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Pension deal bites into IBM profit

The tech bellwether racks up a healthy rise in net income for the third quarter, despite taking a hit from a legal settlement.

Technology industry bellwether IBM on Monday reported a healthy rise in net income in the third quarter, but its overall results were hampered by a $320 million legal settlement related to its employee pension plan.

The Armonk, N.Y.-based company also increased its full-year forecast of earnings per share by 3 cents to $4.99 and took a cautiously optimistic tone about future spending on technology by corporations.

"This pattern of moderate expansion continues," Mark Loughridge, IBM's chief financial officer, said in a conference call on Monday. He added that corporate spending is growing at about 4 percent or 5 percent per year--consistent with the second quarter of 2004 and the best since 2000.

For the third quarter ended Sept. 30, IBM said that earnings were $1.8 billion, or $1.06 per share, after the pension-related charge is taken into account. That compares with $1.79 billion for the same period last year--a rise of 1 percent. Without the charge, third-quarter income would have been $2 billion, an increase of 12 percent.

Analysts surveyed by First Call had expected IBM to report earnings of $1.14 per share. Without the one-time charge, the company would have reported earnings of $1.17 per share.

In September, IBM said that it had agreed to pay $320 million to settle portions of a lawsuit in which workers claimed the company had discriminated against older employees when it made changes to its pension plan in the 1990s. As part of that settlement, Big Blue's potential liability for outstanding related claims was limited to $1.4 billion.

Overall revenue in Europe was flat compared in constant currency with the same quarter last year, Loughridge said. In contrast, revenue from sales in the Asia-Pacific region grew 6 percent and in the Americas, climbed by 7 percent.

IBM's Global Services consulting arm, which represents nearly half of the company's business, had revenue growth of 5 percent. Bookings for services engagements during the last quarter were about $10.5 billion, or $9.8 billion in constant currency--about flat year over year, Loughridge said.

He contended, however, that IBM's investment in emerging services--notably, in its business process outsourcing (BPO) initiative--will offset any short-term weakness in its services earnings. IBM is trying to expand its business services to other forms of outsourcing, such as human resources and accounting.

"We are very confident in our (services) business, not only in the fourth quarter, but in 2005," Loughridge said.

The hardware division showed a 9 percent increase in revenue, with zSeries mainframes and xSeries x86-based servers racking up the fastest growth in sales. In addition, IBM's Personal Systems division was profitable for the second straight quarter.

Big Blue's software business, which declined in the second quarter, returned to growth with a 1 percent rise in revenue, when adjusted for currency. IBM's WebSphere, Tivoli and DB2 business lines posted double-digit returns, while revenue at its Lotus division slid 6 percent, and sales of operating systems dropped two percent.

IBM's Global Financing division saw its revenue decline 11 percent in the quarter.

At the close of regular trading, IBM shares were up $1.07 to $85.92.