The planned spin-off next summer of Exelis’ [XLS] government and military services business will provide the new public entity with the autonomy to flexibly deploy its capital in much the same way Exelis did when it separated from ITT Corp. [ITT] two years ago, Exelis’ top executive said Thursday.
“They’ll be able to allocate capital in a way that is particularly suited for their business,” David Melcher, president and CEO of Exelis, said on an investor call to outline the prospects for both companies. Moreover, Mission Systems has spent 2013 streamlining operations and improving operational efficiency and will have a more efficient and competitive cost structure as a stand alone company, he said.
Mission Systems, which well eventually be re-named and re-branded, historically has strong cash flow, Melcher said. Pro forma margins in the business are expected to be between 5 and 7 percent in 2014 with the contract base stable and visibility strengthened by a strong backlog, he said.
Mission Systems backlog stands at over $3 billion with more than $800 million funded, Peter Milligan, Exelis’ chief financial officer, said on the investor call. The backlog tally excludes indefinite delivery, indefinite quantity contracts.
About $500 million of Mission Systems’ sales this year are through work in Afghanistan. Exelis expects there will be pressure on the top line at Mission Systems in one to two years through the Afghanistan-related work due to a reduced operational tempo for United States forces there but sees a potential budget deal in Congress combined with work toward a Status of Forces agreement in Afghanistan as helping to stabilize the outlook.
Melcher also said that Mission Systems has $4 billion in bid prospects awaiting a decision, with a significant amount of the prospects outside of the Army. There are several re-competes of contracts in 2014 but the outcome either way won’t have a material impact on Mission Systems next year, he said.
Mission Systems’ three business areas are base operations, which makes up more than half of its sales, logistics, and network communications.
The decision to spin-off its $1.5 billion Mission Services business will allow Exelis to focus on its four key strategic growth areas, which will account for 75 percent of the company after the split. Currently, these growth platforms—Critical Networks, ISR and Analytics, Electronic Warfare, and Aerostructures—account for 50 percent of the business.
In its investor presentation, Exelis said that following the spin-off, less than 50 percent of its sales will be to the Army, Navy and Air Force. Between 30 and 35 percent of its business will be with other federal agencies such as NASA, the Federal Aviation Administration, the Department of Energy, the National Oceanic and Atmospheric Administration, and the intelligence community. Of the rest, about 15 percent will be international and about 5 percent will be to commercial customers in the U.S.
By business area, Critical Networks makes up a little less than half of Exelis’ sales with ISR & Analytics accounting for just over 25 percent. Electronic Warfare accounts for the bulk of the rest with Aerostructures bringing in less than $100 million.
Melcher said that Exelis’ exposure to the operational tempo of U.S. forces is less than 1 percent of sales.