-----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, DgyMmZNeE7c7A3AEOps9hHfTi7Bb48EZL/LpifcAfaMoAAOVfT9Q1VVAUJnZioC0 TMf7egfuw/15ACesrJTaAg== 0001005477-99-005197.txt : 19991115 0001005477-99-005197.hdr.sgml : 19991115 ACCESSION NUMBER: 0001005477-99-005197 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99749775 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 SEPTEMBER 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 1,802,604,435 shares of common stock outstanding at September 30, 1999. Index Page ---- Part I - Financial Information: Item 1. Consolidated Financial Statements Consolidated Statement of Earnings for the three and nine months ended September 30, 1999 and 1998 ...........................1 Consolidated Statement of Financial Position at September 30, 1999 and December 31, 1998 ...........................3 Consolidated Statement of Cash Flows for the nine months ended September 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 .................................................22 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 Nine Months Ended per share amounts) September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ------- ------- ------- ------- Revenue: Hardware $ 8,840 $ 8,920 $26,803 $23,952 Global Services 7,898 7,046 23,436 20,356 Software 3,010 2,808 9,056 8,318 Global Financing 774 679 2,222 2,110 Enterprise Investments/Other 622 642 1,849 1,800 ------- ------- ------- ------- Total revenue 21,144 20,095 63,366 56,536 Cost: Hardware 6,610 6,101 19,559 16,667 Global Services 5,715 5,222 17,003 14,917 Software 567 544 1,642 1,632 Global Financing 335 351 978 1,108 Enterprise Investments/Other 353 410 1,138 1,149 ------- ------- ------- ------- Total cost 13,580 12,628 40,320 35,473 ------- ------- ------- ------- Gross profit 7,564 7,467 23,046 21,063 Operating expenses: Selling, general and administrative 3,501 4,057 10,284 11,588 Research, development and engineering 1,383 1,240 3,857 3,639 ------- ------- ------- ------- Total operating expenses 4,884 5,297 14,141 15,227 Operating income 2,680 2,170 8,905 5,836 Other income, principally interest 134 122 423 402 Interest expense 185 160 556 500 ------- ------- ------- ------- Income before income taxes 2,629 2,132 8,772 5,738 Income tax provision 867 638 3,149 1,756 ------- ------- ------- ------- Net income 1,762 1,494 5,623 3,982 Preferred stock dividends 5 5 15 15 ------- ------- ------- ------- Net income applicable to common shareholders $ 1,757 $ 1,489 $ 5,608 $ 3,967 ======= ======= ======= ======= (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 Nine Months Ended September 30, September 30, -------------------- -------------------- 1999 1998* 1999 1998* ---- ----- ---- ----- Earnings per share of common stock - assuming dilution $ 0.93 $ 0.78 $ 2.99 $ 2.05 Earnings per share of common stock - basic $ 0.97 $ 0.80 $ 3.09 $ 2.11 Average number of common shares outstanding: (millions) Assuming dilution 1,869.6 1,909.0 1,874.7 1,931.0 Basic 1,805.2 1,856.9 1,813.7 1,878.8 Cash dividends per common share $ 0.12 $ 0.11 $ 0.35 $ 0.32
* 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) At September 30, At December 31, 1999 1998 ---------------- --------------- Assets Current assets: Cash and cash equivalents $ 4,582 $ 5,375 Marketable securities -- at fair value, which approximates market 1,444 393 Notes and accounts receivable -- trade, net of lowances allowances 20,379 20,271 Sales-type leases receivable 6,432 6,510 Inventories, at lower of average cost or net realizable value Finished goods 1,292 1,088 Work in process and raw materials 3,838 4,112 ------- ------- Total inventories 5,130 5,200 Prepaid expenses and other current assets 4,910 4,611 ------- ------- Total current assets 42,877 42,360 Plant, rental machines and other property 40,812 44,870 Less: Accumulated depreciation 23,349 25,239 ------- ------- Plant, rental machines and other property -- net 17,463 19,631 Software 628 599 Investments and sundry assets 24,407 23,510 ------- ------- Total assets $85,375 $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 September 30, At December 31, per share amounts) 1999 1998 ---------------- --------------- Liabilities and Stockholders' Equity Current liabilities: Taxes $ 3,778 $ 3,125 Accounts payable and accruals 19,904 19,797 Short-term debt 14,096 13,905 -------- -------- Total current liabilities 37,778 36,827 Long-term debt 13,807 15,508 Other long-term liabilities 12,315 12,818 Deferred income taxes 1,407 1,514 -------- -------- Total liabilities 65,307 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 11,850 10,121 Shares authorized: 4,687,500,000 Shares issued: 1999 - 1,874,691,460 1998 - 1,853,738,104* Retained earnings 15,074 10,141 Treasury stock - at cost (5,314) (133) Shares: 1999 - 52,087,025 1998 - 1,924,293* Employee benefits trust (2,419) (1,854) Shares: 1999 - 20,000,000 1998 - 20,000,000* Accumulated gains and losses not affecting retained earnings 630 911 -------- -------- Total stockholders' equity 20,068 19,433 -------- -------- Total liabilities and stockholders' equity $ 85,375 $ 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 NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) (Dollars in millions) 1999 1998 ---- ---- Cash flow from operating activities: Net income $ 5,623 $ 3,982 Adjustments to reconcile net income to cash provided from operating activities: Depreciation 5,010 3,246 Amortization of software 319 401 Gain on disposition of fixed and other assets (4,554) (156) Changes in operating assets and liabilities 362 (932) ------- ------- Net cash provided from operating activities 6,760 6,541 ------- ------- Cash flow from investing activities: Payments for plant, rental machines and other property, net of proceeds (3,373) (3,975) Investment in software (321) (180) Purchases of marketable securities and other investments (2,754) (1,532) Proceeds from sale of the IBM Global Network 4,808 -- Proceeds from marketable securities and other investments 1,081 1,201 ------- ------- Net cash used in investing activities (4,486) ------- ------- Cash flow from financing activities: Proceeds from debt issuance 4,658 6,049 Payments to settle debt (5,639) (4,053) Short-term borrowings less than 90 days-- net (650) (246) Common stock transactions-- net (4,544) (4,830) Cash dividends paid (656) (623) ------- ------- Net cash used in financing activities (6,831) (3,703) ------- ------- Effect of exchange rate changes on cash and cash equivalents (163) 95 ------- ------- Net change in cash and cash equivalents (793) (1,553) Cash and cash equivalents at January 1 5,375 7,106 ------- ------- Cash and cash equivalents at September 30 $ 4,582 $ 5,553 ======= ======= (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 nine-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 ($1,762 million and $1,494 million) plus the increase in foreign currency translation adjustments ($276 million and $253 million) plus unrealized gains/(losses) on marketable securities [$193 million and ($43) million] totaled $2,231 million and $1,704 million for the three-month periods ended September 30, 1999 and 1998, respectively. Net income ($5,623 million and $3,982 million) plus the (decrease)/increase in foreign currency translation adjustments [($476) million and $72 million] plus unrealized gains/(losses) on marketable securities [$195 million and ($60) million] totaled $5,342 million and $3,994 million for the nine-month periods ended September 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 26 through 29 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 -6- Notes to Consolidated Financial Statements - (continued) $.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. All share and per share data presented in the Consolidated Financial Statements reflect the two-for-one stock split. 6. The third quarter 1999 results include a pre-tax benefit of $201 million ($63 million after tax, or $.03 per diluted common share) related to the sale of IBM's Global Network, actions within the company's Technology Group, and charges for acquired in-process research and development related to three purchase acquisitions. Sale of the 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 third quarter of 1999, the company completed the sales of its Global Network business in 34 countries for approximately $727 million, bringing the year-to-date total to 38 countries and $4,919 million. More than 5,100 IBM employees joined AT&T as a result of these sales. The company recognized a pre-tax gain of $586 million on the third-quarter sales ($366 million after tax, or $.19 per diluted common share). The net gain reflects dispositions of Plant, rental machines and other property of $62 million and contractual obligations of $79 million. Technology Group Actions. On August 31, 1999, the company announced that the Networking Hardware Division (NHD) of the company's Technology Group entered into a global alliance with Cisco Systems, Inc. (Cisco) comprising an agreement by Cisco to purchase IBM technology over the next five years; a strategic relationship with IBM Global Services under which the two companies will offer a full spectrum of services and jointly developed solutions for customers' e-business and networking needs; and the sale to Cisco of intellectual property (IP) related to routing and switching technology. The completion of the sale of IP is subject to regulatory approvals. The IP sales agreement permits the company to continue to (a) sell router and switch products to new customers for one year after the company receives the regulatory approvals and (b) fulfill existing contractual commitments beyond the one-year period. As a result of the announcement of the alliance, demand for the router and switch products from both existing and new customers has abruptly deteriorated. Thus, the company took a pre-tax charge totaling $178 million ($109 million after tax, or $.06 per diluted common share) related to a write-down to net realizable value of its inventory of router and switch products ($144 million) and related contract cancellation fees ($34 million). 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. As part of those actions, the company announced (in the second quarter) aggressive -7- Notes to Consolidated Financial Statements - (continued) steps to improve the competitive position of its Storage Systems Division (SSD) 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 took a pre-tax charge of $264 million in the second quarter and expects these actions to be substantially completed by the first half of 2000. The continuing actions within SSD resulted in additional third quarter pre-tax charges of $96 million ($83 million after tax, or $.04 per diluted common share). That amount includes write-downs to fair value of equipment (a) that is idle and will be scrapped ($42 million), (b) under contract for sale and delivery by March 31, 2000 ($7 million), and (c) subject to sale-leaseback agreements ($47 million write-down of the equipment to appraised fair value). The liability as of September 30, 1999 for the second quarter charges within the Technology Group is $327 million. There is no liability at that date for the third-quarter SSD asset write-downs. Acquisitions. On September 24, 1999, the company acquired all of the outstanding capital stock of Sequent Computer Systems, Inc. (Sequent) for approximately $828 million or $18 for each outstanding share of Sequent common stock. Sequent is an acknowledged leader in systems based on NUMA (non-uniform memory access) architecture. NUMA is advanced hardware and software that allows large numbers of processors to operate as a single system while maintaining the ease of programming and manageability of a small system. On September 29, 1999, the company completed the acquisition of Mylex Corporation (Mylex) for approximately $259 million or $12 for each outstanding share of Mylex common stock. Mylex is a leading developer of technology for moving, storing, protecting and managing data in desktop and networked environments. On September 27, 1999, the company acquired DASCOM, Inc., (DASCOM) an industry leader in Web-based and enterprise-security technology, for approximately $115 million. The company accounted for each acquisition as a purchase transaction. The effects of these acquisitions on the company's consolidated financial statements were not material. Hence, the company has not provided pro forma financial statements as if the companies had combined at the beginning of the current period or the immediately preceding period. The company engaged a nationally recognized independent appraisal firm to express an opinion on the fair value of the net assets that the company acquired to serve as a basis for the following allocation of the purchase price. -8- Notes to Consolidated Financial Statements - (continued) (Dollars in millions) Sequent Mylex DASCOM ------- ----- ------ Purchase price $ 828 $ 259 $ 115 Tangible net assets 382 67 (17) Identifiable intangible assets 187 35 13 Current technology 87 26 19 Goodwill 183 145 92 In-process research and development 85 7 19 Deferred tax liabilities related to identifiable intangible assets (96) (21) (11) The tangible net assets comprise primarily cash, accounts receivable, land, buildings and leasehold improvements. The identifiable intangible assets comprise primarily patents, trademarks, customer lists, assembled work force, employee agreements and leasehold interests. Current technology includes products currently in the marketplace as of the acquisition date and products still in the development stage and technologically feasible. The identifiable intangible assets and goodwill, and current technology will be amortized on a straight-line basis over a five- and two-year period, respectively. Purchased In-Process Research and Development. In connection with the acquisitions of Sequent, Mylex and DASCOM, the company recorded a pre-tax charge for research, development and engineering of $111 million ($111 million after tax, or $.06 per diluted common share) for acquired in-process research and development (IPR&D). At the date of each acquisition, the IPR&D projects had not yet reached technological feasibility and had no alternative future uses. The value of IPR&D is calculated using a discounted cash flow analysis of the anticipated income stream of the related product sales. The discount rate assumptions range from 25 percent to 50 percent based on stage of completion of each of the projects, costs and complexity of the work completed to date and to be completed, and other risks associated with completing the development. 7. Subsequent Events: On October 6, 1999, the company announced that the Personal Systems Group (PSG) took actions to intensify its focus on direct distribution channels, consolidate organizations throughout PSG, change its approach to the consumer market and reduce overall costs and expenses. As a result of those actions, the Consumer Division will no longer be a separate structure within PSG. This action had no effect on the third quarter consolidated financial statements. On October 26, 1999, the Board of Directors 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. ITEM 2. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 The company's third-quarter results were mixed. Results reflect a so-called Year 2000 (Y2K) slowdown toward the end of the quarter. It became apparent late in the quarter that many customers had accelerated their hardware purchases earlier in the year to accommodate Y2K testing. Therefore, the third quarter reflected reduced revenue as customers completed the task of making their enterprise-wide, mission-critical applications Y2K compliant and did not purchase additional capacity to begin to install new or expanded applications. That slowdown was particularly evident in S/390 and AS/400 servers, and to a lesser extent in services and operating systems software. Additionally, results reflected shortages of flat-panel displays, price pressure in the hard disk drive (HDD) business, sales deterioration as a result of the sale of intellectual property related to certain NHD hardware technology and the company's inability to rapidly expand into growth areas beyond its traditional customer set. On the positive side, the company's growth businesses -- services, software other than operating systems and original equipment manufacturer (OEM) - -- all performed well. The company's actions in the networking hardware 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 third quarter were mixed, the results underscore the strength of the company's broad portfolio and its fundamental business strategies. Looking forward, the company believes that it will continue to feel the effects of the Y2K slowdown in the fourth quarter of 1999 and the first quarter of 2000. Although fourth quarter demand for servers historically has been roughly 50 percent higher than the third quarter, the company does not expect customer buying patterns for S/390 and AS/400 to follow the historical trend this year. Many customers will hold back on building or expanding their mission-critical applications until after the millennium. The company's fourth quarter earnings per share could be as much as $.15 or $.20 below last year's fourth quarter due to this Y2K slowdown. Additionally, the earnings per share in the first quarter of 2000 could be flat to down slightly from the first quarter of 1999, as these factors start to lift. The company remains confident about its fundamental business strategies, the value of its products and services and its overall momentum. -10- Results of Operations (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Revenue $21,144 $20,095 $63,366 $56,536 Cost 13,580 12,628 40,320 35,473 ------- ------- ------- ------- Gross profit $ 7,564 $ 7,467 $23,046 $21,063 Gross profit margin 35.8% 37.2% 36.4% 37.3% Net income $ 1,762 $ 1,494 $ 5,623 $ 3,982 Earnings per share of common stock: Assuming dilution $ 0.93 $ 0.78* $ 2.99 $ 2.05* Basic $ 0.97 $ 0.80* $ 3.09 $ 2.11* * 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 39.4 million than the third quarter in 1998 and by 56.3 million than the first nine months of 1998. The average number of shares assuming dilution was 1,869.6 million in the third quarter of 1999 and 1,874.7 million for the first nine months of 1999. There were 1,802.6 million shares outstanding at September 30, 1999. Revenue for the three months ended September 30, 1999 increased 5.2 percent versus the same period last year (approximately 5 percent in constant currency). Services, middleware software and OEM revenue continued to show good growth. Hardware revenue declined slightly as a result of lower S/390 and AS/400 server revenue, attributable to the Y2K slowdown. In addition, while RS/6000 revenue declined slightly from the same period last year, RS/6000 Enterprise Unix servers saw double-digit revenue growth. NT servers growth was even stronger. Networking hardware revenue declined significantly. Those declines were partially offset by increased revenue from personal computers, due to strong growth in the Netfinity server line. Microelectronics revenue also increased when compared with the third quarter of 1998. Revenue for the third quarter of 1999 from the company's end-user businesses totaled $9.6 billion from the Americas, a decrease of 0.6 percent (approximately 1 percent increase in constant currency) compared with the same period last year. Latin America, which is approximately 10 percent of the America's revenue, showed improvement with revenues growing at 7 percent on a constant currency basis. Revenue from Europe/Middle East/Africa was $5.8 billion, down 1.6 percent (approximately 4 percent increase in constant currency). Asia-Pacific revenue grew 28.1 percent (approximately 10 percent in constant currency) to $3.7 billion. As in the first half of 1999, key areas outside of Japan continued to show strong double-digit growth. Revenue in Japan was strong in the third quarter following modest growth in the first half of 1999. OEM revenue across all geographies was $2.0 billion, a 23.8 percent increase (approximately 22 percent in constant currency) compared with the third quarter of 1998. -11- Results of Operations - (continued) The company's overall gross profit margin was 35.8 percent in the third quarter compared with 37.2 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 hardware business related to a shift from servers to personal computers which have a lower gross profit margin. In addition, an inventory write-down of $144 million related to the networking hardware business negatively affected the company's overall gross margin by 0.7 points in the third quarter of 1999. The company's $4.9 billion third quarter expenses reflect the actions (excluding the inventory write-down for certain NHD products of $144 million) that are described in Note No. 6 to the Consolidated Financial Statements on pages 7 through 9. The company's expense-to-revenue ratio improved 3.2 points in the quarter. The actions that were included in expense contributed to a 1.6 point improvement in the expense-to-revenue ratio in the third quarter of 1999. The company's tax rate was 33.0 percent in the third quarter compared with 30.0 percent in the year-earlier period. The increase was principally due to the third quarter actions taken by the company. Net income for the nine months ended September 30, 1999, including the effect of actions taken in the second and third quarters, was $5.6 billion, or $2.99 per diluted common share, compared with net income of $4.0 billion, or $2.05 per diluted common share, in the year-earlier period. Through the first nine months of 1999, the company's diluted earnings per share grew 46 percent, with 20 points of that growth attributable to actions taken in the second and third quarters. Revenues for the nine months ended September 30, 1999 were $63.4 billion, an increase of 12 percent (approximately 12 percent in constant currency) compared with $56.5 billion in the same period of 1998. Hardware (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $8,840 $8,920 $26,803 $23,952 Total cost 6,610 6,101 19,559 16,667 ------ ------ ------- ------- Gross profit $2,230 $2,819 $ 7,244 $ 7,285 Gross profit margin 25.2% 31.6% 27.0% 30.4% Revenue from hardware for the third quarter of 1999 declined 0.9 percent and increased 11.9 percent for the first nine months of 1999 when compared with the same periods in 1998. Despite continued pricing pressures, personal computer revenue continued to improve for the third quarter and the first nine months of 1999, compared with the same periods in 1998. The increases were driven by higher revenue for both commercial and consumer personal computers and a richer mix to mobile and Netfinity server products. Although Thinkpad results were good, -12- Results of Operations - (continued) sales were constrained by supply shortages of flat-panel displays. That supply constraint may continue into the fourth quarter of 1999. In the third quarter, the company continued to focus on expanding its direct channel customers; improving its indirect channel efficiency; increasing focus on fast growing small- and medium-size businesses; and realizing more opportunity in businesses that are tied to the personal computer including services, software and financing. As described in Note No. 7 on page 9, the company announced on October 6, 1999 that the Personal Systems Group (PSG) took actions to intensify its focus on direct distribution channels, consolidate organizations throughout PSG, change its approach to the consumer market and reduce overall costs and expenses. As a result of those actions, the Consumer Division will no longer be a separate structure within PSG. This action had no effect on the third quarter financial statements. Technology revenue increased for both the third quarter and first nine months of 1999 when compared with year-ago periods. The increase in third quarter revenue was driven by strong growth in custom logic and high-performance SRAMs; DRAM revenue grew moderately. A slower growth rate in HDD storage revenue than in the comparable year-ago periods continued to reflect pricing pressures and a leaner mix of revenue for high-end HDDs. Those increases were partially offset by (a) declines in high-end RAMAC sales, as customers awaited a new Enterprise Storage Server (Shark) which began to ship in the last week of the quarter, (b) lower tape and DASD sales and (c) declines in Networking Hardware revenue as a result of the proposed sale of routing and switching IP to Cisco Systems. (See Note No. 6 to Consolidated Financial Statements on pages 7 through 9 for further information on this sale). The increase in technology revenue for the first nine months of 1999 primarily was driven by growth in HDD storage, custom logic and storage tape products. The actions that the company took in the third quarter of 1999 in the networking hardware and storage areas are a continuation of the second quarter actions that are aimed directly at strengthening the Technology Group over the long term. Those actions are intended to shift the focus of the Technology Group to higher margin businesses and more efficient operations. Server revenue declined in the third quarter and the first nine months of 1999, versus the same periods of 1998. S/390 revenue declined sharply in the third quarter and decreased for the first nine months of 1999, when compared with the same periods in 1998. S/390 MIPS shipments decreased 18 percent versus the third quarter of last year. Some S/390 customers have completed the task of making Y2K compliant the mainframe computers that they use in data centers to run highly-integrated enterprise-wide applications with large transaction volumes that are mission critical to the customer. Once the systems are Y2K ready, customers are disinclined to enhance them until next year because of concerns about somehow affecting their Y2K readiness. S/390 also had a difficult compare with the third quarter of 1998, in which the company introduced and shipped the Model G5. AS/400 declined in the third quarter and first nine months of 1999, when compared with the same periods last year. The AS/400 continued to see a decline due to poor sales execution and a slowdown in sales related to Enterprise Resource Planning (ERP) solutions due to Y2K concerns. RS/6000 revenue declined in the third quarter and was flat for the first nine months of 1999 versus the same periods in 1998. The RS/6000 enterprise servers had good growth in the quarter, despite the fact that the new S80 server did not start to ship until the end of the third quarter. -13- Results of Operations - (continued) Hardware sales gross profit for the third quarter and first nine months of 1999 decreased 20.9 percent and 0.6 percent, respectively, from comparable periods in 1998. The hardware gross profit margin decreased 6.4 points and 3.4 points, respectively, from the prior year. Pricing pressures associated with personal computers and hard disk drives drove the declines in gross profit margins from the same periods in 1998. Additionally, the change in mix between personal systems and servers, 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 had a negative effect on gross profit for the third quarter and first nine months of 1999. In addition, the third quarter write-down for certain NHD inventory contributed 1.6 points of the decline in hardware gross profit margin. Those declines were partially offset by improved margins for personal computers and a higher mix of servers and laptops. Global Services (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $7,898 $7,046 $23,436 $20,356 Total cost 5,715 5,222 17,003 14,917 ------ ------ ------- ------- Gross profit $2,183 $1,824 $ 6,433 $ 5,439 Gross profit margin 27.6% 25.9% 27.5% 26.7% Global Services revenue increased 12.1 percent and 15.1 percent in the third quarter and first nine months of 1999, respectively, 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. Networking revenue was down for the quarter and increased for the nine-month period, despite the sale of most of the IBM Global Network to AT&T during the second and third quarter of 1999. In the third quarter of 1999, the company started to see a decline in Y2K services, and expects further declines in the fourth quarter of 1999 and the first quarter of 2000 as the need for these services disappears. The company sees growing demand for new services offerings including addressing the European Monetary Unit, business intelligence, e-business services, supply chain management and customer relationship management. Maintenance revenue was flat in the third quarter of 1999 and decreased slightly on a nine-month basis when compared with the same period in 1998. New contract signings in the third quarter were $9.2 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 10 deals that individually are valued at over $100 million. Global Services gross profit dollars increased in the third quarter and first nine months of 1999 by 19.7 percent and 18.3 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, strategic outsourcing and product support services. Those improvements more than offset the changing mix away from the higher margin maintenance business to services. Maintenance margins improved in the third quarter of 1999 and were flat year over year when compared with the same periods in 1998. -14- Results of Operations - (continued) Software (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $3,010 $2,808 $9,056 $8,318 Total cost 567 544 1,642 1,632 ------ ------ ------ ------ Gross profit $2,443 $2,264 $7,414 $6,686 Gross profit margin 81.2% 80.6% 81.9% 80.4% Revenue from software for the third quarter and first nine months of 1999 increased 7.2 percent and 8.9 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. The company continues to 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 declined in the third quarter and is flat for the nine months of 1999 when compared with year-ago periods. The decline in third quarter revenue was driven by AS/400 products partially offset by growth in S/390 and RS/6000 offerings. Software gross profit dollars for both the third quarter and first nine months of 1999 increased 7.9 percent and 10.9 percent, respectively, 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 Nine Months Ended September 30 September 30 ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $774 $679 $2,222 $2,110 Total cost 335 351 978 1,108 ---- ---- ------ ------ Gross profit $439 $328 $1,244 $1,002 Gross profit margin 56.7% 48.1% 56.0% 47.5% Global Financing revenue increased 13.9 percent and 5.3 percent for the third quarter and first nine months of 1999, respectively, when compared with the same periods of 1998. The increases in revenue were driven by growth in customer financing and a changing asset base as financing of software and services showed strong growth. In addition, used equipment sales -15- Results of Operations - (continued) increased in the third quarter of 1999 and decreased for the first nine months of 1999, when compared with the same periods in 1998. Financing originations increased in the quarter to $10.0 billion, with strong year-to-year growth in commercial financing, partially offset by lower customer financing. Global Financing gross profit dollars increased 33.8 percent and 24.2 percent, respectively, for the third quarter and first nine months of 1999, versus the same periods of 1998. The increase was driven by Global Financing's ongoing strategy to increase its use of the company's Global Treasury Centers rather than external banks as a funding source and by lower cost of borrowing. Enterprise Investments / Other (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Total revenue $622 $642 $1,849 $1,800 Total cost 353 410 1,138 1,149 ---- ---- ------ ------ Gross profit $269 $232 $ 711 $ 651 Gross profit margin 43.1% 36.1% 38.4% 36.2% Revenue from Enterprise Investments/Other decreased 3.1 percent and increased 2.8 percent, respectively, for the third quarter and first nine months of 1999, versus comparable periods in 1998. Third quarter 1999 revenue decreased as the company exited several non-strategic businesses. That decline was partially offset by growth in point-of-sale terminals and CATIA software. The increase for the first nine months was driven by growth in point-of-sale terminals and CATIA software, partially offset by lower revenue for non-strategic businesses the company has exited. The Enterprise Investments/Other gross profit dollars increased 15.9 percent and 9.2 percent, respectively, in the third quarter and first nine months of 1999, versus the same periods of 1998. The increases were primarily driven by the increased revenue from point-of-sale terminals as well as an improving gross profit margin. Expenses (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Selling, general and administrative $ 3,501 $ 4,057 $10,284 $11,588 Percentage of revenue 16.6% 20.2% 16.2% 20.5% Research, development and engineering $ 1,383 $ 1,240 $ 3,857 $ 3,639 Percentage of revenue 6.5% 6.2% 6.1% 6.4% -16- Results of Operations - (continued) Selling, general and administrative expense for the third quarter and first nine months of 1999 decreased 13.7 percent and 11.2 percent, respectively, from the same periods in 1998. The decrease in the third quarter of 1999 was primarily driven by the net pre-tax benefit of $456 million associated with the sale of the Global Network, continuing actions within SSD for write-downs to fair value of equipment and the contract cancellation fees associated with the proposed sale of IP by NHD. (See Note No. 6 to the Consolidated Financial Statements on pages 7 through 9 for further information). The decrease in the first nine months of 1999 reflects the net pre-tax benefit of $2,066 million associated with the sale of the Global Network and the actions taken in the second and third quarter of 1999 to better align the operations of the company's Technology Group with that group's strategic direction. 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. Research, development and engineering expense increased 11.5 percent and 6.0 percent, respectively, for the third quarter and first nine months of 1999, when compared with the same periods of 1998. The increases reflect a $111 million pre-tax charge taken in the third quarter of 1999 for in-process research and development associated with the acquisition of Sequent, Mylex and DASCOM. Those acquisitions are intended to improve the company's long-term competitiveness in the server, storage and Web-security markets, respectively. In addition, the increases also 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 $366 million and $1,118 million for the third quarter and first nine months of 1999, respectively. Of these amounts, the company capitalized $8 million for the third quarter and $23 million for the first nine months of 1999. The effective tax rate for the quarter ended September 30, 1999, was 33.0 percent versus 30.0 percent for the same period in 1998. The 3.0 point increase was principally due to the actions taken by the company in the third quarter. The effective tax rate for the first nine months of 1999 was 35.9 percent versus 30.6 percent for the same period in 1998. The 5.3 point increase from the 1998 rate was primarily a result of the actions taken by the company in the second and third quarters. Financial Condition During the first nine months of 1999, the company continued to make significant investments to fund its future growth and increase shareholder value. These investments included expenditures of $4,284 million for Research, development and engineering, -17- Financial Condition - (continued) $4,217 million in Plant, rental machines and other property and $5,140 million for the repurchase of the company's common shares. The company had $6,026 million in Cash and cash equivalents and Marketable securities at September 30, 1999. Cash Flow (Dollars in millions) Nine Months Ended September 30, ------------------------ 1999 1998 ---- ---- Net cash provided from (used in): Operating activities $ 6,760 $ 6,541 Investing activities (559) (4,486) Financing activities (6,831) (3,703) Effect of exchange rate changes on cash and cash equivalents (163) 95 -------- -------- Net change in cash and cash equivalents $ (793) $ (1,553) Working Capital (Dollars in millions) At September 30, At December 31, 1999 1998 -------- -------- Current assets $ 42,877 $ 42,360 Current liabilities 37,778 36,827 -------- -------- Working capital $ 5,099 $ 5,533 Current ratio 1.13:1 1.15:1 Current assets increased $517 million from year-end 1998 primarily due to increases of $258 million in Cash and cash equivalents and Marketable securities, and $299 million in Prepaid expenses and other current assets. 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 the IBM Global Network, offset by stock repurchases, capital expenditures and strategic acquisitions. The increase in prepaid expenses and other current assets is mostly due to increases in deferred tax assets from year-end 1998. Current liabilities increased $951 million from year-end 1998 with increases of $653 million in Taxes payable, $191 million in Short-term debt and $107 million in Accounts payable and other accruals (increases in deferred income and other accruals offset by a decrease in accounts payable). Investments During the first nine 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 $4,217 million during the period, a -18- Financial Condition - (continued) decline of $365 million from the comparable 1998 period. This decrease reflects the write down of assets in the second and third quarter relating to SSD operations. In addition to software development expense included in Research, development and engineering expense, the company capitalized $321 million of software costs during the first nine months of 1999, an increase of $141 million from the comparable period in 1998. The increase resulted from the January 1, 1999 adoption by the company of the American Institute of Certified Public Accountants Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires the capitalization of internal use computer software if certain criteria are met. The capitalized costs are amortized on a straight-line basis over the useful life of the software. Amortization of capitalized software costs (both internal use and externally marketed) was $319 million during the first nine months of 1999, a decline of $82 million from the comparable 1998 period. Investments and sundry assets were $24,407 million at September 30, 1999, an increase of $897 million from year-end 1998, resulting primarily from increases in prepaid pension assets and alliance investments. Other Long-term Liabilities Other long-term liabilities of $12,315 million at September 30, 1999, declined $503 million from year-end 1998 primarily in postretirement benefits and non-U.S. retirement reserves. Debt and Equity (Dollars in millions) At September 30, At December 31, 1999 1998 ------- ------- Global financing debt $27,335 $27,754 Non-global financing debt 568 1,659 ------- ------- Total debt $27,903 $29,413 Stockholders' equity $20,068 $19,433 Debt/capitalization 58.2% 60.2% EBITDA / interest expense 9x 8x Non-global financing: Debt/capitalization 3.6% 9.9% EBITDA/interest expense 18x 15x Global financing debt/equity 5.7:1 6.5:1 Total debt decreased $1,510 million from year-end 1998 as non-global financing debt decreased $1,091 million and debt supporting the growth in global financing assets decreased $419 million. Stockholders' equity increased $635 million from December 31, 1998, as the increase in the company's retained earnings was partially offset by the common share repurchases. -19- Financial Condition - (continued) 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 September 30, 1999, $9,001 million of this confirmed line of credit remained unused and available for future use. At September 30, 1999, the company had an outstanding balance of $568 million in assets under management from the securitization of loans, leases and trade receivables. On September 9, 1999, the company issued a $450 million 5.8 percent note due September 9, 2002, the net proceeds of which were used for general corporate purposes. 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 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 -20- Year 2000 - (continued) from past trends. These events could affect the company's revenues or change its revenue patterns. See Management's Discussion and Analysis of Results of Operations and Financial Condition for further information. 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 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 effect 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. -21- Part II - Other Information ITEM 6 (a). Exhibits Exhibit Number 11 Statement re: computation of per share earnings. 12 Statement re: computation of ratios. 27 Financial Data Schedule. ITEM 6 (b). Reports on Form 8-K The company filed Form 8-K on July 21, 1999, with respect to the company's financial results for the periods ended June 30, 1999 and included the unaudited Consolidated Statement of Earnings, Consolidated Statement of Financial Position and Segment Data for the periods ended June 30, 1999. The company filed Form 8-K on August 5, 1999, to properly reflect the increased number of shares registered under registration statement number 33-54375. 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: November 12, 1999 - ----------------------- By: Mark Loughridge ------------------- Mark Loughridge Vice President and Controller -22- EX-11 2 COMPUTATION OF BASIC AND DILUTED EARNINGS EXHIBIT 11 COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (UNAUDITED) For Quarter Ended -------------------------------------- September 30, 1999 September 30, 1998 ------------------ ------------------ Number of shares on which basic earnings per share is calculated: Average outstanding during period 1,805,214,582 1,856,855,724* Add - Incremental shares under stock compensation plans 60,953,163 52,140,528* Add - Incremental shares associated with contingently issuable shares 3,447,351 0 -------------- -------------- Number of shares on which diluted earnings per share is calculated 1,869,615,096 1,908,996,252* ============== ============== Net income applicable to common shareholders (millions) $ 1,757 $ 1,489 Less - net income applicable to contingently issuable shares (millions) 12 0 -------------- -------------- Net income on which diluted earnings per share is calculated (millions) $ 1,745 $ 1,489 ============== ============== Earnings per share of common stock - assuming dilution $ 0.93 $ 0.78* Earnings per share of common stock - basic $ 0.97 $ 0.80* * Adjusted to reflect a two-for-one stock split effective May 10, 1999. Stock options to purchase 22,701,344 shares and 27,600 shares were outstanding as of September 30, 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 three months ended September 30, 1999 and 1998. -23- COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE - (continued) (UNAUDITED) For Nine Months Ended -------------------------------------- September 30, 1999 September 30, 1998 ------------------ ------------------ Number of shares on which basic earnings per share is calculated: Average outstanding during period 1,813,707,108 1,878,833,270* Add - Incremental shares under stock compensation plans 61,009,102 52,192,788* -------------- -------------- Number of shares on which diluted earnings per share is calculated 1,874,716,210 1,931,026,058* ============== ============== Net income applicable to common shareholders (millions) $ 5,608 $ 3,967 Less - net income applicable to contingently issuable shares (millions) 0 0 -------------- -------------- Net income on which diluted earnings per share is calculated (millions) $ 5,608 $ 3,967 ============== ============== Earnings per share of common stock - assuming dilution $ 2.99 $ 2.05* Earnings per share of common stock - basic $ 3.09 $ 2.11* * Adjusted to reflect a two-for-one stock split effective May 10, 1999. Stock options to purchase 23,240,852 shares as of September 30, 1999 and 377,700 shares as of September 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, 3,215,252 restricted stock units as of September 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 $15 million for the nine months ended September 30, 1999 and 1998. -24- 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 NINE MONTHS ENDED SEPTEMBER 30 (UNAUDITED) (Dollars in millions) 1999 1998 ---- ---- Income before income taxes (1) $ 8,697 $5,720 Add: Fixed charges, excluding capitalized interest 1,448 1,512 ------- ------ Income as adjusted before income taxes $10,145 $7,232 ======= ====== Fixed charges: Interest expense $ 1,098 $1,154 Capitalized interest 23 20 Portion of rental expense representative of interest 350 358 ------- ------ Total fixed charges $ 1,471 $1,532 ======= ====== Preferred stock dividends (2) 23 21 ------- ------ Combined fixed charges and preferred stock dividends $ 1,494 $1,553 ======= ====== Ratio of net income to fixed charges 6.90 4.72 Ratio of net income to combined fixed charges and preferred stock dividends 6.79 4.66 (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 $15 million for the first nine months of 1999 and 1998, or $23 million and $21 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 nine months ended September 30, 1999 and 1998. -25- SEGMENT INFORMATION (UNAUDITED) Hardware Segments Personal Global (Dollars in millions) Technology Systems Server Services - -------------------------------------------------------------------------------- Quarter Ended September 30, 1999: External revenue $ 3,100 $ 3,716 $ 1,946 $7,898 Internal revenue 883 12 72 688 ------- ------- ------- ------ Total revenue $ 3,983 $ 3,728 $ 2,018 $8,586 ======= ======= ======= ====== Pre-tax income (loss) $ 285 $ (69) $ 295 $1,174 ======= ======= ======= ====== Revenue year-to-year change (1.0)% 11.3% (29.7)% 10.2% Pre-tax income year-to-year change 108.0% 43.4% (59.6)% 38.1% Pre-tax income margin 7.2% (1.9)% 14.6% 13.7% Quarter Ended September 30, 1998: External revenue $ 2,824 $ 3,343 $ 2,751 $7,046 Internal revenue 1,200 8 120 742 ------- ------- ------- ------ Total revenue $ 4,024 $ 3,351 $ 2,871 $7,788 ======= ======= ======= ====== Pre-tax income (loss) $ 137 $ (122) $ 731 $ 850 ======= ======= ======= ====== Pre-tax income margin 3.4% (3.6)% 25.5% 10.9% Reconciliations to IBM as Reported: Quarter Ended Quarter Ended (Dollars in millions) September 30, 1999 September 30, 1998 ------------------ ------------------ Revenue: Total reportable segments $ 23,096 $ 22,517 Eliminations/other (1,952) (2,422) -------- -------- Total IBM Consolidated $ 21,144 $ 20,095 ======== ======== Pretax income: Total reportable segments $ 2,515 $ 2,267 Sales of IBM's Global Network 586 0 Third quarter actions (385) 0 Eliminations/other (87) (135) -------- -------- Total IBM Consolidated $ 2,629 $ 2,132 ======== ======== -26- Global Enterprise Total Software Financing Investments Segments - ------------------------------------------------------------------- $ 3,010 $786 $ 619 $21,075 168 194 4 2,021 - ------- ---- ----- ------- $ 3,178 $980 $ 623 $23,096 ======= ==== ===== ======= $ 597 $322 $ (89) $ 2,515 ======= ==== ===== ======= 6.0% 11.0% 3.7% 2.6% 8.0% 14.2% 45.7% 10.9% 18.8% 32.9% (14.3)% 10.9% $ 2,808 $706 $ 585 $20,063 191 177 16 2,454 - ------- ---- ----- ------- $ 2,999 $883 $ 601 $22,517 ======= ==== ===== ======= $ 553 $282 $(164) $ 2,267 ======= ==== ===== ======= 18.4% 31.9% (27.3)% 10.1% -27- SEGMENT INFORMATION (UNAUDITED) Hardware Segments
Personal Global (Dollars in millions) Technology Systems Server Services - ------------------------------------------------------------------------------------- Nine Months Ended September 30, 1999: External revenue $ 9,032 $ 11,178 $ 6,368 $23,436 Internal revenue 2,794 26 237 1,985 -------- -------- ------- ------- Total revenue $ 11,826 $ 11,204 $ 6,605 $25,421 ======== ======== ======= ======= Pre-tax income (loss) $ 485 $ (311) $ 1,309 $ 3,284 ======== ======== ======= ======= Revenue year-to-year change 1.3% 34.1% (11.4)% 13.5% Pre-tax income year-to-year change (26.1)% 69.4% (26.9)% 30.0% Pre-tax income margin 4.1% (2.8)% 19.8 % 12.9% Nine Months Ended September 30, 1998: External revenue $ 8,369 $ 8,335 $ 7,159 $20,356 Internal revenue 3,306 21 298 2,033 -------- -------- ------- ------- Total revenue $ 11,675 $8, 356 $ 7,457 $22,389 ======== ======== ======= ======= Pre-tax income (loss) $ 656 $ (1,016) $ 1,790 $ 2,526 ======== ======== ======= ======= Pre-tax income margin 5.6% (12.2)% 24.0% 11.3%
Reconciliations to IBM as Reported: Nine Months Ended Nine Months Ended (Dollars in millions) September 30, 1999 September 30, 1998 ------------------ ------------------ Revenue: Total reportable segments $ 69,393 $ 63,106 Eliminations/other (6,027) (6,570) -------- -------- Total IBM Consolidated $ 63,366 $ 56,536 ======== ======== Pretax income: Total reportable segments $ 7,406 $ 6,105 Sales of IBM's Global Network 4,016 0 Second and third quarter actions (2,205) 0 Eliminations/other (445) (367) -------- -------- Total IBM Consolidated $ 8,772 $ 5,738 ======== ======== -28- Global Enterprise Total Software Financing Investments Segments $9,056 $2,274 $ 1,829 $63,173 561 599 18 6,220 ------ ------ ------- ------- $9,617 $2,873 $ 1,847 $69,393 ====== ====== ======= ======= $1,954 $ 947 $ (262) $ 7,406 ====== ====== ======= ======= 8.4% 7.4% 9.7% 10.0% 10.1% 11.4% 44.8% 21.3% 20.3% 33.0% (14.2)% 10.7% $8,318 $2,172 $ 1,643 $56,352 552 504 40 6,754 ------ ------ ------- ------- $8,870 $2,676 $ 1,683 $63,106 ====== ====== ======= ======= $1,774 $ 850 $ (475) $ 6,105 ====== ====== ======= ======= 20.0% 31.8% (28.2)% 9.7% -29- EXHIBITS OMITTED FROM THIS COPY The Financial Data Schedule Copies of this exhibit may be obtained without charge from the First Chicago Trust Company of New York, Suite 4688, P.O. Box 2530, Jersey City, New Jersey 07303-2530. -30- EX-27 4 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM CORPORATION'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCAIL STATEMENTS. 1,000,000 9-MOS DEC-31-1999 SEP-30-1999 6,026 1,444 20,379 0 5,130 42,877 40,812 23,349 85,375 37,778 0 11,850 0 247 7,971 85,375 26,803 63,366 19,559 40,320 14,141 0 556 8,772 3,149 5,623 0 0 0 5,623 3.09 2.99
-----END PRIVACY-ENHANCED MESSAGE-----