Government Contracting

Pursuant to a congressional request, GAO reviewed the impact on the defense production base a major defense contractor's separation into two independent companies.

GAO found that: (1) one of the newly created companies focused on commercial business, while the other conducted 98 percent of the government business previously performed by the firm; (2) the defense contractor was the federal government's sole source for certain aircraft components, and was practically guaranteed that business; (3) with its projected sales and increased cash flow, the firm should be able to service its long-term debt; (4) the separation reduced the cost of some existing government contracts; (5) although the prices of existing firm fixed-price contracts were not affected because those prices were not negotiable, the prices of future contracts should be affected by the reduced general and administrative rates; (6) the allocation of debt among the two new firms was based on the debt incurred, and the use of capital by the defense contractor segment over the past several years was equitable; (7) officials of both new companies believed that the debt allocation was equitable because the defense contractor segment had created most of the debt; and (8) the defense contractor segment consolidated the long- and short-term debt into new long-term debt structure to improve its ability to service it. GAO believes that the the separation will not be detrimental to the U.S. defense production base.