Exelis’ move to spin off company is recent formula used by defense contractors

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http://gazette.com/exelis-move-to-spin-off-company-is-recent-formula-used-by-defense-contractors/article/1517689



Bradley line: Bradley Fighting Vehicles lined up for maintenance support in the Middle East.

Exelis’ move to spin off company is recent formula used by defense contractors
by WAYNE HEILMAN [e-mail] - • Updated: April 5, 2014 at 4:59 pm • Published: April 5, 2014 | 4:40 pm

When Exelis spins off its Colorado Springs-based Mission Systems operations into a separate company named Vectrus, it won't be marching into uncharted territory.

McLean, Va.-based Exelis will become the fourth major defense contractor in four years to spin off its low-profit services businesses to focus on higher-margin work. It will follow in the footsteps of Northrop Grumman, L-3 Communications and Science Applications International, which were responding to budget cuts that have hit the Pentagon and the rest of the federal government.

"This is a part of a larger trend in this sector. The service and product businesses are two different businesses headed in different directions," said Byron Callan, a defense industry analyst with Capital Alpha Partners, a Washington, D.C.-based research firm. "This gives them (Vectrus) the opportunity to take down their overhead budget and bid contracts that would not have been palatable to Exelis shareholders because those contracts would have diluted the profit margin of the company."

Once the spinoff happens this summer, Vectrus will immediately become the largest of four public companies based in Colorado Springs with $1.5 billion in annual revenue. It will employ 300 locally and 6,500 others at about 100 locations in 18 countries and may need to add staff in investor relations and other areas that it didn't have as an Exelis subsidiary, but the company also is centralizing other corporate functions to reduce overhead expenses.