Top 100: Inside L-3's spin-off strategy

Following a year-long strategic review, L-3 Communications Inc. announced last July that it would spin off its defense systems engineering and technical services unit into an independent, public company called Engility while retaining the national security solutions business.

That transaction, which was scheduled to be completed this spring, has created something of a quiet period as L-3 executives put the finishing touches to the deal and have been generally unavailable for comment.

“This spin-off will allow both companies to sharpen their focus and continue to successfully innovate and address customer priorities,” Michael Strianese, L-3’s chairman, president and CEO, wrote in an email replying to an interview request. “We are confident that as two separate companies, L-3 and Engility will be better positioned to grow.”

Strianese said L-3 would continue to support intelligence analysis, enterprise IT and cybersecurity.

The company is ranked No. 8 on the 2012 Top 100 with $2.9 billion in prime IT contracts.

“[Management] felt that with Engility not having a parent in the hardware side in particular, Engility could go after more types of work,” said Bill Loomis, managing director at Stifel Nicolaus & Co.

Among the issues that prompted the divestiture, Strianese cited organizational conflict of interest (OCI) issues, the uncertain federal budget environment, a more competitive landscape and “evolving procurement processes” at the Defense Department.

“As an independent services company, Engility will be able to pursue contracts, as well as new and adjacent business opportunities without OCI constraints,” Strianese explained.

As best-value contracting “becomes a more utilized selection criterion, we think there is a potential for an upswing and that both L-3 and Engility will be well-positioned for success in their respective markets,” he said, adding that L-3 will “continue to invest in key focus areas, including data analytics, cloud computing, security and mobility.”

Tony Smeraglinolo, executive vice president of L-3 Services Group, will become CEO for Engility’s 10,000 employees.

“They’re only spinning off about half their business,” Loomis said, so L-3 will still have significant revenue.

“In 2011, for example, Engility had $2 billion in revenues and the part they’ll keep, what they calling NSS, had $1.6 billion. So they’ll still have a significant services component, just with less exposure to direct in-theater work,” he said.

Craig Reed and John Heller recently joined L-3 to help manage Engility: Reed as senior vice president for strategic development and Heller as president of the Command & Control Systems and Software division.

L-3’s Cyber, Intelligence and Security Solutions businesses, currently part of the government services segment, will be renamed National Security Solutions, or NSS.

Steve Kantor, currently a senior vice president and president of L-3 Services Group, will serve as NSS president, a unit of 6,000 employees.

Major contract wins in 2011 included:

• A one-year, $84.9 million DOD award under the U.S. Special Operations Forces IT Enterprise Contract Distributed Computing Management Services program. This contract is the largest portion of the Enterprise Information Technology Contract recompete that has a four-year period of performance with a maximum value of $400 million.
• An Air Force contract with a potential maximum value of $976 million to operate the C-17 Training System program.
• A re-compete for the Air Force’s F-16 Training has a maximum potential value of $469.5 million.
• Contracts from the Navy and Air Force with a potential value of more than $300 million over five years to provide full Contractor Logistics Support for their C-12 aircraft.
• A Navy award worth approximately $104 million for aircraft sustainment for the P-3, EP-3 and NP-3 aircraft.
• A Transportation Security Administration contract worth $44.8 million to provide 300 ProVision ATD personnel screening systems for use at aviation checkpoints.

Like most defense contractors, L-3’s business fell off last year, Loomis said, noting that the company’s government services revenue in particular was down 19 percent for the fourth-quarter and down 8 percent for the full year.

“That reflects some work in Iraq and Afghanistan that’s winding down as well as some other support services,” Loomis said.

“The services [business] felt the brunt of it, and they’re feeling it in most of the other businesses except for their C4ISR work, which is still showing good growth,” he said.