Accounting-Wary Investors Turn Cold Shoulder On IBM

The stock of International Business Machines IBM slumped $5 to $102.89, dragging on the blue-chip Dow Jones industrial average, which fell 98.95 points, or 0.99 percent, to 9,903.04.

Concerns that IBM used gains from the sale of a unit late in the quarter to meet earnings expectations sparked the unusually large share price move for the blue-chip company.

IBM stock, which gained 42 percent in 2001, has fallen about 15 percent since the start of this year.

"We're not going to do anything with the stock, but it's a little disconcerting," said John Rutledge, portfolio manager for the Evergreen Technology Fund, which holds IBM stock.

"The issue is not the bottom line EPS that was reported. That's solid and safe. It's just a matter of how you use it within the income statement. And this augurs debate of what is normal operating earnings versus extraordinary earnings," Rutledge said.

At issue was the sale of IBM's Rochester, Minnesota-based optical transceiver business to Canada's JDS Uniphase for $340 million in cash and stock in December. Optical transceivers are used for short-reach telecom carriers and enterprise communications applications.

IBM included that gain as intellectual property income and licensing royalties in its fourth-quarter earnings but didn't say how large it was. IBM, which defended its accounting, in March will file with the Securities and Exchange Commission its quarterly financial statement, which includes material items.

IT'S IN THE DETAILS

A story in the New York Times on Friday said that one-time items like IBM's sale of the optical business -- which included intellectual property, some equipment and people -- should have been identified as a one-time gain.

IBM said that it has adequately disclosed the sale of the transaction in two press releases, one issued in December and another on Jan. 2. The company said during its Jan. 17 fourth-quarter earnings call that the item was included in its intellectual property income and licensing royalties.

"IBM's accounting is conservative and fully compliant with all regulatory standards," said IBM spokeswoman Carol Makovich.

IBM Chief Financial Officer John Joyce wasn't available to comment on the results.

The article was the latest of several stories questioning IBM's accounting methods, including its inclusion of pension fund gains in earnings and lack of visibility on items.

It comes against the backdrop of increased concerns about accounting that have been raised in part because of the bankruptcy of energy company Enron , which used off-balance sheet items to inflate earnings. On Thursday, graphics chip maker Nvidia said the SEC was investigating its accounting.

Investors and analysts on Friday said that situation with IBM wasn't in the same league as the problems at these companies but that investors were hyper-sensitive.

"Is this a major issue for IBM? On the surface I'd say no, I'd say this is a matter of interpretation, but this is a stock market that is 'sell now, ask questions later,"' said Tim Ghriskey, president of Ghriskey Capital Partners in Greenwich, Conn., which owns the stock.

PUSHING THE ENVELOPE

"With any large company there are accounting issues because they push the envelope, and there certainly could be more issues here at IBM from an accounting standpoint, but how do you know?" Ghriskey said.

Merrill Lynch analyst Steven Milunovich said in a research note that IBM rightly accounted for the transaction as intellectual property revenue. The gain from that sale could have added as much as 8 cents per share to earnings, he said.

The company reported fourth-quarter earnings of $2.3 billion, or $1.33 per share, down from $2.7 billion, or $1.48 per share, a year earlier. The latest's quarter's earnings came in 1 cent ahead of the Wall Street consensus of $1.32 a share.

Steve Salopek, a hardware analyst at Banc One Investment Advisors in Columbus, Ohio, which owns the stock, said he wasn't concerned about IBM's accounting practices because IBM has been lumping all items into the bottom line as recurring business for several years.

He prefers that, he said, to the current trend of pro-forma earnings, in which companies break out every single write-off and asset sale as non-recurring, even if it happens every quarter. "On this one, I give these guys credit," he said.

But, he said, in the current environment, that doesn't matter.

"Companies manage their earnings and anyone who really manages earnings ... everyone from ADP, EDS, IBM, Microsoft, EMC, these companies are going to be questioned," he said.

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REUTERS

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