[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
PRICE GOUGING IN MILITARY CONTRACTS:
NEW INSPECTOR GENERAL
REPORT EXPOSES EXCESS PROFIT OBTAINED
BY TRANSDIGM GROUP
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HEARING
BEFORE THE
COMMITTEE ON
OVERSIGHT AND REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 19, 2022
__________
Serial No. 117-60
__________
Printed for the use of the Committee on Oversight and Reform
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available on: govinfo.gov,
oversight.house.gov or
docs.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
46-681 PDF WASHINGTON : 2022
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COMMITTEE ON OVERSIGHT AND REFORM
CAROLYN B. MALONEY, New York, Chairwoman
Eleanor Holmes Norton, District of James Comer, Kentucky, Ranking
Columbia Minority Member
Stephen F. Lynch, Massachusetts Jim Jordan, Ohio
Jim Cooper, Tennessee Virginia Foxx, North Carolina
Gerald E. Connolly, Virginia Jody B. Hice, Georgia
Raja Krishnamoorthi, Illinois Glenn Grothman, Wisconsin
Jamie Raskin, Maryland Michael Cloud, Texas
Ro Khanna, California Bob Gibbs, Ohio
Kweisi Mfume, Maryland Clay Higgins, Louisiana
Alexandria Ocasio-Cortez, New York Ralph Norman, South Carolina
Rashida Tlaib, Michigan Pete Sessions, Texas
Katie Porter, California Fred Keller, Pennsylvania
Cori Bush, Missouri Andy Biggs, Arizona
Shontel M. Brown, Ohio Andrew Clyde, Georgia
Danny K. Davis, Illinois Nancy Mace, South Carolina
Debbie Wasserman Schultz, Florida Scott Franklin, Florida
Peter Welch, Vermont Jake LaTurner, Kansas
Henry C. ``Hank'' Johnson, Jr., Pat Fallon, Texas
Georgia Yvette Herrell, New Mexico
John P. Sarbanes, Maryland Byron Donalds, Florida
Jackie Speier, California Vacancy
Robin L. Kelly, Illinois
Brenda L. Lawrence, Michigan
Mark DeSaulnier, California
Jimmy Gomez, California
Ayanna Pressley, Massachusetts
Russ Anello, Staff Director
Krista Boyd, Chief Oversight and Policy Counsel
Elisa LaNier, Chief Clerk
Contact Number: 202-225-5051
Mark Marin, Minority Staff Director
------
C O N T E N T S
----------
Page
Hearing held on January 19, 2022................................. 1
Witnesses
Ms. Theresa S. Hull, Deputy Inspector General, Office of
Inspector General, Department of Defense
Oral Statement............................................... 5
Mr. John Tenaglia, Acting Principal Deputy Assistant Secretary of
Defense for Acquisition and Principal Director, Defense Pricing
and Contracting Department of Defense
Oral Statement............................................... 6
Mr. Nicholas Howley, Founder and Executive Chairman, TransDigm
Group Inc.
Oral Statement............................................... 8
Mr. Kevin Stein, Chief Executive Officer, TransDigm Group Inc.
Oral Statement............................................... 10
Opening statements and the prepared statements for the witnesses
are available in the U.S. House of Representatives Repository
at: docs.house.gov.
INDEX OF DOCUMENTS
----------
The documents listed below are available at: docs.house.gov.
* Statement for the Record by Senator Charles E. Grassley of
Iowa; submitted by Chairwoman Maloney.
* Testimony of Mandy Smithberger, Director of the Center for
Defense Information, Project On Government Oversight; submitted
by Rep. Khanna.
* Transdigm Compensation Charts; submitted by Rep. Tlaib.
* Statement for the Record; submitted Rep. Brown.
PRICE GOUGING IN MILITARY CONTRACTS: NEW INSPECTOR GENERAL
REPORT EXPOSES EXCESS PROFIT OBTAINED
BY TRANSDIGM GROUP
----------
Wednesday, January 19, 2022
House of Representatives,
Committee on Oversight and Reform,
Washington, D.C.
The committee met, pursuant to notice, at 10:04 a.m., via
Zoom, Hon. Carolyn Maloney [chairwoman of the committee]
presiding.
Present: Representatives Maloney, Norton, Cooper, Connolly,
Krishnamoorthi, Raskin, Khanna, Mfume, Ocasio-Cortez, Tlaib,
Porter, Bush, Brown, Wasserman Schultz, Welch, Johnson, Speier,
Kelly, DeSaulnier, Comer, Foxx, Hice, Grothman, Cloud, Gibbs,
Higgins, Norman, Sessions, Keller, Clyde, Franklin, LaTurner,
Fallon, and Herrell.
Chairwoman Maloney. [Presiding.] The committee will come to
order.
Without objection, the chair is authorized to declare a
recess of the committee at any time.
I now recognize myself for an opening statement.
Three years ago, this committee held a hearing to examine a
defense contractor who was charging outrageous prices to our
military on mission-critical spare parts for aircraft.
Democrats and Republicans came together to demand that the
company, called TransDigm, repay the excess profits. I was
pleased that following the hearing, TransDigm paid back the
money, but TransDigm did not change its behavior.
I called this hearing today because the Defense
Department's Inspector General recently released a report
showing TransDigm is back at it again. The new IG reviewed
contracts from more than 100 spare parts and found that
TransDigm received $20.8 million in excess profit. TransDigm's
excess profit margins on individual parts range from 68 percent
to a whopping 3,850 percent. No company should be making over a
$3,000 profit from American taxpayers, yet the IG found that
TransDigm's business model is specifically designed to raise
prices on defense contracts. TransDigm identifies companies
with specialized sole-source contracts, buys those companies,
and then hikes prices on mission-critical parts. Our message to
TransDigm today is simple: pay back the money.
Let me give you one recent example. TransDigm manufactures
a product called the linear actuating cap, which was used in
the Eagle F-15 and C-125 transport aircraft. According to
TransDigm, the part only cost $189 to make, but the company
charged the Defense Department over $7,000. The IG found that
TransDigm repeatedly refused to provide cost data that DOD
contracting officers asked for even when it was needed to
determine if the price being offered was fair and reasonable.
TransDigm forced contracting officers to choose between
accepting prices that were blatantly unfair to taxpayers or
denying our military the parts it needs to protect our national
security. At the same TransDigm is gouging our warfighters, its
executives are being rewarded with jaw-dropping compensation.
In 2020, TransDigm founder and executive chairman, Nicholas
Howley, received more than $68 million in salary. It would take
the average American family around 1,000 years to earn as much
as TransDigm's chairman earned in one year while overcharging
our military.
Today, TransDigm is going to tell us they did nothing
illegal or wrong. I disagree. Overcharging taxpayers, even if
you get away with it under the law, is just plain wrong.
TransDigm will claim the IG used a flawed methodology to
calculate excess profit. This is simply not true. The IG
determined that profit above 15 percent was excessive based on
information TransDigm provided. According to TransDigm, similar
aerospace industry contractors generally have profits ranging
from 8 percent to 22 percent. The IG selected 15 percent for
its analysis, the middle of that range. What is more, the
nearly $21 million in excess profit the IG identified was based
on a sample of only three percent of TransDigm's defense
contracts, so the total amount of overcharging may be far
higher.
TransDigm wants to deflect responsibility, but we are here
today saying enough is enough. Congress must act to empower
contracting officers when they are negotiating with greedy
contractors like TransDigm. Today I am releasing a discussion
draft bill that would require companies to provide cost
information when necessary to determine if their proposed
prices are unfair and unreasonable. This will enable government
contracting officers to ensure the government is paying a fair
price. I urge my colleagues on both sides of the aisle to work
with me on this reform.
Mr. Howley and Mr. Stein, the last time you both testified
before this committee in 2019, you were evasive and refused to
provide clear answers to many questions. We expect you to
answer our questions today and take responsibility for your
company's actions. Most importantly, we expect TransDigm to pay
back the outrageous profit it received at the expense of our
warfighters and American taxpayers.
Thank you to all of the witnesses testifying today. I am
appreciative to Deputy IG Hull for the excellent work of her
office. I want to acknowledge Mr. Tenaglia from the Defense
Department. I understand the Department's typical practice is
not to testify on the same panel as private sector witnesses,
and I appreciate you making an exception for this hearing so
that we can have the benefit of your perspective, especially
given that DOD also participated in the committee's earlier
hearing on this issue.
Finally, I ask unanimous consent to submit for the record a
statement Senator Chuck Grassley submitted for today's hearing.
Senator Grassley has been a leader in combatting government
waste, and his letter highlights the need for Congress and DOD
to address what he calls egregious price gouging by TransDigm
and its subsidiaries. Senator Grassley concludes by saying,
``We cannot keep shoveling money into a fire, watching as it
happens, and pretending that everything is fine. Our tax
dollars should go toward supporting the warfighter, not paying
thousands of dollars for a simple spare part that costs peanuts
to make.''
Without objection, so ordered.
Chairwoman Maloney. I now recognize the distinguished
ranking member, Mr. Comer, for an opening statement.
Mr. Comer. Thank you, Chairwoman Maloney, and thank you to
all the witnesses appearing virtually today.
We are again here today to do what committee Democrats do
best: ignore the failures of the Biden Administration. This
committee steadfastly refuses to conduct meaningful oversight
of the Biden Administration. Last week, myself and Whip Steve
Scalise sent a letter to Chairwoman Maloney and Chairman
Clyburn requesting a hearing into serious issues, including the
surge in Omicron, the lack of available testing, President
Biden's declining a plan to order millions of tests, political
influence at the CDC and FDA, CDC messaging failures, and
President Biden abandoning his National Plan. I don't need to
remind my colleague that more Americans have now died under
President Biden than President Trump. These issues don't even
touch on the disastrous withdrawal from Afghanistan, the
origins of COVID-19, or the devastating inflation felt
nationwide because of Democrats' out-of-control spending.
Instead of focusing on any of these crises, we are here
today to conduct a hearing that already happened. We had this
exact same hearing in 2019. Not a similar hearing. The exact
same one with almost the exact same witnesses. Now, I know the
chairwoman is a big fan of recycling, but recycling hearings is
new to me. I agree the government needs to be a good steward of
taxpayer dollars, and I agree the Department of Defense should
not be forced to pay exorbitant prices. I do not agree with
attacking one company that, frankly, followed the law. The
Inspector General concluded as much. I can't remember a company
that got hauled in front of Congress for following the law and
certainly not twice.
Further, I have serious concerns over the methodology of
the report presented today, primarily the arbitrary 15-percent
profit ceiling designed by the Inspector General. The IG admits
a regulatory or legal profit ceiling does not apply to any of
the contracts analyzed in this report. The IG says 15 percent
should not be a benchmark for negotiating fixed-price
contracts, and the IG does not advocate for a 15-percent profit
ceiling for fixed-price contracts, yet that is the standard
they determined applied to TransDigm. That is the definition of
``arbitrary.'' We operate in a free-market economy. Profit
ceilings are inherently un-American.
This report does highlight DOD's struggles with inventory
management. So many of these contracts with TransDigm are of
low quantity and low value. For some parts, there are even
multiple orders for the same part in one year. This is
inefficient and, undoubtedly, leads to higher prices. DOD is
the largest purchaser in the U.S. and has massive buying power.
It can exercise it to avoid some of the issues we see here
today. It can consolidate orders to ensure its negotiating
prices once instead of 4 or 5 times per year. It can better
leverage IT systems to forecast demand signals to know how many
parts it needs to purchase, and it can hold more parts in its
inventory to ensure that there is not a last-minute scramble to
order more.
All of these changes would be good for the taxpayer and for
the warfighter. These are changes we should be focused on,
making the government more efficient. What we should not
discuss today is placing more burdens on businesses, especially
American businesses. Because of the Biden economy, there are
worker shortages in every sector. Prices are skyrocketing. The
last thing needed is more burden and more regulation. If there
are commonsense reforms that can benefit the taxpayer and not
unnecessarily burden business or slow down the procurement, we
are happy to discuss that.
I hope this hearing will be productive and include
questions about how DOD can improve some of these problems. I
also hope my colleagues will not resort to shaming one company
for what is a systemic issue. There are major issues facing
Americans right now. We should be focused on driving down
prices, increasing access to COVID tests, therapeutics and
treatments, and holding the Biden Administration accountable
for a series of failures, not disparaging one company.
I thank you and yield back.
Chairwoman Maloney. I thank the gentleman for his statement
and would like to remind him and other members of the committee
that the Subcommittee on the Coronavirus is having a hearing
tomorrow on Omicron. We had one on it and the crisis last week,
and we can submit for the record a listing of all the hearings
we have had on the coronavirus and the reports that we have
issued. Also, on Afghanistan, we have held a briefing with the
Special Inspector General for Afghanistan. We held a classified
briefing at the request of the minority with the Defense
Department, State Department, DHS, and intelligence community,
and we had one in the National Subcommittee with Chairman Lynch
in December. If you would like another one, request it and we
will have another one on Afghanistan.
And in terms of the hearing today, we have to take steps to
make sure that this abuse does not continue. The Department of
Defense and the IG has come forward and said that roughly $21
million was overcharged by TransDigm, and that when they asked
them for fair pricing and for cost transparency, they were not
able to achieve it. I have sent you a copy of a letter and also
a bill that we have drafted for your review called the Fair
Pricing with Cost Transparency Act, which has been written
specifically to address this problem of overcharging the
warfighter, the Defense Department, and the American taxpayer.
That is just an example of one of the areas that we are
responding to that we hope the minority will join us in solving
this challenge we have.
Now I would like to introduce our witnesses. Our first
witness today is Theresa Hull, who is the Deputy Inspector
General for the Department of Defense. Then we will hear from
John Tenaglia, who is the Acting Principal Deputy Assistant
Secretary of Defense for Acquisition and the Principal Director
of Defense Pricing and Contracting at the Department of
Defense. Next we will hear from Nicholas Howley, who is the
Founder and Executive Chairman of TransDigm. Finally, we will
hear from Kevin Stein, who is the CEO of TransDigm.
The witnesses will be unmuted so that we can swear them in.
Please 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?
[A chorus of ayes.]
Chairwoman Maloney. OK. Let the record show that the
witnesses answered in the affirmative. Thank you.
And without objection, your written statements will be made
part of the record.
With that, Ms. Hull, you are now recognized for your
testimony.
STATEMENT OF THERESA S. HULL, DEPUTY INSPECTOR GENERAL, OFFICE
OF INSPECTOR
GENERAL, DEPARTMENT OF DEFENSE
Ms. Hull. Chairwoman Maloney, Ranking Member Comer, and
members of the committee, thank you for inviting me to discuss
our report on the TransDigm business model and its impact on
spare parts pricing. I am Teresa Hull, a Deputy Inspector
General at the DOD OIG. I will discuss our longstanding
concerns about sole-source procurements, such as those that DOD
conducts with TransDigm.
While these concerns are not new, the prices charged by
TransDigm provide another clear demonstration of the ongoing
problems with negotiating sole-source contracts. Our recent
audit examined prices that TransDigm charged the DOD for a
sample of 107 spare parts. The issues raised in this audit are
not limited to just this company and its contracts with the
DOD. Sole-source contractors' unwillingness to share cost data
and DOD contracting officers' limited success in negotiating
prices for sole-source parts are common findings that we have
highlighted for more than 20 years. Our reports have identified
the lack of cost data available to DOD contracting officers as
the root cause for contractors obtaining excessive profits on
sole-source parts. Using certified or uncertified cost data to
perform cost analysis are the most reliable ways DOD
contracting officers can determine whether a price is fair and
reasonable.
The Federal Acquisition Regulation states that ``certified
cost data is required for contracting officers to award
contracts above a certain dollar threshold,'' which is
established by the Truth in Negotiations Act, or TINA. The 2018
National Defense Authorization Act raised the threshold from
$750,000 to $2 million. Although the intent of raising the
threshold was to streamline acquisition process, the increase
in the threshold resulted in contracting officers having less
information to use during their negotiations with contractors.
This had a particularly large impact on negotiations for sole-
source items.
TransDigm identified that it was the sole manufacturer for
94 of the 107 spare parts we reviewed. Contractors are required
to provide certified cost or pricing data only for contracts
valued at or above the TINA threshold. From January 2017 to
June 2019, more than 95 percent of the contracts that the DOD
awarded to TransDigm were below the TINA threshold. TransDigm
also practices what it calls market-based pricing. According to
TransDigm, market-based pricing is a strategy in which a
company sets prices of items that it sells based on what
customers are willing to pay for the item as opposed to basing
prices on the cost to make the spare parts. Often with sole-
source parts, the price charged by contractors becomes what the
contractor is willing to negotiate and what the DOD is willing
to pay for a part to keep an essential weapon system
operational.
For our audit, we reviewed 107 spare parts that TransDigm
operating units sold to the DOD on 153 contracts with a total
value of $38.3 million. Of those 107 spare parts, we found only
two instances in which TransDigm received a profit of 15
percent or less. Using 15 percent, we determined that TransDigm
earned $20.8 million in excess profit on 105 spare parts. Our
work on spare parts pricing demonstrates that change is
necessary to address the high prices charged by and the
excessive profits obtained by contractors like TransDigm that
sell sole-source parts to the DOD. Because policies do not
compel contractors to provide uncertified cost data for
contracts below the TINA threshold when requested, contracting
officers are not always able to use cost analysis to determine
fair and reasonable prices for sole-source spare parts.
To correct the deficiencies detailed in our TransDigm
report, we recommended several actions to DOD. However, these
efforts will likely have minimal impact without fundamental
regulatory and statutory changes. Without legislative changes,
the DOD will continue to be unable to perform adequate price
reasonableness determinations, and other price analysis methods
are not always effective in identifying excessive prices.
Therefore, we support the legislative reforms proposed by the
DOD. Without these steps, we believe that the DOD will continue
to pay excessive prices for spare parts that it needs.
Thank you for the opportunity to testify this morning, and
I look forward to answering your questions.
Chairwoman Maloney. Thank you. Thank you. Mr. Tenaglia, you
are now recognized for your testimony.
STATEMENT OF JOHN TENAGLIA, ACTING PRINCIPAL DEPUTY ASSISTANT
SECRETARY OF DEFENSE FOR ACQUISITION, AND PRINCIPAL DIRECTOR,
DEFENSE PRICING AND
CONTRACTING, DEPARTMENT OF DEFENSE
Mr. Tenaglia. Thank you. Chairwoman Maloney, Ranking Member
Comer, and distinguished members of the Committee on Oversight
and Reform, thank you for inviting me to testify today to
address DOD's ability to award contracts for military spare
parts at reasonable prices. I very much appreciate the work of
Ms. Hull and the Inspector General in identifying policy gaps
that hinder DOD contracting officers from obtaining the
information they need to establish fair and reasonable prices
for items they prepare for the warfighter. I thank this
committee for continuing its inquiry into this matter and
following up on your 2019 hearing.
I am John Tenaglia, the Principal Director of Defense
Pricing and Contracting in the Office of the Undersecretary of
Defense for Acquisition and Sustainment. I began my civil
service career with the Department in 2008 after retiring from
the United States Air Force. As the Principal Director of
Defense Pricing and Contracting, I am privileged to serve as
the functional leader of DOD's contracting and pricing
community, and I proudly represent those outstanding
professionals today.
DOD's contracting officers seek to award contracts at
prices that are fair and reasonable--that is, fair and
reasonable to the U.S. taxpayer, fair and reasonable to the
Department of Defense, and, yes, fair and reasonable to the
companies that we deal with. Ideally, contract pricing is based
on competitive market pressures that dictate the boundaries of
what is fair and reasonable. In procurement of military spare
parts, though, we don't always enjoy the benefit of competitive
market forces. On a positive note, the Defense Logistics Agency
was successful in awarding 93 percent of its contracting
actions and 77 percent of its obligated contract dollars
through competitive procedures last year. This includes, but is
not limited to, the procurement of consumable spare parts that
the military departments need to sustain their fielded weapons
systems. However, the Department has significant concerns about
our contracting officers' ability to obtain data that is
necessary to negotiate fair and reasonable prices, particularly
for sole-source items that are asserted by companies as
commercial.
As noted in their report, the IG was able to obtain
uncertified cost data from TransDigm for nearly all the
contracts they examined in their sample. TransDigm declined,
however, to provide the same cost data to our contracting
officers to support negotiations. The DOD IG's audit report
concluded, ``Without the necessary legislative changes, the DOD
will continue to be unable to perform adequate price
reasonableness determinations because contractors are not
compelled to provide uncertified cost data.'' I agree with that
conclusion. That is why the Department submitted the
legislative proposals that Ms. Hull just mentioned.
Armed with relevant supporting factual data, our
contracting officers will negotiate better prices. However, I
must clarify. Even where we have obtained data, such as
uncertified cost information, our contracting officers will
continue to face challenges where they lack negotiation
leverage with sole-source contractors who refuse to yield. In
my view, there are two overarching issues here. The first,
change is needed for contracting officers to obtain the data to
analyze and negotiate fair and reasonable prices. The second,
though, relates to the business model that the IG's report
describes and whether the law should provide a check against
the government paying higher prices for contractors to cover
their expenses to acquire companies in the supply chain,
particularly where the business model precludes effective
competition. If unchecked, these expenses will continue to be
embedded in contract prices the taxpayers pay for the products
that the warfighter must have to perform the mission. The price
we pay matters because the more we pay, the less combat
capability we can acquire for a ready force.
Since your 2019 hearing on this subject, the DOD has taken
action to address these issues and, more generally, to address
commercial item pricing. I have detailed those actions in my
formal written statement. The Defense Logistics Agency has
continued to pursue reverse engineering to create government-
owned drawings and technical data packages they are using to
establish new sources and to competitively procure parts that
were formerly sole-source. While this is an important tool,
reverse engineering cannot be used for every problem part.
We in the Office of the Undersecretary of Defense for
Acquisition and Sustainment are absolutely committed to
delivering and sustaining preeminent capabilities for the
warfighter. Our contracting officers' ability to negotiate fair
and reasonable prices translates directly to maximizing those
capabilities. Thank you for the opportunity to testify today,
and I look forward to your questions.
Chairwoman Maloney. Thank you. Mr. Howley, you are now
recognized for your testimony. Mr. Howley.
STATEMENT OF NICHOLAS HOWLEY, FOUNDER AND EXECUTIVE CHAIRMAN,
TRANSDIGM GROUP INC.
Mr. Howley. Chairman Maloney, Ranking Member Comer, and
distinguished members of the committee, good morning and thank
you for the invitation to appear at today's hearing. I'm Nick
Howley. I'm Chairman and Founder of the TransDigm Group, and I
served as CEO until 2018. Since retiring, I focus much of my
time working with the Howley Foundation, a charitable
foundation that began in 2003 and focuses exclusively on
providing improved educational opportunities for economically
disadvantaged inner-city students. As an example, in 2022
alone, we have provided 750 students with scholarships and
related support to attend grade schools, high schools, and
colleges in addition to funding and managing various other
inner-city education programs.
I am here today to speak about the aerospace industry and
the work TransDigm businesses do every day to provide highly
engineered aircraft components for our commercial and
government customers. TransDigm is an American manufacturing
company with over 100 manufacturing plants. We provide well-
paying jobs to roughly 13,000 individuals, most of whom are in
the United States and many of whom are union members. In an era
when the domestic supply chain is vulnerable and the government
is spending billions to incentivize companies to bring
manufacturing back to the United States, our businesses
continue to domestically produce quality products that are
essential to keeping American strong.
We are primarily a commercial company with well over 90
percent of our revenues going to customers other than the U.S.
Government. Our largest customer group is the worldwide
commercial airline industry, such as United Airlines or Delta
Airlines. Our next largest customers are typically Boeing and
Airbus, the leading manufacturers of commercial passenger
airplanes. Our companies produce a broad range of engineered
aerospace components found in major commercial airlines,
including advanced cockpit avionics, cargo handling systems,
engine ignition systems, communication software, and antenna
systems. Each year we introduce a range of new and improved
products primarily for commercial airplanes, but also for
defense programs. We typically fund the engineering, testing,
tooling, and startup of these products at our own expense.
After the September 11th attack, we quickly developed and
quickly produced critical cockpit security door systems that
protect the aircraft and keep passengers safe. We also
manufactured the state-of-the-art parachute and actuators that
safely landed and then helped operate the Mars Perseverance
Rover. In response to COVID, we are developing antimicrobial
and touchless technology for commercial air travel.
The structure of the commercial and defense aerospace
industry for our type of components is pretty similar across
the world. Airplane manufactures, known as OEMs, like Boeing
and Airbus, have suppliers like us compete for the original
design and selection of the part. The engineering, tooling, and
startup costs are borne by us and we don't always win. Once the
supplier is selected after this robust competition, so long as
the supplier continues to produce quality products on time, the
supplier typically keeps the business. But if the supplier does
not provide the customer with adequate value, there is a
commercial industry that actively tries to reverse engineer the
parts. This generally does not happen to us because we are a
good, high-value supplier.
TransDigm is not primarily a defense contractor. Our direct
contracts with the DOD represent a small fraction of our
revenue. The defense contracts for our businesses are almost
exclusively through firm-fixed-price contracts. We rarely have
cost-plus contracts where the contractor receives a markup on
cost and the government bears all the risk of increased cost.
Unlike many traditional defense contractors, we shoulder the
risk of delays, cost fluctuations, and other potential losses.
We also take the risk that the DOD will elect not to buy from
us or will buy in such low quantities that the program is not
economically viable. In fact, the report noted 61 of the 107
parts in the audit lacked procurement history data sufficient
to perform an analysis. In many cases, DOD went more than five
years between procurements. We also work to be good corporate
citizens, including supporting the provision of quality,
affordable broadband for underserved neighborhoods and
establishing college scholarships for minority students
interested in engineering and business. I am proud of all that
our team has done over the past 30 years and continues to do to
make TransDigm a premiere American developer and manufacturer.
My colleague, Kevin Stein, will provide an overview of our
company's deep concerns regarding the Inspector General report
that is the subject of today's hearing, so I will not reiterate
those points. I do want to reiterate TransDigm's dedication to
being a partner with the DOD in creating long-term solutions to
acquisition industries. As the IG report indicates, TransDigm
Group follows all laws and regulations, and we will, of course,
continue to do so. We value our work with DOD and we're proud
to provide our support.
Thanks for the invitation to appear, and I look forward to
questions.
Chairwoman Maloney. Thank you. Mr. Stein, you are now
recognized for your testimony.
STATEMENT OF KEVIN STEIN, PH.D., CHIEF EXECUTIVE OFFICER,
TRANSDIGM GROUP INC.
Mr. Stein. Chairwoman Maloney, Ranking Member Comer, and
distinguished members of the committee, thank you for the
opportunity to appear today. I am joined by our founder, Nick
Howley.
The DOD's inspector general completed an audit last month
in which they reviewed firm-fixed-priced contracts awarded to
TransDigm businesses. The contracts were from the same general
time period as the last audit and predated the 2019 hearing
before this committee. During the audit, we engaged in an open
exchange with the IG, providing access to thousands of pages of
documents, regular meetings, and tours of many of our
factories. The IG team even commended us for our cooperation
and transparency.
Since the 2019 hearing, we have instituted initiatives to
improve communication with DOD. First, we worked with DOD to
establish a working group to identify and address acquisition
and pricing issues. This has been helpful in addressing various
matters over the last two years. Second, we have proactively
been providing more information to DOD to facilitate the
determination of price reasonableness. We have also proactively
been offering volume discounts. Finally, we hired independent
experts to train employees on requirements related to DOD
contracting. We believe these efforts have improved
procurements.
I would now like to turn to the report. We are deeply
concerned with the fundamental errors in this report which we
communicated to the IG and their counsel. First, we provided
complete cost information for the parts reviewed in this audit.
However, the IG arbitrarily excluded nearly $10 million in
Federal taxes that we paid and interest paid by us. Remarkably,
the report says that the IG's exclusion should not be
interpreted to mean that the DOD should exclude interest in
taxes in negotiating fixed-price contracts. This is not the
only occasion that IG creates arbitrary standards and applies
them only to TransDigm and blatantly states that it is doing
so.
Second, the report creates a 15-percent profit limit for
fixed-price contracts. This limit does not exist in law or
policy. The report acknowledges that there are no profit
thresholds in the FAR for these kinds of contracts and that
they used an inapplicable standard meant for contracts in which
the government, not the contractor, takes the risk of overruns.
The report itself specifically states, and I quote, ``We are
not stating that 15 percent should be used as a benchmark when
negotiating firm-fixed-priced contracts. We reiterate that
nothing in this report states or should be interpreted to mean
that the IG advocates a 15-percent profit ceiling or any other
specified profit ceiling on fixed-price contracts.'' So again,
the IG expressly acknowledges that the standard they used for
this report was unique and should not apply to other DOD
contracts.
Third, most of our sales to DOD are for products derived
from parts used on commercial aircraft, but the IG failed to
acknowledge that the majority of the audited parts have
commercial equivalents and that, on average, DOD received a 25-
percent discount to the commercial price of those parts. I
repeat, on average, DOD received a 25-percent discount, and the
IG knew that. The FAR requires DOD to evaluate commercially
comparable pricing first and only then consider cost. The
report incorrectly claims that there is no way to evaluate
price on sole-source parts. However, most airline parts can be
found on multiple platforms and are made by multiple companies
even when a part is sole-source on a particular platform. So,
DOD can compare our products with others in the market to see
that the prices are fair and reasonable. That is exactly what
Congress intended with the Federal Acquisition Streamlining Act
and subsequent laws.
The question is supposed to be not how much it costs to
produce a part, but whether the government is getting a fair
and reasonable price. The audit does the opposite in direct
conflict with congressional intent. By using these arbitrary
standards and ignoring legitimate costs and reams of
information we provided in support of price reasonableness, the
IG was able to come up with inflammatory profit percentages
that make a good headline but ignore basic facts. Further, the
report creates these arbitrary standards not for all companies,
but only for TransDigm. The report itself contains an
extraordinary admission that even the IG doesn't support using
these standards for fixed-price contracts.
As a final matter, in our invitation to testify, we were
asked whether we will voluntarily pay the amount deemed
excessive in the report. Once we receive all of the requests
from the DOD, we will evaluate them. We look forward to working
with DOD to come to a resolution on this and to establish a
plan for going forward. However, we remain deeply concerned
with the arbitrary standards used in this report. The policy
the IG invented in this report will disincentivize businesses
from accepting firm-fixed-price contracts with the government.
Thank you, and I look forward to your questions.
Chairwoman Maloney. Thank you. I now recognize myself for
five minutes for questions.
Ms. Hull, the independent audit report from your office
shows that TransDigm is routinely overcharging the Defense
Department. Your team analyzed TransDigm's costs to manufacture
106 spare parts and compared that to prices charged to DOD for
those same items. You found that TransDigm received excess
profits on all one but one of those parts, 105 out of 106
parts. Is that right, Ms. Hull?
Ms. Hull. Thank you, Chairwoman. Yes, that is what we
found. We found that TransDigm earned excess profit of $20.8
million on 105 of the 107 parts that we looked at.
Chairwoman Maloney. OK. Before us now is a chart with some
of the worst examples of excess profit you found in your
review. All four of these are examples of excess profits above
500 percent. Two of the parts had profit margins above 2,000
percent. One part has a profit margin of nearly 4,000 percent.
Mr. Stein, according to the IG's report, contracting officers
requested uncertified cost data for 26 of the spare parts the
IG reviewed in order to help them determine whether TransDigm's
was fair and reasonable. TransDigm refused to provide the cost
data for 24 of those parts, all but two. Is that right?
Mr. Stein. That is correct.
Chairwoman Maloney. TransDigm could have provided data on
its costs, but the company refused so it could charge
outrageous prices. It is simply wrong to do that, to have a
4,000-percent profit for spare parts that our military needs.
The IG recommended that DOD seek repayment of the $20.8 million
in excess profit, and I understand that DOD agreed with that
recommendation and has notified TransDigm it is seeking
repayment. Mr. Tenaglia, has DOD received a check from
TransDigm yet?
Mr. Tenaglia. Chairwoman Maloney, the Defense Logistics
Agency has corresponded with TransDigm and indicated their
intent to pursue that refund. The refund has not been received
as of yet, but they are working with the company on that
matter.
Chairwoman Maloney. So, Mr. Stein, is TransDigm planning to
pay back the full $20.8 million? ``Yes'' or ``no.''
Mr. Stein. As I said in my opening statements, we think
there are significant legal and accounting issues with this
report. I can talk about some of those parts that you just had
up on the screen. One of those, a quick disconnect coupling,
DOD only bought 13 of those over five years. Thirteen pieces.
Imagine interrupting a manufacturing company to make a part
once in a great while and then expect them to understate their
costs or to understate what it is. We are a commercial company.
Even on that part that you were referring to, you received a
two-percent discount from commercial. You are still getting a
discount. It costs us much more to do business with the Federal
Government than the DOD, and it does----
Chairwoman Maloney. Reclaiming----
Mr. Stein [continuing]. And it does to do business with
commercial companies.
Chairwoman Maloney. Reclaiming my time. If they could have
bought it commercially, they would have. I am calling on you
right now to pay back the more than $20 million TransDigm owes
taxpayers. In addition to clawing back this taxpayer money, we
need to empower contracting officials to prevent companies from
manipulating the contract process to obtain excessive profits
in the first place. Today I am introducing a draft bill, which
I would like everyone to comment on, to require contractors to
provide cost data that a contracting officer needs to determine
whether prices are fair and reasonable, data that TransDigm
refused to provide. Mr. Tenaglia, would having access to cost
data help contracting officers ensure that contractors like
TransDigm are not overcharging our military?
Mr. Tenaglia. Yes. I believe access to cost data would give
our contracting officers a better chance to negotiate fair and
reasonable prices. I do want to comment in addition, as Mr.
Stein mentioned, the hierarchy that we use to request
information from companies, particularly in sole-source
situations for commercial products, could eventually result in
our requesting cost information. We do seek to obtain other
relevant information, whether it is historical prices paid for
commercial parts in the industry. But lacking that relevant
information, we will seek contract cost data as a last resort,
yes.
Chairwoman Maloney. And I urge all of my colleagues to co-
sponsor this bill and work with us to empower contracting
officers to protect taxpayer dollars.
I now recognize the gentlelady from North Carolina. Ms.
Foxx, you are now recognized. Virginia Foxx.
Ms. Foxx. Thank you, Madam Chair. I appreciate it, and I
appreciate our witness for being here today.
Mr. Tenaglia, the recent DOD Inspector General report
states that current statutory and regulatory requirements
discourage contracting officers from asking for uncertified
cost and pricing data. Why would contracting officers be
discouraged from seeking that data?
Mr. Tenaglia. Thank you, Congresswoman, for that question.
They are discouraged because of other means of establishing
fair and reasonable prices, including looking at analogous
parts. Some of these parts that we are talking about are sold
in the commercial aviation industry, and where we can make
those analogies on pricing and look at the sales data
associated with that part to, let's say, the airlines, then
that would be the most relevant point of comparison. That
indicates what commercial competitive market forces established
that price to be, and so that would be our first priority for
looking at that. However, if there are not relevant comparable
parts that are being sold in the commercial marketplace, then
we might revert to requesting cost information as a means to
understand the true price of that product.
Ms. Foxx. I have another question for you. When negotiating
a contract for a sole-source part, do contracting officers
explore the ability to obtain intellectual property rights?
While this may make the initial buy more expensive, do you
think it would drive down costs by creating competition in the
long run?
Mr. Tenaglia. For the most part, for the parts we are
talking about in the sustainment environment of spare parts
that is not typically part of the calculus in terms of the
Defense Logistics Agency looking to actually acquire the
intellectual property for those parts. Those decisions really
are made much earlier in the life cycle of our products. We are
examining that. We have a focus right now on competition, as I
illustrated in my statement, and part of that involves the
effective management of intellectual property at the beginning
of a product's life cycle.
Ms. Foxx. I think this is a big loophole that we have here
that could save the American taxpayers billions and billions of
dollars. And I know how long it takes to look into something,
particularly at the DOD, and I want to urge you to move this
along because we are spending way too much money because you
have signed these sole-source contracts, and other companies
could be providing the parts a lot less expensively if you were
to get that intellectual property. It is an issue I am very,
very familiar with.
I have another question for you. The DOD Inspector General
report states that the Defense Logistics Agency is working on
an issue to help ensure that DOD receives fair and reasonable
prices on spare parts, including an initiative to reverse
engineer parts. What advantages does the DOD gain when it
reverse engineers a part, and does this increase competition?
Mr. Tenaglia. Yes, Congresswoman, absolutely. That is the
objective, to increase competition by having the government own
the technical data package associated with that so we can put
it out for competitive bid. There is a limited opportunity for
us to do that. Our engineers will assess products that are
candidates for reverse engineering and take a look and see what
the potential return on investment might be. But each one of
those engineering analyses are backed up with an understanding
of how much risk it might be to source that to an alternative
supplier. There is a limited capacity for us to do that. We
certainly are taking opportunities to do that. I can give you
all the details about the TransDigm products, but it is a
larger issue for the DLA, the initiative to use companies to
help us create those technical data packages so that we can
compete the manufactured product.
Ms. Foxx. I have a question for Ms. Hull. The DOD Inspector
General report notes that DOD policies do not compel
contractors to provide uncertified cost data for contracts
below the TINA threshold when requested and encourages the
Department to explore alternative contracting strategies when
negotiating with a company that sells sole-source parts in
small quantities of low dollar values. Could you explain what
alternative contracting strategies DOD could utilize to better
determine fair and reasonable prices?
Ms. Hull. Yes. One of the alternative contracting
strategies that we highlighted in the report was the use of the
DPC in coordination with DLA to look at the buys that DOD
purchases on the TransDigm contracts. In fact, according to
TransDigm officials, DOD buys fewer than 25 spare parts per
contract on 60 percent of the TransDigm spare parts sold to the
DOD. So, there is an opportunity there to combine the purchases
of the parts to potentially get savings for the DOD.
Ms. Foxx. And I want to agree with what the ranking member
said at the beginning. I don't think we should be picking on
any one company, particularly an American-owned company, here.
I think what we need to do is have the DOD be much more open
and transparent on the way it does business and, again, save
the American people a lot of money. I have one more question
for Ms.----
Chairwoman Maloney. Excuse me. The gentlelady's time has
expired.
Ms. Foxx. Thank you. Madam Chair, I can't find the clock
here, so thank you very much. I apologize.
Chairwoman Maloney. All right. OK. Thank you. Thank you for
your questions, but it is hard for the DOD to be transparent if
they cannot get the information from the contractor, which is
what my legislation will do, so I ask you to take a serious
look at it. It will have more transparency and, therefore,
result in lower prices going forward, so please take a serious
look at it.
And I now call on the gentlelady from the District of
Columbia. Ms. Norton, you are now recognized. Eleanor Holmes
Norton.
Ms. Norton. Thank you, Madam Chair, and I appreciate this
important hearing.
Ms. Hull, when the former chairman, Elijah Cummings,
requested that the DOD inspector general conduct an audit of
TransDigm's contracts, Senator Chuck Grassley and, and he has
been referred to by the chair, joined the request and asked
that your audit include a review of TransDigm's business model.
The resulting IG order described TransDigm's acquisition
strategy as, and here I am quoting, ``focused on obtaining
businesses that design and manufacture sole-source aerospace
components.'' Your report also noted that these businesses
often sell spare parts to the government for older aircrafts.
Now, that means that the companies TransDigm acquire are often
the only place for DOD to go to buy a spare part needed for an
aircraft. Is that correct?
Ms. Hull. Yes. TransDigm's business model focuses on
acquiring business units that specialize in highly engineered
sole-source spare parts, so that creates a situation in which
DOD has one person they can go to for that part, in this case,
the TransDigm operating unit.
Ms. Norton. Thank you very much, Ms. Hull. Now, this
question is for Mr. Tenaglia. You mentioned in your written
testimony that one method that DOD is using to address concerns
related to sole-source items is to encourage contracting
officers to escalate to leadership instances whereby they are
unable to obtain cost data. How often do contracting officers
escalate problems with obtaining cost data from sole-source
contracts, and are these escalations ultimately successful?
Mr. Tenaglia. Thank you for the question. The escalation
process that we have established is designed really to put
senior leadership attention on the matter, whether it is on the
government side here in the Department of Defense, and also on
the corporate side, so the open channels of communication we
have established with the TransDigm corporate leadership
through the working group that I described. We would like it to
not get to that point. Ideally, at the working level, our
contracting officers can deal with officials in TransDigm or
any other company without needing to elevate the matter to a
higher level, and what we are talking about is a request for
information. The information is not always a request for cost
information. It could be a request for other supporting
documentation so the contracting officer can establish a fair
and reasonable price. And so----
Ms. Norton. Can you say how often this escalation to
leadership occurs and whether it is successful?
Mr. Tenaglia. It is successful in some cases. How often?
So, we have had two reports to the Congress. In the first
report to the Congress summarizing the number of instances of
elevation last year was 83. This year it went significantly up.
We just submitted that report to the Congress last week. I will
be happy to provide that to the committee through the
appropriate channels. The success of actually resolving the
matter is really dependent on individual leaders on both sides,
primarily with the company, if we can convince them that we
need the information. But we would rather not let it get to the
point of elevating to senior levels because we are talking
about the heads of contracting activities for the major
components of the Department, Defense Logistics Agency, and the
military departments. We really need the contracting officers
who are empowered and warranted to do their job to get the
information they need from companies, not just this company,
but any company that we are negotiating with.
Ms. Norton. Mr. Howley, just in a sample of 107 spare parts
included in your audit, TransDigm was the sole-source
manufacturer for 94 out of 107 of those parts. Isn't that
correct?
Mr. Howley. I am sorry if you are asking me. I am not sure
who you are asking. Yes, that is true. We believe, however,
that 100 percent of the parts are actually commercial and that
we offered a discount to the commercial price of 25 percent on
this entire audited basket of contracts, a 25-percent discount
to the available commercial price. This is not gouging. It
simply is not.
Chairwoman Maloney. The gentleman's time and the
gentlelady's time has expired.
The gentleman from Georgia, Mr. Hice, is now recognized for
five minutes. Mr. Hice.
Mr. Hice. Thank you, Madam Chair. I recall during the
hearing on this same topic in 2019 that then I expressed my
concern regarding TransDigm's business practices. It appeared
clear that the American taxpayers were getting ripped off and
that TransDigm should pay back the money. But here we are again
going over the exact same situation. Committee Democrats here
today are holding this hearing presumably to present themselves
as being tough on things like waste, fraud, and abuse, but I
find that extremely difficult for anyone with a reasonable
mindset to buy into and to believe.
I mean, here today, Democrats are going to hold up
TransDigm as though they were some sort of trophy to be
exhibited on the wall when literally trillions--trillions--of
dollars have gone out the door from the Biden Administration,
much of it for dubious so-called COVID relief measures just by
itself. For example, unemployment insurance fraud by itself
could run into hundreds of billions of dollars. What is this
committee doing about it, to address those kinds of concerns?
And yet here we are. The Democrats are bringing this company
back as an encore, if you will, for practices that, yes, might
be unsavory, but certainly not illegal.
And even if the definition itself of ``excessive profits''
has pretty much has been made up by the inspector general, it
is not a matter of regulation, nor is it a matter of statute.
This committee has jurisdiction over hundreds of billions of
dollars in spending for state, local, and tribal governments
through the inflation creation act, that bill which others
maybe refer to as the American Rescue Plan. But what has this
committee done to look at where that money was spent? Does this
committee have any idea what those moneys were spent on and
what impact it did or did not have? So, if there is a problem
here today, quite frankly, my opinion is that the problem is
with the DOD's failure to do a better job forecasting its needs
and administering its contracts. These underlying acquisition
regulations leave DOD exposed for the kinds of tactics we are
here today yet again talking about.
So, with that, Mr. Tenaglia, let me throw one out to you.
In the last 18 months, since the last hearing on this same
subject, what has DOD done differently to protect the interest
of the taxpayers?
Mr. Tenaglia. Thank you, Congressman. So, since the last
hearing, we have taken a number of steps to work with this
particular company to refine the process we have with our
contracting officers to empower them to request information, to
encourage them to request information, not just cost
information, but the information that they need. And so there
is a training aspect to that. We have a cadre of pricing
experts that we have formed across the various components of
the Department making sure that they understand this issue. And
I would say that this issue presents itself, again, not just
with this company, but across the board where we are to go for
commercial items, and all the dollars we are talking about
today flow through prime contracts.
My office has purview over looking at the largest
negotiations the Department has in the sole-source arena, and
in doing so, we focus very intently on the dollars that flow
through the subcontracts. And so that is an area of emphasis,
again, empowering our contracting officers to know what
information they should be requesting. We are really about
trying to get the best deal for the taxpayer.
Mr. Hice. So, let me ask you this then. Has the DOD
actually improved its ability to forecast its own needs and to
avoid these one-off or small-item purchases like we are talking
about today?
Mr. Tenaglia. So, I have had those discussions with the
Defense Logistics Agency, and we accept the IG's recommendation
for alternative pricing strategies that do include some of the
aggregation techniques that the ranking member mentioned. We
will be looking at that. It is balanced, however, with the
carrying cost of inventory for the parts at DLA, as for many of
these parts, they respond to the demand signal of the
warfighter who presents the requirements, and DLA is the
supplier of those products for the rest of the Department. But
there is potential for aggregated buys, and we will look at
that as an alternative.
Mr. Hice. So, it is all----
Chairwoman Maloney. The gentleman's time has expired, and I
would like to respond to Mr. Hice. Today we are examining
overcharging by a defense contractor. It is true we looked at
them in 2019, but they have continued to overcharge millions of
dollars, and we are trying to stop it. And this overcharging
has cost taxpayers millions, so if my colleagues care about
waste, fraud, and abuse, you should care about this hearing,
and I hope you will take a serious look and help us with the
passage of legislation that will stop it.
I now recognize the gentleman from Virginia, Mr. Connolly.
Mr. Connolly, you are recognized.
Mr. Hice. Millions in waste is being ignored, Madam Chair.
Mr. Connolly. Thank you, Madam Chairwoman, and I do find it
amazing that my friends on the other side of the aisle all of a
sudden become apologists for price gouging and, by anyone's
standards, excessive profits, and want to resist the very
oversight they claim they want with respect to this
Administration and the ongoing COVID crisis. So, I commend the
chairwoman for having this hearing and for updating us on what,
if any, progress has been achieved in the interim two years
since we last had an oversight hearing on this matter.
Ms. Hull, at our last hearing and I believe at this one as
well, we talked about cooperation on documentation and the fact
that DOD was somewhat hampered by the fact that documentation
was not provided by the vendor, in this case TransDigm. Is that
still the case that we are not getting documents that have been
requested by the contract office in DOD in order to provide
some kind of analytical framework for determining a fair and
reasonable price?
Ms. Hull. Yes. In our current audit or this past audit, the
contracting officers asked for cost information 26 times and
only received it twice from TransDigm. So, they are still
encountering the similar problems.
Mr. Connolly. Dr. Stein, at our last hearing, I asked you
about this issue, and you kind of danced around it. Why isn't
TransDigm providing the documentation requested by DOD so that
both parties can be happy with what could be mutually arrived
at, at a fair and reasonable price and a fair and reasonable
return on your investment?
Mr. Stein. Congressman Connolly, I appreciate that
question. I feel like I am in a bit of double jeopardy as you
audited, we audited, the IG audited the same time period as the
last audit, and we audited some of the exact same parts. Why
would we expect there to be a different answer? We went back in
time and audited the same parts.
Mr. Connolly. Dr. Stein. Dr. Stein, the question is really
simple. You just heard Theresa Hull say that out of 26
documentation requests, you only complied with two of them. Why
is that? Why not have full transparency and provide the
information and documentation that DOD says it needs to
determine a fair and reasonable price?
Mr. Stein. So, of the 154 contracts that were audited, they
only asked for that on 26 of them, and we thought at the time,
we thought the process, since they are commercial, they have
always been commercial, that you should be able to use
commercial invoices, so we didn't see the point of giving our
critical information up. Now, since the audit----
Mr. Connolly. No, no. Wait. Wait.
Mr. Stein. OK.
Mr. Connolly. Dr. Stein, unfortunately, this is very time
limited----
Mr. Stein. I know. I understand.
Mr. Connolly. So, you made a conscious decision as a
corporation not to comply with a documentation information
request from DOD with respect to these pending contracts.
Mr. Stein. We did provide commercial qualification packages
on all of the parts, so everything is commercial. Everything
has now been given to the IG. At the time of contracting----
Mr. Connolly. So again, let me just interpret what I am
hearing you say. So, you are taking direct issue with Theresa
Hull and her assertion that you only complied with two of the
26 requests. You are arguing, well, actually that is
technically true, but more broadly, we did comply by allowing
that commercial information to be available to you.
Mr. Stein. That is correct. That is correct.
Mr. Connolly. All right. Theresa Hull, this 15-percent
threshold, I think, too many people seems very arbitrary. So,
you looked at profit margins in the range of 8 to 22 percent,
and you somewhat arbitrarily said 15 is the happy medium for
the purpose of our examining not only cost structure, but
profit that is extracted from that cost structure. Is that
correct?
Ms. Hull. Yes, but the 15 percent, you know, we were asked
by the committee to look at the specific date ranges for
specific thresholds, and we included all of the spare parts
included in that time period.
Mr. Connolly. All right. I get that, but I am trying to
just look at how we arrived at 15 because I do think that--I am
sorry?
Ms. Hull. The 15 percent, we looked at the cost information
that TransDigm provided, and in order to determine a fair and
reasonable price, we had to compare it to a benchmark. The 15
percent is not arbitrary. It is within the range of the
aerospace companies that practice market-based pricing, which
is between 8 and 22 percent. Also, I would like to note that we
have over 20 years of spare parts pricing reports that used
benchmarks in the range of 13.3 to 18 percent, so that 15
percent falls within that range as well.
Chairwoman Maloney. Thank you. The gentleman's time has
expired.
The gentleman from Wisconsin, Mr. Grothman, is recognized.
Mr. Grothman. Here we are. That was kind of exciting in the
background there. Mr. Tenaglia, we are going to ask you a
couple questions here. Understanding that procurement in the
sole-source environment is difficult and can lead to
exploitation, have you or anyone else made efforts to instruct
contracting officers to actively look for parts that could meet
the requirements that are similar to those produced by sole-
source providers?
Mr. Tenaglia. Yes, Congressman. That part of the market
research is undertaken across the Department for commercial
items. In this particular instance, we are talking about
national stock items that the Defense Logistics Agency is
responding to with the requirements of the military
departments. Most of those parts are specified whether there is
an alternate source or alternate part. That is part of the
calculus, but in most cases, there is one particular part and,
in many of these cases, one particular manufacturer for the
parts that are available. That is a function of the dynamics of
the market where only one provider is making that particular
item, and if that is the case, then we are into the scenario
that we are talking about today: negotiating on a sole-source
basis.
Mr. Grothman. Are there any efforts to increase competition
in the spare parts space? Can you think of anything we can do?
Mr. Tenaglia. While reverse engineering is a good example,
I want to downplay the extent to which we can use that across
the board for every part. We really can't. Each one of those
requires the engineering analysis behind it. But ultimately,
what we do there is we have the technical data package that we
can compete the spare parts once we go through that process.
Mr. Grothman. When procuring an original system, do you
consider if any of the parts are sole sourced? Is that a
factor?
Mr. Tenaglia. We certainly do. At the very beginning of any
weapon system life cycle, we generally do enjoy competition.
Once you get into the sustainment environment, as was described
earlier in this hearing, competition is more challenging
because companies that have developed these products at the
outset have that intellectual property, and then it is up to
the Department to either identify alternate sources or reverse
engineer in the examples that we have talked about.
Mr. Grothman. OK. Mr. Howley and Mr. Stein, I will ask you
a question. Would you say that much of your business with the
government is in the aftermarket sustainment space?
Mr. Stein. Six percent of our business today is directly to
the government.
Mr. Grothman. OK. When bidding with an original equipment
manufacturer for the original system procurement, do you
analyze the potential for aftermarket contracts?
Mr. Stein. We don't. We look at can we develop and design a
part that makes sense. Can we meet the design criteria that the
OEM is requiring, and then it is a competitive process? There
are many companies involved in bidding. Only one is down
selected, and that is a decision made by the OEM, not by us.
And that is the nature of these highly engineered, extremely
low-volume parts that you end up selling to the DOD.
Mr. Grothman. Is it encouraged that your subsidiaries find
contracts that will have larger aftermarket potential?
Mr. Stein. Well, you know, aftermarket is an important part
of our business. We want highly engineered products, and many
of those happen to have aftermarket content, so it is not that
we are exclusively looking for those. What we don't want are
commodities. We want to invest in engineering, new product
development. That is what we get excited about, and that is
part of our business model.
Mr. Grothman. OK. Can you explain the difference between a
proprietary part and one for which you are the sole source?
Mr. Stein. Well, a proprietary part simply means that you
developed it, so here, let me show you examples. Here I have in
front of, me and hopefully you can see them, I have a Boeing
737 actuator and a B-1 bomber actuator. They are the same. You
can't tell the difference in them. The fact that we developed
the 737 actuator on our own dime and can transfer that
development and technology to the B-1 bomber, and we sell this
at a lower price, we give the government a discount to what we
charge every other airline in the world, and I have lots of
examples. These are pitot tubes. Pitot tubes are what measure
air speed. This is a military. This is a commercial. They are
identical. There is no difference in those.
This is what we provide, and we show there is a commercial
part and we are selling you this commercial part in whatever
package you want it, and we are giving it to you at a discount.
There is no gouging or overcharge.
Chairwoman Maloney. The gentleman's time has expired. The
gentleman's time has expired.
The gentleman from Maryland, Mr. Raskin, is now recognized.
[No response.]
Chairwoman Maloney. You need to unmute.
Mr. Raskin. Thank you very much, Madam Chair, for calling
this important hearing, and I just would want to begin by
framing this in the historical context. I mean, defense
contractor fraud, military fraud goes back to the 19th century.
Abraham Lincoln complained about it, which is why we have the
qui tam process, but billions and billions of dollars have been
ripped off from American taxpayers as established in thousands
of criminal cases as well as civil cases reclaiming money for
the taxpayers.
Ms. Hull, I want to give you the chance to respond to some
of the statements that TransDigm made about the IG report. Mr.
Stein said that the IG audit has fundamental legal and
accounting errors, and even the DOD IG doesn't support the
standard that was used for TransDigm's audit. How would you
respond to those statements?
Ms. Hull. Thank you for the question and the opportunity to
respond to the statements made about our report. TransDigm took
a lot of those statements out of context. In fact, we performed
this audit under generally accepted government auditing
principles, which we followed robustly. And, you know, in our
report we distinguish in our scope and methodology section
exactly what we did, exactly what we looked at. So, for this
audit, we applied a 15-percent profit rate based on what we
looked at with the cost data I mentioned earlier. It falls
within the range of the 13.33 and 18 percent benchmark we have
used on over 20 years of auditing the spare parts environment.
Also, as far as----
Mr. Raskin. Let me stop you there for a second. I mean,
that is really nitpicking when we are talking about 1,000-
percent profit margin in some cases that was made by the
contractor here. So, whether you call it 15, 20, or 25 percent,
I mean, we are looking at ludicrous hyper-billing of the
government, right?
Ms. Hull. Correct. The environment that the Department of
Defense has to negotiate in right now with TransDigm is very
cumbersome. Because they are a sole source, they have created
this sole-source environment, and in a sole-source environment,
there aren't competitive market forces. There aren't other
alternatives. And Mr. Stein mentioned commercial packages that
his company provided to our audit team. I would like to note
that in those packages, we did not see like quantities for
comparison which would have been a fundamental, you know,
consideration for analysis. And also, fundamentally, a
contracting officer determines the commerciality, not an audit
team and not a government contractor. So, in this case----
[Audio malfunction.]
Mr. Stein. Uh-oh.
Mr. Raskin. Well, Madam Chair, I will complete my
questioning of her afterwards. Let me go to Mr. Howley. Do you
agree with the IG's finding that TransDigm did refuse to
provide the cost data in 24 cases when it was requested by the
contracting officers?
Mr. Howley. I don't know the specific answer on those 24
parts. What I will say is that almost every one of these parts
is a commercial part. The preferred way of doing price analysis
here in the FAR is it gives a preferred way of doing it, and
the preferred way is to compare it to price data, comparable
commercial price data. We submitted the commercial price data
and the commercial justification for every product. And, in
total, the government is buying at a 25-percent discount to the
commercial price, not the commercial price on some price list,
but the commercial price that commercial customers are paying.
And that is the preferred method of doing this as defined in
the regulation, not cost analysis.
Mr. Raskin. Why would you not provide the cost data in
those 24 cases which ended up being exorbitantly overpriced?
Why?
Mr. Howley. I will repeat the same thing. The regulations
that govern this have a specific methodology by which you
determine reasonableness of price, and commercial pricing is
a----
Mr. Raskin. OK. OK.
Mr. Howley [continuing]. Is a preferred method.
Mr. Raskin. I got you. I got you. So, I mean, essentially--
--
Mr. Howley. I would also add----
Mr. Raskin. Well, the----
Mr. Howley [continuing]. I would also add another----
Mr. Raskin. Forgive me. I will give you a chance in a
minute if I have got it. But the point I want to make here is
the point some of my colleagues have made which is, well, this
is perfectly legal. When they asked you that question, you were
under no obligation to answer. So, the question is really the
one being posed by the chair: do we need to change that rule
for contracts under $2 million because it looks like a gaping
loophole where the contracting officers can try to determine
what the cost is. The contractors have no reason to comply with
that. They don't, and, of course, the taxpayers get ripped off
because of it. I mean, there is that one email saying that
turning over the information would make a $40-to $50-million
ballpark difference in terms of the profitability of the
contract.
So, you know, you guys are operating within the rules as
they are written, and I think that that should be an incentive
for us to change those rules because it is a rip off of the
taxpayers. I yield.
Chairwoman Maloney. Thank you, Mr. Raskin. Your time has
expired.
The gentleman from Texas, Mr. Cloud, is now recognized.
Mr. Cloud. Thank you, Madam Chair. This, of course, is an
important topic. I do find it odd that the same people who have
advocated for trillions in wasteful spending over the last year
are suddenly fiscal hawks when it comes to this.
This is an important topic, especially, of course, as we
are facing new challenges. We need to realize that efficiency
has to be a competitive edge for our DOD and a patriotic duty
for the companies that we are contracting with of course. My
only question in this hearing is why we are only looking at one
company and why we are only talking about $15 to $20 million
when we have trillion-dollar contracts that remain backlogged,
wasting billions of dollars. We saw Biden leave $85 billion in
military hardware to a terrorist organization, and today we are
talking about $15 to $20 million, which is important, but I
think it is more of a systemic larger issue when we should be
looking at all the issues when it comes to military contracting
where that is really wasting billions, not millions. But today
we are talking about $15 to $20 million.
So, Mr. Tenaglia, can you talk about just-in-time
inventory, sole-source contracting? They place DOD in a
position of paying more for spare parts and decreasing
readiness. These are longstanding issues. Never been fully
addressed. What can DOD do to reform the acquisition process?
Mr. Tenaglia. Thank you, Congressman. So, as I mentioned
earlier, part of the calculus in deciding how many of these
parts we can buy at any one time is the carrying cost, the
inventory cost for DLA to hold that. There is the fiscal
pressure to purchase the items that are needed instantaneously,
and the warfighter expects DLA to respond and having those on
stock. And so that has driven the need to purchase some of the
smaller quantities that we have talked about. For the sole-
source scenario, I wanted to come back to Mr. Stein's
description of the two parts, and certainly I agree where the
part is exactly the same as that as sold in the commercial
marketplace, then we have confidence that the fairness of the
price that, let's say, the airline paid for that exact same
part would be a fair price.
Where we run into difficulties is when we look at these
items that are not the same. They are somewhat comparable, but
they are more what we call commercial of a type, meaning you
can't go out and see that exact same product and understand
what the price of it is when it is subjected to competitive
market forces.
Mr. Grothman. Ultimately, this has been a longstanding
question, but how do we build in incentive within the DOD for
bargaining? You know, when you are a contractor and you are
negotiating these deals, it seems to me like there is not much
incentive to push for the lower price for the American people.
You know, businesses are trying to operate in a competitive
environment. We would like them each, of course, to keep in
mind the overall patriotic goal of what we are trying to
produce efficiently, but they are also competing against other
companies in that space. How can we better incentivize the DOD
contractors to negotiate better in this? I would like to just
expand this conversation into contracting because it seems like
we constantly put in contracts that never get fulfilled on time
or on budget, and we continue to pay them anyway. That is where
the billions are being wasted as opposed to what we are talking
about today, but if you could address that.
Mr. Tenaglia. I think competition is the key. We have our
men and women who wear the uniform of this country enjoying the
weapon systems, and that they really need to have the decisive
advantage in any adversary conflict. And so I am proud of the
fact that our defense acquisition work force brings and deliver
those capabilities to the warfighter. So, there is a lot of
cause to look at the positive side of that. If you look at the
weapon systems that have been deployed for this Nation, many of
those originated through competition and, I think, coming back
to that. So, the extent to which we are effective in competing
these requirements will be better off for the taxpayers.
Mr. Grothman. Thank you, Chairwoman. I yield back. Thank
you.
Chairwoman Maloney. The gentleman yields back.
The gentleman from California, Mr. Ro Khanna, is recognized
for five minutes. Mr. Ro Khanna.
Mr. Khanna. Thank you, Madam Chair. Thank you for your
leadership. I will remind this committee that we had a
bipartisan hearing in 2019, and there were calls on both the
Democratic and Republican side to have TransDigm reimburse the
Federal Government $16.1 million. They did the right thing
then. They must reimburse the government at least $20.8
million, excess profit finding.
Let me start with Ms. Hull. Do you agree that that is the
least TransDigm can do in reimbursing the government for that?
Ms. Hull. Thank you. Thank you for the question. I stand by
our report that the $20.8 million that TransDigm earned, excess
profits on the 105 spare parts, should be refunded to the
government.
Mr. Khanna. I mean, it would be unconscionable, in my view,
for them not to do that given that they admitted their error
last time. I hope they will. Let me ask you, Inspector General
Glenn Fine said when he was before us in 2019, ``We ought to
look to the legislative structure to require companies to
provide cost information when asked by contracting officers.''
Basically, if the DOD wants to buy something and asks the
company for the cost, they should be required to do so. Do you
agree, Ms. Hull, that companies like TransDigm should be
required to provide uncertified cost data when the contracting
officer deems it necessary?
Ms. Hull. Yes. I agree that when a contracting officer is
unable to determine a fair and reasonable price and asks a
contractor, especially in a sole-source environment, they
should obtain the data that they request.
Mr. Khanna. Mr. Tenaglia, if contracting officers could
require contractors like TransDigm to provide uncertified cost
data, would that empower our government or the Pentagon to make
better buying decisions?
Mr. Tenaglia. Yes, I believe it would, and central to that
is the judgment that our contracting officers exercise in
getting to the point where they have decided that that is
necessary to establish fair and reasonable pricing using the
hierarchy of other means that have established that price.
Mr. Khanna. Thank you. Madam Chair, I ask for unanimous
consent to place in the record the written testimony from Mandy
Smithberger, director of the Project of Government Oversight.
Chairwoman Maloney. Without objection.
Mr. Khanna. She wrote, ``It is time for Congress to stop
enabling contractor overpricing.'' The problems identified by
this watchdog report and other reports are only the tip of the
iceberg, but the solutions are clear. They can only be fixed if
Congress gets serious and takes action. Madam Chair, you have
gotten serious. You are taking action with the bill, The Fair
Pricing with Cost Transparency Act that would require
contractors to provide uncertified cost information. I am
joining you in supporting that. I hope everyone on the
committee will. Mr. Tenaglia, this bill is based on the
legislative proposal from the DOD, so I assume you would
support changing the law for DOD contractors. Is that right?
Mr. Tenaglia. Yes, Congressman. I look forward to working
with your committee and understanding how that legislation
would help us.
Mr. Khanna. Mr. Howley, the last time you came before the
committee, you denied, you obfuscated, et cetera. I said you
are going to end up paying the $16.1 million. You disagreed.
You went back. People told you pay the $16.1 million. You want
to skip those steps and just tell us today that you are going
to pay the $20.8 million?
[No response.]
Voice. Nick?
Mr. Howley. I apologize. I apologize. I have to unmute. I
think I am unmuted now. Let me start by saying we are primarily
a commercial company. The Department of Defense, though, is a
not our largest customer by a fair amount, but they are an
important customer.
Mr. Khanna. Mr. Howley, no.
Mr. Howley. The last thing we want----
Mr. Khanna. I don't want to be disrespectful. It is a
simple question. Are you going to pay it or are you not going
to pay it? You know, it is a simple ``yes'' or ``no.''
Mr. Howley. You asked the question and I will attempt to
answer it. The last thing we want, we do not like an unhappy,
antagonized customer. What we want to do is we want to get to
the bottom of the facts so that everyone understands the facts
clearly, at which point we can see what kind of resolution we
can have here. We cannot go forward with an assertion----
Mr. Khanna. Well, I will take that as ``yes.'' I will take
that as a ``yes.''
Mr. Howley. You can take it as a----
Mr. Khanna. My time has expired.
Mr. Howley. You can take that incorrectly as a ``yes.'' We
cannot go forward without the facts being clearly stated and
clearly understood.
Mr. Sessions. Madam Chairman?
Mr. Khanna. That is unfortunate. I thought you were going
to do it. My prediction is you will do it. It would be better
for you to just say here you are going to do it.
Mr. Sessions. Madam Chairwoman, point of parliamentary
inquiry.
Chairwoman Maloney. The gentleman's time has expired. And
what is your point, Mr. Sessions?
Mr. Sessions. My point would be, is this a negotiation with
the company or a hearing?
Voice. No, that is not a parliamentary inquiry.
Chairwoman Maloney. That is not a parliamentary inquiry.
I now recognize from Ohio, Mr. Gibbs. You are now
recognized.
Mr. Gibbs. Thank you, Madam Chair. To Ms. Hull, just to be
clear, you found that TransDigm did not violate any law or
policy in your audit, correct? It is a ``yes'' or ``no.''
Ms. Hull. Yes, we did not determine they did anything
illegally.
Mr. Gibbs. OK. And that the government, you found that
these prices were fair and reasonable and yet they entered into
the contracts? I guess my thought here is these are firm-fixed-
price contracts, and it sounds like we are negotiating the
contract after the contract has been fulfilled. What kind of
negotiation happens before the contract is signed by both
parties? So, I guess for the first question, I will go to Dr.
Stein. Has anybody at TransDigm ever walked away from a
negotiation or contract or has the Department of Defense walked
away? You know, what has happened here because it sounds like
we are negotiating after the fact.
Mr. Stein. I am not aware of any anything that anyone has
walked away on. What I will say is that since the last audit
and the last hearing, we have implemented quite a bit of
changes ourselves in how we interact with the DOD. We now offer
volume discounts on all spare parts pricing to try and get
around this. We have voluntarily provided cost data. We are
providing more information than we ever have before. None of
that was captured in this audit because, again, this audit, it
is like double jeopardy. They are auditing the same timeframe
again. What we know is that we offered a discount to
commercial, and we do not agree with the artificial, arbitrary
profit limits.
Mr. Gibbs. I think, too, Dr. Stein, and you can respond to
this, it seems to me if I was a manufacturer, and, of course,
94 percent of my business was the commercial market, only six
percent to the DOD, and I have got my manufacturing lines
going, and all of a sudden they want a contract for a specialty
single-source item or a special item, a specific item, and then
you have to shut down some of your operation to make that, you
know, it is difficult to figure the cost because you have got
lost revenues from the production where you shut down. Is that
correct?
Mr. Stein. That is correct. Often what happens is that we
see orders, and then a couple days later even you might get
another order with no forecast, no notification of what is
happening. You could clearly have manufactured differently if
the DOD was buying in some reasonable lot quantity. Many of the
parts, including in this audit, 61 of the 107 spare parts
evaluated do not have enough procurement history data to even
perform an analysis. So, if you are not buying something but
once every 5, 10 years, can you imagine what you have to go
through from an engineering point of view to figure out how to
make that part again so that it passes all the criteria that
the warfighter deserves to keep them alive? It is nonsense
almost.
Mr. Gibbs. Well, if these were cost-plus contracts, I can
understand having negotiations over what your costs are. But
since they are not--it is a contract that you agreed on before
you even started making the product--both sides have to honor
their contract, which you did, and so now to come back after
the fact, it seems to be a problem. I don't quite understand
how that works, and then I think it is very difficult to put in
what your true cost might be when you had to----
Mr. Stein. That is true, and often we see inflationary
pressures that are out of control. For a product we make in our
South Carolina facility, a gen engine igniter, a critical raw
material over a three-month period went up over 300 percent. If
we had agreed to that contract beforehand, we have no ability
to get more money back out of the DOD because of that. We take
it on risk.
Mr. Gibbs. So, on this 15 percent, the figure that the IG
put in for profit margin, is that applied to all similar
companies for these types of fixed-price contracts?
Mr. Stein. Not that we are aware of, no. We believe we are
the only company being targeted in this way.
Mr. Gibbs. OK. So yes, I just think there are huge issues
here, how you calculate your costs, and if you both agree on
it, that is an issue. You just move on forward, and you could
walk away from this business if you wanted to, right, and they
have to find the part somewhere else. We talk about single
source. That is kind of, you know----
Mr. Stein. It is strange in this because if TransDigm
disappeared, the planes would keep flying. They would find
another source.
Mr. Gibbs. OK. Well, my time is up, but thank you for what
you do for making the country safe.
Mr. Stein. Thank you.
Mr. Gibbs. Thank you.
Chairwoman Maloney. Thank you. The gentlewoman from
Florida, Ms. Wasserman Schultz, is now recognized.
Ms. Wasserman Schultz. Thank you, Madam Chair. Madam Chair,
I serve as Chair of the Military Construction, Veterans
Affairs, and Related Agencies Appropriations Committee, and our
committee is committed to protecting our service members and
improving their quality of life. We have pushed to improve
atrocious housing standards, build childcare development
centers, and address PFAS contamination. While we have made
great strides in these areas, there is much more that must be
done to meet our obligations to care for not only those who
wear the uniform, but also for their families. The challenges
our troops face already make it all the more reprehensible that
TransDigm would choose to fleece the American taxpayer and
overcharge the Department of Defense for critical products.
TransDigm supplies DOD with spare parts for Black Hawk
helicopters, F-16s, and F-35s. Our military is using those
planes and helicopters in operations all over the world, and
the spare parts that TransDigm supplies are critical to keeping
those planes and helicopters flying safely. In an email that I
have here obtained by the committee, a sales director of
AeroControlex, a TransDigm subsidiary, emphasized several
talking points for employees to use when responding to DOD
requests for cost and price data. The email says that when
communicating with contracting officers, employees should be
clear that the company is ``offering this as a solution to
support the warfighter'' and that you ``welcome all
opportunities to support the government to economically procure
goods to support the troops.''
Mr. Stein, the IG found that TransDigm's excess profits
were more than 500 percent for dozens of spare parts sold to
DOD. Do you actually consider charging DOD prices that give
TransDigm a profit of more than 500 percent to be economical
for the government?
Mr. Stein. You know, when we look at these contracts, we
lost money on nine of the contracts audited by the IG. You are
cherry picking a single part here or there that has extremely
low volume on it. Some of these parts were only----
Ms. Wasserman Schultz. No, no, no, no. Reclaiming my time.
I am sorry.
Mr. Stein [continuing]. Part at a time, and, therefore,
this is not----
Ms. Wasserman Schultz. I am sorry. Madam Chair, reclaiming
my time. There is no reasonable benchmark that would justify
the profits TransDigm obtained. You don't get to charge 500
percent more for parts on one part of the contract because you
lost money on another part. There were more than a dozen
instances where your profits were more than 500 percent.
Mr. Stein. Well, we----
Ms. Wasserman Schultz. That is just outrageous and
unconscionable.
Mr. Stein. We object to the calculation of 500-percent
profit. It is not an SEC calculation that is being----
Ms. Wasserman Schultz. Reclaiming my time. Reclaiming my
time. It is very clear the IG was correct that that was the
percentage of profit, and that is an outrage. Ms. Hull, the
IG's review is limited to a small sample of approximately three
percent of TransDigm's contracts, yet still identified $20.8
million in excess profit. Wouldn't you agree that in all
likelihood, the total amount of excess profit could be tens of
millions more?
Ms. Hull. Thank you for the question, and we looked at the
specific dollar value thresholds and the time period that was
requested by the committee, and we found, again, that TransDigm
earned an excess profit of at least $20.8 million. There were
other contracts that we did not include in this review, so it
is possible that that number could be greater than $20.8
million.
Ms. Wasserman Schultz. OK. Thank you. Now, let me close,
Madam Chair, with a statement from a former director of
TransDigm subsidiary. They told the committee that when
TransDigm acquired their company, ``It was disheartening since
I had tried to do the right thing for the warfighter my whole
career.'' Mr. Stein and Mr. Howley, I believe it is morally
wrong for TransDigm to take advantage of our military in a time
of need or any time, and I expect you to repay the $20.8
dollars. To me, you should be barred from future contracts for
this greed and deception, and if you really cared about the
troops, you would provide full cost data to the military when
requested, not talking points to try to obfuscate what your
true cost is. It is imperative that they know when you are
trying to rip them off.
Thank you, Madam Chair. I yield back the balance of my
time.
Chairwoman Maloney. Yes, I thank the gentlelady for her
questioning, and I would just like to clarify with Mr. Stein,
building on her question. The Inspector General selected
contracts awarded from 2017 through 2019 within a certain
dollar amount. And I would be very happy to request a review of
all of TransDigm's contracts if that is what you are
requesting. So, I am going to ask you, are you requesting that?
Would you like all TransDigm's contracts to be reviewed for
excess profits with the government? ``Yes'' or ``no.''
Mr. Stein. Of course not.
Chairwoman Maloney. OK.
Mr. Stein. We have made incredible progress----
Chairwoman Maloney. Reclaiming my time.
Mr. Stein [continuing]. Working with the DOD.
Chairwoman Maloney. Reclaiming my time. Reclaiming my time.
The gentleman from South Carolina, Mr. Norman, is
recognized for five minutes.
Mr. Norman. Thank you. Thank you, Mrs. Maloney. I
appreciate you holding this hearing. I still find this
astounding that we are going after a company that has employed
Americans, it pays American taxes. We are taking time that we
could be devoting to, I think as Mr. Hice said, trillions of
dollars that have been wasted by this Administration. Where is
the hearing on the $80 billion that was left in Afghanistan?
Where is a hearing on the $420,000 per illegal that was
proposed? Where is a hearing on having those testify that
looted and destroyed over 500 of our nice cities? Where is the
hearing on the Medicaid and Medicare fraud and abuse? It is not
here. We are picking on an American company that, again,
employs Americans, pays American taxes.
And let me try to understand, Ms. Hull, your decision to
exclude taxes and interest from your cost calculations. Can you
explain why that was made?
Ms. Hull. When we received the cost data from TransDigm,
FAR 31 applied, and within that specific section of the FAR, it
talks to excluding interest and taxes when cost information is
being used. So, that is why we removed those costs from our
calculations.
Mr. Norman. Was this made for similar companies providing
materials that you went over and got information from?
Ms. Hull. Well, for this particular situation, we are
talking about TransDigm, but we do have other reports in which
we have looked at cost information and had to make similar
decisions based on information provided.
Mr. Norman. OK. And you are aware that TransDigm does not
have to provide this. It is only six percent of their income.
Do you blame them for being a sole provider?
Ms. Hull. In our report, we highlight the risk to the
government when they negotiate in sole-source environments. So,
TransDigm being a sole-source company and there being no other
competitive forces at play are really the issue here for why
the Department of Defense is unable to get better pricing. And
when the environment is completely sole source for the parts
that we looked at, there really isn't a lot of options for the
government. So yes, you are correct that TransDigm did not have
to provide us the cost information, and they willingly provided
it to the audit team to be able to calculate a fair and
reasonable price.
Mr. Norman. Mr. Tenaglia, can you explain to me again about
the sole source? Have you made any efforts to try and increase
competition? That is certainly not TransDigm's issue, is it?
Mr. Tenaglia. No, Congressman, I don't think that is
necessarily an issue for TransDigm to take up. There are a
significant amount of transactions that we execute with
TransDigm that have been coded as commercial and competitive.
We do have initiatives underway to increase the extent to which
we are able to compete these things. We have talked about some
of those activities, such as the reverse engineering that gives
us the ability to compete the manufacturing of those parts
where we have situations such as these.
Mr. Norman. But that is the government's responsibility.
Mr. Tenaglia. Yes.
Mr. Norman. If you want to go after another company that
makes something that is now made by one company that is your
responsibility.
Mr. Tenaglia. Yes.
Mr. Norman. But here you are, you know, investigating one
company. Again, it still amazes me you are excluding taxes and
interest when anybody that has been in the private sector, you
have to put that in before you price anything, whether it is a
house, whether it is a car, or whatever. The 15 percent, again,
is staggering to me as to why that is that there. Mr. Howley
and Mr. Stein, would you say that much of your business with
the government is in the aftermarket sustainment space?
Mr. Stein. This piece that we are talking about right now,
that is six percent of our direct sales is direct and is these
spare parts.
Mr. Norman. Well, let me just say in closing that, you
know, here we are again, you know, majoring in the minor when
it takes an American company and ignoring everything else this
Administration is doing that is costing taxpayers so much more
than this. You are a private company that, again, is employing
Americans for their livelihood. You are paying taxes that
support our law enforcement, our police, and it looks to me
like that you have done everything you have been asked to do.
So, Madam Chair, I yield back.
Chairwoman Maloney. The gentleman yields back.
The gentlelady from California, Ms. Porter, is now
recognized.
Ms. Porter. Hello. Thank you. Mr. Howley, has TransDigm
ever trained staff to provide ``the minimum amount of
information to the government?''
Mr. Howley. TransDigm regularly trains the staff and brings
in outside consultants and lawyers.
Ms. Porter. Reclaiming my time, Mr. Howley. Reclaiming my
time, sir. I am sure you do all kinds of training. I am asking
a specific question and I am going to repeat it. Has TransDigm
ever trained staff to provide ``the minimum amount of
information to the government?''
Mr. Howley. I don't know the answer to that. What I know is
we regularly train people in all the regulations required to
deal with the government, and we insist they comply with them.
Ms. Porter. OK. You have told people to provide the minimum
amount of information. Have you ever told staff that it is
wrong to charge taxpayers lower unit prices on higher-volume
orders? In other words, we all know when we buy in bulk on
Amazon it is cheaper per unit. Has TransDigm ever told its
employees that it is wrong to charge taxpayers lower per-unit
prices on higher-volume orders?
Mr. Howley. Not that I have knowledge of or recall.
Ms. Porter. OK. Mr. Howley, what I am introducing here is
an exhibit, TDG00034189. It is displayed on the screen so you
can see it. ``More volume equals lower price.'' What does it
stay in big purple all-cap letters? Can you read that for me?
Mr. Howley. The word is ``wrong.''
Ms. Porter. ``Wrong.'' So, would you like to modify your
answer? In light of seeing this exhibit, and I have seen this
exhibit, has TransDigm ever told its staff that it is wrong to
charge taxpayers lower per-unit prices on higher-volume orders?
Mr. Howley. I don't know what that is. I suspect it is out
of context somewhere. I suspect it is something done by one of
our----
Ms. Porter. Mr. Howley----
Mr. Howley [continuing]. One of our operating businesses at
one time. I simply don't know.
Ms. Porter. Well, Mr. Howley, for $68 million a year, you
need to know what is going on in your company. That is your
annual salary in your retirement. In your retirement. Has
TransDigm or its subsidiaries ever refused to provide price
data to the military when it has requested it?
Mr. Howley. I don't know the answer to that whether they
ever have. I do know----
Ms. Porter. Mr. Howley.
Mr. Howley. I do know----
Ms. Porter. Mr. Howley.
Mr. Howley [continuing]. That we regularly provide price
data, and, in fact, provided commercial price data for, I
believe, every part in this audit.
Ms. Porter. Mr. Howley, I just want to remind you that you
are under oath as you are giving this testimony. Do you
recognize these words, ``We didn't have to give up a dime. I am
just full of B.S., and they took the bait?''
Mr. Howley. I don't have knowledge or recall it.
Ms. Porter. OK. That is from a TransDigm exhibit. You don't
need to see it, but that is from an exhibit in this
investigation. That is your salespeople talking about a deal
that they just made with the military for jet engine parts in
2018. ``We don't have to give up a dime.'' Your salesperson
said, ``I am just full of B.S., and they''--being the DOD and
taxpayers--``took the bait.'' Mr. Howley, does TransDigm have a
code of business ethics and conduct?
Mr. Howley. Oh, as any company does. Of course we do. It is
on our website.
Ms. Porter. OK. Does that code require fair dealing?
Mr. Howley. Yes, and it says what it is, but of course it
requires fair dealing.
Ms. Porter. Do you think it is fair dealing to be full of
bullshit and get the taxpayers to take the bait?
Mr. Howley. I don't have a comment on that. I am not
familiar with the situation. I don't know what it is. I don't
know who the person is. I just can't comment on it.
Ms. Porter. Mr. Howley, will you find out who that person
is?
Mr. Howley. I presume you have it. You have an email. I
presume you have who it is. I don't know who it is. I don't----
Ms. Porter. Mr. Howley, as executive chair of the board
being paid $68 million when a typical board member of a Fortune
100 company receives $319,000. Here is the typical board member
of Fortune 100 companies. See this flat line? You can't even
see it. Here is you. For $68 million, you need to enforce your
company's code of business ethics.
Chairwoman Maloney. The gentlelady's time has expired. Ms.
Porter, your time has expired.
The gentleman from Texas, Mr. Sessions, you are now
recognized.
Ms. Sessions. Madam Chairwoman, thank you very much. The
questions that I would like to go down really involve this
conversation that the IG has engaged in about this percentage
of over earning the $20.8 million they are being berated today
to pay back. I thought this was a hearing, not a negotiation,
and I am disappointed that we are going down that track.
So, Mr. Tenaglia--I am sorry--John, how do you pronounce
your last name?
Mr. Tenaglia. ``Ti-NAY-glee-uh.''
Mr. Sessions. Mr. Tenaglia, the number that is used and
that the IG used, the $20.8, does that take into account a net
of working against taxes they would have paid, or is that just
the total amount of money that you see?
Mr. Tenaglia. So, the IG's use of the 15 percent really is
an after-the-fact way of looking at how things played out. The
way we normally negotiate contracts on the front end, we
prospectively price. Let's say it was a non-commercial part and
we had the use of the record of weighted guidelines. That gives
our contracting officers some structured approach to arrive at
an objective profit amount. It is all subject to negotiation. I
don't disagree with the methodology the IG used here.
Mr. Sessions. Yes, sir. So, in other words, forget the
percent, the amount. So, they just went in and applied their
own perspective that is not related to the law. As she said, it
is anywhere from 8 to 24 percent. She just applied 15 percent
to the entire profit?
Mr. Tenaglia. So, I think that was trying to portray the
mark-up beyond the amount of costs that were incurred to
produce the item.
Mr. Sessions. OK. Let's go back and talk for a second about
what is available in the marketplace. There has been discussion
about the market value, the marketplace, and then the two-
percent discount that was applied. Were there others available
that someone could have gone to to get the same parts that they
wanted?
Mr. Tenaglia. So, I would have to look at each one of those
parts. But as I was describing earlier, in those instances
where we have a manufacturer or a seller-contractor presenting
us a part that is sold in the marketplace, that exact same
part, then our policy and our training is to respect the fact
that the going price that another commercial customer paid for
that is what the market would bear. What is different in most
of these circumstances is that same part is not necessarily
sold to other commercial customers. They are of a type, meaning
there is some variation of that same part, and then it becomes
the analysis of what is the difference in the functionality of
that part versus the part that is sold in the marketplace.
Mr. Sessions. OK. So, if there is a generally accepted
value, and you ask for the parts and they gave you a discount,
why would someone assume that they are gouging someone as the
majority is attempting to claim today? If you go and buy
gasoline at the marketplace and you know it is $2.68, and you
know it is $2.62, and you buy it for $2.65 somewhere in that
marketplace, why would you even have an investigation about how
much money you made when that is the marketplace?
Mr. Tenaglia. Sir, I think for that analogy, for gasoline,
it is essentially the same gasoline that all consumers that are
purchasing that. In this case, these are specialized parts that
may be of a type.
Mr. Sessions. They are, but my point is that they were well
within the norm of what would be paid for, and they still gave
a discount. Is that disingenuous to give a discount off that to
get the business? If the going price is X and you make it X
minus two percent, why do you set yourself up for being accused
of gouging the government? This makes no sense to me.
Mr. Tenaglia. Sir, I would just say the starting point for
the analysis for a contracting officer is to take a look at
whatever the contractor has identified as what they are selling
on the commercial marketplace. If they are selling us the exact
same product, then that contracting officer will look at the
sales price that that company has got in the commercial
marketplace. If it is something different, there is a different
analysis that needs to be undertaken.
Mr. Sessions. And then----
Chairwoman Maloney. The gentleman's time has expired.
The gentlewoman from Illinois, Ms. Kelly, is now
recognized.
Ms. Kelly. Thank you, Madam Chair. Ms. Hull, thank you for
your reports on TransDigm's price gouging. Your recent report
identifies astounding levels of excess profits. For example,
TransDigm sells a part called the plain encased seal that is
used on the B-22 Osprey aircraft. You should see a picture of
it in the room. According to TransDigm's own data, it costs
$125 to make the seal, but they charge DOD more than $1,600,
which translates to an excess profit of more than 1,000
percent. I would like to show a picture of this part and a
chart of TransDigm's excess profits, so you should be able to
see that. Ms. Hull, would you characterize DOD paying a
contractor over 1,000 percent profit as government waste?
[No response.]
Ms. Kelly. Ms. Hull.
[No response.]
Ms. Kelly. Ms. Hull?
[No response.]
Ms. Kelly. I will just move on. Mr. Tenaglia, an analysis
released last week by the Project on Government Oversight said,
``Nearly $21 million in excess company profits may not sound
like a lot in the context of $768 billion defense budget, but
those overcharges add up to a lot of waste and undermine the
readiness of our forces as maintaining our existing weapon
systems becomes increasingly costly.'' Do you agree with that
analysis?
Mr. Tenaglia. Well, I certainly agree with the point that,
you know, the more we pay unnecessarily, the less capability we
can deliver. And so it is the responsibility of our contracting
officers to negotiate the best price they can, a price that is
fair to industry and that is fair to the taxpayer and the
Department.
Ms. Kelly. And TransDigm is the sole-source contractor for
the B-22 Osprey plain encased seal, which means that the
Department of Defense had to buy this part from you or go
without it. Isn't that correct?
Mr. Tenaglia. That is my understanding, and perhaps this is
one of the parts that will be a good candidate for reverse
engineering.
Ms. Kelly. Mr. Howley, do you think it is fair for
taxpayers to pay over $1,600 for a part that cost TransDigm
$125 to make?
Mr. Howley. I think there are some regulations that define
how you determine the pricing, and the preferred way to do it
is to compare it to the comparable commercial price, and I
believe this price is discounted to that. I also believe that
when the contract is placed, the government has the right to
declare a price fair and reasonable or not fair and reasonable,
and that has some other name, I don't recall. All these
contracts were declared fair and reasonable at the time of
placement, and they all have commercially comparable pricing.
Ms. Kelly. Well, that is why we are having this hearing. In
my opinion, taxpayers should not be significantly overpaying
for parts the military needs to keep planes flying. Ms. Hull,
your audit addressed how the DOD can implement administrative
reforms, such as reducing the Agency's reliance on sole-source
search manufacturers. Can you elaborate on this?
Ms. Hull. Thank you. The Department proposed a couple of
legislative reforms in the last cycle. My understanding and
hearing today is that they have some plans for additional
proposals for the current legislative cycle. Now, from a sole-
source environment, the only other options that the Department
has is to pursue some of those that Mr. Tenaglia outlined to
include reverse engineering. There is a strategic supplier
alliance in which DLA is looking to original equipment
manufacturers to potentially cancel their licenses with
TransDigm and produce the parts directly for the government.
So, while there are options there currently in play, more
legislative and regulatory reform would be needed to address
the systemic issue.
Chairwoman Maloney. The gentleman from Pennsylvania, Mr.
Keller, is now recognized for five minutes.
Mr. Keller. Thank you, Chairwoman Maloney, and thank you to
our witnesses for taking time to be with us today.
Americans in Pennsylvania and across our country are
contending with huge increases in the price of daily
necessities, including fuel, gasoline, and groceries. While the
record inflation we have seen over the past year plays a large
role, broken supply chains only exacerbate transportation
issues and lead to higher-end costs. It is time to take a
closer look at how the Department of Defense handles its
contracts and taxpayer funds. So, my question is for Ms. Hull.
Can you explain the just-in-time, or JIT, Inventory Management
System?
Ms. Hull. Mr. Tenaglia or the Department may be able to
speak to this more robustly because it wasn't a part of our
audit. But just-in-time inventory essentially is being able to
get the part just when you need it, and forecasting models are
also considered in order for that particular concept to work.
Mr. Keller. Yes. And I just, you know, want to make sure
that it is the same as what I have experienced in private
industry. But if the Department of Defense miscalculates the
parts required for a particular program, how does the DOD go
about acquiring additional or replacement parts?
Ms. Hull. Again, that was not a focus of our audit.
However, we did highlight a potential opportunity for DOD to
consider coordinating the quantities that they wish to purchase
in order to potentially get a discount on pricing from
TransDigm.
Mr. Keller. So, what would happen to the price of a
replacement item when it needs to be bought via a rapid order
fulfillment?
Ms. Hull. Again, that was not a focus of our audit.
However, the Department would have to look into whether they
could forecast their demand in time to be able to benefit from
that, and pricing, of course, would be impacted in some way.
Mr. Keller. OK. Sole-source contracting is a longstanding
issue within the Pentagon. How can Congress better work with
the Department to remove barriers to entry and alleviate the
many problems that come with lack of competition for these
contracts?
Ms. Hull. The Department is pursuing reverse engineering.
That is an option. Also, again, the strategic supplier alliance
or an original equipment manufacturer would potentially cancel
their licensing agreement with TransDigm and produce those
products parts for the Department directly. But, again, sole-
source parts by their nature, without competitive market
forces, are the systemic issue that our report highlights. And
without reform, without some legislation where a contracting
officer can receive the information that they need to be able
to make a well-informed negotiation with a contractor, you are
going to continue to see these results time and time again.
Mr. Keller. Yes, and that is really what we need to
address. With a variety of accounting methods available and a
large number of domestic contractors available to meet defense
needs, I would urge the Department of Defense to analyze its
current system to better assist both the warfighter and
taxpayer. And with that, I thank you and I yield back.
Chairwoman Maloney. The gentleman yields back.
The gentlelady from Michigan, Ms. Tlaib, is recognized.
Ms. Tlaib. Thank you so much, Chairwoman. Thank you for
having this really important hearing about transparency and,
really, accountability.
Mr. Howley, in a 2020 performance recap, TransDigm had
reported that the company fired more than 30 percent of its
work force in response to the reduced demand during the
pandemic. Has TransDigm rehired all of the people that they
laid off in 2020? ``Yes'' or ``no.''
Mr. Howley. Excuse me. I was muted. The answer is no.
Ms. Tlaib. Yes. Yes. Just keep it unmuted for a while, OK?
TransDigm also stated that it was ``implementing unpaid
furloughs and salary reductions across the organization.'' So,
Mr. Howley, as we sit here today, has TransDigm restored the
employees who it furloughed or had their salaries reduced in
2020? ``Yes'' or ``no.''
Mr. Howley. I don't know the answer to all that in all
cases. I do know----
Ms. Tlaib. OK. Please send the answer later to the
committee.
Mr. Howley. Yes. The commercial airline, which is----
Ms. Tlaib. Yes. Mr. Howley, OK. I am trying to get to a
point. You can explain it in your response. Mr. Howley, in
2020, in response to the pandemic, you gave up about two
percent of your total compensation, correct?
Mr. Howley. I gave up something. I don't remember the
percent.
Ms. Tlaib. OK. It was two percent. At the same time,
TransDigm reported to the SEC that your total compensation in
2020 was just over $68 million, including dividends and option
awards. So, while TransDigm was laying off employees and
cutting salaries, it was paying you more than $68 million even
when accounting for a measly two percent of your salary that
you gave up. So, Mr. Howley, are you aware that you received
more than compensation than the CEOs of Raytheon, Boeing, and
Lockheed Martin combined? Combined. ``Yes'' or ``no.''
Mr. Howley. I don't know what their----
Ms. Tlaib. Well, my colleague showed you a chart, yes.
Mr. Howley. I don't know what their compensation is. Can
you repeat the question?
Ms. Tlaib. I am trying to find out where we can get the
money that you owe the American people, so I am trying to get
to----
Mr. Howley. Can you repeat the question to me about
compensation just so I can answer it carefully, about the----
Ms. Tlaib. Basically, do you know that you received more
compensation than the CEOs combined of Raytheon, Boeing, and
Lockheed Martin?
Mr. Howley. I don't know their compensation.
Ms. Tlaib. That is right. Your compensation was so high
that TransDigm felt that it had to include a note in the
shareholders report that acknowledged the ``magnitude of Mr.
Howley's reported compensation, particularly in light of the
COVID-19 pandemic.'' Before we go on, Chairwoman, can I submit
for the record the compensation charts, please?
Chairwoman Maloney. Without objection.
Ms. Tlaib. Mr. Stein, to you. Dr. Stein, to you. You
received about $22 million in total compensation in 2020 after
forfeiting about 25 percent of your salary, correct?
Mr. Stein. I believe that is correct.
Ms. Tlaib. Oh, thank you for your honesty. So, to recap, at
the time when American families were and still are struggling
with the financial burden of the pandemic, TransDigm paid two
executives here today around $90 million, while at the same
time laying off, furloughing, cutting the salaries of its other
employees; $90 million, I might add, that TransDigm got by
screwing over the American people. Sadly, TransDigm is not
unique. You just got caught. You know, I know that we are
talking about one company, but know, for me, you all are the
perfect poster child of an out-of-control defense budget that
puts the interests of wealthy, well-connected people like
yourselves ahead of the best interests of the American people.
You are, for my residents, what corporate greed looks like in
America. You two and TransDigm must be held accountable and
must pay the $20.8 million in excess profits identified by the
IG. I would recommend that it comes out of your salaries as
your last act before you both resign in disgrace.
I would also add on and call on the Department of Defense
as a whole to ensure that not a single cent of taxpayer money
ever goes to a business run by either of these folks again. It
is so critically important, and, Chairwoman, we need to
continue holding these folks accountable because we are not
holding them accountable, and we have to cut programs and those
things that actually attack this virus, protect the families at
the forefront. And for all of my colleagues, they may be
wearing suits and may be millionaires and wealthy folks, but
they can still be scammers of our country. They can still be
scamming our folks. I wish you would all treat them the same
way you would if somebody was on food assistance and they
didn't maybe qualify. Whatever it is, the fact of the matter is
we need to hold them accountable equally as the same as we
would hold anybody coming before our committee, again, that
used, you know, their resources in undermining and also, you
know, scamming the system to basically make a profit off of all
of us.
So, I thank you and I yield.
Chairwoman Maloney. The gentlewoman yields back.
The gentleman from Kansas, Mr. LaTurner, is now recognized.
The gentleman from Kansas.
Mr. LaTurner. Thank you, Madam Chairwoman. My first
question is for Ms. Hull.
In the absence of market-driven pricing, the Federal
Government may be left with a take-it-or-leave-it pricing
approach by sole-source manufacturers. Rather than capping
profits with arbitrary profit ceilings or potentially bogging
down the procurement process with pricing data requests, is
there a way to drive down prices organically by improving
competition from smaller, non-traditional defense contractors?
Ms. Hull. There are certainly ways that the Department can
potentially begin to do that through some of the methods we
discussed, like reverse engineering or the strategic supplier
alliance. But like the case that we are discussing today, the
majority of the parts are sole source, so there isn't another
option for the Department currently.
Mr. LaTurner. No, I appreciate that. Mr. Tenaglia, this
committee a few years ago spent a lot of time unpacking defense
contractors' role in contributing to the high prices of spare
parts, but applicable laws and regulations seem to invite
practices that drive up prices for the Federal Government and
for the American taxpayer by extension. Can you explain the
rationale behind the Department of Defense's just-in-time
inventory management practices?
Mr. Tenaglia. Well, Congressman, I think I am not sure I
would describe our acquisition of all these parts using just-
in-time. Certainly we can provide some additional information
from the Defense Logistics Agency about how they manage
inventory, but we are talking about the number of transactions
in the sample happened to be the smaller transactions by
design. That was what you asked the IG to look at, and I think
inherently that is going to drive some of the smaller-quantity
purchases. If we were to look at some of the larger-value
transactions, on the other side of the Truth-of-Negotiations
Act threshold, I would expect the commercial item exception
would most likely come into play, and we would not be getting
certified cost and pricing data, but you would have larger
transactions with perhaps larger quantities.
Mr. LaTurner. I appreciate that. Are you concerned that
legislative changes that force companies to disclose cost data
will hamstring the DOD's ability to move quickly when procuring
spare parts, particularly with just-in-time purchasing?
Mr. Tenaglia. So, I don't want to leave the impression that
our contracting officers are always going to need to look at
cost data. We have in the law a preference that puts that as
the last resort. I will leave it to the Congress if they want
to maintain that and you can see how that preference plays out,
but the current law that we have that asks us to look at
analogous pricing starting with sales data. I come back to the
point I was making earlier. The starting point is really
analyzing the particular part that you are buying and asking
yourself and the market, doing the market research to
demonstrate whether that same product is sold in the commercial
marketplace. If it is, then we will look at what other
consumers are paying for that product.
But it is almost never quite that straightforward because
it is usually an of-a-type commercial product, and then we need
to do some analysis on the differences between the product that
is sold in the commercial marketplace and the product that we
are buying.
Mr. LaTurner. Thank you. Appreciate you being here today as
well as the other conferees. Madam Chairman, I yield back.
Chairwoman Maloney. The gentleman yields back.
The gentlelady from Missouri, Ms. Bush, is now recognized
for five minutes.
[No response.]
Chairwoman Maloney. We lost her. Unmute Cori Bush.
Ms. Bush. Thank you, and thank you, Madam Chair, for
convening this hearing.
St. Louis and I are very troubled to hear about yet more
military waste from the IG audit. TransDigm sells a linear
actuating cap which is used in both the Eagle F-15 and
Stratolifter C-135 airplanes. According to the IG report,
TransDigm sold this part to DOD for $7,495 per spare part
despite it only costing TransDigm $189 to make the part. The
price has increased by 400 percent in just the last three
decades and doubled in just a three-year period. Mr. Tenaglia,
why would DOD pay double what it paid for the same spare part
just three years prior?
Mr. Tenaglia. Thank you, Congresswoman. Part of our
analysis is looking at what we have previously paid. Ideally,
we are looking at what other competitive consumers are paying
in the marketplace for this particular item, and I don't know
if the exact same item is sold in the commercial marketplace. I
suspect it is not. And then the reality becomes whether this is
a flight safety item. The leverage that we have, we need the
part. As the sole-source supplier, if there is no other source
to buy that part, we are going to need to make the purchase to
keep our aircraft flying.
Ms. Bush. Yes. And so $189 to make, but $7,400 is what is
being paid for this. The IG audit determined that TransDigm's
excess profit for this part was over 3,800 percent. Just to be
clear, that is not the profit TransDigm earned. Mr. Stein, how
can TransDigm justify, though, how can you justify charging
$7,000 for a part that costs just $189?
Mr. Stein. I am glad you asked that question. It is a great
question. There is a commercial equivalent for that part. The
commercial equivalent costs $8,182. We gave the DOD a 10-
percent discount on that part, and over five years, the DOD
ordered less than 40 pieces. Over five years, 40 parts. It is
so small and irregular, and we gave a discount of 10 percent to
commercial. It is simple to explain. I don't understand why we
are here even. We are giving a discount to commercial prices.
Ms. Bush. You are giving a discount on something that costs
$189 to make. Mr. Stein, will you commit to paying back the
excess profit TransDigm received in this example as well as the
other 105 parts identified by the IG as returning excess
profit? ``Yes'' or ``no.''
Mr. Stein. It isn't a ``yes'' or ``no'' answer.
Ms. Bush. ``Yes'' or ``no,'' because what we are talking
about here is something that is $189 to make, not necessarily
what somebody else is charging for it. It is $189 to make.
Mr. Stein. We look forward to working with the DOD----
Ms. Bush. Reclaiming my time. Reclaiming my time.
Mr. Stein. OK.
Ms. Bush. It is essential that TransDigm pay back the $20.8
million it made in excess profits as a result of this price
gouging. As lawmakers, we will also work to ensure that this
abuse ends. Recouping those excess profits is the difference
between having housing or not, mapping environmental racism or
not, having clean drinking water or not. Twenty-point-eight
million dollars could fund housing for tens of thousands of our
veterans, many of whom are far too often living on the street,
and I know because I am out there working with them. It could
map environmental racism in hundreds of communities like St.
Louis that are suffering from polluted air and climate change.
It could provide millions of gallons of clean drinking water
for children and families, especially black and brown families,
all across this country. Instead, more than 50 percent of the
exorbitant $778 billion defense budget is given to military
contractors.
Ms. Hull, would you say that the linear actuating cap
represents an isolated case of DOD waste and mismanagement of
money?
Ms. Hull. The part that you mentioned was the highest
excess profit percentage that we found during the audit, but
the profit percentages ranged anywhere from 2.8 percent to
3,850.6 percent.
Ms. Bush. Despite receiving hundreds of billions of dollars
every year, the DOD has never detailed its assets or undergone
a complete clean audit, likely leading to the kinds of abuse
and waste we are discussing in today's hearing. I am encouraged
by the steps this committee is taking to address this pressing,
pressing issue. Thank you, and I yield back.
Chairwoman Maloney. The gentlelady yields.
The gentleman from Texas, Mr. Fallon, you are now
recognized.
Mr. Fallon. Thank you, Madam Chair. I appreciate it.
Mr. Tenaglia, obviously there has got to be a balance
between the needs of our warfighters and the needs of our
taxpayers, and the longer that R&D takes and the longer
acquisition takes, you know, it is worse for both. You know,
that is money and time that is wasted, and a hot war, it could
be even more. In your opinion, is it acceptable that the DOD is
consistently overpaying on contracts?
Mr. Tenaglia. Well, it is never acceptable if we are paying
excessive prices, and in this case, we are talking about
whether or not our contracting officers should have full access
to the information, the part we just described or any of the
other parts for that matter, whether we know all the facts that
really would go into that. If we were in the world, non-
commercial items, and, again, most of these items are probably
commercial. I don't know. You would have to do a part-by-part
analysis. But in the world of non-commercial items, the way we
put ourselves on level footing is the legislation that the
Congress enacted many years ago, the Truth in Negotiations Act,
which gives us access to the information and, furthermore,
requires companies to certify that all the facts that they are
revealing to us for the purpose of negotiation are current,
accurate, and complete.
That doesn't come into play here for two reasons: one,
because we are below the dollar threshold for these
transactions, and two, because they are commercial. But what we
really need is a policy that will give our contracting officers
a means to establish fair and reasonable pricing when some of
the TINA exceptions are in play.
Chairwoman Maloney.--yield back your time? Mr. Fallon, are
you finished?
[No response.]
Chairwoman Maloney. Mr. Fallon?
[No response.]
Chairwoman Maloney. We seem to have lost Mr. Fallon. Let's
go on and we can come back to him. Mr. Fallon?
[No response.]
Chairwoman Maloney. Let's go to Mr. Clyde. Mr. Clyde, you
are now recognized. We seem to have lost Mr. Fallon.
Mr. Clyde. Thank you, Madam Chair and Ranking Member Comer,
for holding this hearing today. While I appreciate a closer
examination of wasteful government spending, I cannot help but
notice that we need to take a look at the flaws in the
Department of Defense's acquisition process, too, including
what I call just-in-time inventory, and what the industry calls
that as well.
Time and time again, the Department of Defense has had
difficulty correctly forecasting much-needed, highly
sophisticated spare parts until it comes time for repairs, thus
leading, in my opinion, to costly, small-batch ordering. This
issue has gone on for years. In fact, in March 1986, the GAO
produced a report called, ``DOD Initiative to Improve the
Acquisition of Spare Parts.'' This report highlighted that the
Department of Defense continuously purchased spare parts at
high prices when less expensive alternatives were available. To
further highlight the Department of Defense's flawed
acquisition, in a 2015 report, the inspector general of the
Department of Defense stated that in 20 of 32 reports regarding
spare part price issues since 1998, it was found that the
Department of Defense did not perform adequate cost or price
analysis when purchasing spare parts.
You know, as a navy supply officer for over two decades, I
have had a fair bit of experience when it comes to Department
of Defense procurement. So, that leads me to question why are
we holding the hearings on TransDigm's profits when we should
be primarily focusing, in my opinion, on the Department of
Defense's acquisition processes. So, Mr. Tenaglia, a question
for you. Thank you for being here today. I appreciate that.
Regarding item procurements, what research is done to ensure
that the Department of Defense is getting the best price
available, sir?
Mr. Tenaglia. For the items we are talking about in this IG
sample, for the most part it is a universe of the parts that
are known to the Defense Logistics Agency. They are parts that
we have procured in the past. There may be some market research
to identify not only alternative sources, but alternative
parts, but for most cases in the sustainment environment, I
think the parts that we are talking about, there aren't
alternatives. And the question is, what can we do to create
alternative sourcing where we do have sole-source suppliers
such as TransDigm.
Mr. Clyde. Right. OK. All right. So, once you have
determined what the best available price is, are there things
that prevent you from placing larger batch orders that would
give you, you know, maybe a better price because of the
increasing quantity?
Mr. Tenaglia. In my discussions with the senior officials
at Defense Logistics Agency, they recognize that that is a
factor, and they describe a scenario where they were responding
to a demand signal from the military departments that have
needs for a particular part. Perhaps the Department in general
could have done a better job at predicting when they would need
that, but all those factors that go into that, I think we owe
you a more robust answer that goes into the inventory
management. And I am not really the subject matter expert to
address that, but that is certainly a factor in the price we
pay. The smaller the quantities----
Mr. Clyde. Right.
Mr. Tenaglia. By virtue of this particular sample, the IG
was asked to only look at the smaller-dollar purchases, so
inherently, you are going to have smaller batches. And so there
is another universe of larger procurements with larger
quantities that really weren't examined for this particular
audit.
Mr. Clyde. OK. You know, I would think that for highly
sophisticated equipment intended for national security use, you
know, I would think that we would generally want a little more
depth when it comes to our inventory positions, you know,
things like aircraft or whatever. That was my primary focus as
an aviation supply officer. So, as a followup, based on your
experience, what information or resources do you think DOD
could use to improve forecasting and inventory management or
are there any that come to mind right now?
Mr. Tenaglia. Congressman, I actually prefer to take that
one for the record. That is not my area of expertise.
Mr. Clyde. OK. All right.
Mr. Tenaglia. But I will get back with you with a fulsome
answer.
Mr. Clyde. OK. All right. Well, thank you. I appreciate
that. Madam Chair, I yield back.
Chairwoman Maloney. The gentleman yields back. We will now
go to the gentleman from Georgia. Mr. Johnson, you are now
recognized.
Mr. Johnson. Thank you, Madam Chair, for holding this very
important hearing. And I have missed much of it having to
attend two other hearings, but I am happy to be here right now.
And I may ask a question that has been already asked and
answered, and I told you why that may happen, so I apologize
for it.
But, Mr. Stein, in your response to the OIG report, your
company stated that after working with DOD officials, ``There
have been improvements to the procurement process.'' What
specific improvements were made?
Mr. Stein. It is a great question. Thanks for asking. We
have formed a working group with the DOD DLA to look at pricing
and procurement issues that may exist in any of our businesses.
This is something we have put in place. We have hired outside
consultants, experts. We have retrained our people as we do
constantly on this topic. We have also now gone the further
step of, one, submitting commerciality packages up front on
every part that has a commercial equivalent. So, we take that
off the table, and we now offer volume discounts if they buy
more than what they are asking for. Unfortunately, to date,
they have----
Mr. Johnson. I am sorry for interrupting.
Mr. Stein. Oh no. No.
Mr. Johnson. Let me ask you this question. What has the
company done specifically to ensure that it never overcharges
the government by a 3,850.6-percent profit margin on a
particular product?
Mr. Stein. Well, as I have said earlier, we disagree with
that. This calculation omits the taxes and interest we paid to
the Federal Government. The taxes. I don't think that that
percentage received justification.
Mr. Johnson. Well, how much taxes did the company pay?
Mr. Stein. The amount we were obligated to pay legally. I
don't actually know the answer to that.
Mr. Johnson. Well, but you are saying your tax burden would
substantially cut into a----
Mr. Stein. Well, for these contracts, the taxes and
interest were $10 million, so it is half of the overcharge.
Half of it that being alleged is taxes and interest that the IG
somehow correlated as profit. This makes no sense.
Mr. Johnson. Well, it makes no sense that we would have a
figure of 3,850-percent profit margin off of one product, which
is kind of like a business model that you have for your company
to go in and purchase companies that manufacture parts, and
then getting a lock on the market so that there is no place
other than your company for the government to purchase a part.
And then you turn around and charge the government whatever, or
charge the taxpayers actually, whatever you feel like you want
to charge them, and it can be as high as 3,850 percent. I think
that is despicable conduct.
This is the second time that this committee has held a
hearing to address your company's price gouging on essential
military parts. The last hearing that we held resulted in your
Company refunding $16.1 million requested by the Department of
Defense. Do you see your company paying back the $20 million
that DOD has asked you to pay back as a result of overcharging
the government?
Mr. Stein. You know, as I have said repeatedly, we see
significant accounting and legal errors in this IG report. We
look forward to sitting down directly with the DOD. And I will
tell you, Congressman, that if we find that TransDigm made a
mistake in any of our contracting, we will gladly pay money
back, but what we must do is agree to the facts. The facts are
that we lost money on nine of the contracts. We only made a 37-
percent average on these entire IG-audited parts, and we now
know definitively that we gave the DOD and the American
warfighter a 25-percent discount to commercial prices. I don't
understand why we would pay back $21 million when, as we have
illustrated, it is rife with error.
Chairwoman Maloney. The gentleman's time has expired, and
we are now going to the gentleman from Kentucky, Mr. Comer. Mr.
Comer, you are now recognized.
Mr. Comer. Well, thank you, Madam Chair. I am fascinated by
listening to some of your socialist members talk about how the
private sector should operate and what an appropriate profit
level is, and all of the points they have made. But, Ms. Hull,
I want to talk a little bit about the methodology in your
report, and just ``yes'' or ``no'' to these questions, please.
First, the decision to make anything more than 15-percent
profit is excessive. In your report, you state that a 15-
percent cap did not apply by law or regulation to any of the
contracts examined. Is that correct?
Ms. Hull. It is not defined as a specific 15-percent
benchmark by law, no.
Mr. Comer. Correct. Yes. So, you also state that a 15-
percent cap should not be the benchmark for negotiating firm-
fixed-price contracts. Is that correct?
Ms. Hull. Correct. It is not a standard.
Mr. Comer. Right. Finally, you state that a 15-percent cap
is not the formal position of the inspector general, and this
report should not be interpreted to mean that. Is that correct?
Ms. Hull. Correct, but if I could add, we were asked to
determine the fair and reasonable prices for these parts
requested by the committee. And in order to do that, we had to
calculate a benchmark, so that is where that 15 percent was
applied.
Mr. Comer. Next, the decision to exclude taxes and
interest. As Congressman Norman pointed out in your report, you
state that you determined to not allow taxes and interest in
your cost calculations. Is that correct?
Ms. Hull. That is correct.
Mr. Comer. You also state that the exclusion of taxes and
interest from your calculations should not be interpreted to
mean that offerors cannot include these costs in their
negotiations. Is that correct?
Ms. Hull. Yes, but if I could add, again, we were asked to
determine a fair and reasonable price. And because we received
cost data, FAR 31 allowed us to look at it from that
perspective, which is why we removed interest and taxes as
allowable costs.
Mr. Comer. All right. So, you used two standards in this
report that you yourself admit you would not advocate for. Mr.
Stein, the IG report highlights a few spare parts manufactured
by TransDigm that had multiple contracts in one calendar year
for a very low dollar amount. I have a few questions, and,
again, just a ``yes'' or ``no'' because I have two minutes and
40 seconds left. Does DOD instigate those negotiations, meaning
it is DOD who comes to you and says what they need to order,
correct?
Mr. Stein. That is correct.
Mr. Comer. Does DOD determine how many of each part they
need?
Mr. Stein. Yes.
Mr. Comer. Does DOD determine when they request the parts?
Mr. Stein. Yes.
Mr. Comer. Does this haphazard kind of contracting put you
in a more difficult position?
Mr. Stein. Absolutely. It is not regular purchases or there
is no forecast to it. What comes is what I need immediately
today.
Mr. Comer. Generally, would purchasing more parts at once
and in a more regular manner drive down cost?
Mr. Stein. Yes, it will drive down price and it will drive
down cost, and we have offered these to the government, to the
DOD, and they have not taken us up on a single offer to lower
the price to buy more parts.
Mr. Comer. And I think that is what this hearing should be
about, and my colleagues on the Republican side of the aisle
have pointed that out. I just want to clarify a few other
things in closing here. How much of your business is direct to
government?
Mr. Stein. Six percent is direct.
Mr. Comer. Six percent. Six percent is all that you sell to
the government. That is what your government sales are.
Mr. Stein. Yes, direct government sales, six percent.
Mr. Comer. What is the average price the government pays
versus the commercial sector?
Mr. Stein. On this basket of contracts, 25 percent lower.
Mr. Comer. Twenty-five percent lower. Mr. Tenaglia, based
on those answers, it would appear the DOD has an issue with
demand forecasting. Finally, ``yes'' or ``no,'' did DOD agree
to and sign all the contracts that were analyzed by the IG?
Mr. Tenaglia. Yes, it is my understanding they did.
Mr. Comer. We are passionate about waste, fraud, and abuse
in the Department of Defense, but I believe we have to look at
the Department of Defense for a lot of the problems that are
being discussed in this hearing today. There is a better way to
order parts. We have talked about that in this committee
hearing and over the five years that I have served on this
committee. So, hopefully that is something that the DOD can
focus on in the future to be more efficient and to be a better
advocate of tax dollars.
So, Madam Chair, my time has expired, and I yield back.
Chairwoman Maloney. The gentleman yields back. We will now
hear from the gentlelady from New York, Ms. Ocasio-Cortez, and
I understand Mr. Fallon is back and we will go back to him. I
now recognize Ms. Ocasio Cortez.
Ms. Ocasio-Cortez. Thank you, Madam Chairwoman. I would
like to thank all of our witnesses who are here today, and, you
know, I would like to just jump straight into it.
Mr. Howley, thank you as well for being here. I just want
to start off with a simple question. The spare parts that
TransDigm supplied to the U.S. military were used in
Afghanistan, correct?
[No response.]
Ms. Ocasio-Cortez. Mr. Howley?
Mr. Howley. Excuse me. I was muted. I don't know the
answer, but I would presume probably.
Ms. Ocasio-Cortez. Well, TransDigm has supplied the U.S.
military with spare parts for aircraft, such as the AH-64
Apache, the C-17 Globemaster 3, the F-16 Fighting Falcon, and
the CH-47 Chinook, correct?
Mr. Howley. I believe so. I don't know that whole list.
Ms. Ocasio-Cortez. Well, each of those aircraft were used
in Afghanistan. Now, TransDigm is the sole supplier for many of
the spare parts that the Pentagon needs for these aircrafts. In
other words, there is no question that the spare parts that
TransDigm supplied to the U.S. military were used in
Afghanistan. So, Mr. Howley, it does seem like the war in
Afghanistan was a boon for TransDigm, correct?
Mr. Howley. I don't know the answer to that.
Ms. Ocasio-Cortez. You don't know. Well, I have some
numbers here to give us an idea. According to The Wall Street
Journal, since 2001, military outsourcing has pushed Pentagon
spending to about $14 trillion. That is 12 zeros. And to give a
comparison, even after averaging that number out over 20 years,
that is at least 12 times the amount that we spend on essential
program like SNAP. And in essence, really the United States and
U.S. Government hid the real price tag of our war in
Afghanistan and contracts with private companies like yours.
According to Ms. Heidi Peltier at Brown University's Cost of
War Program, the U.S. military's reliance on contractors has
led to the rise in a camo economy in which the U.S. Government
camouflages the cost of war that might reduce public support
for it. So, $14 trillion were handed over to private industry,
companies like TransDigm, but also Lockheed Martin, Raytheon,
and Boeing, without real transparency with the American public.
So, Mr. Howley, was there a net negative to TransDigm's
bottom line, or has it been a net negative to TransDigm's
bottom line that the war in Afghanistan has ended?
Mr. Howley. I don't know the answer to that. I don't know
where the total defense spending has gone. I think it has
probably still stayed about flat. I just don't know the answer.
Ms. Ocasio-Cortez. OK. So, as the Executive Chairman of
TransDigm, you are not sure about the financial impact of
military contracting with respect to Afghanistan with your
company despite the fact that it was one of the sole suppliers
of many of the military supplies and contracts that they were
using?
Mr. Howley. No. What I said is I am not sure specifically
what the impact of the cessation of the fighting in Afghanistan
was on the total buys that we got from the government. I just
don't know how to parse that out.
Ms. Ocasio-Cortez. And you don't have, like, a general idea
even if it is not a specific number.
Mr. Howley. I think that our defense business has been
roughly flat, I believe, but I don't know the exact number.
Ms. Ocasio-Cortez. OK. Mr. Howley, what was your
compensation in 2020?
Mr. Howley. It is a public number, so you probably have it.
I am not looking at it. I think it was $68 million or
thereabouts.
Ms. Ocasio-Cortez. Mr. Stein, what was your compensation in
2020?
Mr. Stein. I think you have it. It was somewhere around $20
million.
Ms. Ocasio-Cortez. OK. It does seem that in 2020, TransDigm
did lay off its employees during this time as well. The company
fired about 30 percent of its work force in order to maintain a
revenue stream. Is that correct?
Mr. Stein. Yes. I believe those numbers are accurate.
Ms. Ocasio-Cortez. And even while the government paid
TransDigm $1.5 billion in cash as part of a pandemic debt
buyback program to prevent precisely those layoffs from
occurring, you took home a total of $90 million in compensation
during that time, more than the compensation of chief
executives of Lockheed Martin, Boeing, and Raytheon combined.
So, let's talk about what contributed exactly to such
exorbitant compensation.
Now, TransDigm sells a part called the linear actuating
cap. It is used in the Eagle F-15 and the Stratolifter C-135.
It cost the company only $135 to produce. Now, Mr. Stein, how
much did TransDigm charge the Pentagon for this $135 part?
Mr. Stein. Ten percent less than what we charged the
commercial world for this part.
Ms. Ocasio-Cortez. Do you know how much that was?
Mr. Stein. About 10 percent less, yes.
Ms. Ocasio-Cortez. So, about $7,495 for a part that cost
about $135.
Mr. Stein. Yes, and the commercial part is $8,182.
Ms. Ocasio-Cortez. And that is a profit margin of about
3,850 percent.
Mr. Stein. No, that is not how----
Chairwoman Maloney. The gentlelady's time has expired. He
can respond in writing to her question.
Chairwoman Maloney. Mr. Fallon, you are now recognized for
your two remaining minutes and we think have lost you during
this process. Welcome back. We now recognize you.
Mr. Fallon. Madam Chair, thank you. Thank you very much. I
appreciate it.
Mr. Tenaglia, has the DOD acquired any IP from sole-source
contracts?
Mr. Tenaglia. Generally, that is not what we do. What we
try do in some limited circumstances is produce intellectual
property using our own engineers and sending out technical data
packages for re-procurement through reverse engineering. But it
is not generally our practice to buy back the intellectual
property from sole-source providers.
Mr. Fallon. Do we purchase any IP at all?
Mr. Tenaglia. Well, for the items we are talking about in
this spare part universe, all the decisions about intellectual
property were made long ago, and so now we are living with some
of those decisions. In many cases, it makes the most sense for
the Department to allow companies to retain their intellectual
property. Sometimes that results in putting us in a less-than-
the-best position with respect to competition, but that is a
tradeoff we make. It would be very expensive for the Department
to buy up all the intellectual property, and I am not sure
industry would generally be interested in selling us all their
intellectual property.
Mr. Fallon. Yes, because I was going to followup with, do
you think this is cost-effective to do it that way?
Mr. Tenaglia. Well, I think to the extent that we can do
whatever we can to maintain competition for our weapons systems
and spare parts that will put us in the best position to get
the best price.
Mr. Fallon. Well, thank you. Thank you, Madam Chair. I
yield back.
Chairwoman Maloney. The gentleman yields back.
The gentlelady from New Mexico, Ms. Herrell, is now
recognized for five minutes.
Ms. Herrell. Thank you, Madam Chair. Can you hear me OK?
OK. I had had some problems with my other computer.
Just kind of following along just the discussion in terms
of procurement, I am directing this question to Ms. Hull. In
October, members of the House Appropriations Committee
requested that this committee conduct an independent review of
the evidence used to support the Department of Defense
inspector general's April 2020 report on the Joint Enterprise
Defense Infrastructure--JEDI--cloud procurement. Since then, I
have received extensive briefings on this matter. New evidence
obtained through a FOIA raises serious questions about criminal
violations in connection with the JEDI procurement. Plus, I
have asked to meet with Acting Inspector General Sean O'Donnell
over the oversight investigation and the evidence collected to
support the April 2020 JEDI report. I hope this meeting can be
arranged with the IG soon.
As Members of Congress, it is without question our right to
review documents referenced publicly and cited repeatedly in
the JEDI report without extensive redactions. And as members of
this committee, especially in our oversight capacity, we must
review the actual evidence underlying the conclusions in the
JEDI report. It is critical that Congress have trust and
confidence in the integrity of the procurement process and the
Office of the Inspector General, and I intend to do everything
to see that this happens. Ms. Hull, will you commit that the IG
will meet with me and any other member of this committee?
Ms. Hull. While I did not personally work on the JEDI
product that you mentioned, I will certainly take that question
back.
Ms. Herrell. Thank you. I would very much appreciate it.
And, Madam Chair, I hope that this committee will proceed with
an investigation on this important matter. Thank you so much,
and I yield back.
Chairwoman Maloney. The gentlelady yields back. And before
I close, I would like to offer the ranking member an
opportunity to give closing remarks if he would so wish. Mr.
Comer, you are now recognized.
Mr. Comer. Well, thank you, Madam Chair. I will be very
brief. We have got a lot of problems in America. We have got a
lot of problems with reckless, unnecessary spending. If we want
to focus on the Department of Defense now and look at a big
ticket item of waste, we should be holding hearings on exactly
how much military equipment was left behind in the debacle
withdrawal that President Biden orchestrated in Afghanistan.
This is something that I get asked every day in my
congressional district, and, unfortunately, we don't know the
answer. You know, you are talking billions and billions of
dollars. That is what we need to be focused on.
What we have learned from this committee hearing today is
the same thing we learned 2 or 3 years ago when we had this
same hearing. The Department of Defense needs to do a better
job in establishing an inventory and in establishing how they
purchase parts. We have heard that in other committee hearings
as well, so I would like to see some type of plan moving
forward from the Department of Defense. There is no question
there is a lot of wasteful spending at the Pentagon, and it is
our duty on the Oversight Committee to try to reduce waste,
fraud, and abuse in in the Federal Government.
I think the members on your side of the aisle, Madam Chair,
are trying to bill this as a government contracting company.
Six percent of their sales goes to the Federal Government and
the other 94 percent are commercial, and they said they had to
sell their parts to the government at a 25-percent discount to
what they sell in the commercial market, to the commercial
airlines and companies like that. So, you know, I think we can
spend our time better looking at the bigger ticket items and
trying to bring the Pentagon in, the Department of Defense
officials in, to see if there is a better way, if we can help
facilitate that, a better way to do business at the Department
of Defense.
Again, Madam Chair, thank you, and I yield back.
Chairwoman Maloney. I thank the gentleman for his testimony
and for co-chairing this with me, and I would now like to thank
our witnesses for testifying today. Mr. Howley, Mr. Stein,
thank you for agreeing to testify. Mr. Tenaglia and Ms. Hull,
thank you for your service to our country. Ms. Hull, I would
like to thank you in particular for your continued work to hold
TransDigm accountable and root out waste, fraud, and abuse in
the Department of Defense.
We heard today that TransDigm is fleecing taxpayers by
refusing to provide cost data, which forces contracting
officers to accept TransDigm's prices in order to secure the
parts our military desperately needs. TransDigm's debate over
the 15-percent benchmark is a deflection tactic. TransDigm, in
some cases, received over a 1,000-percent profit, so whether
the benchmark is 15, 20, or even 50 percent, TransDigm received
outrageously excessive profits.
In regard to the IG's exclusion of tax and interest, they
did so in accordance with Federal cost principles. The IG
report explains that TransDigm is highly leveraged, leading to
high interest payments on debt. Americans should not have to be
footing the bill for TransDigm's acquisition strategy. Mr.
Howley and Mr. Stein also discussed giving the Department of
Defense a discount from the price it sells to commercial
airlines. Regardless of whether the Defense Department received
its discount, it does not change the fact that the inflated
prices still resulted in excess profits of over 1,000 percent
in multiple instances. I strongly urge my colleagues on both
sides of the aisle to support reforms that would empower
contracting officers and require companies like TransDigm to
provide cost information when it is necessary to determine that
proposed prices are unfair and unreasonable.
Mr. Howley and Mr. Stein, we have heard from many committee
members. We expect TransDigm to pay back the outrageous excess
profits. All $20.8 million should be repaid. It received this
money at the expense of our warfighters and American taxpayers.
We expect you to repay this money to the taxpayers.
Now, in closing, I want to thank our panelists for their
remarks--all of them--and I want to commend my colleagues for
participating in this important conversation.
Before we adjourn, I would like to ask unanimous consent to
submit into the record a statement from the Project on
Government Oversight.
Without objection, so ordered.
Chairwoman Maloney. With that, all members will have five
legislative days within which to submit extraneous material and
to submit additional written questions for the witnesses to the
chair, which will be forwarded to the witnesses for their
response. I ask our witnesses to please respond as promptly as
they are able.
Chairwoman Maloney. And with that this meeting is adjourned
[Whereupon, at 12:57 p.m., the committee was adjourned.]
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