AT&T to take $10bn charge, subsidies weigh on Q4

The one-time charge relates to pension obligations, but carrier also complains of effect of superstorm and device subsidies

AT&T’s shares were rocked by a shock warning that it would take a $10bn charge related to pension schemes, while also citing the impact of Hurricane Sandy plus more long term – and therefore concerning – factors like device subsidies, which will reignite the controversy over the way the iPhone, in particular, harms profits.

The carrier said in a filing with the SEC that it expects to take a non-cash, pre-tax charge of about $10bn related to actuarial gains and losses on pension and post-employment benefit plans. The loss of about $12bn will be offset by an asset gain of $1.9bn.

AT&T also said in the filing that it will suffer the penalty of high smartphone sales in its fourth quarter. Having crowed over those sales, which totalled 10.2m, ahead of announcing its Q4 results on Thursday, it now warns that the high subsidies on the products will create “near term pressure” on operating income, margins and earnings per share. All carriers with a heavy emphasis on contract customers, often lured by a low upfront charge for an expensive device, suffer this effect, which is leading to many operators, led by T-Mobile USA, Telefonica Spain and others, to seek alternatives to subsidies to attract users – financing schemes, lower data tariffs and other tactics are increasingly being employed.

AT&T has been particularly affected by the subsidy impact since launching the iPhone exclusively in 2007, since it remains more reliant on this smartphone than its rivals, and Apple devices come with the most hefty subsidies.

AT&T also cited Hurricane Sandy as a negative factor in its Q412 performance. It expects a reduction in operating income of about $175m as a result of storms, mainly affecting its mobile unit.

It has massive pension liabilities, many stemming from its historic position as the US’s monopoly carrier. The obligations rise in an environment of low interest rates because the present value of those future payments goes up. In 2011, AT&T recorded a non-cash charge of $6.3bn for adjustments to its pension and post-retirement benefit plans.

Verizon also said last week, ahead of its own results, that it would take $9bn to $10bn in one-time charges related to several issues including the superstorm and refinancing costs.

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