Posted on June 16 2019
Transdigm Part III - the Contracts
In Transdigm Part I - I walked you through the February 2019 Department of Defense Office of Inspector General (DOD-OIG) Report. The National Defense Authorization Act (NDAA) for Fiscal Years 2017 and 2018. I am certain that you made a note, that there were multiple inquires from both the House & Senate to the DOD-OIG. This culminated into Congress “inviting”, Transdigm’s May 2019 testimony during the House OverSight Hearing. I also embedded various DOD-OIG reports circa 2006 to present.
Apologies though, I realized when I started writing this follow that I had inadvertently overlooked the written testimony of Kevin Stein Chief Executive Officer, TransDigm. Written Testimony Found HERE or simply click on the embedded Twitter link below.
Watch Acting DoD IG, Glenn Fine and Assistant IG for Audit, Theresa Hull testify before the Committee on Oversight and Reform on "the DoD IG Report on Excess Profits by TransDigm Group, Inc.," May 15 at 10 a.m https://t.co/eDA8mcELPl pic.twitter.com/PmPIwWYyOY— DoD InspectorGeneral (@DoD_IG) May 14, 2019
In Transdigm Part II - I expounded on Part I - by doing a deeper dive into the Department of Justice 2017 thru 2018 Civil Anti-Trust action filed against Transdigm. Which resulted in an April 2018 Final Judgment whereas the DC Court ordered Transdigm to divest several newly acquired entities MEG KG and Perusa. I embedded the German Foreign Ministry and CIFUS data it’s been about 16 months and the docket doesn’t reflect an alternative acquirer or a 60 day delay. I’m not sure what the status of the Final Judgement in Case No: 1:17-cv-02735 Complaint (December 21, 2017), Competitive Impact Statement, Explanation of Consent Decree Procedures, Hold Separate Stipulation and Order, Proposed Final Judgment
See see pages 5 and 6 of the Final Judgment. I further detailed the combined certified class action Complaint and rhetorically asked why would Transdigm’s CEO & Executives sell off 300K shares - netting (collectively) >$87M less than 24 hours before Transdigm’s June 9, 2016 SEC filing. I also concluded Part II with a fractional sample size of various contracts awarded to Transdigm et al and set your expectations in Part III - a deeper contract dive.
So let’s start dive into Part III. Firstly it might be informative if I drill down on Contracts, Statutes and then dive in to Transdigm’s subsidiaries. Grab a Red Bull or three, because I’m about to drop a lot of files. I like facts. I like files. I like dots but I really like receipts.
Also many assume that the only “internal watchdog” group is limited to the Defense Department Office of Inspector General.
FAR and TINA
To further complicate the matter there are various statutory “thresholds”. Federal Acquisitions Regulations (FAR) is incredibly complicated. The last time I reviewed the “manual” it’s a 4 to 5 inch binder containing thousands of pages. When you see the word “codification” that essentially means, it’s the law. GSA FAR in PDF format - FAR is 53 chapters long. Alternatively you can access the same documents via the USAF FARsite
FAR Regulations Hierarchy - like I said Federal Contracts can be incredibly complex , moreover Federal Contract Enforcement can be equally complex and arduous to prove or disprove material breach of the Contract/Award terms and conditions.
It is worth noting that the vast majority of the time Federal Contractors are ethical, mindful of their contractual obligations to the Agency and to our Government writ large. Truth In Negotiations Act (TINA) - 10 U.S.C. 2306a and 41 U.S.C. chapter 35:
...requires offerors to submit certified cost or pricing data if a procurement exceeds the TINA threshold and none of the exceptions to certified cost or pricing data requirements applies. Under TINA, the contracting officer obtains accurate, complete, and current data from offerors to establish a fair and reasonable price (see FAR 15.403). TINA also allows for a price adjustment remedy if it is later found that a contractor did not provide accurate, complete, and current data.
See May 2018 Memorandum from the Office of the Under Secretary of Defense, this Memorandum superseded all previous Memorandum concerning FAR & TINA “class deviation - threshold for obtaining certified cost of pricing data”
See GSA May 2018 Memorandum from the chair of the CIVILIAN AGENCY ACQUISITION COUNCIL which informs Contracting Shops of the FAR threshold increase raises the threshold for requiring Certified Cost or Pricing Data from $750,000 to $2,000,000.00
With respect to both FAR and TINA thresholds (value/cost) if the Government by way of the Contracting Shop request either certified or uncertified pricing. Generally speaking, there’s a long standing misconception that when the Government ask the Contractor/Awardee to provide cost/pricing data that it is required to provide that information. This is where tiny details matter. The reality is this is not always the case. You have to look at the threshold and any exemptions. The bottom line is Transdigm and it’s subsidiaries have leveraged a few loopholes; pricing threshold, subcontracts and/or “part” or “service” classification - meaning if the aforementioned is classified as “commercial” the Contracting Shops really can not demand pricing. Frankly it’s a pernicious complicated cycle of disfunction that has oddly allowed companies like Transdigm and their subsidiaries to refuse data even when a Contracting Shop request it. As previously discussed in the February 2019 DOD-OIG Report, I now refer you to page 20.
For context and to support my assertion that the February 2019 audit was extremely limited meaning they looked at .000000026315789% contract revenues. The aforementioned percentage is based on relatively simple mathematics. Which can be found of page 23. DOD-OIG audited $29.7 million in contracts divided by Transdigm $3.8 billion multiplied by 100 = .000000026315789% - again that’s not me chastising the DOD-OIG, that’s me explaining in simple mathematical terms what the February 2019 DoD-OIG covered. And I should say this isn’t just Transdigm - there are hundreds of Government Contractors who probably should be barred from doing business with our Government.
One of the primary reasons I take the time to read Annual Reports and various SEC filings is it provides you with empirical data. Not opinions or a hypothesis but actual facts. Moreover SEC filings provide you with a static snapshot, provided you take the time to read the filings and have the ability to understand the filings. For example in Transdigm’s June 9 2016 filing it gave us a snapshot of their subsidiaries and made researching their federal contracts relatively easy.
When it comes to public companies - the SEC has enforcement power by way of numerous public laws, for example the Securities Act 15 USC §78 et seq - See partial list of laws below - the non-legalese is the SEC acts as a safety net to insure public companies are making decisions in the best interest of both shareholders and consumers.
- Securities Act of 1933
- Securities Exchange Act of 1934
- Trust Indenture Act of 1939
- Investment Company Act of 1940
- Investment Advisers Act of 1940
- Sarbanes-Oxley Act of 2002
- Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
- Jumpstart Our Business Startups Act of 2012
- Rules and Regulations
I suppose one likely and historical explanation is after the Great Depression - Congress legislated (and has Amended when needed) to put a check on public companies. I know that there are very strong opinions about the SEC Enforcement Actions - both pro and con. Full disclosure I’m in the camp of let the SEC do their job and if there’s an overreach then perhaps we should discuss limitations. But by and large the SEC stays in their lane and I’m appreciative of the thankless work they do to protect the public.
Transdigm et al Federal Contracts
As with my standard practice, when available I will embed links to the original document source. The primary database I will use is a public database run by our Government (USASpending), which allows users to query and then drill down. You will note that I’ll repeatedly provide DUNs and/or Parent DUNs. You might not know what a DUNS number is, when it comes to Federal Contracts its mandatory. A DUNS tends to be static datapoint, whereas a company might charge their name - especially when it comes to mergers and acquisitions. With respect to Federal Contracts it’s what the Government uses to make awards.
DUNS - Data Universal Numbering System
See Dun & Bradstreet
In short if you are going to do business with the Federal Government your organization is required to obtain & use a DUNs number. Occasionally you’ll see me reference CAGE Codes.
CAGE - Commercial And Government Entity
See Defense Logistics Agency (DLA) CAGE info page
As an example of why I think it’s important for you to have the basic understanding of how Federal Contracts work (and for the record those in DC know I’m barely touching the “tip”) the DLA has a Database where you can query based on DUNS and CAGE - MARATHONNORCO AEROSPACE, INC. is a subsidiary of Transdigm, as affirmed by the following search
SpicyFiles Data Dump
The Transdigm is an incredibly complex labyrinth. Which is why taking the pragmatic approach of “slow and steady” is the . What I have yet determine (yet being the operative word) is Transdigm may or may not have intentionally set up this labyrinth for a multitude of functions mask and shield their various subsidiaries and exclusive distributors.
Once you’ve identified said thread, tug down hard. If you tug down hard enough eventually the thread leads to more data. Meaning this might evolve to a multi-part series. From a constructive and educational perspective some of the information provided will seem like data-overload. I’m a firm believer in “show your homework” as this helps you understand the methodology of research and hopefully it might make you feel comfortable attempting to do your own research. As for expediency purposes future write ups will be rapid firing of data. But for the purpose of this entry it made sense to group the Transdigm subsidiaries based on specific DOD-OIG reports.
Meaning it may be helpful to re-read this archived DOD-OIG February 23, 2006 Report . In any thorough investigation and expected research it makes sense to open with current events and then start at the beginning with the intent of filling in the gaps. I’m not entirely convinced 2006 was the beginning but for now this is the first known DOD-OIG Investigation. In the Report the following recommendation after receiving a hotline tip of excessive pricing based in part of a sole source Justification - which can inherently have issues. Also it is important to remember that Federal Fiscal Years - do not start in January and end in December. Those of us in the beltway know that September & early October are the absolute worse times to take a vacation. Given Federal Agencies are often making a mad dash to obligate and de-obligate funds, colloquially known as “use it or lose It”. Also the majority of State and Local Fiscal Years start in July and end in June. When you see a “fiscal year” in relation to Federal Contracts it can straddle two calendar years. For Example: Fiscal Year 2019, starts in October 2018 and ends in September 2019.
“seek a voluntary refund of about $2.6 million for overpriced parts identified in the report; and require the Commanders of the Defense Supply Centers Columbus, Ohio, and Richmond, Virginia, to discontinue using competition between sole-source manufacturers and dealers to determine price reasonableness”
Report NO. D-2006-055 “Spare Parts Procurements From TransDigm, Inc.”
Addressed the following companies and contracts awarded to; AeroControlex, Adams Rite Aerospace, Adel Wiggins, Champion Aerospace, and Marathon Norco Aerospace all of which are subsidiaries of TransDigm, Inc
Just to reiterate the purpose of this entry is start at the beginning or at least the first DOD-OIG Report concerning Transdigm and it’s subsidiaries “excessive pricing” circa 2006. On page 8 of the 2006 report you’ll find the Transdigm corporate hierarchy with regards to their subsidiaries
ADAMS RITE AEROSPACE, INC
DUNS 151847340 Parent DUNS 135472285
Assigned to three IDVs/contract vehicles (one of which expired in 2017), if I were an auditor I’d zero in on N0016412DJQ29, because Adams Rite Aerospace was awarded 14 awards from 2012 to 2017 with a TCV of >$4.2million. With a current total of 272 contract awards. In Fiscal Year 2019 - 20 subcontracts have been awarded
Although one particular contract category that some tend to overlook is the “subcontracts” of which in 2019 alone more than $3,310,759.00 was awarded to Transdigm’s subsidiary Adams Rite Aerospace - those are some really expensive “door handles” or this is just another grotesque example of excessive pricing ergo Transdigm’s unjust enrichment.
MARATHONNORCO AEROSPACE INC
DUNS 835107574 Parent DUNS 135472285 MarathonNorco Aerospace presently listed on nine contact vehicles. Since 2013 to present they have been awarded 199 awards. With 69 Subcontract Awards, with revenues for 2019 alone $6,885,538.00
Again for those of us in DC we know where and what and how to drill down on contacts. While USASpending is the main and arguably central contract database it does tend to be rather lean on details. As such sometimes this requires you to run a search in other Federal Contract Databases, such as SAM (FYI SAM is down for maintenance until June 17th), GSA etc
IDV - Indefinite Delivery Vehicles
When you use other Federal Databases you can in fact find far more detailed Contract information, such as the following 7 contract awards, October 2016 to August 2018 the DLA spent $5,827,971.22 for “batteries” under IDV: SPE7MX16D014 via the following awards:
Remember how I said that the best way to research federal contracts is, DUNS and/or CAGE numbers? This is where proof in concept come into it play, if you ran a generic search in USASpending for Adel Wiggins or iteration thereof it would yield you the following zero returns
So this is when you jump on over to the DLA’s CAGE database and then you double check the CAGE Number and/or actual business name CAGE registration isn’t Adel
And once you have the correct DUNs and/or CAGE number you can then return to the USASpending Database and you hit the target, dead on. In 2019 - Transdigm (DBA DBA ADEL WIGGINS GROUP- MILITARY) awarded 74 contracts and only 3 subcontracts awarded in 2019. Whereas 2016 to 2018 some 395 contracts were awarded and 40 subcontracts awarded for the same timeframe. More broadly from 2008 to 2015 some 659 contracts awarded and only 7 subcontracts for the same period of time.
If I were let’s say an auditor or a member of Congress or perhaps the DCAA I would actually take a hard look at 2011 to 2014 and 2016 to present. Especially starting in Q3 of 2016 there was a sizable uptick in “subcontracts”. Although I’m not a forensic auditor but what I can tell you is when you have more than three datapoints that all share multiple corollaries - it truly starts to look like a pattern. Meaning why would Transdigm subcontract to multiple of their subsidiaries?
DUNS 185050945 Parent DUNS 135472285 CAGE 0AFL4
According to the Federal Contract Database in Fiscal Year 2019, thus far have been awarded 94 awards and awarded 23 subcontracts. Moreover from 2008 to present this Transdigm Subsidiary placed on 14 IDVs (contract vehicles) For the combined fiscal years 2015 thru 2018 Champion Aerospace was awarded a total of 44 awards. In the same 2014 thru 2018 Fiscal Years a total of 513 subcontracts were awarded. In totality Champion Aerospace, a Transdigm Subsidiary was awarded 1,377 awards totaling $107.5 million.
This is why, when it comes to DOD contracts you need to also look for the Contractor’s CAGE number, because as you can see Transdigm has two CAGE numbers and the “affiliate” companies differ predicated on each of the CAGE Nos, 65 and 88 respectively. This is a tiny detail that actually matters because most who have attempted to research appear to be only looking at one versus two.
Transdigm Inc - CAGE 7E8F9 - has 65 “list of offers” all of which are classified as “intermediate”
Whereas TRANSDIGM GROUP INC - CAGE No 7E8C9, list 88 - of that 85 are ranked highest and 3 are immediate.
In order to ensure that you have all of Transdigm and their subsidiaries I’m kind of an old school DC ally cat. So when I’m pulling down contracts if it’s a simple search I will use:
System Award Management (SAM - which is presently down for maintenance until June 17 at 7AM EST)
FedBizOps (FBO which is decent but it’s a clunky database)
GovWin (it is behind a paywall - but this is almost mandatory for DC folks, it’s one of my favorite because of the sheer volume of information that’s available to you)
But like I said I’m old school and my preferred database is Federal Procurement Data System - FPDS - pardon me while I go whipsaw the 1700 page query I pulled down for Transdigm and it’s subsidiaries.
One thing I like about the FPSD Database is you can create PDFs and/or Export into excel so you can then drill down on the data in even further detail. I mean I’m a fan of titl-tables, especially on a Sunday evening.
Via FPSD - Transdigm DLA Contracts 1999 to present
Transdigm & their Subsidiaries awarded 1,402 awards from the US Navy
US Air Force awarded Transdigm and/or it’s subsidiaries some 1,105 awards:
The United States Army (not to be confused with DLA or Army Corp of Engineers) awarded Transdigm and it’s subsidiaries some 724 awards:
Yet another reason I’m a fan of the FPSD is they literally go all the way back. Case in point the USCG has awarded Transdigm and it’s subsidiaries a mere 206 contracts since 1983 to present
And yes it can be confusing to keep up with the DC alphabet soup. When agencies have a full on turf war of who’s wheelhouse is it. Then add in the thousands of contract award. What you find is just below the surface of Transdigm’s and it’s subsidiaries, questionable business practices and models. Therefore adding, yet another thick layer of complexity. Although the constant is, perhaps a honest conversation about Sole Source Contracts is well over due and perhaps we should start to closely examine the DOD Budget. Which means this particular “series” is far from over because I have more files to read and drop.
My closing thought - listen to Transdigm’s response during last month’s House OverSight Hearing. I can tell in that in my line of work Transdigm’s Executives did not or they refused to be properly prepared for actual testimony. This is by far one of the most awkward exchanges I’ve watched in a while. When you hire a firm to prepare for your oral and written testimony, a decent rule of thumb (largely predicated on the subject matter) is for every one hour of testimony - at minimum 6 hours goes in to preparing that witnesses/client.
If you’re a decent firm then you want to have a fully prepared client/witness. Meaning you start off slow and nice and then you just batter them for hours. You grill them to the point that they might actually grow to hate you. By taking the time to fully prepare them, which often includes; numerous curveball questions, open hostility and perhaps some raised voices. When your client does do take the stand or in front of the camera for a video depo or appears before a Congressional panel. If you have done your job correctly, your client is almost inoculated from the element of surprise and has the self awareness to not react with unmitigated frustration when pointed & precise questions are asked. That you’ve drilled the following thought in to the client: “listen to the question that is asked and only answer that question - do not inadvertently open the door and accidentally proffer any information beyond what the question asked you”
Antidotally - I was once involved in a highly contentious merger. By the end of day three of witness preparations. the client looked haggard. That particular witness preparation lasted a few more days but I knew that the our client was fully prepared and wouldn’t lose their cool, more importantly the client also knew they were fully prepared too. But this exchange is exactly what it’s like when you do not take the time and “care” to prepare a witness
ps Happy Fathers Day to you and hope you had a great day.
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