A Potpourri of Hot Topics Affecting Industrial Companies
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Private Equity Forum Debrief

A Potpourri of Hot Topics Affecting Industrial Companies

 The panel focused on five primary topics.
1. Expiration of Bush-era tax cuts
  • Set to expire December 31, 2012. If Congress takes no further action, tax rates will increase effective January 1, 2013, as follows:
    • Maximum marginal income tax will increase from 35% to 39.6%
    • Maximum long term capital gain rate will increase from 15% to 20.0%
    • Maximum qualified dividend rate will increase from 15% to 39.6%
  • Since Congress has currently adjourned, no action will likely be taken until at least the lame duck session.

2. New Medicare taxes

  • New Medicare taxes on earned and net investment income become effective on January 1, 2013, since the Supreme Court upheld most of the key health care reform provisions in a landmark 5-4 ruling on June 28th, 2012:
    • 3.8% Medicare Tax on “Unearned” Investment Income. Generally taxpayers with modified adjusted gross income in excess of $200,000 ($250,000 for married couples filing a joint return) will be liable for an additional 3.8% tax on capital gains, interest, dividends, annuities, royalties, rents, and other income from passive activities.
    • 0.9% Medicare Tax on “Earned” Income. Generally taxpayers with modified adjusted gross income in excess of $200,000 ($250,000 for married couples filing a joint return) will be liable for an additional 0.9% tax on their wages, bonuses and other earned income.
  • The 3.8% unearned Medicare tax will be imposed in addition to these tax increases, so the maximum marginal ordinary income tax rate will be 43.4% and the maximum long-term capital gain tax rate will be 23.8%.

3. Planning opportunities

  • Consider accelerating income into 2012 due to the significant increase in 2013 tax rates. This could include paying dividends, selling portfolio companies, or the payment of additional reasonable management fees.
  • Another issue to revisit is entity selection. The increasing individual tax rates may significantly impact the determination of whether a pass-through entity or C corporation will be the most advantageous tax-efficient structure for future operations.

4. International matters: Reshoring and near-shoring

  • Trend is being prompted by two factors: (1) increasing labor costs in growing economies such as China and (2) a market correction for the overly enthusiastic investment in China, expecting it to be the factory to the world, which created unsustainable and impractical offshoring.
  • Companies are now rationalizing their global manufacturing footprint to fit the logistics, resources and customers that relate to their products
  • Trend unlikely to stay because of the growth of economies outside the U.S. that will be markets for products. Even the most optimistic estimates of job growth in manufacturing only cover half of the anticipated increase in the eligible workforce.
  • Instead, global expansion can be accomplished by rationalizing the manufacturing footprint to large regional markets and using flexible manufacturing within those regions to expand or contract based on regional growth. Future investments should be focused on expected growth markets while not forsaking U.S. and Western developed markets that fuel more consistent results.

5. International matters: Global talent war

  • Global talent market means expatriates are not needed as frequently to run foreign operations.
  • Developing markets are focusing on improving education and re-attracting citizens who left for education in the developed world to come back home and increase the local talent pool.
  • Costs of expats range from 200% to 400% of fully loaded U.S. labor costs, so this is an area to control and rationalize.
  • Growth in talent is most prevalent in Brazil and Asia, particularly in India and China given the increasing number of technical and science degrees being issued. The U.S. now supplies only 10% of the annual engineering degrees.
  • Back home, a “perfect storm” leaves U.S. industrial companies struggling to find skilled labor. Decreases in education quality and the belief in the worth of education paralleled globalization and the movement of business offshore. The result is a bubble of under-educated U.S. labor who want work, but can’t do advanced manufacturing. This will be a challenge for the next 15 years, and companies that can set up apprenticeship programs and provide support for associate degrees will be the most successful.
  • An important best-in-class key performance indicator (KPI) for organizations looking to grow global talent will be the existence of a complete recruiting, training and retention strategy. Many companies lack this talent development capability in that they have mostly hiring and administrative HR managers, but no talent.

This is the third of a three-part series. Overviews of Panel 1 and Panel 2 are available online.

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