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Table: Gerstner's Earnings Machine


Under Chairman Lou Gerstner, IBM has used financial levers to help boost earnings. In 2001, income from such maneuvers accounted for at least 20% of pretax profits. This year, that could fall to 10%. Here's why:

FINANCIAL LEVER: PENSION INCOME

Returns from IBM's (IBM) pension funds exceed the cost of servicing the plan. Rules require the income be added to earnings, though it can't be used for operations.

CONTRIBUTION TO 2001 PRETAX EARNINGS OF $10.9 BILLION: $904 MILLION, OR 8.3%

FOR THE FUTURE: IBM has trimmed the expected rate of return on its pension fund to 9.5% from 10%. That will cut pension income to 5.2% of IBM's projected $11.8 billion in pretax income this year.

FINANCIAL LEVER: INTELLECTUAL-PROPERTY SALES

IBM counts intellectual-property sales as income. Critics say booking recurring fees is OK but including one-time sales is a no-no. IBM stands by the practice.

CONTRIBUTION TO 2001 PRETAX EARNINGS OF $10.9 BILLION: $900 MILLION, OR 8.3%*

FOR THE FUTURE: IBM says it will break out intellectual-property income in its financial statements. Still, look for gains from one-time sales to fall to $500 million this year.

FINANCIAL LEVER: BAD DEBT

Some say IBM inflates earnings by downplaying credit risk. It sets aside 2.75% of its total loans and unpaid bills to cover bad debts, but some analysts say 4% is more realistic.

CONTRIBUTION TO 2001 PRETAX EARNINGS OF $10.9 BILLION: $490 MILLION, OR 4.5%**

FOR THE FUTURE: IBM has boosted reserves to $1.08 billion, from $927 million in 2000. But its rosy assumptions could result in bigger charges down the road if the economy doesn't rebound.

FINANCIAL LEVER: TAX RATE

Moving plants to locations with lower taxes has helped IBM slash its tax rate from 42.4% in 1993 to 29.5% last year.

CONTRIBUTION TO 2001 PRETAX EARNINGS OF $10.9 BILLION: $33 MILLION, OR 0.4%***

FOR THE FUTURE: No more help from the taxman. IBM says the tax rate is unlikely to go lower. And it could edge up to 30%. If it does, that'll cut profits next year by about $50 million, or nearly 1%.

FINANCIAL LEVER: SHARE BUYBACKS

IBM spent $44 billion buying back 864 million shares from 1995 to 2001. Last year, IBM was one of the 10 most active corporate share repurchasers, plunking down $5.3 billion.

CONTRIBUTION TO 2001 PRETAX EARNINGS OF $10.9 BILLION: 9 cents PER SHARE

FOR THE FUTURE: Share repurchases are slowing to $4.6 billion this year. Banc of America Securities estimates IBM's 2002 buyback program will boost earnings by 7 cents per share, or 1.3%.

* From one-time intellectual-property sales

** Difference between 2.75% rate and 4% rate

*** Of net income

Data: IBM, Merrill Lynch & Co., Sanford Bernstein & Co., Behind the Numbers, Banc of America Securities, BusinessWeek


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