Printer Friendly

IBM BOOKS CHARGE WITHOUT HURTING CREDIT QUALITY, FITCH SAYS -- FITCH FINANCIAL WIRE --

NEW YORK, March 8 /PRNewswire/ -- International Business Machine's (IBM) plan to take approximately $800 million in annual restructuring charges will not have a material impact on its credit quality as the company has considerable ability to fund the charges from annual operating cash flow. Moreover, the company's large existing cash balances relative to its core debt leverage provide an added measure of debtholder protection. Operating cash flow, as measured by EBITDA in 1995, was close to $15.0 billion. At year end IBM reported cash and equivalents totaling about $8.0 billion and core debt of $2.2 billion.

IBM's senior debt and commercial paper ratings were upgraded in December 1995 to 'A+/F-1+' from 'A/F-1', respectively. The upgrade considered the cash outlays related to the company's ongoing restructuring program, as well as the concerns surrounding IBM's ability to successfully integrate recent acquisitions.

IBM's decision to report restructuring charges as a cost of doing business highlights the difficulty these charges often create with respect to evaluating a company's true earnings performance. Historically, IBM and other companies have accounted for future restructurings by taking multiple charges to earnings over time. This approach has made it difficult to assess long-term earnings trends on a consistent basis as the quality of reported earnings has deteriorated. By treating restructuring charges as a regular annual charge to operating earnings, IBM acknowledges that in a competitive economy, corporate restructurings and related costs are not one time events; rather, they represent a continuous process for major corporations.

For many companies, significant annual restructuring charges have become a regular occurrence. Over the last five years the thirty companies that comprise the Dow Jones Industrial Average have taken close to $50.0 billion in after-tax charges to earnings. Companies generally advocate analysts to ignore the impact of these charges while the equity market typically reacts favorably by boosting the company's stock price.

In assessing credit quality, the timing and magnitude of the cash flows associated with an event such as restructuring charges is far more important than the method of expense recognition in the financial statements. As a result, a company's credit profile and debt rating is only affected to the extent its ability to service debt going forward is materially altered.

Restructuring charges such as asset write-downs only serve to reduce reported asset values, and have no impact on future cash flows. The write-down of impaired assets represents failed capital expenditures of a prior period. As such, the asset impairment would already be reflected in a company's free cash flow as well as cash flow-based measures of leverage (debt-to-cash flow) and coverage (cash flow to interest). Restructuring charges related to workforce reduction, plant shutdowns, and environmental liabilities, however, can create substantial liabilities, which must be serviced in a relatively short period of time. Depending on the cash flow characteristics of the company, it may have to incur additional debt to fund these obligations. Fitch focuses on the magnitude and stability of the company's internally generated cash flow and its ability to cover these obligations without detracting from claims of existing creditors.
 -0- 3/8/96


/CONTACT: Thomas W. Hoens, CPA, 212-908-0569 or Keith B. Foley, 212- 908-0572, both of Fitch Financial Wire/

CO: Fitch Financial Wire ST: New York IN: SU: RTG

KW -- ATF004 -- 1529 03/08/96 10:07 EST
COPYRIGHT 1996 PR Newswire Association LLC
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:PR Newswire
Date:Mar 8, 1996
Words:554
Previous Article:STERLING SOFTWARE PRICES INITIAL PUBLIC OFFERING OF SHARES OF STERLING COMMERCE, INC. COMMON STOCK
Next Article:UNION PLANTERS TO ACQUIRE LEADER FINANCIAL CORPORATION
Topics:

Terms of use | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters