Northrop Grumman‘s (NYSE: NOC) chief executive signaled to investors Wednesday that he wouldÂ rather reposition its technology services segmentÂ to different focus areasÂ rather than pursue a sale or spinoff of the division.
Falls Church, Virginia-based Northrop created the technology services segment at the start of this year from a realignment initiative originally announced in OctoberÂ andÂ hasÂ opted to keep the businessÂ in aÂ time where other large GovCon companies have chosen sales or spinouts of similar divisions.
Lockheed Martin (NYSE: LMT) is in the process of merging its information systems and global solutionsÂ business into Leidos Holdings (NYSE: LDOS), whileÂ L-3 Communications (NYSE: LLL) sold its national security solutions segment to CACI International (NYSE: CACI) for $550 million in February.
CSRAÂ (NYSE: CSRA) launched in November 2015 from the separation of the former Computer Sciences Corp. (NYSE: CSC) U.S. governmentÂ business and subsequent merger with SRA International.
The trend toward services business divestitures led one analyst to question CEO Wes BushÂ in Northrop’sÂ second quarter earnings call WednesdayÂ whether the contractor has considered a similar move.
“As always, you’ve seen us do this over the last number of years. If it’s very, very clear that some part of our business would be better executed in the hands of another party, we’re the first to step up and make that happen, ” Bush said.
“In general… I have a bias towards redeploying the amazing people that we have in that organization to ensure that we can be on the better trajectory.”
Under then-CEO Ronald Sugar, Northrop sold theÂ TASC advisory business in 2009 to private equity firms General Atlantic and KKR for $1.65 billion in an effort to comply with organizational conflict-of-interest laws that largely forbid companies from simultaneouslyÂ bidding onÂ contracts to make products for the federal governmentÂ and advising agenciesÂ through theÂ acquisition process.
In 2011 during Bush’s second year as CEO, Northrop separated its then-$6.1 billionÂ shipbuilding segment into the company now known as Huntington Ingalls Industries (NYSE: HII) as part of a shift toward core aerospace, electronics and information systems.
Lockheed, L-3 and CSC cited pressures on profit margins from price-focusedÂ government purchasing methods as reasons for their transactions, but Bush describedÂ Northrop’s approach for its services as “portfolio tuning” with a longer-term view.
“The idea is to make sure that we’re investing in the places where we see really differentiated capabilities. And with differentiated capabilities, we’re able to focus on the areas that provide the better margin rates, ” Bush said.
In a similar vein, General Dynamics (NYSE: GD) CEO Phebe Novakovic has also strongly hinted that her company prefers to stay in the government services market and views that business as a positiveÂ performer.
“When they go to market, they go to market in their core, and they are very competitive in their core both through past performance and cost competitiveness. So I like where they’re positioned, and that hasn’t changed for us, ” Novakovic told investors in January.
BAE Systems PLCÂ said in November it decided to retain itsÂ U.S. manpower andÂ services businessÂ after a seven-month review of external offers for the organization.
Bush told analystsÂ one wayÂ NorthropÂ is reshaping theÂ technology services segment is a slow ramp down inÂ work withÂ state and localÂ government agencies and other markets it views with lower profit potential.
“We tend to do a better job for our customers in areas where they need some aspect of technology componentry as a part what they’re doing or they need engineering applied to the outcomes for the products or services that they’re looking at, ” Bush said.
Northrop’s stock closed down 54 cents to $217.81 Wednesday.