Greetings to Good Neighbors throughout ‘CCO Land. Taxes are in local business news this week. Fridley-based, but Dublin, Ireland-incorporated Medtronic Corp is reporting increased sales but also increased tax liability related to the recent tax overhaul. In 2014-2015, Medtronic merged with another healthcare company, Covidien, so that it could re-locate to Ireland where corporate tax rates are substantially lower (and still are) than in the US. The new US tax law doesn’t target companies like Medtronic specifically. It just restricts things like interest deductions on which “inverted” companies like Medtronic rely heavily.The provision known as the Base Erosion and Anti-Abuse Tax limits the degree to which Medtronic can deduct interest expenses and royalties that its US subsidiary operations pay to their foreign parent in Ireland. Another measure caps how much interest a company like Medtronic can deduct at 30% of its earnings before interest, taxes, depreciation and amortization. Such provisions will bring the tax bills for Medtronic and other inverted foreign companies sheltering US earnings closer to what US-based rivals owe, Here is where you can learn more about the impact of the tax overhaul on corporate taxes for companies like Medtronic: https://www.wsj.com/articles/new-tax-law-haunts-companies-that-did-inversion-deals-1518350401.
Another big Minnesota company is in the news after settling a legal dispute with the State of Minnesota. Minnesota Attorney General Lori Swanson announced on Tuesday that it had settled claims of groundwater contamination in Washington County by Maplewood, Minnesota-based 3M. Swanson claimed that 3M had dumped at four different sites tons of perfluorinated chemicals used in consumer products like Teflon and Scotchgard. Swanson claimed the PFC contamination was the source of public health problems like low birth-weight and stunted intellectual development in children. 3M denied the claims, but will pay $850 million to settle Swanson’s lawsuit, which was scheduled to go to trial next week. That’s not the end of the story for 3M, which will now need to monitor the contaminated sites for years. And there are similar sites outside of Minnesota where 3M is likely to be held accountable. Federal and state environmental clean-up laws dating back to the “Love Canal” scandal of the late 1970s have proven quite far-reaching, even if for polluters fro decades past. 3M’s spent decades developing, selling, and profiting from PFC innovations. Now it is likely to spend decades and millions of dollars cleaning them up. Here is where you can learn more about the settlement: http://www.startribune.com/jury-selection-in-3m-trial-begins-today/474581573/.
The Twin Cities “other” airline, Sun Country, is in the news for its changing ownership, expanding scope number of destinations, but shrinking headcount, at least with grounds crew. The “home-town” airline is a little less so with its purchase by New York-based Apollo Management. Apollo’s strategy appears to be expanding routes, but outsourcing the grounds crewing for those routes running out of MSP Airport. Sun Country announced this week layoffs of 350 grounds crew (from 1800 workers in total). The jobs will be outsourced to a specialty grounds crew service firm, Toronto-based Global Aviation Services. Airline ground support is what GAS does and does so around the world. Some laid off employees will catch on with GAS. Why outsource? Apollo thinks it will shave off costs in a discount airline travel business that watches costs very closely. But will outsourcing change quality of service? That is the big question for Apollo, Sun Country, and its many loyal customers in the Twin Cities looking for a cheap trip to someplace warm during the lingering Minnesota winter. Here’s where you can learn more about this move by Sun Country: http://www.startribune.com/sun-country-will-cut-350-ground-workers-at-msp-taps-canadian-firm-to-manage/474606963/.
Speaking of outsourcing and quality of service, let’s go across the pond to the UK. For the last week, 900 KFC outlets in the UK have not been very finger-lickin’ good to their customers. From one third to two thirds of the Colonel’s stores have run out of chicken,causing early closings or just closings. As of Monday, almost 600 of the 900 stores were closed. What happened? KFC recently changed it’s contract delivery service for chicken to DHL. The guys and gals in the yellow and red trucks can’t seem to get it together. DHL’s managing director of retail, John Boulter, said the delivery firm regretted the “interruption of supply” and apologized for the “inconvenience and disappointment caused to KFC and their customers.” I am guessing that Mr. Boulter gets to straighten out the mess and then clear his desk to “pursue other interests” outside of KFC. This incident teaches us that switching to outside suppliers or simply switching outside suppliers isn’t costless. Whether it’s Sun Country or KFC, the challenge is how to oversee, assist, and assure that the outside suppler follows the letter and spirit of the outsourcing agreement. That’s not easy. And it can be costly to the business if that outside supplier’s goods or services are critical inputs…like chicken at a chicken restaurant…or like fueled and provisioned airplanes for an airline. It’s why those businesses often internalize those services or switch outside suppliers as often as they find hen’s teeth.