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Accounting questions dog IBM
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February 15, 2002: 1:20 p.m. ET
Report says $300M gain from sale of unit was key to topping 4Q forecasts.
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NEW YORK (CNN/Money) - Shares of IBM fell more than 4 percent early Friday on the heels of a published report that questioned the way the company reported its fourth-quarter profit.
At issue is the way IBM (IBM: down $5.00 to $102.89, Research, Estimates) accounted for a $300 million gain from the sale of its optical transceiver business, which it sold to JDS Uniphase (JDSU: Research, Estimates) near the end of the fourth quarter.
A report published in Friday's edition of the New York Times pointed out that the company treated the gain as an offset to its operating expenses, rather than as other income, and suggested that the sale could have raised its earnings per share by as much as 12 cents in the period.
On Jan. 17, IBM reported a better than expected profit for its fourth-quarter despite lower revenue in most of its divisions. Executives attributed the earnings upside to improved productivity and higher sales of certain products. The company reported earnings of $2.3 billion, or $1.33 per diluted share, a penny better than the consensus earnings-per-share forecast of analysts surveyed by results tracker First Call.
Gains from sales of business units normally are broken out as non-recurring items and not considered by analysts when weighing whether a company beats, meets or misses its estimates.
In the wake of the collapse of Enron Corp. following disclosures that accounting irregularities led to overstatement of income, investors have taken a new, harder look at accounting practices and the validity of earnings reports.
IBM issued a statement Friday defending its actions in relation to the sale, saying it properly disclosed the sale of the unit to JDS Uniphase, and that its accounting of the transaction is proper.
"IBM's accounting is conservative and fully compliant with all regulatory standards," the statement said.
Although the proceeds of the sale were not disclosed in the fourth-quarter earnings press release, executives did mention it in a teleconference with analysts afterward.
IBM views the transaction as a example of how it recovers investments in intellectual property, similar to licensing royalty payments which contribute to over $1 billion to income each year. Executives told analysts that they had included the sale as part of that category.
"This transaction does not appear to be unusual," Merrill Lynch analyst Steven Milunovich told his clients in a research note late Friday morning. He said the transaction contributed roughly 8 cents per share to IBM's total earnings for the quarter.
"We believe that the accounting seems to proper and the company reports that it has been reviewed and approved by its auditors," Milunovich said.
At the same time, the analysts pointed out that while IBM executives did point out that the sale of the optical transceiver business was included with intellectual property income and licensing royalties, they could have done more to stress the magnitude of the transaction.
The company has yet to file its comprehensive quarterly financial report with the Securities and Exchange Commission. That filing normally trails the public release of financial information. 
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