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Going for Break: Our Third Annual Tax Efficiency Scorecard

New rules and a down economy have companies revising their tax strategies. Who's best at paying the least?
Ronald Fink, CFO Magazine
November 1, 2001

Earlier this year, Procter & Gamble announced that it would buy the Clairol hair-care business of Bristol-Myers Squibb for $4.95 billion in cash, a significant premium over Bristol-Myers's cost basis for the assets. In response, Standard & Poor's and Dominion Bond Rating Service soon downgraded P&G's credit ratings.

But these credit agencies ignored the tax benefits that P&G gained from the deal. In fact, because P&G paid a premium for Clairol, the value of the goodwill amortization deduction will improve P&G's cash flow for the next 15 years. The tax consequences reduced the cost of the deal to P&G by $1 billion — or 20 percent. Yet Bristol-Myers presumably got more for Clairol than it would have if P&G received no such benefits. Neither P&G nor Bristol-Myers would comment.

This transaction was accomplished courtesy of Section 338(h)10 of the U.S. tax code, and it is one that other firms besides P&G and Bristol-Myers are eyeing. Under Section 338(h)10, a company that makes an acquisition is entitled to write off goodwill against its taxable income for the next 15 years. That, to be sure, would also reduce reported earnings. But buyers are always interested in goodwill amortization for tax purposes, and they may be able to convince investors to ignore the resulting hit to earnings.

What's more, the end of pooling-of-interest accounting will encourage more asset disposition of all kinds. While pooling made it easy for even the most aggressive acquirers to avoid earnings hits from goodwill, that applied only to acquisitions of entire companies. The rules also required companies to wait at least two years to sell assets. Starting last July 1, buyers are free to dispose of assets at any time.

Indeed, the accounting change may greatly reduce effective tax rates simply because in most cases goodwill will no longer be written off against earnings unless it is impaired. The average firm paid nearly 37 percent of its revenue in federal, state, and local taxes last year, up more than two percentage points from 1997, according to CFO's Third Annual Tax Efficiency Scorecard.

Under the new rules, more companies will have less amortization inflating their effective tax rates. But with new freedom to do deals anytime as the economy weakens, companies will find themselves both freer and under increasing pressure to pursue synergies through asset disposals.

"The situation is changing," says a tax expert who asks not to be identified, "because of new rules and the impact of a down economy." The downturn helps explain why other moves may also gain currency these days. For example, companies that have losses abroad may want to designate their foreign subsidiaries as branches so that the parent can use the losses for tax purposes.

"We're looking at everything," says Sandy Peiser, vice president and tax manager of Raymond James Financial, an investment and brokerage firm based in St. Petersburg, Florida. Currently in Peiser's sights are tax credits for training and business development at the local and state levels, which are often connected with so-called enterprise zones. Such credits require a considerable amount of Peiser's attention, in part because of the significant differences in each jurisdiction's terms for qualifying. "They don't all play by the same rules," he notes. But Raymond James, for one, finds the rules worth mastering, since the company has offices in all 50 states.

Even companies that are relatively immune from recession are turning more to tax savings these days. "We're leaving no stone unturned," says Dave Bernard, vice president of tax for Kimberly-Clark, a major producer of basic household products. Having taken measures to maximize income in foreign jurisdictions with lower tax rates, for example, the company has been busy striking so-called advance pricing agreements with local and U.S. tax authorities. The agreements are designed to make sure that transfer pricing policies, which allow the company to take maximum advantage of tax losses, won't run afoul of either authority. Kimberly-Clark now has five or six such agreements in place, says Bernard.

The company is also looking to buy from third parties tax credits for which it cannot itself qualify. These include credits for the development of low-income housing and synthetic fuels, neither of which are directly related to its business. "We look at every dollar of tax basis and every dollar of tax loss as a potential tax asset," says Bernard.

The tables that follow should help Bernard and other tax directors get a better handle on where they stand in relation to their peers. Included is data for the five leaders in 40 industries for the three years ending with fiscal 2000.

Methodology for Computing Effective Tax Rates

As in years past, KPMG LLP compiled this year's Tax Efficiency Scorecard by reviewing income statement data for the Fortune 1,000. It eliminated industries that were either too small to provide a representative sample or of little relevance to most readers; divided the remaining companies into 40 industry groups; tossed out those that didn't post a cumulative profit for the three-year period from 1998 through 2000 or posted losses in two out of those three years; reviewed the footnotes to the financial statements of each qualifying company to verify discrepancies between the data supplied by Standard & Poor's Compustat and the companies' annual reports, and in some cases to eliminate companies where unusual circumstances prevented apples-to-apples comparisons; and sorted the survivors within their industry groups by the lowest effective tax rate. Note that the results do not reflect the amount of cash a company paid in taxes, which is often quite different from the tax provision on its income statement.


The 2001 Tax Efficiency Scorecard

AEROSPACE
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
General Dynamics26.9728.61
Boeing28.0229.04
United Technologies30.1330.93
Honeywell International30.6930.39
Northrop Grumman36.4635.90
Industry Average 34.7137.53
AIRLINES
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Ual35.6637.65
Amr38.1639.47
Southwest Airlines38.5838.55
Continental Airlines38.9438.95
Delta Airlines39.6840.09
Industry Average 39.8140.24
APPAREL
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Phillips-van Heusen34.5637.57
Reebok International35.3536.08
Liz Claiborne36.1235.73
Nike37.3636.00
VF38.4138.10
Industry Average 40.3843.95
BEVERAGES
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Coca-Cola Enterprises25.9329.13
Pepsico31.8031.99
Coca-Cola34.4335.95
Anheuser-Busch35.4134.80
Brown-Forman36.4236.34
Industry Average 34.0534.45
CHEMICALS
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Great Lakes Chemical20.5422.98
Praxair21.9820.89
FMC22.0119.94
Union Carbide27.688.65
Air Products & Chemicals28.97-11.60
Industry Average 37.2733.55
COMMERCIAL BANKS
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Popular25.4826.83
Bank One27.3152.69
Huntington Bancshares30.5328.58
BB&T31.5530.83
Regions Financial31.8028.88
Industry Average 35.1935.77
COMPUTER AND DATA SERVICES
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
First Data32.5228.95
Computer Sciences32.7529.40
Nova33.5853.24
Ceridian34.0437.56
Unisys34.1735.41
Industry Average 38.1637.82
COMPUTER PERIPHERALS
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
EMC26.1627.00
Lexmark International30.6228.00
Imation35.6496.20
Symbol Technologies39.0613.31
Storage Technology39.2134.99
Industry Average 32.9629.53
COMPUTER SOFTWARE
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Comverse Technology8.007.03
BMC Software23.6129.80
Electronic Arts 34.1634.1631.00
Microsoft34.8134.00
Adobe Systems36.0335.14
Industry Average 37.1136.46
COMPUTERS, OFFICE EQUIPMENT
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
NCR11.7735.27
Apple Computer19.1228.02
Hewlett-Packard25.5623.01
Xerox27.8533.75
Dell Computer30.6229.99
Industry Average 32.9131.75
CONSUMER FOOD PRODUCTS
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Dole Food28.3432.00
Ralston Purina28.5027.66
Quaker Oats29.7534.57
Wrigley (wm.) Jr.31.0031.37
Campbell Soup34.4133.67
Industry Average 34.8530.36
DIVERSIFIED FINANCIALS
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Fannie Mae26.6826.18
American Express27.7028.10
Federal Home Loan Mortgage28.6628.16
General Electric30.3830.26
USA Education32.2633.15
Industry Average 32.5232.67
DIVERSIFIED OUTSOURCING SERVICES
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Viad23.3316.39
Paychex30.4429.98
Dyncorp33.3132.06
Wackenhut34.7134.02
Staff Leasing36.15241.78
Industry Average 36.5336.51
ELECTRONICS, ELECTRICAL EQUIP
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Hubbell25.8925.01
Harman International Industries28.2329.10
Molex29.6431.14
American Power Conversion29.9429.00
Gentek31.9243.44
Industry Average 35.7634.88
ENERGY
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
WPS Resources24.557.89
Back Hills31.3032.13
Utilicorp United32.7733.21
Equitable Resources33.3435.00
Duke Energy33.6932.87
Industry Average 33.9334.03
ENGINEERING, CONSTRUCTION
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
KB Home29.6426.82
Centex33.0732.93
IT Group36.21126.11
Fluor36.3729.80
Toll Bros.36.5936.81
Industry Average 40.7639.18
FOOD & DRUG STORES
Company3-yr. weighted Avg. ETR (%) 2000 ETR (%)
Marsh Supermarkets31.8532.87
Publix Super Markets35.5535.60
Weis Markets36.7936.80
Ruddick36.9439.16
Ingles Markets37.8538.31
Industry Average50.2152.40
FOOD PRODUCTION
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Pilgrims Pride20.2716.63
Archer Daniels Midland28.7214.82
IBP37.4440.98
Pro-Fac Cooperative37.5734.46
Suiza Foods38.1438.60
Industry Average35.1932.92
FOOD SERVICES
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Jack in the Box28.9218.33
Outback Steakhouse30.7030.79
McDonald's32.1831.40
Brinker International34.8235.09
Darden Restaurants35.2335.50
Industry Average34.5435.15
FOREST & PAPER PRODUCTS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
International Paper18.1116.18
Rayonier29.1128.03
Kimberly-Clark29.9128.92
Mead34.0933.52
Westvaco34.1436.90
Industry Average34.0833.07
GENERAL MERCHANDISERS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Kmart32.3135.45
Dollar General35.9336.24
Belk36.0936.60
Family Dollar Stores37.0236.50
Wal-Mart Stores37.0536.50
Industry Average38.2339.07
INDUSTRIAL & FARM EQUIPMENT
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Pall23.6822.17
York International24.9711.87
Milacron26.04q25.22
Caterpillar30.8529.80
Dover32.5930.96
Industry Average37.4433.98
MEDICAL PRODUCTS & EQUIPMENT
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Becton Dickinson26.6124.43
Baxter International28.0721.99
Medtronic36.0732.50
Hillenbrand Industries36.5435.83
Boston Scientific41.0529.22
Industry Average34.5928.84
METAL PRODUCTS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Flowserve34.4233.97
Stanley Works34.8333.81
Harsco34.8431.50
Gillette35.3036.26
Masco35.8633.77
Industry Average41.2739.83
METALS PRODUCTS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Alcoa32.0533.97
Nucor35.6435.00
Maxxam35.7744.94
Commercial Metals37.1036.86
Worthington Industries37.1436.50
Industry Average40.1449.23
MINING, CRUDE-OIL PRODUCTION
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
EOG Resources18.9737.35
Transocean Sedco Forex25.1525.41
Mitchell Energy & Development27.6728.16
Burlington Resources29.7730.20
Martin Marietta Materials34.2233.64
Industry Average39.7839.19
MOTOR VEHICLES & PARTS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Navistar International18.2029.02
Ford Motor21.3932.85
Dana34.2733.01
Delphi Automotive Systems34.2736.29
General Motors34.8834.96
Industry Average28.3435.45
NETWORK AND OTHER COMMUNICATIONS EQUIPMENT
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Scientific-Atlanta30.0030.00
Tellabs31.7331.50
3com33.97-21.00
Corning34.5448.45
Cisco Systems38.6238.57
Industry Average41.6145.09
PETROLEUM REFINING
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
USX-Consolidated28.1035.58
Sunoco30.5731.04
Texaco34.1338.59
Valero Energy34.2135.80
Exxon Mobil35.2840.34
Industry Average37.4841.32
PHARMACEUTICALS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Lilly (Eli)21.1720.76
Schering-Plough24.3124.00
Bristol-Myers Squibb26.4925.23
Abbott Laboratories27.6327.00
Johnson & Johnson27.7527.51
Industry Average28.3628.38
PUBLISHING, PRINTING
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Scholastic36.6836.10
Harcourt General37.3937.00
Reader's Digest38.4334.12
Deluxe38.7038.02
Washington Post38.7840.63
Industry Average42.3747.67
RUBBER AND PLASTIC PRODUCTS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Goodyear Tire & Rubber24.5820.04
Mark IV Industries34.9736.00
Cooper Tire & Rubber37.4139.60
Carlisle38.0136.25
Polyone39.2539.08
Industry Average37.9940.08
SAVINGS INSTITUTIONS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Golden State Bancorp12.4220.28
Sovereign Bancorp26.4661.39
Bank United27.8534.40
Charter One Financial32.6031.95
Dime Bancorp34.5934.75
Industry Average34.0034.13
SCIENTIFIC, PHOTO, CONTROL EQUIPMENT
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Applera Applied Biosystems27.9232.45
Kla-Tencor29.9528.12
Teradyne30.0030.00
Applied Materials30.6930.00
Beckman Coulter30.8531.01
Industry Average36.3938.06
SECURITIES
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Goldman Sachs Group17.4238.90
Franklin Resources25.1624.00
Lehman Bros. Holdings29.4529.65
Merrill Lynch32.6631.47
Bear, Stearns36.1434.00
Industry Average32.2335.19
SEMICONDUCTORS AND OTHER ELECTRONIC COMPONENTS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Amkor Technology19.3412.63
Cypress Semiconductor24.5225.09
Vishay Intertechnology24.8721.47
Analog Devices27.5029.87
Advanced Micro Devices29.0120.34
Industry Average33.1130.85
SOAPS, COSMETICS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Colgate-Palmolive31.6631.47
Int'l Flavors & Fragrances33.8333.20
Procter & Gamble35.1136.02
Alberto-Culver35.1833.12
Dial35.3543.07
Industry Average35.6835.26
SPECIALTY RETAILERS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Venator Group23.0339.21
Limited24.3239.96
Footstar30.5229.73
Brown Shoe32.5930.54
PC Connection33.7638.01
Industry Average40.6843.78
TELECOMMUNICATIONS
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Cox Communications35.3730.54
Bellsouth37.2436.04
SBC Communications38.2138.18
Sprint Fon Group38.6140.46
Verizon Communications38.6438.86
Industry Average46.9548.78
TRUCKING, TRUCK LEASING
Company3-yr. weighted Avg. ETR (%)2000 ETR (%)
Hunt (J.B.) Transport Services30.7815.00
Amerco36.0737.14
Ryder System37.7637.00
Werner Enterprises38.0038.00
Swift Transportation38.7838.01
Industry Average40.1039.34


Source: KPMG analysis of data supplied by Standard & Poor's Compustat and company 10-Ks


Tax Trends: An Analysis by Industry

• Sample Size: Number of companies in the industry sample.
• 3-Year Average Revenue: Average annual revenue divided by the number of companies in the industry sample.
• 3-Year Average PBT: Average annual profit before tax (PBT) divided by the number of companies in the industry sample.
• 3-Year Weighted Average Effective Tax Rate (ETR): 1998—2000 total tax provision divided by 1998—2000 total PBT.
• Ranking Among Industries: Rank of each industry's 3-year weighted average ETR in ascending order.
• 2000 ETR: 2000 total tax provision divided by 2000 total PBT.
• 1999 ETR: 1999 total tax provision divided by 1999 total PBT.
• 1998 ETR: 1998 total tax provision divided by 1998 total PBT.
• ETR % Change: The difference between the 2000 and 1998 ETRs divided by 1998 ETR.
• 3-Year Weighted Average Cash Rate: 1998-2000 cash taxes paid divided by 1998—2000 total PBT.
• 3-Year Weighted Average U.S. Revenue: 1998—2000 U.S. revenue divided by the sum of 1998—2000 U.S. and foreign revenue.
• 3-Year Weighted Average Non-U.S. Revenue: 1998—2000 non-U.S. revenue divided by the sum of 1998—2000 U.S. and non-U.S. revenue.

*Includes other electronic components

IndustrySample Size3-Yr. Avg. Rev. ($ mil)3-Yr. Avg. PBT ($ mil)3-Yr. Avg. ETR (%)Ranking among Ind.2000 ETR (%)1999 ETR (%)1998 ETR (%)ETR % Change ('98-'00)3-Yr. Avg. Cash Rate (%)3 Yr. Avg. U.S. Rev. (%)3-Yr. Avg. Non-U.S. Rev (%)
Aerospace & Defense1115,342.11086.834.712237.5332.5933.7411.2423.3672.0127.99
Airlines108,593.6650.839.814340.2439.9139.402.1311.9875.7324.27
Apparel102,233.5232.640.384843.9538.0339.7410.6128.9480.8819.12
Beverages96,066.71157.434.051634.4538.6928.7419.8430.1468.5331.47
Chemicals323,632.0377.537.273833.5545.3434.84-3.72-218.8257.1942.81
Commercial Banks410.01,496.635.192535.7735.1234.593.430.00NANA
Computer and Data Svcs.223,127.7449.638.164037.8240.2136.074.8527.6968.1731.83
Computer Peripherals92,061.4343.132.961329.5334.8336.66-19.4616.3760.3439.66
Computer Software123,368.11,540.837.113436.4638.1136.081.0710.9363.4036.60
Computers, Office Equip.1220,575.91,816.132.911231.7532.0836.09-12.0318.0349.4250.58
Consumer Food Products194,222.8406.134.852430.3634.1540.21-24.5130.2271.8228.18
Diversified Financials2010,958.82,561.332.521032.6732.7032.081.8221.3176.6823.32
Diversified Outsourcing Svcs.131,166.8142.836.533136.5136.4936.63-0.3223.1191.548.46
Electronics, Electrical Equip.213,239.1342.435.762934.8835.7436.89-5.4429.6370.8929.11
Energy143,891.0330.233.931734.0332.9635.49-4.1035.4089.9510.05
Engineering, Construction262,068.4142.140.765039.1839.0544.85-12.6338.6266.0034.00
Food & Drug Stores193,402.6312.650.215952.4055.6842.0224.7136.3494.685.32
Food Production124,375.2117.835.192332.9236.3135.33-6.8037.9480.5619.44
Food Services112,839.5422.934.542135.1537.4931.0513.2428.1365.3534.65
Forest & Paper Products195,221.6365.534.081833.0734.6535.05-5.6422.8781.5318.47
General Merchandisers166,884.21,087.538.234139.0737.3638.471.5633.2495.264.74
Industrial & Farm Equip.323,626.10226.837.443733.9837.6141.63-18.3636.2461.4238.58
Medical Products & Equip.82,705.3397.534.593328.8431.3150.04-42.3728.3758.7941.21
Metal Products173,764.7330.941.275139.8346.6538.663.0333.9566.2933.71
Metals123,398.4230.840.144449.2336.9633.9145.1926.6676.2023.80
Mining, Crude-Oil Production152,102.1375.939.785739.1938.6560.35-35.0722.5770.5329.47
Motor Vehicles & Parts2317,041.91,210.328.34835.4535.1918.5990.6621.9669.5230.48
Network & Other Comm. Equip118,598.2964.841.615545.0935.6448.77-7.5617.1953.2846.72
Petroleum Refining1618,853.81,908.437.482041.3233.5828.7843.5830.4051.6448.36
Pharmaceuticals1114,550.93,283.628.36528.3827.4829.27-3.0525.1665.9934.01
Publishing, Printing201,873.0364.342.375347.6739.6840.9916.3039.6287.8912.11
Rubber & Plastic Products82,945.8173.237.993940.0835.3838.603.8539.8464.6135.39
Savings Institutions90.0654.734.001434.1335.8531.488.410.00N/AN/A
Scientific, Photo, Control Equip.143,729.9491.136.393038.0634.2436.115.3928.3649.5150.49
Securities137,834.91,560.532.23935.1928.2632.109.6127.0783.9816.02
Semiconductors*223,672.6798.033.111930.8534.5738.12-19.0825.2249.2950.71
Soaps, Cosmetics95,055.2995.535.682735.2637.2434.562.0331.4751.9148.09
Specialty Retailers572,632.9248.740.684743.7842.2835.4123.6232.9291.728.28
Telecommunications228,325.71,899.346.955848.7845.2242.265.4328.2494.055.95
Trucking, Truck Leasing121,926.7106.940.104539.3440.3640.55-2.9823.0089.9010.10
All Industries Average5,647.7790.135.5136.5035.3334.306.421.171.528.5



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