Verizon Communications Inc., the second-largest U.S. phone company, became the latest company to record a cost related to the U.S. health-care overhaul, saying it will incur a $970 million expense.
The one-time, non-cash cost will be taken in the first quarter, New York-based Verizon said late yesterday in a regulatory filing.
Verizon follows AT&T Inc., the biggest U.S. carrier, Deere & Co., Caterpillar Inc. and other companies in disclosing similar expenses after losing a tax benefit for retiree plans. The costs may reduce corporate profits by as much as $14 billion as companies account for the impact of the health-care reforms, according to benefits consulting firm Towers Watson.
“While it is a non-cash charge, it does reflect real value destruction, based on expected cash flows over the life of the company,” said Jonathan Schildkraut, an analyst at Jefferies & Co. in New York. Schildkraut, who anticipated Verizon would book an expense of about $750 million, advises investors to buy the company’s shares and doesn’t own any himself.
AT&T said March 26 it would record $1 billion in costs in the first quarter related to the changes.
The almost $1 trillion program is meant to provide medical coverage to uninsured Americans and force insurance companies to lift restrictions, such as denying coverage based on pre-existing conditions.
The federal government pays a subsidy to companies that provide retiree prescription drug coverage. Under prior law, those subsidies were tax-exempt. The new law eliminates the tax break starting in 2013. Verizon said in February that it had about 213,000 retirees at the end of last year.
Not the ‘Final Story’
“This is having an impact on the bottom line and that can cut jobs,” said Chetan Sharma, an independent wireless analyst in Issaquah, Washington. “I am not sure the final story has been told on this” because most companies still don’t know exactly how the new law will affect them, he said.
Verizon had about 223,000 workers at the end of December, with about 35 percent represented by labor unions including the Communication Workers of America. About 58 percent of Dallas- based AT&T’s workforce has union representation.
In a note to employees after the law was passed, Verizon said that the law would make the federal subsidy to provide retiree benefits less valuable to employers and so “may have significant implications for both retirees and employers.”
Prior to the announcement, analysts had projected Verizon would report first-quarter profit excluding some items of 56 cents a share, the average of estimates compiled by Bloomberg.
While the costs erode profit, the new law won’t hurt the company’s ability to compete against its rivals, Schildkraut said.
“This bill doesn’t make Verizon any less well positioned vis-à-vis cable competitors or AT&T,” he said. “It doesn’t make AT&T any less well positioned.”
Standard & Poor’s said today that the charge won’t affect Verizon’s credit rating. The cost relative to the company’s revenue along with the deferral of higher cash taxes won’t materially impact the company’s credit profile, S&P said in a statement.
Verizon rose 26 cents to $31.28 yesterday in New York Stock Exchange composite trading. The stock has dropped 5.6 percent this year. U.S. markets are closed today for Good Friday.
Craig Mathias, founder of wireless consultant Farpoint Group, said consumer prices for communications services may climb in about a year as the economy recovers.
“The money is going to come from somewhere,” Mathias said. “Guess where it’s going to come from? Us customers.”