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Wall Street Journal |
14:51 Thursday 25th November 1999
Reuters
Big blue sinks 5 percent over financial reporting
IBM shares fell 5 percent on Wednesday after a report criticised the computer maker's accounting practices, but the shares recovered partially.
By late afternoon, IBM stock recovbered from morning lows below 102 to trade at 104-1/8, down 2 from Tuesday's New York Stock Exchange close.
A Wall Street Journal report quoted forensic accounting expert Howard Schilit, of the Center for Financial Research and Analysis, questioning IBM's "unusual treatment of one-time gains."
Yet securities analysts who follow IBM said the issue was not how the company does its maths, but simply how it presents its results -- keeping one-time gains and charges in operating results instead of breaking out these as non-operating items.
"The earnings reports from IBM are clean," Brown Brothers Harriman analyst William Milton said flatly. "IBM has disclosed non-recurring items right up front," and thereby reduced confusion over special charges and gains that might otherwise make it difficult for investors to compare results over time, he told Reuters.
Gary Helmig, a financial analyst with brokerage SoundView Technology Group, who was also cited as critical of IBM's practices in the article, said IBM provides analysts with the data necessary for a complete picture. "This is not an accounting issue," Helmig told Reuters. "This is a financial reporting issue."
"They (IBM) give you enough information to put together a pro forma (income statement) as to what it would look like without those charges and gains," he said.
Schilit was not available to comment on his findings. An analyst at his research firm confirmed Schilit had issued a report that showed how IBM's third-quarter results would be lower after backing out one-time gains.
An IBM spokesman said the company seeks to live up to the highest accounting standards. "We believe our accounting practices are appropriate," IBM spokesman Rob Wilson said. "We think we are doing this the right way. We do breakdown the EPS (earnings per share) impact to the penny. We believe we are operating in a spirit of openness and candour and in the very best interest of our investors and shareholders," Wilson said.
Helmig said that while IBM's financial presentation practices could be simpler, they have proved consistent over the years, even when it portrayed the company's operating results unfavorably.
Specifically, IBM has reported restructuring charges in operating results, cutting into bottom-line profits, he noted. While gains on the roughly $4bn (£2bn) sale of the IBM Global Network boosted results in the third quarter of 1999, IBM's reported earnings suffered in early 1998 from restructuring write-downs taken during that quarter.
The charges reflected costs tied to its sponsorship of the 1998 Winter Olympics and to several acquisitions. Helmig said IBM officials have told him they believe they conform strictly to US Securities and Exchange Commission guidelines by categorising these events as "selling, general and administrative" expenses and not "other income."
The analyst said IBM's reading of accounting policy is that regulators frown on the common corporate practice of pro forma presentation of results that exclude such gains and charges.
IBM has resisted moves that have been taken by several of its industry peers, who have taken to presenting two sets of results, or including regular one-time charges in operating results, making it difficult to develop a single view of the business over time.
Business software maker Computer Associates posts operating results that both include and exclude write-offs for acquisitions. First Call keeps two sets of widely varying earnings estimates to make sense of this practice.
Chip maker Intel recently began reporting two sets of results to distinguish between its basic operating sales, expenses and profits from results including recent acquisitions. Similarly, newer "dot.com" Internet stocks use a dual presentation to ease investor concerns about heavy spending on marketing and other costs that delay profits until several years from now.
By contrast, IBM believes its presentation makes its financial performance easier to understand than the reports of these peers, Helmig said.
For example, in IBM's latest results issued October 20, the company disclosed an after-tax benefit of $63m it received from various charges and gains.
Later in the results, IBM detailed the gain on the sale of its Global Network business to AT&T and offsetting charges for an acquisition and a restructuring.
"As they interpret FASB and SEC guidelines, it's okay to show the numbers but they should never do the (pro forma) arithmetic," an analyst said, referring to the Financial Accounting Standards Board, an accounting rulemaking body.
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