[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
DOD INSPECTOR GENERAL REPORT
ON EXCESS PROFITS
BY TRANSDIGM GROUP, INC.
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
OVERSIGHT AND REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
May 15, 2019
__________
Serial No. 116-22
__________
Printed for the use of the Committee on Oversight and Reform
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Available on: http://www.govinfo.gov
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COMMITTEE ON OVERSIGHT AND REFORM
ELIJAH E. CUMMINGS, Maryland, Chairman
Carolyn B. Maloney, New York Jim Jordan, Ohio, Ranking Minority
Eleanor Holmes Norton, District of Member
Columbia Justin Amash, Michigan
Wm. Lacy Clay, Missouri Paul A. Gosar, Arizona
Stephen F. Lynch, Massachusetts Virginia Foxx, North Carolina
Jim Cooper, Tennessee Thomas Massie, Kentucky
Gerald E. Connolly, Virginia Mark Meadows, North Carolina
Raja Krishnamoorthi, Illinois Jody B. Hice, Georgia
Jamie Raskin, Maryland Glenn Grothman, Wisconsin
Harley Rouda, California James Comer, Kentucky
Katie Hill, California Michael Cloud, Texas
Debbie Wasserman Schultz, Florida Bob Gibbs, Ohio
John P. Sarbanes, Maryland Ralph Norman, South Carolina
Peter Welch, Vermont Clay Higgins, Louisiana
Jackie Speier, California Chip Roy, Texas
Robin L. Kelly, Illinois Carol D. Miller, West Virginia
Mark DeSaulnier, California Mark E. Green, Tennessee
Brenda L. Lawrence, Michigan Kelly Armstrong, North Dakota
Stacey E. Plaskett, Virgin Islands W. Gregory Steube, Florida
Ro Khanna, California
Jimmy Gomez, California
Alexandria Ocasio-Cortez, New York
Ayanna Pressley, Massachusetts
Rashida Tlaib, Michigan
David Rapallo, Staff Director
Krista Boyd, General Counsel
Kadeem Cooper, Counsel
Amish Shah, Counsel
Brandon Rios, Counsel
Laura Rush, Deputy Chief Clerk
Christopher Hixon, Minority Staff Director
Contact Number: 202-225-5051
C O N T E N T S
----------
Page
Hearing held on May 15, 2019..................................... 1
Witnesses
The Honorable Glenn Fine, Acting Inspector General, Department of
Defense
Oral Statement............................................... 4
Theresa Hull, Assistant Inspector General for Acquisition, Office
of Inspector General, Department of Defense
Oral Statement............................................... 5
The Honorable Kevin Fahey, Assistant Secretary of Defense for
Acquisition, Department of Defense
Oral Statement............................................... 7
Kevin Stein, Chief Executive Officer, Transdigm Group, Inc.,
joined by W. Nicholas Howley, Executive Chairman, Transdigm
Oral Statement............................................... 8
Written statements of the witnesses are available at: https://
docs.house.gov.
INDEX OF DOCUMENTS
----------
The documents listed below are available at: https://
docs.house.gov.
* Federal News Network article from May 13, 2019; submittedby
Rep. Meadows
* Slides from Transdigm's 2018 Analyst Day Presentation;
submitted by Rep. Hill
* Questions for the Record from Chairman Cummings to Mr. Walter
Nicholas Howley
* Questions for the Record from Rep. Hice to Mr. Kevin Stein
DOD INSPECTOR GENERAL REPORT
ON EXCESS PROFITS
BY TRANSDIGM GROUP, INC.
----------
Wednesday, May 15, 2019
House of Representatives
Committee on Oversight and Reform
Washington, D.C.
----------
The committee met, pursuant to notice, at 10 a.m., in room
2154, Rayburn House Office Building, Hon. Rho Khanna presiding.
Present: Representatives Maloney, Norton, Clay, Connolly,
Krishnamoorthi, Raskin, Rouda, Hill, Wasserman Schultz,
Sarbanes, Welch, Speier, Kelly, DeSaulnier, Lawrence, Khanna,
Ocasio-Cortez, Tlaib, Jordan, Foxx, Meadows, Hice, Grothman,
Comer, Cloud, Gibbs, Miller, and Steube.
Mr. Khanna.
[Presiding.] The committee will come to order.
Without objection, the chair is authorized to declare a
recess of the committee at any time; and if the witnesses would
like a recess, let me know.
This full committee hearing is convening to examine the
results of a review by the Department of Defense Inspector
General of contracts for spare parts supplied by TransDigm
Group, Incorporated.
I now recognize myself for a five-minute opening statement.
Good morning. Thank you for being here. As everyone knows,
our Nation has been at war for almost two decades. We owe it to
our servicemembers to give them everything they need to fulfill
their missions on the battlefield. What we will not tolerate is
war profiteers, those who seek to use the fact that we are at
war to hold us hostage and hike their prices on mission-
critical Defense articles to astronomical levels.
Now, this is a bipartisan hearing in the tradition of Harry
Truman during World War II to make one thing clear: Defense
contractors cannot rip off the American taxpayers.
Unfortunately, the Inspector General of the Department of
Defense, after investigating TransDigm, concluded that they owe
millions of dollars back to the taxpayers for overcharging for
parts. TransDigm supplies parts for a number of our most
critical missions in Afghanistan, Iraq, and around the world.
Today, we will hear directly from the Inspector General
about TransDigm's actions and to understand what took place.
TransDigm's basic business model consists of identifying
relatively small companies that make spare parts for the
military, especially parts that no other companies make.
TransDigm then, according to the report, buys up these small
companies, purchases the rights to produce the products, and
then, unfortunately, jacks up the prices. The Pentagon has to
pay, knowing that they have a monopoly.
As a result, contracting officers are in an impossible
position. They have generals calling them from the field and
demanding these spare parts to get their aircraft off the
ground, but the prices they are charged are unconscionable. Let
me give you an example. TransDigm manufactures a small part for
the Freedom Fighter F-5. This part is called a quick disconnect
coupling half.
According to information that TransDigm provided to the
Inspector General, the part costs only $173 to make, but the
company charged the Defense Department $6,986 for a part that
costs $173 to make. This is not rocket science; this is just
wrong. The Inspector General found that even after factoring in
all the costs and assigning a generous profit margin of 15
percent that TransDigm charged the Pentagon an excess profit of
nearly 4,000 percent.
Now, TransDigm argues that the Inspectors General's $173
cost figure isn't fair because it doesn't incorporate the costs
associated with restarting production or making a small number
of parts. This is economic nonsense. We've consulted with
leading economists, and they will tell you that argument
wouldn't pass Economics 101.
The Inspector General's cost figure is based on TransDigm's
own information. If TransDigm thought that making small parts
and not having economies of scale would have additional labor
hours or additional capital costs, they would have incorporated
it into the Inspector General's analysis. That's because the
cost is based on the labor hours and capital that TransDigm
provided, including the cost for making small parts as opposed
to economies of scale.
These are, unfortunately, not isolated incidents; they are
the norm. The Inspector General reviewed 47 TransDigm contracts
of about 2,000, and identified excess profits for 46 of 47
parts that they reviewed. TransDigm also isn't a first-time
offender. In 2006, the Inspector General found that TransDigm
engaged in the exact same type of behavior, to overcharge the
Department of Defense by $5.3 million.
While companies are bilked by taxpayers, the CEOs have done
very well. In 2017, Mr. Howley earned a total compensation of
$61 million, receiving more compensation than the CEOs of
Microsoft, IBM, and Boeing combined. I am glad that Mr. Howley
has agreed to appear today and to cooperate with our
investigation, but we are going to have some difficult
questions for him on behalf of the American taxpayer.
As part of this committee's investigation, on both sides of
the aisle, we talked to whistleblowers and former company
officials who condemned these activities. For example, one
former company official told us that TransDigm overcharging the
Pentagon was like taking candy from a baby. These
whistleblowers also told us how company officials concealed
information from the Department of Defense about their true
costs of production.
The committee also obtained documents showing TransDigm
employees and Pentagon officials communicating about breaking
contracts into multiple smaller contracts to avoid reporting
requirements. One director of sales told us the employees were
coached not to provide cost data. As the director of operations
of TransDigm said, we were going out of our way not to disclose
the costs to our government.
Overall, the Inspector General found that TransDigm made
more than $16 million in excess profits just from the
contractors reviewed in 47 samples out of 2,000. The Pentagon
asked to pay that money back, but so far the company has
refused. Well, here is the deal: We will not leave here today
without a commitment from TransDigm that they will repay the
excess profits.
Mr. Stein, we are demanding that TransDigm pay back an
amount that is less than TransDigm paid you this year. I hope
you will make that commitment in your opening statement or
sometime in this committee. It would go a long way.
Finally, I want to thank Ranking Member Jordan and his
staff for their cooperation and assistance on this hearing and
making it bipartisan.
And I now yield to him for his opening statement.
Mr. Jordan. Chairman, thank you for this hearing today. And
to our witnesses, thank you for being here. In particular,
Assistant Secretary Fahey, we appreciate you being with us this
morning.
I understand the Department had reasons for preferring to
testify on a government-only panel, but I am glad we were able
to work with you to accommodate the committee's interest today
for this important matter.
The worldwide threats confronting our Nation have never
been more complex, uncertain, and daunting. It is because of
that that Defense procurement is more important than ever. This
issue reaches almost all our districts through enlisted men and
women who come from our districts or, frankly, the
manufacturing that takes place in our respective congressional
districts.
The system must provide the warfighter with the most
capable, innovative, and cost-effective equipment, but it has
clearly faltered. It is too complicated, too slow, and too
expensive, does not consider how businesses operate and the
goals that they have. Because of this, I think it imposes a
massive burden on supplies and fails to utilize the private
sector's research, development, and innovation.
The system employs upwards of 200,000 Federal employees.
Think about that. That's more than all our Active Duty Marine
Corps. There are now over 180,000 pages of regulations, with
about 2,000 more every single year. In 2008, when there were
only about 160,000 pages, the Office of Management and Budget
and the Small Business Administration estimated the regulatory
compliance cost to be $1.7 trillion. That is certainly a
problem. It is too expensive to do business with this
government and it is driving away innovation and competition,
and it's time to bring Defense procurement into the 21st
century, with a commonsense reform aimed at reaching
nontraditional contractors, increasing competition, and
obviously driving innovation.
All that said, it is also important that the Department of
Defense not overpay for its products. Fiscal year 2017, DOD
obligated about $320 million on contracts, more than all the
other agencies combined. It is important for us to be
responsible stewards of taxpayer dollars. We must ensure that
the Department is paying a fair and reasonable price for all
products, including those at issue today. We must balance the
needs of the contracting officers with the burdens placed on
the industry. I think we should recognize that this is not an
easy goal, but certainly one worth striving for.
It is important to note that while this is an important
issue, it is broader than one company. As I understand it, DOD
is already working tirelessly to root out bad actors. The DOD
Criminal Investigative Service is consistently investigating
issues related to defective pricing, averaging about 32
investigations per year.
So I want to thank Mr. Khanna today and Chairman Cummings
for holding this important hearing, for all our witnesses and
for their testimony.
With that, Mr. Chairman, I would yield back.
Mr. Khanna. Thank you, Ranking Member Jordan.
Now I want to welcome our witnesses: The Honorable Glenn
Fine, who is the Acting Inspector General of the U.S.
Department of Defense; Theresa Hull, the Assistant Inspector
General for Acquisition of the U.S. Department of Defense;
Kevin Stein, the chief executive officer of TransDigm; Nicholas
Howley, the founder and executive chairman of TransDigm; and
the Honorable Kevin Fahey, who is the Assistant Secretary of
Defense for Acquisition, U.S. Department of Defense.
If you all could please rise and raise your right hand.
Do you swear or affirm that the testimony you are about to
give is the truth, the whole truth, and nothing but the truth,
so help you God?
Thank you. Let the record show that the witnesses answered
in the affirmative.
The microphones are sensitive, so please speak directly
into them. Without objection, your written statement will be
made part of the record.
With that, Inspector General Fine, you are now recognized
to give an oral presentation of your testimony.
STATEMENT OF THE HONORABLE GLENN FINE, ACTING INSPECTOR
GENERAL, U.S. DEPARTMENT OF DEFENSE
Mr. Fine. Representative Khanna, Ranking Member Jordan, and
members of the committee, thank you for inviting us to appear
before you today to discuss the Department of Defense Office of
Inspector General report on the DOD's purchase of spare parts
from TransDigm.
Our audit examined the prices that TransDigm charged the
DOD for these spare parts. Specifically, we determined that
TransDigm earned profits of over 15 percent on 46 of the 47
spare parts we reviewed in our audit. The profits ranged from
17 percent to over 4,400 percent for these parts.
We also determined that TransDigm declined to share cost
data when requested by DOD contracting officers. We concluded
that the inability of contracting officers under the current
legal framework to compel TransDigm to provide cost data
contributed to the DOD significantly overpaying for these
parts.
I will briefly discuss in my oral testimony this morning
the DOD OIG's longstanding concerns about sole-source
procurements, such as those with TransDigm. While these
concerns are not new, the prices charged by TransDigm provide
another clear and recent demonstration of the problem.
With me is Theresa Hull, our Assistant Inspector General
for Audit, Acquisition, Contracting and Sustainment, the DOD
OIG unit that conducted the audit of TransDigm. She will
provide in her testimony a few more specific details about the
findings of our audit as well as potential legislative changes
to help address these issues.
First, it is important to note that the issues raised in
our audit are not limited to just this company and its
contracts with the DOD. These findings are representative of
ones we have highlighted in our audit reports going back many
years. Often, our reports have identified the lack of cost data
available to DOD contracting officers as a root cause for
contractors obtaining excessive profits on sole-source parts.
Our prior audits, beginning as far back as 1998, have
repeatedly found problems with determining a fair and
reasonable price for sole-source parts. We discuss a series of
those audits in our written statement.
With regard to TransDigm, we previously conducted an audit
in 2006 that had similar findings to our recent report. In our
2006 audit, we concluded that the DOD was unable to effectively
negotiate prices for spare parts procured from TransDigm
subsidiaries and that DOD had paid approximately $5.3 million
more than fair and reasonable prices for 77 parts.
Also, in 2015, we published a summary report, which noted
that since 1998 we have issued 32 audit reports related to
spare parts pricing. In only three of the 32 reports do we find
that the DOD had obtained fair and reasonable prices for these
parts.
Ms. Hull will now discuss our recent audit of TransDigm as
well as some potential actions to help address these issues.
STATEMENT OF THERESA S. HULL, ASSISTANT INSPECTOR GENERAL FOR
ACQUISITION, U.S. DEPARTMENT OF DEFENSE, OFFICE OF INSPECTOR
GENERAL
Ms. Hull. Representative Khanna, Ranking Member Jordan, and
members of the committee, more than three-quarters of
TransDigm's net sales come from products for which TransDigm
stated that it was the sole-source provider.
Sole-sourced parts are, by their nature, difficult to price
on a fair and reasonable basis, because the normal market
structure and market dynamics do not always exist for sole-
sourced parts. Often, with sole-sourced parts, the price for
the part is not what the commercial market would set. Rather,
when competitive forces are absent, the price becomes what the
DOD is willing to pay for the part that is essential for a DOD
weapons platform, such as an aircraft.
In our audit of TransDigm, which we issued in February of
this year, we reviewed a sample of 47 spare parts that
TransDigm subsidiaries sold to the DOD between January 2015 to
January 2017 on 113 contracts, with a total value of $29.1
million for the 47 parts. TransDigm was the sole manufacturer
for 39 of the 47 spare parts that we reviewed in our audit.
Of the 47 spare parts, we only found one instance in which
TransDigm received a profit less than 15 percent for that part
when compared to the cost for TransDigm to make the part, which
we determined from the cost data we obtained from TransDigm.
The remaining 46 spare parts that we reviewed had profits
ranging from 17 percent to over 4,000 percent. In total, we
determined that for these 46 parts, which cost the DOD $26.2
million, TransDigm earned $16.1 million in excess profit.
On 16 occasions, DOD contracting officers requested cost
data from TransDigm. However, TransDigm was not obligated by
law to provide that data and it refused to do so in response to
15 of the 16 requests. The one instance that TransDigm provided
the requested certified cost data was for the only part that
the contracting officer could not award the contract without
obtaining the data. Significantly, of the spare parts we
analyzed, this was the only time that TransDigm received a
profit of less than 15 percent.
The more insight contracting officers have into the cost of
a part, the better their chances are to negotiate a fair and
reasonable price. However, the contracting officers had limited
options once TransDigm refused to provide the requested cost
data. Either buy the parts without receiving the cost data from
TransDigm or not purchase the parts needed to meet mission
requirements, which could potentially impact the warfighter.
We recommended in our report several administrative actions
that the DOD could pursue: First, we believe that the DOD
should seek voluntary refunds from TransDigm for the $16.1
million in excess profits that we identified.
Second, we recommend that the DOD update and enforce policy
guidance that DOD contracting officers track and report within
the DOD when a contractor that provides sole-source parts
refuses to provide the cost data to the DOD.
However, current statutes do not deter companies where the
statutory provisions have combined to hinder the government's
ability to obtain sufficient information to ensure that
reasonable prices are paid for those spare parts. We recommend
that Congress consider several legislative reforms, such as
amending existing acquisition statutes to require that
contracting officers obtain, at a minimum, uncertified costs or
pricing data before awarding a contract to a sole-source
offeror for the procurement of spare parts, regardless of the
contract dollar value.
In addition, the statutory and regulatory definitions of
adequate price competition for spare parts could exclude those
instances in which offerors of the spare parts obtain the part
from a single source or from subsidiaries of that source.
We believe that with these changes, the DOD contracting
officers would be better able to obtain crucial information
necessary to level the playing field and award contracts for
spare parts with these sole-source manufacturers that do not
result in profits like those obtained by TransDigm and others.
Without these steps, the DOD may continue to pay excessive
prices for spare parts that it needs.
Thank you for the opportunity to testify this morning, and
we look forward to answering your questions.
The Chairman. Assistant Secretary Fahey.
STATEMENT OF THE HONORABLE KEVIN FAHEY, ASSISTANT SECRETARY OF
Defense FOR ACQUISITION, U.S. DEPARTMENT OF DEFENSE
Mr. Fahey. Mr. Chairman and Ranking Member Jordan and
distinguished members of the Committee on Oversight and Reform,
thank you for the opportunity to testify today on matters
relating to the Department of Defense's ability to be a good
steward of the taxpayers' dollars in cases where we are
procuring spare parts from an exclusive sole-source buyer.
I am Kevin Fahey, the Assistant Secretary of Defense for
Acquisition. I appreciate the opportunity today to discuss and
review the conduct by the Office of the Inspector General at
the Department of Defense relating to contract on military
spare parts. My role as the Department acquisition lead is to
ensure that the Department acquires goods and services at a
fair and reasonable price at the time of need.
I join you here today to discuss an atypical situation in
which we currently find ourselves within. A contractor has
developed what I would call a disgraceful business model
designed to exploit current statutes and regulations that are
fair and reasonable pricing of supplies and services procured
by the Department of Defense.
For the period of Fiscal Year 2015 to April 2019, the
Department awarded nearly 47,000 contract actions in a total
contract value of approximately $635 million to TransDigm and
its subsidiaries. Of those contracts, 28 percent were sole-
source transactions totaling $273 million, or 43 percent of the
total value of the contracts awarded to TransDigm and its
subsidiaries.
In their review, the IG determined that TransDigm earned
excessive profits on 46 of the 47 sample parts, with a profit
from 17 percent to over 4,000 percent. When our contracting
officers requested cost data on 16 of the 47 received,
TransDigm denied all but one of those requests, leaving our
contracting officers with little choice but to pay TransDigm
prices in order to ensure warfighters' needs were met. The
singular instance where TransDigm agreed to pay the requested
cost data was under a contract that met the threshold of Truth
in Negotiations Act.
Unfortunately, existing statutes and regulations do not
prohibit TransDigm's outrageous pricing practices nor, in fact,
do they hinder their business model of acquiring ownership or
intellectual property rights to be sole-source producers and
then inflating those prices on those products. We do not
condone the gouging of the American taxpayers or wasting the
Department's finite resources, which could be better used to
procure supplies and services to support our men and women in
uniform.
In light of what the Department has seen today, we have
taken several actions consistent with the IG recommendations.
We continue to review the laws and regulations to make sure
that they are sound, to protect the taxpayers' dollars, and can
prevent companies from exploiting a position where they own the
intellectual property in a sole-source position.
We directed the heads of contracting activities to report
all contractors who refuse to provide cost and pricing
information. Beginning in July of this year, this reporting
will provide the Department holistic insight into such denials
and requests for cost pricing data.
Further, we have appointed a group of functional experts to
review the information in this report to identify those sellers
who routinely refuse to provide cost information and to
identify and share information regarding those contractors that
are deemed to be high risk for unreasonable pricing. To improve
our negotiating position with sole-source contractors, the
Defense Management Agency Commercial Items Group will engage to
perform should-cost analysis on high priority parts.
We look forward to working with Congress to find ways to
prevent companies like TransDigm from gouging the taxpayers
with their sickening business practices. As we work to reform
acquisition to support the National Defense Strategy to prepare
for near-peer adversaries, we do this based on trust and that
people and companies will be ethical and do the right thing for
the country and the taxpayer.
But we have to deal with companies like TransDigm. This is
a very small percentage of bad actors that results in necessary
rules and regulations that bogs down the entire acquisition
system, results in overhead and bureaucracy. This gets under my
skin and makes me sick. Our warfighters are the best in the
world, but also rely on some of the best equipment in the
world.
We have a long and mutual benefit 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 attention and
financial resources away from the challenges and, the worst,
endangers our warfighters.
Thank you for the opportunity to testify today before
Congress, and I look forward to your questions.
Mr. Khanna. Thank you, Secretary Fahey. Mr. Stein.
STATEMENT OF KEVIN STEIN, CHIEF EXECUTIVE OFFICER, TRANSDIGM
Mr. Stein. Thank you, Mr. Chairman, Ranking Member Jordan,
and members of the committee. Thank you for your invitation to
participate in today's hearing. I am joined by our executive
chairman, Nick Howley.
TransDigm is a supplier of highly engineered aircraft
components with products in nearly all commercial and military
aircraft, but TransDigm is not a traditional Defense
contractor. Its primarily a commercial company. Our primary
customers are commercial aircraft manufacturers and airlines.
About seven to eight percent of our sales represent U.S.
Government aftermarket sales.
TransDigm operates through 54 independently run operating
units, with 134 manufacturing locations and over 200,000
product SKUs. In general, each unit shoulders its own R&D
costs. DOD rarely funds the cost of product development for us.
Most of our Defense sales are of products developed from
commercial parts or of a type sold commercially.
As TransDigm is primarily a commercial company, its
business model is different from that of traditional Defense
contractors receiving cost-based contracts. But its model is
common in the commercial aerospace, automotive, and marine
industries. In these industries, parts are often developed and
sold to the OEM at lower margins. After selling parts to the
OEM, suppliers are able to realize higher margins by selling
the same parts or subcomponents to end users as spares. This
razor/razor-blade pricing strategy is common in the industry.
It is also important to note that TransDigm makes specially
designed made-to-order parts in small quantities. During
production, we might make parts for a few hundred planes per
year. After the airplane goes out of production, we have to
support the aftermarket for as long as those planes fly, often
decades. That means that we're supplying DOD in very small
order sizes with sometimes years between orders.
For an order of out-of-production parts, we may have to
order materials, switch machines and tooling, set up test
equipment and the like. These investments of time and
opportunity costs are not captured in the product cost as
reported by the IG. These dynamics are, however, standard in
the industry and drive our pricing.
Congress has enacted several laws to facilitate government
reliance on the commercial marketplace and reduce the number of
onerous government requirements applicable to commercial item
procurements. The proposal of these laws is to encourage
commercial contractors, such as TransDigm, to sell to the
government. For parts that qualify as commercial items, the
fairness and reasonableness of prices that the DOD pays is
determined by commercial market prices.
Contracting officers should use historical prices,
catalogues, government estimates or market research. Only as a
last resort should contractors request cost data. In
TransDigm's case, 43 of the 47 parts audited are, in fact,
commercial items and all their prices were originally
determined to be fair and reasonable.
But the IG appears to have ignored the FAR and
congressional intent by using cost analysis and an arbitrary
profit percentage. In doing so, the IG determined that
TransDigm's profit was excessive. However, it also found that
in purchasing those parts, contracting officers followed all
applicable laws and regulations and, importantly, that
TransDigm did nothing illegal in its pricing.
Further, the IG's conclusion is based on informal cost
estimates that don't accurately capture many of the actual
costs of doing business. The informal cost data provided by
TransDigm is understated and the profit is overstated, because
they were mere estimates and do not include many general and
administrative costs, such as taxes, interest, as well as
litigation, acquisition, and patent costs, which we do not and
cannot allocate to a specific product.
It has been wrongly asserted that TransDigm doesn't develop
any products itself, but, rather, only acquires businesses and
raises prices. On the contrary, TransDigm undertakes
significant engineering projects. We have about 3,000 engineers
and spent almost $300 million in R&D over the last 5 years
alone. Our written statement includes details about our
development of a cockpit door locking system and module in
response to 9/11 and our design of a missile actuation system.
We are very proud to offer these kinds of innovative products
to our commercial and government customers.
With regard to acquisitions, after we buy a business, we
focus on how to improve quality, expand product offerings, and
better provide value for our customers. For example, we
acquired our Kirkhill business last year. Since then, we've
added employees, improved quality and delivery, and this year
we'll invest $9 million in capital projects. We invest
significantly to own and provide high-quality engineered
products and work hard to timely deliver zero defects. This has
significant value to our customers.
Yes, pricing is one of a number of elements that we review
when we analyze and acquire businesses, but it's one of many
factors. We hope this will help dispel confusion about us and
how we do business. Though our Defense sales are a minority of
our business, we are proud of our contribution to the Nation's
Defense.
Thank you for the opportunity to appear today. We look
forward to your questions.
Mr. Khanna. Thank you.
Mr. Howley, do you have a statement?
Mr. Howley. No, I don't. We just have one statement.
Mr. Khanna. Okay. Thank you.
The chair now recognizes Representative Speier of
California for five minutes for questions.
Ms. Speier. Mr. Chairman, thank you. And this is the kind
of hearing that this committee should be having, so I applaud
the chairman and ranking member for doing so.
Mr. Fahey made a very compelling statement. He called your
business model at TransDigm a disgraceful business model. So,
Mr. Stein, let me ask you this question: The Inspector General
has determined in two different reports now that you
overcharged for parts. In one, they came up with a figure of $5
million. The last study they just did showed that you
overcharged $60 million in excess of charges.
And my question to you is, are you going to pay back the
taxpayers of this country the $16.1 million and the $5 million
in overcharges, yes or no? Mr. Stein, you are the CEO, correct?
Mr. Stein. Yes, I am. Thank you.
In terms of the----
Ms. Speier. Yes or no?
Mr. Stein. No. We are still evaluating and we have not come
to a conclusion. This meeting today is part of that evaluation
and, you know, we will take all of this into account.
Ms. Speier. So one of the estimates was done back in a 2006
report. So you've been evaluating this since 2006 to determine
whether or not you're going to pay back the taxpayers the $5
million in overcharges? How much longer do you need? That was
2006. That was 12 years ago, 13 years ago.
Mr. Stein. I wasn't with the company in 2006, so I can't
comment on what happened back then.
Ms. Speier. That to me is a cop-out. Either you are willing
to repay the taxpayers of this country or you are not. I'm
holding here a door handle. This door handle for the Black
Hawk, you charged the taxpayers $977 for this door handle. The
Department of Navy was able to reverse engineer this door
handle and manufacture it itself for $503. So you charged
almost twice as much for a door handle that they reverse
engineered and were able to make for $503. That to me is
outrageous.
How do you explain charging $907 for something that they
were able to reverse engineer for $500?
Mr. Stein. I'm not sure I can comment on the reverse
engineering. I don't know if that information was made privy to
us beforehand. Is this part of the should-cost analysis that
was done, because I'm not--I can't comment on the rationale,
process, or methodology that was used to calculate the should
cost.
However, you know, if we're alleging that we're doing
something wrong or, you know, not in the best interests, I
think the answer is absolutely emphatically no. We're a
commercial company. We're a commercial business that
manufactures over 200,000 parts----
Ms. Speier. Okay, but you already said that.
Mr. Stein [continuing]. over 50,000 parts in the military
business alone.
Ms. Speier. Thank you. Thank you. Thank you.
That was made public back in 2008, so that's information
that has been made available to you before.
Let me ask you this, Mr. Stein: On October 10th, 2018, you
had a call with investors about the acquisition of Esterline.
And it appears that you like to buy companies that can be sole
source so you don't have to compete with anyone. And you
commented to your investors: We just think that there's juice
here. And, again, following the same TransDigm value creation
drivers, there's juice here that we can go get.
What is the juice you're referring to? Is that the American
taxpayer?
Mr. Stein. Certainly not.
Ms. Speier. What's the juice?
Mr. Stein. Important improvements in the business,
important improvements in quality.
Ms. Speier. To investors?
Mr. Stein. To investors and to customers.
Ms. Speier. Well, no, to investors who are looking for
profits.
Mr. Stein. We acquired a number of companies. Kirkhill was
one of them that were part of the Esterline group before we
acquired it. It was losing money. It's an F-35 supplier. It was
in doubt of its long-term existence. It was losing money.
Esterline no longer wanted them in their portfolio.
We bought that business. We've hired hundreds of people.
We've solved some of the F-35 delivery issues on products.
We're working on other ones now. We've, you know, regained the
confidence of the Department of Defense.
Ms. Speier. Mr. Stein, my time is elapsing. When you refer
to juice to a group of investors, I think we can all understand
that what juice means, we can squeeze a lot of money out of
this acquisition.
And from what I understand, part of your model is to
increase the prices of spare parts and reduce the cost of
making those spare parts by actually laying off people.
With that, I yield back.
Mr. Khanna. Thank you.
The chair now recognizes Representative Foxx for five
minutes.
Ms. Foxx. Thank you, Mr. Chairman.
I am going to direct this question to Mr. Fine, Ms. Hull,
Mr. Fahey. Either of you or all of you can respond.
There's a section of your report that discusses contractor
interference when determining fair and reasonable prices.
Specifically, the report notes previous OIG reports that
discuss instances where, quote, ``contractor actions hinder
contracting officers from determining a fair and reasonable
price,'' end quote.
The report also mentions a contracting officer recounting
that a, quote, ``contractor benefited from its status as DLA
Aviation's only approved source by arguing against or delaying
responses to requests for supporting data on 22 occasions until
the need to sustain the military aircraft in support of DOD
missions became urgent and the contracting officer had to buy
the part so the mission would not be negatively affected,'' end
quote.
My question is, are there efficiencies available or ways to
improve the source approval process at DLA and the military
components that could encourage greater competition from small
businesses or nontraditional Defense contractors?
Ms. Hull. Thank you for the question. In that particular
case, it's referring to an instance in which the government
contracting officer didn't have another option. It was a sole-
source situation. So in those cases, what we've found, both in
this report and in prior work, is that there isn't really a lot
of other available options to that individual to get accurate
pricing information.
So, in this case, there was not another company to go to.
And in our findings, what we've highlighted is that it's
important to get the right information into their hands, into
the hands of the contracting officer, which is why we've laid
out suggestions to look into providing, at a minimum,
uncertified cost data. If they had had that information, they
would have been in a much better situation to make a decision
on the purchasing of those parts.
Ms. Foxx. Mr. Fine, would you like to add to that?
Mr. Fine. I think that is absolutely right. What we're
trying to do is level the playing field, so that particularly
in sole-source cases without adequate competition, the
contracting officers have enough information to determine what
is a fair and reasonable price.
In many of these cases, the contracting officer in the
military needs that part, needs that aircraft, and they are
over a barrel. And so it is not--they do not have options other
than to take the part at exorbitant prices. And what we are
trying to do is level the playing field with those suggestions.
Ms. Foxx. Well, I certainly can concur that we need to do
that.
Mr. Fahey, when negotiating a contract for a sole-source
part, do contracting officers explore the ability of obtaining
intellectual property rights? If they do not, can you explain
why?
Mr. Fahey. So, ma'am, first I'd like to touch on your first
question.
Ms. Foxx. Certainly.
Mr. Fahey. The additional piece which Representative Speier
talked about, which is the reverse engineering piece, right? We
get into situations over and over again, we do look at reverse
engineering. Just some of the parts that have been around for a
while that are critical, sometimes the engineers won't touch
them. But like the handle is a good example that we've reverse
engineered. And then we can compete it. And usually parts like
that are good for small business.
Yes, I mean, we absolutely do explore--could you----
Ms. Foxx. Yes. Do you explore the ability of obtaining
intellectual property rights?
Mr. Fahey. Yes, ma'am, we do, right. It's sort of the same
thing you see here is what we find when we get in this
situation when it's a spare part of an old part, our ability to
buy it at a fair and reasonable price is almost impossible,
because what industry values it as an opportunity, not as the
cost of the IP. And so that's why it's so important when we
start acquisitions to make sure that we negotiate the IP up
front and have an IP strategy when we stop programs, because
when we get in the situation we're here, it's hard to buy that
intellectual property.
Ms. Foxx. When did you start looking at this issue of IP?
How long has that been in existence?
Mr. Fahey. So the Department has been looking at the issue
of IP for quite a while. Me personally, my job is--just this
past November there was a report done because, you know,
Congress asked industry and the Department to get together, and
they submitted the report. And now I'm in the process of
writing what is the Department of Defense's new intellectual
property strategy.
If you think about a lot of these parts, their legacy was
back in the day where we didn't purchase the IP, right? So we
have done a 180 and know that's important and up front. And
it's really more about what is the data we need to sustain our
equipment.
Ms. Foxx. Thank you.
Mr. Chairman, one quick comment. I have become aware of
many situations where there is a claim of distinctiveness of
parts when they really are not, and we are way overpaying for
things than we should be.
Thank you, Mr. Chairman.
Mr. Khanna. Thank you, Representative Foxx.
I'd now like to recognize Representative Sarbanes, for five
minutes.
Mr. Sarbanes. Thank you, Mr. Chairman. Thanks for doing
this hearing. I appreciate it very much.
Mr. Howley, I think you were the CEO at the time when the
parts were being sold that Congresswoman Speier was talking
about a moment ago at these exorbitant prices. And I think the
company at that time was asked to pay back $5 million in
association with a contract, and that has not been paid back
yet, has it? And if not, why not?
Mr. Howley. No, it has not.
Mr. Sarbanes. How come?
Mr. Howley. We--let me--a couple things I'd like--I'd point
out there. One, we went through an IG audit at the time. And
the determination, as I recall--and I'm now saying this from 13
years ago--was that we had complied with all the rules and
regulations and the company had done nothing wrong. And we
decided--we didn't pay it back. We did not have an obligation
to pay it.
Mr. Sarbanes. That's going to be a refrain here today, I
think, that you complied with all the rules and regulations,
which may get to why we need to tighten those up. And I know
there are some recommendations on that.
But----
Mr. Howley. I might just add there's some differences
between the 2018 and the 2006 one. In the 2006 one, we probably
were not as familiar with regulations, and about half of the
parts were not determined to be fair and reasonable. We,
frankly, didn't even know such a determination was made at that
time.
In the last audit, I just want to point out that all 46 or
47 parts were determined to be fair and reasonable at the time
the order was placed.
Mr. Sarbanes. Let me ask you about something else, because
you said, you know, you complied with all the regulations and
so forth, which I imagine there may be some dispute over; but
you then said, we did nothing wrong.
And I want to challenge you on that, because the committee
got some testimony from a former director of operations that
said that at quarterly meetings, Nick Howley--that's you--and
management gave a wink-wink, nod-nod that we want to avoid
disclosing any cost data. They told us under their breath we
should see what we can do to avoid disclosing cost data. We
don't want to talk about costs; we want to talk about price, in
parentheses profit.
Have you or any senior official at TransDigm told an
employee that they should avoid disclosing cost data?
Mr. Howley. What we tell the employees--well, first on
that, I don't know what that is. I don't know the situation. I
don't know the specifics. I don't remember it. I don't--I
simply don't know what it is.
Mr. Sarbanes. Well, it's somebody saying that basically the
message was don't talk about cost data.
Mr. Howley. I'll repeat. I probably have not--I've been
doing very few product reviews in the last 10 years.
Mr. Sarbanes. Mr. Stein, are you aware of that happening?
Mr. Stein. Am I aware of what happening again?
Mr. Sarbanes. Are you aware of a senior official telling
employees that they should avoid disclosing cost data?
Mr. Stein. I'm not aware of that. I'm only aware of the----
Mr. Khanna. If the gentleman would turn on his microphone.
Mr. Stein. Sorry, my apologies. I'm not aware of that. I am
aware that we continually stress with our employees to follow
all rules, regulations, laws accordingly. That's what we stress
with them.
Mr. Sarbanes. Yes. So then there's another--there's a
former sales director on the same theme said, told the
committee: Quote, ``we were coached to not provide cost data.''
And then you sent a letter in May 2019, just now, to the
committee, saying: ``TransDigm has no written policy stating
that employees should refuse to provide uncertified cost data
on request.'' So that you don't have a written policy, right?
Mr. Stein. We have no written policy.
Mr. Sarbanes. That's convenient to not have a written
policy.
Mr. Stein. I'm not aware of any verbal policy either.
Mr. Sarbanes. Well, it sounds like there was kind of an
unwritten policy, based on the directives that were being given
to these various employees, according to the testimony that
they provided to the committee.
So you're saying you have no policy, written or unwritten,
to refuse cost data when it is requested by a contracting
officer if it is not required by statute. Is that correct?
Mr. Stein. If it's not required by statute, we have no
policy.
Mr. Sarbanes. And what's your justification generally for
denying contracting officers cost data when they ask for that
data?
Mr. Stein. We are a commercial company. We develop----
Mr. Sarbanes. Proprietary, all that kind of stuff?
Mr. Stein. Sure. It's true.
Mr. Sarbanes. So that will be another refrain here today.
But I don't think it passes the smell test. I mean, you're
hanging a lot of stuff on some technicalities here maybe. We
can try to fix those to, you know, lock this down, but the
notion that you didn't do anything wrong I think doesn't meet
the laugh test, given what we've heard here today and the
testimony and the documentary evidence and so forth.
And, with that, I yield back to the chairman.
Mr. Khanna. Thank you, Representative Sarbanes.
The chair now recognizes for five minutes Representative
Gibbs.
Mr. Gibbs. Thank you, Chairman.
Mr. Stein, you talked about it. I can appreciate you're a
commercial company and then when you have to make things for
the military, Defense, in small quantities as you stated and
aftermarket and you got to do special things. Obviously,
there's going to be some higher cost, and I can appreciate
that. And you got legacy cost.
But where I'm struggling a little bit is I never heard of
this company until just recently, and I Googled your company
and there's from Bloomberg here a report and it talks about
some of the items that were sold. And there's one here, the
Defense Logistics Agency talking about paying $4,361 for a
half-inch drive pin that they say should have cost $46.
Now, as the citizens, they Google that and they see that,
that must be one hell of a drive pin. I'm a farmer. I kind of
know what those are. I'd kind of like to see that drive pin.
But I get my arms around things a little bit better when I see
an example. Can you tell me about this drive pin that costs
$4,300?
Mr. Stein. I can't. I think, if I can, you know, again, we
make a lot of parts for the Defense. I can't comment on the
should cost because, again, that is a process and a methodology
no one has shared with us, so it's hard for me to comment on
that.
But, again, we--you know, we have this commercial heritage.
This is how we develop parts. But I think even in the farming
industry that you're referring to--I know because my family was
also farmers. That's where my mother was raised. John Deere
everywhere.
And if you go to buy a pin or a point for your corn planter
that's 50 years old, you are going to pay more than that corn
planter cost when you bought it originally, without a doubt.
Mr. Gibbs. Without a doubt.
Mr. Stein. This is a model that is common in industry, the
razor/razor-blade. You develop it, you sell it at extremely low
cost, low profit up front, and you hope to recover that in the
aftermarket.
In the military case, in many cases we're only making a
couple parts over decades. The cost to go in and make----
Mr. Gibbs. I appreciate that, and maybe shame on the
military aspect. You know, it's just a lot of engineering or
whatever to let that happen, but I can tell you, as a farmer,
there's no way I'm going to spend 43, 44 hundred dollars on a
half-inch drive pin. I mean, we'll just get another piece of
equipment or do something different.
But back to that, Mr. Fahey, on the procurement side, how
do you justify--okay, let me ask the question this way: Sole
source, I can understand that, especially in the Defense
acquisitions and there's no competition.
So I guess back to Mr. Stein. Where would you think when
there's no competition, it's sole source, is there a legitimate
question to be overlooked for the Defense procurement people to
come in and analyze what your costs are and, you know, keep it
confidential? But since there's no competition there, would you
agree that that's a fair thing for them to be able to do or
not?
Mr. Stein. Sorry, is that a question for me? I wasn't sure
if you said Stein or Fine.
Mr. Gibbs. I changed my----
Mr. Stein. So can you repeat it? I apologize.
Mr. Gibbs. Well, when there's no competition, okay--a wide
level of competition keeps prices down and makes--that's how
our system works. But in this case, where there is no
competition and it's sole-sourcing, do you think it's
unreasonable for the acquisition people in the Defense
Department to come in and really ask questions and find out
what your costs are? And it would be confidential, they
shouldn't be talking to anybody else about that. But, you know,
is that an unreasonable request when there's no competition?
Mr. Stein. I don't know. It's difficult for me to speculate
on policy or intent. So I fall back to that, you know, we want
to deliver parts on time with the highest quality, the highest
engineering standards for these mission-critical parts.
That's----
Mr. Gibbs. Let me go back, go over to Mr. Fahey, the
acquisition people.
Mr. Howley. Could I clarify just a second on that? It would
be helpful
Mr. Gibbs. Make it quick.
Mr. Howley. The vast majority of what we do, we are a
commercial supplier. You say, how are the parts prices
generally regulated? Most of what we supply is of-a-kind
commercial parts. So the commercial market essentially
establishes the price.
Mr. Gibbs. I understand that. The commercial market is not
going to pay $4,300 for a half-inch drive pin.
Mr. Howley. Oh, they are if it's of a kind. That's how
we're establishing the price for many of these parts.
Mr. Gibbs. I have a hard time believing that, but okay.
Mr. Fahey. So I would take a variation of what the IG DOD
is recommending. If you think about it, if we get to the
situation where, through sales data, market researches, reverse
engine--we can't figure out whether they are giving us a fair
and reasonable price, when we ask for the cost data, by law
require that they do it. You know what I mean? When we ask for
it and they don't give it to us, it makes it so we have no
alternative. But there's no reason why when we get in those
situations when we do ask for it, it is required for them to
give it.
Mr. Gibbs. Currently, the law requires that?
Mr. Fahey. No.
Mr. Gibbs. It doesn't, okay.
Mr. Fahey. No. Today, they are only required if it falls
above $2 million. That's the Truth in Negotiations. It is the
recommendation for sole-source situations. I would argue when
you can't get data that says that you know it's fair and
reasonable and then when you request data like the procurement
office have, by law, it should be required that they give it to
them.
Mr. Gibbs. Thank you. I yield back my time.
Mr. Khanna. Thank you, Representative Gibbs.
I now recognize myself for five minutes. Mr. Fine and Ms.
Hull, thank you for your work and the work your staff did to
expose this. You obtained, Mr. Fine, cost data from TransDigm
to see how much the company spent on those parts, correct?
Mr. Fine. Correct.
Mr. Khanna. Can you respond to TransDigm's obfuscation that
they didn't give you all the cost information because of
economies of scale and having to make small parts? Was that
factored in?
Mr. Fine. We didn't hear that from them. We asked them for
the cost data. This is cost data that the contracting officers
had asked for. And in 15 out of the 16 times they were refused
that, because the contracting officers could not force them to
give that by law. They didn't give it.
We asked for it. We are backed by subpoenas. We didn't have
to issue a subpoena, though. They gave us the information. They
gave us information broken down with labor, materials, and
overhead. The overhead did include other things, like marketing
and supplies and other things.
We used that information. We examined it. We came up with
our numbers. We provided the report to them. They did not
contest the accuracy of our figures. The first time we heard
about that was last night when we read their testimony. So they
had a chance to discuss whether the cost calculations that we
made were inaccurate. They did not say that.
And the final thing I'll say is even if there are some
costs that are not captured in the information that they gave
to us--we used their data--I doubt it is going to turn a $43
part into $4,300. There's no way that there is that delta.
And that's why we did a range of profit margins. And even
if you give them a profit margin of--a significant profit
margin, most of those parts are way, way above any reasonable
profit margin. So that's how I would respond to the comments
that we've heard this morning in the testimony.
Mr. Khanna. And just to put it in perspective, Mr. Fine,
the first on this chart it shows that one of the estimates is
$799 for the cost and then the part is being sold for almost
$11,000, correct? I mean, so your analysis, even if you're
saying it's $1,100 or $800, the idea is absurd that--the
profits, the margins are absurd, correct?
Mr. Fine. We think the margins are excessive, given the
cost of the part. And we provided the--the information, we
analyzed the information that they gave to us, which they did
not contest after we analyzed it.
Mr. Khanna. Do you believe, Mr. Fine, that TransDigm should
pay back the $16 million and the $5 million, as Representative
Speier suggested?
Mr. Fine. Yes.
Mr. Khanna. And some of my colleagues on the Republican
side suggest?
Mr. Fine. Yes. Are they required to do it by law? No.
Should they do it? I think they should.
Mr. Khanna. Secretary Fahey, you represent the Department
of Defense. Is it your view that they should pay back the $16
million?
Mr. Fahey. Yes, they should pay it back.
Mr. Khanna. Mr. Stein and Mr. Howley, a free bit of advice.
You got a bipartisan Congress saying you should pay back $16
million you owe the taxpayers. We in Congress can almost agree
on nothing. I mean, it's remarkable that we agree on this. You
got the Secretary of Defense's representative saying you should
pay back $16 million. Your big risk is that FOX & Friends will
cover this and you'll have a Presidential tweet asking you to
pay back the money. So before we get to that kind of point, why
not just--the company is worth $1.2 billion. Why not just pay
back $16 million?
Mr. Howley. We're still evaluating that. I think a couple
things I would like to point out on that. One, these contracts
were placed, and they were all determined to be fair and
reasonable by the Department of Defense when they gave us--when
they placed the contracts with us. And I don't think anyone is
disputing that that was the determination. Furthermore, we had
an audit of the process, and no one is alleging that we have
not complied with any FARs, with the FARs or the regulations.
The DOD is a good customer and we value the relationship,
but we also have other constituencies that we have to think
about. We have private shareholders. We have employees. We have
management. We have commercial customers. And we're concerned
about implying that we've done something wrong here or
something illegal.
It's not--the money is not the issue here. We're trying to
balance those sort of conflicting demands to come to a
conclusion. And we also, frankly, like to hear what we hear at
this committee hearing before concluding. That's where we--
we're not saying no. We're trying to balance these different
tensions, I'll say.
Mr. Khanna. I think it would go a long way. One final
question: When you purchase these companies at increased
prices, what value are you adding? I mean, for example, you
purchased a company that made a part for $5,500, solenoid, and
then after you bought it the price went up to $11,790. The part
only cost $3,000. So what is the additional value when you're
purchasing this and raising the price?
Mr. Howley. I can explain our acquisition process if you'd
like and how we go about that. We seek to buy proprietary,
highly engineered aerospace components with some aftermarket in
them. We do a fair amount of looking into it. We study whether
the business is proprietary, in fact, what's its position,
what's the quality of the product, what's the management like,
what's the--and if we come to a conclusion that it makes sense,
we buy it if the price is right.
After we buy a business, we do a lot of things to the
business. Typically, we have a fairly extensive evaluation of
management. We almost invariably change the organization
structure to a very clean simple structure with clear lines of
responsibility.
Mr. Howley. We give the businesses frequently much more
autonomy than they're used to having, and that takes a fair
amount of training. The ability to provide reliable technical
product on time is very important. We put a lot of time into
improving that, and I think Kevin pointed that out on the
Kirkhill business. We look to make the businesses efficient,
and we invest a lot of money in that. We substantially crank up
the new business development process. We develop many, many new
products, with something like 3,000 engineers working on them.
And, yes, we look at the prices. And if we look at the
prices and we determine that the combination of the value
provided, the market position, the contracts, the regulation,
the customer perception would allow us to increase prices, we
do so in cases. It is one of many things we do when we acquire.
By and large, we acquire businesses and we make them better
businesses than they were before. We make them more
sustainable, we make them better generators of products, and
the like.
Mr. Khanna. Thank you.
Mr. Howley. And we rarely, I would add--we are not buyers
and sellers. We are long-term owners of businesses.
Mr. Khanna. I recognize Mrs. Miller for five minutes of
questions.
Mrs. Miller. Thank you, Mr. Chairman and Ranking Member
Jordan.
And thank you all for being here today.
It is vitally important that our military does have the
tools to do the job that they do well, which is protecting us
and our freedom. However, the American taxpayers have entrusted
their hard-earned money with our government to spend it wisely,
both responsibly and effectively.
Mr. Fine and Ms. Hull, the majority of TransDigm contracts
studied fell under the old TINA threshold of $750,000 and the
new threshold of $2 million. Would the proposal to reverse this
2018 increase, which did not apply to TransDigm at the time,
have any benefit?
Ms. Hull. Reversing the threshold to the $750,000 would
only have benefit if combined with our suggestion that, in
sole-source situations, contracting officers are able to obtain
uncertified cost data at a minimum.
The issue at hand is, when they are negotiating with
companies like TransDigm in sole-source environments, they are
looking at information that they believe to be reasonable
because there aren't any market forces at play that are
controlling costs. And as TransDigm alluded to earlier
regarding their value-based pricing approach, the cost, or the
price, I should say, to the government becomes what the
Department will pay and not what the market forces will bear.
When you are limited to one source, there's very little
leverage.
Mrs. Miller. Mr. Fine?
Mr. Fine. I think it could help, but many contracts are for
smaller than even $750,000, and there can be acquisitions that
will have the same problem under that rate. The one time they
were required to provide the information was because a contract
was above the TINA rate, $2 million, and that's the only time
they've received a profit of less than 15 percent. They
received 11 percent.
So cost information and providing cost information, we
think, is a helpful tool for contract officers. And that's why
there ought to be consideration of all sorts of legislative
fixes to allow the contracting officers to get that information
when they need it.
Mrs. Miller. The contracts studied are for low-dollar and
low-quantity purchases that will almost always be below the
threshold. What are the benefits to an increased threshold,
which is sort of what you alluded to, such as increasing
competition and the inclusion of nontraditional contractors?
Mr. Fine. I think the benefit and the reason for it was to
streamline processes, to reduce the burden on contractors of
providing information in all sorts of cases, even in cases when
it is not necessary. In our view, some cases, it is necessary,
particularly the sole-source context of what we are talking
about here.
Mrs. Miller. Same answer, Ms. Hull?
Ms. Hull. Yes. And I would say, our approach wouldn't be to
raise thresholds, by any means. And, again, the threshold
amount itself won't really have an impact. It's really getting
to that information. Because without that more critical
information, the contracting officer is pretty much put in a
position where they don't have what they need to make the right
decision for the warfighter.
Mrs. Miller. Thank you.
Mr. Howley and Mr. Stein, has TransDigm ever coached
employees from subsidiary companies on how to avoid exceeding
the TINA threshold so that the cost data would not have to be
provided to the government contract negotiator?
Mr. Stein. No, absolutely not. We do not do that. The
government contracting officer is the deciding factor on the
contract size, what's ordered, number of pieces and parts. We
have no ability to influence that.
Mr. Howley. We do run--particularly after 2006, we do put
some amount of time in training people on what the regulations
are, and we absolutely insist people comply with whatever the
rules and regulations are.
Mrs. Miller. Thank you.
Another question for the two of you. Does TransDigm monitor
the bidding process of its subsidiaries? Do you know when a bid
is placed, for how much, and for what parts?
Mr. Stein. Absolutely not. We have so many business units
and parts, we have no ability to follow that. We have 150-plus
business systems that run each individual business unit.
There's no way for us to see this information.
Mrs. Miller. Do your business practices vary significantly
from companies in the industry?
Mr. Stein. I do not believe so, no.
Mrs. Miller. Okay.
Mr. Howley?
Mr. Howley. I don't believe so.
And I'd expand. I think both in the commercial aerospace
business, where we primarily compete, as in, I'll say, the
automotive business, the mining, the power transmission, et
cetera, the model of a razor-razorblade is a very common model.
You pay all the money up front, you pay all your own
development, you develop your own products, you put your
capital in, you pay all your startup costs, you don't make a
whole lot of money on new equipment production, and you recover
your investment in the higher prices and margins in the
commercial after-market. That's very common.
You know, I would just give an example. As I say, if you go
to buy a car, and you pay $35,000 for the car, and you like the
car, and your spouse or your next-door neighbor says, ``I'd
like that car too, I think I'll go buy the parts and put it
together in my garage,'' they'd probably pay $500,000 for that
car. It's a very common razor-razorblade model in the
commercial world.
Mrs. Miller. Thank you. I yield back my time.
Mr. Khanna. I recognize Mr. DeSaulnier for five minutes.
Mr. DeSaulnier. Thank you, Mr. Chairman. I want to thank
the ranking member. And I'd also like to thank all of the
sources you worked at, the whistleblowers who courageously came
forward and helped us with this. And I do appreciate the
bipartisan approach.
Mr. Howley, I think you just said that all of these
contracts were found to be fair and reasonable. Is that
correct?
Mr. Howley. That's my belief. At the time of placement,
they were fair and reasonable. That's what I understand.
Mr. DeSaulnier. Mr. Fine, that's not true. Eight of them
where the excess profits came from, you actually found that
they were best obtainable price. Is that correct?
Or Mr. Fahey?
Ms. Hull. If I may, eight of those parts were determined
fair and reasonable by the reason of best obtainable price.
Mr. DeSaulnier. Right.
Ms. Hull. So what that means is the contracting officer
didn't necessarily find it fair and reasonable but didn't call
it unfair either. Just based on the information they had, they
were put in a position where they had to purchase the part.
Mr. DeSaulnier. Another way of saying that in layman's
terms is that was the only place to go to get the product.
Ms. Hull. Yes, they were sole source for those parts.
Mr. DeSaulnier. Is that historically the case, Mr. Fine?
I'm sorry. I can tell by your body language you're anxious to
get in here.
Mr. Fine. No, I think that's a really important point. It's
determined to be fair and reasonable because there's no other
source for this and they have to get the part to allow the
aircraft to fly.
And so simply because they are over a barrel and saying we
need this part at this price doesn't mean it's an appropriate
practice or there are not excessive profits or this is an
appropriate way to charge the government.
Mr. DeSaulnier. So what Mr. Howley just said is not
accurate, just to----
Mr. Fine. Well, it's--you know, it's----
Mr. DeSaulnier. Were they all found to be fair and
reasonable with--but eight of them have the exception is
because they were the only possible place to get the product.
Ms. Hull. Yes.
Mr. Fine. Yes.
Mr. DeSaulnier. Okay.
We talked a lot about data. Mr. Fine, 47 of the TransDigm
part sales that you reviewed, only 1 had a reasonable price.
And as I understand that, it's because the contracting officer
obtained certified cost data. On the other cases, you didn't
get enough data. You've made some suggestions as to how we
could change that. Would you like to elaborate?
Ms. Hull. Yes. For that particular part, the contracting
officer negotiated a fair and reasonable price because they
obtained the certified cost data. That particular part was over
the TINA threshold.
Some of the changes what we recommend, based on our work
here, is to amend the statutes to require that the contracting
officers obtain, at a minimum, the uncertified cost or pricing
data. And we specify that for sole-source situations because,
again, there aren't any other options for that contracting
officer, so it would benefit that government contracting
officer to get that information.
The other change that we would recommend is regarding the
definition of adequate price competition for spare parts. We
would exclude the instances where the offerors of those parts
obtain from that same source or subsidiaries of that source.
Mr. DeSaulnier. Mr. Fahey, the former Director of Defense
Pricing and Contracts told the IG that recent changes Congress
has made to make the contracting process easier for certain
contracts has led to opportunities for abuse. Do you agree with
that?
Mr. Fahey. Yes. I mean, the one that was talked about
previously is at $2 million. When you go from $750,000 to $2
million, by definition, you've increased the bandwidth that
doesn't require TINA.
Mr. DeSaulnier. So, in Congress' desire to, I think As Mr.
Stein said, get rid of burdensome regulations, we have
actually, perhaps, incurred costs that Congress needs to look
at correcting so you have the proper oversight, from my
perspective. I don't want to put words in your mouth, but----
Mr. Stein. Sir, I would agree. Working with you on what the
right language--this is why this makes me really upset, right?
Because as we try to attract small business and nontraditionals
and those, it's part of the reasons we make these adjustments,
right? So maybe the balance of, you know, the--when asked for
price data, even uncertified price data, because it doesn't
fall in--you have to give it, you can't choose not to--would
be, I think, a reasonable thing to look into.
Mr. DeSaulnier. So, Mr. Fahey--and I think Congresswoman
Foxx mentioned this, about small businesses and helping with
competition. And no matter what the data you get, if they're
the only source to get it, and the military needs the part, you
still have the same situation.
So, Mr. Fahey, we want to encourage competition. I assume
we do. It's a problem in this country; there is a lack of
competition. How do we do that? The data will help, but getting
small businesses to compete against a large company like this
is going to be difficult.
Mr. Fahey. What I think is that, if you had the data,
right, in a lot of those instances, the handle being a good
example, reverse engineering, small business can compete,
right? Because their overheads are low and those kind of
things. Where it's hard for them to compete is when they don't
have the high IP and there are specialized small parts that we
know we're way overpaying, they may not have the ability to
compete on those high-performance parts.
Mr. DeSaulnier. Well, I'd be particularly interested in a
further discussion in this committee on how we make sure that
we get that competition in the market. Otherwise, as long as
they have a monopoly, you're not going to get the best price.
Thank you, Mr. Chairman. I yield back.
Mr. Khanna. Thank you.
I now recognize Mr. Meadows for five minutes.
Mr. Meadows. Thank you, Mr. Chairman.
I thank each of you for your testimony this morning.
Mr. Stein, Mr. Howley, let me come to you. This is the type
of thing that just drives me crazy. And I'll give you some
advice. If you're looking for feedback, you better pay the
money and start giving us the cost, even though it may not be
required by statute. Because I can tell you that, once you
raise an issue in a bipartisan way like this, it makes us look
for other things.
And I can tell you that the trouble that I have with this--
and there's going to be enough wrath to go around, so--but my
encouragement to you is to do those two things: chalk it up to
marketing expense, and pay the American taxpayer back
immediately. Because I don't understand why you haven't done
it. Instead of coming here today, you could've paid a few
million dollars back and avoided all of this. And instead
you're going to highlight it, where I'm going to have to, in a
bipartisan way, start to look in a way that you would not find,
I guess, supportive of future business.
I don't know, Mr. Fahey, why we continue to do business
with a company that wouldn't pay it back.
So let me just be clear. When you have a sole source, no, I
get that. I understand. I was a business guy. But what I'm
saying is, with the types of moneys that we have here, the fact
is we need to do a better job of showing the amount of money
that is out there and available for a drive pin, $4,300.
I mean, here's the problem is, we've been alerted to this
because of this hearing, but the average small-business guy has
no idea, Mr. Howley, how much money is to be made, and so
that's the reason why you don't have the competition. And so,
at this point, my recommendation is to do that.
And, Mr. Fahey, I would recommend that you make several
recommendations here in terms of how we can fix the procurement
side of things. I'm big on making sure we have a strong
national defense. I also know that your audit, on a regular
basis, is not something to brag about with DOD. We have these
continued issues that are out there.
And so, Mr. Fahey, what I would ask of you is if you give
three recommendations to this committee on how we can highlight
the fact that competition could be there for some of these
sole-source contracts. Are you willing to do that?
Mr. Fahey. Yes, sir.
Mr. Meadows. All right.
Mr. Fine, in the two minutes I have left, I'm going to
switch gears just briefly, because I've got you here today and
I may not have you--Federal News Network actually has talked
about an iCloud issue with two different companies, where we
have--I believe it's Oracle and Amazon looking at a $10 billion
contract. Are you investigating that particular conflict of
interest?
Mr. Fine. That matter has been referred to us, and we are
reviewing it.
Mr. Meadows. And so, as you're reviewing it, one of the
issues--and I'm a big fan of the IGs. You know that. This is
not our first rodeo. When you have people that leave DOD and go
out into the private sector, is there an issue with your
oversight and the ability to actually do a proper
investigation?
Mr. Fine. It depends. If it's criminal, no. We have
criminal authorities to that. If it's administrative, sometimes
there is a problem with other IGs not having testimonial
subpoena power. We in the DOD have testimonial subpoena power,
which is good, because when we go to witnesses who have left
and say we want to talk to you, they know that we can back that
up with a subpoena, and they almost always talk with us.
My colleagues in the IG community have a problem with it. I
had a problem with it when I was at Justice----
Mr. Meadows. Right.
Mr. Fine [continuing]. when people left and we couldn't
force them to talk to us and there were gaps in our
investigations.
Mr. Meadows. And so, in your investigation, the potential--
and I want to stress, the potential--conflict of interest that
is out there, is that something that you can report back to
this committee? Obviously, with an IG's report, but is that
something that you can brief this committee as you're going
through your investigation or your--you didn't say you had an
investigation, because there are two different words there. Did
you say you were investigating it?
Mr. Fine. I did not say that. I said we have it, we are
reviewing it. I don't really want to talk about an ongoing
matter and characterize it. But I will represent that we
absolutely will brief the committee when we are completed.
We're always willing to do that, and we're willing to do that
in this case too.
Mr. Meadows. And so, Mr. Chairman, I ask unanimous consent
that the Federal News Network article that I mentioned be
submitted as part of the record.
Mr. Khanna. Without objection.
Mr. Meadows. And I thank the chairman.
And, Mr. Fine, I would just let you know, in terms of the
IG community, this particular procurement issue has been raised
to the level where a number of us have a concern there, and so
I appreciate your further insight on that matter.
And I'll yield back.
Mr. Khanna. Thank you.
I just want to take this moment to thank Mr. Meadows and
Ranking Member Jordan for the bipartisan nature of this
committee hearing and your staff and teams' cooperation to put
the country's interests first.
I now want to recognize Representative Tlaib for five
minutes.
Ms. Tlaib. Thank you, Mr. Chairman.
Mr. Howley, you were the CEO of TransDigm during the time
period where you over-billed our country, the American people,
$16 million. Is that correct?
Mr. Howley. I was the CEO in 2016.
Ms. Tlaib. Sure. And 2017, I believe.
Mr. Howley. And 2017.
Ms. Tlaib. Yes. According to The New York--so do you
remember how much you were getting paid in 2017?
Mr. Howley. Yes. I was getting paid--I believe I was paid
$61 million in 2017 and $19 million the year before.
Ms. Tlaib. Yes. The New York Times said it was the sixth-
highest-paid CEO in American business that year. Did you know
that?
Mr. Howley. I saw the article in The New York Times. I
didn't----
Ms. Tlaib. Yes. Congratulations. Mr. Howley, you earn more
than anyone at your--combined salaries of the CEOs of
Microsoft, IBM, and Boeing. In fact, you are one of the 10
highest-paid CEOs in America 3 of the last 6 years.
You received that compensation all while you were price-
gouging the military and American taxpayers. And then, of
course, you can see this is very deeply troubling to both sides
of the aisle. And, again, in a very bipartisan way, I think
we're all very troubled by it.
Mr. Stein, you're not far behind. According to TransDigm's
most recent proxy statement, you earned about $23 million in
2018, correct?
Mr. Stein. That's right. It's mostly non-cash
compensation----
Ms. Tlaib. Yes. So----
Mr. Stein [continuing]. as I was promoted to the CEO and
given a----
Ms. Tlaib. Yes. I'm just trying to find out where I can get
$16 million back for our people.
So TransDigm is willing to pay its executives tens of
millions of dollars, but still not agree to pay back the
Department of Defense the American people's excess profits.
Correct? You're not willing to pay it back.
Mr. Howley. Is that a--that's a question?
Ms. Tlaib. Yes, I'm asking, are you willing to pay it back?
Mr. Howley. We told we have not--we have not--we are still
evaluating that, and we haven't--and we haven't decided.
Ms. Tlaib. Okay. So----
Mr. Howley. I think I told you--I think I went through some
of the reasons.
Ms. Tlaib. Yes, yes. No, I know. My kids, actually, my two
boys always say ``should'' and come up with these kinds of
excuses when it is stealing in some sort of way, right? I mean,
you may not label it that way. I'm a lawyer; you nuance around
it. But it is stealing when you overcharge people like this.
So Doug Hillman, a former CEO of a TransDigm subsidiary,
told the committee staff, quote: TransDigm management used a
one-two punch after acquiring the company. It involves two
actions: one, raising the prices; two, cutting the costs. They
cut costs by firing employees. The metric they used was, quote,
revenue per head.
TransDigm provided the committee with a slide that was
presented at a quarterly meeting in 2015. That slide details
what is called the operations value creation. The slide
identifies the actions taken at one of TransDigm's
subsidiaries, including, and I quote, reduced current head
count by three people, $135,000; eliminated overtime, $68,000;
implemented shutdown for 1 week over the holidays, $65,000. The
slide includes proposed actions such as cutting workweeks to
four days and shutting down for an additional week.
Which subsidiary does this slide refer to? It's right up
there. You can see----
Mr. Stein. This slide refers to CDA, our smallest business
in Florida.
Ms. Tlaib. How can you justify the compensation you
received while TransDigm was overcharging taxpayers and you
were cutting the pay of employees?
It is a question.
Mr. Stein. We did not cut any pay of any employees. I'm
confused by that statement.
Ms. Tlaib. Yes, it's in the slide. I mean----
Mr. Stein. The slide does not say we cut pay. We looked at
it, we had a business that was--you can see it up at the top,
what we saw. The last 6 months, bookings on a $13.5 million
annualized pace. That's significantly below the annualized
pace----
Ms. Tlaib. Okay.
Mr. Stein [continuing]. that the business currently
operates at----
Ms. Tlaib. So I just got confirmation you actually fired
people. The subsidiary fired people.
Mr. Stein. We reduced current head count by three----
Ms. Tlaib. Yes.
Mr. Stein [continuing]. people, absolutely. As the
business----
Ms. Tlaib. You guys call it ``head count.'' That's so
interesting.
Mr. Stein. As the business----
Ms. Tlaib. Yes.
Mr. Stein [continuing]. goes up and down----
Ms. Tlaib. Yep.
Mr. Stein [continuing]. you frequently have to do this to
right-size the costs so that we----
Ms. Tlaib. Yep, I understand.
Mr. Stein [continuing]. can continue to return value to our
shareholders.
Ms. Tlaib. So I'm really trying to help you all figure out
how you can pay us back. And my good colleague from North
Carolina and my colleague from California, I think--you know,
look, I have the third-poorest congressional district in the
country. I have veterans that can't find homes. I have, on the
front line, people that are looking to us.
And when they see this and they see us not holding you
accountable, we're the ones they have to--they're looking to us
to do our jobs. And that's what we're doing here. And we're
urging you and encouraging you to please pay back the American
people. Sixteen million dollars can do a lot for our residents
at home.
And, again, it is really about oversight and
responsibility. Government is supposed to be about people, and
we have to put the people first. And you understand that, I
hope, why we have to do our due diligence here.
And I thank you for coming before this committee, and I
thank our chairman for bringing this forward.
Thank you. I yield the rest of my time, Chairman.
Mr. Khanna. Thank you, Representative Tlaib.
I now recognize for five minutes Mr. Hice.
Mr. Hice. Thank you, Mr. Chairman. I appreciate it.
And, listen, I would just share with what has already been
said. This is looking really bad for you guys. And the American
people hate to be ripped off. All of us, all of us, in any
deal, hate to be ripped off. And this is one of those issues
that is inexcusable, and why the money is not paid back to the
American people is beyond me.
Mr. Stein, let me ask you, how many long-term or multiyear
contracts do you currently have with the government?
Mr. Stein. I do not know.
Mr. Hice. Mr. Howley?
Mr. Howley. I don't know the number.
Mr. Hice. Can you give me a ballpark?
Mr. Howley. I just don't know.
Mr. Hice. You don't have any idea how many contracts you
have? Isn't that the business you're in?
Mr. Howley. I think we provided a very long list of
contracts to the committee here, and I think it was thousands.
I don't believe most of them were long-term. We run 55
autonomous businesses that are run with standalone management
systems and run very autonomously. I simply don't know the
number.
Mr. Hice. Can you get that number to me?
Mr. Howley. I believe we gave the number to the committee
already. We gave them a list of all our government contracts.
Mr. Hice. Would you confirm? I would like to know how many
long-term or multiyear contracts there are with the government.
And likewise for the subsidiaries, if you've got 55. I'd like
to have a ballpark, at least, of what we're dealing with.
And it's amazing to me, the price-gouging that's taking
place, and you don't even know how many contracts you have. I
want that information.
Mr. Howley. I think--I would just--I think we've given that
to the committee.
Mr. Hice. We'll followup, and if not, I expect to hear.
Mr. Howley. If not, we'll give it to you.
Mr. Hice. That's what I want to hear.
Mr. Fine, let me ask you this regarding contract splitting.
Of course, this is where a large contract is split up into
smaller ones to avoid anything from pricing threshold to
helping acquisitions.
In the report or when you all were going through this, how
often did you see contract splitting? Either one of you, Mr.
Fine or Ms. Hull.
Ms. Hull. We found 32 of our 47 contracts, or our parts
that we looked at, were under the simplified acquisition
threshold. But I can't speak to splitting of contracts in that
regard.
Mr. Hice. All right. So explain that to me. How does that
work, what you described?
Ms. Hull. So the total dollar threshold of the contract is
what drives the need to provide cost information----
Mr. Hice. Right.
Ms. Hull [continuing]. to the contracting officer. So in
the 47 parts that we looked at, 32 were under the simplified
acquisition threshold of $150,000 at the time.
Mr. Hice. So somehow that had to be made an agreement that
this is a better route for us to go to get under the pricing
threshold. Is that correct?
Ms. Hull. The company would've made a determination----
Mr. Hice. I mean, somebody had to make that determination.
Were you able to determine if it was TransDigm that made
that request or that decision or if it was the government?
Ms. Hull. The contractor, in this case, would be the one
that would bid on the particular part for the government.
Mr. Hice. Okay. But there could be a situation where DOD,
for instance, wants to simplify the acquisition process and it
would go more quickly with a smaller contract, pricing
threshold, correct?
Ms. Hull. Potentially. I can't speak to that for this
particular audit.
Mr. Hice. Okay. That would be worth knowing.
Mr. Fahey, let me ask you this regarding intellectual
property rights. Is that ever considered when dealing with
contracts and the contracting officers? Do they look at
intellectual property rights?
Mr. Fahey. So the answer is, yes, sir, we look at
intellectual property rights, right? I mean, that's usually
more of the program manager who would give the requirements to
the contracting officer of, do we own the intellectual property
rights? And if we don't, do we have a situation like we don't
think we have fair and reasonable pricing, that we should
reverse-engineer it to get the intellectual property rights?
Mr. Hice. Right. So are you saying, then, DOD does
currently have some intellectual property rights on what would
otherwise be sole-source-type----
Mr. Fahey. Yes, sir.
Mr. Hice. Okay.
So there is a negotiating process to try to address the
problem that could be--because that could lead to price-
gouging----
Mr. Fahey. Yes, there----
Mr. Hice [continuing]. by obtaining the intellectual
property.
Mr. Fahey. There is. The challenge here is it's usually
easier to negotiate getting a fair and reasonable price for the
IP early in a program, not when you're in an after-market
spare-parts situation.
Mr. Hice. All right. So do you include in that, say, first
right of refusal on----
Mr. Fahey. So that--I had mentioned earlier that we had
done a report we delivered to Congress last November. One of
the recommendations in there was, if you're in a situation
where somebody's in sole source and owns intellectual property
and they are going to sell it, that the government has right of
first refusal to buy that intellectual property before they
could sell it to somebody else like TransDigm.
Mr. Hice. Okay. Thank you very much.
Thank you, Mr. Chairman.
Mr. Khanna. Thank you, Mr. Hice.
I want to recognize Ms. Hill for five minutes.
[11:29 a.m.]
Ms. Hill. Thank you so much, Mr. Chairman.
I'd like to ask for unanimous consent to submit to the
record two slides from TransDigm's own 2018 Analyst Day
presentation.
Mr. Khanna. Without objection.
Ms. Hill. Thank you.
Ms. Hull and Mr. Fine, as we've discussed today, TransDigm
is the sole manufacturer in many of the spare parts sales you
reviewed. However, as we've discussed, TransDigm has repeatedly
refused to provide contracting officers with the cost data they
requested during price negotiations. I don't want to belabor
this point, but I want to dig in to sole-sourcing.
The IG report explains, and I quote, ``contracting officers
had the option of buying the parts without receiving cost data
from TransDigm or not buying the parts needed to meet mission
requirements.''
Mr. Fahey, in a situation where TransDigm is the sole
source for a part, the government and other private contractors
have two options, either walk away or--either buy from
TransDigm or walk away. And when we're talking about parts
needed to keep military aircraft in the sky, from my
perspective, there doesn't appear to be much of a choice. Would
you agree?
Mr. Fahey. I would agree.
Ms. Hill. In fact, according to the IG report, five
contracting officers stated that they went forward with
contracts even without the cost data they requested because,
and I quote, ``the need for the spare part was urgent enough
that they had to buy the part at the price offered by
TransDigm.''
Mr. Fahey, is it harder for DOD to negotiate a fair price
for parts when there is no market competition?
Mr. Fahey. Yes, it is.
Ms. Hill. Thank you.
And, Mr. Howley, I want to dig in to a few facts and
figures from TransDigm's 2018 Analyst Day presentation, which
was just submitted into the record.
According to the slides, since 1993, through the
acquisition and integration of over 64 companies, TransDigm has
established itself as a sole-source supplier. In fact, 80
percent of TransDigm's revenues came from sole-source sales. Is
this correct?
Mr. Howley. To the best of my belief, that's correct.
Ms. Hill. Great.
So, in other words, TransDigm has a business model of
buying companies that are the sole manufacturers of spare
parts. When TransDigm acquires companies that are the sole
manufacturer for parts used in military aircraft or other
vehicles, you know you will be able to use that position to
make significant profits. Is that right?
Mr. Howley. I'd like to take a difference between we are a
sole manufacturer, because we were typically selected in a
competition at the beginning, at the time the airplane was
designed----
Ms. Hill. No, no, no. But you have a business model of
acquiring companies that are sole-source providers.
Mr. Howley. They are companies that were--they were
selected in a competition at the time the airplane was----
Ms. Hill. But you specifically seek out----
Mr. Howley [continuing]. as are we regularly selected in
competition.
Ms. Hill. Reclaiming my time, you specifically seek out
sole-source manufacturers. That is part of the business model
that is described in the slides that you presented and that I
have entered into the record.
Mr. Howley. We seek out proprietary, highly engineered
aerospace components----
Ms. Hill. Great. Proprietary sole source. Okay.
Mr. Howley. As a practical matter----
Ms. Hill. Reclaiming my time----
Mr. Howley [continuing]. if you do a good job----
Ms. Hill. Reclaiming my time----
Mr. Howley [continuing]. they end up being sole source.
Ms. Hill. Sir, I'm reclaiming my time.
So, Mr. Howley, even if the government was able to obtain
cost data on all these parts, TransDigm would be able to charge
whatever it wants, because DOD needed the parts to meet mission
requirements, because TransDigm's business model is to own and
hold exclusive rights to the products it sells, and that
enables them to set the market price. Do you agree?
Mr. Howley. I agree--we are a commercial supplier
primarily. The market----
Ms. Hill. Just answer ``yes'' or ``no.'' Do you agree?
Mr. Howley. The market price is frequently established by
the commercial of a kind.
Ms. Hill. Okay.
We just have to look at the examples in the IG report to
see how well TransDigm's business model works.
Mr. Stein, TransDigm recently sealed a $4 billion deal to
buy Esterline Technologies. TransDigm announced in its press
release that Esterline expands, as it quotes, ``a platform of
proprietary and sole-source content for the aerospace and
defense industries, including significant after-market
exposure.''
Will you commit that when it is time for TransDigm to
negotiate the contracts currently held by Esterline that you
will provide cost data when requested by a contracting officer?
Mr. Stein. We will follow the law, the rules, and the
regulations of the land.
Ms. Hill. So you're not committing.
Mr. Stein. We will follow the rules----
Ms. Hill. So you're not committing.
Mr. Stein [continuing]. and the laws and regulations of the
land.
Ms. Hill. I would like to get it on the record that you are
not committing to providing cost sharing data.
So will you commit that when TransDigm negotiates contracts
currently held by Esterline that you will not take advantage of
your sole-source position and charge DOD prices that give
TransDigm excess profits?
Mr. Stein. We will follow all rules and laws of the land.
Ms. Hill. Great. So you are not committing to that either.
Mr. Howley. Yes. I could expand on----
Ms. Hill. Reclaiming my time. I have 30 seconds left.
Mr. Fine, TransDigm has the ability to grow its business as
large as it wishes. Does it concern you, however, that the more
businesses TransDigm acquires, the harder it will get for DOD
to get fair prices on spare parts?
Mr. Fine. It concerns me when there's only one entity that
can manufacture a part that is critical to the Department of
Defense. And to the extent that increases, that's problematic.
Ms. Hill. Okay.
So, last, Mr. Fahey, from my perspective, this is about
more than just data. TransDigm has based its business on
becoming the sole-source provider of critical parts needed by
the warfighter. It seems what we urgently need is a vibrant
industrial base that fosters healthy competition.
So, Mr. Fahey, what is the Department of Defense doing to
address the issue of diminishing manufacturers and sole-source
providers in the defense industrial base?
Mr. Fahey. So, ma'am, we have a lot going on, as you
probably know. In the Presidential order 13806, we did a
complete evaluation of the industrial base and identified over
300 risk areas, where a lot of it was, you know, stuff that is
foreign sole source or sole source here.
The hard part is, when you get into the after-market like
this, it gets to be--one of questions that I got asked
previously--you know, if a foreign company is buying a company
here, we do have a national security input to it. If a U.S.
company is buying a U.S. company, the only input we have is,
will it affect competition? So, obviously, if you're buying a
sole source and a sole source, it doesn't affect competition.
It would be valuable if we had input to say, do we believe it
could affect national security?
Ms. Hill. That is a really great point and something that I
believe we need to investigate further.
Thank you so much, and I yield back.
Mr. Khanna. Thank you, Ms. Hill.
I would now like to recognize Mr. Grothman for five
minutes.
Mr. Grothman. Thank you.
The inspector general, you folks' report on TransDigm's
contract dealings indicate that historical prices for 34
different parts were inflated and could not be used as an
accurate determination of price reasonableness.
This is for either Ms. Hull or Mr. Fine. Could you walk the
committee through the process that the IG's office used to
determine that the historical prices for these 34 products were
inflated?
Ms. Hull. The process that we applied in analyzing the
historical prices is we accessed a data base that holds the
pricing history for those particular items in our sample, so 47
parts. So we looked at the prices over time that the government
has paid for these particular items.
Then we also obtained uncertified cost information from
TransDigm and analyzed what we thought to be a reasonable
profit. And, in doing that, we selected 15 percent as simply a
benchmark. And I want to emphasize that we did not, in this
report, state that 15 percent should be or is the reasonable
profit across the board; it's just simply a benchmark. And then
beyond 15 percent, we classified those costs as excessive.
Mr. Grothman. Okay.
And how did the prices then become inflated? Did they not
go through an initial review process?
Ms. Hull. Anytime a part is purchased, it becomes part of
that particular part's history. So if a part is inflated at the
first time it's purchased and then the next contracting officer
comes along and negotiates a new part and then adds a couple
percent on top of that, that already originally inflated price
becomes more inflated over time.
Mr. Grothman. Okay.
Could a part that you originally deemed inflated have any
valid explanation, or were you given any valid explanations?
Ms. Hull. No, we were not able to determine any reason for
justification for the excess profit on those particular items
we looked at.
Mr. Grothman. Okay.
We have a question of Mr. Fahey.
It is my understanding that several factors play on cost
and pricing on a daily basis. Isn't looking at prices in a
vacuum like this dangerous?
Mr. Fahey. Looking at pricing? Absolutely, right? Just
looking at the price, versus the cost.
Mr. Grothman. Okay. Do you want to elaborate at all?
Mr. Fahey. Yes. I mean, obviously, if you know the cost of
what it costs to produce a part, then you have the difference
between what they're trying to charge you versus the cost, and
then you know whether you believe it's a fair and reasonable
price, right?
When you don't have that cost data--as you've seen, it was
the best available price, so, by definition, it was fair and
reasonable. But you didn't have the information to really be
able to negotiate that.
Mr. Grothman. Okay.
Mr. Howley and Mr. Stein, do you ever give the government
cost or pricing data to back up a reasonableness claim even if
it's not mandated by law or regulation?
Mr. Howley. Well, I would like to make the difference here
between price data and cost data. And I don't allege to be an
expert on the FAR, but I believe for the type of parts we make,
where we are primarily a commercial supplier, the rules state
that the first place to go is to look at the price data, of
which most of what we make is what I would call commercial of a
kind, so that the commercial prices are the first place to look
for reasonableness of the price.
I think, of the 47 or 46 parts, I think upwards of 40 of
them were commercial of a kind, of which we have submitted
commercial comparable price data to show that there's a
comparable commercial market for them.
Mr. Grothman. Are there some parts so vital to the
Department--and this is really for Mr. Fahey. Are there some
parts so vital to the Department that they're willing to pay
more to have them, even excessively?
Mr. Fahey. I'd say we have to pay the price if that's our
only alternative to keep the readiness of our equipment, but we
should never be paying excessive pricing.
Mr. Grothman. Okay. Are there any instances where the
Department is priced out of a transaction, where you just say
no?
Mr. Fahey. There have been situations. Where it becomes
difficult is when it's a readiness issue.
Mr. Grothman. Can you give me an example?
Mr. Fahey. I can't give you one off the top of my head, but
I was a program executive officer in the Army over 10 years,
and there were many times that we walked away from the table
because we didn't think we got a fair and reasonable price.
Mr. Grothman. Okay.
Do you think for mission-critical parts that having cost or
pricing data would change the analysis of a purchase?
Mr. Fahey. It could change the analysis, but you should
never be paying, quote/unquote, excessive pricing, right? It
should be always be fair and reasonable.
Mr. Grothman. Okay.
I yield the remainder of my time.
Mr. Khanna. Thank you, Mr. Grothman.
I now recognize Ms. Ocasio-Cortez for five minutes.
Ms. Ocasio-Cortez. Thank you, Chairman.
And thank you, everyone, for joining us here on this panel
today.
Today is my lucky day. Because for ages we're consistently
told that single-payer healthcare is too expensive. We're told
constantly, how are you going to pay for it? How are you going
to pay for covering the insulin costs of everyday Americans?
And I seem to have found part of my answer here today.
Because it seems that TransDigm sold a part called a non-
vehicular clutch disk. You have to excuse how small the image
is here, but it's up there on that screen. But if I blew it up
much larger, it wouldn't even be to scale, because this disk is
only about 3 inches anyway.
And it seems as though TransDigm sold 149 non-vehicular
clutch disks to DOD. It costs about $32 to make the part, and
TransDigm charged us $1,443 for each of these 3-inch disks. As
a result of the upcharge, the inspector general determined that
TransDigm profited 4,436 percent.
A pair of jeans can cost $32. Imagine paying $1,000--over
$1,000 for that.
But the good news here is that what I found is that the
cost of about 149 of these clutch disks will cost, at cost,
about $4,768, except TransDigm charged the public $215,007.
That is a margin of about $210,239.
Mr. Howley, are you aware of how many doses of insulin we
could get for that, for that margin?
Mr. Howley. I'm not.
Ms. Ocasio-Cortez. In a single-payer healthcare system, an
insulin dose can cost about $137 a vial. I could've gotten over
1,500 people insulin for the cost of the margin of your price-
gouging for these vehicular disks alone.
The incidence of diabetes, according to the CDC, is about
seven people in 1,000, which means I could've covered the
insulin costs of a community of 21,400 people for the cost of
your price-gouging of the public on a non-vehicular clutch disk
alone.
I could've sent 21 kids to college.
I could've sent 18 toddlers to free preschool for a year in
the most expensive city in America.
So my question to you is, why should we give you another
dime?
Mr. Howley. It seems to me the government always has the
choice of what to buy and what not to buy from us.
Ms. Ocasio-Cortez. Uh-huh. My----
Mr. Howley. We believe we provide the government with well-
designed, well-manufactured, high-quality product, we deliver
in a timely fashion, and we support it when there's a problem.
Ms. Ocasio-Cortez. Uh-huh.
How much competition do you have? How many competitors do
you have in this market?
Mr. Howley. We have in--I don't know this individual part,
just because we make 200,000 parts, but I would say there is
almost no product we make where there aren't other alternatives
to buy the part. We typically----
Ms. Ocasio-Cortez. But it could be one alternative, two
alternatives, or 1,000 alternatives.
Mr. Howley. But not 1,000.
Ms. Ocasio-Cortez. Not 1,000.
Mr. Howley. Some number of alternatives. We are almost
always----
Ms. Ocasio-Cortez. So it's not a perfectly----
Mr. Howley [continuing]. selected originally in a
competitive process when the airplane's designed, where we are
selected because of our price, our technology, our delivery,
our contract terms, whatever.
Ms. Ocasio-Cortez. Uh-huh.
You know, I find this interesting, because this term ``free
market'' comes up very often, but I don't think people really
understand what that means. Because, so often, it's not a free
market at all. It's a captive market. It's one where we're
forced to choose between two to three people.
Oftentimes, in these processes, there is significant
argument and there's significant evidence that there's
collusion in these markets, that it's not a perfectly
competitive market, because a perfectly competitive market
requires a large amount of competitors.
But I'll move on.
Mr. Fahey, what can Congress do to break this cycle?
It seems that the inspector general has been calling
attention to the unreasonable prices for TransDigm, in
particular, since 2006. So I think about all those insulin
doses from just this one part in this one contract times 10, 15
years.
What can we do to break this cycle?
Mr. Fahey. So, ma'am, you know, first, you know, I would
support, you know, the recommendations of the DOD IG and
working with Congress to figure out--what I'd say is I would
absolutely like to work with Congress on what are the right
things to do, and I'd rather not talk about it in front of
TransDigm because they'll go out and try to figure out ways to
overcome those too.
Ms. Ocasio-Cortez. Understood.
Mr. Fahey. So it just--as I've said, it just bugs me that
we have to do this, right? And what it does is it's additional
bureaucracy within my system to account for these bad
situations.
Ms. Ocasio-Cortez. Well, I look forward to us having a
confidential meeting sometime soon.
Thank you very much.
Mr. Khanna. Thank you, Ms. Ocasio-Cortez.
I now want to recognize Ranking Member Jordan for five
minutes.
Mr. Jordan. Thank you, Mr. Chairman.
Earlier, Mr. Stein, I forget whom, but someone on the
Democrat side asked whether you would pay back the--I think
they used $16 million, and you said it's really not about the
money. But it kind of seems like it is. You said there was
other factors you had to look at--you know, the message that
would send to your customers--and I get that.
So let me just walk through a couple things. How many parts
do you make for the government?
Mr. Stein. I don't know the exact figure. I know that I
have over 50,000 parts that are military parts.
Mr. Jordan. Fifty thousand.
Mr. Stein. Yes.
Mr. Jordan. Any idea how many you make for DOD?
Mr. Stein. No. I know--sales I could split out, but not
part numbers.
Mr. Jordan. Mr. Fine, you said you guys looked at 47, I
think was the number you said earlier. Is that right?
Mr. Fine. Correct.
Mr. Jordan. Do you know how many they make for the
government?
Mr. Fine. I don't know how many parts they make. I know
that 34 percent of their business is with the defense industry.
Mr. Stein. Yes. I can talk about revenue.
Mr. Jordan. Okay. So 34 percent----
Mr. Howley. I might add, that's not all with the Department
of Defense.
Mr. Jordan. I understand. So 34 percent is with the
government. What percent is with DOD?
Mr. Howley. No, it's not with the government. Thirty-four
percent is not with the government.
Mr. Jordan. Oh. Straighten me out then. Thirty-four percent
is with who?
Mr. Stein. Is military----
Mr. Howley. Military some way, shape, or form around the
world. About 6 or 8 percent is the government, the U.S.
Government.
Mr. Stein. Is Defense--is after-market to the U.S.
Government.
Mr. Jordan. When you say the U.S. Government, you're
talking about Defense.
Mr. Stein. Yes.
Mr. Jordan. Okay.
Mr. Stein. Sorry.
Mr. Jordan. So 7 percent is with the United States
Department of Defense. The other percent, you know, whatever,
34 minus 7, the other 27 percent is with foreign governments?
Mr. Stein. Foreign governments and OEMs for U.S.
production.
Mr. Jordan. Oh, Okay. Okay.
Percent of your--so when it comes to profits, what's your
profit margin on the 7 percent, the 34 percent, and then on the
commercial?
Mr. Stein. I don't know the profit margin on the individual
segments. What I can tell you is that our profits in the
defense after-market spares business is significantly lower
than our commercial after-market profit margin, just the way it
works out with the regulations----
Mr. Jordan. But that's not--based on everything we've heard
today----
Mr. Stein. I know, but----
Mr. Jordan [continuing]. that's not what you'd be--that's
not the conclusion I think we'd all reach. We would assume that
it would've been higher.
Mr. Stein. Yes. It's because this process has
nonstatistically selected a couple parts that, you know, would
show a certain direction of price increase. I can just as
easily select 46 part numbers or 47 that show dramatic changes
the other way. We have----
Mr. Jordan. So are you saying, like, on the commercial
side, the non-defense side, you're getting 4,000 percent
profits on parts there?
Mr. Stein. Yes. The parts that were analyzed had commercial
equivalents, and the commercial price is listed as reference
points. And that's a leading indicator of----
Mr. Jordan. So Ms. Ocasio-Cortez just had up this valve or
ring or----
Mr. Stein. Yes.
Mr. Jordan [continuing]. whatever that was. Do you sell
that to commercial folks as well?
Mr. Stein. Yes, we do. Would you like--so I have a data on
that.
Mr. Jordan. I'm just curious, what do you charge them?
Mr. Stein. So it was sold to British Air for $2,400. And it
currently sits on a Satair price list--they're a commercial
after-market distributor--for somewhere around $1,000.
Mr. Jordan. Mr. Fine, do you agree with all that?
Ms. Hull. We don't----
Mr. Jordan. Frankly, that's not what I expected when I
started my line of questioning. I was just curious where this
all was going, and I expected something different.
Ms. Hull. We don't have that information. I'm sorry. I
can't speak to that particularly.
Mr. Stein. We do provide that information. When
commerciality packages are submitted, we do provide that
reference point.
Mr. Jordan. Let me go to the inspector generals.
This all happened when? When you did this investigation,
this was for what years and what timeframe?
Mr. Fine. January 2015 to January 2017.
Mr. Jordan. And since that time, it's my understanding that
the threshold amount has been increased when you can--the sole
source and the dollar amount----
Mr. Fine. The Truth----
Mr. Jordan. Go ahead.
Mr. Fine. The Truth in Negotiations Act and the 2018
National Defense Authorization Act increased the threshold for
when they have to provide certified cost information from
$750,000 to $2 million.
Mr. Jordan. And if I understood correctly earlier, a line
of questioning, it's not the threshold that is maybe the
determining factor; it's the fact that you just don't get the
information to--if there's a way to get the information, it's
not so much the threshold.
Because my understanding was the Armed Services Committee
thought this made sense for our military to get access to parts
in a quicker fashion and get what our warfighters need. That's
why they raised it. But you guys are saying it's not so much
the threshold, it's we need information. Is that accurate?
Mr. Fine. So it is a little bit the threshold. It does
change the equation of when they have to provide the
information----
Mr. Jordan. I understand.
Mr. Fine [continuing]. in order to streamline things.
But it has side effects. And one of the side effects is
contracting officers can't require companies like TransDigm to
provide cost information when it's below $2 million and
TransDigm declines to provide that information.
In 15 of the 16 times that was below that threshold, that
the contracting officer asked for cost data, TransDigm
declined. They weren't required by law to do it.
Mr. Jordan. And is that happening with other companies too?
Mr. Fine. We haven't looked at other companies, but I
assume it is happening. I'm not sure to the same extent as
TransDigm.
Mr. Jordan. And I'm running out of time here, or I guess I
ran out of time, but I appreciate the chair's----
Ms. Hull. Well----
Mr. Jordan [continuing]. indulgence.
Ms. Hull. I'm sorry.
Mr. Jordan. So what do we need to do so that you get the--
we all want this to work. We want people to make a reasonable
profit. We don't want excessive profit. We want it to work. We
want our military to be equipped. We want it all to work. So
what needs to happen? We need to say, certain information has
to be given to the Department of Defense?
Mr. Fine. I would say that we ought to look at the
legislative structure to require companies to provide cost
information when asked for by contracting officers. They don't
have to ask for it each time. There may be times they don't
need it. But there are times they need it, particularly in the
sole-source environment, that when they ask for it, they should
get it.
Mr. Jordan. And the message--if it happens just a few
times, the message gets sent: When you ask for it, you've got
to give it, so you better be doing it right from the get-go.
Mr. Fine. Exactly. I mean, TransDigm keeps saying that we
weren't required to do it and the law didn't require them to do
it. But that's the problem. There ought to be a requirement so
that companies who are asked for the information, like
TransDigm, provide that information.
Mr. Jordan. Thank you.
Thank you, Chairman.
Mr. Khanna. Thank you, Ranking Member Jordan.
I'd now like to recognize Ms. Kelly for five minutes of
questioning.
Ms. Kelly. Thank you, Mr. Chair, and thank you to the
ranking member for holding this very important hearing.
Ms. Hull, in the inspector general's report, you considered
a 15 percent profit to be reasonable and any profit over 15
percent you considered excess profit. How did you select that
as your benchmark?
Ms. Hull. The 15 percent is certainly a benchmark. We
researched Federal supply codes with similar contracts to the
parts that we selected for our sample and found 15 percent to
be a reasonable number to apply. And then anything in excess of
15 we claimed as excess profit.
Ms. Kelly. And it seemed like many of TransDigm's contracts
you reviewed had profit margins, as we've been discussing, well
over 15 percent.
And one of the contracts your office reviewed was a
contract for a filter subassembly used in the Hercules C-130
aircraft. This contract, according to your report, had an
excess profit margin of 356 percent. To be clear, the profit
margin excludes the 15 percent in reasonable profits you used
as a benchmark for your review?
Ms. Hull. Yes, it does.
Ms. Kelly. Mr. Howley, Federal Acquisition Regulations
recognizes that contractors need to make a reasonable profit on
their government contracts, but there is a difference between a
reasonable profit margin and profits over 300 percent on a
single contract.
Do you agree with the inspector general that a 356 percent
profit margin is a bit unreasonable?
Mr. Howley. What I would say is we are primarily a
commercial business. They have a method of checking the
reasonableness of the prices, and this is the preferred method,
I believe, that the regulations describe, is to check price
data, not cost data. You know, most all the parts that were
inspected, we provided commercial pricing data. And that is the
preferred method, I understand, by the regulations to confirm
the reasonableness of the price.
Ms. Kelly. So let me ask----
Mr. Howley. In other words, what the commercial market is
paying for that.
Ms. Kelly. Let me ask you this. Could you sell to the DOD
these parts at a lower price and still make a reasonable
profit?
Mr. Howley. I don't believe that's the question for us. The
question for us is, what----
Ms. Kelly. But I'm asking the questions, sir.
Mr. Howley. Yes, I understand.
Ms. Kelly. Let me----
Mr. Howley. I understand.
Ms. Kelly. Let me----
Mr. Howley. But the reasonable--I'd say again, we run under
a commercial model. In other words, we don't get paid by the
government for our development expenses. We don't get paid for
our engineering. We don't get paid for the capital we put into
a project. We don't get paid----
Ms. Kelly. But 356 percent?
Mr. Howley. We make our money--we make our money in the
after-market on the spare parts. We don't make--and we even
lose money up front. This is a razor-razorblade model----
Ms. Kelly. Well, reclaiming my time, my colleague asked
about the part she asked about, my colleague Ms. Ocasio-Cortez.
And what you are selling to us, the staff just informed me,
you're the only person that sells that. So there is no
competition; you're a sole source for that. And, again, I would
think that you could still make a reasonable profit, very
reasonable profit, that would be less than 356 percent despite
your expenses.
The committee received documents from TransDigm that showed
that TransDigm's starting offer for the filters that I talked
about was $5,581 for each filter. I'm holding up the report.
TransDigm's own data shows that it costs per part, however,
$1,189.
Do you feel like you were acting in good faith when you
offered to sell these parts for over four times the cost?
Mr. Stein. Yes. So we do have--this is a commercial part.
It's of a commercial type. And we have sold that commercially,
and it's on a price list commercially at almost $5,000--$4,848.
Ms. Kelly. The government cannot determine that this was a
commercial item.
You know, when the contracting officer pushed back on this
unreasonable price, one of your employees stated, and I quote,
``Given our costs on this part, it's the lowest we can go at
this quantity.'' That statement was false, right? Based on
TransDigm's own data, the company had plenty of room to lower
the price and still make a profit.
Mr. Stein. Given the laws and rules of the land, I don't
think they were wrong in the way they approached it. There is a
commercial price out there, and we're allowed to use commercial
prices as justification for the pricing that we set to the
government. If it's on an identical or a part that is similar
of type, this is allowed. And so the pricing is set that way.
Ms. Kelly. Ms. Hull, are these parts commercial?
Ms. Hull. Ms. Kelly, I think it's important to point out
that only 4 of the parts of the 47 that we looked at are indeed
commercial items or determined by the contracting officer to be
commercial. So, although TransDigm has said several times
during the hearing that all the parts were commercial, it is
our belief that four are commercial.
Ms. Kelly. I'm going to squeeze in another question.
Mr. Stein, you know it's a crime to provide false
information to a contracting officer. How is the statement that
``given our costs on this part, it's the lowest we can go at
this quantity'' not a false statement?
Mr. Stein. I do not have the information on that individual
part at that time which would have led him to--him or her to
make that comment. So it's impossible for me to provide
background on that.
Ms. Kelly. Well, you're giving the appearance that you
don't always negotiate in good faith. And I do think that you
should pay a refund for these excessive profits immediately.
I yield back.
Mr. Khanna. Thank you, Ms. Kelly.
I now want to recognize Mr. Raskin for five minutes.
Mr. Raskin. Mr. Chairman, thank you. And thank you for
calling this important hearing.
There really are two Americas now. There's the America that
we all represent, where we know there to be homeless veterans
and people going bankrupt because they can't afford to pay
their medical bills; diabetics rationing their insulin; public
schools closing art and music classes.
And then we've got the military industrial complex that
President Eisenhower warned us of more than a half-century ago,
a place where 15 percent, which is a pretty good return in most
parts of America, isn't remotely enough for the greed and the
avarice and the seclusion from the rest of society. You've got
to make 50 percent or 100 percent profit or 200 percent profit
or 500 percent profit or, in some of these cases, more than
1,000 percent profit--something simply unheard of and unseen in
the real America that we represent.
Mr. Raskin. Let me come to--let me come to you, Mr. Howley.
A former director of operations at your company, TransDigm,
told this committee, quote: ``At quarterly meetings, Nick
Howley, management, gave a wink-wink, nod-nod that we want to
avoid disclosing any cost data. They told us under their breath
we should see what we can do to avoid disclosing cost data. We
don't want to talk about costs; we want to talk about price.''
Now, I want to ask you this and I want you to think about
your answer carefully, because I know that you're under oath.
Have you or any senior official at TransDigm told an employee
that they should avoid disclosing cost data?
Mr. Howley. First, I presume we're talking about these
various business unit review meetings we make. I've rarely
attended them in the last 10 years, to begin with. I would tell
you we regularly tell people what the rules are for contracting
with the government.
Mr. Raskin. Have you ever told anyone to avoid disclosing
cost data?
Mr. Howley. Not that I recall. We always tell people, here
are the rules. When you deal with the government, you have to
comply with all the rules and regulations. We have an outside
law firm come in and run those training classes for employees.
We have our in-house counsel run them.
Mr. Raskin. Okay. Mr. Howley, you were, according to your
testimony, in 2017, the sixth highest paid CEO in America. You
made $61 million, right? Was the business model to find these
sole-source contracts and then to jack up the price as far as
it could go?
Mr. Howley. The business model is to--we buy and operate
proprietary, highly engineered aerospace component businesses
with significant--with aftermarket content. That's the business
model.
Mr. Raskin. Let me ask you----
Mr. Howley. We buy them and we improve them. The long-term
owners----
Mr. Raskin. I was interested in your exchange with my
colleague, Ms. Ocasio-Cortez. Is your business model, the way
you do business, is that socialism or capitalism?
Mr. Howley. Capitalism.
Mr. Raskin. So you're defining capitalism as one business
can basically charge the taxpayers whatever it wants, 50
percent, 100 percent, 500 percent, 1,000 percent, that's what
capitalism is?
Mr. Howley. Any buyer can buy from someone else if they
want. In almost no cases are we the only one in the country
that can provide the part. At such point as we don't deliver a
quality product, we don't deliver it on time, it doesn't work
well, we're not technically competent, they can go somewhere
else.
Mr. Raskin. Let me ask you about one specific case, Mr.
Howley. One of the contracts reviewed by the inspector general
was for a part called an actuator cover assembly which was used
in the KC-135 aircraft. You charged $12,000 for actuator cover
assemblies. TransDigm's cost for getting the same part was
$800. Now, how do you justify getting the part for $800 and
then selling it to the taxpayers for $12,000?
Mr. Howley. I'm going to defer to--I'm going to defer to
Kevin Stein, because I don't know the individual part.
Mr. Raskin. But in principle, in principle, how do you
defend that?
Mr. Howley. I don't know the--I don't know how to answer in
general. All I can do is address it specific.
Mr. Raskin. But that's the business model. But that is your
business model that you've described this as capitalism, and
that's what capitalism----
Mr. Howley. No. Our business model is we are primarily a
commercial business. Our business model is we----
Mr. Raskin. Aren't all businesses commercial businesses? I
don't know what you mean.
Mr. Howley. No. I make the distinction between a primary
defense contractor. We invest our own money to develop
products. We invest our own money to design them, to qualify
them on airplanes----
Mr. Raskin. All right. Let me ask you a different question.
Mr. Howley [continuing]. to do the testing, to invest the
product. And we make our money back.
Mr. Raskin. Maybe you can help us--maybe you can help us
find out how pervasive this is. One of the things that
impresses me about the testimony is the kind of indignation
you're demonstrating about being asked about this. Is this, in
fact, the pervasive business model in the work that you do? Are
you aware that other businesses are basically doing the same
thing with DOD contracts?
Mr. Howley. I think the model of a razor/razor-blade type
of model where you invest your money upfront and you make your
money back in the aftermarket is very common across many highly
engineered niche products.
Mr. Raskin. So if we did a thorough investigation of
Defense Department contractors, you're saying we would find
other businesses that are essentially taking the taxpayers for
100, 200, 300, 400, 500 percent profits on the products that
are being sold to the government?
Mr. Howley. I'm going to say this from memory now, and the
other people at the table know much better than I do about
this, but I think this is a relatively common audit result when
the IG goes out and audits component manufacturers that they
come to the conclusion that the spare parts prices are higher
than they'd like. I think that's a fairly common conclusion,
and I think--I believe that's one of the reasons that they are
proposing regulatory changes.
Mr. Khanna.
[Presiding.] Thank you, Mr. Raskin.
Mr. Raskin. I yield back.
Mr. Khanna. Thank you, Mr. Raskin.
I now want to recognize Ms. Wasserman Schultz for five
minutes of questioning.
Ms. Wasserman Schultz. Thank you, Mr. Chairman.
I want to clear something up for the record, so I'll ask
you, Mr. Howley or Mr. Stein, whichever one can answer the
question. My understanding is that for thousands of the parts
that you make available for sale commercially, you are the
sole-source provider on most of them, and that there are no
options besides you for the military to be able to make those
purchases.
Mr. Stein. That's, I think, not true. During the
qualification phase, there are many people involved in
qualification and quoting on parts who all have the capability
to make these. So there is competition out there. Because of
the extremely small volumes, you end up taking it as a sole
source, but that's simply the way that the business is awarded.
Ms. Wasserman Schultz. Okay. That's not my understanding
and, thankfully, we have people here who can testify to that.
So, Mr. Fahey, TransDigm owns the rights for thousands of
parts used to fix and maintain our military equipment. And my
understanding is when DOD needs a mission-critical part, you
are oftentimes forced to buy it at an inflated price from
TransDigm who, as has been stated here today, may earn a profit
of more than 4,000 percent. That's obviously not only an
egregious swindling of taxpayer money, it also would appear to
be a huge additional expense that is grossly irresponsible for
the Department of Defense to have to bear.
Do TransDigm's inflated prices impact military readiness,
in your assessment, by pulling funding that could be spent on
other mission-critical acquisitions?
Mr. Fahey. Absolutely. Absolutely.
Ms. Wasserman Schultz. Could you elaborate a little bit?
Mr. Fahey. I mean, every time you're paying, you know, a
cost that is outrageous, right, you could be spending that
money somewhere else, right? So, for example, if we got our $60
million back, we could be buying other spare parts to increase
readiness. As you know, if you go across the Department, one of
our major concerns is the readiness of our fleets.
Ms. Wasserman Schultz. Exactly. I'm pretty familiar with
that, given my other job in Congress, which is chairing the
Military Construction VA Appropriations Subcommittee.
Does DOD--Mr. Fahey, does DOD currently have unfunded
acquisitions that could potentially have been funded if you
weren't expending extra dollars to meet TransDigm's inflated
prices?
Mr. Fahey. Absolutely.
Ms. Wasserman Schultz. Do you have any examples that come
to mind?
Mr. Fahey. I don't have any examples that come to mind, but
I know, given the time of year as we're going through that
process now to figure out, you know, what money we're going to
ask for to have reprogrammed, because there are significant
programs that need--important programs that need funding.
Ms. Wasserman Schultz. Pricewise, what would you say is the
amount of unfunded acquisitions that are sitting on that list?
Mr. Fahey. I don't have that, ma'am, off the top of my
head.
Ms. Wasserman Schultz. Is it in the hundreds of millions of
dollars? Even billions?
Mr. Fahey. It's in the billions.
Ms. Wasserman Schultz. It's in the billions of dollars,
okay. So I think it's safe to say that if we're spending
4,000--if we have a 4,000 percent unfair, egregious, outrageous
profit, that we are really affecting our military's readiness
and our ability to make sure we can address mission-critical
projects.
Mr. Fahey. Absolutely.
Ms. Wasserman Schultz. Okay. Mr. Stein--I'm sorry, Mr.
Fahey, or any of you who are there and can answer the question,
is what Mr. Howley just said accurate? Is there the kind of
competition that they are suggesting, and am I wrong that the
military appears to only have them as an option in many cases
when it comes to these purchases?
Mr. Fahey. I'll give--they are wrong, right. What he
explained was accurate, that way back like 10 years ago when we
were doing the development, there was probably competition to
the part; but at this time, on most of those parts, they are
sole-source providers.
Ms. Wasserman Schultz. And that would be because they
bought up every single company that--with the business--using
the business model, as my colleague Ms. Hill entered into the
record, specifically focused on sole-source providers as their
business model to acquire.
Mr. Fahey. Correct. And I'll let Mr. Fine answer.
Mr. Fine. So if I could, of the 47 parts in our sample, we
determined that 39 were manufactured only by TransDigm.
Ms. Wasserman Schultz. Okay. So, Mr. Howley, Mr. Stein,
what you're saying is completely inaccurate, and I'll just
remind you, you're under oath. Today, there is not competition
apparently in 39 parts that----
Mr. Howley. There are other--there are other suppliers.
Ms. Wasserman Schultz. Excuse me. Reclaiming my time. The
way it works here is that we ask the questions and you answer
them when we're ready for you to answer them, okay?
So there are 39 parts that Mr. Fine just mentioned that you
are the only source for the military to be able to purchase. Is
that accurate?
Mr. Howley. We are not the only one that could supply them.
We're the only--they have--apparently, it's not worth the cost
or effort or time to qualify another source at this time. There
are other people that could do it.
Ms. Wasserman Schultz. Okay. Reclaiming my time, which I am
now out of. In legislative speak, in a setting like this, we
call that not passing the straight face test. What you just
said doesn't pass the straight face test because it's tap
dancing, inaccurate, and incongruent with the facts.
So you are grossly robbing the American taxpayers and
impacting our military readiness and our ability to make sure
that we have the ability to accomplish mission-critical goals.
You ought to be ashamed of yourself, and you owe the taxpayers
millions of dollars that I hope your company decides to make
sure that you do on your own.
I yield back.
Mr. Khanna. Thank you, Ms. Wasserman Schultz.
I now want to recognize Mr. Connolly for five minutes of
questioning.
Mr. Connolly. Thank you, Mr. Chairman.
Mr. Stein, your testimony is--let me ask this. Mr. Fine
made the point that you declined to provide DOD or his office
with data because it fell at or below the $2 million threshold
in contract value. Is that correct?
Mr. Stein. I think at the time of the contracting, it was
$750,000, but I would defer to my colleague.
Mr. Connolly. No, my question is you declined. I'm asking
you to corroborate what he asserted.
Mr. Stein. Okay. I think it was $750,000 at the time of the
awards, not $2 million, because that was a----
Mr. Connolly. But is it accurate that you declined to
provide that information voluntarily?
Mr. Stein. We agreed to all the laws and rules and
regulations.
Mr. Connolly. Yes, we stipulate that, Mr. Stein. My
question again is, is Mr. Fine accurate that, in fact, you
declined to provide information his office requested using the
threshold as the reason why you did not have to?
Mr. Fine. If I could, they declined to provide to the
contracting officer when the contracting officer requested it
15 of the 16 times.
Mr. Connolly. Okay. Mr. Stein, is that accurate?
Mr. Stein. I'm confused. Can you rephrase the question?
Mr. Connolly. Yes. Mr. Fine said that the contract officer
had requested information and you said, we're not going to
provide it because we're not required to because it falls below
$2 million.
Mr. Stein. That's not true. If it falls below $750,000, at
the time, we said that----
Mr. Connolly. Mr. Fine.
Mr. Fine. I think he's debating the issue of what the
threshold was at the time. Whatever the threshold was at the
time, they were asked to provide the cost and they declined to
do it in----
Mr. Connolly. Is that accurate?
Mr. Stein. That is accurate.
Mr. Connolly. That is accurate. Thank you.
Now, is it the policy of your company deliberately to
restructure the value of contracts so that you fall below that
threshold? For example, we had one former TransDigm sales
director who told the committee, and I quote: ``We were coached
on how to structure agreements. It was suggested to us that we
use shorter agreements. Don't sign long-term agreements. We
were encouraged to use excuses.''
Is that an accurate statement, in terms of the policy of
your company?
Mr. Stein. I don't think so. We do not have a policy that
does anything but to agree with----
Mr. Connolly. You're under oath. Is it your testimony that
nobody was ever coached to do that?
Mr. Stein. No, no one was ever coached to split a contract.
I'm not aware of any instance where that happened, period.
Mr. Connolly. All right. Good. You're on record.
Mr. Stein. Yes. I'm not aware of any instance where that
happened.
Mr. Connolly. That employee went on to provide an example.
He said, and I quote: ``The government asked for a multiyear
solicitation of Black Hawk parts. We, however, shortened the
term of the contract to 9 months so that we wouldn't go over
TINA.
Is it your testimony that he's wrong, that that did not
happen?
Mr. Stein. I have no idea the details of this part or the
testimony that this person is giving.
Mr. Connolly. That's not my question. Are you familiar with
the fact that there was a----
Mr. Stein. No.
Mr. Connolly [continuing]. multiyear solicitation of Black
Hawk parts?
Mr. Stein. No.
Mr. Connolly. That doesn't ring a bell with you?
Mr. Stein. No, it didn't ring a bell with me.
Mr. Connolly. All right. So we have testimony from one of
your former employees that contradicts what you've just said
here under oath; that, in fact, it was the strategy of your
company to do that.
Mr. Fine or Ms. Hull, any evidence about that?
Ms. Hull. For the purposes of our audit, I can't speak to
TransDigm intentionally keeping dollar values under a certain
threshold, but what I can say is that the majority of the parts
in our sample, which is proportionate to the percentage of
contracts they have, are predominantly under the simplified
acquisition threshold.
Mr. Connolly. Sure looks like a strategy to me.
Mr. Stein, you have repeatedly said in your testimony today
in response to questions that you look at the commercial value
of products, and what you provide is largely commercial. Ms.
Hull, you said, if I understood correctly, of I think you said
47 parts you looked at, only 4 would fit that category.
Ms. Hull. Only 4 of the 47 parts were commercial.
Mr. Connolly. Right. Do you dispute that, Mr. Stein?
Mr. Stein. I do.
Mr. Connolly. Do you want to elaborate?
Mr. Stein. We have commercial packages that have been
submitted on all of these. These are commercial parts. They
fall under the FAR Part 12 of commercial in type. So the
commercial prices are legitimate.
Mr. Connolly. Ms. Hull?
Ms. Hull. The contracting officer in this case made the
decision that four were commercial, not more than four per our
sample.
Mr. Connolly. Mr. Stein says that's just not accurate.
Ms. Hull. It is up to the contracting officer to determine
whether a part is commercial. And in this case, for those four
parts, they made the commercial item determination that just
four were commercial.
Mr. Connolly. Mr. Fine or Mr. Fahey, before--my time is up,
but I'd like to give you an opportunity to comment on that.
Mr. Fahey. I would agree. And we have----
Mr. Connolly. You would agree with what?
Mr. Fahey. That the low number that is considered
commercial. And we have a more laborious process to decide
whether somebody is commercial or not.
Mr. Connolly. So, Mr. Fine.
Mr. Fine. I agree with Ms. Hull. This is a decision made by
the contracting officer and DLA in this case, what was
commercial. And four times they were determined to be
commercial; the rest were not.
Mr. Connolly. So, Mr. Chairman, as I yield back my time, I
just want to note this is very troubling, because we have the
government saying that only four of the parts, in fact, would
be defined as commercial; and we have the contractor saying,
no, no, they're all commercial. We have employees who have told
us that they were told not to talk about cost directly by Mr.
Howley; and Mr. Howley says he does not recall ever making that
statement to employees.
We have employees telling this committee that the company
deliberately restructured contracts and agreements to fall
below a certain dollar threshold so that they would not have to
provide data to the government; and we have Mr. Stein under
oath denying that, that that was not the policy of his company.
It just seems to me we have an awful lot of contradictions
and a very different point of view between the government, who
is the recipient of these services, and the company providing
them, and the company's own former employees.
And I would just say to both Mr. Stein and Mr. Howley,
you'd better be right, because you're under oath. And it would
be my hope that this committee will vigorously followup on this
testimony and corroborate or not what we've just heard here
today.
I thank the chair.
Mr. Khanna. Thank you, Mr. Connolly.
The chair now recognizes Ms. Norton for five minutes of
questioning.
Ms. Norton. Thank you very much, Mr. Chairman.
Mr. Howley, I think this is an opportunity to clear up for
the public, not only for this committee, some of--make us
understand something about these private margins. For example,
one of the findings of the inspector general was that TransDigm
actually denied 15 separate requests from contracting officers
for uncertified cost data. And the dates given us are between
January 2015 and January 2017. You might understand that it
creates a kind of suspicion right there that you can't get the
information that normally a buyer would ask for.
So let's test this. On one of the parts you refused to
provide data for was a position indicator, it is called,
purchased by the Army Contracting Command. And according to the
cost data TransDigm provided to the inspector general, this
part cost $2,161 to manufacture, but you charged the government
$11,733 for each part.
So my question is pretty straightforward. How is nearly
$12,000 a reasonable price for something that cost TransDigm
about $10,000 less than that to manufacture?
Mr. Howley. Congresswoman, I don't know the details of the
individual parts. We have 55 independent operating units that
we operate.
Ms. Norton. Would you regard that as a reasonable price?
Mr. Howley. I don't know the context of it. I think----
Ms. Norton. So under some circumstances----
Mr. Howley. We are generally--we are a commercial business,
primarily. And our business model, again, is to pay our own
money upfront, to invest and not make money in the beginning,
to pay our engineering capital, et cetera, to sell things for
aircraft----
Ms. Norton. Look, I understand what your business model is.
Reclaiming my time, Mr. Howley, because you're not answering my
question.
The inspector general found that TransDigm received 428
percent, 428 percent excess profit in the sales of this part,
position indicators.
So we may disagree and you may need some context and you
don't answer the question directly, but let me ask you if you
will answer this question directly. Will TransDigm provide a
refund to the Army of the excess profit the company received
for this part?
Mr. Howley. I think I answered that earlier, but I'd be
glad to do it again. We're still in the process of evaluating
that. We have----
Ms. Norton. No. My question is, after you evaluate it--
there may be some differences on how much excess profit or not.
If you find that there was some amount that was in excess, will
TransDigm provide a refund to the Army for your excess profit?
After you've done all your study, will you provide the excess--
will you provide a refund to the Army?
Mr. Howley. And I think I would say we're still in the
process of evaluating how we're going to deal with this
voluntary refund request.
Ms. Norton. That's not my question. Will you provide--let
me just ask a general question. When you've had an opportunity
to evaluate what the inspector general has found, if you find
that there was some excess profit on any of these, after
comparing your information with the inspector general, will you
provide a refund to the Government of the United States, yes or
no, Mr. Howley?
Mr. Howley. We're in the process of evaluating how we're
going to handle that. I would say we are a commercial company
that operates primarily in a commercial model. And there is a
set of rules, as I understand, by which the government buys
commercial of a type product. I think many of what we sell is
commercial of a type product. So we have to put that in its
context.
Ms. Norton. Mr. Chairman, I will note for the record that I
have tried on at least three separate occasions to get a
response from this witness that almost any manufacturer or any
seller of a product to either the government or the public
would have given. If I find I'm wrong, expect that I will give
back whatever amount you should have received.
And I think it should be noted for the record that this
witness has refused to say--and I must say, in the way in which
we do business in the future, it should be noted that this
witness has refused to say that even if he finds there has been
excess profits, he will return that excess to the government.
And I thank you, Mr. Chairman.
Mr. Khanna. Thank you, Ms. Norton.
I'd like to thank our witnesses for testifying today. I'd
like to thank Assistant Secretary Fahey, Ms. Hull, Mr. Fine for
your service to our country.
Without objection, all members will have five legislative
days within which to submit additional written requests,
written questions for the witnesses to the chair, which will be
forwarded to the witnesses for their response. I also ask our
witnesses to please respond as promptly as you are able, and
would note that, Mr. Stein, there is an outstanding letter with
a number of requests to you. And our understanding and
expectation is that all of those requests will be answered
fully and comprehensively.
Before I give Mr. Grothman a chance for his closing, I
would just like to note the bipartisan commitment in this
committee to continue to investigate this, to note Mr. Meadows'
comments as well as Ms. Speier's comments, that TransDigm
should reimburse the taxpayers for the excessive profits.
You've heard that over and over again from both Republican and
Democratic members.
Now, you could do that personally, given the amount at
stake and given the amount you were making as CEOs, or you
could do it as a company, after you consult your lawyers,
without admitting liability. People do that all the time. You
don't have to admit liability to do the right thing.
My strong recommendation, speaking for many members on the
committee, would be that you consult your lawyers, maybe over
lunch, and do it by the end of the day, to seem responsive to a
body that represents so many constituencies in this country.
I now yield to Mr. Grothman for any final words.
Mr. Grothman. Right. I'd just like to thank you for having
the hearing. I thought it was illuminating for everybody here.
At a time when we're borrowing about 20 percent of our Federal
budget, it is again and again amazing the degree to which we
seem to shovel money out of this city without regard to the
fact that we're driving people deeper into debt.
I would hope the military itself weighs in a little bit
stronger here. I mean, they've gotten huge increases in
spending the last few years. And the military is No. 1. I mean,
if we ever doubt we're the No. 1 military in the world, we're
in a lot of trouble. But it's frustrating when people in that
business who should be, above all, committed to making sure
every dime is well spent, seem to view things as an opportunity
to make ridiculously huge profits. I realize it's not unique to
this industry, but it amazes me how people who do not found an
industry are making tens of millions of dollars of salary. I
mean, I don't know whether I was ever in that position, if I'd
feel guilty about cashing such a check or not.
But I'd like to thank you for having this hearing and,
hopefully, something will come of it.
Mr. Khanna. Thank you, Mr. Grothman.
I also just want to recognize the staffs, both on the
Republican side and on the Democratic side, for their
extraordinary work in making sure that we had this oversight
hearing.
With that said, this hearing is adjourned.
[Whereupon, at 12:27 p.m., the committee was adjourned.]
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