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Pajak dan kompensasi eksekutif Briefing Paper 344 Topik tentang kompensasi eksekutif telah lama menarik bagi akademisi, pers populer, dan politisi. Dengan berlanjutnya peningkatan kompensasi eksekutif dan kenaikan gaji yang meningkat antara eksekutif dan pekerja rata-rata, masalah ini sekali lagi berada di garis depan perdebatan kebijakan publik. Selama bertahun-tahun, anggota parlemen telah men-tweak kode pajak untuk membatasi bentuk kompensasi eksekutif yang tidak disukai, sementara regulator telah meningkatkan jumlah perusahaan pengungkapan yang harus dibuat. Dalam Kongres saat ini, Rep Barbara Lee (D-Calif.) Telah memperkenalkan Undang-Undang tentang Tingkat Penghasilan Tahun 2011 (HR 382), yang akan mengubah Internal Revenue Code untuk melarang pemotongan kompensasi yang berlebihan untuk kompensasi karyawan penuh waktu yang ditentukan. Sebagai berlebihan jika melebihi 500.000 atau 25 kali kompensasi dari pegawai dengan bayaran terendah, mana yang lebih besar. Tujuan dari penelitian ini adalah untuk menguji dampak pembatasan sebelumnya terhadap deductibility kompensasi, Internal Revenue Code Section 162 (m). Berbeda dengan sebagian besar perdebatan hari ini mengenai perlunya pemerintah federal untuk menaikkan pemasukan pajak, tujuan utama dari Bagian 162 (m), yang membatasi pengurangan pajak untuk kompensasi eksekutif, bukanlah untuk meningkatkan pendapatan tetapi untuk mengurangi kerugian, Kompensasi berbasis kinerja dengan kata lain, untuk melakukan sesuatu tentang kompensasi yang berlebihan yang diajukan kandidat presiden 1992 William Jefferson Clinton melawan. Makalah ini akan meninjau keefektifan ketentuan tersebut dalam mencapai tujuannya, dan memberikan informasi tentang berapa besar pendapatan yang telah diraih atau hilang karena pengurangan kompensasi eksekutif. Sehubungan dengan pengurangan kompensasi berbasis kinerja yang tidak berkinerja tinggi, banyak yang menganggap Bagian 162 (m) sebuah kegagalan, termasuk Christopher Cox, ketua Komisi Sekuritas dan Bursa Efek, yang sejauh ini mengatakan bahwa mereka termasuk dalam museum Konsekuensi yang tidak diinginkan Senator Charles Grassley (R-Iowa), ketua Komite Senat untuk Keuangan, bahkan lebih langsung lagi, mengatakan: 162 (m) rusak. Itu niat baik. Tapi itu benar-benar tidak bekerja sama sekali. Perusahaan merasa mudah untuk berkeliling hukum. Ini memiliki lebih banyak lubang daripada keju Swiss. Dan tampaknya telah mendorong industri pilihan. Orang-orang hebat ini bekerja dengan perangkat mirip jam Swiss untuk memainkan peraturan mirip keju Swiss ini. Sejak Bagian 162 (m) berlalu hampir 20 tahun yang lalu, penelitian akademis dan praktisi telah menunjukkan peningkatan kompensasi eksekutif yang dramatis, dengan sedikit bukti bahwa hal itu lebih terkait dengan kinerja daripada sebelumnya. Dalam makalah ini, kami memperkirakan bahwa deduksi perusahaan untuk kompensasi eksekutif telah dibatasi oleh ketentuan ini, dengan perusahaan publik membayar, rata-rata, tambahan 2,5 miliar per tahun untuk pajak federal. Namun, mereka terus mengurangi sebagian besar kompensasi eksekutif mereka, dengan deduksi ini membebani Treasury A. S. sekitar 7.5 miliar per tahun. Karena sebenarnya data pengembalian pajak adalah, berdasarkan undang-undang, rahasia, perkiraan kami agak tidak tepat, karena kami harus menyimpulkan pengurangan deduksi pajak dari kompensasi eksekutif dan status pajak perusahaan dari pengajuan publik. Temuan utama kami adalah: Perusahaan diperbolehkan untuk sepenuhnya mengurangi komponen kompensasi eksekutif yang memenuhi persyaratan IRS untuk memenuhi syarat sebagai 8220 kinerja berdasarkan.8221 Salah satu persyaratan tersebut adalah persetujuan pemegang saham. Namun, hanya informasi yang sangat umum yang diberikan kepada pemegang saham. Oleh karena itu, pemegang saham diminta untuk, dan biasanya melakukan, menyetujui rencana tanpa mengetahui apakah kondisi kinerja itu menantang atau tidak, dan potensi pembayaran dari rencana tersebut. Tuntutan kinerja, seperti opsi saham dan rencana insentif non-ekuitas, yang memenuhi persyaratan IRS untuk pengecualian 8220performance berbasis8221 sepenuhnya dapat dikurangkan. Gaji, bonus, dan hibah saham dikurangkan namun dikenai batas 1 juta. Pada tahun 2010 perkiraan kami adalah bahwa ada 27,8 miliar kompensasi eksekutif yang dapat dikurangkan. Sebanyak 121,5 miliar kompensasi eksekutif dapat dikurangkan selama periode 20072010. Kira-kira 55 persen dari total itu untuk kompensasi berbasis kinerja. Tampaknya perusahaan yang menyukai pajak tampaknya tidak peduli dengan pembatasan deduksi dan terus membayar gaji eksekutif yang tidak dapat dipungkiri. Jumlah eksekutif yang menerima gaji melebihi batas maksimum yang dapat dikurangkan dari 1 juta sebenarnya meningkat dari 563 di tahun 2007 menjadi 594 pada tahun 2010. Untuk semua hal Bagian 162 (m) dimaksudkan untuk membatasi kompensasi eksekutif yang berlebihan, pemegang saham dan Departemen Keuangan AS Telah mengalami kerugian finansial. Kode tersebut tidak melarang perusahaan membayar kompensasi jenis apapun, mereka dilarang mengurangi jumlah tersebut pada SPT mereka. Hasilnya adalah penurunan laba perusahaan dan imbal hasil yang berkurang bagi pemegang saham. Dengan asumsi tarif pajak marginal 25 persen atas keuntungan perusahaan (perkiraan konservatif), pendapatan yang hilang dari pemerintah federal pada tahun 2010 dari kompensasi eksekutif yang dapat dikurangkan adalah 7 miliar, dan pendapatan federal yang terdahulu selama periode 20072010 adalah 30,4 miliar. Lebih dari separuh pendapatan federal yang terdahulu adalah karena subsidi pajak untuk gaji eksekutif 8.2201 Kompensasi eksekutif kemungkinan akan pulih dalam waktu dekat, melebihi tingkat yang terlihat pada tahun 2007. 1. Bagian Latar Belakang 162 dari Internal Revenue Code mencakup biaya perdagangan dan bisnis. Seperti yang dikemukakan di Bagian 162 (a), entitas diperbolehkan sebagai pengurangan semua biaya biasa dan wajib yang dibayarkan atau dikeluarkan selama tahun kena pajak dalam melakukan perdagangan atau bisnis apa pun, termasuk, sebagaimana tercantum dalam Bagian 162 (a) (1) , Tunjangan gaji atau kompensasi lain yang wajar untuk layanan pribadi benar-benar diberikan. Namun, sejumlah bagian dari Internal Revenue Codein khususnya, bagian 162 (m), 162 (m) (5), 162 (m) (6), dan 280 (g) membatasi deductibility kompensasi eksekutif. Diadopsi pada tahun 1993, Bagian 162 (m), yang berlaku untuk perusahaan publik, membatasi pengurangan kompensasi eksekutif menjadi 1 juta per individu yang tercakup, 1 dengan pengecualian untuk kompensasi berbasis kinerja yang sesuai. Artinya, perusahaan dapat mengurangi 1 juta kompensasi berbasis kinerja per individu yang tercakup dan jumlah kompensasi berbasis kinerja yang tidak terbatas. Berbeda dengan Bagian 162 (m), bagian 162 (m) (5) dan 162 (m) (6) lebih baru dan ditargetkan secara sempit, mereka berlaku untuk peserta Troubled Asset Relief Program (TARP) dan perusahaan asuransi kesehatan. Mereka juga menetapkan batas yang lebih rendah pada potongan pajak yang diperbolehkan untuk kompensasi sebesar 500.000 per individu, tanpa perbedaan atau pengecualian untuk kompensasi berbasis kinerja. Bagian 162 (m) (5) diadopsi pada tahun 2008 dan berlaku untuk chief executive officer (CEO), chief financial officer (CFO), dan tiga pejabat tertinggi yang dibayar tertinggi dari entitas publik dan swasta yang menerima uang di bawah TARP. Bagian 162 (m) (6) mulai berlaku pada tahun 2013, dan batasannya berlaku bagi kebanyakan pegawai penyedia layanan kesehatan. Bagian 280 (g) tidak berlaku untuk pembayaran periodik kepada karyawan, melainkan untuk mengubah pembayaran kontrol.2 Jika jumlahnya sama dengan atau lebih besar dari tiga kali kompensasi individual Wajib Pajak rata-rata yang dipersyaratkan untuk lima tahun sebelumnya, perusahaan Kehilangan potongan pajak untuk pembayaran itu, dan orang tersebut dikenai pajak cukai 20 persen atas kelebihan pembayaran tersebut. Seperti pada bagian 162 (m) (5) dan 162 (m) (6), Bagian 280 (g) tidak mengandung pengecualian berbasis kinerja. Untuk membahas pengurangan deduksi kompensasi eksekutif, makalah ini akan berfokus pada Bagian 162 (m) karena jangkauannya yang lebih luas. Ingat, tidak terbatas pada sektor ekonomi tertentu, ini membatasi pengurangan kompensasi eksekutif di perusahaan publik menjadi 1 juta per individu yang tercakup, dengan pengecualian untuk kompensasi berbasis kinerja yang sesuai. Untuk memenuhi syarat sebagai kompensasi berbasis kinerja, persyaratan berikut harus dipenuhi: Kompensasi harus dibayarkan semata-mata atas pertimbangan eksekutif yang mencapai satu atau lebih sasaran kinerja yang ditentukan oleh formula yang obyektif. Tujuan ini dapat mencakup harga saham, pangsa pasar, penjualan, biaya atau pendapatan, dan dapat diterapkan pada individu, unit bisnis, atau korporasi secara keseluruhan. Tujuan kinerja harus ditetapkan oleh komite kompensasi dari dua atau lebih direktur independen. Harus diungkapkan kepada pemegang saham dan disetujui oleh suara mayoritas dan Panitia kompensasi harus menyatakan bahwa sasaran kinerja telah dipenuhi sebelum pembayaran dilakukan. Sedangkan Bagian 162 (m) dimaksudkan untuk membatasi kompensasi eksekutif yang berlebihan, penulis ini melihat beberapa kelemahan atau celah dalam kode. Mengenai persetujuan pemegang saham, perusahaan hanya perlu memberi para pemegang saham persyaratan paling umum saat mereka menyusun rencana kompensasi untuk mendapatkan suara. Pemegang saham diminta untuk, dan biasanya melakukan, menyetujui rencana tanpa mengetahui apakah kondisi kinerja menantang atau tidak, dan potensi pembayaran dari rencana tersebut. Rincian tersebut diserahkan ke komite kompensasi, yang harus menetapkan persyaratan paling lambat pada kuartal pertama tahun fiskal perusahaan. Yang juga bermasalah adalah jika persyaratan ini tidak terpenuhi, korporasi tidak dilarang membayar ganti rugi. Sebagai gantinya, dilarang mengurangi jumlah tersebut pada SPTnya. Hasilnya adalah penurunan laba perusahaan. Orang-orang yang menderita adalah pemegang saham di antara orang-orang yang sama, bahkan di hari pengungkapan kompensasi yang diperluas ini, tidak diberi rincian tentang rencana kompensasi eksekutif sebelum diminta memberikan suara pada mereka, juga tidak diberi informasi mengenai potongan pajak yang diambil atau dibatalkan . Pada Bagian 2, kita akan membahas komponen paket kompensasi dan membahas konsekuensi pajak masing-masing. Bagian 3 akan menggunakan informasi kompensasi eksekutif yang diungkapkan dalam pernyataan pernyataan kuasa perusahaan yang diminta, berguna untuk menilai bagaimana pengelolaan dibayar dan mengidentifikasi potensi konflik kepentingan, yang harus diajukan ke Komisi Sekuritas dan Bursa Efek AS (Formulir DEF 14A) untuk meringkas dan mengganti kompensasi Dilaporkan setiap tahun dari tahun 2007 sampai 2010 dan untuk membandingkan jumlah yang dilaporkan dengan yang benar-benar dapat dikurangkan oleh perusahaan tersebut. Bagian 4 akan memperkirakan kerugian pendapatan yang terkait dengan potongan tersebut. Makalah ini akan ditutup dengan Bagian 5, yang akan melihat kembali dampak dari ketentuan pajak ini, khususnya batasan deduksi dan pengaruhnya terhadap kompensasi eksekutif, dan berharap bagaimana kejadian terkini, seperti penerapan kata-kata Membayar kebijakan, akan mempengaruhi masa depan kompensasi eksekutif. 2. Komponen paket kompensasi eksekutif Sebelum kita dapat sepenuhnya mengeksplorasi konsekuensi dari Bagian 162 (m), kita perlu memahami paket kompensasi eksekutif. Oleh karena itu, bagian ini akan memperkenalkan komponen paket kompensasi, yang dirangkum dalam tabel yang berjudul 8220 Komponen kompartemen kompensasi, 8221 dan diskusikan konsekuensi pajak mereka kepada eksekutif dan perusahaan. Gaji adalah jumlah kompensasi tetap, mungkin terkontrak, yang tidak secara eksplisit berbeda dengan kinerja. Menurut definisi, gaji tidak didasarkan pada kinerja dan oleh karena itu tidak memenuhi syarat untuk pengecualian berbasis kinerja berdasarkan Bagian 162 (m). Konsekuensinya, kena pajak untuk eksekutif dan deductible untuk perusahaan (dikenai pengurangan deduksi) pada tahun yang dibayarkan. Perlu dicatat bahwa batasan deduksi 1 juta berlaku untuk semua kompensasi non-kinerja secara keseluruhan, tidak masing-masing komponen kompensasi tersebut. Jika perusahaan membayar gaji eksekutif 750.000, seluruh jumlah akan dikurangkan. Namun, jika membayar tambahan 500.000 dalam bentuk kompensasi non-kinerja lainnya, pengurangan total untuk kompensasi berbasis kinerja tidak terbatas hanya bisa menjadi 1 juta 250.000 tambahan tidak dapat dikurangkan. Kompensasi bonus dapat dikondisikan pada kinerja individu, kelompok, atau perusahaan. Karena itu dikondisikan pada kinerja, ia sering dibayar setelah akhir tahun fiskal perusahaan. Dari sudut pandang karyawan itu kena pajak tidak di tahun yang akan datang, namun di tahun yang diterima. Bagi pengusaha, Peraturan Perbendaharaan 1.404 (b) -1T memungkinkan perusahaan yang menggunakan metode akuntansi akrual dapat menggunakan pengurangan pada tahun yang diperoleh jika seorang karyawan menerima kompensasi dalam 2,5 bulan setelah akhir tahun kena pajak majikan tahun 1982. Dengan kata lain, bonus dikenai pajak kepada eksekutif di tahun yang diterima, sementara dikurangkan (dikenai pengurangan deduksi) pada tahun yang diperoleh (dengan asumsi bonus dibayarkan dalam 2,5 bulan dari akhir tahun). Meskipun bonus secara teoritis merupakan penghargaan atas kinerja, namun tidak diberikan atau dibayar sesuai dengan rencana tertulis yang disetujui oleh pemegang saham, 3 dan oleh karena itu, penilaian tersebut tidak memenuhi syarat berdasarkan pada Bagian 162 (m). Kompensasi insentif insentif non-ekuitas Sama dengan bonus, kompensasi rencana insentif non-ekuitas dapat dikondisikan pada kinerja individu, kelompok, atau perusahaan. Perbedaan antara keduanya adalah bahwa kompensasi kompensasi insentif non-ekuitas dibayar berdasarkan rencana tertulis, yang, untuk tujuan penelitian ini, kita akan berasumsi memenuhi persyaratan Bagian 162 (m) .4 Akibatnya, pembayaran di bawah ekuitas non-ekuitas Rencana insentif sepenuhnya dikenakan pajak kepada eksekutif pada tahun yang diterima dan dapat dikurangkan oleh perusahaan pada tahun yang akan diterima.5 Hibah saham Hibah saham terjadi ketika perusahaan memberikan saham kepada karyawan mereka.6 Mereka berbeda dari opsi saham karena mereka tidak memiliki harga pelaksanaan. Sedangkan opsi saham hanya memiliki nilai jika harga saham korporasi tersebut berada di atas harga pelaksanaan, hibah saham memiliki nilai asalkan harga sahamnya di atas nol. Akibatnya, hibah saham selalu bernilai lebih dari sekedar hibah opsi saham untuk jumlah saham yang sama. Namun, hibah saham tidak dibatasi atau dibatasi, sebagian besar hibah karyawan dibatasi. Misalnya, pembatasan mungkin karena eksekutif tidak dapat menjual sahamnya sampai dia bekerja untuk korporasi untuk jangka waktu tertentu (periode vesting yang khas adalah tiga atau empat tahun). Pembatasan juga dapat didasarkan pada kinerja. Misalnya, eksekutif akan kehilangan saham jika pendapatan andor return saham tidak mencapai tujuan yang telah ditetapkan.7 Setelah pembatasan ini berakhir, eksekutif memiliki kepemilikan penuh atas saham tersebut dan, tidak hadir dalam Bagian 83 (b) pemilihan, 8 akan Segera kenali penghasilan kena pajak yang setara dengan nilai wajar saham pada saat itu. Karena itu, tahun hibah dan tahun pengenal pajak biasanya berbeda. Deductibility dari hibah saham sebagai berbasis kinerja tergantung pada pembatasan tersebut. Artinya, jika pembatasan didasarkan pada kinerja, maka hibah saham mungkin memenuhi syarat untuk pengecualian berbasis kinerja berdasarkan Bagian 162 (m), 9 sedangkan jika batasannya berakhir hanya dengan berlalunya waktu, maka tidak demikian. Dalam beberapa tahun terakhir telah terjadi kecenderungan penggunaan yang lebih besar dari apa yang sekarang disebut sebagai saham kinerja, pada tahun-tahun sebelumnya, mereka merupakan minoritas hibah saham yang berbeda. Akibatnya, asumsi yang dibuat dalam makalah ini adalah bahwa sebagian besar hibah yang dibuat di tahun-tahun sebelumnya dan vesting dalam periode pengamatan tidak memenuhi syarat untuk pengecualian berbasis Bagian 162 (m). Kemungkinannya adalah karena semakin banyak hibah yang berbasis kinerja, persentase dan jumlah dolar dari kompensasi eksekutif yang akan dikurangkan akan meningkat. Bahkan hibah saham berbasis kinerja, bagaimanapun, tidak perlu memenuhi persyaratan untuk dikurangkan. Pertimbangkan bagian berikut dari pernyataan proxy Intel Corporation 2012: Bagian 162 (m) kode pajak menetapkan batas 1 juta dari jumlah kompensasi yang mungkin dipotong Intel dalam satu tahun sehubungan dengan CEO dan masing-masing dari yang berikutnya. Tiga pejabat eksekutif yang paling mendapat kompensasi (tidak termasuk CFO). Kompensasi berdasarkan kinerja tertentu yang disetujui oleh pemegang saham tidak tunduk pada batasan deduksi ini. Intel menyusun Rencana Insentif Ekuitas tahun 2006 dengan maksud agar opsi saham yang diberikan berdasarkan rencana tersebut akan memenuhi syarat untuk dikurangkan dari pajak. Selain itu, untuk menjaga fleksibilitas dan meningkatkan kesederhanaan dalam administrasi pengaturan ini, kompensasi lainnya, seperti OSU, RSU, dan pembayaran tunai insentif tahunan dan setengah tahunan, tidak dirancang untuk memenuhi syarat untuk dikurangkan dalam pajak di atas kode pajak Bagian 162 ( M) 1 juta batasan. OSU yang dimaksud dalam bagian di atas adalah unit saham yang tidak berkinerja baik, yaitu berbasis kinerja, namun tidak dirancang untuk memenuhi syarat menurut Bagian 162 (m). Opsi saham Opsi saham memungkinkan pemegangnya untuk membeli satu atau lebih saham dengan harga pelaksanaan yang pasti selama periode waktu tertentu. Mereka memiliki nilai jika harga saham perusahaan pada saat latihan atau pembelian lebih besar dari harga pelaksanaan. Karena harga pelaksanaan biasanya ditetapkan pada harga saham pada tanggal pemberian, nilai tertinggi dari opsi tersebut bergantung pada kinerja harga saham perusahaan setelah tanggal pemberian. Artinya, mereka bisa sangat berharga saat harga saham naik secara dramatis, namun juga bisa kadaluarsa jika harga sahamnya turun. Seperti hibah saham, opsi saham biasanya diberikan kepada eksekutif dengan batasan. Pembatasan ini umumnya berakhir dengan berlalunya waktu. Sementara perusahaan dapat menambahkan kondisi kinerja ke opsi saham mereka, saat ini yang agak jarang terjadi. Seperti halnya hibah saham, tahun hibah dan tahun pengenal pajak biasanya berbeda untuk opsi saham. Namun, mereka berbeda dalam hibah saham yang dikenakan pajak pada saat berakhirnya pembatasan atau pembebasan, sedangkan opsi saham tidak dikenakan pajak sampai pemegang memilih untuk menggunakan opsi tersebut.10 Jumlah yang dikenakan pajak bukanlah nilai wajar dari saham yang diakuisisi, Namun elemen tawar atau diskon, yaitu selisih antara nilai wajar saham yang diperoleh dikurangi dengan exercise atau harga beli yang dibayarkan. Opsi saham dianggap berbasis kinerja berdasarkan Bagian 162 (m) jika memenuhi persyaratan minimal (misalnya persetujuan pemegang saham, opsi yang diberikan dengan harga pelaksanaan pada atau di atas harga pasar pada saat pemberian), karena pemegang opsi hanya dapat memperoleh keuntungan Dari pilihan jika harga saham meningkat. Dengan demikian asumsi yang dibuat dalam penelitian ini adalah bahwa kompensasi opsi saham sepenuhnya dapat dikurangkan dari perusahaan. Nilai apresiasi saham Meskipun tidak sepopuler opsi saham dan hibah, beberapa perusahaan memberikan hak penghargaan saham (HMEK). Hak apresiasi saham adalah hak untuk menerima kenaikan nilai saham tertentu dari saham biasa selama jangka waktu tertentu. Secara ekonomi, mereka setara dengan opsi saham, dengan satu pengecualian. Dengan opsi saham, eksekutif harus membeli dan kemudian menjual sahamnya untuk menerima keuntungannya. Dengan apresiasi saham yang tepat, korporasi hanya membayar eksekutif, tunai atau saham biasa, selisih harga pasar saat ini atas harga pelaksanaan. Dengan demikian eksekutif mampu mewujudkan keunggulan opsi saham tanpa harus membeli saham. Dalam banyak kasus, nilai apresiasi saham diberikan bersamaan dengan opsi saham dimana eksekutif, pada saat berolahraga, dapat memilih opsi saham atau apresiasi saham. Untuk tujuan pelaporan pernyataan-proxy, SAR digabungkan dengan opsi saham. Demikian pula, mereka diperlakukan seperti opsi saham untuk pajak termasuk bagian 162 (m) tujuan. Akibatnya, untuk analisis ini, SAR akan dimasukkan ke dalam kategori opsi saham yang lebih luas. Pensiun dan kompensasi ditangguhkan Kompensasi ditangguhkan adalah kompensasi yang diterima dalam satu periode namun ditangguhkan oleh eksekutif untuk diterima di masa mendatang. Jika memenuhi persyaratan Bagian 409 (A) dari Internal Revenue Code, pengakuan pajak juga dapat ditangguhkan sampai masa depan. Pensiun adalah bentuk kompensasi yang ditangguhkan (dicakup oleh beberapa bagian terpisah dari Kode Pendapatan Internal), dimana setelah pensiun dari perusahaan, karyawan tersebut menerima pembayaran atau serangkaian pembayaran. Pembayaran ini dapat ditentukan oleh program pensiun (yang dikenal sebagai program imbalan pasti), atau berdasarkan jumlah yang terakumulasi pada akun pensiun karyawan pribadi (yang dikenal sebagai program iuran pasti, yang satu jenisnya adalah 401 (k)). Jika pembayaran ditentukan oleh program pensiun, mereka dapat didasarkan pada sejumlah faktor, termasuk, namun tidak terbatas pada, jumlah tahun dengan perusahaan, pendapatan saat bekerja, dan tingkat di dalam perusahaan. Pensiun dapat terstruktur dalam banyak cara misalnya, pembayaran dapat ditetapkan dalam jumlah, atau dapat disesuaikan dengan inflasi. Karena keterbatasan Internal Revenue Code, eksekutif biasanya diliputi oleh lebih dari satu rencana. Artinya, mereka berpartisipasi dalam rencana kualifikasi pajak utama bersama dengan karyawan lainnya, dan memiliki setidaknya satu rencana tanpa kualifikasi tambahan. Rencana kedua diharuskan oleh pembatasan Internal Revenue Code pada pembayaran dari rencana yang memenuhi syarat. Artinya, agar memenuhi syarat untuk mendapatkan perlakuan pajak yang menguntungkan, rencananya harus tidak diskriminatif, yaitu, tunjangan tidak dapat diabaikan untuk menguntungkan pegawai dengan gaji tinggi, dan korporasi tidak dapat mempertimbangkan kompensasi yang melebihi ambang batas, yaitu 250.000 untuk Tahun 2012 (Bagian 401 (a) (17)), dalam menentukan manfaat pensiun, atau melakukan pembayaran lebih dari 200.000 (Bagian 415 (b)). Sebagian besar eksekutif puncak menghasilkan jumlah yang jauh lebih besar. Untuk tujuan perpajakan, baik manfaat pasti maupun paket iuran pasti dibagi menjadi rencana yang berkualitas dan tidak memenuhi syarat. Dengan rencana yang berkualitas, perusahaan dapat memberikan kontribusi atau mendanainya saat ini, dan mengambil potongan pajak yang sesuai (di atas dan di luar batasan Bagian 162 (m)), sementara eksekutif tidak mengakui penghasilan kena pajak sampai masa depan ketika dia menerima Pembayaran. Namun, mengingat keterbatasan yang dibahas di atas, perusahaan beralih ke rencana pensiunan eksekutif yang tidak memenuhi syarat atau tambahan (SERPs) untuk sebagian besar pembayaran pensiun kepada eksekutif mereka. Karena rencana ini tidak memenuhi syarat, mereka tidak didanai, karena dana akan mengarahkan eksekutif ke perpajakan saat ini. Singkatnya, sebagian besar pembayaran pensiun dan pembayaran tangguhan dibayarkan baik kena pajak maupun dapat dikurangkan setelah masa pensiun, dan pada saat mana hal tersebut tidak lagi diungkapkan dalam pernyataan kuasa perusahaan. Pada saat itu, mereka akan dikurangkan sepenuhnya, karena eksekutif yang sudah pensiun tidak lagi tunduk pada Bagian 162 (m). Jadi, sementara bagian berikutnya akan membahas jumlah yang dilaporkan sebagai kenaikan pensiun dan kompensasi yang ditangguhkan dalam pernyataan proxy, tidak akan memasukkan jumlah tersebut saat memperkirakan konsekuensi pajak langsung dari kompensasi eksekutif.11 Semua kompensasi lainnya Komposisi ringkasan pernyataan kuasanya Tabel berisi satu kategori lain, kategori catch-all yang mencakup semua hal yang tidak termasuk dalam judul sebelumnya: semua kompensasi lainnya. Semua kompensasi lainnya mencakup item seperti perquisites yang terkenal mis. Pesawat pribadi, mobil perusahaan, dan lain-lain. Untuk tujuan makalah ini, kami berasumsi bahwa jumlah yang dilaporkan sebagai kompensasi lainnya dalam pernyataan proxy saat ini dikenakan pajak kepada eksekutif dan dikurangkan oleh perusahaan, sesuai dengan batasan Bagian 162 (m), sebagai Mereka tidak berbasis kinerja. Dalam ringkasan di atas, Komponen dari paket kompensasi, kami menggunakan frase 8220 yang kemungkinan tidak dapat dikurangkan lagi8221 karena suatu alasan. Sebagai orang luar, menggambar data dari database berskala besar, kita tidak dapat menentukan dengan tepat apa dan apa yang tidak dapat dikurangkan. Catatan dari atas bahwa kompensasi berbasis kinerja dapat memenuhi syarat untuk dikurangkan sepenuhnya jika perusahaan memenuhi persyaratan yang tercantum dalam Internal Revenue Code. Namun, terkadang perusahaan memilih untuk tidak mematuhi persyaratan tersebut. Pertimbangkan kutipan berikut dari pernyataan kuasa terbaru dari Goodyear Tire amp Rubber Company: Deductibility Tax of Pay Section 162 (m) Kode Etik ini memberikan kompensasi yang dibayarkan kepada CEO perusahaan publik dan tiga pejabat eksekutif dengan gaji tertinggi lainnya pada akhir Tahun (selain pejabat keuangan utamanya) lebih dari 1 juta tidak dapat dikurangkan kecuali persyaratan tertentu telah terpenuhi. Komite Kompensasi percaya bahwa penghargaan berdasarkan Rencana Insentif Manajemen dan Rencana Kinerja 2008 memenuhi syarat untuk dikurangkan sepenuhnya berdasarkan Bagian 162 (m). Meskipun kompensasi yang dibayarkan berdasarkan Executive Performance Plan berbasis kinerja, namun tidak memenuhi syarat untuk pengecualian deductible untuk kompensasi berbasis kinerja karena Rencana tersebut belum disetujui oleh pemegang saham kami. Oleh karena itu, pembayaran berdasarkan Rencana Kinerja Eksekutif tunduk pada batasan Pasal 162 (m) atas deductibilitas. Karena aset pajak tangguhan A. S. yang signifikan dari periode sebelumnya, pembatasan penguraian tidak berdampak pada posisi keuangan kami. Dalam meninjau dan mempertimbangkan pembayaran atau pendapatan berdasarkan Rencana Kinerja Eksekutif, Komite Kompensasi tidak hanya mempertimbangkan dampak dari pengurangan pajak yang hilang, namun juga aset pajak tangguhan AS yang signifikan yang tersedia bagi kita dari periode sebelumnya, serta manfaat yang direalisasikan oleh kami. Dan pemegang saham kami atas keberhasilan usaha tim manajemen senior kami. Dalam menyeimbangkan pertimbangan ini, Komite Kompensasi menyimpulkan bahwa akan sesuai untuk menyetujui pembayaran sehubungan dengan hibah dan pendapatan 2009-2011 untuk periode kinerja 2011 sehubungan dengan hibah 2010-2012 dan 2011-2013. Tanpa membaca bagian ini, kita akan mengasumsikan bahwa kompensasi yang dibayarkan berdasarkan Rencana Kinerja Eksekutif, yang akan dilaporkan sebagai kompensasi rencana insentif non-ekuitas, dapat dikurangkan sepenuhnya. Komplikasi lebih lanjut adalah bahwa pembayaran berdasarkan Rencana Insentif Manajemen, yang memenuhi syarat untuk pengecualian berbasis kinerja, dan Rencana Kinerja Eksekutif, yang tidak, dilaporkan dalam tabel ringkasan ringkasan pernyataan kompensasi sebagai satu nomor di bawah ekuitas non-ekuitas Kolom insentif Dan sementara Goodyear harus dipuji karena kejelasan pengungkapannya, sebagian besar pengungkapannya tidak begitu jelas. 3. Kompensasi eksekutif, 20072010 Bagian ini memberikan analisis dan pembahasan tentang kompensasi eksekutif yang dibayar selama tahun 20072010. Seperti yang ditunjukkan pada Tabel 1. Sampelnya adalah populasi perusahaan publik AS yang termasuk dalam basis data Standar Amp Poors Capital IQ dan berkisar antara 8.960 pada tahun 2007 menjadi 7.248 pada tahun 2010.12 Di bawah peraturan Securities and Exchange Commission saat ini, perusahaan diminta untuk melaporkan dalam pernyataan proxy mereka kompensasi masing-masing Dan setiap individu yang telah memegang gelar CEO atau CFO sepanjang tahun, kompensasi dari tiga individu dengan gaji tertinggi berikutnya, 13 dan kompensasi hingga dua orang tambahan yang termasuk di antara tiga orang dengan bayaran tertinggi berikutnya kecuali bahwa mereka tidak Lagi bekerja di akhir tahun. Pelaporan tidak diperlukan jika kompensasi individu kurang dari 100.000. Beralih ke kolom kedua pada Tabel 1, kita melihat bahwa jumlah eksekutif yang termasuk dalam analisis ini berkisar antara 38,824 di tahun 2007 sampai 28,365 pada tahun 2010.14 Sementara batasan Bagian 162 (m) hanya berlaku untuk kompensasi CEO dan tiga pembayaran tertinggi berikutnya Individu, tidak termasuk CFO, Capital IQ dan akibatnya kita, termasuk kompensasi semua eksekutif yang termasuk dalam pernyataan proxy. Bagi para eksekutif di luar CEO dan tiga orang bayaran tertinggi lainnya, kami berasumsi bahwa kompensasi sepenuhnya dapat dikurangkan. Contoh informasi Salin kode di bawah ini untuk menyematkan bagan ini di situs Anda. Tabel 2 menjelaskan berbagai komponen paket kompensasi untuk tahun 20072010, dan mencantumkan jumlah individu yang menerima barang tersebut pada suatu tahun.115 Misalnya, semua eksekutif di sampel kami menerima gaji (perusahaan dengan data gaji yang hilang dikeluarkan dari analisis ), Tapi tidak semua menerima bonus, dan bahkan lebih sedikit menerima insentif non-ekuitas dan bentuk kompensasi lainnya. Rata-rata total kompensasi tertinggi di tahun 2007, hanya di atas 1,7 juta. Penurunan rata-rata kompensasi saat ini adalah karena penurunan tajam harga saham, yang mengurangi nilai hibah saham. Nilai kompensasi rata-rata dalam tabel ini lebih rendah daripada yang biasanya diamati di media cetak dan sebagian besar penelitian karena dua alasan. Yang pertama adalah kebanyakan studi membatasi kompensasi CEO, sedangkan studi ini memperluas sampel ke semua eksekutif. Karena eksekutif lain biasanya dibayar kurang dari CEO, ini mendorong rata-rata turun. Sebagai contoh, pada tahun 2007 rata-rata total kompensasi untuk CEO adalah 3.468.375, sedangkan rata-rata untuk non-CEO adalah 1.191.828. Alasan kedua untuk cara yang lebih rendah adalah sampel perusahaan yang digunakan dalam penelitian ini. Sebagian besar studi membatasi diri mereka pada SampP 500 atau perusahaan SampP 1500 yang tercakup dalam Standard amp Poors ExecuComp, sedangkan penelitian ini menggabungkan perusahaan-perusahaan tersebut dan banyak perusahaan publik yang lebih kecil. Karena kompensasi cenderung meningkat dengan ukuran perusahaan, penyertaan perusahaan kecil ini mengurangi rata-rata kita. Sebagai contoh, pada tahun 2007 total kompensasi rata-rata untuk para eksekutif di perusahaan SampP 500 adalah 4.994.819, sedangkan rata-rata untuk perusahaan lain adalah 1.448.167. Jumlah rata-rata untuk kompensasi eksekutif yang dilaporkan dalam tabel kompensasi ringkasan (jumlah dolar eksekutif di bawah jumlah rata-rata) Salin kode di bawah ini untuk menyematkan bagan ini di situs Anda. Tabel 3 mengumpulkan jumlah yang dilaporkan pada Tabel 2 untuk menggambarkan total kompensasi eksekutif untuk semua perusahaan publik. Kompensasi total agregat menurun dari 66 miliar di tahun 2007 menjadi 42 miliar di tahun 2010. Ada dua alasan untuk penurunan ini. Pertama, jumlah perusahaan yang tergabung dalam analisis kami menurun pada tahun 2010 (seperti yang ditunjukkan pada Tabel 1 dan mencerminkan penurunan jumlah perusahaan publik). Kedua, kompensasi rata-rata (seperti ditunjukkan pada Tabel 2) menurun juga. Jumlah gabungan untuk kompensasi eksekutif yang dilaporkan dalam tabel kompensasi ringkasan (miliaran dolar jumlah eksekutif di bawah jumlah keseluruhan) Salin kode di bawah ini untuk menyematkan bagan ini di situs web Anda. Seperti dibahas di Bagian 2, tahun pajak untuk kompensasi ekuitas, yaitu hibah saham dan opsi saham, berbeda dengan tahun hibah. Demikian pula, jumlahnya akan berbeda dengan yang dilaporkan pada tahun hibah, karena jumlah yang dilaporkan pada tahun hibah akan didasarkan pada jumlah yang diharapkan, sementara yang termasuk dalam eksekutif yang disalurkan dari perusahaan-perusahaan tersebut8217 penghasilan kena pajak akan didasarkan pada jumlah aktual jumlah. Jumlah yang dilaporkan pada tabel 2 dan 3 adalah nilai tanggal pemberian kompensasi berdasarkan jumlah dari tabel kompensasi ringkasan pernyataan pernyataan. 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 s low 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 Apr il 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 publicat ion 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. Hal ini didasarkan pada faktor-faktor ini: 1. Marjin Operasi 2. Tren Margin Pengoperasian (rata-rata 5 tahun). Perusahaan dengan profit margin naik memiliki rangking yang lebih tinggi. 3. Konsistensi profitabilitas 4. Piotroski F-Score 5. Peringkat Prediktif Peringkat maksimal adalah 10. Rangking 7 atau lebih tinggi berarti profitabilitas lebih tinggi dan mungkin tetap seperti itu. Peringkat 3 atau lebih rendah mengindikasikan bahwa perusahaan tersebut memiliki kesulitan untuk menghasilkan keuntungan. Profitability Rank tidak berhubungan langsung dengan Financial Strength Rank. Tetapi jika sebuah perusahaan secara konsisten menguntungkan, kekuatan finansialnya akan lebih kuat. Pertumbuhan Profitabilitas. 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. Lebih dari 500.000 orang telah bergabung dengan GuruFocus untuk melacak saham yang mereka ikuti dan menukar ide investasi. 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. Baca lebih banyak. 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. Baca lebih banyak. 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. Baca lebih banyak.