Steuern und Vorstandsvergütung Briefing Paper 344 Das Thema Exekutivvergütung ist seit langem für Akademiker, die Volkspresse und Politiker von Interesse. Mit der anhaltenden Zunahme der Exekutivvergütung und der daraus resultierenden Erhöhung der Lohndisziplin zwischen den Führungskräften und dem durchschnittlichen Arbeiter steht diese Frage wieder an die Spitze der öffentlichen Diskussion. Im Laufe der Jahre haben die Gesetzgeber das Steuerkennzeichen angepasst, um die ungünstigen Formen der Exekutivvergütung zu begrenzen, während die Regulierungsbehörden die Höhe der Offenlegungsgesellschaften erhöht haben. Im laufenden Kongress hat die Republikanerin Barbara Lee (D-Calif.) Das Einkommensgesellschaftsgesetz von 2011 (HR 382) eingeführt, das den Internal Revenue Code ändern würde, um Abzüge für eine übermäßige Entschädigung für eine Vollzeitbeschäftigung zu entschädigen Als übertrieben, wenn sie entweder 500.000 oder 25 Mal die Entschädigung des am niedrigsten bezahlten Angestellten übersteigt, je nachdem, welcher Wert größer ist. Das Ziel dieser Studie ist es, die Auswirkungen einer vorherigen Begrenzung auf die Abzugsfähigkeit der Entschädigung, Internal Revenue Code Abschnitt 162 (m) zu untersuchen. Im Gegensatz zu einem Großteil der Debatte heute über die Notwendigkeit der Bundesregierung, Steuereinnahmen zu erhöhen, war das primäre Ziel von Abschnitt 162 (m), die begrenzte Steuerabzüge für die Exekutive Entschädigung war nicht auf Einnahmen zu erhöhen, sondern um übermäßige, nicht - Performance-basierte Vergütung mit anderen Worten, um etwas über übermäßige Entschädigung zu tun, dass 1992 Präsidentschaftskandidat William Jefferson Clinton kämpfte gegen. In diesem Beitrag wird die Wirksamkeit dieser Bestimmung bei der Erreichung ihrer Ziele überprüft und darüber informiert, wieviel Einnahmen sie aufgrund von Abzügen für die Entschädigung von Führungskräften erhoben oder verloren haben. In Bezug auf die Verringerung der übermäßigen, nicht leistungsorientierten Vergütung, betrachten viele Abschnitt 162 (m) ein Misserfolg, darunter Christopher Cox, der damalige Vorsitzende der Securities and Exchange Commission, der so weit ging, dass er in das Museum gehörte Von unbeabsichtigten Konsequenzen. Senator Charles Grassley (R-Iowa), der damalige Vorsitzende des Senatsausschusses für Finanzen, war noch direkter und sagte: 162 (m) ist kaputt. Es war gut gemeint. Aber es hat wirklich gar nicht geklappt. Unternehmen haben es leicht gefunden, das Gesetz zu umgehen. Es hat mehr Löcher als Schweizer Käse. Und es scheint die Optionsbranche gefördert zu haben. Diese anspruchsvollen Leute arbeiten mit Swiss-Watch-ähnlichen Geräten, um diese Schweizer-Käse-ähnliche Regel zu spielen. Seit § 162 (m) vor fast 20 Jahren vergangen ist, haben sowohl die akademische als auch die praktische Forschung eine dramatische Zunahme der Exekutivvergütung gezeigt, mit wenig Beweis dafür, dass sie stärker an die Leistung gebunden ist als zuvor. In dieser Arbeit schätzen wir, dass die Unternehmensabzüge für die Entschädigung von Führungskräften durch diese Bestimmung begrenzt wurden, wobei die öffentlichen Körperschaften im Durchschnitt 2,5 Mrd. EUR jährlich in Bundessteuern zahlen. Sie setzen jedoch fort, die Mehrheit ihrer Exekutivvergütung abzuziehen, wobei diese Abzüge das US-Finanzministerium schätzungsweise 7,5 Milliarden pro Jahr kostet. Weil die tatsächlichen Steuererklärungsdaten vertraulich sind, sind unsere Schätzungen etwas ungenau, da wir sowohl die steuerliche Abzugsfähigkeit der Vorstandsvergütung als auch die Körperschaftssteuerstatus von öffentlichen Einreichungen ableiten müssen. Unsere wichtigsten Erkenntnisse sind: Unternehmen sind berechtigt, Komponenten der Vorstandsvergütung, die den IRS-Anforderungen entsprechen, vollständig abzurechnen, um als 8220performance-based.8221 zu qualifizieren. Eine dieser Anforderungen ist die Zustimmung der Aktionäre. Allerdings werden den Aktionären nur sehr allgemeine Informationen zur Verfügung gestellt. Daher sind die Aktionäre gebeten, und in der Regel zu genehmigen Pläne, ohne zu wissen, ob die Performance-Bedingungen sind anspruchsvoll oder nicht, und die potenziellen Auszahlungen aus dem Plan. Performance-Lohn, wie Aktienoptionen und Nicht-Equity-Anreizpläne, die den IRS-Anforderungen für die 8220performance-based8221-Ausnahme entspricht, ist vollständig abzugsfähig. Gehälter, Prämien und Stipendien sind abzugsfähig, aber unterliegen einer Grenze von 1 Million. Im Jahr 2010 war unsere Schätzung, dass es 27,8 Milliarden von Führungskompensation gab, die abzugsfähig war. Im Geschäftsjahr 20072010 waren insgesamt 121,5 Mrd. in Exekutivvergütung abzugsfähig. Rund 55 Prozent davon waren für leistungsorientierte Vergütungen. Scheinbar steuerlich anspruchsvolle Konzerne scheinen sich nicht um die Beschränkungen der Abzüge zu kümmern und weiterhin nicht abzugsfähige Führungskräfte zu zahlen. Die Zahl der Führungskräfte, die ein Gehalt von höchstens der abzugsfähigen Schwelle von 1 Million betragen, stieg von 563 im Jahr 2007 auf 594 im Jahr 2010. Für alle, die Abschnitt 162 (m) beabsichtigt ist, eine übermäßige Exekutivvergütung zu begrenzen, sind es die Aktionäre und die US-Treasury, die Finanzielle Verluste erlitten haben. Der Kodex verbietet den Unternehmen nicht, irgendeine Art von Entschädigung zu bezahlen, es ist ihnen verboten, diesen Betrag auf ihre Steuererklärung abzuziehen. Das Ergebnis ist verminderte Unternehmensgewinne und verminderte Erträge an die Aktionäre. Unter der Annahme eines 25-prozentigen Grenzsteuersatzes auf Unternehmensgewinne (eine konservative Schätzung) betrug der Umsatz, den die Bundesregierung im Jahr 2010 aus abzugsfähiger Vorstandsvergütung verloren hatte, 7 Milliarden, und der Bundesumsatz im Zeitraum 20072010 betrug 30,4 Milliarden. Mehr als die Hälfte des vorübergehenden Bundeseinkommens ist auf die Steuerzahler-Subventionen für die Exekutive 8220Verfügungsgeld zurückzuführen.8221 Die Vorstandsvergütung dürfte sich in naher Zukunft wieder erholen und damit das Niveau von 2007 übersteigen. 1. Hintergrund 162 des Internal Revenue Code deckt die Handels - und Geschäftsausgaben ab. Wie in § 162 a) dargelegt, sind Unternehmen als Abzug alle üblichen und notwendigen Aufwendungen, die während des steuerpflichtigen Jahres gezahlt oder angefallen sind, bei der Durchführung von Geschäften oder Geschäften, einschließlich, wie in Abschnitt 162 (a) (1) Eine angemessene Vergütung für Gehälter oder sonstige Entschädigungen für persönlich erbrachte Leistungen. Eine Reihe von Abschnitten des Internal Revenue Codein insbesondere, §§ 162 (m), 162 (m) (5), 162 (m) (6) und 280 (g) begrenzen die Abzugsfähigkeit der Vorstandsvergütung. Angenommen in 1993, § 162 (m), die für öffentlich gehandelte Unternehmen gilt, begrenzt den Abzug für die Exekutivvergütung auf 1 Million pro abgedeckten Einzelpersonen, 1 mit Ausnahme einer qualifizierten leistungsorientierten Vergütung. Das heißt, ein Unternehmen kann 1 Million nicht leistungsorientierte Vergütung je abgedeckter Einzelperson abziehen und eine unbegrenzte Menge an leistungsorientierter Vergütung. Im Gegensatz zu § 162 (m) sind die Abschnitte 162 (m) (5) und 162 (m) (6) jünger und eng angestrebt, sie gelten für Tranche Asset Relief Program (TARP) und Krankenversicherer. Sie setzen auch eine untere Grenze für die Steuerabzüge für eine Entschädigung bei 500.000 pro Person, ohne Unterscheidung oder Ausnahme für leistungsorientierte Vergütung erlaubt. § 162 (m) (5) wurde im Jahr 2008 verabschiedet und gilt für den Chief Executive Officer (CEO), Chief Financial Officer (CFO) und die nächsten drei höchsten bezahlten Offiziere öffentlicher und privater Unternehmen, die unter TARP Geld akzeptierten. § 162 (m) (6) wird im Jahr 2013 wirksam, und seine Einschränkungen gelten für die meisten Angestellten von Gesundheitsdienstleistern. § 280 (g) gilt nicht für regelmäßige Zahlungen an Arbeitnehmer, sondern um eine Änderung der Kontrollzahlungen.2 Wenn der Betrag gleich oder größer als das Dreifache der abgedeckten Einzelpersonen8217s durchschnittlichen W-2-Entschädigung für die letzten fünf Jahre ist, wird das Unternehmen Verliert den Steuerabzug für diese Zahlung, und der Einzelne unterliegt einer 20-prozentigen Verbrauchsteuer auf die überschüssige Zahlung. Wie in den Abschnitten 162 (m) (5) und 162 (m) (6) enthält § 280 (g) keine erfolgsorientierte Ausnahme. Um die steuerliche Abzugsfähigkeit der Exekutivvergütung zu erörtern, wird sich dieses Papier aufgrund seiner breiteren Reichweite auf Abschnitt 162 (m) konzentrieren. Denken Sie daran, es ist nicht beschränkt auf einen bestimmten Sektor der Wirtschaft es begrenzt den Abzug für Exekutive Entschädigung in öffentlichen Körperschaften auf 1 Million pro abgedeckten Einzelpersonen, mit einer Ausnahme für qualifizierte leistungsorientierte Entschädigung. Um als leistungsorientierte Vergütung zu qualifizieren, müssen folgende Voraussetzungen erfüllt sein: Die Entschädigung muss nur wegen der Erfüllung eines oder mehrerer Leistungsziele, die durch eine objektive Formel bestimmt werden, gezahlt werden. Diese Ziele können Aktienkurs, Marktanteil, Umsatz, Kosten oder Erträge enthalten und können auf Einzelpersonen, Geschäftseinheiten oder die Gesellschaft als Ganzes angewendet werden. Die Leistungsziele müssen durch einen Entschädigungsausschuss von zwei oder mehr unabhängigen Direktoren festgelegt werden Müssen den Aktionären offengelegt und mit Mehrheitsbeschluss angenommen werden. Der Ausgleichsausschuss muss bescheinigen, dass die Leistungsziele vor der Zahlung eingehalten wurden. Während § 162 (m) eine übermäßige Exekutivvergütung begrenzen soll, sieht dieser Autor mehrere Schwächen oder Schlupflöcher im Code. In Bezug auf die Zustimmung der Aktionäre müssen Unternehmen den Aktionären nur die allgemeinsten Bedingungen geben, wenn sie den Vergütungsplan zur Abstimmung stellen. Die Aktionäre werden gebeten, in der Regel Pläne zu genehmigen, ohne zu wissen, ob die Leistungsbedingungen anspruchsvoll sind oder nicht, und die potenziellen Auszahlungen aus dem Plan. Diese Angaben sind dem Entschädigungsausschuss überlassen, der spätestens im ersten Quartal des Geschäftsjahres die Bedingungen festlegen muss. Auch problematisch ist, dass, wenn diese Bedingungen nicht erfüllt sind, die Gesellschaft nicht verboten ist, die Entschädigung zu zahlen. Stattdessen ist es verboten, diesen Betrag auf seine Steuererklärung abzuziehen. Das Ergebnis ist verminderte Unternehmensgewinne. Diejenigen, die leiden, sind die Gesellschafter der gleichen Leute, die, auch an diesem Tag der erweiterten Entschädigungen, nicht mit Einzelheiten über die Vorstandsvergütungspläne versehen sind, bevor sie aufgefordert werden, über sie zu stimmen, noch erhalten sie Informationen über die Steuerabzüge, die ergriffen oder verfallen sind . In Abschnitt 2 werden wir die Komponenten des Vergütungspakets durchlaufen und die steuerlichen Konsequenzen von jedem besprechen. In Abschnitt 3 werden die in der Konzernrechtsvertretung offenbarten Vermögensausgleichserklärungen verwendet, die für die Beurteilung der Art und Weise, wie das Management bezahlt wird, und die Identifizierung potenzieller Interessenkonflikte, die bei der US Securities and Exchange Commission (Form DEF 14A) eingereicht werden müssen, um eine Kompensation zusammenzufassen und zu tabellieren Für jedes Jahr von 2007 bis 2010 gemeldet und die Beträge, die mit den tatsächlich von diesen Gesellschaften abzugsfähigen Beträgen gemeldet wurden, zu kontrastieren. Abschnitt 4 wird die mit diesen Abzügen verbundenen Ertragsverluste abschätzen. Das Papier wird mit Abschnitt 5 abschließen, der auf die Auswirkungen dieser steuerlichen Bestimmungen zurückblicken wird, insbesondere auf die Beschränkungen der Abzüge und deren Auswirkung auf die Entschädigung von Führungskräften und freuen uns darauf, wie bestimmte aktuelle Ereignisse, wie die Annahme von Say-on - Politik bezahlen, wird die Zukunft der Exekutivvergütung beeinträchtigen. 2. Bestandteile des Vorstandsvergütungspakets Bevor wir die Konsequenzen des § 162 (m) vollständig erforschen können, müssen wir das Vorstandsvergütungspaket verstehen. Daher werden in diesem Abschnitt die Komponenten des Vergütungspakets vorgestellt, die in der Tabelle 8220Komponenten des Vergütungspakets 8221 zusammengefasst sind und ihre steuerlichen Konsequenzen für die Exekutive und die Gesellschaft erörtern. Gehalt ist die feste, möglicherweise vertraglich vereinbarte Entschädigung, die sich nicht explizit mit der Leistung unterscheidet. Definitionsgemäß ist das Gehalt nicht leistungsorientiert und würde daher nicht für die erfolgsbezogene Ausnahme nach § 162 (m) qualifizieren. Folglich ist es für die Exekutive steuerpflichtig und abziehbar für das Unternehmen (vorbehaltlich der Abzugsbeschränkungen) in dem gezahlten Jahr. Es ist anzumerken, dass die 1 Million Abzugsbeschränkung für alle nicht leistungsorientierten Vergütungen in Summe gilt, nicht jede einzelne Komponente dieser Entschädigung. Wenn ein Unternehmen ein Führungskräftegehalt von 750.000 zahlt, wäre der gesamte Betrag abzugsfähig. Allerdings, wenn es eine zusätzliche 500.000 in anderen Formen der Nichterfüllung Entschädigung zahlt, würde seine gesamte Abzug für nicht-Performance-basierte Vergütung auf 1 Million begrenzt werden die zusätzlichen 250.000 ist nicht abzugsfähig. Bonus-Entschädigung kann auf die Leistung eines Einzelnen, einer Gruppe oder eines Unternehmens konditioniert werden. Weil es von der Leistung abhängig ist, wird es oft nach dem Ende des Geschäftsjahres bezahlt. Von den Mitarbeitern aus Sicht ist es steuerpflichtig nicht im Jahr verdient, sondern im Jahr erhalten. Für den Arbeitgeber kann die Treasury Regulation 1.404 (b) -1T eine Körperschaft, die eine periodengerechte Rechnungslegung verwendet, den Abzug in dem erworbenen Jahr verwenden, wenn ein Arbeitnehmer innerhalb von 2,5 Monaten nach Beendigung des Arbeitgebers des Versicherungsnehmers eine Entschädigung erhält. Mit anderen Worten, Boni sind steuerpflichtig für die Exekutive in dem Jahr erhalten, während abzugsfähig (vorbehaltlich Abzugsbeschränkungen) im Jahr verdient (unter der Annahme, dass Boni innerhalb von 2,5 Monaten nach Jahresende ausgezahlt werden). Obwohl Prämien theoretisch eine Belohnung für die Leistung sind, werden sie nicht gemäß einem von den Aktionären genehmigten schriftlichen Plan vergeben oder bezahlt und sind daher nach § 162 (m) nicht als leistungsorientiert anzusehen. Nicht-Equity-Anreizplan-Vergütung Ähnlich wie bei Boni kann die Nicht-Equity-Anreizplan-Vergütung auf Einzel-, Gruppen - oder Unternehmensleistung konditioniert werden. Der Unterschied zwischen den beiden besteht darin, dass die Nicht-Equity-Anreizplanentschädigung im Rahmen eines schriftlichen Plans gezahlt wird, der für die Zwecke dieser Studie die Anforderungen von § 162 Abs. M) erfüllen wird. Daher sind die Zahlungen im Rahmen eines Nicht-Eigenkapitals Incentive-Plan sind voll steuerpflichtig für die Exekutive in dem Jahr erhalten und abzugsfähig von der Gesellschaft im Jahr verdient.5 Stock-Stipendien Stock Zuschüsse auftreten, wenn Konzerne geben Aktien an ihre Mitarbeiter.6 Sie unterscheiden sich von Aktienoptionen, dass sie keinen Ausübungspreis haben. Während eine Aktienoption nur dann wert ist, wenn der Aktienkurs der Gesellschaft8217s über dem Ausübungspreis liegt, hat eine Aktienzuteilung einen Wert, solange der Aktienkurs über Null liegt. Folglich ist eine Bestandsbewilligung immer mehr wert als ein Aktienoptionszuschuss für die gleiche Anzahl von Aktien. Stock-Stipendien können uneingeschränkt oder eingeschränkt werden, jedoch ist die überwiegende Mehrheit der Mitarbeiter-Stipendien beschränkt. Zum Beispiel könnte eine Beschränkung sein, dass die Exekutive die Aktien nicht verkaufen kann, bis er oder sie für die Gesellschaft für einen Zeitraum gearbeitet hat (eine typische Wartezeit wäre drei oder vier Jahre). Einschränkungen können auch auf Leistung basieren. Zum Beispiel wird die Exekutive die Aktien veräußern, wenn die Erträge und die Aktienrenditen kein vorher festgelegtes Ziel erreichen.7 Sobald diese Beschränkungen auslaufen, hat die Exekutive das volle Eigentum an den Aktien und fehlt eine Sektion 83 (b) Wahl, 8 wird Sofort ein steuerpflichtiges Einkommen anerkennen, das dem beizulegenden Zeitwert der Aktie entspricht. Daher sind das Jahr der Gewährung und das Jahr der Steuererkennung in der Regel unterschiedlich. Die Abzugsfähigkeit der Aktienzuschüsse als leistungsorientiert hängt von diesen Einschränkungen ab. Das heißt, wenn die Beschränkungen auf der Leistung beruhen, können die Stipendien für die erfolgsorientierte Ausnahme nach § 162 (m), 9 in Betracht kommen, wenn die Beschränkungen nur im Laufe der Zeit ablaufen, dann nicht. In den letzten Jahren gab es einen Trend zur stärkeren Nutzung der heutigen Performance-Aktien, aber in den Vorjahren waren sie eine deutliche Minderheit von Aktienzuschüssen. Folglich ist die in diesem Papier enthaltene Annahme, dass die meisten der in früheren Jahren getätigten und in der Beobachtungsperiode ausgeübten Stipendien nicht für die erfolgsorientierte Ausnahmeregelung des § 162 (m) gelten. Die Möglichkeit ist, dass, da mehr Zuschüsse leistungsorientiert werden, der Prozentsatz und der Dollarbetrag der Exekutivausgleich, der abzugsfähig sein wird, zunehmen wird. Auch leistungsorientierte Aktienzuschüsse müssen jedoch nicht die Voraussetzungen für die Abzugsfähigkeit erfüllen. Betrachten Sie die folgende Passage aus der 2012 Intel Corporation Proxy-Anweisung: Abschnitt 162 (m) der Steuer-Code legt eine Grenze von 1 Million auf die Höhe der Entschädigung, die Intel in einem Jahr in Bezug auf seine CEO und jede der nächsten abziehen kann Drei hochkompensierte Führungskräfte (ohne CFO). Eine gewisse leistungsorientierte Vergütung, die von den Aktionären genehmigt wurde, unterliegt nicht dieser Abzugsgrenze. Intel strukturierte seinen 2006 Equity Incentive Plan mit der Absicht, dass Aktienoptionen, die im Rahmen des Plans vergeben wurden, für die Steuerabzugsfähigkeit qualifizieren würden. Darüber hinaus sind, um die Flexibilität zu gewährleisten und die Einfachheit bei der Verwaltung dieser Vereinbarungen zu fördern, andere Entschädigungen wie OSUs, RSUs und jährliche und halbjährliche Anreiz-Barzahlungen nicht dazu bestimmt, für die Steuerabzugsfähigkeit über dem Steuerkennzeichen zu verfügen. § 162 ( M) 1 Million Begrenzung. Die OSUs, auf die in der obigen Passage Bezug genommen wird, sind Outperformance-Aktieneinheiten, d. h. leistungsorientiert, und sind dennoch nicht dazu bestimmt, unter Abschnitt 162 (m) zu qualifizieren. Aktienoptionen Aktienoptionen erlauben dem Inhaber, einen oder mehrere Aktien zu einem festen Ausübungspreis über einen bestimmten Zeitraum zu erwerben. Sie haben Wert, wenn die Gesellschaften Aktienkurs zum Zeitpunkt der Ausübung oder Kauf ist größer als der Ausübungspreis. Da der Ausübungspreis in der Regel zum Aktienkurs am Tag der Gewährung festgesetzt wird, hängt der endgültige Wert der Option von der Wertentwicklung eines Körpers8217s Aktienkurs nach dem Tag der Gewährung ab. Das heißt, sie können äußerst wertvoll sein, wenn der Aktienkurs drastisch ansteigt, aber auch wertlos auslaufen kann, wenn der Aktienkurs sinkt. Wie Aktienzuschüsse werden Aktienoptionen in der Regel an Führungskräfte mit Einschränkungen gewährt. Diese Einschränkungen laufen im Laufe der Zeit im Allgemeinen ab. Während Unternehmen Performance-Bedingungen zu ihren Aktienoptionen hinzufügen können, ist das derzeit eher selten. Wie bei den Stockzuschüssen ist das Jahr der Gewährung und das Jahr der Steuererkennung für Aktienoptionen normalerweise unterschiedlich. Sie unterscheiden sich jedoch dadurch, dass die Bestände nach Ablauf der Beschränkungen oder der Ausübung steuerpflichtig sind, während Aktienoptionen nicht steuerpflichtig sind, bis der Inhaber die Optionen ausübt.10 Der Betrag, der steuerpflichtig ist, ist nicht der beizulegende Zeitwert der erworbenen Aktien, Aber das Schnäppchenelement oder Rabatt, dh die Differenz zwischen dem beizulegenden Zeitwert der erworbenen Aktien abzüglich der Ausübung oder des Kaufpreises. Aktienoptionen werden nach § 162 (m) als leistungsorientiert betrachtet, wenn sie minimale Bedingungen erfüllen (z. B. Aktionärsgenehmigung, Optionen, die mit einem Ausübungspreis zu oder über dem Marktpreis am Tag der Gewährung gewährt werden), wobei die Begründung, dass der Optionsinhaber nur profitieren kann Aus der Option, wenn der Aktienkurs steigt. So ist die in dieser Studie getroffene Annahme, dass die Aktienoptionsentschädigung für das Unternehmen vollständig abziehbar ist. Wertsteigerungsrechte Während nicht so beliebt wie Aktienoptionen und Stipendien, gewähren einige Unternehmen Aktienwertsteigerungsrechte (SARs). Aktienwertsteigerungsrechte sind das Recht, die Erhöhung des Wertes einer bestimmten Anzahl von Stammaktien über einen bestimmten Zeitraum zu erhalten. Ökonomisch entsprechen sie den Aktienoptionen, mit einer Ausnahme. Mit einer Aktienoption muss der Vorstand die Aktien erwerben und dann verkaufen, um seinen Gewinn zu erhalten. Mit einem Aktienwertsteigerungsrecht, zahlt das Unternehmen einfach die Exekutive, in bar oder Stammaktien, der Überschuss des aktuellen Marktpreises der Aktien über den Ausübungspreis. So ist die Exekutive in der Lage, die Vorteile einer Aktienoption zu realisieren, ohne die Aktie zu erwerben. In vielen Fällen werden Aktienwertsteigerungsrechte im Rahmen von Aktienoptionen gewährt, bei denen die Exekutive zum Zeitpunkt der Ausübung entweder die Aktienoption oder die Wertminderungsrechte wählen kann. Für Proxy-Statement Reporting Zwecke werden SARs mit Aktienoptionen kombiniert. Ebenso werden sie wie Aktienoptionen für die Besteuerung von § 162 (m) behandelt. Infolgedessen werden für diese Analyse SARs in die breitere Kategorie von Aktienoptionen einbezogen. Renten und aufgeschobene Vergütung Entschädigte Entschädigung ist eine Entschädigung, die in einer Periode erwirtschaftet wird, aber von der Exekutive in einer zukünftigen Periode aufgeschoben wird. Entspricht sie den Anforderungen des § 409 (A) des Internal Revenue Code, so kann die Steuererkennung auch bis zu einem späteren Zeitraum aufgeschoben werden. Die Renten sind eine Form der aufgeschobenen Entschädigung (die von mehreren getrennten Abschnitten des Internal Revenue Code abgedeckt wird), wobei der Mitarbeiter nach dem Eintritt in den Ruhestand von der Gesellschaft eine Zahlung oder eine Reihe von Zahlungen erhält. Diese Zahlungen können durch den Pensionsplan (als leistungsorientierter Plan bezeichnet) definiert werden, oder auf der Grundlage der Beträge, die im Personal-Ruhestandkonto des Mitarbeiters angekündigt werden (bekannt als ein beitragsorientierter Plan, von denen ein Typ 401 (k) ist). Wenn die Zahlungen durch den Pensionsplan definiert werden, können sie auf einer Reihe von Faktoren beruhen, einschließlich, aber nicht beschränkt auf die Anzahl der Jahre mit dem Unternehmen, das Ergebnis während der Arbeit und das Niveau innerhalb des Unternehmens. Die Renten können in vielerlei Hinsicht strukturiert werden, zum Beispiel können die Zahlungen in voller Höhe festgesetzt werden, oder sie können für die Inflation angepasst werden. Aufgrund von Internal Revenue Code Einschränkungen sind Führungskräfte in der Regel von mehr als einem Plan abgedeckt. Das heißt, sie nehmen an einem primären steuerqualifizierten Plan zusammen mit anderen Mitarbeitern teil und haben mindestens einen ergänzenden, nicht qualifizierten Plan. Der zweite Plan ist durch Einschränkungen des Internal Revenue Code auf Zahlungen aus einem qualifizierten Plan erforderlich. Das heißt, um sich für eine günstige steuerliche Behandlung zu qualifizieren, muss der Plan nicht diskriminierend sein, dh die Leistungen können nicht zugunsten hochbezahlter Arbeitnehmer verzögert werden, und die Gesellschaft kann eine Entschädigung, die eine Schwelle überschreitet, nicht betragen (§ 401 (a) (17)), bei der Festsetzung der Rentenleistungen noch Zahlungen über 200.000 (§ 415 Buchst. B). Die meisten Top-Führungskräfte machen wesentlich größere Summen. Für steuerliche Zwecke werden sowohl leistungsorientierte als auch beitragsorientierte Pläne in qualifizierte und nicht qualifizierte Pläne unterteilt. Mit einem qualifizierten Plan kann das Unternehmen derzeit einen Beitrag leisten oder finanzieren und die entsprechenden Steuerabzüge (über die §§ 162 (m) Einschränkungen hinausgehen), während die Exekutive das steuerpflichtige Einkommen erst in der Zukunft anerkennt, wenn er oder sie die Zahlungen Angesichts der oben diskutierten Beschränkungen wenden sich die Unternehmen jedoch an nicht qualifizierte oder ergänzende Vorstandsverpflichtungen (SERPs) für den Großteil der Altersvorsorge an ihre Führungskräfte. Da diese Pläne nicht qualifiziert sind, sind sie unfundiert, da die Finanzierung die Exekutive der laufenden Besteuerung unterwerfen würde. Zusammenfassend lässt sich feststellen, dass der Großteil der Pensions - und Zahlungsaufschubzahlungen nach dem Eintritt in den Ruhestand steuerpflichtig und abzugsfähig ist. Zu diesem Zeitpunkt werden sie nicht mehr in der Konzernmitteilung ausgewiesen. Zu diesem Zeitpunkt werden sie vollständig abzugsfähig sein, da die damals pensionierte Exekutive nicht mehr dem Abschnitt 162 (m) unterliegt. Während im nächsten Abschnitt die Beträge, die als Erhöhungen der Renten und der aufgeschobenen Entschädigung in der Vollmachtserklärung gemeldet werden, erörtert werden, wird sie bei der Schätzung der unmittelbaren steuerlichen Konsequenzen der Exekutivvergütung keinen solchen Betrag enthalten. Alle anderen Vergütungen Die Zusammenfassungserklärung der Proxy-Erklärung Tabelle enthält eine andere Kategorie, eine catch-all Kategorie, die alles umfasst, was nicht in den vorherigen Überschriften enthalten ist: alle anderen Entschädigungen. Alle anderen Entschädigungen umfassen Gegenstände wie jene berüchtigten Vorgaben, z. B. Private Flugzeuge, Firmenwagen usw. Für die Zwecke dieses Papiers gehen wir davon aus, dass die Beträge, die als alle anderen Entschädigungen in der Vollmachtserklärung gemeldet werden, derzeit an die Exekutive steuerpflichtig und von der Gesellschaft abschreibbar sind, vorbehaltlich Abschnitt 162 (m) Einschränkungen, als Sie sind nicht leistungsorientiert. In dem obigen zusammenfassenden Diagramm, Komponenten des Vergütungspakets, verwenden wir die Phrase, die aus irgendeinem Grund vollständig abziehbar ist8221. Als Außenseiter, die Daten aus einer großformatigen Datenbank zeichnen, können wir nicht genau bestimmen, was ist und was nicht abzugsfähig ist. Beachten Sie, dass eine leistungsorientierte Vergütung für eine vollständige Abzugsfähigkeit in Betracht kommt, wenn das Unternehmen die im Internal Revenue Code festgelegten Anforderungen erfüllt. Doch manchmal entscheiden sich die Unternehmen dafür, diese Anforderungen nicht einzuhalten. Betrachten Sie den folgenden Auszug aus Goodyear Tire amp Rubber Companys jüngsten Vollmachtserklärung: Die Steuerabzugsfähigkeit der Ziffer 162 (m) des Kodex sieht vor, dass eine Entschädigung an einen Vorstandsvorsitzenden der Gesellschaft und ihre drei anderen am höchsten bezahlten Vorstandsmitglieder am Ende von Das Jahr (außer seinem Chief Financial Officer) über 1 Million ist nicht abzugsfähig, es sei denn, bestimmte Anforderungen wurden erfüllt. Der Vergütungsausschuss ist der Auffassung, dass die Prämien im Rahmen des Management Incentive Plan und des Performance Planes 2008 für die volle Abzugsfähigkeit nach § 162 Abs. Obwohl die im Rahmen des Executive Performance Plan gezahlte Vergütung erfolgsorientiert ist, gilt sie nicht für die Abzugsermächtigung für erfolgsorientierte Vergütungen, da dieser Plan nicht von unseren Aktionären genehmigt wurde. Daher unterliegen die Zahlungen im Rahmen des Executive Performance Plan dem Abschnitt 162 (m) die Begrenzung der Abzugsfähigkeit. Aufgrund unserer bedeutenden latenten Steueransprüche aus früheren Perioden hat die Beschränkung der Abzugsfähigkeit keine Auswirkung auf unsere Finanzlage. Bei der Überprüfung und Berücksichtigung von Auszahlungen oder Erträgen im Rahmen des Executive Performance Plan berücksichtigte der Vergütungsausschuss nicht nur die Auswirkungen der verlorenen Steuerabzüge, sondern auch die signifikanten US-latenten Steueransprüche, die uns aus früheren Perioden zur Verfügung stehen, sowie die von uns realisierten Vorteile Und unsere Aktionäre aus den erfolgreichen Bemühungen unseres Senior Management Teams. Bei der Bilanzierung dieser Erwägungen kam der Entschädigungsausschuss zu dem Schluss, dass es angemessen wäre, Auszahlungen für die Zuschüsse und Erträge 2009-2011 für die Leistungsperiode 2011 für die Zuschüsse 2010-2012 und 2011-2013 zu genehmigen. Ohne diese Passage zu lesen, hätten wir davon ausgegangen, dass die im Rahmen des Executive Performance Plan gezahlte Vergütung, die als Nicht-Equity-Anreizplanausgleich ausgewiesen wird, vollständig abzugsfähig wäre. Eine weitere Komplikation ist, dass Zahlungen unter dem Management Incentive Plan, die für die erfolgsorientierte Exception qualifiziert sind, und der Executive Performance Plan, die nicht, in der Proxy-Statement-Kompensationstabelle als eine Nummer im Rahmen des Nicht-Eigenkapitals ausgewiesen werden Anreizsäule Und während Goodyear für die Klarheit seiner Offenlegung zu loben ist, sind die meisten Offenlegungen nicht so klar. 3. Vorstandsvergütung, 20072010 Dieser Abschnitt enthält eine Analyse und Diskussion der Führungskompensation, die über 20072010 gezahlt wurde. Wie in Tabelle 1 gezeigt. Die Stichprobe ist die Bevölkerung der US-amerikanischen Körperschaften, die in der Standard-Amp-Poors Capital IQ-Datenbank enthalten ist und von 8.960 im Jahr 2007 bis 7.248 im Jahr 2010 liegt. 12 Nach den derzeitigen Vorschriften der Securities and Exchange Commission sind die Unternehmen verpflichtet, in ihren Proxy - Und jeder Einzelne, der während des Jahres entweder den CEO oder den CFO-Titel gehalten hat, die Entschädigung der nächsten drei höchsten bezahlten Personen, 13 und die Entschädigung von bis zu zwei weiteren Personen, die unter den nächsten drei höchsten bezahlten Personen gewesen wären, außer dass sie nicht waren Länger beschäftigt am Ende des Jahres. Eine Berichterstattung ist nicht erforderlich, wenn eine Einzelpersonenkompensation weniger als 100.000 beträgt. In der zweiten Spalte der Tabelle 1 sehen wir, dass die Anzahl der Führungskräfte, die in die Analyse einbezogen sind, von 38.824 im Jahr 2007 auf 28.365 im Jahr 2010 reicht.14 Während die §§ 162 (m) Einschränkungen nur für die Entschädigung des CEO und der nächsten drei höchsten bezahlt gelten Einzelpersonen, ohne den CFO, Capital IQ und folglich haben wir eine Entschädigung aller Führungskräfte, die in der Proxy-Anweisung enthalten sind. Für Führungskräfte jenseits des CEO und der nächsten drei höchsten bezahlten Personen gehen wir davon aus, dass die Entschädigung vollständig abzugsfähig ist. Beispielinformationen Kopiere den Code unten, um diesen Chart auf deiner Website einzubetten. Tabelle 2 beschreibt die verschiedenen Komponenten des Vergütungspakets für 20072010 und listet die Anzahl der Personen auf, die die Position in einem bestimmten Jahr erhalten.15 Zum Beispiel erhalten alle Führungskräfte in unserer Stichprobe ein Gehalt (Unternehmen mit fehlenden Gehaltsdaten sind von der Analyse ausgeschlossen ), Aber nicht alle erhalten Boni, und noch weniger erhalten nicht-Equity-Anreize und andere Formen der Entschädigung. Die durchschnittliche Gesamtvergütung war im Jahr 2007 mit knapp über 1,7 Millionen am höchsten. Die daraus resultierende Abnahme der durchschnittlichen Entschädigung ist auf den starken Rückgang der Aktienkurse zurückzuführen, der den Wert der Aktienzuschüsse verringerte. Die mittleren Kompensationswerte in dieser Tabelle sind niedriger als die, die normalerweise in der Presse beobachtet wurden, und die meisten Studien aus zwei Gründen. Die erste ist, dass die meisten Studien beschränken sich auf CEO-Kompensation, während diese Studie erweitert die Probe an alle Führungskräfte. Da andere Führungskräfte in der Regel weniger als der CEO bezahlt werden, fährt der Durchschnitt nach unten. Zum Beispiel betrug im Jahr 2007 die durchschnittliche Gesamtvergütung für CEOs 3.468.375, während der Durchschnitt für Nicht-CEOs 1.191.828 betrug. Der zweite Grund für niedrigere Mittel ist die breitere Stichprobe von Unternehmen, die in dieser Studie verwendet werden. Die meisten Studien beschränken sich auf die SampP 500 oder die SampP 1500 Unternehmen, wie sie in Standard amp Poors ExecuComp enthalten sind, während diese Studie diese Unternehmen und viele kleinere börsennotierte Unternehmen einbezieht. Da die Entschädigung mit der festen Größe zunimmt, verringert die Einbeziehung dieser kleineren Unternehmen unsere Durchschnittswerte. So betrug im Jahr 2007 die durchschnittliche Gesamtvergütung für Führungskräfte in SampP 500-Gesellschaften 4.994.819, während der Durchschnitt für andere Unternehmen 1.448.167 betrug. Mittlere Beträge für die Exekutivvergütung, die in der summarischen Vergütungstabelle angegeben sind (Anzahl der Führungskräfte unterhalb der mittleren Beträge) Kopiere den Code unten, um diese Karte auf deiner Website einzubetten. Tabelle 3 aggregiert die in Tabelle 2 angegebenen Beträge, um die Gesamtausgleichsentschädigung für alle börsennotierten Unternehmen darzustellen. Die Gesamtkompensation sank von über 66 Milliarden im Jahr 2007 auf 42 Milliarden im Jahr 2010. Es gibt zwei Gründe für diesen Rückgang. Zunächst sank die Zahl der in unsere Analyse einbezogenen Unternehmensexperten im Jahr 2010 (wie in Tabelle 1 gezeigt und was den Rückgang der Zahl der börsennotierten Unternehmen widerspiegelt). Zweitens sank die durchschnittliche Kompensation (wie in Tabelle 2 gezeigt) ebenfalls ab. Aggregierte Beträge für die Exekutivausgleichsrechnung in der summarischen Vergütungstabelle (Milliarden von Dollars Anzahl der Führungskräfte unterhalb der Summenbeträge) Kopieren Sie den Code unten, um diese Karte auf Ihrer Website einzubetten. Wie in Abschnitt 2 erörtert, unterscheidet sich das Jahr der Steuerpflicht für die Eigenkapitalvergütung, d. H. Aktienzuwendungen und Aktienoptionen, vom Jahr des Zuschusses. Ebenso unterscheiden sich die Beträge von denen, die im Jahr des Zuschusses gemeldet wurden, da der Betrag, der im Jahr des Zuschusses ausgewiesen wird, auf einem erwarteten Betrag beruht, während derjenige, der in die von den Unternehmen eingeführten Führungskräfte einbezogen wird, auf dem tatsächlichen Betrag basiert Menge. Die in den Tabellen 2 und 3 ausgewiesenen Beträge sind die Erteilungstermine auf der Grundlage der Beträge aus der Zusammenfassungsentscheidung der Proxy-Anweisung. In contrast, the amounts in Table 4 are based upon the vesting date value of stock grants and exercise date profits for stock options, as reported by companies in their proxy statements. Looking at the mean amounts, we are somewhat surprised to see that the number of employees with stock grants vesting (Table 4) is significantly less than the number receiving stock grants (Table 2). A number of potential explanations for this exist, such as stock grants vesting after retirement or stock grants not vesting because restrictions were not met. Unfortunately, the data do not allow us to determine what these reasons are. Similarly, for stock grants the aggregate amount recognized for tax purposes in Table 4 is less than the amount reported in Table 3, although the taxable amounts for stock options are generally greater than that reported in the summary compensation table. Amounts reported for vested shares and exercised options (number of executives are below dollar amounts) Copy the code below to embed this chart on your website. Table 5 focuses on the impact of Section 162(m) on the deductibility of non-performance-based compensation, which is defined as salary, bonus, stock grants, and all other compensation. As noted above, although the bonus is normally performance-based, if it is not paid pursuant to a written plan that meets Internal Revenue Code requirements, it will not qualify for the performance-based exception (and if it were paid pursuant to a written plan, it should be included in the non-equity incentive column). Stock grants with performance conditions have become more common, and therefore may qualify for the Section 162(m) performance-based exception,16 but constitute a minority of those stock grants that vested during the years 2007 through 2010. Consequently we sum these four itemssalary, bonus, stock grants, and all other compensationby individual and treat the first 1 million as deductible. Decomposition of non-performance-based compensation into deductible and nondeductible amounts (billions of dollars) Copy the code below to embed this chart on your website. We shift gears in Table 6 to examine the total deductions associated with executive compensation, performance and non-performance based. On an aggregate basis the deductible components of the compensation package decline from about 39 billion in 2007 to a little less than 28 billion in 2010, with much of the decrease being associated with fewer deductions associated with stock options. In 2010 15 billion of the deductions were based on performance pay, down from roughly 24 billion in 2007. As discussed in the next section, even at these reduced amounts in 2010 there are substantial tax savings for the companies and revenue foregone to the federal government. The Appendix Table provides more detail underlying the aggregates in Table 6 by delineating the total deductions for CEOs and other executives and doing so for large firms (SampP 500) and other firms. Total deductible compensation (billions of dollars) Compensation, taxation, and deductibility: An illustration At this point an illustration comparing the amounts reported in the proxy statement summary compensation table, executives tax return, and corporations tax return might be informative. Consider the 2011 compensation of Paul S. Otellini, president and CEO of Intel. According to the proxy statement summary compensation table, he received total compensation of 17,491,900 for that year. Of that amount, stock awards (7,331,100), option awards (1,802,800), and change in deferred compensation (319,000) are not taxable currently. His taxable income from Intel will include a salary (1,100,000), a bonus (34,000), non-equity incentive plan income (6,429,500), all other compensation (475,500), stock grants that vested during the year (1,319,600), and exercised stock options (132,100). His total taxable income was therefore 9,490,700. The amount currently deductible by Intel includes both non-performance compensation and compensation that qualifies for the performance-based exception. Non-performance compensation includes the salary (1,100,000), bonus (34,000), all other compensation (475,500), and stock grants that vested during the year (1,319,600), for a total of 2,929,100. With the 1 million cap on deductions, Intel forfeits deductions on 1,929,100 of CEO compensation. At the same time, it can deduct for non-performance-based compensation (the maximum allowable at 1 million), non-equity incentive plan income (6,429,500), and the exercised stock options (132,100), for a total deduction of 7,561,600an amount much less than Mr. Otellini8217s 9,490,700 in taxable income. Mr. Otellini and Intel provide a perfect illustration of the aggregate numbers in Table 5. What is most interesting, to this author, about Table 5 is the magnitude of deductions being forfeited by public corporations for the sake of executive compensation. Over the four-year period examined, executives recognized 96 billion in taxable income from the four categories of salary, bonus, vest value of stock grants, and all other compensation, while companies only deducted 55 billion, forfeiting slightly more than 41 billion in potential deductions Hence, one of the problems with Section 162(m), which was adopted ostensibly to reduce excessive, non-performance-based compensation (see U. S. House of Representatives 1993), was that it never touched on compensation directly. Instead, it legislated the deductibility of that compensation and penalized shareholders rather than executives. While corporations have paid lip service to the idea of preserving deductions, empirical research has shown only a marginal effect on executive compensation.17 Overall, however, executive compensation has continued to grow, and with it deductions have been forfeited.18 For example, the number of executives receiving salary in excess of 1 million increased from 563 in 2007 to 594 in 2010, and the number of executives receiving non-performance-based compensation in excess of 1 million increased from 3,379 in 2007 to 4,729 in 2010. This is despite a substantial decrease in the number of executives covered from 2007 to 2010 (see Table 1). Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions. Consider Apple Inc. Duhigg and Kocieniewski (2012) detail how Apple avoids billions in taxes by setting up subsidiaries in low-tax jurisdictions. Yet when Apple made Tim Cook their CEO in August 2011, they gave him one million shares of restricted stock that vested purely with the passage of time, which therefore is not performance-based. Consequently, this grant, valued at 378 million at the time it was made, would not meet the performance-based exception of Section 162(m) and therefore would not be deductiblecosting shareholders more than 100 million in additional taxes 4. Tax benefits to corporations As noted above, compensation is normally deductible as an ordinary business expense under Section 162 of the Internal Revenue Code. This benefit can be large for the corporation and costly for the federal Treasury,19 as the corporate tax rate is 15 percent for taxable incomes under 50,000, 25 percent for those between 50,000 and 75,000, 34 percent for those between 75,000 and 100,000, 39 percent for those between 100,000 and 333,333, and 34 percent for taxable incomes between 333,333 and 10 million.20 Above 10 million, the rate increases to 35 percent (except between 15,000,000 and 18,333,333, where the tax rate is 38 percent). A reasonable assumption is that most public corporations have taxable incomes in excess of 100,000, so their tax rate would either be 34 or 35 percent. For a number of reasons, such as tax deductions and credits, even large public corporations may pay taxes at a lower rate, or not at allthus the tax benefit of executive compensation can be overstated. An example is Whirlpool Corporation, which, due to tax credits, did not pay taxes in 2010 and 2011. Whirlpool is not alone in this regard (for example, see the Goodyear excerpt above). So the question becomes: What is the value of the tax deductions associated with executive compensation to companies like Whirlpool Note that if the corporation has a tax loss, as in the case of Whirlpool, it can use that loss to claim a refund on taxes paid in the previous two years or to shelter taxable income earned in the following 20 years. In theory, even if the company does not have any current taxable income, a 1 additional deduction will either increase this year8217s tax refund by 35 cents, or reduce future taxes by 35 cents. But in practice, sometimes a company cant claim the carryback because it hasnt paid federal taxes in the past two years, and the existence of taxable income in the future may be uncertain as well. If so, how do we estimate the benefits of these deductions Academic researchers answer this question by estimating marginal tax rates, the rate of taxbenefit associated with the next dollar of incomededuction. Professor John Graham of Duke University, who has done extensive research in the area (see Graham 1996), provides estimates of these rates on his website, faculty. fuqua. duke. edu jgrahamtaxform. html. Unfortunately, he does not provide tax rates for all companies in the Capital IQ data set. But for the approximately 25 percent of observations for which he does provide tax rates, the rates he provides are substantially lower than 35 percent, as the mean of his rates is slightly below 13 percent. As an alternative, in another paper (Graham and Mills 2008) he provides a fairly simple and less data-intensive method of calculating marginal tax rates. Using that algorithm still results in a sample reduction of about 30 percent, but perhaps a more realistic average tax rate of 25 percent. However, both rates are calculated after the impact of executive compensation, and Graham, Lang, and Shackelford (2004), among others, document that the stock-option deduction can significantly decrease marginal tax rates. So when calculating the average tax benefit of the executive compensation deductions, the relevant tax rate to use is something lower than 35 percent, yet is somewhat higher, perhaps significantly higher, than 13 or 25 percent. For this reason, Table 7 provides estimates using three alternative rates15, 25, and 35 percentwhile the following discussion uses what is probably the most realistic estimate, 25 percent. Estimated tax savingsrevenue loss as a result of executive compensation (billions of dollars) Table 7 provides some boundaries for the aggregate tax savings to companies and costs to the Treasury using effective tax rates of 15, 25, and 35 percent. Using the 15 percent rate provides the lower bound on our estimate of the tax savings, which ranges from about 3.5 billion in 2009 to just under 6 billion in 2007. In contrast, using the 35 percent statutory federal rate provides an upper bound on our estimate of the aggregate tax benefitscost to the U. S. Treasury, which ranges from about 13.7 billion in 2007 to 8.3 billion in 2009. If we assume a conservatively estimated 25 percent marginal tax rate, then revenue lost to the federal government in 2010 from deductible executive compensation was about 7 billion, and the total amount lost over the 20072010 period was 30.4 billion. 5. Looking back and forward While the data provided in this study do show a moderating of executive compensation over the study period 20072010, over a longer period it is well known that executive, in particular CEO, compensation has increased at rates far in excess of inflation and the wage growth of rank-and-file individuals. So the question exists: Is the moderating trend observed over the recent past a new paradigm, or is it merely one of the outcomes of the countrys severe financial crisis In terms of a new paradigm, 2010 marked a once-in-a-lifetime opportunity for shareholder empowerment. That July, the Dodd-Frank banking bill imposed the long-awaited say-on-pay on American corporations, which took effect with annual meetings on or after January 21, 2011. This provision, which was widely opposed by the business community, requires that publicly traded corporations provide their shareholders with a non-binding vote on their executive compensation at least once every three years. While the vote is (1) after the fact, i. e. shareholders are voting to approve compensation provided in the previous year, and (2) advisory, the possibility does exist that the board will moderate compensation to avoid being embarrassed by a negative outcome.21 In fact, Lucien Bebchuk of Harvard University notes in several of his papers that shame is perhaps the only constraint on executive compensation. Academic research in the United Kingdom, where say-on-pay has been in effect since 2002, and in the United States, by this author, suggests that say-on-pay can have a restraining impact on executive compensation under certain circumstances. Another provision of the Dodd-Frank banking bill, which has not yet been implemented by the Securities and Exchange Commission, is the requirement that companies disclose the ratio of CEO compensation to that of the companys median employee. This disclosure, which has been opposed by companies, also has the potential to embarrass corporate boards and CEOs, and if put into place, has the potential to restrain executive compensation.22 But looking back, a reasonable question might be whether mandatory disclosure and tax penalties have worked to restrain compensation. In this authors lifetime, the first big change in proxy statement disclosure was made in 1993. This disclosure, which dramatically increased the amount disclosed, inadvertently led to increased compensation, as executives at one company were able to more clearly assess what executives at their competitors were making. Section 280(g) of the Internal Revenue Code caused companies to forfeit deductions and imposed penalties on the recipient, if change-in-control payments (i. e. golden parachutes) were higher than allowed by the section. This Internal Revenue Code section did little, if anything, to curtail those payments, as companies without change-in-control payments added them, while those with change-in-control payments in excess of that allowed added the now-infamous tax gross-ups, whereby the shareholders would provide additional compensation to pay the executives tax penalty as well as the tax on that additional compensation. The same holds true for Section 162(m). Harris and Livingstone (2002) suggest that inadvertently, Section 162(m) may have encouraged increases in cash compensation for executives earning less than 1 million. Balsam and Ryan (2008) find that Section 162(m) resulted in increases in stock option compensation for executives earning more than 1 million in cash compensation. And although stock options were in favor amongst the political class when Section 162(m) was adopted, by the time the 21st century rolled around, the shine had worn off. In discussing the effect of Section 162(m) on the increased use of stock options, a 2006 Wall Street Journal article (Maremont and Forelle 2006) quoted Christopher Cox, the then-chairman of the Securities and Exchange Commission, as saying it deserves a place in the museum of unintended consequences. The belief of this author is that executive compensation will recover in the near future, exceeding levels seen in 2007. Some of that increase will be in the form of deductible performance-based compensation, but the level of non-performance-based compensation will increase as well. EPI would like to thank the Stephen Silberstein Foundation for supporting its work on executive compensation. Steven Balsam is Professor of Accounting and Senior Merves Research Fellow at the Fox School of Business at Temple University. He has written several books on executive compensation including Executive Compensation: An Introduction to Practice and Theory , as well as published in the top academic and practitioner journals in accounting. Professor Balsam is also a member of the editorial boards of the Journal of Accounting and Public Policy and The International Journal of Accounting . He has been widely quoted in the media and has given expert witness testimony on executive compensation to the U. S. Senate Committee on Finance. 1. Covered individuals were originally defined as the chief executive officer plus the next four highest paid executive officers, as disclosed in the corporate proxy statement. However, in late 2006 the Securities and Exchange Commission changed the proxy statement disclosure requirements, so that corporations had to disclose compensation for the chief executive officer, chief financial officer, and next three highest paid executive officers. Since Section 162(m) does not specify the chief financial officer, covered individuals are now the chief executive officer plus the next three highest paid executive officers. 2. A change in control payment, also known as a golden parachute, is a payment to an executive that occurs when his or her company experiences a change in ownership. 3. For purposes of proxy statement reporting, awards pursuant to a written plan have been incorporated under the heading of non-equity incentive plan compensation since the end of 2006. It is common to combine the two categories of bonus and non-equity incentive plan compensation for other purposes. 4. This may not always be the case even when there is a written plan, the plan may not meet Section 162(m) requirements. In a private letter ruling (irs. govpubirs-wd0804004.pdf) the IRS informed the company in question that compensation paid under its incentive plan would not qualify as performance-based, because the plan allowed for payments in the event of termination regardless of whether the performance conditions were met. 5. When the compensation is earned over a multiple year period, e. g. a two - or three-year performance period, the deduction would be taken in the last year of the period. 6. Sometimes rather than granting shares, companies grant units, which are then turned into shares upon vesting. 7. In most cases, meeting performance conditions is not a yesno proposition. Typically, the percentage of shares that vest vary based upon performance, with a lesser number of shares vesting if performance meets the pre-established minimum threshold, the full grant vesting if performance meets the pre-established target, and possibly additional shares being earned if performance exceeds the target, up to a maximum that is usually defined as 200 percent of the original grant. 8. Normally a stock grant is not taxable to the recipient or deductible by the grantor until the restrictions expire. However, under tax code Section 83(b) the recipient may elect to have the grant taxed at the time of grant. Discussions with practitioners confirm these elections are rare in public companies. 9. Companies do not always clearly disclose whether their compensation qualifies as performance-based, nor do they disclose the amounts of deductions forfeited. 10. This discussion ignores Section 422 (tax-qualified or incentive) stock options. A Section 422 stock option provides benefits to its holder, as the tax event is not exercised, but rather the later sale of the shares is acquired upon exercise. Further, if certain conditions are met (for example, the shares are held from two years from the date of grant to one year from the date of exercise), the income is taxed as a capital gain and not ordinary income. While these options are beneficial to their holder, they are costly to the company, because if the holder meets the conditions for capital gain treatment, the company does not receive any tax deduction. However, because these options are limited to 100,000 in nominal value vesting per year and are considered tax-preference items at the time of exercise for purposes of the alternative minimum tax, they are not very useful (or used) in executive compensation. Thus we can safely ignore them in our discussion. 11. While pensions and deferred compensation need to be recognized as financial accounting expenses and disclosed in proxy statements in the year earned, for tax purposes they receive deferred recognition. Consequently, if deferred until the executive is no longer covered by Section 162(m) (e. g. post-retirement), they will be fully deductible for tax purposes. 12. This decrease is consistent with the decrease in publicly traded companies as documented in Stuart (2011). See cfoarticle. cfm14563859. 13. Since 2007, the Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals. 14. In theory, each company should have a CEO, but not all companies identify an individual as such in their filings. Consequently, the number of CEOs is slightly less than the number of companies in each year. 15. Capital IQ collects and we analyze the values as reported by companies in their proxy statements. 16. But do not have to, as illustrated by the excerpt from the Intel proxy statement above. 17. For example, Balsam and Ryan (2007) show that Section 162(m) increased the performance sensitivity of bonus payments for CEOs hired post-1994. 18. For more discussion on the forfeiture of deductions, see Balsam and Yin (2005). 19. This analysis only incorporates federal taxes. Incorporating state income taxes would increase the benefit associated with compensation deductions. 20. The 39 percent tax rate is intended to remove the benefits associated with the 15 percent and 25 percent rates. 21. In the first two years of say-on-pay, more than 98 percent of companies have had their executive compensation approved by shareholders, with the typical firm receiving a positive vote in excess of 80 percent. However, some well-known companies have had their executive compensation rejected by shareholders, including Hewlett-Packard in 2011 and Citigroup in 2012. 22. While the disclosure only applies to CEO compensation, compensation of other executives is often tied to that of the CEO. References Balsam, Steven, and David Ryan. 2007. Limiting Executive Compensation: The Case of CEOs Hired after the Imposition of 162(m). Journal of Accounting, Auditing and Finance . vol. 22, no. 4, pp. 599621. Balsam, Steven, and David Ryan. 2008. The Effect of Internal Revenue Code Section 162(m) on the Issuance of Stock Options. Advances in Taxation . vol. 18, pp. 328. Balsam, Steven, and Qin Jennifer Yin. 2005. Explaining Firm Willingness to Forfeit Tax Deductions under Internal Revenue Code Section 162(m): The Million-dollar Cap. Journal of Accounting and Public Policy . vol. 24, no. 4, pp. 300324. Capital IQ Database. 2012. Standard and Poors Financial Services LLC. capitaliqhome. aspx Duhigg, Charles, and David Kocieniewski. 2012. How Apple Sidesteps Billions in Taxes. New York Times , April 28. nytimes20120429businessapples-tax-strategy-aims-at-low-tax-states-and-nations. html Graham, John R. 1996. Proxies for the Corporate Marginal Tax Rate. Journal of Financial Economics . vol. 42, no. 2, pp. 187221. Grassley, Chuck. 2006. Executive Compensation: Backdating to the FutureOversight of Current Issues Regarding Executive Compensation Including Backdating of Stock Options and Tax Treatment of Executive Compensation, Retirement and Benefits. Closing statement of Senator Chuck Grassley at a hearing of the U. S. Senate Finance Committee, September 6. finance. senate. govimomediadoc090606cga. pdf Graham, John R. Mark Lang, and Doug Shackelford. 2004. Employee Stock Options, Corporate Taxes, and Debt Policy. Journal of Finance . vol. 59, no. 4, pp. 15851618. Graham, John R. and Lillian Mills. 2008. Simulating Marginal Tax Rates Using Tax Return Data. Journal of Accounting and Economics . vol. 46, no. 23, pp. 366388. Harris, David, and Jane Livingstone. 2002. Federal Tax Legislation as a Political Cost Benchmark. The Accounting Review . vol. 77 (October), pp. 9971018. Maremont, Mark, and Charles Forelle. 2006. Bosses8217 Pay: How Stock Options Became Part of the Problem 8211 Once Seen as a Reform, They Grew Into Font of Riches And System to Be Gamed Reload, Reprice, Backdate. The Wall Street Journal, December 27. online. wsjarticleSB116718927302760228-search. html Stuart, Alix. 2011. Missing: Public Companies: Why Is the Number of Publicly Traded Companies in the U. S. Declining CFO, March 22. cfoarticle. cfm14563859 U. S. House of Representatives. 1993. Fiscal Year Budget Reconciliation Recommendations of the Committee on Ways and Means. U. S. Government Printing Office. Appendix Table 1 EPI is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States. EPIs research helps policymakers, opinion leaders, advocates, journalists, and the public understand the bread-and-butter issues affecting ordinary Americans. Follow EPI 1225 Eye St. NW, Suite 600 Washington, DC 20005 Phone: 202-775-8810 bull epiepi. org copy2016 Economic Policy Institute Privacy Policy bull Contact Us A research and public education initiative to make wage growth an urgent national policy priority. The authoritative analysis of the living standards of American workers. Interactive tools and videos bringing clarity to the national dialogue on economic inequality. Affiliated programs A national campaign promoting policies to weaken the link between socioeconomic status and academic achievement. A network of state and local organizations improving workers lives through research and advocacy. Cobham plc - Terms of Rights Issue NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES (INCLUDING ITS TERRITORIES AND POSSESSIONS, ANY STATE OF THE UNITED STATES AND THE DISTRICT OF COLUMBIA), AUSTRALIA, CANADA, JAPAN OR SOUTH AFRICA OR ANY OTHER STATE OR JURISDICTION IN WHICH SUCH RELEASE, PUBLICATION OR DISTRIBUTION WOULD BE UNLAWFUL. THIS ANNOUNCEMENT IS AN ADVERTISEMENT AND DOES NOT CONSTITUTE A PROSPECTUS OR PROSPECTUS EQUIVALENT DOCUMENT. NOTHING IN IT SHALL CONSTITUTE AN OFFERING OF ANY SECURITIES. ANY DECISION TO PURCHASE, SUBSCRIBE FOR, OTHERWISE ACQUIRE, SELL OR OTHERWISE DISPOSE OF ANY PROVISIONAL ALLOTMENT LETTER, NIL PAID RIGHTS, FULLY PAID RIGHTS, ANDOR NEW ORDINARY SHARES MUST BE MADE ONLY ON THE BASIS OF THE INFORMATION CONTAINED IN AND INCORPORATED BY REFERENCE INTO THE PROSPECTUS ONCE PUBLISHED. 1 for 2 fully underwritten 163506.7 million Rights Issue On 26 April 2016, Cobham plc (the Company or Cobham and, together with its subsidiaries, the Group ) announced that it intended to carry out a rights issue (the Rights Issue ) of new ordinary shares (the New Ordinary Shares ) in the second quarter of 2016. The Board of Directors of Cobham (the Board ) today confirms that it intends to raise 163506.7 million (before expenses) by way of the Rights Issue. The Prospectus containing full details of the Rights Issue is expected to be made available on cobhaminvestors later today. Details of the Rights Issue 183160160160160 1 for 2 fully underwritten Rights Issue of 569,287,950 New Ordinary Shares to raise gross proceeds of 163506.7 million (approximately 163487 million net of expenses) 183160160160160 The issue price of 89 pence per New Ordinary Share represents a discount of 45.4 to the Closing Price on 31 May 2016, and a 35.7 discount to the theoretical ex-rights price of 138.3 pence per New Ordinary Share calculated by reference to the Closing Price on the same basis 183160160160160 The Rights Issue is fully underwritten by BofA Merrill Lynch and Jefferies International Limited and is not subject to shareholder approval 183160160160160 The Directors intend to take up in full the New Ordinary Shares to which they are entitled under the Rights Issue Reasons for the Rights Issue 183160160160160 Since 2014 a combination of the increase in net debt, constraints on cash generation and adverse factors impacting the Groups level of EBITDA generation as well as the slow start in first quarter 2016 trading means that by 30 June 2016, the Groups next lending covenant testing date, net debt to EBITDA could be around the covenant ratio of 3.5x 183160160160160 In light of this the Board is planning to reduce the Groups indebtedness through the Rights Issue, which it believes to be in shareholders best interests 183160160160160 The Groups long term success is dependent upon its ability to continue to make targeted investments across its leading technologies and position itself on development programmes, which will deliver long term streams of revenue and cash, once engineering and development is completed and production commences 183160160160160 Reducing the indebtedness of the Group will allow management to focus on bringing the Groups development programmes to production and insulate the Group against short-term market headwinds, while continuing its focus on operational efficiency and working capital improvement 183160160160160 As announced on 26 April 2016, the Board of Cobham confirms its intention to pay a rebased total dividend in respect of 2016 which is equal in absolute quantum to the 163126 million dividend announced for 2015 183160160160160 This quantum will be paid over the total share capital, as enlarged by the Rights Issue, with the additional shares first qualifying for the 2016 interim dividend to be paid on 4 November 2016. The total dividend in respect of 2016 equates to approximately 7.4 pence per share based on the enlarged share capital Bob Murphy, Chief Executive Officer, said: The Rights Issue will put Cobham on a sound financial footing by reducing gearing towards its target of below 2x net debt to EBITDA. The Board confirms the outlook for the year ended 31 December 2016 remains consistent with the 26 April 2016 announcement. We remain confident that continued investment in technology and know-how will enable us to maintain our leading positions in specialist markets with good prospects leaving Cobham well placed to deliver growth over the medium term. Abridged expected timetable of principal events Record Date for entitlement under the Rights Issue The Group is an international technology and services company, employing around 11,000 people across five continents with customers and partners in over 100 countries. The Group offers a range of technologies and services to solve challenging problems across commercial, defence and security markets. It has strong market positions in air-to-air refuelling aviation services wireless audio, video and data communications, including satellite communications defence electronics life support and mission equipment. The defined terms set out in the Appendix apply in this announcement. This announcement has been issued by and is the sole responsibility of Cobham. The information contained in this announcement is for background purposes only and does not purport to be full or complete. No reliance may or should be placed by any person for any purpose whatsoever on the information contained in this announcement or on its accuracy or completeness. The information in this announcement is subject to change. This announcement is an advertisement and not a prospectus and not an offer of Nil Paid Rights, Fully Paid Rights or New Ordinary Shares for sale in any jurisdiction, including in or into the United States, Australia, Canada, Dubai International Financial Centre, Guernsey, Isle of Man, Jersey, Japan, New Zealand, Singapore, Switzerland, South Africa or any jurisdiction where the availability of the Rights Issue (and any other transactions contemplated in relation to it) would breach any applicable laws or regulations (each an Excluded Territory ). 160 Neither this announcement nor anything contained in it shall form the basis of, or be relied upon in connection with, any offer or commitment whatsoever in any jurisdiction. Investors should not acquire any Nil Paid Rights, Fully Paid Rights or New Ordinary Shares referred to in this announcement except on the basis of the information contained in the Prospectus to be published by Cobham in connection with the Rights Issue. Copies of the Prospectus will, following publication, be available from Cobham plc, Brook Road, Wimborne, Dorset BH21 2BJ and on Cobhams website at cobhaminvestors. Neither the content of the Companys website nor any website accessible by hyperlinks on the Companys website is incorporated in, or forms part of, this announcement. The distribution of this announcement, the Prospectus, the Provisional Allotment Letter, and the offering or transfer of Nil Paid Rights, Fully Paid Rights or New Ordinary Shares into jurisdictions other than the United Kingdom may be restricted by law, and, therefore, persons into whose possession this announcement, the Prospectus, the Provisional Allotment Letter andor any accompanying documents comes should inform themselves about and observe any such restrictions. Any failure to comply with any such restrictions may constitute a violation of the securities laws of such jurisdiction. In particular, subject to certain exceptions, this announcement, the Prospectus (once published) and the Provisional Allotment Letters (once printed) should not be distributed, forwarded to or transmitted in or into the United States or any other Excluded Territory. Recipients of this announcement andor the Prospectus should conduct their own investigation, evaluation and analysis of the business, data and property described in this announcement andor the Prospectus. This announcement does not constitute a recommendation concerning any investors options with respect to the Rights Issue. The price and value of securities can go down as well as up. Past performance is not a guide to future performance. The contents of this announcement are not to be construed as legal, business, financial or tax advice. Each Shareholder or prospective investor should consult his, her or its own legal adviser, business adviser, financial adviser or tax adviser for legal, financial, business or tax advice. This announcement is not and does not contain an offer of securities for sale or a solicitation of an offer to purchase or subscribe for securities in the United States or any other Excluded Territory, or any other state or jurisdiction in which such release, publication or distribution would be unlawful. The securities to which this announcement relates (the Securities ) have not been, and will not be, registered under the U. S. Securities Act of 1933, as amended (the Securities Act ), and may not be offered or sold in the United States unless registered under the Securities Act or pursuant to an exemption from, or a transaction not subject to, registration under the Securities Act. There will be no public offer of the Securities in the United States or any other jurisdiction. Subject to certain exceptions, the Securities may not be offered or sold in any Excluded Territory or to, of for the account or benefit of any national, resident or citizen of such countries.160 Accordingly, subject to certain exceptions, the Rights Issue is not being made in the United States and neither this announcement, the Prospectus nor the Provisional Allotment Letters constitute or will constitute an offer, or an invitation to apply for, or an offer or an invitation to subscribe for or acquire any Nil Paid Rights, Fully Paid Rights or New Ordinary Shares in the United States. Subject to certain limited exceptions, Provisional Allotment Letters have not been, and will not be, sent to, and Nil Paid Rights have not been, and will not be, credited to the CREST account of, any Qualifying Shareholder with a registered address in or that is located in the United States. The information in this announcement may not be forwarded or distributed to any other person and may not be reproduced in any manner whatsoever. Any forwarding, distribution, reproduction, or disclosure of this information in whole or in part is unauthorised. Failure to comply with this directive may result in a violation of the Securities Act or the applicable laws of other jurisdictions. Jefferies International Limited ( Jefferies ), which is authorised and regulated in the United Kingdom by the UK Financial Conduct Authority ( FCA ), and Merrill Lynch International ( BofA Merrill Lynch ), which is authorised by the Prudential Regulation Authority ( PRA ) and regulated in the United Kingdom by the PRA and FCA, are acting exclusively for Cobham and no one else in connection with the Rights Issue, and will not regard any other person (whether or not a recipient of this announcement) as their respective clients in relation to the Rights Issue and will not be responsible to anyone other than Cobham for providing the protections afforded to their respective clients or for providing advice in relation to the Rights Issue referred to in this announcement or any other transaction, arrangement or matter referred to in this announcement. No action has been taken by the Company, BofA Merrill Lynch or Jefferies that would permit an offering of the Nil Paid Rights, Fully Paid Rights or New Ordinary Shares or possession or distribution of this announcement, the Prospectus, the Provisional Allotment Letter or any other offering or publicity material relating to the Nil Paid Rights, Fully Paid Rights or New Ordinary Shares in any jurisdiction where action for that purpose is required. Persons into whose possession this announcement comes are required by the Company, BofA Merrill Lynch and Jefferies to inform themselves about, and to observe, such restrictions. No representation or warranty, express or implied, is or will be made as to, or in relation to, and no responsibility or liability is or will be accepted by BofA Merrill Lynch or Jefferies or their respective affiliates or agents as to, or in relation to, the accuracy or completeness of this announcement or any other information made available to or publicly available to any interested party or its advisers, whether written, oral or in a visual or electronic form, and howsoever transmitted or made available, and any liability therefore is expressly disclaimed. In connection with the proposed rights issue, BofA Merrill Lynch, Jefferies and any of their affiliates, may in accordance with applicable legal and regulatory provisions, engage in transactions in relation to the Nil Paid Rights, the Fully Paid Rights, the New Ordinary Shares andor related instruments for their own account for the purpose of hedging their underwriting exposure or otherwise. Accordingly, references in the Prospectus to the Nil Paid Rights, Fully Paid Rights or New Ordinary Shares being issued, offered, subscribed, acquired, placed or otherwise dealt in should be read as including any issue or offer to, or subscription, acquisition, placing or dealing by, BofA Merrill Lynch, Jefferies and any of their affiliates acting in such capacity.160 In addition BofA Merrill Lynch, Jefferies and any of their affiliates may enter into financing arrangements (including swaps or contracts for differences) with investors in connection with which BofA Merrill Lynch, Jefferies and any of their affiliates may from time to time acquire, hold or dispose of Ordinary Shares. BofA Merrill Lynch, Jefferies do not intend to disclose the extent of any such investment or transactions otherwise than in accordance with any legal or regulatory obligations to do so. This announcement contains forward-looking statements with respect to the financial condition, results of operations and business of Cobham and to certain of Cobhams plans and objectives with respect to these items. Forward-looking statements are sometimes but not always identified by the use of a date in the future or such words as anticipates, aims, due, could, may, should, expects, believes, intends, plans, targets, goal, or estimates.160 By their very nature forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that may or will occur in the future. There are various factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements.160 These factors include, but are not limited to, changes in the economies, political situations and markets in which the Group operates changes in government priorities due to programme reviews or revisions to strategic objectives changes in the regulatory or competition frameworks in which the Group operates the impact of legal or other proceedings against or which affect the Group changes to or delays in programmes in which the Group is involved the completion of acquisitions and divestitures and changes in commodity prices, inflation or exchange rates. All written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to Cobham or any other member of the Group or persons acting on their behalf, are expressly qualified in their entirety by the factors referred to above.160 Neither Cobham nor any other person (including BofA Merrill Lynch and Jefferies) intends to update these forward-looking statements. You are advised to read this announcement and the Prospectus (once published) in their entirety for a further discussion of the factors that could affect Cobhams future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur. No statement in this announcement is intended as a profit forecast and no statement in this announcement should be interpreted to mean that underlying operating profit for the current or future financial years would necessarily be above a minimum level, or match or exceed the historical published operating profit or set a minimum level of operating profit. 1 for 2 fully underwritten 163506.7 million Rights Issue On 26 April 2016, Cobham announced that it intended to carry out a rights issue in the second quarter of 2016. The Board today confirms that it intends to raise 163 506.7 160 million (before expenses) by way of a rights issue. The Board believes the Rights Issue to be in the best interests of Cobham and the Shareholders as a whole. The Rights Issue is fully underwritten by Jefferies and BofA Merrill Lynch, subject to the terms of the Underwriting Agreement. 1.1160160160160160160160160160160 Background to the Rights Issue In May 2014, the Group entered into an agreement to acquire Aeroflex, and completion of this acquisition took place on 12 September 2014. At the time of the acquisition of Aeroflex, the Board decided to raise equity via a cash placing to maintain its leverage ratio at approximately 2.5x net debt to EBITDA. The Group was expected to deleverage thereafter leading to a balance sheet target of 2.1x by the 2015 year end. However, following the Aeroflex acquisition, the Groups leverage ratio 160 did not reduce as expected and by year end 2015 it had reached 2.9x net debt to EBITDA. This was caused by a number of factors which have constrained cash generation and adversely impacted Group EBITDA. At the same time debt has increased in part due to the strengthening of the U. S. dollar against sterling. Approximately 90 per cent. of the Groups gross debt is denominated in U. S. dollars and the strengthening of the U. S. dollar against sterling increased net debt since the Aeroflex acquisition by approximately 163162 million, which in isolation increased the Groups net debt to EBITDA ratio by 0.4x. In defence and security markets, constraints on cash generation and factors impacting Group EBITDA include: 183160160160160 Ongoing investment in the Groups engineering and development programmes, including investment in multi-year aerial refuelling development programmes in the Mission Systems Sector and major electronics upgrade programmes in the Advanced Electronics Solutions Sector. There is significant ongoing investment in the Groups balance sheet related to these activities, which will be invoiced to customers over time, and cash subsequently collected, on achievement of contractual milestones. Cobham continues to make good progress on key programmes, with low rate initial production now commencing on the A400M aircraft and the KC820946 aircraft being in flight test phase. In aggregate the Groups development programmes are expected to deliver significant long-term cash and revenue streams, once engineeringdevelopment is completed and production commences and 183160160160160 Investment in increased levels of capital expenditure to support new contract wins, in particular the Australian Maritime Safety Authority contract for airborne search and rescue. This contract has a value of A640 million over 12 years, excluding three optional years. Cobham will invest an expected A110 million, including the purchase and modification of four aircraft the bulk of this being incurred over 2015 and 2016. Flying operations will commence later this year. In commercial markets, the Group experienced unexpected and significant market headwinds in some of its short cycle commercial markets, adversely impacting earnings and cash. These include the Groups marine SATCOM and Wireless businesses with subdued market conditions being driven primarily by reduced underlying demand in Asia-Pacific, weakness in global oil and gas markets and reduced levels of research and development expenditure by prospective customers in wireless test markets. In addition, this resulted in a 16342 million build-up in working capital at the 2015 year end, as conditions deteriorated rapidly. Excess inventory on hand at the 2015 year-end has now largely been shipped and the Group continues to 160 focus on achieving sustainable improvements in 160 working capital levels. The Group remains positive on the medium-term macro growth prospects for its communications markets. 1.2160160160160160160160160160160 First Quarter 2016 Trading As set out in the announcement on 26 April 2016, first quarter trading was behind the Boards expectations with the Groups trading profit being 16315 million (2015: 16350 million). There were three principal reasons for this slow start: operational issues in the Wireless business resulting in delayed shipments and a one-off charge of 1639 million increasing headwinds in the commercial fly-in fly-out business and deferred revenue on a small number of development programmes in the Advanced Electronics Solutions Sector. The remainder of the Group continues to trade in line with the Boards expectations, with the order book slightly ahead of the year-end position on a like-for-like basis at the end of the quarter. The biggest adverse impact on underlying trading was in the Wireless business, where there were operational issues and delayed shipments to customers. Following a detailed operational review, Cobham decided to record a one-off 1639 million charge within the Groups first half trading profit. The charge includes some additional liabilities relating to 2015 shipments and adjustments which reflect the reassessment of some accounting policies. The Group has acted to strengthen internal controls in the business and has made changes to strengthen its operational and financial management leadership teams. The Wireless order book at the end of the quarter was ahead of the prior year comparative and this, together with the recovery from the first quarter shipment issues and increased momentum in relation to the in-building wireless order opportunity pipeline, is anticipated to result in improved trading in the business as the year progresses. Cobham also saw increasing headwinds in its commercial fly-in fly-out business in its Aviation Services Sector towards the end of the first quarter, with certain natural resources customers in Australia slowing-down their operational activities and increased competition. This development resulted in reduced flying activity in this market. In response to the increasing headwinds the business proactively removed costs, including reducing the number of aircraft and making reductions in other direct and indirect costs. Within Cobhams Advanced Electronic Solutions Sector, a combination of technical and supplier quality issues resulted in deferred revenue on a small number of development programmes in the first quarter. Cobham is working through these issues and expects improved performance and recovery through the year. 1.3160160160160160160160160160160 Reasons for the Rights Issue The combination of the increase in net debt, constraints on cash generation and adverse factors impacting the Groups level of EBITDA generation following the acquisition of Aeroflex as well as the slow start in first quarter trading means that, while the Group has significant headroom within its interest cover covenants in its financing documents, by 30 June 2016, the Groups next lending covenant testing date, net debt to EBITDA could be around the covenant ratio of 3.5x. In light of this the Board is planning to reduce the Groups indebtedness through the Rights Issue, which it believes to be in Shareholders best interests. The Groups long term success is dependent upon its ability to continue to make targeted investments across its leading technologies and position itself on development programmes, which will deliver long term streams of revenue and cash, once engineering and development is completed and production commences. Reducing the indebtedness of the Group will allow management to focus on bringing the Groups development programmes to production and insulate the Group against short-term market headwinds, while continuing its focus on operational efficiency and working capital improvement. The Board has considered alternative options before deciding to pursue the Rights Issue, including seeking amendments to the Groups covenants under the terms of its borrowing facilities without undertaking an equity capital raising, further asset disposals, cutting or suspending the Groups dividend to shareholders and a smaller equity placing of shares on a non-preemptive basis. The Board has determined that the Rights Issue is in the best interest of the Group as it reduces leverage to a more sustainable level, which will safeguard the Groups operational and financial flexibility. The Board considers that the Groups target level of gearing should be below 2.0x net debt to EBITDA. The Rights Issue will reduce gearing towards this level, with future free cash flow generation anticipated to allow the Group to continue to delever over time whilst continuing to meet its capital allocation commitments, including necessary internal investment and dividend payments. 2.160160160160160160160 Further actions to be taken by the Group Cobham is reviewing its Group-wide cost structures, targeting run-rate net savings of approximately 16330 million per annum by 31 December 2016, with anticipated net savings of 16310 million to be delivered in 2016. This will aid mitigation of trading margin pressure and support delivery of the Boards earnings expectations and the generation of future free cash flow, which will underpin further deleveraging over the medium term. The savings will be achieved from a combination of restructuring areas of demand weakness, increasing the Groups outsourcing of manufacturing and reducing the Groups overheads. The costs of achieving the savings are included in the net savings figures quoted above and will be recognised largely in Cobhams underlying trading profit, with no additional non-underlying charges anticipated. 3.160160160160160160160 Use of 160 proceeds The Rights Issue is expected to raise 163 506.7 160 million in gross proceeds. Of the expected approximately 163 487 160 million of net proceeds from the Rights Issue, the Group currently intends to redeem or repurchase U. S. Private Placement Notes and repay other borrowings totalling approximately 163467 million, with the balance of the net proceeds to be used for make-whole premiums pursuant to the terms of the U. S. Private Placement Notes. However, the Board will continue to evaluate whether there are more financially advantageous ways to pay down debt. 4.160160160160160160160 Financial impact of the Rights Issue The Rights issue is expected to reduce the Groups pro forma net debt to EBITDA ratio from 2.9x as reported at 31 December 2015, to around 2x taking into account the receipt of the net proceeds of the Rights Issue and the repayment of debt. The Prospectus which is expected to be published later today will contain an unaudited pro forma statement of net assets that illustrates the effect of the Rights Issue and the repayment of debt on the Groups net assets as at 1 April 2016 as if the Rights Issue had been undertaken at that date. 5.160160160160160160160 Principal terms of the Rights Issue and underwriting commitments Cobham is proposing to raise approximately 163 487 160 million (net of expenses) by way of the Rights Issue of 569,287,950 New Ordinary Shares. The Rights Issue is being fully underwritten by the Joint Underwriters, subject to certain customary conditions, on the basis set out in the Underwriting Agreement. The principal terms of the Underwriting Agreement will be summarised in Part XVII: Additional Information of the Prospectus. The Rights Issue Price of 89 pence per New Ordinary Share, which is payable in full on acceptance by no later than 11.00160a. m. on 16 June 2016, represents a 45.4 per cent. discount to the closing middle-market price of Cobham of 163.0 pence per Existing Ordinary Share on 31 May 2016, the last trading day prior to the date of this announcement, and a 35.7 per cent. discount to the theoretical ex-rights price of 138.3 pence per New Ordinary Share calculated by reference to the closing middle-market price on the same basis. If a Qualifying Shareholder does not take up any of his entitlement to New Ordinary Shares, his proportionate shareholding will be diluted by 33.3 per cent. However, if a Qualifying Shareholder takes up his New Ordinary Shares in full, he will, after the Rights Issue has been completed, and ignoring any fraction of an Ordinary Share, as nearly as practicable have the same proportionate voting rights and entitlements to dividends as he had on the Record Date. If a Qualifying Shareholder does not subscribe for the New Ordinary Shares to which he is entitled, such Shareholder can instead sell his rights to those New Ordinary Shares and receive the net proceeds in cash. This is referred to as dealing in the rights nil paid and, subject to the fulfilment of certain conditions, dealings on the London Stock Exchange in the Nil Paid Rights are expected to commence at 8.00 a. m. on 2 June 2016. Subject to the fulfilment of, among other things, the conditions set out below, Cobham will offer 569,287,950 New Ordinary Shares to Qualifying Shareholders at a Rights Issue Price of 89 pence per New Ordinary Share, payable in full on acceptance. The Rights Issue will be offered on the basis of: 1 New Ordinary Share for every 2 Existing Ordinary Shares held by Qualifying Shareholders on the Record Date, and so in proportion to any other number of Existing Ordinary Shares then held and otherwise on the terms and conditions to be set out in Part IX: Terms and Conditions of the Rights Issue of the Prospectus. Qualifying Non-CREST Shareholders with registered addresses in the United States or in any of the other Excluded Territories will not be sent Provisional Allotment Letters and Qualifying CREST Shareholders in such territories will not have their CREST stock accounts credited with Nil Paid Rights, except where Cobham and the Joint Underwriters are satisfied that such action would not result in the contravention of any registration or other legal or regulatory requirement in such jurisdiction. Holdings of Existing Ordinary Shares in certificated and uncertificated form will be treated as separate holdings for the purpose of calculating entitlements under the Rights Issue. Fractions of New Ordinary Shares will not be allotted to any Qualifying Shareholders, but the Joint Bookrunners will endeavour to place the aggregated Nil Paid Rights in respect of such New Ordinary Shares in the market for the benefit of Cobham. The New Ordinary Shares will, when issued and fully paid, rank pari passu in all respects with the Existing Ordinary Shares, including the right to receive in full all dividends and other distributions declared, made or paid by reference to a record date after the date of their issue. The Rights Issue is conditional upon, among other things: 183160160160160160 Admission of the New Ordinary Shares (nil paid) becoming effective by not later than 8.00 a. m. on 2 June 2016 (or such later time andor date as the parties to the Underwriting Agreement may agree, being not later than 6 June 2016) 183160160160160160 save to the extent that, in the sole opinion of the Joint Underwriters, would not be material in the context of the Rights Issue, Cobham having complied with its obligations under the Underwriting Agreement including the delivery of certain documents to the Sponsor and the Joint Underwriters, by the times and dates specified in the Underwriting Agreement 183160160160160160 the warranties on the part of Cobham under the Underwriting Agreement being true, accurate and not misleading on the date of the Underwriting Agreement and immediately before Admission 183160160160160160 no matter requiring a supplement to the Prospectus having arisen between the time of publication of the Prospectus and Admission and no such supplement being published by Cobham at any time before Admission and 183160160160160160 in the opinion of the Joint Underwriters (acting in good faith), no material adverse change having occurred in respect of Cobham prior to Admission. The results of the Rights Issue, including the aggregate amount raised is expected to be announced by Cobham to a Regulatory Information Service by 8.00 a. m. on 17 June 2016. Applications have been made to the FCA for the New Ordinary Shares to be admitted to the premium listing segment of the Official List and to the London Stock Exchange for the New Ordinary Shares to be admitted to trading on its main market for listed securities. It is expected that Admission of the New Ordinary Shares, nil paid, will become effective and dealings (for normal settlement) in the New Ordinary Shares will commence, nil paid, at 8.00 a. m. on 2 June 2016. The Existing Ordinary Shares are already admitted to the premium listing segment of the Official List and to trading on the London Stock Exchanges main market for listed securities and to CREST. It is expected that all of the New Ordinary Shares, when issued and fully paid, will be capable of being held and transferred by means of CREST. The New Ordinary Shares will trade under ISIN GB00B07KD360 and the SEDOL number of the New Ordinary Shares will be B07KD36. The ISIN number for the Nil Paid Rights is GB00BZBVN521 and the ISIN for the Fully Paid Rights will be GB00BZBVN745. 6.160160160160160160160 Current trading and outlook On 26 April 2016, Cobham made the following statement in relation to the Groups outlook: Following the slow start in the first quarter, the Board now anticipates that Group underlying trading profit will be approximately 16315m below its previous expectations for the full year. This is primarily due to a combination of the impact of increased headwinds in the commercial fly-in fly-out business in Australia together with the one-off charge of 1639m in Wireless and short-term resolution of operational issues. The Board also expects there will be a more pronounced earnings bias to the second half of the year. The Board confirms the outlook for the year ended 31 December 2016 remains consistent with the 26 April 2016 announcement. The Board confirms its intention to pay a rebased total dividend in respect of 2016 which is equal in absolute quantum to the 163126 million dividend announced for 2015. This quantum will be paid over the total share capital, as enlarged by the Rights Issue, with the additional shares first qualifying for the 2016 interim dividend to be paid on 4 November 2016. The total dividend in respect of 2016 equates to approximately 7.4 pence per share based on the enlarged share capital. The Board believes that over time the Groups ability to convert a high proportion of its earnings into cash is unchanged and therefore it remains committed to its stated dividend policy, which is broadly to align future dividend increases with underlying earnings growth, while rebuilding cover over time. 8.160160160160160160160 Overseas shareholders The attention of Qualifying Shareholders who have registered addresses outside the United Kingdom, or who are citizens or residents of countries other than the United Kingdom, or who are holding Ordinary Shares for the benefit of such persons (including, without limitation, custodians, nominees, trustees and agents) or who have a contractual or other legal obligation to forward the Prospectus, a Provisional Allotment Letter and any other document in relation to the Rights Issue to such persons, is drawn to the information which will appear in paragraph 7 of Part IX: Terms and Conditions of the Rights Issue of the Prospectus. In particular, subject to certain very limited exceptions, the Rights Issue is not being made to Shareholders in the United States or into any of the other Excluded Territories. Notwithstanding any other provision of the Prospectus or the Provisional Allotment Letter, the Company reserves the right to permit any Qualifying Shareholder to take up his rights if the Company and the Joint Underwriters in their absolute discretion are satisfied that the transaction in question will not violate applicable laws. The Company has made arrangements under which the Joint Underwriters will try to find subscribers for the New Ordinary Shares provisionally allotted to such Shareholders (and other Shareholders who have not taken up their rights) by 4.30 p. m. on the second dealing day after the last date for acceptance of the Rights Issue. If the Joint Underwriters find subscribers and are able to achieve a premium over the Rights Issue Price and the related expenses of procuring those subscribers (including any applicable brokerage and commissions and amounts in respect of VAT which are not recoverable), such Shareholders will be sent a cheque for the amount of that aggregate premium above the Rights Issue Price less related expenses (including any applicable brokerage and commissions and amounts in respect of VAT which are not recoverable), so long as the amount in question is at least 1635. If any person in the United States or any other Excluded Territory receives a Provisional Allotment Letter, that person should not seek to, and will not be able to, take up his rights thereunder, except as described in paragraph 7 of Part IX: Terms and Conditions of the Rights Issue of the Prospectus. The provisions of paragraph 6 of Part IX: Terms and Conditions of the Rights Issue of the Prospectus will apply to Overseas Shareholders who cannot or do not take New Ordinary Shares provisionally allotted to them. Persons who have registered addresses in or who are resident in, or who are citizens of, countries other than the United Kingdom should consult their professional advisers as to whether they require any governmental or other consents or need to observe any other formalities to enable them to take up their entitlements to the Rights Issue. 9.160160160160160160160 Board recommendation The Board believes the Rights Issue to be in the best interests of Cobham and the Shareholders as a whole. The Directors who hold in aggregate 257,510 Existing Ordinary Shares, representing 0.02 per cent. of Cobhams existing issued ordinary share capital as at 31 May 2016 (being the latest practicable date 160prior to publication of this announcement) intend to take up in full the New Ordinary Shares to which he or she is entitled under the Rights Issue. The following definitions shall apply throughout this announcement unless the context requires otherwise: London Stock Exchange plc is not responsible for and does not check content on this Website. Website users are responsible for checking content. Any news item (including any prospectus) which is addressed solely to the persons and countries specified therein should not be relied upon other than by such persons andor outside the specified countries. Terms and conditions. including restrictions on use and distribution apply. 169 2014 London Stock Exchange plc. All rights reserved Cobham plc - Terms of Rights Issue - RNSGuruFocus Profitability Rank ranks how profitable a company is and how likely the companys business will stay that way. It is based on these factors: 1. Operating Margin 2. Trend of the Operating Margin (5-year average). The company with an uptrend profit margin has a higher rank. 3. Consistency of the profitability 4. Piotroski F-Score 5. Predictability Rank The maximum rank is 10. A rank of 7 or higher means a higher profitability and may stay that way. A rank of 3 or lower indicates that the company has had trouble to make a profit. Profitability Rank is not directly related to the Financial Strength Rank. But if a company is consistently profitable, its financial strength will be stronger. Profitability Growth. 6 10 ( Industry Median: -56.32 vs. CHK: -80.02 ) Ranked among companies with meaningful Operating Margin only. CHK s Operating Margin Range Over the Past 10 Years Min: -148.22 Med: 13.79 Max: 46.59 Current: -80.02 ( Industry Median: -70.72 vs. CHK: -70.72 ) Ranked among companies with meaningful Net Margin only. CHK s Net Margin Range Over the Past 10 Years Min: -115.05 Med: 6.74 Max: 27.34 Current: -70.72 ( Industry Median: -19.02 vs. CHK: -474.88 ) Ranked among companies with meaningful ROE only. CHK s ROE Range Over the Past 10 Years Min: -474.88 Med: 5.6 Max: 21.85 Current: -474.88 ( Industry Median: -13.43 vs. CHK: -37.56 ) Ranked among companies with meaningful ROA only. CHK s ROA Range Over the Past 10 Years Min: -50.54 Med: 3.08 Max: 9.88 Current: -37.56 ( Industry Median: -21.47 vs. CHK: -47.10 ) Ranked among companies with meaningful ROC (Joel Greenblatt) only. CHK s ROC (Joel Greenblatt) Range Over the Past 10 Years Min: -80.24 Med: 6.48 Max: 19.58 Current: -47.1 ( Industry Median: -12.20 vs. CHK: 0.20 ) Ranked among companies with meaningful 3-Year Revenue Growth Rate only. CHK s 3-Year Revenue Growth Rate Range Over the Past 10 Years Min: -10.2 Med: 16.7 Max: 43.8 Current: 0.2 ( Industry Median: 2.90 vs. CHK: 148.60 ) Ranked among companies with meaningful 3-Year EPS without NRI Growth Rate only. CHK s 3-Year EPS without NRI Growth Rate Range Over the Past 10 Years Min: -46.6 Med: -1.4 Max: 148.6 Current: 148.6 GuruFocus has detected 5 Warning Signs with Chesapeake Energy Corp CHK. More than 500,000 people have already joined GuruFocus to track the stocks they follow and exchange investment ideas. Financials Revenue Net Income Operating Cash Flow Free Cash Flow Operating Cash Flow Net Income Warning Signs Guru Trades CHK Guru Trades in Q1 2016 CHK Guru Trades in Q2 2016 CHK Guru Trades in Q3 2016 CHK Guru Trades in Q4 2016 Insider Trades Latest Guru Trades with CHK (List those with share number changes of more than 20, or impact to portfolio more than 0.1) Peter Lynch Chart ( What is Peter Lynch Charts ) Preferred stocks of Chesapeake Energy Corp 5 34 Cum Conv Pfd Shs Series - A - Reg-S 5 Conv Pfd Shs -144A - 4.50 Cumulative Convertible Preferred Stock 5 34 Cum Non-Voting Conv Pfd Shs Reg-S 5 34 Conv Pfd Shs Series - A - -144A - 5 34 Cum Non-Voting Conv Pfd Shs Reg-S 5 34 Cum Conv Pfd Shs Series - A - 5 34 Pfd Shs -144A 5 34 Conv Pfd Shs Series - A - -144A - Business Description Traded in other countries: Chesapeake Energy Corp is a natural gas and oil exploration and production company. It explores, develops and acquires properties for the production of natural gas and crude oil from underground reservoirs and also provides marketing midstream services. Chesapeake Energy Corp was incorporated in Oklahoma in 1989. The Company is a natural gas and oil exploration and production Company engaged in the exploration, development and acquisition of properties for the production of natural gas and crude oil from underground reservoirs and it provides marketing and midstream services. The Company operates in three segments which are managed separately because of the nature of its products and services. Its segments includes exploration and production marketing, gathering and compression and oilfield services. The Companys exploration and production operating segment is responsible for finding and producing natural gas, oil and NGL its marketing, gathering and compression operating segment is responsible for marketing, gathering and compression of natural gas, oil and NGL and its oilfield services operating segment is responsible for drilling, oilfield trucking, oilfield rentals, hydraulic fracturing and other oilfield services operations for both Chesapeake-operated wells and wells operated by third parties. The Company focuses its exploration, development, acquisition and production efforts in the two geographic operating divisions Southern division and Northern Division. The Companys Southern Division includes the Eagle Ford Shale in South Texas, the Granite WashHogshooter, Cleveland, Tonkawa and Mississippi Lime plays in the Anadarko Basin in northwestern Oklahoma, the Texas Panhandle and southern Kansas, the HaynesvilleBossier Shale in northwestern Louisiana and East Texas and the Barnett Shale in the Fort Worth Basin in north-central Texas. Its Northern Division includes the Utica Shale in Ohio, West Virginia and Pennsylvania, the Marcellus Shale in the northern Appalachian Basin in West Virginia and Pennsylvania and the Niobrara Shale in the Powder River Basin in Wyoming. It competes with both integrated and other independent natural gas and oil companies in acquiring desirable leasehold acreage, producing properties and the equipment and expertise necessary to explore, develop and operate its properties and market its production. The Companys exploration and production operations are subject to various types of regulation at the U. S. federal, state and local levels. Such regulation includes requirements for permits to drill and to conduct other operations and for provision of financial assurances covering drilling and well operations. Guru Investment Theses on Chesapeake Energy Corp Bruce Berkowitz Comments on Chesapeake Energy - Jan 31, 2017 In early 2016, news on all things related to oil and natural gas devoted little coverage to how declining commodity prices were forcing energy companies to reduce supply, lower debt, and cut operating costs. Time and again, history shows that a commodity price forges its own anchor. Our credit investments in Chesapeake Energy ( NYSE:CHK ) performed exceptionally well in 2016 due to the combination of operational efficiencies driving down unit costs, higher natural gas prices, and success with debt buybacks and asset sales. Longleaf Partners Comments on Chesapeake Energy - Jan 24, 2017 Chesapeake Energy ( NYSE:CHK ) (377 8.46), one of the largest U. S. producers of natural gas, oil, and natural gas liquids, was the Funds top contributor to performance in 2016 and gained an additional 12 in the fourth quarter. Earlier in the year, we transitioned our equity position into heavily discounted bonds and convertible preferred stock, which offered equity-like returns higher in the capital structure and a potentially faster payback. As the bonds rose close to par, we exited them. At the end of the third quarter, we converted all of our appreciated preferred securities into common stock for an attractive premium. Over the course of the year, management executed beyond expectations, selling various assets, improving the balance sheet through discounted debt repurchases, reducing operating and capital expenditures, and renegotiating midstream contracts. The most recent asset sales in the fourth quarter included a portion of the companys properties in the Haynesville Shale in northern Louisiana for proceeds of approximately 915 million. Signed or closed asset sales reached 2.5 billion in 2016, exceeding managements original target of 1 billion. To further strengthen its balance sheet, the company secured a term loan and convertible debt offering, which raised more capital at better terms than expected. Since the beginning of 2012, Chesapeake has reduced debt by 50, and its remaining fixed liabilities should be well covered in the coming years. The company has targeted a two times net debt over earnings before interests, taxes, depreciation, and amortization (EBITDA) with cash flow neutrality by 2018 and 5 to 15 of annual production growth by 2020. We salute CEO Doug Lawler and Chesapeakes board, with Brad Martin as Chairman, for their successful pursuit of shareholder value in the face of massive headwinds. Southeastern Asset Management Comments on Chesapeake - Oct 14, 2016 Chesapeake ( NYSE:CHK ) (112 4.0), one of the largest U. S. producers of natural gas, oil, and natural gas liquids, was the top contributor to performance during the quarter. Early in the year we swapped our equity position for near-term bonds and preferred stocks which offered equity-like returns and a shorter horizon for value recognition. As management delivered good results, the bonds approached par. Consequently, we sold all of the remaining bonds over the last three months. On the final day of the quarter, we exchanged all of our preferreds into equity at a price well below our appraisal. In the quarter, both operating expenses and capital expenditures continued to improve, additional debt was retired below face value, and management reduced distribution costs through restructuring agreements with Williams and selling the Barnett assets. The company is pursuing more cost improvements and increased its asset sale target for the year to 2 billion after surpassing the original 1 billion goal. Asset sales plus proceeds from the recent upsized term loan and convertible debt offering, which raised more capital at better terms than expected, should cover the companys obligations for at least three years. We remain confident that CEO Doug Lawler and Chesapeakes board will continue to successfully navigate the company through this lower-for-longer commodity price environment. Southeastern Asset Managements Longleaf Partners third quarter 2016 commentary. Bill Nygren Comments on Chesapeake - Oct 12, 2016 Recall that earlier in 2016, we swapped most of our Chesapeake ( NYSE:CHK ) stock at approximately 4 per share for the companys bonds at 48 per 100 par value, believing the bonds offered similar upside and less downside while capturing a tax loss. Last quarter we reported that the bonds had rallied to 85 per 100 par value, and the stock was trading at 4.28. Given the relative performance of the bonds to the stock and our comfort with the improved liquidity position of the company, we elected to swap back into the stock. Today our position in Chesapeake is exclusively in the form of equity. Bruce Berkowitz Comments on Chesapeake Energy - Aug 02, 2016 Short-duration bonds of Chesapeake Energy (NYSE:CHK ), such as the 7.250 bonds maturing in 2018, were purchased at substantial discounts to par to yield double digit returns. Chesapeake is one of Americas largest producers of natural gas, oil, and natural gas liquids. The companys assets span numerous U. S. shale basins. New management has navigated the cyclical downturn in oil and gas prices by cutting costs, raising liquidity, and reducing outstanding debt to the lowest level in the last nine years. Though we normally shy away from commodity price forecasting, data shows that natural gas markets have tightened due to waning production growth, expanding exports (to Mexico or via liquefied natural gas), and record domestic demand for electricity generation. Price forges its own anchor. While the company maintains an active hedging program to mitigate future commodity price fluctuations, small improvements in commodity prices can have a significantly positive impact on Chesapeakes operating results. The companys 4 billion revolving credit facility was recently reaffirmed and remains almost entirely untapped, which should provide flexibility for Chesapeake to renegotiate gas gathering contracts and shed additional assets to further reduce obligations. Southeastern Asset Management Comments on Chesapeake - Jul 14, 2016 As stated earlier, Chesapeake (NYSE:CHK ) (733.6), one of the largest U. S. producers of natural gas, oil, and natural gas liquids, was the Funds largest contributor during the quarter. Earlier in the year, we swapped our equity for preferred stock and also added to our Chesapeake position via very discounted bonds and convertible bonds. This repositioning paid off in the quarter the bonds appreciated more quickly than the stock as the company continued to lower its overall debt through purchases below par and debt for equity swaps. Additionally, in April, Chesapeake had its 4 billion revolving credit facility reaffirmed (90 untapped), with the next scheduled redetermination pushed out until June 2017. The company increased liquidity with the sale of about half of its mid-continent STACK (Sooner Trend Anadarko Basin Canadian and Kingfisher Counties) acreage to Newfield at a fair price of over 400 million. In total, net debt has declined by over 10 or 1 billion in 2016. Management projects additional asset sales this year and continues to renegotiate pipeline commitments toward better rates. The company has put on hedges that help mitigate its downside. We remain confident that CEO Doug Lawler and Chesapeakes board will successfully navigate the company through this particularly challenging commodity price environment. Bill Nygren Comments on Chesapeake - Jul 11, 2016 Earlier in 2016, investors were pricing in significant bankruptcy risk across Chesapeake (NYSE:CHK )s capital structure. At the time, we believed Chesapeakes liquidity risks were manageable given the companys ability to sell assets representing a small percentage of its future production in exchange for cash, making up a meaningful percentage of the companys enterprise value. We felt that Chesapeakes bonds at the time had a similar upside to the stock and had the added benefit of higher seniority in the capital structure, so we swapped the preponderance of our Chesapeake equity position into the companys fixed income securities. On average over the months in which we executed this trade, we sold CHK stock for approximately 4 per share and bought bonds trading for 48. Commodity prices rose during the quarter, while Chesapeake sold assets for cash without substantially reducing its current EBITDA. We believe that the liquidity profile of the company is now considerably improved. Today the bonds are trading for 85 while the stock is at 4.28, and the relative attractiveness of Chesapeake bonds to its stock has noticeably narrowed. We are very impressed with how well Chesapeakes management team and board of directors have navigated this challenging commodity price environment, and we remain positive about the long-term prospects for this company. Brandes Investments Comments on Chesapeake - Jun 15, 2016 The uncertainty with Chesapeake (NYSE:CHK ) is (and has been) the natural gas price. We believe that supply and demand warrant a much higher price than the current sub-2 per mmBtu level (currently even lower in Pennsylvania where Chesapeake has a significant percentage of its acreage), likely in the 4-6 range in the medium to long term. At the current natural gas price, producers are cutting capex significantly, which could ultimately impact the supply of natural gas. The path of natural gas prices is uncertain with a lag between capex cuts and changes to production levels. At higher long-term price levels we believe that Chesapeakes enterprise value would be substantially more than what was valued by the market. However, as Chesapeake built out its acreage, it utilized a significant amount of debt, making it one of the more leveraged oil and natural gas companies today. As a result, while we think it likely has access to liquidity to survive the depressed natural-gas price environment for the next year or two, we cannot rule out that the management and board will choose to preemptively file for reorganization under the bankruptcy code in order to restructure the company and reduce the substantial debt burden. Therefore, the Global Large-Cap Investment Committee decided to sell Chesapeake equity, which bears the brunt of this bankruptcy timing risk, and allocate where possible to Chesapeake debt, which we believed offers a more attractive riskreward tradeoff as it traded at 15 cents to 35 cents on the dollar. At these levels, the yield to maturity was north of 30, offers the potential for equity-like returns and provides some downside protection because debt holders have a higher claim on assets than do equity shareholders if the company decides to file for reorganization. It is not typical for the Global Equity Fund to hold securities other than common equity. Exceptions have been made when the securities within a companys capital structure offered potential investment returns that rivaled those of common equity. This happened with the preferred equity securities of U. S. banks during the financial crisis, for instance. In this particular case, Chesapeake endured an extremely difficult commodity-price environment which resulted in the market value of its common equity, preferred equity and debt falling significantly. The investment committee believes that the potential return from investing in Chesapeake debt surpasses that of many other common equity investments. If the company files for reorganization and emerges having restructured its debt, it is highly likely that someall of the debt will be converted to equity, allowing us to potentially participate in the upside of the companys enterprise value. The restructured company would allow for further potential recovery in value should natural-gas prices eventually rise to economically viable levels during or after the reorganization process. Bill Nygren Comments on Chesapeake Energy - Apr 11, 2016 While there were no new companies purchased in the quarter, recent volatility in the equity and fixed income markets allowed us to purchase securities within the capital structure of two existing holdings in a way that maintained upside to these undervalued companies and added downside protection, while also providing a tax benefit. In the case of Chesapeake Energy ( NYSE:CHK ), we purchased bonds at prices that offered similar upside to the equity, despite higher seniority in the capital structure, while capturing a tax loss on the sale of equity. Bill Nygren Comments on Chesapeake Energy - Apr 11, 2016 When a business doesnt meet our expectations, we reduce our intrinsic value estimate accordingly, and the remaining three eliminations fall into that category. Selling our positions in American Express, Union Pacific and Chesapeake Energy allowed us to take tax losses while reinvesting proceeds into businesses in which we have more long-term confidence. Specifically, Chesapeake Energy ( NYSE:CHK ) has been a poor performer as oil prices have dropped from over 100 per barrel to less than 40 per barrel. Therefore, we swapped our Chesapeake holdings for other energy holdings that are also undervalued based on expected cost-cutting and higher commodity prices, but have what we believe are stronger balance sheets. Longleaf Partners Comments on Chesapeake Energy - Jan 22, 2016 As noted, Chesapeake Energy (NYSE:CHK ), the second largest producer of natural gas in the U. S. declined 39 in the quarter and 77 for the year, making it the largest detractor of performance in both periods. Options accounted for 40 of our position and slightly half of our return. Fears related to further declines in energy prices drove the stock lower, despite CEO Doug Lawlers progress in areas he could control. After reaffirming the companys untapped 4 billion revolving credit facility and renegotiating a deal with Williams (pipeline operator), in the fourth quarter Chesapeake turned to restructuring its debt. Chesapeake offered to exchange various unsecured debt securities at a discount to par for secured debt with a later maturity. Pushing out due dates coupled with reducing overall debt outstanding should help the company weather a sustained low energy price environment. Over the year we adjusted our appraisal of Chesapeake to account for the tumble in oil and natural gas prices. Even with the depressed energy prices of today and little growth in that price as indicated by the futures strip pricing, the companys non-producing assets have value that is not reflected at all in the stock price. Asset sale transactions in basins where Chesapeake operates helped validate our appraisal. We expect the company will continue to reduce costs while also seeking asset sales at fair prices. We are mindful of the risks associated with commodity companies. Once the debt restructuring was announced, we added to higher parts of the companys capital structure that became particularly discounted. During the quarter, Brad Martin assumed the role of non-executive Chairman of the Board from Archie Dunham, who became Chairman Emeritus. Martin has been a productive partner for Southeastern in other successful investments including Saks, Dillards and FedEx. We are confident that management, coupled with the board, can navigate the company through what has been and continues to be a severely challenging energy price environment. Bill Nygren Comments on Chesapeake Energy - Jan 08, 2016 Our worst quarterly performer by far was Chesapeake Energy, down 39, while only two other positions declinedFNF Group down 2 and Calpine down 1. In our opinion, commodity prices have fallen to levels which, if permanent, would bankrupt much of the exploration and production sector of the oil and gas industry. However, we believe commodity prices will rise and that many investments made today in this industry will prove quite rewarding. That said, given Chesapeake ( NYSE:CHK )s financial obligations, it is without question a much riskier investment than we normally hold. Securities across Chesapeakes capital structure have all declined sharply and, in our opinion, are now all attractively priced. Weve shifted some of our position from common stock to somewhat less risky preferred stock, which we believe reduces risk without forfeiting upside potential. Southeastern Asset Management Comments on Chesapeake Energy - Oct 22, 2015 One of the largest producers of natural gas, natural gas liquids, and oil in the U. S. Chesapeake Energy ( NYSE:CHK ) declined 34 in the quarter. In line with our exposure, about 60 of the impact came from the options we own and the remainder from the common equity. Concerns remain over the companys liquidity profile, but management made major strides to improve realizations by successfully renegotiating two contracts with pipeline operator Williams that reduces transportation costs. Additionally, on October 1 the company announced the renewal of its 4 billion credit facility. Comparable asset sales in overlapping basins, such as Encanas sale of Haynesville assets, further confirmed our appraisal of Chesapeake. The companys shares remain more heavily discounted than its peers, yet CEO Doug Lawler is keenly focused on realizing value for shareholders even in this depressed energy price environment. Further reducing costs, including the recently announced 15 headcount reduction, coupled with asset divestitures, should lead to a stock price more in line with intrinsic value, which we appraise at twice the current price assuming the underlying commodity prices remain depressed. Bill Nygren Comments on Chesapeake - Oct 08, 2015 We wrote fairly extensively about Chesapeake (NYSE:CHK ) last quarter, but an update seems warranted given the stock prices continued weakness. In short, it wasnt all bad newslower oil and gas prices notwithstanding. Chesapeake renegotiated a meaningful component of its legacy high-cost transportation contracts (see last quarters letter for details), and this has reduced the companys sensitivity to lower gas prices. Importantly, many of the companys fundamentals, including production volume as well as drilling and operating costs, have been consistent with our expectations. Furthermore, one of Chesapeakes competitors recently sold assets in the Haynesville Shale that were quite similar to those of Chesapeake the sale price was consistent with our estimated value. At Oakmark, we always closely monitor private market transactions, which we believe are important indicators of business value. John Rogers Comments on Chesapeake Energy Corp. - Sep 03, 2015 Also, natural gas explorer Chesapeake Energy Corp. ( NYSE:CHK ) declined -20.65 as clouds continued to hang over the stock. The price of natural gas has declined nearly 40 over the past 12 months, and Chesapeake has become a favorite for short sellers as short interest has nearly quadrupled in just more than six months. Declines in prices for both natural gas and crude oil have brought increased scrutiny to Chesapeake debt level. We continue to own the stock. From John Rogers (Trades. Portfolio ) Ariel Focus Fund second quarter 2015 commentary. Bill Nygren Comments on Chesapeake Energy Corp - Jul 09, 2015 Chesapeake Energy (CHK ) has been a notably poor performer in 2015, down 42 since the start of the calendar year, and deserves further discussion. Every oil and gas producer has been hurt by the decline in commodity prices, but it has been particularly painful for Chesapeake. This is because Chesapeake has an unusually large fixed-cost base, which magnifies the impact falling revenue has on earnings. The outsized costs stem from onerous transportation contracts that require Chesapeake to pay a fixed-dollar amount to suppliers regardless of the volume of energy the company produces. Since a portion of these agreements cover assets that are not economical at todays prices, Chesapeakes high-return assets must now shoulder the full burden of these legacy costs as well as their own costs. At current commodity prices Chesapeake is losing money, and investors have become worried about the companys liquidity. We believe these issues are manageable, and we remain confident in the companys ability to improve its earnings and liquidity. We believe Chesapeakes huge scale will allow the company to sell a relatively small percentage of its future production in exchange for cash making up a relatively large percentage of the companys current enterprise value. Such divestitures may take various forms (providing immediate cash, third party drilling capital, or simply reducing transportation burdens), but all would help resolve liquidity issues while also highlighting what we believe is the large disconnect between Chesapeakes intrinsic value and its market price. Considering that Chesapeakes Board of Directors looks at such decisions with the goal of maximizing value per share, we are comfortable that our investment is in good hands. Mason Hawkins Comments on Chesapeake Energy Corp - May 28, 2015 The largest detractor in the quarter was Chesapeake Energy (CHK ), one of the largest producers of natural gas, natural gas liquids, and oil in the U. S. which declined 27. The company reported lower-than - expected price realizations and production in the fourth quarter. While the company cut 2015 budgeted capital expenditures (capex) over 40 versus 2014, the market was hoping for Chesapeake to balance lower cash flow with capex. The company maintains a flexible balance sheet, with 4 billion in cash and an additional 4 billion in an undrawn credit facility, which will allow CEO Doug Lawler to focus on driving the greatest value for shareholders for the long-term, either through the authorized 1 billion repurchase program, strategic acquisitions, or a combination of both. While our appraisal of the company has come down in the short-term with the collapse of oil and gas prices, the long-term thesis remains intact. Chesapeakes second largest shareholder, Carl Icahn (Trades. Portfolio ), recently increased his stake in Chesapeake by 10, and Chairman Archie Dunham bought an additional 14 million at quarter-end. During the quarter we maintained our overall exposure to Chesapeake but switched half our position into options due to favorable pricing created by the panic and resulting volatility in energy markets. We also employed this approach to increase our exposure to Murphy. We viewed this as a rare opportunity to gain more downside protection while maintaining the upside benefit of higher stock prices. The Chesapeake options accounted for more than half of that positions decline in the quarter. Top Ranked Articles about Chesapeake Energy Corp January 31, 2017 In early 2016, news on all things related to oil and natural gas devoted little coverage to how declining commodity prices were forcing energy companies to reduce supply, lower debt, and cut operating costs. Time and again, history shows that a commodity price forges its own anchor. Our credit investments in Chesapeake Energy (NYSE:CHK ) performed exceptionally well in 2016 due to the combination of operational efficiencies driving down unit costs, higher natural gas prices, and success with debt buybacks and asset sales. Weiterlesen. January 24, 2017 Chesapeake Energy (NYSE:CHK ) (377 8.46), one of the largest U. S. producers of natural gas, oil, and natural gas liquids, was the Funds top contributor to performance in 2016 and gained an additional 12 in the fourth quarter. Earlier in the year, we transitioned our equity position into heavily discounted bonds and convertible preferred stock, which offered equity-like returns higher in the capital structure and a potentially faster payback. As the bonds rose close to par, we exited them. At the end of the third quarter, we converted all of our appreciated preferred securities into common stock for an attractive premium. Over the course of the year, management executed beyond expectations, selling various assets, improving the balance sheet through discounted debt repurchases, reducing operating and capital expenditures, and renegotiating midstream contracts. The most recent asset sales in the fourth quarter included a portion of the companys properties in the Haynesville Shale in northern Louisiana for proceeds of approximately 915 million. Signed or Read more. October 14, 2016 Chesapeake (NYSE:CHK ) (112 4.0), one of the largest U. S. producers of natural gas, oil, and natural gas liquids, was the top contributor to performance during the quarter. Early in the year we swapped our equity position for near-term bonds and preferred stocks which offered equity-like returns and a shorter horizon for value recognition. As management delivered good results, the bonds approached par. Consequently, we sold all of the remaining bonds over the last three months. On the final day of the quarter, we exchanged all of our preferreds into equity at a price well below our appraisal. In the quarter, both operating expenses and capital expenditures continued to improve, additional debt was retired below face value, and management reduced distribution costs through restructuring agreements with Williams and selling the Barnett assets. The company is pursuing more cost improvements and increased its asset sale target for the year to 2 billion after surpassing the original 1 billion goal. Asset sales plus proceeds from the recent upsized term loan and Read more. October 12, 2016 Recall that earlier in 2016, we swapped most of our Chesapeake (NYSE:CHK ) stock at approximately 4 per share for the companys bonds at 48 per 100 par value, believing the bonds offered similar upside and less downside while capturing a tax loss. Last quarter we reported that the bonds had rallied to 85 per 100 par value, and the stock was trading at 4.28. Given the relative performance of the bonds to the stock and our comfort with the improved liquidity position of the company, we elected to swap back into the stock. Today our position in Chesapeake is exclusively in the form of equity. Weiterlesen. September 20, 2016 Short-duration bonds of Chesapeake Energy (NYSE:CHK ), such as the 7.250 bonds maturing in 2018, were purchased at substantial discounts to par to yield double digit returns. Chesapeake is one of Americas largest producers of natural gas, oil, and natural gas liquids. The companys assets span numerous U. S. shale basins. New management has navigated the cyclical downturn in oil and gas prices by cutting costs, raising liquidity, and reducing outstanding debt to the lowest level in the last nine years. Though we normally shy away from commodity price forecasting, data shows that natural gas markets have tightened due to waning production growth, expanding exports (to Mexico or via liquefied natural gas), and record domestic demand for electricity generation. Price forges its own anchor. While the company maintains an active hedging program to mitigate future commodity price fluctuations, small improvements in commodity prices can have a significantly positive impact on Chesapeakes operating results. The companys 4 billion revolving credit facility was recently reaffirmed and remains almost entirely untapped, which should provide flexibility for Read more. As stated earlier, Chesapeake (NYSE:CHK ) (733.6), one of the largest U. S. producers of natural gas, oil, and natural gas liquids, was the Funds largest contributor during the quarter. Earlier in the year, we swapped our equity for preferred stock and also added to our Chesapeake position via very discounted bonds and convertible bonds. This repositioning paid off in the quarter the bonds appreciated more quickly than the stock as the company continued to lower its overall debt through purchases below par and debt for equity swaps. Additionally, in April, Chesapeake had its 4 billion revolving credit facility reaffirmed (90 untapped), with the next scheduled redetermination pushed out until June 2017. The company increased liquidity with the sale of about half of its mid-continent STACK (Sooner Trend Anadarko Basin Canadian and Kingfisher Counties) acreage to Newfield at a fair price of over 400 million. In total, net debt has declined by over 10 or 1 billion in 2016. Management projects additional asset sales this year and continues to renegotiate pipeline commitments toward better rates. The company has put on hedges Read more. Earlier in 2016, investors were pricing in significant bankruptcy risk across Chesapeake (NYSE:CHK )s capital structure. At the time, we believed Chesapeakes liquidity risks were manageable given the companys ability to sell assets representing a small percentage of its future production in exchange for cash, making up a meaningful percentage of the companys enterprise value. We felt that Chesapeakes bonds at the time had a similar upside to the stock and had the added benefit of higher seniority in the capital structure, so we swapped the preponderance of our Chesapeake equity position into the companys fixed income securities. On average over the months in which we executed this trade, we sold CHK stock for approximately 4 per share and bought bonds trading for 48. Read more. The uncertainty with Chesapeake (NYSE:CHK ) is (and has been) the natural gas price. We believe that supply and demand warrant a much higher price than the current sub-2 per mmBtu level (currently even lower in Pennsylvania where Chesapeake has a significant percentage of its acreage), likely in the 4-6 range in the medium to long term. At the current natural gas price, producers are cutting capex significantly, which could ultimately impact the supply of natural gas. The path of natural gas prices is uncertain with a lag between capex cuts and changes to production levels. At higher long-term price levels we believe that Chesapeakes enterprise value would be substantially more than what was valued by the market. Weiterlesen.
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