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,” a company 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 sorts of 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 as “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 2020-2021,” 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 overly 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 contractors, not from direct sales to the Pentagon.