Health Care Reform: Companies React

(Health care reform story updated with General Mill's response to the new health care law).

NEW YORK ( TheStreet) -- In the wake of the sweeping health care reform bill passed by the House on Sunday and signed into law by President Barack Obama on Tuesday, a number of companies have begun to announce that their bottom lines will be damaged by a tax change in the new law.

From Deere ( DE) and Caterpillar ( CAT) to Verizon ( VZ) and Medtronic ( MDT), to AT&T ( T) and 3M ( MMM), U.S. firms have been issuing notices of upcoming one-time tax charges based on what the Obama administration refers to as the closing of a tax loophole.

On the other hand, drugstores like Walgreen ( WAG) and CVS ( CVS) and pharmaceutical giants like Pfizer ( PFE), Merck ( MRK), Johnson & Johnson ( JNJ) and GlaxoSmithKline ( GSK) should benefit from the new law, according to IBISWorld analyst Sophia Snyder.

Pharmaceutical giants "all stand to benefit in similar ways," Snyder says. Snyder notes that 32 million people will now gain access to prescription drugs, while studies indicate that there's 75% more prescription drug use among people with prescription drug coverage than those who don't. By 2011, it's expected that pharmaceutical companies will also be making available a 50% discount for brand-name drugs for seniors who fall into the "doughnut hole," or the Medicare Part D prescription-drug coverage gap.

There will also be a 12-year extension on vaccine-brand protection under the reform, at a time in which "vaccines are becoming a bigger part of pharmaceutical industry," Snyder says. "A lot of blockbuster drugs are set to expire in 2011 and 2012, so many companies have shifted to vaccines."

With more people insured under the new law and the anticipation of more people buying more prescription drugs -- a large chunk of Walgreen's revenue -- the company could stand to benefit, Synder says. Also, both Walgreen and CVS have in-store clinics, so she adds that "with more people being insured, there's going to be a predicted shortage of access to getting into your primary doctor for basic things like colds. So in-store clinics could stand to benefit from an overflow of patients who can't go to see their primary doctors."

Meanwhile, which companies are crying foul -- and issuing forecasts of future loses based on one-time tax charges? Read on to see...

General Mills ( GIS) on Wednesday said it will take a charge of roughly $34 million, or 10 cents a share in the fourth quarter of fiscal 2010 on account of the new health care reform bill. The stock was trading sideways at $70.70 towards the end of the trading day on April 14.

Alcoa ( AA) said that it expects to incur a noncash charge of about $80 million in the quarter ended March 31, 2010, in connection with the reduction of income tax deduction for the costs of providing prescription drug benefits to retirees under the new health care law.

Some question the legitimacy of the charges, wondering whether companies had basically been "double dipping" through these subsidies in the first place.

Also, the income tax deduction doesn't kick in until 2013.

Hartford Financial

Hartford Financial ( HIG) said that for the quarter ended March 31, 2010, the company expects to incur a charge of about $20 million related to a decrease in deferred tax assets as a result of recent federal health care legislation that will reduce the tax deduction available to Hartford related to retiree health care costs beginning in 2013.

Hartford added that its net unrealized losses associated with real estate related assets declined from about $3.9 billion as of December 31, 2009, to about $3.3 billion as of February 28, 2010, largely as a result of improved market pricing and, to a lesser extent, interest rate declines.

Prudential ( PRU) said in order to reflect the anticipated increase in taxes due to the change in law regarding tax deduction available to Prudential Financial for retiree health care costs beginning in 2013, the company has incurred a charge for the impairment of deferred tax assets in an amount of about $100 million for the quarter ending March 31.

Exelon

Exelon ( EXC) said "federal healthcare legislation was recently signed into law. The healthcare legislation includes a provision that reduces the deductibility, for federal income tax purposes, of retiree healthcare costs to the extent an employer's postretirement healthcare plan receives federal subsidies that provide retiree prescription drug benefits equivalent to Medicare prescription drug benefits." Because of these changes, the company now expect to record total non-cash after-tax charges of about $65 million for income tax expense to establish deferred tax liabilities in the first quarter of 2010 .

The reduction of these income tax deductions is also estimated to increase Exelon's total annual income tax expense by about $10 million to $15 million. Of this total, annual income tax expense of subsidiaries Generation, ComEd and PECO is estimated to increase $5 million to $8 million, $3 million to $4 million and $1 million to $2 million, respectively.

Verizon

Verizon ( VZ) announced on April 1 that because it will no longer receive a Federal income tax deduction for the expenses incurred in connection with retiree prescription drug coverage, the company expects to record a one-time, non-cash tax charge of about $970 million in the first quarter of 2010 to reflect the impact of this change.

"Because future anticipated retiree health-care liabilities and related subsidies are already reflected in Verizon's financial statements, this change requires Verizon to reduce the value of the related tax benefits recognized in its financial statements in the period during which the law is enacted," the company said in an SEC filing.

A Verizon spokesman said that the company hasn't been expressing any concern about the possible side effects of the new health care reform law.

Ingersoll-Rand
A Trane logo hangs outside Trane headquarters in Parsippany, New Jersey. Ingersoll-Rand, the world's largest maker of truck-refrigeration units, owns Trane.

Ingersoll-Rand ( IR) announced in an SEC filing on April 1 that because of the new healthcare law, the tax benefits available to Ingersoll-Rand will be reduced to the extent its prescription drug expenses are reimbursed under the Medicare Part D retiree drug subsidy program.

Although the provisions of the healthcare reform legislation as it pertains to the retiree drug subsidy program do not take effect until 2013, the company -- as with the others that follow -- is required to recognize the full accounting impact in its financial statements in the reporting period in which the healthcare reform legislation is enacted. This led Ingersoll to announce a non-cash charge to income tax expense in the first quarter of 2010 of about $41 million, or roughly 12 cents a share.

Xcel Energy
Xcel Energy ( XEL) announced on April 1 that expects to expense about $17 million, or 4 cents a share, of previously recognized tax benefits relating to Medicare Part D subsidies during the first quarter ending March 31, 2010, as a result of the new health care law.

Xcel said that $17 million of additional tax expense won't reoccur in future periods. Xcel reaffirms its 2010 ongoing earnings guidance of $1.55 to $1.65 a share. "Xcel Energy does not consider the 4 cents per share charge to be part of ongoing earnings, as the adjustment results from a new law that is not expected to reoccur in the future," the company said in a statement.

Lockheed Martin

Lockheed Martin ( LMT) announced on April 1 that it expects a charge to Lockheed Martin's net earnings in the first quarter of 2010 of about $96 million after tax, or about 25 cents a share, to reflect the elimination of the tax deduction that had been reflected as an asset in Lockheed Martin's 2009 financial statements.

The cash impacts of this charge will be realized over several years beginning in 2013.

Boeing

Boeing ( BA) announced on March 31 that it expects to recognize an income tax charge of about $150 million as a result of the new health care law, given that Boeing will no longer be able to claim an income tax deduction related to prescription drug benefits provided to retirees and reimbursed under the Medicare Part D retiree drug subsidy, beginning in 2013.

Boeing said that though this tax increase does not take effect until 2013, accounting standards require that a deferred income tax asset be written down in the period that legislation changing the tax law is enacted.

Boeing said the charge is expected to reduce net earnings by about $150 million, or 20 cents a share, in the first quarter of 2010. Boeing adds that cash impacts of this charge will be realized over many years beginning in 2013.

3M

On March 26, 3M ( MMM) announced in an SEC filing that under the new law, 3M will be taking a one-time non-cash charge to 3M's earnings in the first quarter of 2010 of about $85 to $90 million after tax, which is about 12 cents per share.

3M said that the elimination of a tax-advantaged subsidy to encourage companies to provide retiree prescription drug coverage will result in a reduction of the value of the company's deferred tax asset related to the subsidy -- despite expectations that the elimination of this tax advantage does not take effect until 2013.

Under the new plan, the firms with the largest number of retirees might have the most to lose due to lost subsidies. Industrial firms frequently fall under this category.

AT&T

Also on March 26, AT&T ( T) said in an SEC filing that it intends to take a non-cash charge of about $1 billion in the first quarter of 2010 to reflect the impact of a change in the tax treatment of the Medicare Part D subsidy under the health care reform law.

As a result of this legislation, including the additional tax burden, AT&T will be evaluating prospective changes to the active and retiree health care benefits offered by the company.

AK Steel

AK Steel ( AKS) has said that it will record a non-cash charge of about $31 million in the first quarter of 2010 resulting from the new health care law.

The charge is due to a reduction in the value of the company's deferred tax asset as a result of a change to the tax treatment of Medicare Part D reimbursements.

However, AK Steel emphasizes that it expects to continue to receive Medicare Part D reimbursements, and that the first quarter charge attributable to this change is non-cash in nature.

Medtronic

Medical technology company Medtronic ( MDT) said the company "supports patient access to affordable, quality health coverage and the health care bill takes our country in this direction. We helped to form several elements of this legislation, but there is no doubt it will have an impact on our business."

Medtronic says the sales tax on medical devices now included in the bill was revised to be $20 billion over a decade. It provides for a 2013 start date to coincide with coverage expansion; will be a conventional excise tax with full deductibility; and will cover all product classes with the exception of retail products like contact lenses and maybe diabetes supplies, including continuous glucose monitors, which Medtronic manufactures.

"The impact of the tax, we estimate, will be roughly $150 million to $200 million on Medtronic annually beginning in 2013," Medtronic said in an email.

Deere & Company

Agricultural equipment maker Deere & Company ( DE)announced on March 25 that the legislation would "adversely impact" the company's expenses for fiscal 2010. Deere said it expects its expenses to rise by around $150 million on an after-tax basis, mainly in the second quarter, as a result of the legislation.

The company said this impact was not reflected in the 2010 outlook for net income attributable to Deere of about $1.3 billion reported in the company's first-quarter earnings.

Caterpillar

On March 24, industrial equipment manufacturer Caterpillar ( CAT) said that its first-quarter earnings will be hit with a $100 million after-tax charge under tax law changes attached to the new health care reform legislation. Caterpillar complained that as a result of the new legislation, beginning in 2011, the tax deduction available to Caterpillar will be reduced to the extent its drug expenses are reimbursed under the Medicare Part D retiree drug subsidy program.

Early last year, President Obama paid a visit to a Caterpillar plant in Illinois shortly after the company laid off tens of thousands of employees. During the press briefing, Obama said that he believed his economic stimulus proposals would enable companies like Caterpillar to rehire staff. But the company's CEO, James Owens, told reporters after the press conference that he believed there would be more layoffs before rehiring became a possibility -- undermining Obama's message.

-- Reported by Andrea Tse in New York

RELATED STORIES:


Follow TheStreet.com on Twitter and become a fan on Facebook.
Copyright 2010 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

If you liked this article you might like

3 Names That Could Jump 25% if Big 'What Ifs' Are Answered

3 Names That Could Jump 25% if Big 'What Ifs' Are Answered

Twitter CEO Jack Dorsey: Our Independence Is an Advantage

Twitter CEO Jack Dorsey: Our Independence Is an Advantage

Verizon Defies FCC Agreement, to Start Locking Phones in Spring

Verizon Defies FCC Agreement, to Start Locking Phones in Spring

Cramer: 10 Stock Surprises

Cramer: 10 Stock Surprises

Twitter's Ongoing Turnaround Fuels Stock Gains -- and M&A Hopes

Twitter's Ongoing Turnaround Fuels Stock Gains -- and M&A Hopes