IBM Profit Down 18.1%; Restructuring Blamed

International Business Machines Corp. said Friday that its second-quarter profit fell 18.1%, but would have risen 12.7% if not for the expense of a streamlining plan.

Last month, IBM announced a $600-million plan to consolidate manufacturing and headquarters operations that it said would probably lead to the resignation or retirement of 3,000 to 4,000 employees.

The company employs 390,000 people worldwide.

Although the company has succeeded in cutting costs, it has had less luck drumming up more business. Revenue rose 6.3% in the second quarter after an unusual blip of 10% growth in the first quarter.

“Our business continues to improve as a result of our actions to be more competitive, and customer response to our recent product announcements has been positive,” John F. Akers, IBM’s chairman and chief executive, said in a statement.

IBM said its profit fell to $964 million from $1.18 billion a year earlier. Revenue rose to $13.6 billion from $12.8 billion a year earlier.

For the first six months of the fiscal year, IBM said its profit rose 12.7% to $2.21 billion from $1.96 billion a year earlier. Revenue rose 8% to $25.3 billion from $23.5 billion.

The cost of the restructuring, which IBM says will eventually benefit its profits, was charged to the second quarter and reduced earnings for the period by $364 million.

The charge for the plan, announced in late June, covered the consolidation of certain manufacturing plants to reduce costs and help lift profits.

Earnings for the first quarter of 1988 were restated to reflect a change in accounting standards for deferred taxes. That change added 57 cents a share to first-quarter earnings, largely offsetting the negative effect of the restructuring charge on first-half results.

“It’s a solid report,” said Steven Cohen, an analyst for Gartner Group in Stamford, Conn. “The growth in expenses is slowing without these special charges.”

Aside from the special charge, IBM held the growth in costs and expenses to 5.8% in the second quarter, less than revenue growth, Cohen said.

He predicted that revenue would grow strongly next year with new products such as the F series of 3090 mainframe computers, the new Application System-400 mid-range models and improved operating software for its new personal computer line.

“It’s been a tough five years for the company, but it looks like the pieces have fallen in place for a record 1989,” he said.

Joseph Battipaglia, an analyst for Gruntal & Co., is also predicting IBM’s 1989 earnings per share will exceed the record of $10.77 set in 1984. But he said revenue growth is likely to remain subdued.

“I think that is a situation that may well be with them until the next significant leap in price and performance in the industry, and we really haven’t had any,” he said.

Akers, in his written statement, said, “Our ongoing drive for efficiency and competitiveness and our continuing commitment to customer partnerships give us confidence for the future.”

Analysts said second-quarter revenue likely suffered as customers chose to delay purchases until they could take a look at the new mid-range and mainframe offerings.

Second-half results will also benefit from IBM’s tight control over costs and expenses, but further cuts may be needed, said analyst Ulric Weil of Weil & Associates. “The company’s overhead structure is still out of line with the (amount) of business they are doing in the U.S.,” he said.

Investors, apparently focusing on evidence that IBM was controlling costs better, bid the stock up 75 cents to $125.50 a share in consolidated New York Stock Exchange trading.