Northrop Grumman Not Following The Pack – No Plans To Spin Off Government Services

Defense contractor Northrop Grumman (NOC) is feeling pretty good right now after having just won a massive contract for the new long range bomber. The company is also in the process of restructuring its organization by cutting its operating groups from 4 to 3, one of which will be called Technology Services. The move led to suspicion that a spin off of its government services business was coming down the road, but CEO Wesley Bush put the kibosh on that talk during his opening remarks on the company’s recent Q3 conference call (bold is our emphasis):

I’d like to address some of the speculation that this realignment is perhaps aimed at separating our services businesses. It is not. We’ve demonstrated that we actively manage our portfolio, and we continually evaluate our portfolio to assess value creation opportunities. We have, over the last several years, reshaped the content of our service offerings to reposition us at the higher end of the market. Our margin rates show that those efforts have been successful.

A spinoff would have followed the playbook of several other players in the space such as Exelis (since acquired), L-3 (LLL) and potentially Lockheed Martin (LMT) and I am sure that is what fueled all of the speculation in the first place. Classic case of lemmings. Northrop’s operations are a bit different though and James Bach picks up on Mr. Bush’s point on margins, noting that the company was way ahead of the curve on weeding out low margin businesses. Its current services portfolio actually delivers comparatively nice margins and its acquisitions in the space have targeted better businesses. Those factors are likely the reasons behind why the company is happy hanging onto the business.

In some ways, Northrop actually kicked off the recent spinoff trend in the defense industry by shedding its shipbuilding business Huntington Ingalls (HII) back in 2011. Despite the low expectations, that spin has been a tremendous success for shareholders as HII has been able to dramatically improve margins while slightly growing.

Disclosure: Author holds no position in any stock mentioned.