Big Blue's blues continued yesterday as the computer giant's $8.9 billion of restructuring charges triggered a Standard & Poor's Corp. downgrade and a Moody's Investors Service negative review.
"It was certainly larger than the Street was expecting, but it was in line with our expectations here as an appropriate measure." Craig S. Fitt, an assistant vice president at Moody's, said of the charges.
On International Business Machines Corp.'s intermediate issues, yield spreads to comparable Treasury issues widened by about seven to eight basis points yesterday. One trader noted that IBM'S board of directors had authorized the issuance of up to $1 billion of new debt. The board also authorized up to $1 billion of asset securitization. IBM'S stock closed at 45 5/8, up 3 1/4 points.
A second trader said the two-notch Standard & Poor's downgrade to A from AA-minus was in line with his firm's expectations.
"It was pretty much what we were looking for," he said.
That $8.9 billion in pre-tax charges, which includes the cost of trimming 35,000 more jobs, was the major culprit in IBM'S $8 billion net after-tax loss for the second quarter. That loss compares with $734 million of earnings a year earlier. Without the restructuring charge, IBM'S 1993 second-quarter net loss would have tot million, an IBM release says.
"Getting IBM'S cost and expense structure in line with the revenue realities of our industry -- right-sizing the company -- is my highest near-term priority at IBM," IBM chairman Louis V. Gerstner Jr. said in a press release issued yesterday.
Yesterday's restructuring charges will cover cuts in IBM'S worldwide work force, manufacturing capacity, office space, and related expenses. The actions are expected to save IBM $4 billion annually when fully implemented, the release says. Some of the workforce reductions could be accomplished through layoffs, an IBM spokesman said.
Also yesterday, IBM'S board of directors voted to slash the quarterly cash dividend on common stock to 25 cents a share 54 cents a share, the release says.
"The board's decision to reduce the common stock dividend will conserve cash at a time when we're making the difficult decisions necessary to improve shareholder value over the long term," Gerstner said in the release.
While Gerstner said yesterday's measures are intended to help IBM reach its goals, he said, "If our current view of future industry revenue and demand proves incorrect, we will have to take further actions. "
While the effects of yesterday's restructurings will be felt worldwide and in all parts of the company, the most job reductions are expected to occur outside the United States.
Year to date, about 50,000 employees worldwide have left or have committed to leaving the company in 1993. Yesterday's reductions will cut an additional 35,000 employees.
However, continued growth in IBM'S services businesses will mean some limited hiring. Consequently, IBM'S worldwide employees should total about 255,000 at yearend 1993 and 225,000 at yearend 1994.
The $8.9 billion pre-tax restructuring charge includes $6 billion for job cuts and $2.9 billion to trim capacity, office space, and related expenses.
Nicholas D. Riccio, a Standard & Poor's Corp. managing director, said IBM leadership this time appears to have been more conservative in assessment of its cost stucture.
"These people are cognizant of what happened last year under [former chairman John F.] Akers' regime," Riccio said. "I don't think they want to come back to the market in three or four months and say whoops."'
Under Akers, IBM announced $4 billion of third-quarter charges relating to restructuring in 1992 and six weeks later announced another $6 billion in restructuring charges, he said.
Riccio noted Gerstner's comments that the company would be willing to undertake additional belt-tightening measures if the need arises.
"Right now, business conditions look like they will be difficult for the balance of the year," Riccio said.
Standard & Poor's lowered senior debt ratings on IBM Corp., IBM Credit Corp., IBM International Finance N.V., and IBM Japan Ltd. to A from AA-minus.
The rating agency also down-graded IBM'S preferred stock rating to A-minus from A-plus, and IBM and IBM Credit Corp.'s commercial paper ratings to A-1 from A-1 -plus. Approximately $21 billion of debt is affected.
The rating outlook is negative.
"The downgrades reflect the financial impact of the most recent round of restructuring charges, expected to total $8.9 billion, and continued uncertainties about the timing and magnitude of the company's turnaround. "
Standard & Poor's had indicated in May that the company's ratings would be cut if "material" additional restructing charges were taken this year.
"The $8.9 billion of charges announced [yesterday], combined with the $11.4 billion taken in 1992, has reduced the company's equity base by almost 50% since the end of 1991," a Standard & Poor's release says.
"Additionally, while efforts to bring the cost structure more in line with business conditions represent a longer-term positive factor, the cash outflow associated with these charges has reduced flexibility." the release says.
Riccio noted that the rating assumes the company turns a modest profit in 1994. If that is not the case, the rating will be reviewed for a possible downgrade, he said.
For its part, Moody's is reviewing the short-term and long-term debt ratings and preferred stock ratings of IBM, IBM Credit, IBM International Finance, IBM Associates Limited Partnership, and IBM Japan Limited for a possible downgrade.
"Moody's ratings review was triggered by IBM'S announcement today that it is taking an additional restructuring charge of approximately $9 billion pre-tax to cover further work-force reductions which are weighted toward positions outside the United States costing $6 billion and capacity reductions of $3 billion."
Ratings under review are: IBM'S Prime-1 short-term debt, Al senior long-term debt; a2 preferred stock, and (P)A1 shelf registration; IBM Credit's Prime-1 short-term debt, A1 senior long-term debt; and (P)A 1 shelf registration; IBM International Finance's Prime-1 short-term debt and A1 senior long-term debt; IBM Associates Limited Partnership's Prime-1 short-term debt; and IBM Japan's A1 senior long-term debt.
In other news, Circle K Corp. yesterday said the company had officially emerged from Chapter 1 1 bankruptcy protection.
Circle K's reorganization makes no provision for the company's bondholders or shareholders.
In a press release, Bart A. Brown, the company's chairman of the board, announced that Circle K had sold the company to CK Acquisitions earlier yesterday for $399.5 million in cash and assumption of some liabilities. Circle K becomes a private company with the sale.
The closing came after an appeals court refused a request by Circle K bondholders to delay implementation of a bankruptcy court judge's confirmation order that endorsed Circle K's reorganization plan.
"This is the day we have been waiting for," Brown said. "I think I speak for everyone in the company when I say we are elated. We are glad to have the chance to compete again without the constraints and inefficiencies of the bankruptcy process."
In secondary trading yesterday, high-yield bonds finished a quiet day unchanged. Spreads on high-grade issues were also unchanged.