Some companies rely on non-GAAP EPS gimmicks to make their earnings looks pretty; others rely on stock buybacks to reduce the number of shares outstanding; a third group of companies merely adds back everything it believes is not part of SG&A to boost its bottom line… and then there is IBM which does all three at unprecedented levels.
Recall that last quarter, just as IBM’s revenue was plunging, the company “beat” courtesy of a collapsing tax rate. This is what we reproted last quarter:
While IBM had used 22.3% for its tax rate a year ago, it decided to use a far lower effective tax rate in the current quarter, only 12.5%. The non-GAAP tax rate was also sharply lower. So using a 12.5% tax rate, the company’s GAAP PES was $4.59. If, instead, IBM had used the same tax rate as a year ago, its EPS would have been about 52 cents lower, ot 4.07, resulting in non-GAAP EPS of $4.33, a big miss to expectations.
Fast forward to today, when IBM reported its Q1 results.
First, the top line, was another disaster, with revenue printing at $18.7 billion, which may have been a beat to sharply lowered expectations of $18.3 billion, but was nonethelss the worst quarter in IBM history going back all the way to Q1 2002 – in other words, the lowest quarterly revenue in 14 years.
It was also the 16th consecutive quarter of declining revenues, with Q1 dropping 5% compared to a year ago.
Going down the income statement things were not any better, and IBM’s reported gross profit of 46.5% was 1.7% lower than the 48.2% reported a year ago. Even the pro forma adjusted margin of 47.5% was worse than the 48.6% expected.
Which brings us to Net Income, and yet another example of IBM abusing the oldest accounting trick in the book, because whereas IBM’s Net Income plunged by $2 billion from $3 billion in Q1 2015 to just $1 billion this quarter (a paltry 5.5% pretax margin), the company miraculously reported an EPS of $2.35, wilfly beating expectations of a $2.09 print.
There is just one problem with this.
Just like last quarter, when IBM’s merely “trimme” its tax rate, this quarter it went “full retard.” This is what IBM said:
IBM’s tax rate for the first quarter includes a $1.0 billion refund of previously paid non-U.S. taxes, plus interest, for a total benefit of $1.2 billion. This is the result of a long-standing tax matter which was resolved in the company’s favor in February and was disclosed in the 2015 IBM Annual Report. The impact of the tax refund on the company’s first-quarter net income was largely equivalent on an after-tax basis to the expenses for workforce transformation, real estate actions, and actions in Latin America.
Bottom line: instead of using the 19.5% effective tax rate from a year ago, IBM ended up using a tax rate of, wait for it, -95.1%. This means that its after tax net income was double the pre-tax amount.
So what would have happened had IBM used its historical tax rate?
Instead of a $2.09 GAAP EPS, it would have reported a paltry 87 cents in EPS.
Oops.
And while the stock initially jumped in the after hours, it appears that even the algos are no longer dumb enough to be fooled by the oldest accounting trick in the book, even when the perpetrating company takes it to new, previously unseen levels.
But perhaps the biggest tell, and the loudest indication that IBM is preparing for a tubulent future is that its cash on hand increased $7.7 billion to $14.9 billion at the end of March, as a result of of a jump in long-term debt from $33.4BN to $40.3BN. Just why the sudden need to hoard up on cash?
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