The Air Force on Monday suspended Eaton's AIL division from obtaining new contracts, saying that the company had falsified contract payment requests and had paid gratuities to government employees on the B-1 bomber program.
The suspension significantly deepens Eaton's problems on the B-1 program, even as the company tries to sell its troubled defense electronics unit, which includes Long Island, N.Y.-based AIL. Eaton put the division up for sale two weeks ago but some defense industry leaders said Monday that they are dubious about its salability.
The Air Force is withholding $210.2 million in payments to Eaton because of deficiencies in its products, late deliveries and deviations from requirements on products, Air Force officials said. Eaton produces the B-1's defensive electronics system, known formally as the ALQ-161.
Company to Appeal
In the action Monday, the Air Force said Eaton had engaged in "falsification of progress payment requests" starting in 1982 and continuing until the present, and that gratuities were given to government employees between 1982 and 1985. Progress payments are made monthly to contractors for defense work as it is completed.
"The Defense Contract Audit Agency discovered the improprieties during a routine audit of overhead costs and a routine DCAA backup audit of progress payment requests," an Air Force statement said. "The temporary suspension will continue until any legal proceedings are completed."
An Eaton spokesman said: "We believe AIL's current practices on gratuities and progress payment reporting is fully responsible." He added that the company intends to appeal the suspension, though he conceded that the company had provided "meals and admission to sports events" to government employees.
Criminal and civil investigations of Eaton are under way by the U.S. attorney in New York, the Air Force said. Such investigations often take months or even years, raising the prospect that the AIL division could be locked out of new business for a considerable amount of time.
The AIL division holds B-1 contracts worth $3.9 billion, representing 98% of its government work. Air Force officials said earlier this year that deficiencies in the defensive electronics system on the B-1 made the bomber vulnerable to being shot down by the most advanced Soviet missiles. The B-1 is assembled in Palmdale by Rockwell International, the aircraft's prime contractor.
Shortcomings in the Eaton system have created a furor in Congress, which was assured by the Air Force that the prototypes of the bomber were fully tested before the aircraft was ordered into production by President Reagan in 1981. Rep. Les Aspin (D-Wis.), chairman of the House Armed Services Committee, has been an outspoken critic, saying recently that the B-1 may never be capable of performing its bombing mission.
The combination of the suspension, the withholding of progress payments and the serious technical problems in the B-1 system all appear to raise the question of whether Eaton will be able to find a buyer for the division, according to defense executives who asked not to be identified.
"If they have all of these problems, who's going to buy them?" one asked. "It is not a very attractive entity."
On the other hand, Eaton is not necessarily in a loss position on its B-1 work. The company is negotiating with the Air Force to recoup some of the cost of fixing the B-1 equipment, claiming that the improvements were not required in the original 1981 contract, according to knowledgeable sources.
"I don't think Eaton is selling AIL because they have a big loss," an executive said. "On the contrary, they are going to make money."
Nonetheless, Air Force officials are concerned about the prospect that Eaton wants to sell AIL before the Air Force is satisfied that the B-1 problems are fixed.