Exelis to Spin Off Services Business

McLean, Va.-based Exelis (NYSE: XLS  ) is transforming itself into a pure-play defense contractor.

On Wednesday, the government contractor announced plans to spin off its military and government services business as a separate, publicly traded company, retaining for itself only its "higher-margin strategic growth platforms."

After the spinoff, two companies will emerge. One, the spun-off unit, will focus on "services" such as facilities management, logistics, and network communications for military and government customers, and will host roughly 7,000 of Exelis's current 19,000 workers. The company that remains, 12,000 workers strong, will focus on intelligence, surveillance, and reconnaissance systems for the military, plus electronic warfare.

From a financial perspective, the core Exelis, which will retain the company name, will be the larger business, retaining $3.4 billion worth of the combined firm's current $5 billion annual revenue stream, and the bulk of the higher-profit margin businesses.

The spun-off unit, which will be renamed, will have about $1.5 billion in annual revenues, "strong cash flow," and "high return on invested capital" because of "the low capital investment required in the services market." Exelis Mission Systems President Kenneth W. Hunzeker will accompany the spun-off unit to the new company and take over as its CEO.

The spinoff is scheduled to take place in the summer of 2014.

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