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