Northrop CEO Eyes Tech Services Segment Reposition Versus Sale or Spinoff

NorthropLogoNorthrop Grumman‘s (NYSE: NOC) chief executive signaled to investors Wednesday that he would rather reposition its technology services segment to different focus areas 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 October and has opted to keep the business in a 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 solutions business into Leidos Holdings (NYSE: LDOS), while L-3 Communications (NYSE: LLL) sold its national security solutions segment to CACI International (NYSE: CACI) for $550 million in February.

CSRA (NYSE: CSRA) launched in November 2015 from the separation of the former Computer Sciences Corp. (NYSE: CSC) U.S. government business and subsequent merger with SRA International.

The trend toward services business divestitures led one analyst to question CEO Wes Bush in Northrop’s second quarter earnings call Wednesday 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 the 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 simultaneously bidding on contracts to make products for the federal government and advising agencies through the acquisition process.

In 2011 during Bush’s second year as CEO, Northrop separated its then-$6.1 billion 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-focused government purchasing methods as reasons for their transactions, but Bush described 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 positive 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 PLC said in November it decided to retain its U.S. manpower and services business after a seven-month review of external offers for the organization.

Bush told analysts one way Northrop is reshaping the technology services segment is a slow ramp down in work with state and local 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.

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