Which brings us to Net Income, and yet another example of IBM abusing the oldest accounting trick in the book, because whereas IBM's Net Income plunged by $2 billion from $3 billion in Q1 2015 to just $1 billion this quarter (a paltry 5.5% pretax margin), the company miraculously reported an EPS of $2.35, wildly beating expectations of a $2.09 print.
There is just one problem with this.
Just like last quarter, when IBM's merely "trimmed" its tax rate, this quarter it went "full retard." This is what IBM said:
IBM’s tax rate for the first quarter includes a $1.0 billion refund of previously paid non-U.S. taxes, plus interest, for a total benefit of $1.2 billion. This is the result of a long-standing tax matter which was resolved in the company’s favor in February and was disclosed in the 2015 IBM Annual Report. The impact of the tax refund on the company’s first-quarter net income was largely equivalent on an after-tax basis to the expenses for workforce transformation, real estate actions, and actions in Latin America.
Bottom line: instead of using the 19.5% effective tax rate from a year ago, IBM ended up using a tax rate of, wait for it, -95.1%. This means that its after tax net income was double the pre-tax amount.
So what would have happened had IBM used its historical tax rate?
Instead of a $2.09 GAAP EPS, it would have reported a paltry 87 cents in EPS.