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Talking about tax reform during earnings season

Most public companies remained circumspect at best in their comments about the federal tax reform legislation as it took shape last summer and fall and even as the Tax Cuts and Jobs Act was signed into law.

Now, though, with the quarterly earnings season underway, virtually every company is saying something about tax reform – the impact on its corporate tax rate, earnings, cash flow, customers and markets, and more. And it probably won’t be the last time they address the subject. What lessons can companies take away from how early reporters have addressed federal tax reform?

While a handful of companies have limited their discussion to the bare bones, the majority appear to be taking a deeper dive. As the Wall Street Journal wrote, “Some of the biggest U.S. companies are promising significant annual savings, bigger pension contributions, higher dividend payments and more extensive stock buybacks as executives start to discuss the impact of the federal tax overhaul.”

Giving tax reform short shrift might send a mixed message. Think beyond the basics to the broader impact. For example, Huntington Bancshares Inc. (NASDAQ: HBAN) CEO Steve Steinour told analysts on the earnings call:

“It’s important to remember that our commercial focus is primarily on privately held businesses. These businesses stereotypically are more likely to pay a full statutory tax rate and therefore are going to see materially improved profitability and cash flow. And importantly, these companies are also likely to reinvest those tax benefits into their businesses to fund growth.”

Drug maker AbbVie Inc. (NYSE: ABBV) CEO Richard Gonzales recently told analysts that the company expects to generate far more cash than it can use productively in the business. But, even so, tax reform “will provide increased flexibility for capital deployment, including incremental investments here in the U.S.” The company plans to improve employee benefits, contribute more to the company’s pension plans and make bigger charitable contributions.

Brown & Brown Insurance (NYSE: BRO) included a helpful slide in its earnings call deck that walks through the estimated effective tax rate for 2018. CEO Powell Brown elaborated on management’s thinking:

“As it relates to additional money from tax reform that we’ll be able to invest, we’re focused upon current and future teammates, innovation both in technology and beyond as well as M&A. Our goal each year is to deploy as much capital as we can that will generate appropriate returns for shareholders.”

PNC Financial Services Group, Inc. (NYSE: PNC) CEO William Demchak connected the tax reform benefits with the company’s business model:

“And the good news is that tax reform has produced both current and future benefits for our shareholders…. Tax reform has also given us the flexibility to invest more in our businesses, our communities, and our employees, which helps drive our Main Street banking model.”

Not willing to wait until its scheduled February 20 earnings call, Home Depot (NYSE: HD) announced a one-time cash bonus for U.S. hourly associates of up to $1,000 on January 25. “Amid the changing retail environment, the Company intends to invest in its associates, its stores and the customer experience,” the release stated.

While most companies don’t appear to be facing tough questions around the tax overhaul, it’s wise to be prepared. In several banking sector calls, executives were asked whether heightened competition could erode away some of the expected benefits of lower tax rates. This is in line with the consensus among economists that the growth spurt will be short-lived because “we are already at full employment and the Federal Reserve will respond by raising interest rates more aggressively,” Associated Press reported.

Companies should have a handle on industry expectations and how their situation may differ from that of their peers. For example, as an industry-by industry review in the Wall Street Journal noted, “U.S. manufacturers are likely to benefit from the ability to immediately write off the costs of equipment purchases…. But the tax bill could have mixed impacts for U.S.-based companies with overseas operations, depending on each company’s circumstances.”

As the above Home Depot news illustrates, it is not too late for companies to announce some form of employee tax reform bonus. According to a list  maintained by the group Americans for Tax Reform, more than 274 companies to date have announced wage and salary increases, bonuses, or 401(k) match increases. A cynical PR move? More likely, employers know that the battle for talent is picking up steam.

In a recent op-ed, former CEO of CKE Restaurants (and erstwhile nominee for U.S. Labor Secretary) Andy Puzder urged employers who haven’t granted a bonus or wage increase to seriously consider doing so. “Otherwise, your employees will wonder where your increased profits are going.” Companies not sharing the corporate tax cut bounty should at least let their people know that reform has reduced their taxes so their take-home pay is higher, Puzder wrote.

Finally, if you do announce a bonus or other employee benefit, please don’t repeat the mistake the Walt Disney Company made and neglect to mention why you are doing it.

If you would like to talk further about how you’re communicating tax reform implications, feel free to call me at 216-241-4619 or drop me an email. And stay tuned to our blog for further updates.

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