-----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, NgSOLwA8vRtGrKf8X1LhkC4Mjh5u2DKTbjdws48Ng9JVdNMgZnO3rIeJonExTV2o FCtvrvWozR2TlPhoUAcFfA== 0001005477-99-002266.txt : 19990514 0001005477-99-002266.hdr.sgml : 19990514 ACCESSION NUMBER: 0001005477-99-002266 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: SEC FILE NUMBER: 001-02360 FILM NUMBER: 99619319 BUSINESS ADDRESS: STREET 1: 1 NEW ORCHARD ROAD CITY: ARMONK STATE: NY ZIP: 10504- BUSINESS PHONE: 9144991900 MAIL ADDRESS: STREET 1: ONE NEW ORCHARD RD CITY: ARMONK STATE: NY ZIP: 10504 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1999 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 subject to such filing requirements for the past 90 days. YES |X| NO |_| The registrant has 1,814,835,137* shares of common stock outstanding at March 31, 1999. * Adjusted to reflect a two-for-one stock split effective May 10, 1999. INDEX Page ---- Part I - Financial Information: Item 1. Consolidated Financial Statements Consolidated Statement of Earnings for the three months ended March 31, 1999 and 1998 .................................... 1 Consolidated Statement of Financial Position at March 31, 1999 and December 31, 1998 ............................. 3 Consolidated Statement of Cash Flows for the three months ended March 31, 1999 and 1998 .................................... 5 Notes to Consolidated Financial Statements ......................... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition .............. 7 Part II - Other Information .............................................. 17 Part I - Financial Information ITEM 1. INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(Dollars in millions except Three Months Ended per share amounts) March 31 ---------------------- 1999 1998 ------- ------- Revenue: Hardware $ 8,584 $ 7,318 Global Services 7,550 6,341 Software 2,920 2,644 Global Financing 705 719 Enterprise Investments/Other 558 596 ------- ------- Total revenue 20,317 17,618 Cost: Hardware 6,250 5,219 Global Services 5,567 4,630 Software 555 540 Global Financing 311 380 Enterprise Investments/Other 376 399 ------- ------- Total cost 13,059 11,168 ------- ------- Gross profit 7,258 6,450 Operating expenses: Selling, general and administrative 3,937 3,719 Research, development and engineering 1,181 1,179 ------- ------- Total operating expenses 5,118 4,898 Operating income 2,140 1,552 Other income, principally interest 134 150 Interest expense 174 179 ------- ------- Income before income taxes 2,100 1,523 Income tax provision 630 487 ------- ------- Net income 1,470 1,036 Preferred stock dividends 5 5 ------- ------- Net income applicable to common shareholders $ 1,465 $ 1,031 ======= =======
(The accompanying notes are an integral part of the financial statements.) -1- INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF EARNINGS - (continued) (UNAUDITED)
Three Months Ended March 31 ------------------------- 1999 1998 ------------------------- Earnings per share of common stock - basic* $ .80 $ .54 Earnings per share of common stock - assuming dilution* $ .78 $ .53 Average number of common shares outstanding: (millions) Basic* 1,823.8 1,900.4 Diluted* 1,882.9 1,946.6 Cash dividends per common share* $ .11 $ .10
* Adjusted to reflect a two-for-one stock split effective May 10, 1999. (The accompanying notes are an integral part of the financial statements.) -2- INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS
At March 31 At December 31 (Dollars in millions) 1999 1998 (Unaudited) ----------- -------------- Current assets: Cash and cash equivalents $ 4,855 $ 5,375 Marketable securities - at fair value, which approximates market 501 393 Notes and accounts receivable - net of allowances 18,194 20,271 Sales-type leases receivable 6,054 6,510 Inventories, at lower of average cost or net realizable value Finished goods 1,272 1,088 Work in process and raw materials 3,969 4,112 ------- ------- Total inventories 5,241 5,200 Prepaid expenses and other current assets 4,956 4,611 ------- ------- Total current assets 39,801 42,360 Plant, rental machines and other property 43,898 44,870 Less: Accumulated depreciation 25,032 25,239 ------- ------- Plant, rental machines and other property - net 18,866 19,631 Software 587 599 Investments and sundry assets 22,497 23,510 ------- ------- Total assets $81,751 $86,100 ======= =======
(The accompanying notes are an integral part of the financial statements.) -3- INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (continued) LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in millions except At March 31 At December 31 per share amounts) 1999 1998 (Unaudited) --------------- --------------- Current liabilities: Taxes $ 2,782 $ 3,125 Accounts payable and accruals 16,791 19,797 Short-term debt 13,708 13,905 --------------- --------------- Total current liabilities 33,281 36,827 Long-term debt 16,285 15,508 Other liabilities 12,386 12,818 Deferred income taxes 1,493 1,514 --------------- --------------- Total liabilities 63,445 66,667 Stockholders' equity: Preferred stock - par value $.01 per share 247 247 Shares authorized: 150,000,000 Shares issued: 1999 - 2,546,011 1998 - 2,546,011 Common stock - par value $.20* per share 10,332 10,121 Shares authorized: 4,687,500,000* Shares issued: 1999 - 1,860,375,375* 1998 - 1,853,738,104* Retained earnings 11,383 10,141 Treasury stock - at cost (2,213) (133) Shares: 1999 - 25,540,238* 1998 - 1,924,293* Employee benefits trust (1,790) (1,854) Shares: 1999 - 20,000,000* 1998 - 20,000,000* Accumulated gains and losses not affecting retained earnings 347 911 --------------- --------------- Total stockholders' equity 18,306 19,433 --------------- --------------- Total liabilities and stockholders' equity $ 81,751 $ 86,100 =============== ===============
* Adjusted to reflect a two-for-one stock split effective May 10, 1999. (The accompanying notes are an integral part of the financial statements.) -4- INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31: (UNAUDITED)
(Dollars in millions) 1999 1998 ------- ------- Cash flow from operating activities: Net income $ 1,470 $ 1,036 Adjustments to reconcile net income to cash provided from operating activities: Depreciation 1,294 1,073 Amortization of software 110 150 Gain on disposition of fixed and other assets (120) (72) Changes in operating assets and liabilities (878) (1,246) ------- ------- Net cash provided from operating activities 1,876 941 ------- ------- Cash flow from investing activities: Payments for plant, rental machines and other property, net of proceeds (957) (1,078) Investment in software (97) (68) Purchases of marketable securities and other investments (3,706) (702) Proceeds from marketable securities and other investments 3,799 435 ------- ------- Net cash used in investment activities (961) (1,413) ------- ------- Cash flow from financing activities: Proceeds from new debt 2,059 2,717 Payments to settle debt (1,568) (1,522) Short-term borrowings less than 90 days - net 356 (343) Common stock transactions - net (1,931) (1,753) Cash dividends paid (208) (197) ------- ------- Net cash used in financing activities (1,292) (1,098) ------- ------- Effect of exchange rate changes on cash and cash equivalents (143) (41) ------- ------- Net change in cash and cash equivalents (520) (1,611) Cash and cash equivalents at January 1 5,375 7,106 ------- ------- Cash and cash equivalents at March 31 $ 4,855 $ 5,495 ======= =======
(The accompanying notes are an integral part of the financial statements.) -5- 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 month periods have been made. 2. The accumulated gains and losses not affecting retained earnings line of stockholders' equity comprises foreign currency translation adjustments and unrealized gains and losses on marketable securities. Net earnings and accumulated gains and losses not affecting retained earnings were $906 million and $949 million for the three month periods ended March 31, 1999 and 1998, respectively. 3. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders' equity or net income depending on whether the derivative instrument qualifies as a hedge and, if so, the nature of the hedging activity. The company will adopt this standard as of January 1, 2000. Management does not expect the adoption to have a material effect on the company's results of operations, however, the effect on the company's financial position depends on the fair values of the company's derivatives and related financial instruments at the date of adoption. 4. The tables on pages 21 and 22 of this Form 10-Q reflect the results of the company's segments consistent with the company's management system. These results are not necessarily a depiction that is in conformity with generally accepted accounting principles, e.g., employee retirement plan costs are developed using actuarial assumptions on a country-by-country basis and allocated to the segments on headcount. A different result could be arrived at for any segment if actuarial assumptions unique to each segment were used. Performance measurement is based on income before income taxes (pre-tax income). These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments. 5. Subsequent Events: On April 27, 1999, the stockholders of the company approved amendments to the Certificate of Incorporation to increase the number of authorized shares of common stock from 1,875 million to 4,687.5 million, which was required to effect a two-for-one stock split that the company's Board of Directors approved on January 26, 1999. In addition, the amendments reduced the par value of the common shares from $.50 to $.20 per share. Common stockholders of record at the close of business on May 10, 1999 are entitled to receive one additional share for each share held. The Consolidated Financial Statements in this Form 10-Q have been adjusted to reflect the two-for-one stock split. On April 27, 1999, the company announced that the Board of Directors approved a quarterly dividend increase of 9 percent from $.22 to $.24 per common share or $.12 per common share after the two-for-one stock split. The dividend is payable June 10, 1999, to shareholders of record May 10, 1999. -6- Notes to Consolidated Financial Statements - (continued) On April 27, 1999, the Board of Directors also authorized the company to repurchase up to an additional $3.5 billion of IBM common shares. The company plans to repurchase the shares in the open market from time to time, based on market conditions. On April 30, 1999, IBM sold its U.S. Global Network business to AT&T. This sale is part of a broader agreement announced in December 1998 under which AT&T will acquire IBM's Global Network business for $5 billion in cash. The company expects the sales of the non-U.S. portion of the business to take place throughout the remainder of 1999. More than 2,900 IBM employees will join AT&T as a result of the sale of the U.S. business. In addition to the sale, IBM and AT&T have agreed to enter into outsourcing contracts with each other. The company will outsource a significant portion of its global networking needs to AT&T. AT&T will outsource certain applications processing and data center management to the company. In response to its changing workforce and the competitive environment in which it operates, the company announced amendments to its U.S. retirement plan, its U.S. supplemental executive retirement plan, and the U.S. retiree medical plan (the Plans). The amendments were announced on May 3, 1999 and are effective July 1, 1999, do not have a significant effect on the projected benefit obligations of the Plans. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE THREE MONTHS ENDED MARCH 31,1999 The company's first-quarter results reflect significant improvement in its Asian business and double-digit revenue growth in Europe and the Americas. The company's operating results were led by services and software which together produced 60 percent of the company's gross profits for the quarter. The Personal Systems group also had substantially improved results this quarter, due to the changes in its business model during the past year and continued strong sales growth. The company continued to move forward its strategy to reposition the S/390 with an increase of more than 80 percent in MIPS (millions of instructions per second) shipments in the first quarter. Also within servers, AS/400 and RS/6000 revenues declined due to product transitions. The Technology group results were mixed, with growth in hard disk drives (HDD) offset by continued weakness in memory chips. While the company had a strong first quarter, there are a number of uncertainties facing the company in the remainder of 1999 including ongoing weakness in some parts of Asia and Latin America; continued price pressure in personal computers, HDDs and semiconductors; and the unknown effect of the Year 2000 issue on customer purchases. The company will continue to focus on increasing revenue with particular emphasis on addressing customers' needs to build integrated e-business solutions through the use of the company's hardware, services, software and technology. In addition, the company continues to invest judiciously, reduce infrastructure and optimize the deployment of the company's employees and resources to maintain or improve its pre-tax profits. -7- Results of Operations (Dollars in millions Three Months Ended except per share amounts) March 31 ------------------------ 1999 1998 ------- ------- Revenue $20,317 $17,618 Cost 13,059 11,168 ------- ------- Gross profit $ 7,258 $ 6,450 Gross profit margin 35.7% 36.6% Net income $ 1,470 $ 1,036 Earnings per share of common stock: Basic* $ .80 $ .54 Assuming dilution* $ .78 $ .53 * Adjusted to reflect a two-for-one stock split effective on May 10, 1999. As a result of the company's share repurchase program, the average number of common shares outstanding was lower by 76.6 million than the first quarter in 1998. The average number of shares outstanding in the quarter was 1,823.8 million compared with 1,900.4 million in the first quarter of 1998. There were 1,814.8 million shares outstanding at March 31, 1999. Revenue for the three months ended March 31, 1999 increased 15.3 percent or about 14 percent on a constant currency basis. Services revenue remained strong and software continued its momentum as middleware continued its strong growth. Hardware revenue grew more than 17 percent, due in part to strong sales of personal computers. The G5 models of the S/390 shipped nearly twice as many MIPS in the quarter as last year. Revenue for the quarter from the company's end-user business totaled $8.8 billion from the Americas (formerly reported as U.S., Canada and Latin America). This represents an increase of 12.5 percent (about 14 percent in constant currency) compared with the first quarter of 1998. Revenue from Europe/Middle East/Africa (EMEA) was $6.3 billion, up 20.0 percent (about 18 percent in constant currency). Revenue from Asia-Pacific increased 20.2 percent (about 13 percent in constant currency) to $3.5 billion. Original equipment manufacturer (OEM) revenue across all geographies totaled $1.8 billion in the first quarter of 1999, a 5.2 percent increase (about 5 percent in constant currency) compared with the year-earlier period. The overall gross profit margin was 35.7 percent in the first quarter compared with 36.6 percent in the first quarter of last year. The decline in gross profit margin continues to reflect the changing mix of the company's business to services, and a decline in margins in the company's hardware business related to a shift from servers to personal computers which have a lower gross profit margin. Total expenses increased 4.7 percent compared with last year's first quarter. The company's expense-to-revenue ratio improved 2.6 points over the first quarter of 1998 to 25.4 percent. The company's tax rate was 30.0 percent in the first quarter compared with 32.0 percent in the year-earlier period as the company continued to benefit from generating increased profit in markets with lower effective tax rates. -8- Results of Operations - (continued) Hardware (Dollars in millions) Three Months Ended March 31 ------------------------ 1999 1998 ------ ------ Total revenue $8,584 $7,318 Total cost 6,250 5,219 ------ ------ Gross profit $2,334 $2,099 Gross profit margin 27.2% 28.7% Revenue from hardware sales increased 17.3 percent (about 16 percent on a constant currency basis) for the first quarter of 1999 compared with the first quarter of 1998. Technology revenue increased slightly in the first quarter of 1999, versus the comparable period in 1998. The increase was driven by growth in HDD storage products, storage tape products and custom logic products. That growth was partially offset by lower semiconductor revenue, primarily due to lower dynamic random access memory (DRAM) prices year over year. Although DRAM prices were down over 40 percent from the first quarter of 1998, prices have stabilized since the fourth quarter of 1998. The company continues to evaluate alternatives to mitigate the effect of memory price pressures on its results. These alternatives include realigning alliance structures, rebalancing sources of supply and redirecting product focus. During the first quarter of 1999 the company signed two major technology contracts. Dell Computers signed a seven year contract valued at $16 billion for the purchase of personal computer parts from the company. The company also entered into a five-year strategic technology and business alliance with EMC Corporation valued at $3 billion. Despite pricing pressures, Personal Systems revenue had very strong growth in the first quarter of 1999 when compared with the same quarter last year. The increase was driven by higher revenue for both commercial and consumer personal computers and a richer mix to mobile and server products. The company introduced new models across its brands - ThinkPads, commercial desk tops, Aptivas, workstations and Netfinity servers. With respect to direct channel sales, the company continued to add to its build-to-order manufacturing capability. The company further expanded its colocation program which enables channel partners to improve their inventory turnover and continues to work with its channel partners to further expand its advanced fulfillment initiative. -9- Results of Operations - (continued) Server revenue declined slightly in the first quarter of 1999 versus the first quarter of 1998. The decline was driven by lower revenue from AS/400 and RS/6000 products, partially offset by increased revenue from S/390 servers. New AS/400 mid-range products with Northstar technology, which doubled the performance of these models, were introduced late in the first quarter of 1999 and sales volumes increased significantly while RS/6000 products showed strong revenue growth in Asia and Europe. These increases were more than offset by lower revenue in North America. The S/390 products are increasingly being used in e-business, Enterprise Resource Planning (ERP) and business intelligence. In addition, the total delivery of computing power increased over 80 percent as measured in MIPS versus the first quarter of last year. Hardware gross profit dollars increased 11.2 percent in the first quarter of 1999 from the comparable period in 1998, primarily due to the strong recovery of the personal systems business. The change in mix between personal systems and servers had a negative effect on the gross profit margin. DRAM prices and price pressures on HDD products also had a negative effect on gross profit margin. Global Services (Dollars in millions) Three Months Ended March 31 ------------------------ 1999 1998 ------ ------ Total revenue $7,550 $6,341 Total cost 5,567 4,630 ------ ------ Gross profit $1,983 $1,711 Gross profit margin 26.3% 27.0% Global Services revenue increased 19.1 percent (about 18 percent on a constant currency basis) compared with the first quarter of 1998. The increase in revenue was driven by strong growth in strategic outsourcing, systems integration and product support services across all geographies. These increases were partially offset by lower revenue associated with maintenance offerings. In the first quarter, new contract signings amounted to $9.8 billion. Most of those contracts are for strategic outsourcing agreements and involve a full spectrum of the company's services and product offerings. Those signings include the outsourcing agreement between the company and AT&T as discussed on page seven of this document. The company recently announced new service offerings that help small and medium-sized businesses as well as Fortune 500 companies create value from e-business. These offerings will create websites that help customers improve their competitiveness. Some offerings support software that integrates commerce websites with back-end systems and corporate data. -10- Results of Operations - (continued) Services gross profit dollars increased in the first quarter by 15.9 percent when compared with the year-ago period. The gross profit margin decline was a result of services, which has a lower gross profit margin than maintenance, becoming a larger percentage of the total Global Services gross profit than in the comparable quarter of 1998. The gross profit margins for services and maintenance individually were flat year over year. Software (Dollars in millions) Three Months Ended March 31 ------------------------ 1999 1998 ------ ------ Total revenue $2,920 $2,644 Total cost 555 540 ------ ------ Gross profit $2,365 $2,104 Gross profit margin 81.0% 79.6% Revenue from software grew 10.4 percent (about 9 percent on a constant currency basis) in the first quarter of 1999 versus the same period in 1998. The growth reflects the company's continued emphasis on growing its middleware business across IBM and non-IBM platforms. Middleware products comprise data management, transaction processing, Tivoli systems management, and Lotus Notes messaging and collaboration. Middleware is a key component of the company's e-business solutions. In addition, operating-systems software revenue also showed growth, primarily in S/390 and RS/6000 offerings. S/390 software revenue is generated from recurring license charges on the entire install base of IBM and non-IBM MIPS capacity. Thus, growth in the install base over the past three quarters drives increased recurring license fees. Software gross profit dollars for the first quarter of 1999 increased 12.4 percent versus the same quarter of 1998. The improvement in gross profit dollars was due to lower levels of amortization costs associated with previously deferred development spending. The improvement will level out over the next three quarters. Global Financing (Dollars in millions) Three Months Ended March 31 ---------------------- 1999 1998 ---- ---- Total revenue $705 $719 Total cost 311 380 ---- ---- Gross profit $394 $339 Gross profit margin 55.9% 47.1% -11- Results of Operations - (continued) Global Financing revenue declined 1.9 percent (about 3 percent on a constant currency basis) in the first quarter of 1999 versus the same period in 1998. The decrease in revenue was driven primarily by lower used equipment sales, due to lease extensions. The decrease was partially offset by higher financing income primarily in North America and EMEA. Financing originations increased nearly 20 percent in the quarter to $9.5 billion, with more growth in commercial financing than in customer financing. Global Financing gross profit dollars increased 16.2 percent versus the first quarter of 1998. The increase was driven by lower cost of borrowing and by Global Financing's increased use of the company's Global Treasury Centers rather than external banks as a funding source. Enterprise Investments/Other (Dollars in millions) Three Months Ended March 31 ---------------------- 1999 1998 ---- ---- Total revenue $558 $596 Total cost 376 399 ---- ---- Gross profit $182 $197 Gross profit margin 32.6% 33.1% Revenue from Enterprise Investments/Other decreased 6.4 percent (about 8 percent on a constant currency basis) in the first quarter of 1999 versus the same period in 1998. The decrease was primarily driven by lower software revenue, offset partially by increased revenue from point-of-sale terminals. The decline in gross profit dollars was primarily driven by the lower software revenue in the first quarter of 1999 versus first quarter of 1998. Expenses (Dollars in millions) Three Months Ended March 31 ---------------------- 1999 1998 ---- ---- Selling, general and administrative $ 3,937 $ 3,719 Percentage of revenue 19.4% 21.1% Research, development and engineering $ 1,181 $ 1,179 Percentage of revenue 5.8% 6.7% -12- Results of Operations - (continued) Selling, general and administrative expense increased 5.8 percent from first quarter 1998. The increase was primarily driven by expenses associated with growth areas like e-business (that is, expenses associated with the company's own web-related sales), additional sales people for software and commissions associated with the strong quarterly sales. The company continues to aggressively manage infrastructure expense and its overall portfolio to allow for investment in growth segments of the business. Research, development and engineering expense was essentially flat for the first quarter of 1999 when compared with the same period of 1998. Interest on total borrowings of the company and its subsidiaries, which includes interest expense and interest costs associated with rentals and financing, amounted to $363 million for the first quarter of 1999. Of this amount, $4 million was capitalized. The effective tax rate for the quarter ended March 31, 1999 was 30.0 percent versus 32.0 percent for the same period in 1998. The company continued to benefit from generating increased profit in markets with lower effective tax rates. Financial Condition The company continued to make significant investments during the first quarter to fund its future growth and enhance shareholder value. These include expenditures of $1.3 billion for research, development and engineering, $1.1 billion in plant, rental machines and other property and $2.1 billion for the repurchase of the company's common shares. The company had $5.4 billion in cash, cash equivalents and marketable securities at March 31, 1999. Cash Flow (Dollars in millions) Three Months Ended March 31 ---------------------- 1999 1998 ------- ------- Net cash provided from (used in): Operating activities $ 1,876 $ 941 Investing activities (961) (1,413) Financing activities (1,292) (1,098) Effect of exchange rate changes on cash and cash equivalents (143) (41) ------- ------- Net change in cash and cash equivalents $ (520) $(1,611) -13- Financial Condition - (continued) Working Capital (Dollars in millions) At March 31 At December 31 1999 1998 ----------- -------------- Current assets $39,801 $42,360 Current liabilities 33,281 36,827 ------- ------- Working capital $ 6,520 $ 5,533 Current ratio 1.20:1 1.15:1 Current assets declined $2.6 billion from year-end 1998 with declines of $2.5 billion in accounts receivable and $.4 billion in cash, cash equivalents, and marketable securities, offset by an increase of $.3 billion in prepaid expenses. The decrease in cash, cash equivalents and marketable securities resulted 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 typically higher year-end accounts receivable balances, while prepaid expenses reflect the seasonal increases from year-end levels. Current liabilities declined $3.5 billion, reflecting declines of $3.0 billion in payables and accruals (resulting primarily from seasonal declines in these balances from their typically higher year-end levels), $.3 billion in taxes, and $.2 billion in short-term debt. Investments During the first three months of 1999, the company continued to invest in its rapidly growing services business, primarily in the management of customers' information technology, as well as in manufacturing capacity for hard disk drives and microelectronics. The company's capital investment for plant, rental machines and other property was $1.1 billion during the first quarter of 1999, a decrease of $.1 billion from the comparable 1998 period. In addition to software development expense included in research, development and engineering expense, the company capitalized $.1 billion of software product costs during the first three months of both 1999 and 1998. Amortization of capitalized software product costs was $.1 billion during the first three months of 1999, a slight decline from the comparable 1998 period. Investments and sundry assets were $22.5 billion at March 31, 1999, a decrease of $1.0 billion from year-end 1998, resulting primarily from decreases in non-current sales-type lease receivables and notes, and deferred tax assets. -14- Financial Condition - (continued) Debt and Equity (Dollars in millions) At March 31 At December 31 1999 1998 ----------- -------------- Non-global financing debt $ 2,799 $ 1,659 Global financing debt 27,194 27,754 ------- ------- Total debt $29,993 $29,413 Stockholders' equity $18,306 $19,433 Debt/capitalization 62.1% 60.2% EBITDA/interest expense 9x 8x Non-global financing: Debt/capitalization 16.7% 9.9% EBITDA/interest expense 17x 15x Global financing debt/equity 6.3:1 6.5:1 Total debt increased $.6 billion from year-end 1998, as non-global financing debt increased $1.1 billion, and debt in support of global financing assets declined $.5 billion. Stockholders' equity declined $1.1 billion from December 31, 1998, as the increase in the company's retained earnings was more than offset by the common share repurchases. Liquidity The company maintains a $10.0 billion committed global credit facility as part of its ongoing efforts to ensure appropriate levels of liquidity. As of March 31, 1999, $8.8 billion of this confirmed line of credit remained unused and available for future use. On February 1, 1999, the company issued $600 million of 5 3/8% notes due February 1, 2009. The net proceeds from the issuance of this debt was used for general corporate purposes. At March 31, 1999, the company had an outstanding balance of $.9 billion in assets under management from the securitization of loans, leases and trade receivables. Year 2000 The "Year 2000 issue" arises because many computer hardware and software systems use only two digits to represent the year. As a result, these systems and programs may not process dates beyond 1999, which may cause errors in information or systems failures. Assessments of the potential effects of the Year 2000 issues vary markedly among different companies, governments, consultants, economists and commentators, and it is not possible to predict what the actual impact may be. Given this uncertainty, the company recognizes the need to remain vigilant and is continuing its analysis, assessment, conversion and contingency planning for the various Year 2000 issues, across its business. -15- Year 2000 - (continued) With respect to its internal systems, the potential Year 2000 impacts extend beyond the company's information technology systems to its manufacturing and development systems and physical facilities. The company has been addressing these issues using the same five-part methodology it recommends to its customers: (1) assessment and strategy; (2) detailed analysis and planning; (3) implementation; (4) maintaining readiness of converted systems; and (5) Project Office Management. The company has completed most conversion and testing efforts, with extended system integration testing and contingency planning projects scheduled throughout 1999. The company estimates that at the conclusion of its various Year 2000 efforts, including conversion, testing and contingency planning, it will have spent a total of approximately $575 million over a multi-year period. Although the company believes its efforts will be successful, any failure or delay could result in the disruption of business and in the company incurring substantial expense. To minimize any such potential impact, the company has initiated a global contingency planning effort designed to support critical business operations. As part of its ordinary course product development efforts, the company's current product and service offerings have been designed to be Year 2000 ready. The Year 2000 readiness of the company's customers varies, and the company continues actively to encourage its customers to prepare their own systems, making available a broad array of product, service and educational offerings to assist them (see the IBM Year 2000 Home Page at http://www.ibm.com/IBM/year2000/). Efforts by customers to address Year 2000 issues may absorb a substantial part of their information technology budgets in the near term, and customers may either delay or accelerate the deployment and implementation of new applications and systems. While this behavior may increase demand for certain of the company's products and services, including its Year 2000 offerings, it could also soften demand for other offerings or change customer buying practices from past trends. These events could affect the company's revenues or change its revenue patterns. The company is continuing its assessment of the Year 2000 readiness of its key suppliers in an effort to establish that the company has adequate resources for required supplies and components. With respect to third-party products the company may remarket or provide with the company's offerings (such as third-party software pre-loaded on the company's personal computers), the company relies on its business partners and other third parties to be responsible for the Year 2000 readiness of their offerings. A failure of the company's suppliers, business partners and other third parties to address adequately their Year 2000 readiness could affect the company's business. As part of its contingency planning efforts, the company is identifying alternate sources or strategies where necessary if significant exposures are identified. Further, some commentators believe that a significant amount of litigation will arise from Year 2000 issues. The company continues to believe that it has good defenses to any such claims brought against it. Finally, the Year 2000 presents a number of other risks and uncertainties that could affect the company, including utilities and telecommunication failures, competition for personnel skilled in the resolution of Year 2000 issues, and the nature of government responses to the issues, -16- Year 2000 - (continued) among others. While the company continues to believe that the Year 2000 matters discussed above will not have a material impact on its business, financial condition or results of operations, it remains uncertain whether or to what extent the company may be affected. The Year 2000 statements set forth above are designated as "Year 2000 Readiness Disclosures" pursuant to the Year 2000 Information and Readiness Disclosure ACT (P.L. 105-271). Forward Looking and Cautionary Statements Except for the historical information and discussions contained herein, statements contained in this Form 10-Q (including statements in the Year 2000 discussion above) may constitute 'forward looking statements' within the meaning of the Private Securities Litigation 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 ultimate impact of the various Year 2000 issues on the company's business, financial condition or results of operations; quarterly fluctuations in revenues and volatility of stock prices; the company's ability to attract and retain key personnel; currency and customer financing risks; dependence on certain suppliers; changes in the financial or business condition of the company'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 elsewhere in this Form 10-Q, in the company's other filings with the Securities and Exchange Commission or in materials incorporated therein by reference. Part II - Other Information ITEM 2 (c). Changes in Securities and Use of Proceeds During February and March, in reliance on Regulation S and pursuant to an employee benefit plan established and administered in accordance with the laws of Ireland, Mercer Limited purchased shares of IBM's capital stock on behalf of foreign nationals domiciled abroad (or on temporary assignment in the United States) and employed by affiliates of the registrant. On February 24, 1999, 283 shares were purchased at a price of $178.563 per share for a total price, excluding commissions, of approximately $50,523. On March 18, 1999, 863 shares were purchased at a price of $177.3125 per share for a total price, excluding commissions, of approximately $153,021. On March 24, 1999, 6,511 shares were purchased at a price of $167.4375 per share for a total price, excluding commissions, of $1,090,213. ITEM 6 (a). Exhibits Exhibit Number 11 Statement re: computation of per share earnings. 12 Statement re: computation of ratios. 27 Financial Data Schedule. -17- Part II - Other Information - (continued) ITEM 6 (b). Reports on Form 8-K The company filed Form 8-K on January 22, 1999, with respect to the company's financial results for the periods ended December 31, 1998, and included unaudited consolidated financial statements for the periods ended December 31, 1998. The company filed Form 8-K on January 26, 1999, regarding the decision of the company's Board of Directors to declare a two-for-one stock split of the company's common stock, subject to stockholder approval of an increase in the company's authorized shares of common stock. No financial statements were filed with this Form 8-K. The company filed Form 8-K dated January 29, 1999, to incorporate by reference into Registration Statement No. 333-40669 on Form S-3, effective December 10, 1997, the Underwriting Agreement dated January 27, 1999, among International Business Machines Corporation; Morgan Stanley & Co. Incorporated; Bear, Stearns & Co. Inc.; Chase Securities Inc.; Credit Suisse First Boston Corporation; Goldman, Sachs & Co.; Lehman Brothers Inc.; Merrill Lynch, Pierce, Fenner and Smith Incorporated and Salomon Smith Barney Inc. In addition, the Form of the 5.375% Note due 2009 was filed. No financial statements were filed with this Form 8-K. 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: May 11, 1999 - ----------------------- By: Mark Loughridge ------------------------------------------- Mark Loughridge Vice President and Controller -18- EX-11 2 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (UNAUDITED) For Three Months Ended -------------------------------- March 31, 1999 March 31, 1998 -------------- -------------- Number of shares on which basic earnings per share is calculated: Average outstanding during period* 1,823,832,328 1,900,420,610 Add - Incremental shares under stock compensation plans* 56,088,292 46,199,546 Add - Incremental shares associated with contingently issuable shares* 3,021,220 -- -------------- -------------- Number of shares on which diluted earnings per share is calculated* 1,882,941,840 1,946,620,156 ============== ============== Net income applicable to common shareholders (millions) $ 1,465 $ 1,031 Less - net income applicable to contingently issuable shares (millions) 4 -- -------------- -------------- Net income on which diluted earnings per share is calculated (millions) $ 1,461 $ 1,031 ============== ============== Basic earnings per share* $ .80 $ .54 Diluted earnings per share* $ .78 $ .53 * Adjusted to reflect a two-for-one stock split effective on May 10, 1999. Stock options to purchase 13,196,830 shares and 39,460,538 shares were outstanding as of March 31, 1999 and 1998, respectively, but were not included in the computation of diluted earnings because the options' exercise price was greater than the average market price of the common shares, and therefore, the effect would have been antidilutive. Net income applicable to common shareholders excludes preferred stock dividends of $5 million for the periods ended March 31, 1999 and 1998. -19- EX-12 3 COMPUTATION OF RATIO OF NET INCOME EXHIBIT 12 COMPUTATION OF RATIO OF NET INCOME TO FIXED CHARGES AND NET INCOME TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS FOR THREE MONTHS ENDED MARCH 31 (UNAUDITED) (Dollars in millions) 1999 1998 ------ ------ Income before income taxes(1) $2,100 $1,521 Add: Fixed charges, excluding capitalized interest 476 525 ------ ------ Net income as adjusted $2,576 $2,046 ====== ====== Fixed charges: Interest expense 359 406 Capitalized interest 4 4 Portion of rental expense representative of interest 117 119 ------ ------ Total fixed charges $ 480 $ 529 ====== ====== Preferred stock dividends(2) 7 7 ------ ------ Combined fixed charges and preferred stock dividends $ 487 $ 536 ====== ====== Ratio of net income to fixed charges 5.37 3.87 Ratio of net income to combined fixed charges and preferred stock dividends 5.29 3.82 (1) Income 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 for the quarter ended March 31, 1999 and 1998, respectively, are preferred stock dividends of $5 million, or $7 million representing the pre-tax earnings which would be required to cover such dividend requirements based on the company's effective tax rate for the three months ended March 31, 1999 and 1998. -20- SEGMENT INFORMATION (UNAUDITED) Hardware Segments --------------------------------- Personal Global (Dollars in millions) Technology Systems Server Services - --------------------------------------------------------------------------- Quarter Ended March 31, 1999: External revenue $2,870 $3,589 $2,073 $7,550 Internal revenue 898 7 73 669 - --------------------------------------------------------------------------- Total revenue $3,768 $3,596 $2,146 $8,219 =========================================================================== Pre-tax income (loss) $ 70 $ (89) $ 498 $ 973 =========================================================================== Revenue year-to- year change (0.1)% 48.6% (3.1)% 17.4% Pre-tax income year- to-year change (70.6)% 80.6% (2.0)% 33.8% Pre-tax income margin 1.9% (2.5)% 23.2% 11.8% Quarter Ended March 31, 1998: External revenue $2,767 $2,414 $2,135 $6,341 Internal revenue 1,005 6 80 659 - --------------------------------------------------------------------------- Total revenue $3,772 $2,420 $2,215 $7,000 =========================================================================== Pre-tax income (loss) $ 238 $ (458) $ 508 $ 727 =========================================================================== Pre-tax income margin 6.3% (18.9)% 22.9% 10.4% Reconciliations to IBM as Reported: Quarter Ended Quarter Ended (Dollars in millions) March 31, 1999 March 31, 1998 -------------- -------------- Revenue: Total reportable segments $ 22,351 $ 19,626 Eliminations/other (2,034) (2,008) -------- -------- Total IBM Consolidated $ 20,317 $ 17,618 ======== ======== Pretax income: Total reportable segments $ 2,334 $ 1,739 Eliminations/other (234) (216) -------- -------- Total IBM Consolidated $ 2,100 $ 1,523 ======== ======== -21- Global Enterprise Total Software Financing Investments Segments - --------------------------------------------------- $2,920 $724 $ 549 $20,275 211 207 11 2,076 - --------------------------------------------------- $3,131 $931 $ 560 $22,351 =================================================== $ 657 $297 $ (72) $ 2,334 =================================================== 10.6% 5.1% 11.3% 13.9% 10.4% 6.5% 52.0% 34.2% 21.0% 31.9% (12.9)% 10.4% $2,644 $725 $ 492 $17,518 186 161 11 2,108 - --------------------------------------------------- $2,830 $886 $ 503 $19,626 =================================================== $ 595 $279 $(150) $ 1,739 =================================================== 21.0% 31.5% (29.8)% 8.9% -22- EXHIBITS OMITTED FROM THIS COPY The Financial Data Schedule. Copies of these exhibits may be obtained without charge from First Chicago Trust Company, a division of Equiserve, Suite 4688, P.O. Box 2530, Jersey City, New Jersey 07303-2530. EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM CORPORATION'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 4,855 501 18,194 0 5,241 39,801 43,898 25,032 81,751 33,281 0 10,332 0 247 7,727 81,751 8,584 20,317 6,250 13,059 5,118 0 174 2,100 630 1,470 0 0 0 1,470 .80 .78
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