PREDICTIVE Indirect Rate Analysis

Aircraft Manufacture COE

ARDAK developed contract analysis targeting an Aircraft Manufacturer / Integrator recent realignment into various Centers of Excellence (COE’s). By analyzing the Aircraft Manufacturer’s Annual Reports and 10K’s, ARDAK validated FFP versus CP contract percentages for each Aircraft Manufacturer / Integrator’s Cost Centers identified below:

  1. Aircraft Manufacturer Co. A (Location A)
  2. Aircraft Integration Co. A (Location C)
  3. Aircraft Integration Co. A (Location D)
Contract Actions Summary Table

By analyzing the contracts in ACES (ARDAK Contract Exploitation Systems), ARDAK developed an independent, bottoms up analysis of the contract types, and specifically FFP versus CP. ARDAK then developed a contract type analysis for the Aircraft Manufacturer / Integrator and associated COE’s delineating relative dollars and percentages of FFP and CP contract types that establishes a baseline for subsequent analysis; as follows:

ARDAK developed a set of baseline or “cost basis” wrap rates to establish a baseline for subsequent analysis.  Baseline wrap rates have been developed for the following cost centers:

  1. Aircraft Manufacturer Co. A, Location A
  2. Aircraft Integration Co. A, Location C
  3. Aircraft Manufacturer Co. B, Cost Center A

Notional Wrap Rate Development

ARDAK derived a notional (adding $1.9B to the contract base) labor wrap rate multiple (multiple of G&A, overhead, and fringe, without regard to fee or material handling costs) for both plant and site work.

The hypothetical analysis was predicated on an increase in contract base and the resultant potential decrease in cost.  The cost decrease was calculated by determining what percentage of fixed cost could be decreased through spreading of the cost through an increased base. This decrease was then checked to insure that the decreased rate would then result in similar raw dollars being delivered to the business unit.

Hypothetical Award Effect on the Aircraft Manufacturer / Integrator’s Cost Center Profitability

ARDAK analyzed the Aircraft Manufacturer / Integrator’s contract types to predict the effect of a $1.9B annual increase in business base on potential cost center profitability.

  • Aircraft Manufacturer Co. A, Location A is currently performing an average of $73M a year in fixed price efforts. A 15.8% reduction in cost basis would result in an additional “profit” of approximately $11.5M per year.
  • Aircraft Integration Co. A, Location C is currently performing an average of $343M a year in fixed price efforts. A 13.8% reduction in cost basis would result in an additional “profit” of approximately $47.4M per year.

Comparative Occupancy Rate Analysis

ARDAK has provided a basis of estimate for the comparative occupancy wrap rate impact for Northrop, given the Palmdale contract base determinations herein this study, to clarify relative cost differences between fabrication, manufacturing, and assembly work conducted within a facility leased from the Government on Government owned property like the buildings at Edwards AFB, versus conducting the same work at a commercially leased facility or company owned facility in Palmdale (or comparably adjacent region of California such as El Segundo, CA).

The discrete component elements of occupancy cost considerations comprising the Occupancy Factor utilized within the analysis for each of the three different scenarios are; Rent, Real Estate Taxes, Personal Property Taxes, Insurance, Depreciation, Amortization, Maintenance, Utilities, Security, and IT Infrastructure cost.

The Rent factor was estimated by performing research on commercial and industrial property listings for lease or for sale in the Palmdale area. These estimated rental costs are utilized within the Government Owned Contractor Operated Facility and the Contractor Leased Facility scenarios. Estimated mortgage cost was utilized within the Contractor Owned Facility scenario.

The Real Estate Taxes and Personal Property Taxes factor is based on the General Tax percentage and any special voter-approved taxes for the Palmdale area. For the Government Owned Contractor Operated Facility scenario, the Real Estate Tax was not applied, as Property owned by the government is exempt from property tax.

The Insurance factor, representing premium expenses for the building and its contents, is comprised by estimated premium costs for an All Risk Policy, including earthquake, flood, boiler and machinery, providing the following specific categories of coverage: 1.) Real and Personal Property 2.) Business Interruption-Gross Earnings 3.) Business Interruption-Loss of Profits 4.) Extra Expense 5.) Accounts Receivable 6.) Leasehold Interest 7.) Rental Value and Rental Income 8.) Royalties 9.) Transit. This factor was applied consistently within all three scenarios.

The Depreciation and Amortization factor was applied within each scenario, proportionately to Plant Property and Equipment information available in the Aircraft Manufacture 10-K. Depreciation and Amortization is increased within the Contractor Owned Facility scenario, due to increased property ownership.

The Maintenance factor considerations include custodial functions, building maintenance, parking and paving costs, and environmental, health and safety costs. This factor was applied consistently within all three scenarios.

The Utilities factor was estimated based upon the average utility costs for similar type facilities of similar size. This factor was applied consistently within all three scenarios.

The Security factor provides for increased Security costs within both the Commercially Leased and Contractor Owned Facility scenarios, as government-provided security reduces the cost of this factor within the Government Owned Contractor Operated Facility scenario.

The IT Infrastructure factor represents cost considerations of Hardware, Software, Labor, and Downtime expenses. This factor was applied consistently within all three scenarios.

CSC / SRA Merger Predictive Analysis

ARDAK’s IP’s open architecture facilitates using the financial basis from one competitor’s cost center as the baseline while leveraging the contract actions from another cost center. This approach coupled with sophisticated algorithms provides for a number of Predictive Models including JV’s, Notional, Pro Forma, and other modifications to a competitors cost basis.

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