-----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, Kup6OUWIgQBKcxXDht2nPmtMmllUFXfWAh95cOaQHo3Lb5FrzLhOL4wEEY4DB0vu Rl6nYvTViX6W1UPN2vSqiA== 0001005477-99-003620.txt : 19990813 0001005477-99-003620.hdr.sgml : 19990813 ACCESSION NUMBER: 0001005477-99-003620 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 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: 99685792 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, DC 20549 FORM 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 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 1,809,089,785 shares of common stock outstanding at June 30, 1999. Index Page ---- Part I - Financial Information: Item 1. Consolidated Financial Statements Consolidated Statement of Earnings for the three and six months ended June 30, 1999 and 1998 .......................................... 1 Consolidated Statement of Financial Position at June 30, 1999 and December 31, 1998 ................................................. 3 Consolidated Statement of Cash Flows for the six months ended June 30, 1999 and 1998 ................................................ 5 Notes to Consolidated Financial Statements .............................. 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ......................................... 10 Part II - Other Information ................................................. 21 Part I - Financial Information ITEM 1. Consolidated Financial Statements 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, ------------------ ------------------ 1999 1998 1999 1998 ------- ------- ------- ------- Revenue: Hardware $ 9,379 $ 7,714 $17,963 $15,032 Global Services 7,988 6,969 15,538 13,310 Software 3,126 2,866 6,046 5,510 Global Financing 743 712 1,448 1,431 Enterprise Investments/Other 669 562 1,227 1,158 ------- ------- ------- ------- Total revenue 21,905 18,823 42,222 36,441 Cost: Hardware 6,699 5,347 12,949 10,566 Global Services 5,721 5,065 11,288 9,695 Software 520 548 1,075 1,088 Global Financing 332 377 643 757 Enterprise Investments/Other 409 340 785 739 ------- ------- ------- ------- Total cost 13,681 11,677 26,740 22,845 ------- ------- ------- ------- Gross profit 8,224 7,146 15,482 13,596 Operating expenses: Selling, general and administrative 2,846 3,812 6,783 7,531 Research, development and engineering 1,293 1,220 2,474 2,399 ------- ------- ------- ------- Total operating expenses 4,139 5,032 9,257 9,930 Operating income 4,085 2,114 6,225 3,666 Other income, principally interest 155 130 289 280 Interest expense 197 161 371 340 ------- ------- ------- ------- Net income before income taxes 4,043 2,083 6,143 3,606 Income tax provision 1,652 631 2,282 1,118 ------- ------- ------- ------- Net income 2,391 1,452 3,861 2,488 Preferred stock dividends 5 5 10 10 ------- ------- ------- ------- Net income applicable to common shareholders $ 2,386 $ 1,447 $ 3,851 $ 2,478 ======= ======= ======= ======= (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 Six Months Ended June 30, June 30, --------------------- --------------------- 1999 1998* 1999 1998* ---- ---- ---- ---- Earnings per share of common stock - assuming dilution $ 1.28 $ 0.75 $ 2.05 $ 1.28 Earnings per share of common stock - basic $ 1.32 $ 0.77 $ 2.12 $ 1.31 Average number of common shares outstanding: (millions) Assuming dilution 1,870.6 1,928.7 1,876.6 1,939.0 Basic 1,812.1 1,879.2 1,818.0 1,889.8 Cash dividends per common share $ 0.12 $ 0.11 $ 0.23 $ 0.21 * 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 (UNAUDITED) ASSETS (Dollars in millions except At June 30, At December 31, per share amounts) 1999 1998 ----------- --------------- Assets Current assets: Cash and cash equivalents $ 5,465 $ 5,375 Marketable securities -- at fair value, which approximates market 1,776 393 Notes and accounts receivable -- trade, net of allowances 19,727 20,271 Sales-type leases receivable 6,299 6,510 Inventories, at lower of average cost or net realizable value Finished goods 1,272 1,088 Work in process and raw materials 3,767 4,112 ------- ------- Total inventories 5,039 5,200 Prepaid expenses and other current assets 5,146 4,611 ------- ------- Total current assets 43,452 42,360 Plant, rental machines and other property 40,015 44,870 Less: Accumulated depreciation 22,762 25,239 ------- ------- Plant, rental machines and other property -- net 17,253 19,631 Software 613 599 Investments and sundry assets 22,029 23,510 ------- ------- Total assets $83,347 $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) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY (Dollars in millions except At June 30, At December 31, per share amounts) 1999 1998 ----------- --------------- Liabilities and Stockholders' Equity Current liabilities: Taxes $ 3,397 $ 3,125 Accounts payable and accruals 17,851 19,797 Short-term debt 14,713 13,905 -------- --------- Total current liabilities 35,961 36,827 Long-term debt 14,330 15,508 Other long-term liabilities 12,574 12,818 Deferred income taxes 1,324 1,514 -------- --------- Total liabilities 64,189 66,667 Stockholders' equity: Preferred stock - par value $.01 per share 247 247 Shares authorized: 150,000,000 Shares issues: 1999 - 2,546,011 1998 - 2,546,011 Common stock - par value $.20 per share 11,638 10,121 Shares authorized: 4,687,500,000 Shares issued: 1999 - 1,869,868,949 1998 - 1,853,738,104* Retained earnings 13,542 10,141 Treasury stock - at cost (3,866) (133) Shares: 1999 - 40,779,164 1998 - 1,924,293* Employee benefits trust (2,564) (1,854) Shares: 1999 - 20,000,000 1998 - 20,000,000* Accumulated gains and losses not affecting retained earnings 161 911 Total stockholders' equity 19,158 19,433 -------- -------- Total liabilities and stockholders' equity $ 83,347 $ 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 SIX MONTHS ENDED JUNE 30, (UNAUDITED) (Dollars in millions) 1999 1998 ---- ---- Cash flow from operating activities: Net income $ 3,861 $ 2,488 Adjustments to reconcile net income to cash provided from operating activities: Depreciation 3,669 2,054 Amortization of software 203 283 Gain on disposition of fixed and other assets (3,796) (128) Changes in operating assets and liabilities (417) (1,357) ------- ------- Net cash provided from operating activities 3,520 3,340 ------- ------- Cash flow from investing activities: Payments for plant, rental machines and other property, net of proceeds (2,155) (2,403) Investment in software (209) (120) Purchases of marketable securities and other investments (2,693) (1,150) Proceeds from sale of the IBM Global Network 4,081 -- Proceeds from marketable securities and other investments 1,505 812 ------- ------- Net cash provide from (used in) investment activities 529 (2,861) ------- ------- Cash flow from financing activities: Proceeds from debt issuance 2,986 4,106 Payments to settle debt (3,274) (2,326) Short-term borrowings less than 90 days -- net 177 (560) Common stock transactions -- net (3,259) (3,272) Cash dividends paid (433) (412) ------- ------- Net cash used in financing activities (3,803) (2,464) ------- ------- Effect of exchange rate changes on cash and cash equivalents (156) (37) ------- ------- Net change in cash and cash equivalents 90 (2,022) Cash and cash equivalents at January 1 5,375 7,106 ------- ------- Cash and cash equivalents at June 30 $ 5,465 $ 5,084 ======= ======= (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- and six-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 income ($2,391 million and $1,452 million) plus the decrease in foreign currency translation adjustments ($162 million and $90 million) plus unrealized losses on marketable securities ($24 million and $22 million) totaled $2,205 million and $1,340 million for the three-month periods ended June 30, 1999 and 1998, respectively. Net income ($3,861 million and $2,488 million) plus the decrease in foreign currency translation adjustments ($752 million and $181 million) plus unrealized gains/losses on marketable securities ($2 million and $18 million) totaled $3,111 million and $2,289 million for the six-month periods ended June 30, 1999 and 1998, respectively. 3. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date Of FASB Statement No. 133. This statement defers the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to fiscal years beginning after June 15, 2000, although early adoption is encouraged. SFAS No. 133 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 for accounting purposes and, if so, the nature of the hedging activity. The company will adopt this standard as of January 1, 2001. 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 29 through 32 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. On January 26, 1999, the company's Board of Directors approved a two-for-one stock split effective May 10, 1999. 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 that stock split. In addition, the amendment 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 received one additional share for each share held. -6- Notes to Consolidated Financial Statements - (continued) All share and per share data presented in the Consolidated Financial Statements reflect the two-for-one stock split. 6. The second quarter 1999 results include a pre-tax benefit of $1,610 million ($687 million after tax, or $.37 per diluted common share) related to the sale of IBM's Global Network, actions within the company's Technology Group, and a change in estimate related to the depreciable life of personal computers used within the company. That benefit is reflected in Selling, general and administrative expense. Sale of Global Network. In December 1998, the company announced that it would sell its Global Network business to AT&T for $5 billion. The IBM Global Network generated revenues of approximately $1.2 billion in 1998. During the second quarter of 1999, the company completed the sales of its Global Network businesses in the United States, Japan, the United Kingdom, and Ireland, for approximately $4,192 million. More than 3,500 IBM employees joined AT&T as a result of the sales to date. The company expects the sales of the Global Network in the remaining countries to be substantially completed in the third quarter. The company recognized a pre-tax gain of $3,430 million on the sales ($2,102 million after tax, or $1.12 per diluted common share). The net gain reflects dispositions of Plant, rental machines and other property of $310 million and other assets of $181 million, and contractual obligations of $283 million. Technology Group Actions. During the second quarter, the company approved and implemented actions designed to better align the operations of IBM's Technology Group with that group's strategic direction in view of the competitive environment, overcapacity in the industry and resulting pricing pressures. The actions affect the Microelectronics Division (MD) and the Storage Systems Division (SSD) of the company's Technology Group. The company expects these actions to be substantially completed by the first half of 2000. The actions and the resulting improvement in the cost structure are intended to enable the company to enhance its profitability within MD and SSD in the future. During the second quarter, the company recorded a charge of $1,416 million ($1,174 million after tax, or $.62 per diluted common share) related to the Technology Group actions. The charge included $190 million related to employee termination benefits and $1,226 million of other costs as described below. (The table on page 9 identifies the portion of the total charge that relates to investment and other asset write downs and the portion that relates to liabilities as of June 30, 1999.) -7- Notes to Consolidated Financial Statements - (continued) The actions within MD have two objectives. First, they address a prolonged, industry-wide downturn in memory chip prices that has affected the results of the company's semiconductor business and are intended to enable the company to reconfigure the assets and capabilities of the division to allow more focus on the faster-growth, higher-margin custom logic portion of the MD business. After evaluating alternatives to mitigate the effect of memory price pressures and negotiating with other members of joint ventures, the company acted to minimize its dependence on high-volume manufacturing of DRAM memory components businesses while shifting its resources toward the faster-growth, higher-margin custom chip area. The DRAM actions affect one of the company's European manufacturing facilities and a joint venture partnership in the United States. Second, the actions within MD enhance the company's ability to more cost effectively manage a partnership agreement that was formed to produce CMOS-based logic components. The company will reduce its internal DRAM capacity by converting its manufacturing facility in Essonnes, France from DRAM to custom logic over an 18-month period. The company will effect that conversion through a joint venture established in the second quarter with Infineon Technologies, a subsidiary of Siemens. The partners will share equally in the capacity output of the venture. The company used assets whose net book value is greater than their fair value to fund its stake in the venture. The company recognized a charge in the second quarter for the difference between net book value and fair value of those assets as well as assets that were idled as a result of these actions and that will be scrapped. Also in connection with the decisions related to the DRAM business, the company executed contracts with various banks and other financing institutions in the second quarter to sell and leaseback test equipment. The net book value of the equipment was greater than the appraised fair value and the company recognized a charge in the second quarter for that difference. The company took a pre-tax charge of $829 million ($770 million after tax, $.41 per diluted common share) related to the actions in Essonnes and the sale-leasebacks of test equipment. That amount includes a $167 million pre-tax charge for workforce reductions that affect approximately 790 employees (455 direct manufacturing and 335 indirect manufacturing) in France. The terminations are expected to be substantially completed by the end of the first quarter of 2000. The company also participates in a 50/50 joint venture (Dominion Semiconductor Company) with Toshiba Corporation to produce DRAM memory components. In the second quarter, the company entered into an agreement whereby Toshiba will assume the company's interest in Dominion effective December 31, 2000. The company will participate in the capacity output of Dominion at a significantly reduced rate in the interim period. The company took a pre-tax write-off of $171 million ($104 million after tax, or $.05 per diluted common share) for its investment in the joint venture at the signing of the agreement with Toshiba. The company holds a majority interest in a joint venture (MiCRUS) with Cirrus Logic Inc. (the partner) to produce CMOS-based logic components for IBM and its partner based on contractual capacity agreements. In the second quarter, the partner indicated that it will not require the output capacity that is provided for in the partnership agreement. The company determined that the most cost-effective manner in which to address the partner's desire to exit the partnership agreement is to acquire the minority interest held by that partner. Accordingly, the company acquired the minority interest late in the second quarter and has waived its rights to -8- Notes to Consolidated Financial Statements - (continued) seek compensation from the former partner for equipment leasehold cancellation liabilities and lease rental payments for idle equipment. The company recognized a pre-tax charge of $152 million ($92 million after tax, or $.05 per diluted common share), as a result of this arrangement. The company also announced aggressive steps to improve its competitive position in the markets that SSD serves by merging server hard disk drive product lines and realigning operations. The company will integrate all server hard disk drives into a single low-cost design platform that uses common development and manufacturing processes. The company will continue to transfer manufacturing assembly and test operations to Hungary and Mexico. The company expects to complete these actions by June 30, 2000. The actions within SSD resulted in second quarter pre-tax charges of $264 million ($208 million after tax, or $.11 per diluted common share). That amount includes write-downs to fair value of equipment (a) that is being idled and will be scrapped ($123 million), (b) under contract for sale and delivery by December 31, 1999 ($27 million), and (c) subject to sale-leaseback agreements ($91 million write-down of the equipment to appraised fair value). The pre-tax amount for SSD actions also includes a charge of $23 million in workforce reductions that affect approximately 900 employees (780 direct manufacturing and 120 indirect manufacturing) in the United States. The terminations are expected to be substantially completed by December 31, 1999, with 105 terminations in the first half of 2000. Summary. The following table identifies the significant components of the pre-tax charge related to Technology Group actions, the investments and other asset write-downs in the quarter, and the liability as of June 30, 1999: (Dollars in millions) Liability Created Total Investment & in the Pre-tax Other Asset Second Liability as of Charges Write-Downs Quarter June 30, 1999 MD Actions Essonnes Equipment $ 662 $ 662 $ -- $ -- Employee Terminations 167 -- 167 167 Dominion Investment 171 171 -- -- MiCRUS Investment 152 -- 152 152 SSD Actions Equipment 241 241 -- -- Employee Terminations 23 -- 23 23 ------ ------ ------ ------ Total Actions $1,416 $1,074 $ 342 $ 342 ====== ====== ====== ====== -9- Notes to Consolidated Financial Statements - (continued) Change in Estimate. The company developed a Client Standardization Strategy for IBM's internal desktop asset management designed to ensure that IBM deploys standard platforms to provide common interfaces among IBM organizations. To achieve optimal productivity, the acquisition and rollout of standard use software must be aligned with compatible hardware. New software typically is designed to be used with technology that is no more than three years old. Thus, personal computers (PCs) used within IBM will be replaced, on average, by the end of their third year in use instead of the current practice of five years. As a result of the Strategy and the change in estimate of PC useful life, the company recognized a charge in the second quarter of $404 million ($241 million after tax, $.13 per diluted common share). The remaining book value of the assets will be depreciated over the remaining new useful life. In the second quarter, the company wrote off the net book value of PCs that were 3 years or older and, therefore, had no remaining useful life. The net effect on future operations is expected to be minimal as the increased depreciation due to the shorter life will be offset by the lower depreciable base attributable to the write off of PCs older than three years. 7. Subsequent Events: The company announced on July 12, 1999, that it will acquire Sequent Computer Systems Inc. for approximately $810 million. Under terms of the deal, the company will pay Sequent stockholders $18 in cash for each share of Sequent common stock. The completion of the acquisition is subject to Sequent stockholder and regulatory approvals. The company announced on July 27, 1999, that it will acquire Mylex Corporation, a leading developer of technology for moving, storing, protecting and managing data in desktop and networked environments. The company will pay $12 for each outstanding share of Mylex common stock, or approximately $240 million. The completion of the acquisition is subject to regulatory and other approvals. During July 1999, the company completed the sales of its Global Network business in France, Germany, Switzerland, Norway, Denmark, Austria, Sweden, Finland, Iceland, Liechtenstein, Belgium, Spain, Netherlands, Luxembourg, Curacao and Monaco for approximately $500 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 The company's second-quarter and first-half results reflect continued building on strategic priorities in services, software and the sale of leadership technology to the marketplace. The services business continued to show excellent results. The software unit had very good performance, with strong results from the company's database, transaction processing and Tivoli products. Although the company saw price pressures in some areas of technology, the company's technology business nevertheless performed well overall in a difficult environment. The company had very good growth in its S/390 servers, with shipments of S/390 computing power more than doubling year over year. The RS/6000 revenue showed marked improvement -10- in the second quarter. The Personal Systems group continued to demonstrate strong year-over-year sales growth. The company's second quarter actions in the microelectronics and storage areas are intended to improve the competitiveness of the company's technology business and to further strengthen the company's overall business portfolio. While the results for the second quarter and the first six months of 1999 were strong, the company still faces uncertainties 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 margins. Result of Operations (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenue $21,905 $18,823 $42,222 $36,441 Cost 13,681 11,677 26,740 22,845 ------- ------- ------- ------- Gross profit $ 8,224 $ 7,146 $15,482 $13,596 Gross profit margin 37.5% 38.0% 36.7% 37.3% Net income $ 2,391 $ 1,452 $ 3,861 $ 2,488 Earnings per share of common stock: Assuming dilution $ 1.28 $ 0.75* $ 2.05 $ 1.28* Basic $ 1.32 $ 0.77* $ 2.12 $ 1.31* * Adjusted to reflect a two-for-one stock split effective May 10, 1999. As a result of the company's share repurchase program, the average number of common shares outstanding assuming dilution was lower by 58.1 million than the second quarter in 1998 and by 62.4 million than the first six months of 1998. The average number of shares assuming dilution was 1,870.6 million in the second quarter of 1999 and 1,876.6 million for the first six months of 1999. There were 1,809.1 million shares outstanding at June 30, 1999. Revenue for the three months ended June 30, 1999 increased 16.4 percent versus the same period last year (also 16.4 percent in constant currency). Services revenue growth remained strong and software continued to display improved year-to-year growth in middleware offerings. -11- Results of Operations - (continued) Hardware revenue grew 21.6 percent as the personal computer business continued its year-over-year improvement. Revenue for the second quarter of 1999 from the company's end-user businesses totaled $10.0 billion from the Americas, an increase of 16.3 percent (about 18 percent in constant currency) compared with the same period last year. Latin America, which is about 10 percent of the Americas, showed improvement with revenues growing at 8 percent on a constant currency basis, compared with a 10 percent decline in the first quarter of 1999. Revenue from Europe/Middle East/Africa was $6.4 billion, up 13.7 percent (about 17 percent in constant currency). Asia-Pacific revenue grew 19.5 percent (about 9 percent in constant currency) to $3.6 billion. As in the first quarter of 1999, key areas outside of Japan continued to show strong double-digit growth. Japan revenue was basically flat in the second quarter following modest growth in the first quarter of 1999. OEM revenue across all geographies was $1.9 billion, a 20.6 percent increase (about 20 percent in constant currency) compared with the second quarter of 1998. The company's overall gross profit margin was 37.5 percent in the second quarter compared with 38.0 percent in the same period of 1998. 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. The company's $4.2 billion second quarter expenses include the actions that are described in Note No. 6 to the Consolidated Financial Statements on pages 7 through 10. The company's expense-to-revenue ratio improved 7.8 points in the quarter. The actions contributed to a 7.3 point improvement in the expense-to-revenue ratio in the second quarter of 1999. The company's tax rate was 40.8 percent in the second quarter compared with 30.3 percent in the year-earlier period. The increase was principally due to the second quarter actions taken by the company. Hardware (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $ 9,379 $ 7,714 $17,963 $15,032 Total cost 6,699 5,347 12,949 10,566 ------- ------- ------- ------- Gross profit $ 2,680 $ 2,367 $ 5,014 $ 4,466 Gross profit margin 28.6% 30.7% 27.9% 29.7% Revenue from hardware for the second quarter and first six months of 1999 increased 21.6 percent and 19.4 percent, respectively, when compared with the same periods in 1998. Despite continued pricing pressures, personal computer revenue had very strong growth in the second quarter and first six months of 1999, compared with the same periods in 1998. -12- The Results of Operations - (continued) increases were driven by higher revenue for both commercial and consumer personal computers and a richer mix to mobile and Netfinity server products. The company continues to focus on expanding its direct channel customers; improving its indirect channel efficiency through its advanced fulfillment initiative, expanding its co-location program and focusing on turnover of high-cost parts; increasing focus on fast growing small- and medium- size businesses; and realizing more opportunity in businesses that are tied to the personal computer-like services, software and financing. Technology revenue increased for both the second quarter and first six months of 1999 when compared with year-ago periods. The increases were driven by strong growth in HDD storage, custom logic and storage tape products. Despite very strong growth in HDD revenue, these products continue to be affected by pricing pressures. During the second quarter of 1999, the company signed two major technology contracts. Acer signed a seven-year contract valued at $8 billion and Nintendo signed a multi-year contract valued at $1 billion to purchase technology from the company. The actions that the company took in the second quarter of 1999 are aimed directly at strengthening the Technology Group over the long term. These actions are intended to shift the focus of the Technology Group to higher margin businesses and more efficient operations. Server revenue increased slightly in the second quarter of 1999 and was flat for the first six months of 1999, versus the same period of 1998. S/390 had strong revenue growth as demand continued for the G5 and the new G6 models. The S/390 servers are increasingly being used in e-business, Enterprise Resource Planning (ERP) and business intelligence. RS/6000 showed improvement in the second quarter with good revenue growth and was up slightly on a six-month basis. The new H70 SMP model, an enterprise server, was well received by customers in the second quarter. AS/400 declined in the second quarter and first six months of 1999, when compared with the second quarter and first six months of 1998. While volumes grew, revenue was down reflecting a change in the mix within the AS/400 product line. In addition, Europe (where the AS/400 has traditionally been well received) had declining revenue due to poor sales execution, and North America revenue grew modestly. Hardware sales gross profit for the second quarter and first six months of 1999 increased 13.2 percent and 12.3 percent, respectively, from comparable periods in 1998. The hardware gross profit margin decreased 2.1 points and 1.8 points, respectively, from the prior year. Pricing pressures associated with personal computers, hard disk drives and memory chip prices drove the declines in gross profit margins from the same periods in 1998. Additionally, the change in mix between personal systems and servers had a negative effect on the gross profit margin and a lower model mix in the mobile HDDs (in which some customers' capacity needs are being met by new mid-range products, rather than the more profitable high-end mobile products) also affected gross profit for the second quarter. Those declines were partially offset by improved margins for personal computers and S/390 products. -13- Results of Operations - (continued) Global Services (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $ 7,988 $ 6,969 $15,538 $13,310 Total cost 5,721 5,065 11,288 9,695 ------- ------- ------- ------- Gross profit $ 2,267 $ 1,904 $ 4,250 $ 3,615 Gross profit margin 28.4% 27.3% 27.4% 27.2% Global Services revenue increased 14.6 percent and 16.7 percent, respectively, in the second quarter and first six months of 1999, when compared with the same periods of last year. The increase in revenue was driven by strong growth in strategic outsourcing, systems integration and product support services across all geographies. Networking revenue was up slightly for the quarter and had good growth for the six-month period, despite the sale of a portion of the IBM Global Network to AT&T during the second quarter of 1999. These increases were partially offset by lower revenue associated with maintenance offerings. New contract signings in the second quarter were $9.5 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 11 deals that individually are valued at over $100 million. Global Services gross profit dollars increased in the second quarter and first six months of 1999 by 19.1 percent and 17.6 percent, respectively, when compared with year-ago periods. The improvement in gross profit dollars and margin was a result of improved services margins in systems integration and strategic outsourcing primarily in EMEA, which more than offset the changing mix away from the higher-margin maintenance business. Maintenance margins were flat year over year. Software (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $3,126 $2,866 $6,046 $5,510 Total cost 520 548 1,075 1,088 ------ ------ ------ ------ Gross profit $2,606 $2,318 $4,971 $4,422 Gross profit margin 83.4% 80.9% 82.2% 80.2% Revenue from software for the second quarter and first six months of 1999 increased 9.1 percent and 9.7 percent, respectively, over comparable periods in 1998. The growth continues to be driven by the company's middleware products which comprise data management, transaction processing, Tivoli systems management, and Lotus Notes messaging and collaboration across both IBM and non-IBM platforms. Middleware is the software that powers the infrastructure of the company's e-business solutions. The company continues to -14- Results of Operations - (continued) focus on helping customers use its software to transform their businesses to e-businesses, particularly in collaboration with the company's Global Services Group and channel partners. Operating-systems software revenue was flat for the second quarter and showed growth for the six months of 1999, when compared with year-ago periods. The increase in the six months revenue was primarily driven by S/390 and RS/6000 offerings. Software gross profit dollars for both the second quarter and first six months of 1999 increased 12.4 percent versus the same periods in 1998. The improvement in gross profit dollars and margin is due to increased revenue and lower levels of amortization costs associated with previously deferred development spending, partially offset by higher vendor royalty payments due primarily to increased volumes. Global Financing (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $ 743 $ 712 $1,448 $1,431 Total cost 332 377 643 757 ------ ------ ------ ------ Gross profit $ 411 $ 335 $ 805 $ 674 Gross profit margin 55.3% 47.2% 55.6% 47.2% Global Financing revenue increased 4.3 percent and 1.2 percent, respectively, for the second quarter and first six months of 1999, when compared with the same periods of 1998. The increases in revenue were driven by growth in customer financing, as well as increased financing of software and services in North America and Europe. These increases were partially offset by lower used equipment sales. Financing originations increased by nearly 30 percent in the quarter to $11.0 billion, with strong growth in both customer and commercial financing year to year. In addition, the company increased its asset base in North America with the acquisition of Comdisco's mainframe lease portfolio. Global Financing gross profit dollars increased 22.7 percent and 19.4 percent, respectively, for the second quarter and first six months of 1999, versus the same periods of 1998. The increase was driven by lower cost of borrowing and by Global Financing's continued increased use of the company's Global Treasury Centers rather than external banks as a funding source. -15- Results of Operations - (continued) Enterprise Investments / Other (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $ 669 $ 562 $1,227 $1,158 Total cost 409 340 785 739 ------ ------ ------ ------ Gross profit $ 260 $ 222 $ 442 $ 419 Gross profit margin 38.9% 39.6% 36.0% 36.2% Revenue from Enterprise Investments/Other increased 19.1 percent and 6.0 percent, respectively, for the second quarter and first six months of 1999, versus comparable periods in 1998. The increases were driven primarily by strong second-quarter growth in point-of-sale terminals and good growth in CATIA software. The Enterprise Investments/Other gross profit dollars increased 17.1 percent and 5.5 percent, respectively, in the second quarter and first six months of 1999, versus the same periods of 1998. The increases were primarily driven by the increased revenue from point-of-sale terminals. Expenses (Dollars in millions) Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Selling, general and administrative $ 2,846 $ 3,812 $ 6,783 $ 7,531 Percentage of revenue 13.0% 20.3% 16.1% 20.7% Research, development and engineering $ 1,293 $ 1,220 $ 2,474 $ 2,399 Percentage of revenue 5.9% 6.5% 5.9% 6.6% Selling, general and administrative expense for the second quarter and first six months of 1999 decreased 25.3 percent and 9.9 percent, respectively, from the same periods in 1998. The decreases were driven by the net benefit of $1,610 million associated with the actions taken in the second quarter. (See Note No. 6 to the Consolidated Financial Statements on pages 7 through 10 for further information). The company continues to manage aggressively its infrastructure expense and its overall portfolio to allow for investment in growth segments of the business. Key ongoing investments include software marketing, major marketing campaigns and new offerings for small and medium business opportunities, as well as the e-business campaign. These types of expenditures are consistent with the company's ongoing objective of growing revenue while improving the expense-to-revenue ratio over time. -16- Results of Operations - (continued) Research, development and engineering expense increased 5.9 percent and 3.1 percent, respectively, for the second quarter and first six months of 1999, when compared with the same periods of 1998. The increases reflect the company's continued investments in high-growth opportunities like e-business, Tivoli systems management and Lotus products. Interest on total borrowings of the company and its subsidiaries, which includes interest expense and interest costs associated with rentals and financing, amounted to $389 million and $752 million for the second quarter and first six months of 1999, respectively. Of these amounts, the company capitalized $11 million for the second quarter and $15 million for the first six months of 1999. The effective tax rate for the quarter ended June 30, 1999, was 40.8 percent versus 30.3 percent for the same period in 1998. The 10.5 point increase was principally due to the second-quarter actions taken by the company. The effective tax rate for the first six months of 1999 was 37.1 percent versus 31.0 percent for the same period in 1998. The 6.1 point increase from the 1998 rate was primarily a result of the same factors that affected the second quarter effective tax rate. Financial Condition During the first half of 1999, the company continued to make significant investments to fund its future growth and increase shareholder value. These included expenditures of $2,741 million for Research, development and engineering, $2,865 million in Plant, rental machines and other property and $3,732 million for the repurchase of the company's common shares. The company had $7,241 million in Cash and cash equivalents and Marketable securities at June 30, 1999. Cash Flow (Dollars in millions) Six Months Ended June 30, ---------------------- 1999 1998 ---- ---- Net cash provided from (used in): Operating activities $ 3,520 $ 3,340 Investing activities 529 (2,861) Financing activities (3,803) (2,464) Effect of exchange rate changes on cash and cash equivalents (156) (37) ------- ------- Net change in cash and cash equivalents $ 90 $(2,022) ======= ======= -17- Financial Condition - (continued) Working Capital (Dollars in millions) At June 30, At December 31, 1999 1998 ----------- --------------- Current assets $43,452 $42,360 Current liabilities 35,961 36,827 ------- ------- Working capital $ 7,491 $ 5,533 Current ratio 1.21:1 1.15:1 Current assets increased $1,092 million from year-end 1998 with increases of $1,473 million in Cash and cash equivalents and Marketable securities, and $535 million in Prepaid expenses and other current assets, offset by decreases of $755 million in accounts receivable ($544 million in Notes and accounts receivable and $211 million in Sales-type lease receivables) and $161 million in Inventories. The increase in Cash and cash equivalents and Marketable securities resulted primarily from cash generated from operations and the net proceeds from the sale of a portion of the IBM Global Network, offset by stock repurchases and capital expenditures. Prepaid expenses and other current assets reflect the seasonal increase in prepaid expenses from typically lower year-end levels. The decline in accounts receivable is attributable to the collection of traditionally higher year-end accounts receivable balances, while inventory declines were driven by personal computer and storage systems inventory reductions. Current liabilities declined $866 million with declines of $1,946 million in Accounts payable and accruals (resulting primarily from seasonal declines in these balances from their normally higher year-end levels), offset by increases of $808 million in Short-term debt and $272 million in Taxes payable. Investments During the first half 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 $2,865 million during the first half of 1999 and $2,778 million for the first half of 1998. In addition to software development expense included in Research, development and engineering expense, the company capitalized $209 million of software costs during the first half of 1999, an increase of $89 million from the comparable period in 1998. Amortization of capitalized software costs was $203 million during the first half of 1999, a decline of $80 million from the comparable 1998 period. Investments and sundry assets were $22,029 million at June 30, 1999, a decrease of $1,481 million from year-end 1998, resulting primarily from decreases in non-current sales-type lease receivables and deferred tax assets. -18- Financial Condition - (continued) Other Non-Current Liabilities Other non-current liabilities of $12,574 million at June 30, 1999, declined $244 million from year-end 1998 primarily in postretirement benefits and non-U.S. retirement reserves. Debt and Equity (Dollars in millions) At June 30, At December 31, 1999 1998 ----------- --------------- Global financing debt $26,902 $27,754 Non-global financing debt 2,141 1,659 ------- ------- Total debt $29,043 $29,413 Stockholders' equity $19,158 $19,433 Debt/capitalization 60.3% 60.2% EBITDA / interest expense 9x 8x Non-global financing: Debt/capitalization 12.8% 9.9% EBITDA/interest expense 17x 15x Global financing debt/equity 6.0:1 6.5:1 Total debt decreased $370 million from year-end 1998 as debt supporting the growth in global financing assets decreased $852 million, and non-global financing debt increased $482 million. Stockholders' equity declined $275 million 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 June 30, 1999, $9,062 million of this confirmed line of credit remained unused and available for future use. At June 30, 1999, the company had an outstanding balance of $515 million 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 -19- Year 2000 - (continued) the actual impact may be. Given this uncertainty, the company recognizes the need to remain vigilant and is continuing its analysis, assessment and planning for the various Year 2000 issues, across its business. 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 is actively encouraging 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 that the company may remarket or provide with the company's offering (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 failures, competition for personnel skilled in the resolution of -20- Year 2000 - (continued) Year 2000 issues, and the nature of government responses to the issues, 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 On April 26, 1999, 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 429 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. The purchase price per share was $206.375 for a total price, excluding commissions, of $88,535. -21- ITEM 4. Submission of Matters to a Vote of Security Holders The International Business Machines Corporation held its Annual Meeting of Stockholders on April 27, 1999. For more information on the following proposals, see the company's proxy statement dated March 23, 1999, the relevant portions of which are incorporated herein by reference. (1) The stockholders elected each of the twelve nominees to the Board of Directors for a one-year term: DIRECTOR FOR WITHHELD ------------------- ----------- --------- C. Black 736,341,039 5,238,516 K. I. Chenault 736,013,859 5,565,696 J. Dormann 736,537,919 5,041,636 L. V. Gerstner, Jr. 736,197,557 5,381,998 N.O. Keohane 735,844,815 5,734,740 C. F. Knight 736,360,631 5,218,924 M. Makihara 736,143,611 5,435,944 L. A. Noto 736,418,384 5,161,171 J. B. Slaughter 735,868,684 5,710,871 A. Trotman 736,234,310 5,345,245 L. C. van Wachem 736,200,005 5,379,550 C. M. Vest 736,227,422 5,352,133 (2) The stockholders ratified the appointment of PricewaterhouseCoopers LLP as independent auditor of the company: For 737,050,740 Against 1,619,416 Abstain 2,909,399 ----------- Total 741,579,555 (3) The stockholders approved an amendment of the Certificate of Incorporation to increase the authorized common shares and effect a two-for-one common stock split: For 718,296,759 Against 20,463,140 Abstain 2,819,656 ----------- Total 741,579,555 -22- ITEM 4. Submission of Matters to a Vote of Security Holders - (continued) (4) The stockholders approved the adoption of the IBM 1999 Long-Term Performance Plan: For 396,298,469 Against 187,293,051 Abstain 7,914,439 Broker No Vote 150,073,596 ----------- Total 741,579,555 (5) The stockholders approved Annual Incentive Compensation Terms for Certain Executives: For 672,927,431 Against 58,655,838 Abstain 9,996,286 ----------- Total 741,579,555 (6) The stockholders defeated a shareholder proposal on Executive Compensation: For 56,612,979 Against 520,326,369 Abstain 14,566,611 Broker No Vote 150,073,596 ----------- Total 741,579,555 ITEM 6 (a). Exhibits Exhibit Number 11 Statement re: computation of per share earnings. 12 Statement re: computation of ratios. 22 The company's proxy statement dated March 23, 1999, containing the full text of the proposals referred to in Item 4, which was previously filed electronically, is hereby incorporated by reference. 27 Financial Data Schedule -23- ITEM 6 (b). Reports on Form 8-K The company filed Form 8-K on April 22, 1999, to incorporate by reference into Registration Statement No. 333-70521 on Form S-3, effective March 9, 1999, the Agency Agreement dated March 11, 1999, among International Business Machines Corporation, Chase Securities Inc., Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. No financial statements were filed with this Form 8-K. The company filed Form 8-K on April 23, 1999, with respect to the company's financial results for the period ended March 31, 1999 and included unaudited consolidated financial statements for the period ended March 31, 1999. The company filed Form 8-K on April 28, 1999, with respect to the stockholders approval 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 approved by the company's Board of Directors on January 26, 1999. The Form 8-K included pro-forma financial statements to reflect the two-for-one stock split on historical data and the company's Certificate of Incorporation as amended through April 28, 1999. -24- 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 12, 1999 By: /s/ Mark Loughridge --------------------------------------- Mark Loughridge Vice President and Controller -25- EX-11 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (UNAUDITED) For Quarter Ended ------------------------------ June 30, 1999 June 30, 1998 ------------- ------------- Number of shares on which basic earnings per share is calculated: Average outstanding during period 1,812,074,414 1,879,223,476* Add - Incremental shares under stock compensation plans 58,575,124 49,471,050* -------------- -------------- Number of shares on which diluted earnings per share is calculated 1,870,649,538 1,928,694,526* ============== ============== Net income applicable to common shareholders (millions) $ 2,386 $ 1,447 Less - net income applicable to contingently issuable shares (millions) 0 0 -------------- -------------- Net income on which diluted earnings per share is calculated (millions) $ 2,386 $ 1,447 ============== ============== Diluted earnings per share $ 1.28 $ .75* Basic earnings per share $ 1.32 $ .77* * Adjusted to reflect a two-for-one stock split effective May 10, 1999. Stock options to purchase 287,300 shares as of June 30, 1999 were outstanding, 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. In addition, 3,031,183 restricted stock units as of June 30, 1999 relating to the company's Long-Term Performance Plan were not included in the computation of diluted earnings as their effect would have been antidilutive. Net income applicable to common shareholders excludes preferred stock dividends of $5 million for the three months ended June 30, 1999 and 1998. -26- COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE - (continued) (UNAUDITED) For Six Months Ended ------------------------------- June 30, 1999 June 30, 1998 ------------- ------------- Number of shares on which basic earnings per share is calculated: Average outstanding during period 1,817,953,371 1,889,822,044* Add - Incremental shares under stock compensation plans 58,683,577 49,143,298* -------------- -------------- Number of shares on which diluted earnings per share is calculated 1,876,636,948 1,938,965,342* ============== ============== Net income applicable to common shareholders (millions) $ 3,851 $ 2,478 Less - net income applicable to contingently issuable shares (millions) 0 0 -------------- -------------- Net income on which diluted earnings per share is calculated (millions) $ 3,851 $ 2,478 ============== ============== Diluted earnings per share $ 2.05 $ 1.28* Basic earnings per share $ 2.12 $ 1.31* * Adjusted to reflect a two-for-one stock split effective May 10, 1999. Stock options to purchase 417,500 shares as of June 30, 1999 and 93,758 shares as of June 30, 1998 were outstanding, 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. In addition, 2,953,924 restricted stock units as of June 30, 1999 relating to the company's Long-Term Performance Plan were not included in the computation of diluted earnings as their effect would have been antidilutive. Net income applicable to common shareholders excludes preferred stock dividends of $10 million for the six months ended June 30, 1999 and 1998. -27- EX-12 3 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12 COMPUTATION OF RATIO OF NET INCOME TO FIXED CHARGES AND NET INCOME TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS FOR SIX MONTHS ENDED JUNE 30 (UNAUDITED) (Dollars in millions) 1999 1998 ---- ---- Income before income taxes (1) $6,137 $3,598 Add: Fixed charges, excluding capitalized interest 973 1,027 ------ ------ Net income as adjusted $7,110 $4,625 ====== ====== Fixed charges: Interest expense $ 739 $ 789 Capitalized interest 15 11 Portion of rental expense representative of interest 234 238 ------ ------ Total fixed charges $ 988 $1,038 ====== ====== Preferred stock dividends (2) 15 14 ------ ------ Combined fixed charges and preferred stock dividends $1,003 $1,052 ====== ====== Ratio of net income to fixed charges 7.20 4.46 Ratio of net income to combined fixed charges and preferred stock dividends 7.09 4.40 (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 are preferred stock dividends of $10 million for the first six months of 1998 and 1997, or $15 million and $14 million, respectively, representing the pre-tax income that would be required to cover those dividend requirements based on the company's effective tax rate for the six months ended June 30, 1999 and 1998. -28- SEGMENT INFORMATION (UNAUDITED) Hardware Segments -------------------------------- Personal Global (Dollars in millions) Technology Systems Server Services - -------------------------------------------------------------------------------- Quarter Ended June 30, 1999: External revenue $ 3,062 $ 3,873 $ 2,349 $ 7,988 Internal revenue 1,013 7 92 628 ------- ------- ------- ------- Total revenue $ 4,075 $ 3,880 $ 2,441 $ 8,616 ======= ======= ======= ======= Pre-tax income (loss) $ 130 $ (153) $ 516 $ 1,137 ======= ======= ======= ======= Revenue year-to-year change 5.1% 50.1% 3.0% 13.4% Pre-tax income year-to-year change (53.7)% 64.9% (6.4)% 19.8% Pre-tax income margin 3.2% (3.9)% 21.1% 13.2% Quarter Ended June 30, 1998: External revenue $ 2,778 $ 2,578 $ 2,273 $ 6,969 Internal revenue 1,101 7 98 632 ------- ------- ------- ------- Total revenue $ 3,879 $ 2,585 $ 2,371 $ 7,601 ======= ======= ======= ======= Pre-tax income (loss) $ 281 $ (436) $ 551 $ 949 ======= ======= ======= ======= Pre-tax income margin 7.2% (16.9)% 23.2% 12.5% Reconciliations to IBM as Reported: Quarter Ended Quarter Ended (Dollars in millions) June 30, 1999 June 30, 1998 ------------- ------------- Revenue: Total reportable segments $ 23,946 $ 20,963 Eliminations/other (2,041) (2,140) -------- -------- Total IBM Consolidated $ 21,905 $ 18,823 ======== ======== Pretax income: Total reportable segments $ 2,557 $ 2,099 Sales of IBM's Global Network 3,430 0 Second quarter actions (1,820) 0 Eliminations/other (124) (16) -------- -------- Total IBM Consolidated $ 4,043 $ 2,083 ======== ======== -29-
Global Enterprise Total (Dollars in millions) Software Financing Investments Segments - ---------------------------------------------------------------------------------------------- Quarter Ended June 30, 1999: External revenue $ 3,126 $ 764 $ 661 $21,823 Internal revenue 182 198 3 2,123 ------- ------- ------- ------- Total revenue $ 3,308 $ 962 $ 664 $23,946 ======= ======= ======= ======= Pre-tax income (loss) $ 700 $ 328 $ (101) $ 2,557 ======= ======= ======= ======= Revenue year-to-year change 8.8% 6.1% 14.7% 14.2% Pre-tax income year-to-year change 11.8% 13.5% 37.3% 21.8% Pre-tax income margin 21.2% 34.1% (15.2)% 10.7% Quarter Ended June 30, 1998: External revenue $ 2,866 $ 741 $ 566 $18,771 Internal revenue 175 166 13 2,192 ------- ------- ------- ------- Total revenue $ 3,041 $ 907 $ 579 $20,963 ======= ======= ======= ======= Pre-tax income (loss) $ 626 $ 289 $ (161) $ 2,099 ======= ======= ======= ======= Pre-tax income margin 20.6% 31.9% (27.8)% 10.0%
-30- SEGMENT INFORMATION (UNAUDITED) Hardware Segments Personal Global (Dollars in millions) Technology Systems Server Services - -------------------------------------------------------------------------------- Six Months Ended June 30, 1999: External revenue $ 5,932 $ 7,462 $ 4,422 $15,538 Internal revenue 1,911 14 165 1,297 ------- ------- ------- ------- Total revenue $ 7,843 $ 7,476 $ 4,587 $16,835 ======= ======= ======= ======= Pre-tax income (loss) $ 200 $ (242) $ 1,014 $ 2,110 ======= ======= ======= ======= Revenue year-to-year change 2.5% 49.4% 0.0% 15.3% Pre-tax income year-to-year change (61.5)% 72.9% (4.2)% 25.9% Pre-tax income margin 2.6% (3.2)% 22.1% 12.5% Six Months Ended June 30, 1998: External revenue $ 5,545 $ 4,992 $ 4,408 $13,310 Internal revenue 2,106 13 178 1,291 ------- ------- ------- ------- Total revenue $ 7,651 $ 5,005 $ 4,586 $14,601 ======= ======= ======= ======= Pre-tax income (loss) $ 519 $ (894) $ 1,059 $ 1,676 ======= ======= ======= ======= Pre-tax income margin 6.8% (17.9)% 23.1% 11.5% Reconciliations to IBM as Reported: Six Months Ended Six Months Ended (Dollars in millions) June 30, 1999 June 30, 1998 ---------------- ---------------- Revenue: Total reportable segments $ 46,297 $ 40,589 Eliminations/other (4,075) (4,148) -------- -------- Total IBM Consolidated $ 42,222 $ 36,441 ======== ======== Pretax income: Total reportable segments $ 4,891 $ 3,838 Sales of IBM's Global Network 3,430 0 Second quarter actions (1,820) 0 Eliminations/other (358) (232) -------- -------- Total IBM Consolidated $ 6,143 $ 3,606 ======== ======== -31-
Global Enterprise Total (Dollars in millions) Software Financing Investments Segments - ---------------------------------------------------------------------------------------------- Six Months Ended June 30, 1999: External revenue $ 6,046 $ 1,488 $ 1,210 $42,098 Internal revenue 393 405 14 4,199 ------- ------- ------- ------- Total revenue $ 6,439 $ 1,893 $ 1,224 $46,297 ======= ======= ======= ======= Pre-tax income (loss) $ 1,357 $ 625 $ (173) $ 4,891 ======= ======= ======= ======= Revenue year-to-year change 9.7% 5.6% 13.1% 14.1% Pre-tax income year-to-year change 11.1% 10.0% 44.4% 27.4% Pre-tax income margin 21.1% 33.0% (14.1)% 10.6% Six Months Ended June 30, 1998: External revenue $ 5,510 $ 1,466 $ 1,058 $36,289 Internal revenue 361 327 24 4,300 ------- ------- ------- ------- Total revenue $ 5,871 $ 1,793 $ 1,082 $40,589 ======= ======= ======= ======= Pre-tax income (loss) $ 1,221 $ 586 $ (311) $ 3,838 ======= ======= ======= ======= Pre-tax income margin 20.8% 31.7% (28.7)% 9.4%
-32- EX-27 4 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM CORPORATION'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCAIL STATEMENTS. 1,000,000 6-MOS DEC-31-1999 JUN-30-1999 5,465 1,776 19,727 0 5,039 43,452 40,015 22,762 83,347 35,961 0 0 247 11,638 7,273 83,347 17,963 42,222 12,949 26,740 9,257 0 371 6,143 2,282 3,861 0 0 0 3,861 2.12 2.05
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