REVENUE, PROFIT, AND VAPOR PROFIT AT IBM 1996-2003
While revenue and profit have been stagnant, vapor profit grew
Vapor profit is the paper boost to IBM income from pension fund accounting rules. It is purely an accounting
rule treatment: no money is transferred to IBM from the pension fund. Vapor profit is found on p. 112 of
the 2003 annual report, adding US and non-US plans it was $692 + $111 million = $803 million.
The IBM pension fund holds $68.2 billion for retirees (p. 113 of the 2003 annual report). In years past this fund
was used to attract and retain highly qualified employees--providing pension at little or no cost to the company.
Pension works to attract and retain employees only if they can trust that it will be there when they retire. When
IBM converted to cash balance plan in 1999 it destroyed the trust essential for IBM to benefit from its pension
plan. Thus, IBM gave up an enormous competitive advantage.
In the table below, the after tax profit column is sudivided into "vapor profit" and "all other profit."
7 year cumulative growth is the 2003 figure minus the 1996 figure for each column.
4 year cumulative growth is the 2003 figure minus the 1999 figure for each column.
		Source: IBM annual reports
		Dollar figures in millions of dollars						all other
					pretax	after tax	vapor	after tax
			year	revenue	profit	profit	profit	profit
			1996	$75,947.00	$8,587.00	$5,429.00	$157.00	$5,272.00
			1997	$78,508.00	$9,027.00	$6,093.00	$377.00	$5,716.00
			1998	$81,667.00	$9,040.00	$6,328.00	$550.00	$5,778.00
			1999	$87,548.00	$11,757.00	$7,712.00	$799.00	$6,913.00
			2000	$88,396.00	$11,534.00	$8,093.00	$1,266.00	$6,827.00
			2001	$85,866.00	$10,953.00	$7,723.00	$1,450.00	$6,273.00
			2002	$81,186.00	$5,769.00	$3,579.00	$1,199.00	$2,380.00
			2003	$89,131.00	$10,874.00	$7,613.00	$803.00	$6,810.00
7 year cumulative growth				$13,184.00	$2,287.00	$2,184.00	$646.00	$1,538.00
7 year % growth				17.36%	26.63%	40.23%	411.46%	29.17%
7 year average annual growth rate				2.31%	3.43%	4.95%	26.26%	3.72%
4 year cumulative growth				$1,583.00	-$883.00	-$99.00	$4.00	-$103.00
4 year % growth				1.81%	-7.51%	-1.28%	0.50%	-1.49%
4 year average annual growth rate				0.26%	-1.11%	-0.18%	0.07%	-0.21%
Revenue and profit have not increased since 1999.
Revenue growth has averaged only an anemic 2.3% per year since 1996, little more than inflation.
Profit growth (other than vapor profit) averaged only 3.7% per year since 1996.
Vapor profit from the pension fund accounting rule was for a time IBM's supercharged growth engine.
Executives boosted vapor profit an average of 26.26% per year, a 411.46% jump since 1996.
The data shows that between 1996 and 2001, IBM executives focused their efforts on this and other smoke
and mirrors schemes instead of building revenue and profit from operations. After peaking in 2001
at $1.45 billion, vapor profit declined to $1.2 billion in 2002 and to $803 million in 2003. Still, vapor profit
accounted for 10.5% of IBM's after tax profit and 7.4% of IBM's pretax profit in 2003.
Former IBM CEO Lou Gerstner boosted vapor profit in part by slashing earned retirement pay for employees
with the cash balance plan conversion. Since vapor profit is just an accounting rule treatment, no real money
was transferred to IBM, there was no real benefit for shareholders who read the footnotes and understood.
Executive pay is tied to the total profit report, which includes the vapor profit. Thus, vapor profit boosts executive
pay as much as profit from operations. By slashing pensions with the cash balance plan Gerstner boosted
his own pay. His self-serving action hurt employes, the company, and shareholders.
IBM implemented a special retirement plan for top executives (2003 annual report p.112: $132 + $100 million).
Thus, IBM executives did not reduce their own retirement pay when they slashed the retirement pay of others.
Thousands of talented employees quit to join the competition because of the cash balance plan conversion.
Those remaining lost trust that company officials would tell the truth and keep the promises.
However, the whole rotten game came crashing down when, on July 31, 2003, a federal court declared IBM's
cash balance plan conversions illegal for violating age discrimination laws. The court is now considering how
much IBM will have to pay to reimburse its employees for slashed pensions.
Conclusion: IBM executives failed to grow revenue or profit significantly these past 4 years or
7 years. Executives illegally slashed earned pensions from loyal employees, harming employees and
seriously eroding morale. Shareholders did not benefit. Only executives gained. And the court stated
that IBM executives did it "with open eyes:" they knew it was illegal when they converted to cash
balance plan in 1999.
For further information: James Marc Leas, 802 864-1575, 802 734-8811 (cell), jolly39@juno.com
James Leas is proponent of Resolution 6 to be voted at IBM's stockholder meeting April 27 in Providence, RI.