What will you do with your tax refund? is a typical question that comes up for many individuals after April 15. For the first time in decades, a similar question is being pondered by chief financial officers (CFOs) and other executives at corporations across the country, as a result of the December passage of U.S. tax reform legislation.
At the Consumer Analyst Group of New York (CAGNY) meeting last week, most of the top food and beverage company executives addressed it to varying degrees. All will be getting some benefit, although those with overwhelmingly domestic sales – like Conagra, J.M. Smucker and Tyson – will benefit more, while the more global firms – Mondelez is a prime example – will get less. In fact, for some there is a steep repatriation tax on past foreign earnings that were not sufficiently taxed.
Notable up front is that Tyson will be paying cash bonuses to employees whose compensation plans do not include an annual bonus. Full-timers will get $1,000 and part-timers will get $500. "These team members are the backbone of our business and can expect to hear more details from their leadership soon," CEO Tom Hayes announced in his company blog just before the CAGNY meeting.
In addition to the lower domestic tax rate, the legislation differently taxes foreign earnings, which almost all large U.S. food and beverage companies have. That part is not a benefit to U.S. companies, although it does make investing in the U.S. more attractive and should lead to economic growth.
A nice primer, which also predates the CAGNY meeting, comes from Kathy Waller, Coca-Cola Co.'s CFO. She explained the new tax legislation, including some situations unique to her company, to employees in an online company Q&A:
"At the former 35 percent rate, [the former corporate tax rate] was the highest among the 35 countries that are members of the Organization for Economic Co-operation and Development, which is an important benchmark. While our effective tax rate wasn’t as high as 35 percent, given that so much of our business is outside the U.S., it was still 24 percent globally. The new law lowers the U.S. tax rate to 21 percent on corporations.
"The new law imposes a repatriation tax on historical foreign earnings that companies like Coca-Cola have been reinvesting or holding for overseas investment," Waller continued. "For the fourth quarter of 2017, we recorded a one-time, non-cash charge of $3.6 billion [that] will be paid over an eight-year period, as stipulated by the new law. That means our cash flow will be impacted in future periods but, over time, the company gets a cash benefit from the lower ongoing tax rate. Overall, it nets out to be positive for our business."
Coca-Cola expects to use the benefits of tax reform to repay some debt and also return cash to shareowners.
Following is how some of the other companies speaking at CAGNY planned to spend their windfalls:
With its fiscal year ending July 31, Campbell Soup expects to save 25 cents per share (our math: $75 million) from tax reform in 2018 – so nearly twice that going forward. Its full-year adjusted effective rate should be about 26 percent. "We may reinvest a portion, potentially a majority, of this tax benefit back in the business to improve our future growth profile," said a spokesman.
Conagra's tax rate was 33.5-34.5 percent but should come down to 29-30 percent, CFO Dave Marberger said at CAGNY. That should save the company $120 million a year, perhaps adding 11-13 cents to earnings per share. Conagra plans to improve debt and pension obligations, consider "opportunistic" share repurchases, maintain its dividend and consider mergers and acquisitions.
With its fiscal year just ended (Feb. 28), Constellation Brands expects $300-400 million in savings for the new year as its tax rate drops to 21 percent. The spirits company plans to use it to drive topline growth, spending an additional $35 million in FY19 to launch new superpremium Mexican beers Corona Premier and Corona Familiar. Some of the newfound cash will be used for marketing and other costs associated with its 10 percent stake in Canopy Growth Corp., a Canadian provider of medicinal cannabis products, which is awaiting this summer's legalization of marijuana in that country.
General Mills – whose fiscal year ends May 28 -- estimates that a partial year with the new tax law will lower the tax rate by 2 points to approximately 27 percent. For fiscal 2019, with a full-year impact, the rate should be 22-24 percent, or 5 to 7 points lower than the recent rate. “We plan to invest a portion of the tax reform benefit into high-ROI initiatives to help us make further progress in our efforts to return to consistent top line growth,” CFO Don Mulligan said at CAGNY. Priorities include Haagen-Dazs, Old El Paso, snack bars and the natural and organic business.
Hershey is "evaluating the cash benefit of tax reform and believe it will complement the existing cash usage priorities Hershey has previously outlined: business investment, including both brand-building and capital expenditures that result in growth, dividends, share buybacks and debt reduction," read a company statement. In an afterthought, a company spokesman added digital commerce and "the multi-year enterprise resource planning project." At CAGNY, CFO Patricia Little said the company's tax rate should come down to 20-22 percent.
During Kellogg's fourth-quarter earnings call, CFO Fareed Khan said the company expects a full-year tax rate of 20-21 percent, about 5 to 6 points lower than its 2017 rate. Kellogg's using the funds "to invest behind our brands as we pivot to growth as well as to improve financial flexibility, including paying down some debt."
Lawrence Kurzius, chairman and president/CEO of McCormick, says in a written response to us: “The recently enacted tax legislation will provide incremental tax savings for McCormick in fiscal 2018. Our priorities remain the same. We will continue to make investments to drive growth, return cash to shareholders and pay down debt. Net of the significant one-time repatriation tax of $70-90 million, we plan to increase capital expenditures by 10 percent to $200 million in 2018 and accelerate our debt pay-down.”
With three-quarters of its sales outside of the U.S., Mondelez will get less of a benefit than most companies. But the new tax law also looks less worrisome to the global snack company than it once appeared. "It’s essentially a net neutral effect for us," said a spokesman. "While the reduction of the U.S. tax rate has some benefit, it is offset by provisions that limit or eliminate various deductions or credits." The company expects its effective tax rate in the low to mid-20s.
J.M. Smucker Co. expects a $120 million benefit and will contribute $20 million to its pension plan and bonuses.
Tyson expects a $300 million benefit, with tax rates dropping to 24-25 percent. More than $100 million in one-time cash bonuses will be paid to more than 100,000 eligible frontline employees in the second quarter of fiscal 2018 (Tyson's fiscal year ends Sept. 30). There will be more funds for innovation and other initiatives such as enhancing training, education and development. And some capital projects, especially relating to sustainability and animal well-being initiatives, will be accelerated. Tyson executives in a November earnings call estimated $1.3-1.4 billion in 2018 capital expenditures, but after tax reform upped that to $1.4-1.5 billion.