked to find greater balance in their portfolio to protect against defense budget cuts.
Exelis is hardly the first company to divest services businesses, as SAIC spun off part its services business this year and L-3 Communications did the same last year. Experts point to increasing price pressure and competition in services as driving margins lower and lower, making the sector a drag on companies with broader portfolios. In particular, they have said that frequent efforts to recompete services contracts have added to the cost of bids and proposals, and made the sector less desirable.
Defense Department officials say increased competition is good, despite the impact it might have companies.
“I think that nothing, nothing, works better than competition to drive cost down,” Frank Kendall, undersecretary of defense for acquisition, technology and logistics, said when asked about the pressure on services last year. “As long as we have competition, we will be better off.”
As to why this move wasn’t added to the divestitures ITT was doing in 2011 that created Exelis, Melcher said that it took some time to develop the right strategy for the group.
“It takes a little while to develop your thoughts with respect to the portfolio and where you think the market is going and to determine what are going to be the things that you’re going to rally around in terms of growth opportunities and margin opportunities,” he said.