[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

=======================================================================

                                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                     
          
-----------------------------------------------------------------------------------   
                            
                   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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