Northrop restructures. Is a spin-off next?
By
Nick Wakeman
Northrop Grumman is breaking up its Information Systems sector in a move that the company says better positions itself to serve customers. That's true, but is something else also afoot?
On the face of it, Northrop Grumman’s restructuring of its business segments is pretty straight forward.
It is reducing its segments from four to three, and the restructuring creates a new Mission Systems sector that combines the current Electronic Systems sector with certain portions of the Information Systems sector that are focused on new capabilities for military and intelligence customers. The rest of the Information Systems sector – the IT services business – will become part of the Technology Services sector.
The changes take effect Jan. 1.
The company also named Gloria Flach as its chief operating officer. The company has been without a COO for some time.
Company chairman and CEO Wes Bush said the moves were meant meet customers’ needs and enhance innovation.
"These changes align more closely with the evolving missions of our customers in the global security markets we serve," Bush said in the company’s announcement.
But I have to wonder if something bigger is going on here, especially when you view it through the lens of so many other companies spinning off their IT and technical services businesses, including Lockheed Martin, Northrop’s closest competitor.
What caught my eye is that Northrop Grumman is putting all of its lower margin businesses into one organization. Which begs the question: is Northrop contemplating a spin-off or sale of those businesses?
The Information Systems segment had operating margins of 9.8 percent in 2014. Technical Services had operating margins of 9.3 percent.
Meanwhile the other two segments of Northrop Grumman have margins well over 10 percent: Aerospace Systems with 13.2 percent and Electronic Systems with 16.5 percent.
Granted, the margins for Northrop’s Information Systems and Technical Services segments are still very healthy. But you have to consider that Lockheed Martin is looking to sell or spin off its Information Systems & Global Solutions sector, which had an operating margin of 9 percent in 2014.
I’ve asked the question to Northrop officials, but they’ve declined to comment beyond the statement.
Some other things that the company doesn’t talk about in its announcement is the cost savings that might come out of reducing your business segments from four to three. Obviously, you lose some of the upper management layers.
The new Mission Systems sector will be headquartered in Maryland. Currently, Information Systems is based out of Tyson's Corner, Va. What happens to that facility?
The restructuring also brings several leadership changes.
Flach is currently corporate vice president and president of Electronic Systems sector. When Electronic Systems absorbs certain parts of Information Systems, Kathy Warden, who currently leads Information Systems, will take over leadership of Electronic Systems.
Chris Jones will continue to lead the new Technical Services, which will absorb the IT services business from Information Systems.
Tom Vice will continue to lead the Aerospace Systems sector.
The company didn’t release revenue projections for the new sectors. But in 2014, Information Systems had $6.2 billion in revenue and Technical Services had $2.8 billion. But some of the Information Systems sector is moving to Electronic Systems, which had $7 billion in revenue.
In their SEC filings, the company splits out products and services revenue. Information Systems had $1.3 billion in product sales. I would say they are moving the bulk of this to the new Electronic Systems sector because they talked about moving “development of new capabilities for our military and intelligence customers” to the Electronic Systems sector.
The move is very reminiscent of Lockheed Martin’s plan to keep what it calls mission IT that serves its military and intelligence customers and jettisoning the rest. The mission IT also includes Lockheed’s cybersecurity business.
Northrop Grumman’s Information Systems’ services portfolio – those are the company’s words – will move to the new Technical Services sector. According to the SEC filing, the IT services portfolio had $4.9 billion in 2014.
The Technical Services sector had very little product sales, reporting just $184 million in product sales next to its $2.6 billion in services.
If they move all of the services and none of the products to the new Technical Services sector, the total revenue would be $7.7 billion, based on 2014 results. But the movement will likely not be that clean, and I would estimate that the new Technical Services sector will have close to $7 billion in revenue, give or take a few hundred million.
In other words, if Northrop does decide to spin-off its Technical Services sector, the size would rival and possibly top Lockheed Martin’s spin-off, which has about $6 billion in revenue.
Of course, this is a lot of speculation on my part.
I could just take Northrop’s restructuring at face value that it is just trying to optimize its structure to better serve customers. And I believe it is doing that, but with so many other moving pieces in the market, it’s hard not think of it as something much, much more.