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As It Beat Profit Forecast, I.B.M. Said Little About Sale of a Unit
By:
Gretchen Morgenson When
I.B.M. announced in mid-January that it had beat Wall Street's profit
forecasts in the fourth quarter, it did not disclose that the sale of a
business had generated $300 million that the company used to lower its
operating costs. The
company did not provide details of the transaction to investors or account
for it as a one-time gain, as is the practice. Instead, I.B.M., during a
conference call about fourth-quarter earnings, said that its profits had
grown — even as revenue in most categories had declined — because of
increased productivity and higher sales of certain products. To
be sure, I.B.M. has not filed its fourth- quarter and annual financial
statements with the Securities and Exchange Commission, which the company
does not have to do until March. Its scant disclosure of the sale was made
in comments in a conference call with analysts and investors, not in a
federal filing. But the S.E.C. has recently begun cracking down on companies
that have incomplete or misleading disclosures, even in their press
releases. One-time
gains like I.B.M.'s are supposed to be identified as nonrecurring charges.
Using them to offset expenses does not create a fair representation of the
company's operations,accounting experts said. As is its policy, the S.E.C
does not comment on questions about specific companies or their practices. A
spokeswoman for I.B.M., Carol Makovich, said the company was justified in
using the gain from the transaction to offset sales, general and
administrative expenses because those are a part of I.B.M.'s business, and
buying and selling assets is also a part of its business. "We
considered this transaction as the ordinary course of business," Ms.
Makovich said. "This is not an unusual practice. Our auditors have
reviewed it and approved it. "The
S.E.C. has written guidelines in recent years to address this accounting
issue, and it is not known how many other companies, if any, might be using
the practice. Lynn
Turner, a former chief accountant of the Securities and Exchange Commission
who is now director of the center for quality financial reporting at
Colorado State University, said: "Staff Accounting Bulletin 101 is very
clear that gains from the sale of assets have to be in the `other income'
line. And Staff Accounting Bulletin 99 also makes it clear that when you
intentionally violate accounting guidelines, any amount is material." The
bulletins are S.E.C. guidelines that companies are required to follow.
Companies that do not, could be asked to restate their results or face
enforcement actions. The
transaction that generated $300 million for I.B.M. came just as a dismal
quarter was ending. By the time the books were closed on the fourth quarter
of 2001, the company had recorded revenues that were $900 million lower than
a year earlier and $1 billion below what Wall Street had expected. Still,
I.B.M.'s profits beat Wall Street's estimates for the quarter by the
all-important penny a share.It was the type of performance that Wall Street
had come to expect from Louis V. Gerstner Jr., I.B.M.'s chief executive, who
will step down on March 1. I.B.M. has met or exceeded quarterly earnings
estimates since the end of 1997, according to Thomson Financial/First Call. Though
a company's ability to beat Wall Street expectations was applauded by As
a result, some investors had begun to wonder whether I.B.M.'s quiet sale of
its optical transceiver business to JDS Uniphase (news/quote) on Dec. 28,
the last Friday in 2001,was intended to help the company over the earnings
bar. JDS agreed to pay I.B.M.
$340 million in shares and cash, a price that is nearly five times the
business's sales. On
Jan. 17, when I.B.M. announced its fourth-quarter results, there was no
disclosure about the amount generated by the sale or the company's
accounting of it. The
only mention of the sale was an oblique reference in its conference call
with analysts that day to discuss quarterly results. "Our intellectual
property income and licensing royalties were flat in the quarter, which
included the sale of our optical transceiver business to JDS Uniphase,"
John Joyce, I.B.M.'s chief financial officer, said in a statement at the
conference call. During
the conference call, Mr. Joyce explained that earnings grew in the face of
declining revenue because certain areas of strength offset those weaknesses.
In
the fourth quarter, the company recorded business improvements in one of its
mainframe offerings, one of its servers and software, Mr. Joyce said.
Increases in productivity also were a factor, the company said. For
a company as big as I.B.M. — it recorded almost $86 billion in sales last
year — $300 million may not seem like much. But by using that gain to Ms.
Makovich, the company spokeswoman, said, "I.B.M. is a very large
company, and when you are evaluating our company you need to look at many,
many factors." Robert
A. Olstein, manager of the Olstein Financial Alert Fund, said that he had
considered buying I.B.M.'s stock in recent years but stayed away because the
company's earnings appeared to be engineered more than generated. "Mr.
Gerstner did a great job turning the company around when he came in,"
Mr. Olstein said, "but basically they've had a series of what I call
`lower quality of earnings sources' to meet analysts' earningsestimates." The
lack of disclosure about the sale was disturbing to Jack Ciesielski, editor
of The Analyst's Accounting Observer. "How
can they not discuss it?" he asked. "The problem Ihave is, they're
not telling you it didn't affect earnings and they're not telling you it
did. So what are you to presume except the worst?" Lewis
D. Lowenfels, a lawyer who specializes in securities law at Tolins &
Lowenfels in New York, said, "Prior to Enron, executives could justify
limited disclosure based upon intricate and technical accounting rules. "But in the post-Enron era," Mr. Lowenfels said, "the focus will be more upon the overall test for materiality, which is whether the information would be important to a reasonableinvestor." FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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