-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IalrMDmsqEiKjd+rF91NoqKwr9G92qXEV22aCtq+sPLycYfb8dNCvZ8fjXWPLyUB v7SCoL/8GOGo9NJIg8JaHw== 0000912057-97-027788.txt : 19970815 0000912057-97-027788.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-027788 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL BUSINESS MACHINES CORP CENTRAL INDEX KEY: 0000051143 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 130871985 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02360 FILM NUMBER: 97660451 BUSINESS ADDRESS: STREET 1: ONE OLD ORCHARD RD CITY: ARMONK STATE: NY ZIP: 10504 BUSINESS PHONE: 9147651900 MAIL ADDRESS: STREET 1: ONE OLD ORCHARD RD CITY: ARMONK STATE: NY ZIP: 10504 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1997 1-2360 ----------------------- (Commission file number) INTERNATIONAL BUSINESS MACHINES CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) New York 13-0871985 ---------------------- ------------------------------------ (State of incorporation) (IRS employer identification number) Armonk, New York 10504 -------------------------------------- ---------- (Address of principal executive offices) (Zip Code) 914-499-1900 ------------------------------ (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been sub- ject to such filing requirements for the past 90 days. YES X NO ------- -------- . The registrant has 982,261,297 shares of common stock outstanding at June 30, 1997. INDEX _____ Page ____ Part I - Financial Information: Item 1. Consolidated Financial Statements Consolidated Statement of Earnings for the three and six months ended June 30, 1997 and 1996 . . . . . . . . . . 1 Consolidated Statement of Financial Position at June 30, 1997 and December 31, 1996 . . . . . . . . . . 2 Consolidated Statement of Cash Flows for the six months ended June 30, 1997 and 1996 . . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition . . 7 Part II - Other Information . . . . . . . . . . . . . . . . . . 15 ITEM 1. INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(Dollars in millions except Three Months Ended Six Months Ended per share amounts) June 30 June 30 ___________________ ____________________ 1997 1996 1997 1996 Revenue: ________ ________ ________ ________ Hardware sales $ 8,616 $ 8,576 $ 16,377 $ 16,284 Services 4,612 3,734 8,707 6,932 Software 3,084 3,195 6,034 6,232 Maintenance 1,632 1,754 3,235 3,503 Rentals and financing 928 924 1,827 1,791 ________ ________ ________ ________ Total revenue 18,872 18,183 36,180 34,742 Cost: Hardware sales 5,559 5,715 10,803 10,720 Services 3,664 2,959 6,961 5,536 Software 907 1,009 1,819 1,921 Maintenance 873 915 1,726 1,827 Rentals and financing 468 394 878 778 ________ ________ ________ ________ Total cost 11,471 10,992 22,187 20,782 ________ ________ ________ ________ Gross profit 7,401 7,191 13,993 13,960 Operating expenses: Selling, general and administrative 3,958 3,889 7,642 7,586 Research, development and engineering 1,221 1,116 2,290 2,207 Purchased in-process research and development -- -- -- 435 ________ ________ ________ ________ Total operating expenses 5,179 5,005 9,932 10,228 Operating income 2,222 2,186 4,061 3,732 Other income, principally interest 137 193 322 343 Interest expense 179 205 351 354 ________ ________ ________ ________ Earnings before income taxes 2,180 2,174 4,032 3,721 Income tax provision 734 827 1,391 1,600 ________ ________ ________ ________ Net earnings 1,446 1,347 2,641 2,121 Preferred stock dividends and transaction costs 5 5 10 10 ________ ________ ________ ________ Net earnings applicable to common shareholders $ 1,441 $ 1,342 $ 2,631 $ 2,111 ======== ======== ======== ======== Net earnings per share of common stock $ 1.46 $ 1.26* $ 2.64 $ 1.96* Average number of common shares outstanding (millions) 986.9 1,067.8* 995.1 1,078.2* Cash dividends per common share $ .20 $ .175* $ .375 $ .30*
* Adjusted to reflect a two-for-one stock split effective May 9, 1997. (The accompanying notes are an integral part of the financial statements.) - 1 - INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) ASSETS
At June 30 At December 31 (Dollars in millions) 1997 1996 ___________ ______________ Current assets: Cash and cash equivalents $ 6,503 $ 7,687 Marketable securities - at cost, which approximates market 358 450 Notes and accounts receivable - net of allowances 16,060 17,446 Sales-type leases receivable 5,725 5,721 Inventories, at lower of average cost or market Finished goods 1,602 1,413 Work in process 4,224 4,377 Raw materials 87 80 ________ ________ Total inventories 5,913 5,870 Prepaid expenses and other current assets 4,080 3,521 ________ ________ Total current assets 38,639 40,695 Plant, rental machines and other property 42,031 41,893 Less: Accumulated depreciation 24,384 24,486 ________ ________ Plant, rental machines and other property - net 17,647 17,407 Software, less accumulated amortization (1997, $12,367; 1996, $12,199) 1,037 1,435 Investments and sundry assets 21,496 21,595 ________ ________ Total assets $ 78,819 $ 81,132 ======== ========
(The accompanying notes are an integral part of the financial statements.) - 2 - INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in millions except At June 30 At December 31 per share amounts) 1997 1996 ___________ ______________ Current liabilities: Taxes $ 2,494 $ 3,029 Accounts payable and accruals 16,037 18,014 Short-term debt 14,028 12,957 ________ ________ Total current liabilities 32,559 34,000 Long-term debt 11,675 9,872 Other liabilities 13,111 14,005 Deferred income taxes 1,365 1,627 ________ ________ Total liabilities 58,710 59,504 Stockholders' equity: Preferred stock - par value $.01 per share 253 253 Shares authorized: 150,000,000 Shares issued: 1997 - 2,597,361 1996 - 2,610,711 Common stock - par value $.50 per share 8,290 7,752 Shares authorized: 1,875,000,000 Shares issued: 1997 - 1,029,636,294 1996 - 1,018,141,084* Retained earnings 13,411 11,189 Translation adjustments 1,516 2,401 Treasury stock - at cost (3,609) (135) Net unrealized gain on marketable securities 248 168 _________ ________ Total stockholders' equity 20,109 21,628 ________ ________ Total liabilities and stockholders' equity $ 78,819 $ 81,132 ======== ========
* Adjusted to reflect a two-for-one stock split on May 9, 1997. (The accompanying notes are an integral part of the financial statements.) - 3 - INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30: (UNAUDITED) (Dollars in millions) 1997 1996 ________ _______ Cash flow from operating activities: Net earnings $ 2,641 $ 2,121 Adjustments to reconcile net earnings to cash provided from operating activities: Effect of restructuring charges (216) (865) Depreciation 1,861 1,824 Amortization of software 548 688 Purchased in-process research and development 36 435 Gain on disposition of fixed and other assets (70) (163) Changes in operating assets and liabilities (1,866) (1,297) ________ _______ Net cash provided from operating activities 2,934 2,743 ________ _______ Cash flow from investing activities: Payments for plant, rental machines and other property, net of proceeds (2,544) (1,724) Investment in software (140) (125) Purchases of marketable securities and other investments (614) (710) Proceeds from marketable securities and other investments 538 232 Acquisition of Tivoli Systems, Inc. - net - (716) ________ _______ Net cash used in investment activities (2,760) (3,043) ________ _______ Cash flow from financing activities: Proceeds from new debt 3,261 2,279 Payments to settle debt (2,147) (2,474) Short-term borrowings less than 90 days - net 1,066 1,938 Common stock transactions - net (3,043) (2,319) Cash dividends paid (383) (333) ________ _______ Net cash used in financing activities (1,246) (909) ________ _______ Effect of exchange rate changes on cash and cash equivalents (112) (154) ________ _______ Net change in cash and cash equivalents (1,184) (1,363) Cash and cash equivalents at January 1 7,687 7,259 ________ _______ Cash and cash equivalents at June 30 $ 6,503 $ 5,896 ======== ======= (The accompanying notes are an integral part of the financial statements.) - 4 - Notes to Consolidated Financial Statements ------------------------------------------ 1. In the opinion of the management of International Business Machines Corporation (the company), all adjustments necessary to a fair statement of the results for the unaudited three and six month periods have been made. 2. Earnings per share amounts were computed by dividing earnings after deduction of preferred stock dividends by the average number of common shares outstanding. 3. Treasury stock within Stockholders' equity includes 47,374,997 common shares amounting to $3,607.6 million and 53,400 preferred shares amounting to $1.4 million at June 30, 1997, and 2,179,066 common shares (adjusted to reflect a two-for-one stock split on May 9, 1997) amounting to $135.2 million at December 31, 1996. 4. The majority of the company's derivative transactions relates to the matching of liabilities to assets associated with its worldwide customer financing business. The company issues debt, using the most efficient capital markets and products, which may result in a currency or interest rate mismatch. Interest rate swaps or currency swaps are then used to match the interest rates and currencies of its debt to the related cus- tomer financing receivables. These swap contracts are principally one to five years in duration. The company uses an internal regional center to manage the cash of its subsidiaries. This regional center principally uses currency swaps to convert cash flows in a cost-effective manner, predominately for the company's European subsidiaries. The terms of the swaps are generally less than one year. Interest and currency rate differentials accruing under interest rate and currency swap contracts related to the customer financing business are recognized over the life of the contracts in interest expense, and the ef- fects of contracts related to intracompany funding are recognized over the life of the contract in interest income. When the terms of the underwrit- ing instrument are modified, or if it ceases to exist for whatever reason, all changes in fair value of the swap contracts are recognized in income each period until they mature. Additionally, the company uses derivatives to limit its exposure to loss resulting from fluctuations in foreign currency exchange rates on an- ticipated cash transactions between foreign subsidiaries and the parent company. The company receives significant dividends, intracompany royal- ties and net payments for goods and services from its non-U.S. subsid- iaries. In anticipation of these foreign currency flows, and given the volatility of the currency markets, the company selectively employs for- eign currency options to manage the currency risks. The terms of these instruments are generally less than one year. - 5 - Notes to Consolidated Financial Statements - (continued) -------------------------------------------------------- For purchased options that hedge anticipated transactions, gains and losses are deferred and recognized in other income in the same period that the underlying transaction occurs, expires or is otherwise terminated. At June 30, 1997 and December 31, 1996, there were no material deferred gains or losses. The premiums associated with entering into option contracts are generally amortized over the life of the options and are not material to the company's results. Unamortized premiums are included in prepaid assets. All written options are marked to market monthly and are not ma- terial to the company's results. The company also enters into derivative transactions to moderate the impact that an appreciation of the dollar relative to other currencies would have on the translation of foreign earnings. These transactions do not qualify as hedges and their impact results in foreign exchange gains and losses which are recorded in earnings as they occur. The company has used derivative instruments as an element of its risk management strategy for many years. Although derivatives entail a risk of non-performance by counterparties, the company manages this risk by estab- lishing explicit dollar and term limitations that correspond to the credit rating of each carefully selected counterparty. The company has not sus- tained a material loss from these instruments nor does it anticipate any material adverse effect on its results of operations or financial position in the future. 5. A supplemental Consolidated Statement of Operations schedule has been provided, for information purposes only, to exclude the effects of the write-offs of purchased in-process research and development associated with the Tivoli Systems Inc. and Object Technology International Inc. ac- quisitions recorded in the first quarter of 1996. The supplemental state- ment is shown in exhibit 99 on page 22. This information is presented voluntarily and is provided solely to assist in understanding the effects of these items on the Consolidated Statement of Earnings. 6. On April 29, 1997, the stockholders of the company approved amend- ments to the Certificate of Incorporation to increase the number of au- thorized shares of common stock from 750 million to 1,875 million, which was required to effect a two-for-one stock split approved by the company's Board of Directors on January 28, 1997. In addition, the amendments served to reduce the par value of the common shares from $1.25 to $.50 per share. Common stockholders of record at the close of business on May 9, 1997 received one additional share for each share held. All share and per share data presented in the Consolidated Financial Statements reflect the two-for-one stock split. 7. Subsequent Events: On July 30, 1997, the company issued $500 million of 6.45 percent Notes due August 1, 2007, and $500 million of 6.22 percent Debentures due August 1, 2027. The net proceeds will be used for general corporate purposes. The Financial Accounting Standards Board has approved the American Institute of Certified Public Accountants Statement of Position (SOP) on software revenue recognition which will be effective beginning in 1998. The company is generally in compliance with the new SOP and its adoption is not expected to have a material effect on the financial position or re- sults of operations of the company. - 6 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ------------------------------------------------ FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 ------------------------------------------------ The company's second quarter results showed the ongoing strength of its business portfolio. There was good customer response to the new System/390** servers and continued strength in services and hard disk drives. There was substantial year-over-year improvement in the semicon- ductor business, as well as good results in PC commercial and PC server products. Results from these areas more than offset revenue declines in some other areas, most notably consumer PC business and AS/400** and RS/6000** server lines. As a result of its balanced portfolio, the com- pany achieved good constant currency revenue growth in the quarter. During the quarter the company also acquired full ownership of Advantis, the U.S. network services arm of the company's global services business, and completed the acquisition of a majority interest in NetObjects, a leading developer of sophisticated web sites. These are im- portant acquisitions, and they will further strengthen the company's posi- tion in the rapidly growing areas of services and network computing. RESULTS OF OPERATIONS _____________________ (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 ___________________ ___________________ 1997 1996 1997 1996 ________ ________ ________ ________ Revenue $ 18,872 $ 18,183 $ 36,180 $ 34,742 Cost 11,471 10,992 22,187 20,782 ________ ________ ________ ________ Gross profit $ 7,401 $ 7,191 $ 13,993 $ 13,960 Gross profit margin 39.2% 39.5% 38.7% 40.2% Net earnings $ 1,446 $ 1,347 $ 2,641 $ 2,121 The company recorded second quarter 1997 earnings of $1.46 per common share, compared with $1.26 per common share, in the second quarter of last year. Total revenue increased 3.8 percent over the same period of 1996 to $18.9 billion. The average number of common shares outstanding for the period was 986.9 million in 1997 versus 1,067.8 million in 1996. Net earnings for the six months ended June 30, 1997 were $2.64 per common share, compared with earnings of $1.96 per common share in the first six months of 1996. The company's first quarter 1996 results in- cluded a charge of $435 million ($.40 per common share) relating to a non- recurring non-tax deductible charge for purchased in-process research and development in connection with the acquisition of Tivoli Systems Inc. ($417 million) and Object Technology International Inc. ($18 million). Excluding this item, the company's adjusted earnings per common share was $2.36 for the first six months of 1996. Total revenue for the six months ended June 30, 1997 was up 4.1 percent from the prior year to $36.2 billion. The average number of common shares outstanding for the period was 995.1 million in 1997 versus 1,078.2 million in 1996. - 7 - RESULTS OF OPERATIONS - (CONTINUED) ----------------------------------- On an as-reported basis, second quarter revenue in the United States was $7.9 billion, an increase of 11.2 percent from the same period of 1996. Asia-Pacific revenue grew 3.7 percent to $3.8 billion while revenue from Latin America was up 7.8 percent to $847 million. Revenue from Europe/ Middle East/ Africa declined 4.5 percent to $5.7 billion and re- venue from Canada declined 4.5 percent to $697 million. Excluding the effects of currency, Asia-Pacific revenue grew approxi- mately 10 percent, while European revenue climbed about 3 percent year- over-year. Revenue from Canada would have declined approximately 4 percent on a constant currency basis. Total expenses grew 4.1 percent compared with last year's second quar- ter. Within the expense category, research, development and engineering increased 9.4 percent, largely as a result of purchased in-process re- search and development related to the NetObjects acquisition and continued investments to support the company's industry-specific business units. Selling, general and administrative expense increased slightly, 1.8 per- cent, year-over-year. The company's tax rate was 33.7 percent in the second quarter com- pared with 38.1 percent in the year-earlier period. Hardware Sales ______________ (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 ___________________ ___________________ 1997 1996 1997 1996 ________ ________ ________ ________ Total revenue $ 8,616 $ 8,576 $ 16,377 $ 16,284 Total cost 5,559 5,715 10,803 10,720 ________ ________ ________ ________ Gross profit $ 3,057 $ 2,861 $ 5,574 $ 5,564 Gross profit margin 35.5% 33.4% 34.0% 34.2% Revenue from hardware sales for the second quarter and first six months of 1997 was essentially flat, when compared to the same periods in 1996. The second quarter and first six-months revenue was negatively af- fected by approximately 3 and 4 percentage points, respectively, from cur- rency in 1997. Personal computer commercial and personal computer server revenue grew for both the second quarter and first six months of 1997, when compared to the same periods of last year. North America and Asia Pacific showed growth year-over-year, while Europe again had weak performance. Revenue from consumer personal computers was lower for both the second quarter and first six months of 1997, versus comparable periods of 1996. - 8 - RESULTS OF OPERATIONS - (CONTINUED) ----------------------------------- Revenue from storage products increased on both a second-quarter and six months basis when compared to the same periods in 1996, due to strong sales of hard disk drives partially offset by lower revenue for high-end storage systems, which declined as the competitive pricing environment re- mained. Semiconductor revenue grew on both a second-quarter and six months ba- sis when compared to the same periods in 1996, as a result of strong growth in S-RAM and custom logic products, partially offset by lower DRAM revenue. These increases were offset by a decline in AS/400, RS/6000 and System/390 server revenue both on a second quarter and six months basis, when compared to the same periods in 1996. Although System/390 revenue was essentially flat, shipments measured in MIPS (millions of instructions per second) increased approximately 60 percent and 32 percent, respec- tively, for the second quarter and the first six months of 1997, when com- pared to the same periods of 1996. Hardware sales gross profit for the second quarter and first six months of 1997 increased 6.9 percent and .2 percent, respectively, over comparable periods in 1996. These increases were driven by improvements in storage, System/390 and personal computer costs. These increases more than offset the decline in gross profit due to the changing mix of revenue to personal computers which carry a lower margin. In addition, most other hardware products continue to be affected by competitive pricing pres- sures. Services Other Than Maintenance _______________________________ (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 ___________________ ___________________ 1997 1996 1997 1996 ________ ________ ________ ________ Total revenue $ 4,612 $ 3,734 $ 8,707 $ 6,932 Total cost 3,664 2,959 6,961 5,536 ________ ________ ________ ________ Gross profit $ 948 $ 775 $ 1,746 $ 1,396 Gross profit margin 20.6% 20.8% 20.0% 20.1% Services revenue increased 23.5 percent and 25.6 percent, respec- tively, in the second quarter and first six months of 1997, when compared to the same period of last year. Services revenue was negatively affected by approximately 5 percentage points, respectively, from currency in the second quarter and first six months of 1997. The revenue increases were primarily driven by continued growth in outsourcing as well as systems in- tegration activity. Approximately $3.3 billion in new services contracts were signed in the quarter. Services gross profit dollars increased in the second quarter and first six months of 1997 by 22.3 percent and 25.1 percent, respectively, when compared to year-ago periods. - 9 - RESULTS OF OPERATIONS - (CONTINUED) ___________________________________ Software ________ (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 ___________________ ___________________ 1997 1996 1997 1996 ________ ________ ________ ________ Total revenue $ 3,084 $ 3,195 $ 6,034 $ 6,232 Total cost 907 1,009 1,819 1,921 ________ ________ ________ ________ Gross profit $ 2,177 $ 2,186 $ 4,215 $ 4,311 Gross profit margin 70.6% 68.4% 69.9% 69.2% Revenue from software for the second quarter and first six months of 1997 decreased 3.4 percent and 3.2 percent, respectively, over comparable periods in 1996. The second-quarter and first-six months results were negatively affected by approximately 4 and 5 percentage points, respec- tively, from currency in 1997. The revenue decreases were a result of lower host based computer software revenue associated with AS/400 and System/390 products. These decreases were partially offset by revenue growth for distributed software offerings from Lotus Notes and system man- agement software from Tivoli. Software gross profit dollars for the second quarter were essentially flat and decreased 2.2 percent for the first six months of 1997, versus the same periods in 1996. Software gross profit margins increased 2.2 percentage points and .7 percentage points, respectively, for the second quarter and first six months of 1997, when compared to the same periods of last year. The improvements in the gross profit margins are the results of lower capitalization rates and the associated reduction in amortization costs. Maintenance ___________ (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 ___________________ __________________ 1997 1996 1997 1996 ________ ________ ________ _______ Total revenue $ 1,632 $ 1,754 $ 3,235 $ 3,503 Total cost 873 915 1,726 1,827 ________ ________ ________ _______ Gross profit $ 759 $ 839 $ 1,509 $ 1,676 Gross profit margin 46.5% 47.8% 46.6% 47.8% Maintenance revenue for the second quarter and first six months of 1997 decreased 7.0 percent and 7.7 percent, respectively, over comparable periods in 1996. The second-quarter and first six-months revenue was neg- atively affected by approximately 5 percentage points, respectively, from currency in 1997. Maintenance gross profit dollars decreased 9.5 percent and 10.0 percent, respectively, in the second quarter and first six months of 1997, when compared to the same periods of 1996. Maintenance revenue and gross profit margin continue to be affected by price reductions on maintenance offerings. - 10 - RESULTS OF OPERATIONS - (CONTINUED) ___________________________________ Rentals and financing _____________________ (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 ___________________ __________________ 1997 1996 1997 1996 ________ ________ ________ _______ Total revenue $ 928 $ 924 $ 1,827 $ 1,791 Total cost 468 394 878 778 ________ ________ ________ _______ Gross profit $ 460 $ 530 $ 949 $ 1,013 Gross profit margin 49.6% 57.4% 52.0% 56.6% Revenue from rentals and financing for the second quarter was essen- tially flat and increased 2.0 percent for the first six months of 1997, respectively, versus comparable periods in 1996. The second quarter and first six months revenue was negatively affected by approximately 3 per- centage points, respectively, from currency in 1997. The increases in re- venue were primarily due to higher operating lease activity, offset by decreased dealer financing in 1997 versus the same periods in 1996. Rentals and financing gross profit dollars decreased 13.2 percent and 6.3 percent, respectively, for the second quarter and first six months of 1997, when compared to the same periods of the prior year. The decline in gross profit dollars and margin were principally due to a trend towards financing a greater amount of low-end products and faster growth in the more competitive U.S. market. Expenses ________ (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 ___________________ __________________ 1997 1996 1997 1996 ________ ________ ________ _______ Selling, general and administrative $ 3,958 $ 3,889 $ 7,642 $ 7,586 Percentage of revenue 21.0% 21.4% 21.1% 21.8% Research, development and engineering $ 1,221 $ 1,116 $ 2,290 $ 2,207 Percentage of revenue 6.5% 6.1% 6.3% 6.4% Selling, general and administrative expense for the second quarter and first six months of 1997 increased 1.7 percent and .7 percent, respec- tively, from the same periods in 1996. Currency had a benefit of about 4 percentage points for the second quarter and first six months of 1997, re- spectively, versus the same periods in 1996. The company continues to in- vest in more variable based high-yield programs, such as advertising, business partner programs, expenditures associated with new acquisitions, while continuing to focus on reducing fixed infrastructure costs. - 11 - RESULTS OF OPERATIONS - (CONTINUED) ----------------------------------- Research, development and engineering expense, increased 9.4 percent and 3.8 percent, respectively, for the second quarter and first six months of 1997, when compared to the same periods of 1996. These increases were primarily due to the purchased in-process research and development associ- ated with the NetObjects acquisition, and continued investment to support the company's network computing solutions within the company's industry- specific business units. The first six-months 1996 results included a non-tax deductible charge of $435 million for purchased-in process research and development expense associated with the acquisition of Tivoli Systems, Inc. and Object Tech- nology International, Inc. in the first quarter of 1996. This amount has been separately identified on the company's Consolidated Statement of Earnings. Interest on total borrowings of the company and its subsidiaries, which includes interest expense and interest costs associated with rentals and financing, amounted to $390 million and $768 million for the second quarter and first six months of 1997, respectively. Of these amounts, $6 million for the second quarter and $16 million for the first six months were capitalized. The effective tax rate for the quarter ended June 30, 1997, was 33.7 percent, versus 38.1 percent for the same period in 1996. The decrease is primarily the result of the mix of earnings and corresponding weighting of tax rates on a country-by-country basis. The company continues to perform assessments of the realizability of the net deferred tax assets. The effective tax rate for the first six months of 1997 was 34.5 per- cent, versus 43.0 percent for the same period in 1996. The decrease was a result of the $435 million charge associated with Tivoli Systems Inc. and Object Technology Inc. acquisitions in the first quarter of 1996, that did not give rise to a tax benefit. Excluding this charge, the effective tax rate for the first six months of 1996 would have been 38.5 percent. The additional decrease in the six months effective tax rate was primarily the result of the mix of earnings and corresponding weighting of tax rates on a country-by-country basis. Financial Condition ------------------- The company's continued strong financial condition throughout the first half of 1997 enabled expenditures of $3.6 billion for the repurchase of the company's common shares, and investments of $3.0 billion for plant, rental machines, and other property, while the company ended the period with $6.9 billion in cash, cash equivalents and marketable securities. - 12 - Financial Condition - (continued) --------------------------------- Cash Flow _________ (Dollars in millions) Six Months Ended June 30 __________________ 1997 1996 _______ _______ Net cash provided from (used in): Operating activities $ 2,934 $ 2,743 Investing activities (2,760) (3,043) Financing activities (1,246) (909) Effect of exchange rate changes on cash and cash equivalents (112) (154) _______ _______ Net change in cash and cash equivalents $(1,184) $(1,363) Working Capital _______________ (Dollars in millions) At June 30 At December 31 1997 1996 ____________ ______________ Current assets $ 38,639 $ 40,695 Current liabilities 32,559 34,000 ________ ________ Working capital $ 6,080 $ 6,695 Current ratio 1.19:1 1.20:1 The company maintained a current ratio of 1.19 to 1. Current assets declined $2.1 billion from year-end 1996 with declines of $1.3 billion in cash, cash equivalents, and marketable securities and $1.4 billion in ac- counts receivable, offset by an increase of $.6 billion in prepaid ex- penses. The decrease in cash, cash equivalents, and marketable securities results primarily from the stock repurchases, and capital expenditures, offset by cash generated from operations and debt financing. The decline in accounts receivable was attributable to the collection of traditionally higher year-end accounts receivable balances, while prepaid expenses re- flects a seasonal increase from year-end levels. Current liabilities declined $1.4 billion with declines of $2.5 billion in accruals, taxes and accounts payable (resulting primarily from seasonal declines in these balances from their normally higher year-end levels), offset by an increase of $1.1 billion in short-term debt. - 13 - Financial Condition - (continued) --------------------------------- Investments ----------- The company's capital expenditures for plant, rental machines and other property were $3.0 billion for the first half of 1997, an increase of $.7 billion from the comparable 1996 period. The increase reflects the company's continued investment in its rapidly growing outsourcing busi- ness, as well as in the areas of storage products and microelectronics. In addition to software development expense included in research, de- velopment and engineering expense, the company capitalized $.1 billion of software costs during the first half of both 1997 and 1996. Amortization of capitalized software costs amounted to $.6 billion during the first half of 1997, a decline of $.1 billion from the comparable 1996 period. Other Non-Current Liabilities ----------------------------- Other non-current liabilities of $13.1 billion at June 30, 1997, de- clined $.9 billion from year-end 1996 primarily due to reductions in re- structuring accrual balances related to pre-1996 restructuring programs, and in non-U.S. retirement reserves. Debt and Equity --------------- (Dollars in millions) At June 30 At December 31 1997 1996 ____________ ______________ "Core" debt $ 3,045 $ 2,202 Customer financing debt 22,658 20,627 ________ ________ Total debt $ 25,703 $ 22,829 Stockholders' equity $ 20,109 $ 21,628 Debt/capitalization 56.1% 51.4% Customer financing debt/equity 6.6:1 6.3:1 Total debt increased $2.9 billion from year-end 1996 as debt in sup- port of customer financing increased $2.0 billion, and "core" debt in- creased $.9 billion. Stockholders' equity declined $1.5 billion from December 31, 1996 as the increase in the company's retained earnings was more than offset by the significant common share repurchases and the cur- rency effect of the stronger U.S. dollar on the company's foreign net as- sets. Liquidity --------- The company maintains a $10.0 billion committed global credit facil- ity as part of its ongoing efforts to ensure appropriate levels of liquidity. As of June 30, 1997, $9.3 billion of this confirmed line of credit remains unused and available for future use. - 14 - Financial Condition - (continued) --------------------------------- At June 30, 1997, the company had a net balance of $1.1 billion in assets under management from the securitization of lease and trade receiv- ables. Forward Looking and Cautionary Statements ----------------------------------------- Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute 'forward looking statements' within the meaning of the Private Securities Liti- gation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the company's failure to continue to develop and market new and innovative products and services and to keep pace with technological change; competitive pressures; failure to obtain or protect intellectual property rights; the company's ability to attract and retain key personnel; currency and customer financing risks; dependence on cer- tain suppliers; changes in the financial or business condition of the com- pany's distributors or resellers; the company's ability to successfully manage acquisitions and alliances; legal, political and economic changes and other risks, uncertainties and factors discussed in the company's other filings with the Securities and Exchange Commission, including its Form 8-K filed on July 21, 1997. Part II - Other Information --------------------------- ITEM 2. Changes in Securities ----------------------------- On April 11, 1997, the company issued 1,038,232 shares of its common stock, par value $.50 per share, at $67.5188 per share (adjusted to re- flect a two-for-one stock split on May 9, 1997) to certain shareholders of NetObjects, Inc., pursuant to a private placement under Regulation D of the Securities Act of 1933, as amended. Each of the shareholders of NetObjects to whom shares of stock were issued was either an accredited investor, as defined in Rule 501 of Regulation D, or an investor with such knowledge and experience in financial and business matters that such in- vestor was capable of evaluating the merits and risks of the prospective investment prior to the issuance of shares. As a result of the placement of these shares, the company became the majority shareholder of NetObjects. - 15 - Part II - Other Information - (continued) ----------------------------------------- ITEM 4. Submission of Matters to a Vote of Security Holders ----------------------------------------------------------- The Annual Meeting of Stockholders of International Business Ma- chines Corporation was held on April 29, 1997. (1) Each of the eleven nominees to the Board of Directors was elected for a one-year term by the stockholders: DIRECTOR FOR WITHHELD C. Black 399,615,254 2,641,445 H. Brown 399,380,438 2,876,261 J. Dormann 399,650,799 2,605,900 L. V. Gerstner, Jr. 399,623,274 2,633,425 N. O. Keohane 399,444,907 2,811,792 C. F. Knight 399,634,415 2,622,284 L. A. Noto 399,683,564 2,573,135 J. B. Slaughter 399,431,243 2,825,456 A. Trotman 399,627,037 2,629,662 L. C. van Wachem 399,616,196 2,640,503 C. M. Vest 399,487,873 2,768,826 (2) The appointment of Price Waterhouse LLP as independent auditors of the company was ratified: For 399,727,151 Not For 1,135,699 Abstain 1,393,849 Total 402,256,699 (3) The stockholders approved an amendment of the Certificate of Incorporation to increase authorized common shares and effect a two-for-one common stock split: For 397,276,859 Not For 3,664,400 Abstain 1,315,440 Total 402,256,699 (4) The stockholders approved the adoption of the IBM 1997 Long-Term Performance Plan: For 372,281,947 Not For 26,103,613 Abstain 3,871,139 Total 402,256,699 (5) The stockholders defeated a shareholder proposal on Executive Compensation: For 26,720,299 Not For 294,232,165 Abstain 7,429,990 Broker No Vote 73,874,245 Total 402,256,699 - 16 - ITEM 6 (a). Exhibits -------------------- Exhibit Number -------------- 10 The IBM 1997 Long-Term Performance Plan is Appendix B to the company's proxy statement dated March 18, 1997, which was previously filed electronically, and is hereby incorporated by reference. 11 Statement re: computation of per share earnings. 12 Statement re: computation of ratios. 22 The company's proxy statement dated March 18, 1997, containing the full text of the proposals referred to in Item 4, which was previously filed electronically, is hereby incorporated by reference. 99 Consolidated Statement of Earnings Supplemental Schedule. ITEM 6 (b). Reports on Form 8-K -------------------------------- A Form 8-K dated April 23, 1997 was filed with respect to the company's financial results for the period ended March 31, 1997 and included unaudited consolidated financial statements for the period ended March 31, 1997. A Form 8-K dated April 29, 1997 was filed with respect to the stockholders approval to increase the number of authorized shares of common stock from 750 million to 1,875,000 million, which was re- quired to effect a two-for-one stock split approved by the company's Board of Directors on January 28, 1997. Pro-Forma financial state- ments were provided to reflect the two-for-one stock split on his- torical data. In addition, the company's Certificate of Incorporation as amended through May 2, 1997, was filed with this Form 8-K. - 17 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. International Business Machines Corporation ------------------------------------------- (Registrant) Date: August 13, 1997 --------------------- By: /s/ John R. Joyce ------------------------------------- John R. Joyce Vice President and Controller **System/390, AS/400 and RS/6000 are trademarks or registered trademarks of the International Business Machines Corporation. - 18 - EX-11 2 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE EXHIBIT 11 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE UNDER TREASURY STOCK METHOD SET FORTH IN ACCOUNTING PRINCIPLES BOARD OPINION NO. 15 For Quarter Ended ______________________________ June 30, 1997 June 30, 1996 ______________ _______________ Number of shares on which earnings per share is based: Average outstanding during period 986,850,636 1,067,759,790* Add - Incremental shares under stock option and stock purchase plans 23,510,861 18,579,542* _____________ ______________ Number of shares on which fully diluted earnings per share is based 1,010,361,497 1,086,339,332* ============= ============= Net earnings available to common shareholders (millions) $ 1,441 $ 1,342 ___________ ___________ Net earnings on which fully diluted earnings per share is based (millions) $ 1,441 $ 1,342 =========== =========== Fully diluted earnings per share $ 1.43 $ 1.24* Published earnings per share $ 1.46 $ 1.26* * Adjusted to reflect a two-for-one-stock split on May 9, 1997. COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE UNDER TREASURY STOCK METHOD SET FORTH IN ACCOUNTING PRINCIPLES BOARD OPINION NO. 15 - (CONTINUED) For Six Months Ended ______________________________ June 30, 1997 June 30, 1996 ______________ ______________ Number of shares on which earnings per share is based: Average outstanding during period 995,143,843 1,078,183,418* Add - Incremental shares under stock option and stock purchase plans 24,035,390 20,414,846* _____________ _____________ Number of shares on which fully diluted earnings per share is based 1,019,179,233 1,098,598,264* ============= ============= Net earnings available to common shareholders (millions) $ 2,631 $ 2,111 ___________ ___________ Net earnings on which fully diluted earnings per share is based (millions) $ 2,631 $ 2,111 =========== =========== Fully diluted earnings per share $ 2.58 $ 1.92* Published earnings per share $ 2.64 $ 1.96* * Adjusted to reflect a two-for-one stock split on May 9, 1997. EX-12 3 COMPUTATION OF EARNINGS TO FIXED CHARGES EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS FOR SIX MONTHS ENDED JUNE 30: (UNAUDITED) (Dollars in millions)
1997 1996 ________ ________ Earnings before income taxes(1) $ 4,036 $ 3,709 Add: Fixed charges, excluding capitalized interest 945 977 ________ ________ Earnings as adjusted $ 4,981 $ 4,686 ======== ======== Fixed charges: Interest expense 757 779 Capitalized interest 16 14 Portion of rental expense representative of interest 188 198 ________ ________ Total fixed charges $ 961 $ 991 ======== ======== Preferred stock dividends(2) 15 18 ________ ________ Combined fixed charges and preferred stock dividends $ 976 $ 1,009 ======== ======== Ratio of earnings to fixed charges 5.18 4.73 Ratio of earnings to combined fixed charges and preferred stock dividends 5.10 4.64
(1) Earnings before income taxes excludes the company's share in the income and losses of less-than-fifty percent-owned affiliates. (2) Included in the ratio computation are preferred stock dividends of $10 million for the first six months of 1997 and 1996, or $15 million and $18 million, respectively, representing the pre-tax earnings which would be required to cover such dividend requirements based on the company's effective tax rate for the six months ended June 30, 1997 and 1996. EX-27 4 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM CORPORATION'S STATEMENTS FOR THE SIX MONTHS ENDING JUNE 30, 1997 AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1997 JUN-30-1997 6,503 358 16,060 0 5,913 38,639 42,031 24,384 78,819 30,629 0 0 253 8,290 11,566 78,819 16,377 36,180 10,803 22,187 9,932 0 351 4,032 1,391 2,641 0 0 0 2,641 2.64 2.58
EX-99 5 CONSOLIDATED STATEMENT OF EARNINGS SUPP. SCHEDULE EXHIBIT 99 INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF EARNINGS(1) SUPPLEMENTAL SCHEDULE (UNAUDITED)
(Dollars in millions except Three Months Ended Six Months Ended per share amounts) June 30 June 30 ___________________ ____________________ 1997 1996 1997 1996 Revenue: ________ ________ ________ ________ Hardware sales $ 8,616 $ 8,576 $ 16,377 $ 16,284 Services 4,612 3,734 8,707 6,932 Software 3,084 3,195 6,034 6,232 Maintenance 1,632 1,754 3,235 3,503 Rentals and financing 928 924 1,827 1,791 ________ ________ ________ ________ Total revenue 18,872 18,183 36,180 34,742 Cost: Hardware sales 5,559 5,715 10,803 10,720 Services 3,664 2,959 6,961 5,536 Software 907 1,009 1,819 1,921 Maintenance 873 915 1,726 1,827 Rentals and financing 468 394 878 778 ________ ________ ________ ________ Total cost 11,471 10,992 22,187 20,782 ________ ________ ________ ________ Gross profit 7,401 7,191 13,993 13,960 Operating expenses: Selling, general and administrative 3,958 3,889 7,642 7,586 Research, development and engineering 1,221 1,116 2,290 2,207 ________ ________ ________ ________ Total operating expenses 5,179 5,005 9,932 9,793 Operating income 2,222 2,186 4,061 4,167 Other income, principally interest 137 193 322 343 Interest expense 179 205 351 354 ________ ________ ________ ________ Earnings before income taxes 2,180 2,174 4,032 4,156 Income tax provision 734 827 1,391 1,600 ________ ________ ________ ________ Net earnings 1,446 1,347 2,641 2,556 Preferred stock dividends and transaction costs 5 5 10 10 ________ ________ ________ ________ Net earnings applicable to common shareholders $ 1,441 $ 1,342 $ 2,631 $ 2,546 ======== ======== ======== ======== Net earnings per share of common stock $ 1.46 $ 1.26* $ 2.64 $ 2.36*
(1) Supplemental information provided for comparative purposes: Six months 1996 excludes non-recurring, non-tax deductible charge of $435 million ($.40 per common share) for purchased in-process research and development in connection with the acquisitions of Tivoli Systems Inc. and Object Technology International Inc. * Adjusted to reflect a two-for-one stock split on May 9, 1997. -----END PRIVACY-ENHANCED MESSAGE-----