Tag Archives: Defense Contractor Taxes

Defense Companies Funneling Newfound Tax Reform Cash Into Corporate Pension Offsets

Defense company pension Liability

Generally speaking, the biggest recipient of cash infusion happens to be pension plans.. (doomu/Getty Images)


“Most companies froze them a decade ago or longer. But that didn’t eliminate the liability that comes with having to reserve funds for paying out retirement to the many individuals that already have built up those nest eggs.

So it’s understandable then that Lockheed would decide to make a whopping $5 billion cash contribution into its pension trust in 2018, satisfying required payments until 2021. It also explains Raytheon’s contribution of $1 billion, Northrop’s $500 million and Harris’ $300 million, to just name a few more.”

“If you listened to the annual earnings calls of the major, public defense companies (wait, does everyone not do that?) then you might have noticed a common theme.

They’re all going to have more cash. And a lot of them have similar plans for how to spend it.

One of the advantages of the tax reform law was to trim the corporate tax rate from 35 percent to 21 percent, which, in the words of Lockheed Martin’s CEO Marillyn Hewson, “reduces the combined U.S. corporate tax rate from the highest in the industrialized world, in line with the tax rates used in the most advanced economies.”

In the short term, most companies experienced a little bit of hurt by way of a one-time non-cash increase to income tax expense; it showed in earnings, with some falling short of guidance. But the advantages will certainly kick in starting next year.

So then what do companies have in mind? The idea behind the corporate tax cuts, if you ask the Trump administration, was jobs. And longer term, that conceivably will happen among the defense companies. But first, the money is going to other things. And generally speaking, the biggest recipient of cash infusion happens to be pension plans.

If pensions seem “so 1990s,” it’s because they kind of are. For years, that liability has been an enormous drag on the books for companies, particularly those that have been around for a long time (meaning just more obligations).

But here’s what’s interesting about pension liability — and bear with me here, since it’s complicated and I’m not a financial expert: Liability is so high because interest rates are low, and interest rates are used to calculate long-term obligations. Because pension payouts run so far into the future — 60 to 70 years to cover the lifespan of all participants — a company’s plan must predict how much it needs in the short term to cover future payments. That’s done by using an assumed discount rate based on the interest rate of fixed-income securities. Make sense? Put simply: The lower the discount rate, the higher the assumed pension obligation.

Of course, that very reason makes pension liabilities “artificially high,” in the words of Lockheed CFO Bruce Tanner, when he was kind enough to walk me through all this in 2012. I remember this statistic being quite telling: If the interest rate increased to 7.75 percent at that time, Lockheed’s unfunded liability of $12.78 billion in 2012 would have suddenly become zero. Rates have remained low, so pension liability has remained high.

So then what’s the point? If pension liability is something of a false drag on the books, and if we all assume that interest rates will eventually rise, then couldn’t this newfound infusion of cash be better spent elsewhere — acquisitions, research and development? Executives assured investors that too was happening — if not now, then soon.

Lockheed said it’s exploring such things as employee training and educational offerings, increasing charitable contributions in STEM, and increasing the company’s ventures investment fund for early-stage companies developing disruptive tech. And Harris will invest $20 million in technologies to accelerate innovation and affordability efforts for customers, also granting each of its roughly 17,000 nonexecutive employees 10 shares of Harris common stock. That brings a current market value of about $1,470 each, or approximately $24 million in total.

So other investments are happening. It’s also important to consider that companies are using the tax cut windfall to front-load pension contributions before tax rates fall from 39.6 percent to 37 percent. Getting the most for their contribution, so to speak. That makes particular sense amid chatter mentioned by Richard Safran of Buckingham Research Group on an earnings call that the Pentagon might look to claw back some portion of the tax benefit from defense companies either by renegotiating existing contracts or re-pricing items on future ones.

Short-lived benefits? Too soon to tell, but better to take advantage now.”







Government Contractor Tax Day Tidbits – “Food for Thought”


tax day


[On] the federal tax filing deadline, the Project On Government Oversight (POGO) offer[ed] some tax-related contractor oversight food for thought:

  • ” The Treasury Inspector General for Tax Administration (TIGTA) found that the Internal Revenue Service (IRS) awarded contracts to at least 20 companies that owed more than $5 million in delinquent federal taxes. TIGTA also found that 11 contractors owing $4.3 million in taxes were awarded more than $356 million in IRS contracts and an additional $3.7 billion in contracts from other federal agencies
  • POGO tracks tax violations in our Federal Contractor Misconduct Database, which shows that contractors have paid $3.64 billion to resolve cases with local, federal, and foreign revenue collection authorities. The bulk of this amount comes from GlaxoSmithKline’s record-breaking $3.4 billion payment in 2006 to settle IRS charges of under-reporting profits.
  • There are some noteworthy tax misconduct cases pending against the large federal contractors, including actions by New York City and State against FedEx and United Parcel Service for allegedly trafficking in contraband cigarettes, and a complaint filed with the IRS accusing ExxonMobil of violating tax laws to wage a campaign attacking climate science.
  • Earlier this month, the IRS launched a program employing private debt collection companies to recover delinquent income taxes. This is the third time since 1996 the IRS has tried to outsource tax debt collection—both previous attempts were dismal failures.
  • Congress has taken another stab at passing a law that would prevent individuals with seriously delinquent tax debts from obtaining federal employment, contracts, and grants. Similar bills introduced in 2011, 2013, and 2015 ultimately failed to advance. The Senate is also attempting to strengthen protections for those who blow the whistle on tax fraud.

So get those tax returns out the door! You can rest assured that POGO will do its best to make sure the government collects what it is owed and does not waste that money.”





Compelling Proof Large Defense Contractors Are Sheltered from Cuts and Pay Little in Taxes



defense-tax-evaders“NATIONAL DEFENSE MAGAZINE”

“Defense Department contract obligations dropped by 16 percent to $314 billion from 2012 to 2013, a decline four times as steep as was seen from 2009 to 2012, a CSIS study estimated. From 2012 to 2013, contracts for the Pentagon’s top six contractors — Lockheed Martin, Boeing, Raytheon, General Dynamics, Northrop Grumman and L-3 Communications — dropped by 9 percent. For everyone else, they fell by 19 percent.

The report provides overwhelming evidence that the sequester, which was designed to cut government spending across the board, has affected contractors far more dramatically, Berteau said. Non-contract outlays, by comparison, remained mostly flat from 2012 to 2013, an indication that when budgets fall, federal agencies target contract spending as a measure of first resort. The study, conducted annually by CSIS, looks at contracting trends from 2000 to 2013 drawn from the Federal Procurement Data System.

“Contractors are paying the largest share of the impact of the decline,” Berteau said. As a percentage of total gross defense outlays, defense funded contract obligations have declined from 53 percent to 49 percent in 2013, the lowest share since 2002.

Berteau said the industry might not want to keep pretending that its defense sales have hit bottom and are going to come back up. World events and new contingencies such as the war on the Islamic State and the Ebola crisis might boost emergency spending, but will not immediately lead to a broad bipartisan agreement to increase the current caps on government discretionary spending, he added.

At the Defense Department, uncertainty and churn will continue to delay weapon modernization programs. “It is only going to get worse from a contractor point of view,” Berteau said. “I do no see the votes to change those caps any time soon.”

Many defense CEOs believed when sequester hit, that it would be a one-time event, that “Congress would come to its senses, that we’d get our money back in 2014, and the caps would be raised,” said Berteau.

A big warning signal for contractors is the precipitous fall in Defense Department research and development spending. R&D contract obligations dropped by 21 percent from 2012 to 2013, and by 39 percent from 2009 to 2013. The Army’s R&D contracts went down by 35 percent and the Air Force’s by 27 percent, compared to only 10 percent for the Navy.

These numbers show that the Pentagon, contrary to the official rhetoric, is paring back investments in advanced technology and modernization of the force, said CSIS analyst Greg Sanders, one of the authors of the study. After Congress passed the Budget Control Act and military spending took a dive, Defense Secretary Chuck Hagel called for a smaller, but more technologically advanced force. The data contradicts that vision, Sanders said.

As shown by impressive gains in stock prices over the past two year, large primes have pulled through the sequester better than small firms. The study provides compelling proof that the largest contractors are more sheltered from cuts. From 2012 to 2013, contracts for the Pentagon’s top six contractors — Lockheed Martin, Boeing, Raytheon, General Dynamics, Northrop Grumman and L-3 Communications — dropped by 9 percent. For everyone else, they fell by 19 percent.

The numbers in the CSIS study should not come as a surprise to industry investors, says analyst Byron Callan, of Capital Alpha Partners. “The data likely conforms to many investor perceptions of what’s happened in recent years,” he writes in a research note.

“Investors and analysts need to keep in mind that the data is for contracts — this is not the same as outlays,” he warns. Contract awards more closely track company orders while outlays are more closely related to sales. Of particular interest to investors, he says, is that foreign military sales contract obligations fell 20 percent between 2012 and 2013 — from $26 billion to $21 billion. “FMS should not have been impacted by sequestration, but the data is a bit surprising given general optimism surrounding international defense growth opportunities.”