fessing up at big blue
February 19, 2002
IBM Plans to Detail Expense Offsets
As Investors Demand Full Disclosure
By WILLIAM M. BULKELEY
Staff Reporter of THE WALL STREET JOURNAL
International Business Machines Corp., responding to investor demands for greater accounting disclosure, plans to start releasing details of financial income that it previously buried in accounting statements as offsets to its expenses.
John Joyce, IBM's chief financial officer, said in an interview that its past practice has been correct under accounting guidelines. However, he said, "our shareholders and analysts have been asking for more."
Among other things, he said IBM will expand the information it provides about intellectual-property income, the impact of gains and losses from its investments in other companies, the effect of amortization of goodwill from acquisitions, gains on sales of real estate and the impact of income from IBM's overfunded pension plan. Mr. Joyce said the disclosures will be included in IBM's annual report to the Securities and Exchange Commission, which is due to be filed next month, and "I'll probably include it in the Q [the quarterly 10-Q report] as well."
Since the Enron Corp. debacle, big companies' financial-disclosure practices have been increasingly contentious. Even blue-chip companies such as IBM and General Electric Co. have experienced stock declines due to investor concerns about the opaqueness of their earnings reports. During the past week companies ranging from GE and PepsiCo Inc. to Krispy Kreme Doughnuts Inc., have promised to add more detailed disclosures in their financial reports.
IBM has been criticized for using income from such items as sales of intellectual property, pension-fund gains and real-estate sales to reduce its reported costs. Generally, Big Blue reports such income as an offset against its expenses listed under the "sales, general and administrative" category, or SG&A, which typically encompasses such normal expenses as salaries, advertising costs and office rent. That has the effect of lowering its reported SG&A spending, which some accounting experts say makes the company appear to be more efficient and cost-conscious than it is.
Last year, IBM reported it spent $15.49 billion on SG&A, down 1% from $15.64 billion the prior year. Put another way, IBM's reported SG&A spending last year was about 18% of its total revenue, similar to SG&A levels at companies considered less bureaucratic, such as Compaq Computer Corp. and Hewlett-Packard Co.
Friday, IBM's stock fell $5 to $102.89 in the wake of a New York Times report that its fourth-quarter earnings met expectations only because of a gain of $300 million, or nine cents a share, from the sale of its optical transceiver business to JDS Uniphase Corp., an optical telecommunications-equipment supplier with dual headquarters in Ottawa and San Jose, Calif. IBM's drop accounted for one-third of the 98.95-point drop in the Dow Jones Industrial Average that day.
IBM hadn't previously disclosed the financial impact of its gain on the transaction, which was used to reduce its SG&A expenses in the fourth quarter. IBM also didn't put out a press release announcing the sale of the unit to JDS Uniphase.
Steven Milunovich, an analyst with Merrill Lynch, said he believed IBM's treatment of the income was consistent with its past practice, but, "Our only concern would be that the company could have done more to call out the magnitude of the transaction."
Mr. Joyce said IBM felt the sale to JDS Uniphase was adequately disclosed because JDS had issued several press releases that IBM had approved. Mr. Joyce also said he had mentioned the sale as part of IBM's income from sales and licensing of intellectual property during his earnings call with analysts in January although he didn't mention the magnitude of the gain.
The IBM finance chief said the $300 million gain made up the bulk of the company's intellectual-property income in the fourth quarter. IBM said its total intellectual-property income was about $400 million in the fourth quarter both last year and in 2000.
Mr. Joyce also for the first time provided a breakdown of IBM's income from two categories of intellectual property, which were used to reduce its SG&A totals. For the first category, sales of intellectual property (including the disposal of the optical transceiver unit), IBM recognized gains of about $700 million during 2001, down from about $800 million the prior year. In the second category, income from licensing IBM's patents on semiconductors and other products, Big Blue's income totaled about $500 million in 2001, down from about $600 million the prior year, Mr. Joyce said.
Even if IBM discloses more about how it calculates SG&A, some critics say the company is still being too aggressive. Gains from asset disposals, such as the $300 million income from the sale to JDS Uniphase, should be treated as one-time gains, these critics say. Mr. Joyce disagrees, saying such gains are routine for Big Blue and don't require separate disclosure. He said IBM has included gains from intellectual property in SG&A rather than as "other income" for 10 years and continues to for the sake of consistency.
Some accounting experts say that including income items in SG&A can be confusing. "There's usually a presumption that [SG&A] is only expenses" says J. Edward Ketz, an accounting professor at Pennsylvania State University. However, Lawrence Revsine, an accounting professor at Northwestern University and co-author of a popular text on financial reporting, says in general "businesses are always selling off product lines, brands and intellectual property, and there's nothing wrong with putting them" in operations rather than as one-time items.
Write to William M. Bulkeley at bill.bulkeley@wsj.com1 |
