AT&T; Will Take $6.7-Billion Charge for 1st Annual Loss
American Telephone & Telegraph said Thursday that 1988 will produce the first annual loss in the 103-year-old company’s history--the price paid to modernize its network and slash payroll costs to meet stronger telecommunications competition.
AT&T; also said it intends to eliminate 16,000 jobs over the next few years, which will trigger an unknown number of layoffs.
The red ink--which the company had warned six weeks ago was on the way--will come in the form of a $6.7-billion pretax charge against fourth-quarter earnings as AT&T; reduces the value of outmoded switches and other equipment being replaced at a quickened pace by computer-controlled, digital machines.
Strong Gains Erased
That will cut net income for the quarter by $3.9 billion, wiping out strong profits rolled up in the first nine months of the year. The result will be a first-ever annual loss that analysts put at about $1.6 billion.
Analysts generally applauded AT&T;’s decision to write off its old equipment in a single stroke. They predicted that the charge, essentially a non-cash bookkeeping transaction, will result in improved future earnings for a company whose leading competitors--MCI Communications and US Sprint Communications--now hold a technological advantage in the form of newer, more efficient networks.
“This reflects the adjustment of going from a regulated marketplace to a competitive marketplace,” said Robert B. Morris III, who follows the company for the investment banking firm of Goldman, Sachs & Co. James McCabe of Nomura Research called the writedown a formality.
Joe Bettipaglia, an analyst with Gruntal & Co. in New York, noted that the stock market reacted mildly to the largely anticipated news. AT&T; shares closed off a modest 50 cents at $29.375, close to its 52-week high of $30.125. More than 2.8 million shares changed hands, making it the day’s second-most-actively traded issue on the New York Stock Exchange.
‘Too Many People’
Bettipaglia and other analysts said AT&T; should be able to cut even more than 16,000 jobs from a payroll that still carries 310,000 employees.
“They have grossly too many people,” McCabe said. “At the time of divestiture, a lot of people were unloaded onto them.”
A hiring freeze imposed last summer has helped cut the payroll by 6,000. However, the Communications Workers of America complained that the company was swinging the ax far more freely among non-management personnel than among managers.
AT&T; said it will erase 10,000 jobs in long-distance network operations and 6,000 more among its 25,000 telephone operators over the next few years as more efficient, less labor-dependent equipment is installed. The new equipment is expected to increase the number of calls handled by each operator by 25%, it said.
(The company declined to say how many of its 20,000 jobs in California will be eliminated.)
The modernization plan calls for 95% of AT&T;’s telephone traffic to be handled by digital facilities by mid-1989--three years earlier than expected and 20 years sooner than AT&T; had planned before the coming of competition in long-distance telecommunications.
Last October, in warning of the impending writedown, AT&T; Chairman Robert E. Allen said the old analog equipment being replaced over the next few years had a current value on the company’s books of $4 billion to $5 billion, with the exact figure to be determined by an appraisal then under way.
Equipment Writedown
Of the $6.7-billion charge, $5 billion covers writing down the value of analog circuit equipment, switches and transmission facilities. Another $1.7 billion reflects related expenses, Morris Tanenbaum, vice chairman and chief financial officer, told a New York press conference on Thursday.
“These actions will not significantly affect cash flow, nor will they adversely affect our ability to pay dividends and continue investing in the business,” Tanenbaum said. “While our bottom line for the year will show a loss, our earnings have been on a strong, growing trend.”
For the nine months through September, the company reported a profit of $1.67 billion, up from $1.55 billion for the same period last year.
AT&T; has taken a series of writedowns totaling $13.4 billion since the breakup of the Bell System, which divested the company of its former local telephone operations. In anticipation of that move, it took a $10-billion charge five years ago, took a further $200-million writedown for obsolete equipment in 1985, followed a year later by a $3.2-billion charge to cover a reorganization and consolidation program. Until now, however, the company had always managed to turn a profit.
