TransDigm agrees to reimburse Pentagon following allegations of price gouging

TransDigm Group has agreed to repay the government $16.1 million in excess profits auditors said that the company took in via large markups of aviation parts it sold to the Army and the Defense Logistics Agency, Congressional and Pentagon officials said Friday.

The company wrote an $11.5 million check last week, one of several installments it planned on paying, according to the House Oversight and Reform Committee.

Company officials testified before the committee just a week earlier and expressed reluctance to issuing the refunds, because they were wary of appearing to acknowledge wrongdoing.

“We have private shareholders, we have employees, we have a management, we have commercial customers, and we’re concerned about implying that we’ve done something wrong or something illegal here,” Nicolas Howley, TransDigm’s executive chairman said at the May 15 hearing. “The money is not the issue here.”

Pentagon acquisition officials had accused the firm of gauging taxpayers, partly based on the results of a February audit that calculated the $16.1 million in what were deemed to be excess profits. The Defense Department inspector general arrived at the figure by comparing the company’s actual costs against the prices it charged DoD for a sample of 47 parts, and determined all but one involved excess profits, including 17 with margins of 1,000% or more.

“I am pleased TransDigm agreed with our recommendation to return these excess profits to the government,” Glenn Fine, the acting inspector general said in an emailed statement. “Our audit also found that TransDigm took advantage of existing acquisition regulations that did not require it to provide cost data when requested by Department of Defense contracting officers.  We look forward to working with the Department of Defense and Congress to consider legislative reforms to prevent TransDigm, or other companies, from overcharging the government when buying sole-source items.”

A follow-on investigation by the oversight committee suggested the firm has pursued a strategy of buying up smaller, sole-source parts suppliers and then increasing prices by large margins. Roughly 80% of the firm’s sales are for items for which it is the only supplier.

“They went through every contract and raised the price where possible,” Brad Pedersen, a former CEO of TransDigm subsidiary Breeze-Eastern told committee staff.

Glenn Fine, inspector general, Defense Department
Glenn Fine, inspector general, Defense Department

In many instances, the IG attributed the high prices to DoD contracting officers’ inability to get insights into the company’s actual costs, one major factor the government uses in determining whether a price is fair and reasonable. In every instance in which the company was legally allowed to do so, it refused to turn cost data over to DoD contracting officials.

Consequently, aside from pursuing refunds, the IG has urged DoD and Congress to pursue reforms that would give contracting officers the ability to demand at least uncertified pricing data, even for transactions that fall beneath the Truth in Negotiations Act threshold.

In a statement, Rep. Elijah Cummings (D-Md.) said the refunds were a “good first step.”

“[The payments] would not have happened without the hearing in the Oversight Committee … We saved more money today for the American people than our Committee’s entire budget for the year,” he said. “While this is a good first step, we must do even more in the future to prevent unscrupulous contractors from holding us hostage through abusive monopoly contracts.  I look forward to working with my colleagues on both sides of the aisle on common-sense reforms.”

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