Pension Plan: A Blow to AT&T 4Q - Analyst Blog

AT&T Inc. (T), the second largest mobile service provider in the U.S., announced that it will incur non-cash pre-tax charge of $2.7 billion or 28 cents per share in the fourth quarter of 2010 related to a change in pension accounting. The market seems to have reacted positively to AT&T's move with its share price climbing 4 cents yesterday.

The $2.7 billion charge stems from the reduction in the pension benefit plan discount rate to 5.8% from 6.5%, partially offset by higher-than-expected returns on the pension benefit plan assets and favorable health care cost trends.

AT&T has changed its method of recognizing actual gains and losses for pension and other post-retirement benefits in order to provide better clarity and improve transparency of its financial reporting. According to the company, these gains and losses will now be recognized in the year in which they are incurred, instead of amortizing them over several years. The gains and losses will be recorded in the fourth quarter of every year.

AT&T will book service costs, interest costs and expected return on assets on a quarterly basis. However, the adjustments reflecting actual return on assets or changes in discount rates will be taken annually in the fourth quarter of every year. Service costs will be adjusted in the operating segments, while interest cost and expected returns will be adjusted in other segments. AT&T expects to restate the figures related to the pension accounting over the last three years.

This change in accounting method will not affect the company's cash flow or pension funding requirements. AT&T expects 2011 adjusted benefit costs to be in line with 2010.

Although the pension modification will adversely affect AT&T's profitability and margins in the near term, it is expected to have a favorable impact in the long term as it better reflects the underlying operating performance of the business. The new method will aid investors' understanding of the benefit plan accounting simpler and easier.

AT&T's new pension accounting treatment is similar to that of some large U.S. companies such as International Business Machines Corp. (IBM) and Honeywell International (HON). A similar move is also expected from its largest rival Verizon Communications (VZ).

We are currently recommending our long-term Neutral rating supported by the Zacks # 3 (Hold) Rank.

 
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