TransDigm: Twelve TransDigm Group Incorporated Subsidiaries Appear to Have Submitted Incorrect Ownership Information in Federal System for Award Management Database

Vol. 5 No. 75 - March 3, 2017 - Click here to access our library. 

Regulatory Update

Federal Acquisition Regulations require government contractors who register with the System for Award Management (SAM) database to disclose whether they are owned by another entity.  On November 1, 2014, a new subpart was added to the Federal Acquisition Regulations that requires all registrants in the SAM database to disclose whether they are owned by another entity and to identify the parent entity by legal name and by the parent entity’s unique Commercial and Government Entity (CAGE) code. According to the Frequently Asked Questions on the Federal Service Desk, which can be accessed from the SAM registration page, “FAR 52.204-17, Ownership or Control of Offeror, requires entities to enter the immediate and highest level owners [sic] CAGE Codes when registering in SAM. This is a self-certification by the offeror.”

The definitions for immediate owner and highest-level owner can be found at 48 CFR 52.204-17.  The law also requires all prospective contractors to complete and update their registrations, “as necessary, but at least annually, to ensure they are kept current, accurate, and complete.” 

TransDigm ownership structure.  As an exhibit to its most recent 10-K, TransDigm Group Incorporated (the highest-level parent, CAGE code 7E8C9) includes the Second Supplemental Indenture for 6.375% Senior Subordinated Notes due 2026.  That indenture includes the subsidiaries of TransDigm Group Incorporated and indicates that “TransDigm Inc. is a 100% owned subsidiary of TransDigm Group Incorporated” and that “Transdigm Inc. owns directly or indirectly the following subsidiaries:”. 

That list of subsidiaries includes twelve subsidiaries that do not disclose that they are owned by TransDigm Inc. in their SAM registrations.  The twelve subsidiaries are: Acme Aerospace, Adams Rite Aerospace, Avionic Instruments, CDA Intercorp, CEF Industries, Dukes Aerospace, Electromech Technologies, Electromech Technologies DBA Tyee, Hartwell Corporation, Pexco Aerospace, PneuDraulics, and Skurka Aerospace.

Purpose of the rule. According  to Todd Overman, the chair of the government contracts practice at Bass, Berry & Sims, the rule was likely implemented as part of the Obama administration’s desire for increased transparency to better track how government dollars are spent.  Indeed, the preamble to the rule indicates that it was designed to provide greater transparency and reliability of data “to facilitate achievement of rigorous accountability of procurement dollars.”  Further, the preamble states, “Increased transparency and accuracy of procurement data broaden the Government’s ability to implement fraud detection technologies restricting opportunities for mitigating occurrence of fraud, waste, and abuse of taxpayer dollars.”

The language in the preamble also states “the purpose of the rule … is to (1) support successful implementation of business tools that seek insight into Federal spending patterns across corporations; (2) facilitate traceability in the tracking of performance issues across corporations; (3) provide insight on contractor personnel outside the United States (at a corporate/full organization level); and (4) support supply chain traceability and integrity efforts. The use of the CAGE code provides a Government-managed unique identifier for these entities; and the final rule provides a mechanism for the entities themselves to identify their hierarchical structure to the Government.”

Twelve out of 35 subsidiaries whose SAM registrations we reviewed did not disclose TransDigm as the parent. We reviewed all of the available SAM registrations for all companies owned by TransDigm Group Incorporated that we were able to find (note we did not include Takata Protection Systems in our review given the recency of the acquisition). Twelve of those subsidiaries did not disclose that they were owned by another entity. Screen shots for all SAM information for the TransDigm Inc. subsidiaries that do not disclose ownership can be found here.

DLA master list. At the time the rule was proposed, a question was posed during the public comment period as to which system would be the master record for CAGE code information.  In response, DoD, GSA, and NASA responded, “The planned implementation will be to collect the information via SAM, as a part of the contractor's registration. That information collected will be transmitted to the actual CAGE code system, managed by the Defense Logistics Agency (DLA) on behalf of the Federal Government.”

We checked the DLA CAGE Codes against the information in the SAM database and the data was the same—all twelve entities did not disclose that they were owned by a parent.  The screen shots from the DLA website can be found here and below is a table of the twelve companies that do not disclose that they are owned by any other entity, with the date of the company’s most recent registration in the SAM database. Page 27 of TransDigm Group Incorporated’s February 2017 investor presentation provides information as to when each of the companies was acquired.  Importantly, each company’s latest annual registration in the SAM database took place after November 1, 2014, when the new subpart was added to the Federal Acquisition Regulations requiring the subsidiaries to disclose parent ownership.

TransDigm Group Incorporated acquired Tyee Aircraft as part of its McKechnie Aerospace acquisition in 2010.  According to the DLA CAGE code database, Tyee Aircraft’s original CAGE code of 6E775 was replaced by 34742. A search for the 34742 CAGE code in both the SAM and DLA databases return an up-to-date profile of Electromech Technologies DBA Tyee Aircraft.

Haystack Gold research also lists the 34742 CAGE code as having several proprietary parts and recent contracts with the DLA. TransDigm documents acknowledge both Electromech Technologies (CAGE 54395) and AvTechTyee (CAGE 30242) as subsidiaries, but not Electromech Technologies DBA Tyee. However, TransDigm’s own website lists Tyee Aircraft parts as unique products. Because Electromech Technologies DBA Tyee Aircraft has a different CAGE code from Electromech Technologies and AvTechTyee as well as proprietary parts separate from either entity, we have included it in our analysis.  For the purposes of the DLA’s own CAGE code tracking system, Electromech Technologies DBA Tyee Aircraft appears as its own company unaffiliated with TransDigm Group Incorporated.

Effect of rule on TransDigm Group Incorporated. When entities that register for CAGE codes disclose both immediate and highest-level ownership, the DLA can better track its total spend across an entire company and can get more insight into supply chain traceability, as the rule envisioned. For a company with a broad range of holdings such as TransDigm Group Incorporated, the new rule would make it much easier for the DLA to link subsidiaries together as part of the TransDigm Group Incorporated highest-level parent and TransDigm Inc.

As we have previously reported, TransDigm Group Incorporated itself or through TransDigm Inc. or through wholly-owned subsidiaries routinely purchases companies that produce proprietary airplane parts and raises the prices for these parts. Accordingly, the ability for DLA to link price increases across a range of seemingly-separate companies to one parent company would give the DLA greater insight into this practice, which could affect procurement practices.

Indeed, Michelle McCaskill Chief, Media Relations Public Affairs Office Defense Logistics Agency stated, the “DLA aggregates spend based on the Commercial and Government Entity (CAGE) program.  A company with multiple CAGEs should ensure they have a Parent CAGE and tie their other CAGEs to that CAGE to ensure all of their spend is considered.”  Ms. McCaskill also stated “it is a requirement per FAR 4.18 that companies identify their ownership when establishing their CAGE codes.  It is thus incumbent on the supplier to meet this requirement.”

No clear pattern.  There is no apparent reason why certain TransDigm Inc. subsidiaries do not disclose that they are owned by a parent.  Importantly, there is no distinction in any of the subsidiaries appended to the Second Supplemental Indenture for 6.375% notes. Provided with relevant information about TransDigm subsidiaries, government contracting lawyers we interviewed believed that the TransDigm subsidiaries should have disclosed that they are ultimately owned by TransDigm Group Incorporated. At various points in SEC filings, TransDigm Group Incorporated identified nine of the twelve subsidiaries as either direct or indirect wholly-owned subsidiaries of TransDigm Inc. 

In 2006, TransDigm Group Incorporated referred to Adams Rite Aerospace, Inc., Avionic Instruments, Inc., and Skurka Aerospace, Inc. as wholly-owned operating subsidiaries of TransDigm Inc. In 2010, TransDigm Group Incorporated referred to CDA InterCorp LLC and Acme Aerospace, Inc. in a list of direct and indirect wholly-owned operating subsidiaries of TransDigm Inc.  In 2011,TransDigm Group Incorporated referred to Dukes Aerospace Inc. as a wholly-owned subsidiary of TransDigm Inc.; In 2015, TransDigm Group Incorporated referred to Hartwell Corporation and CEF Industries, LLC as wholly-owned subsidiaries of TransDigm Inc., and to Pexco Aerospace Inc. as a newly formed subsidiary of TransDigm Inc.

SAM registration and renewal process requires affirmative or negative response to ownership question.  After entering basic information into the SAM registration form, the registrant is required to answer the question: “Does another entity own or control the entity you are registering?” If the registrant selects “Yes”, additional dialogue boxes are opened, which require the registrant to disclose both immediate and highest level ownership. Several TransDigm Group Incorporated subsidiaries are immediately owned by TransDigm Inc., which in turn is ultimately owned by TransDigm Group Incorporated. TransDigm Group Incorporated subsidiaries are required to affirmatively disclose both their immediate (TransDigm Inc.) and highest-level owner (TransDigm Group Incorporated). For TransDigm Group Incorporated subsidiaries that correctly disclose ownership, the registration process should look like the following:

In the case of the twelve subsidiaries that do not disclose their ownership by TransDigm Inc., the subsidiaries likely selected “No” to the first question, which would not have opened the additional questions about immediate and highest-level ownership.

Knowingly providing false or misleading information on the SAM registration form is a crime.  On the final page of the certification form, registrants are asked to review all information to ensure accuracy. This page also requires the registrant to confirm that they have read and understood all FAR provisions relating to their application, including the provisions in FAR 52.204-17 Ownership or Control of Offeror, which we have included above.

Before clicking submit, the registrant is given this disclosure: “By submitting this registration, you are certifying the information is accurate and complete. Knowingly providing false or misleading information may result in criminal prosecution under Section 1001, Title 18 of the United States Code. Criminal Penalties could include imposition of a fine, imprisonment, or both. You may be subject to other penalties as well, including, but not limited to, administrative remedies, such as suspension and debarment; ineligibility to participate in programs conducted under the authority of the Small Business Act; or civil liability under the False Claims Act.”

Incorrect information submitted after new law took effect. The twelve TransDigm Inc. subsidiaries that submitted incorrect ownership information submitted their most recent registrations well after the 2014 law took effect (please refer to the above table for specific dates of most recent registrations). Additionally, as the SAM database requires registration to be updated on at least a yearly basis, the twelve companies have submitted incorrect information more than once under the new law. Some of the subsidiaries, like Skurka and Avionics, have been owned by TransDigm Group Incorporated for well over a decade.

Risk of loss of CAGE codes; CAGE codes are required to receive government payment. In addition to legal risk, the DLA established new guidelines for CAGE code registration that tie them to SAM registration in August of 2016. Importantly, CAGE codes can now expire and be revoked if a company does not keep its SAM registration up to date and accurate.

The changes were set to take effect for all registrations occurring after August 25, 2016, which would expose seven of the above companies to a risk of losing their CAGE codes because of inaccurate information in their SAM registrations.  According to the DLA release, “Taking action to expire CAGE codes is a step in the right direction for data quality… Ultimately, the goal is to provide current and correct information to everyone using this data.” If a CAGE code expires, a company cannot get paid by the government even if it is currently fulfilling a contract.

Knowingly or unknowingly? We asked the lawyers we interviewed whether there could be any plausible explanation for why immediate ownership interest was not disclosed.   Mr. Overman indicated that the person filling out the SAM registration might simply not have the knowledge of whether the subsidiary was owned by another company.  However, Mr. Overman said that unknowingly providing incorrect information would still constitute a compliance oversight and that the offending subsidiary should have put a person in charge of filling out the SAM registration who has adequate knowledge (or a process in place to ask the right questions). Terrence O’Connor, a partner and co-director of the government contracts practice at Berenzweig Leonard with 40 years of government contract law experience, stated, “the company has the responsibility to know what it is doing and any contractor, especially major companies, should not screw things like this up.”