The Washington Post

Parts sup­plier Tran­sDigm draws scru­tiny over prices

House panel pur­sues probe of prof­its made in De­fense Dept. deals

- BY AARON GREGG aaron.gregg@wash­ Business · Ohio · United States Department of Defense · Congress of the United States · United States of America · U.S. Departement of Defense · Project on Government Oversight · TransDigm

Mem­bers of the House Over­sight Com­mit­tee are call­ing for an in­ves­ti­ga­tion into thou­sands of gov­ern­ment con­tracts the De­fense Depart­ment awarded to Tran­sDigm, a hold­ing com­pany that owns dozens of niche mil­i­tary air­craft parts sup­pli­ers, af­ter law­mak­ers ac­cused the com­pany of ex­ploit­ing reg­u­la­tory loop­holes to boost prof­its.

In a re­port re­leased mid-Fe­bru­ary, the De­fense Depart­ment in­spec­tor gen­eral con­cluded that Tran­sDigm, based in Ohio, had earned “ex­ces­sive prof­its” on 46 of the 47 spare parts au­dited, with profit mar­gins for spe­cific parts rang­ing from 17 per­cent to well above 4,000 per­cent. The prod­ucts them­selves were redacted in the IG’s re­port, mak­ing it hard to de­ter­mine whether the com­pany is pro­vid­ing ad­vanced tech­ni­cal hard­ware or simpler parts such as door han­dles.

The IG con­cluded that those ex­cess prof­its added up to about $16.1 mil­lion, and Tran­sDigm later promised to pay the De­fense Depart­ment back for the over­priced prod­ucts.

But mem­bers of the House over­sight panel said that prom­ise wouldn’t go far enough, point­ing out that the IG’s au­dit cov­ered only a small por­tion of Tran­sDigm’s con­tracts.

“The Com­mit­tee is con­cerned that Tran­sDigm is charg­ing [the De­fense Depart­ment] un­jus­ti­fi­able prices for mis­sion-crit­i­cal spare parts,” mem­bers wrote to In­spec­tor Gen­eral Glenn Fine in a let­ter pub­lished Thurs­day.

“Be­cause you iden­ti­fied so many over­charges in just the small sam­ple of con­tracts you ex­am­ined, we be­lieve it is highly likely that Tran­sDigm is re­ceiv­ing ad­di­tional ex­cess prof­its that have not yet been iden­ti­fied.”

A Tran­sDigm spokes­woman de­fended the com­pany’s busi­ness prac­tices in re­sponse to Thurs­day’s let­ter.

“As de­tailed in the DoD IG’s au­dit, Tran­sDigm did noth­ing in con­tra­ven­tion of the fed­eral ac­qui­si­tion laws and reg­u­la­tions with re­spect to its pric­ing,” the spokes­woman said. “Tran­sDigm’s de­ci­sion to vol­un­tar­ily is­sue re­funds was a demon­stra­tion of good faith and a re­flec­tion of the im­por­tance of our DoD cus­tomers.”

In a con­tentious hear­ing last month be­fore the over­sight panel, a high-level Pen­tagon of­fi­cial called Tran­sDigm a “bad ac­tor” whose busi­ness prac­tices are “sick­en­ing” and “dis­grace­ful.” Law­mak­ers ac­cused the com­pany of ex­ploit­ing pro­cure­ment laws and reg­u­la­tions — with­out nec­es­sar­ily break­ing them — to ob­tain ex­ces­sive prof­its for it­self at the ex­pense of tax­pay­ers and the mil­i­tary.

At the May 15 hear­ing, Tran­sDigm ex­ec­u­tives ar­gued with law­mak­ers about the com­pany’s pric­ing prac­tices, and ac­cused the in­spec­tor gen­eral of us­ing a flawed method­ol­ogy to com­pile its re­port.

“The [In­spec­tor Gen­eral’s] con­clu­sion is based on in­for­mal cost es­ti­mates that don’t ac­cu­rately cap­ture the ac­tual costs of do­ing busi­ness,” said Tran­sDigm Group chief ex­ec­u­tive Kevin Stein, ar­gu­ing that its ac­tual profit mar­gins are much lower than those out­lined in the IG’s re­port. “We are sup­ply­ing DoD in very small or­der sizes, with some­times years be­tween or­ders.”

It was not the first time the in­spec­tor gen­eral had taken Tran­sDigm to task over al­legedly in­flated prices. A 2006 in­ves­ti­ga­tion con­cluded that a Tran­sDigm sub­sidiary was over­charg­ing the De­fense Depart­ment in re­la­tion to an oil pump assem­bly on Air Force F-15 air­craft.

Tran­sDigm is part of a sprawl­ing and lu­cra­tive in­dus­try that sup­plies re­place­ment parts needed to keep old air­craft func­tional. The prices the mil­i­tary pays for such items are sup­posed to be based on what gov­ern­ment buy­ers could ob­tain in a com­pet­i­tive mar­ket. But when there is only one com­pany that makes a cer­tain air­craft part — as is the case for many of Tran­sDigm’s con­tract ar­range­ments — it is hard to de­ter­mine what a fair mar­ket price would be, rais­ing con­cerns that con­trac­tors might have too much lev­er­age in price ne­go­ti­a­tions.

The com­pany has re­ceived about $782 mil­lion in rev­enue from 7,931 fed­eral con­tracts in the past four years, ac­cord­ing to con­gres­sional es­ti­mates.

The com­pany holds patents for nu­mer­ous air­craft parts that make it an ex­clu­sive sup­plier to the De­fense Depart­ment for cer­tain spare parts, mean­ing an ab­nor­mally high per­cent­age of its fed­eral con­tracts are bid out with­out com­pe­ti­tion. Tran­sDigm has been snap­ping up com­pa­nies that hold th­ese ex­clu­sive li­cens­ing ar­range­ments, and has ac­quired more than 50 busi­nesses in the past three decades.

The com­pany is also ac­cused of with­hold­ing in­for­ma­tion about its costs from Pen­tagon con­tract of­fi­cers to hide its prof­its from the gov­ern­ment, al­though fed­eral reg­u­la­tions do not re­quire the com­pany to share such in­for­ma­tion. In 15 of 16 cases the IG ex­am­ined, De­fense Depart­ment of­fi­cials over­see­ing Tran­sDigm’s work were not aware of how much profit the com­pany was mak­ing.

At the hear­ing last month, As­sis­tant Sec­re­tary of De­fense for Ac­qui­si­tion Kevin Fa­hey called the com­pany’s busi­ness prac­tices “sick­en­ing,” and said Tran­sDigm’s busi­ness is “atyp­i­cal” of how de­fense con­trac­tors usu­ally work with de­fense agen­cies.

“We have a long and mu­tu­ally ben­e­fi­cial re­la­tion­ship with most of our in­dus­try part­ners. They are pa­tri­otic and hon­or­able busi­nesses, but oc­ca­sion­ally a bad ac­tor skews pub­lic opin­ion against the in­dus­try, di­verts man­age­ment re­sources away from the chal­lenges, and worse, en­dan­gers our warfight­ers,” Fa­hey said. “This is a very small per­cent­age of bad ac­tors that re­sults in nec­es­sary rules and reg­u­la­tions that bog down the en­tire ac­qui­si­tion sys­tem, re­sults in over­head and bu­reau­cracy.”

Jim McAleese, a de­fense in­dus­try an­a­lyst and con­sul­tant, wrote in a news­let­ter that the po­lit­i­cal back­lash over Tran­sDigm’s ex­cess prof­its “has the po­ten­tial to weaken pub­lic sup­port for con­tin­ued ro­bust de­fense fund­ing in 20202021,” and would also prob­a­bly come up in act­ing sec­re­tary of de­fense Pa­trick Shana­han’s con­fir­ma­tion hear­ing. He sug­gested that the com­pany could see tougher ac­tion from the Pen­tagon mov­ing for­ward, such as be­ing sus­pended.

De­fense spend­ing watch­dogs said Tran­sDigm’s al­leged ex­ces­sive billing could be en­abled by ac­qui­si­tion reg­u­la­tions.

Mandy Smith­berger, di­rec­tor of the Straus Mil­i­tary Re­form Pro­ject at the non­profit Pro­ject on Gov­ern­ment Over­sight, said the gov­ern­ment also bears some re­spon­si­bil­ity when con­trac­tors such as Tran­sDigm are paid too much.

“There’s plenty of blame to go around,” she said. “We have seen too many re­ports find­ing that con­trac­tors are over­charg­ing day af­ter day.”

De­spite the up­set on Capi­tol Hill over Tran­sDigm’s prices, in­vestors do not seem par­tic­u­larly con­cerned. In the three months since the De­fense Depart­ment IG re­leased its find­ings, the com­pany’s stock price has in­creased about 6 per­cent.

In a note to in­vestors ti­tled “Here Nor There: In­spec­tor Gen­eral Hear­ing,” an­a­lysts from the in­vest­ment bank Jefferies up­held the com­pany’s “hold” rat­ing af­ter the May 15 hear­ing. It noted that most of Tran­sDigm’s de­fense rev­enue comes from its sub­con­trac­tor ar­range­ments with other U.S. de­fense firms, not from di­rect sales to the Pen­tagon.

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