Net local gain from Trump tax cuts: $1.4 billion and rising

Cincy companies detail impact of tax reform
Posted at 12:19 PM, Feb 05, 2018
and last updated 2018-02-05 12:44:52-05

CINCINNATI - Local companies have reported to shareholders that the Tax Cuts and Jobs Act signed by President Donald Trump in December will result in net benefits of at least $1.4 billion.

Seven local companies have announced quarterly results since the tax reform was passed, while an eighth company – Macy’s Inc. – has increased its earnings outlook based on changes in the U.S. tax code.

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Cincinnati-based companies have identified more than $2.2 billion in specific benefits from the legislation, which cuts the U.S. corporate tax rate from 35 to 21 percent. These benefits include increased expectations on corporate profits and cash flow, along with accounting changes to reflect the impact of lower tax rates on deferred liabilities.

But the companies have also identified about $809 million in new expenses tied to tax reform, including “repatriation” taxes on companies that earned foreign profits in recent years but didn’t bring the money back to the U.S. because of its 35 percent tax rate.

While the new expenses tied to tax reform are one-time accounting charges that won't affect company operations, many of the benefits are recurring. They haven't been quantified beyond the next few years but they'll continue for years to come, under the new tax rules. And that's led many local CEOs to point to intangible benefits, reflected by this comment from FIfth Third Bank CEO Greg Carmichael.

“In addition to the immediate positive impact of lower corporate taxes on our company’s results, we are optimistic that the new tax law will help to reinvigorate the economy and support further growth in our businesses,” Carmichael said in a Jan. 23 press release on the bank's fourth quarter earnings.

Companies have provided varying levels of detail on how the tax reform will impact their bottom line. So, WCPO estimated the dollar value of certain changes based on company disclosures about how their effective tax rates will change or how much their earnings per share would increase because of tax reform.

The companies also offered varying levels of detail on how the proceeds of tax reform will be spent, although it’s clear that some of the windfall is already earmarked for bonuses, minimum wage increases and increased dividends to shareholders.

Here’s a breakdown of the disclosures starting with the most recent:

  • American Financial Group Inc. expects an earnings boost from tax reform. The Cincinnati-based insurance company told investors to expect “core net operating earnings” to fall between $7.90 and $8.40 in 2018. That’s 20 to 28 percent better than last year’s $6.55 per share. The improvement is worth at least $120 million. American Financial also reported a negative impact of the Tax Act, a one-time $83 million charge against earnings to write down the value of a tax-deferred asset. Tax reform could also bring less tangible benefits, said co-CEO Carl Lindner III, in a Jan. 31 earnings call. “Foreign competitors have had an embedded tax advantage that's been part of the tax code since 1986. By closing the affiliate reinsurance tax loophole and lowering the corporate tax rate, Congress has largely leveled the playing field,” Lindner said.
  • Hillenbrand Inc. reported a one-time expense of $29 million to cover new taxes imposed on foreign profits that were held overseas by the Batesville, Indiana-based maker of caskets and manufacturing equipment. The company also received $15 million in benefits from reduced taxes this year and the “revaluation of domestic net deferred liabilities.” Hillenbrand increased its 2018 guidance by 12 cents per share, but CEO Joe Raver said the increased profits could be spent on new investments and acquisitions in a Jan. 31 earnings call. “Our priorities for capital deployment remain the same,” he said. “First, reinvesting in the business as we drive innovation and market expansion; second, making strategic acquisitions to accelerate profitable growth; and third, continuing to return capital to shareholders in the form of dividends and share repurchases.”
  • Hospital bed maker Hill-Rom Holdings Inc. told shareholders in a Jan. 26 earnings call that it received a one-time benefit of 89 cents per share from tax reform, or roughly $58 million. It also boosted its earnings outlook for 2018 by 30 cents per share, or nearly $20 million, and told investors to expect $50 million in increased cash flow in the next three years. CFO Steve Strobel told investors that the increased cash flow could be used to pay down debt. In an earlier conference call on Jan. 9, CEO John Greisch said the “vast majority of the tax rate reduction (will) flow to the bottom line.”
  • LSI Industries Inc. reported a $4.7 million charge against earnings for the “loss in value of deferred tax assets” tied to tax reform, but it also told investors that its effective tax rate will decline to 29 percent this year and 24 percent in 2019 and beyond. The Cincinnati-based label maker paid $4.5 million in 2016 taxes with an effective tax rate of 32.3 percent. So, dropping that rate to 24 percent would be worth about $3.3 million per year. “We are hopeful that the newly enacted tax legislation will help to break the log jam that our end customers will be motivated to move forward with their capital spending as it relates to lighting and signage projects,” CEO Dennis Wells told investors in a Jan. 25 earnings call.
  • Procter & Gamble Co. delivered the most detailed report on the impact of tax reform when it told shareholders to expect billion-dollar “earnings benefit” in the next three years. “The core earnings benefit of the Tax Act is about $135 million in the December quarter and for the fiscal year,” CFO Jon Moeller told analysts Jan. 23. “The benefit will more than double to about $300 million in FY 2019 and double again to about $600 million per year on an ongoing basis.” But the news wasn’t all positive for P&G, which has about $49 billion in “undistributed foreign earnings” that represent profits from dozens of countries that will be taxed at rates of either 15.5 percent for liquid assets and 8 percent for profits that are already re-invested in global subsidiaries. P&G took a one-time accounting charge of $628 million for the cost of “repatriating” its foreign profits. While it was very specific on the costs and benefits of tax reform, P&G was less specific on how it will use its increased cash flow. “We’re going to be continuing to invest in the business,” Moeller said, “driving superiority, driving sustainable competitive advantage, doing it in a responsible way, driving margin simultaneously.”
  • Fifth Third Bancorp. said its effective tax rate will fall to between 14 and 16 percent, thanks to tax reform. That’s down from a 20.8 percent rate in 2017. Applying those numbers to Fifth Third’s 2017 net income of $2.1 billion means that the bank would save about $142 million annually from reduced taxes. In its fourth quarter earnings release, the bank said it recognized $125 million in new expenses tied to tax reform, including a $15 million donation to its corporate foundation and $15 million in pretax charges for employee bonuses. Another $95 million in accounting charges were tied to the revaluation of leases and affordable housing investments. The bank also recognized a $220 million gain from the remeasurement of its deferred tax liabilities. So, that’s a net gain of $95 million through 2018, although it doesn’t include the cost of increased wages for roughly 3,000 bank employees whose hourly pay will increase to $15. “The investments that we have made following the passage of the new tax law demonstrate our commitment to improving the lives of our employees and our communities,” CEO Greg Carmichael said in Fifth Third’s Jan. 23 earnings release.
  • First Financial Bancorp. announced a 12 percent dividend increase Jan. 23, which will bring 19 cents per share to the owners of its roughly 62 million shares outstanding. CEO Claude Davis said tax reform was “a significant positive” for the bank, causing it to do a review of its dividend policy. WCPO estimates the value of the dividend hike at $1.4 million. In a Jan. 18 earnings release, the bank said tax reform resulted in a $1.1 million net benefit to the bank from the revaluation of a historic tax credit investment. It also recognized a $3 million charge against earnings for a donation to the bank’s charitable foundation inspired by Congressional passage of tax reform. First Financial did not disclose the cost of wage hikes tied to tax reform. The bank increased its starting pay to $15 an hour, impacting more than 200 employees. In a Jan. 19 earnings call, Davis told shareholders the bank may invest proceeds of tax reform in “franchise investments we need to make as we complete our merger” with MainSource Financial Group Inc.
  • Macy’s Inc. hasn’t released any quarterly results since the passage of tax reform, but it did alert shareholders to a one-time benefit that it expects from the revaluation of deferred tax liabilities. It expects the accounting charge to be worth between $550 million and $650 million. Macy’s also increased its profit outlook for the 2017 fiscal year by 6 cents per share, or roughly $18 million, because the tax act will reduce its effective tax rate. Company officials have yet to articulate any plans for increased cash flow caused by tax reform.