UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996
1-2360
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(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
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(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)
914-765-1900
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(Registrant's telephone number)
The registrant has 527,493,928 shares of common stock outstanding at June 30,
1996.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 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
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<PAGE>
INDEX
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Page
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Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Operations for the three and six months
ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . 1
Consolidated Statement of Financial Position at June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the six months ended June 30,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . 6
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
ITEM 1. INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenue:
Hardware sales 8,576 $ 8,659 $ 16,284 $ 16,386
Services 3,734 3,041 6,932 5,486
Software 3,195 3,072 6,232 5,945
Maintenance 1,754 1,877 3,503 3,698
Rentals and financing 924 882 1,791 1,751
------- ------- ------- -------
Total revenue 18,183 17,531 34,742 33,266
Cost:
Hardware sales 5,715 5,190 10,720 9,985
Services 2,959 2,386 5,536 4,360
Software 1,009 1,066 1,921 2,071
Maintenance 915 868 1,827 1,768
Rentals and financing 394 390 778 787
------- ------- ------ ------
Total cost 10,992 9,900 20,782 18,971
------- ------- ------ ------
Gross profit 7,191 7,631 13,960 14,295
Operating expenses:
Selling, general and
administrative 3,889 3,883 7,586 7,516
Research, development and
engineering 1,116 974 2,207 1,887
Purchased in-process research
and development -- -- 435 --
------- ------- ------ ------
Total operating expenses 5,005 4,857 10,228 9,403
Operating income 2,186 2,774 3,732 4,892
Other income, principally interest 193 238 343 484
Interest expense 205 188 354 368
------- ------- ------ ------
Earnings before income taxes 2,174 2,824 3,721 5,008
Income tax provision 827 1,108 1,600 2,003
Net earnings 1,347 1,716 2,121 3,005
------- ------- ------ ------
Preferred stock dividends and
transaction costs 5 5 10 52
------- ------- ------ ------
Net earnings applicable to
common shareholders $ 1,342 $ 1,711 $ 2,111 $ 2,953
======= ======= ======= =======
Net earning per share of
common stock $ 2.51 $ 2.97 $ 3.92 $ 5.09
Average number of common
shares outstanding (millions) 533.9 575.4 539.1 580.3
Cash dividends per common share $ .35 $ .25 $ .60 $ .50
(The accompanying notes are an integral part of the financial statements.)
<PAGE>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
ASSETS
At June 30 At December 31
(Dollars in millions) 1996 1995
-------- --------
Current assets:
Cash $ 1,634 $ 1,746
Cash equivalents 4,262 5,513
Marketable securities at cost, which
approximates market 481 442
Notes and accounts receivable -
net of allowances 16,246 17,441
Sales-type leases receivable 5,673 5,961
Inventories, at lower of average cost or market
Finished goods 1,269 1,241
Work in process 5,389 4,990
Raw materials 62 92
-------- --------
Total inventories 6,720 6,323
Prepaid expenses and other current assets 3,920 3,265
-------- --------
Total current assets 38,936 40,691
Plant, rental machines and other property 42,810 43,981
Less: Accumulated depreciation 26,473 27,402
-------- --------
Plant, rental machines and other property - net 16,337 16,579
Software, less accumulated
amortization (1996, $11,571; 1995, $11,276) 1,933 2,419
Investments and sundry assets 20,268 20,603
-------- --------
Total assets $ 77,474 $ 80,292
======== ========
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<PAGE>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
At June 30 At December 31
(Dollars in millions) 1996 1995
---------- ------------
Current liabilities:
Taxes $ 2,174 $ 2,634
Accounts payable and accruals 14,875 17,445
Short-term debt 13,580 11,569
-------- -------
Total current liabilities 30,629 31,648
Long-term debt 9,478 10,060
Other liabilities 14,022 14,354
Deferred income taxes 1,817 1,807
-------- -------
Total liabilities 55,946 57,869
Stockholders' equity:
Preferred stock - par value $.01 per share 253 253
Shares authorized: 150,000,000
Shares issued: 1996 - 2,610,711
1995 - 2,610,711
Common stock - par value $1.25 per share 7,921 7,488
Shares authorized: 750,000,000
Shares issued: 1996 - 552,784,273
1995 - 548,199,013
Retained earnings 13,331 11,630
Translation adjustments 2,567 3,036
Treasury stock - at cost (2,699) (41)
Shares: 1996 - 25,290,346
1995 - 424,583
Net unrealized gain on marketable securities 155 57
------- -------
Total stockholders' equity 21,528 22,423
------- -------
Total liabilities and stockholders' equity $ 77,474 $ 80,292
======== ========
(The accompanying notes are an integral part of the financial statements.)
- 3 -
<PAGE>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30:
(UNAUDITED)
(Dollars in millions) 1996 1995
---------- ----------
Cash flow from operating activities:
Net earnings $ 2,121 $ 3,005
Adjustments to reconcile net earnings to cash
provided from operating activities:
Effect of restructuring charges (865) (1,381)
Depreciation 1,824 1,960
Amortization of software 688 792
Purchased in-process research and development 435 --
Gain on disposition of fixed and other assets (163) (68)
Changes in operating assets and liabilities (1,297) 334
-------- -------
Net cash provided from operating activities 2,743 4,642
-------- -------
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (1,724) (1,202)
Investment in software (125) (482)
Purchases of marketable securities and
other investments (710) (786)
Proceeds from marketable securities and
other investments 232 2,561
Acquisition of Tivoli Systems, Inc. - net (716) --
-------- --------
Net cash (used in) provided from investment
activities (3,043) 91
-------- --------
Cash flow from financing activities:
Proceeds from new debt 2,279 2,845
Payments to settle debt (2,474) (4,515)
Short-term borrowings less
than 90 days - net 1,938 1,460
Preferred stock transactions - net -- (854)
Common stock transactions - net (2,319) (1,829)
Cash dividends paid (333) (301)
-------- --------
Net cash used in financing activities (909) (3,194)
-------- --------
Effect of exchange rate changes
on cash and cash equivalents (154) 432
-------- --------
Net change in cash and cash equivalents (1,363) 1,971
Cash and cash equivalents at January 1 7,259 7,922
-------- --------
Cash and cash equivalents at June 30 $ 5,896 $ 9,893
======== ========
(The accompanying notes are an integral part of the financial statements.)
- 4 -
<PAGE>
Notes to Consolidated Financial Statements
- ------------------------------------------
1. In the opinion of the management of International Business Machines
Corporation (the company), all adjustments necessary to a fair statement of the
results for the unaudited three and six month periods have been made.
2. Earnings per share amounts were computed by dividing earnings after deduction
of preferred stock dividends by the average number of common shares outstanding.
3. A supplemental Consolidated Statement of Operations schedule has been
provided, for information purposes only, to exclude the effects of the write-
offs of purchased in-process research and development associated with the Tivoli
Systems Inc. and Object Technology International Inc. acquisitions recorded in
the first quarter of 1996. The supplemental statement is shown in exhibit 99 on
page 20. This information is presented voluntarily and is provided solely to
assist in understanding the effects of these items on the Consolidated Statement
of Operations.
4. Subsequent Event: On July 2, 1996, the company announced it had reached
agreement with the United States Department of Justice to terminate within five
years all remaining provisions of the Consent Decree first entered into in 1956
by the company and the U.S. Government.
This agreement is subject to approval and entry of an order by U.S. District
Court Judge Allen G. Schwartz following a period of public comment.
The company and the Department of Justice have agreed to terminate some of
the provisions as soon as Judge Schwartz's order is entered, and some within six
months of the order. The remaining provisions applying to the AS/400* will be
terminated four years from July 2, 1996. All remaining provisions applying to
the S/390* will be terminated within five years.
- 5 -
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
-------------------------------------------------
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------
The company's second quarter results were largely affected by a few short-
term factors, particularly a sharp drop in memory prices and currency. Currency
negatively impacted revenue by about 5 percentage points in the second quarter
of 1996 when compared with the prior year quarter and had approximately a $.33
earnings-per-share negative effect. This was principally due to the strength of
the U.S. dollar against the Japanese yen, and to a lesser extent, against the
German deutsche mark.
Services revenue continued to show strong growth increasing 23 percent,
while software revenue grew 4 percent. Hardware sales revenue declined about 1
percent from the same period last year. Personal computers, RISC System/6000*
and AS/400 revenues all grew year-over-year.
Results of Operations
- ---------------------
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenue $ 18,183 $ 17,531 $ 34,742 $ 33,266
Cost 10,992 9,900 20,782 18,971
-------- ------- -------- --------
Gross profit $ 7,191 $ 7,631 $ 13,960 $ 14,295
Gross profit margin 39.5% 43.5% 40.2% 43.0%
Net earnings $ 1,347 $ 1,716 $ 2,121 $ 3,005
The company recorded second quarter 1996 earnings of $2.51 per
common share, compared with $2.97 per common share, in the second quarter of
last year. Total revenue increased 3.7 percent over the same period of 1995 to
$18.2 billion. The average number of common shares outstanding for the period
was 533.9 million in 1996 versus 575.4 million in 1995.
Net earnings for the six months ended June 30, 1996 were $3.92 per common
share, compared with earnings of $5.09 per common share in the first six months
of 1995. The company's first quarter 1996 results included a charge of $435
million ($.80 per common share) relating to a non-recurring non-tax deductible
charge for purchased in-process research and development in connection with the
acquisition of Tivoli Systems Inc. ($417 million) and Object Technology
International Inc. ($18 million). Excluding this item, the company's adjusted
earnings per common share was $4.72 for the first six months of 1996. Total
revenue for the six months ended June 30, 1996 was up 4.4 percent from the prior
year to $34.7 billion. The average number of common shares outstanding for the
period was 539.1 million in 1996 versus 580.3 million in 1995.
- 6 -
<PAGE>
Results of Operations - (continued)
- -----------------------------------
Revenue from the United States for the first half of 1996 totaled $7.1
billion, an increase of 10.7 percent from the same period of last year. Revenue
from Europe/Middle East/Africa totaled $6.0 billion, down 2.5 percent year-over-
year, while Asia-Pacific revenue was $3.6 billion which is essentially flat
compared with the same period of 1995. Revenue from Latin America was $786
million, up 5.9 percent, while revenue from Canada grew 10.8 percent to $730
million when compared with the same period of 1995.
Excluding the effects of currency, Asia-Pacific revenue grew approximately
19 percent, Latin America revenue increased 6 percent, Canadian revenue grew 8
percent, while European revenue climbed 2 percent year-over-year.
Total expenses grew 4.4 percent compared with last year's second quarter,
primarily because of increased spending due to acquisitions and investments made
by the company in 1995 and 1996. Excluding these types of investments, total
expenses would have decreased approximately 8 percent year-over-year. In
addition, currency benefitted total expense by approximately $170 million in the
second quarter of 1996.
Hardware Sales
- --------------
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $ 8,576 $ 8,659 $ 16,284 $ 16,386
Total cost 5,715 5,190 10,720 9,985
------- ------- -------- --------
Gross profit $ 2,861 $ 3,469 $ 5,564 $ 6,401
Gross profit margin 33.4% 40.1% 34.2% 39.1%
Revenue from hardware sales for the second quarter and first six months
of 1996 decreased 1.0 percent and .6 percent, respectively, over comparable
periods in 1995. The second quarter and first six-months revenue were negatively
affected by currency by approximately 5 and 4 percentage points, respectively,
in 1996.
Personal computer client and server revenue increased year-over-year for
both the second quarter and first six months of 1996, with all geographies
showing growth year-over-year.
AS/400 server revenue increased on both a second-quarter and six months
basis when compared to the same periods in 1995, as shipments of new models
increased in volume during the second quarter. RISC System/6000 revenue showed
strong growth both on a second quarter and first six months basis, when compared
to the same periods of 1995.
- 7 -
<PAGE>
Results of Operations - (continued)
- -----------------------------------
These increases were offset by a decline in System/390 server revenue both
on a second quarter and six months basis, when compared to the same periods in
1995. OEM hardware revenue decreased year-over-year for both the second quarter
and first six months of 1996. This decrease was primarily a result of lower
prices associated with memory products which have dropped significantly during
the first six months of 1996. Storage products revenue also fell for the second
quarter and first six months of 1996 when compared to the same periods of 1995.
Hardware sales gross profit for the second quarter and first six months of
1996 decreased 17.5 percent and 13.1 percent, respectively, over comparable
periods in 1995. These decreases were driven by a shift in revenue mix away from
higher margin products to personal computer products which have a lower margin,
as well as price reductions associated with memory products. In addition, most
other hardware products continue to be affected by competitive pricing
pressures.
Services Other Than Maintenance
- -------------------------------
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
----------------- ---------------
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $ 3,734 $ 3,041 $ 6,932 $ 5,486
Total cost 2,959 2,386 5,536 4,360
------- ------- ------- -------
Gross profit $ 775 $ 655 $ 1,396 $ 1,126
Gross profit margin 20.8% 21.5% 20.1% 20.5%
Services revenue increased 22.8 percent and 26.4 percent, respectively, in
the second quarter and first six months of 1996, when compared to the same
period of last year. Services revenue was negatively affected by currency by
approximately 6 and 4 percentage points, respectively, in the second quarter and
first six months of 1996. The revenue increases were primarily driven by
continued growth in outsourcing for both system and networking activity as well
as systems integration.
Services gross profit increased in the second quarter and first six months
of 1996 by 18.3 percent and 24.0 percent, respectively, when compared to year-
ago periods.
- 8 -
<PAGE>
Results of Operations - (continued)
- ------------------------------------
Software
- --------
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------- --------------------
1996 1995 1996 1995
------ ------ ------- -------
Total revenue $ 3,195 $ 3,072 $ 6,232 $ 5,945
Total cost 1,009 1,066 1,921 2,071
------- ------- ------- -------
Gross profit $ 2,186 $ 2,006 $ 4,311 $ 3,874
Gross profit margin 68.4% 65.3% 69.2% 65.2%
Revenue from software for the second quarter and first six months of 1996
increased 4.0 percent and 4.8 percent, respectively, over comparable periods in
1995. The second-quarter and first-six months' results were negatively affected
by currency by approximately 5 and 3 percentage points, respectively, in 1996.
These increases were primarily driven by products offered by Lotus whose revenue
was included in 1996 results, but not in 1995 results, as well as strong growth
in other distributed software products. The increases were somewhat offset by
lower host-based computer software revenue associated with System/390 and
AS/400.
Software gross profit for the second quarter and first six months of 1996
increased 9.0 percent and 11.3 percent, respectively, versus the same periods in
1995. These increases were primarily driven by the company's shift toward a more
iterative software development process which results in expensing a larger
percentage of software development spending and capitalizing less. This also
results in lower amortization costs and improved software margins, with a
corresponding increase in research, development and engineering expense.
Maintenance
- -----------
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
----------------- ----------------
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $ 1,754 $ 1,877 $ 3,503 $ 3,698
Total cost 915 868 1,827 1,768
------- ------- ------- -------
Gross profit $ 839 $ 1,009 $ 1,676 $ 1,930
Gross profit margin 47.8% 53.8% 47.8% 52.2%
Maintenance revenue for the second quarter and first six months of 1996
decreased 6.5 percent and 5.3 percent, respectively, over comparable periods in
1995. The second-quarter and first six-months' revenue were negatively affected
by currency by approximately 5 and 3 percentage points, respectively, in 1996.
Maintenance gross profit decreased 16.8 percent and 13.2 percent, respectively,
in the second quarter and first six months of 1996, when compared to the same
periods of 1995. Maintenance revenue and gross profit margin continue to be
affected by the competitive environment and resulting pricing pressures on
maintenance offerings.
- 9 -
<PAGE>
Results of Operations - (continued)
- ------------------------------------
Rentals and financing
- ---------------------
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
----------------- ----------------
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $ 924 $ 882 $ 1,791 $ 1,751
Total cost 394 390 778 787
------- ------ ------- -------
Gross profit $ 530 $ 492 $ 1,013 $ 964
Gross profit margin 57.4% 55.7% 56.6% 55.0%
Revenue from rentals and financing for the second quarter and first six
months of 1996 increased 4.7 percent and 2.3 percent, respectively, over
comparable periods in 1995. The second quarter and first six months revenue were
negatively affected by currency by approximately 5 and 3 percentage points,
respectively, in 1996. The 1996 results reflect an increase in new financing
originations versus 1995.
Rentals and financing gross profit increased 7.7 percent and 5.1 percent,
respectively, for the second quarter and first six months of 1996, when compared
to the same periods of the prior year. These increases were a reflection of
lower interest rates and changing country mix.
Expenses
- --------
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
--------------- -------------
1996 1995 1996 1995
-------- -------- -------- --------
Selling, general and
administrative $ 3,889 $ 3,883 $ 7,586 $ 7,516
Percentage of revenue 21.4% 22.2% 21.8% 22.6%
Research, development and
engineering $ 1,116 $ 974 $ 2,207 $ 1,887
Percentage of revenue 6.1% 5.6% 6.4% 5.7%
Selling, general and administrative expense for the second quarter and
first six months of 1996 increased .2 percent and .9 percent, respectively, from
the same periods in 1995. The increases were a result of spending associated
with new acquisitions and investments made by the company in 1995 and 1996. In
addition, the second quarter and first six months of 1996 results included $77
million and $313 million, respectively, for expense associated with work force
separation charges.
- 10 -
<PAGE>
Results of Operations - (continued)
- -----------------------------------
Research, development and engineering expense, increased 14.6 percent and
17.0 percent, respectively, for the second quarter and first six months of 1996,
when compared to the same periods of 1995. These increases were primarily due to
the acquisition of Lotus with its expenses being included in the 1996 results,
as well as lower capitalization rates for software development in 1996 versus
1995. This lower rate has the effect of increasing research, development and
engineering expense, while improving the software gross profit margin.
The first six-months 1996 results included a non-tax deductible charge of
$435 million for purchased-in process research and development expense
associated with the acquisition of Tivoli Systems, Inc. and Object Technology
International, Inc. in the first quarter of 1996. This amount has been
separately identified on the company's Consolidated Statement of Operations.
Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and interest costs associated with rentals and
financing, amounted to $405 million and $779 million for the second quarter and
first six months of 1996, respectively. Of these amounts, $7 million for the
second quarter and $14 million for the first six months were capitalized.
The effective tax rate for the quarter ended June 30, 1996, was 38.1
percent, versus 39.2 percent for the same period in 1995. The decrease is
primarily the result of the mix of earnings and corresponding weighting of tax
rates on a country-by-country basis.
The effective tax rate for the first six months of 1996 was 43.0 percent,
versus 40.0 percent for the same period in 1995. The increase was a result of
the $435 million charge associated with Tivoli Systems Inc. and Object
Technology Inc. acquisitions in the first quarter of 1996, that do not give rise
to a tax benefit. Excluding this charge, the effective tax rate for the first
six months of 1996 would have been 38.5 percent, a decline of 1.5 points from
the prior year. This decrease was a result of the same factors that impacted the
second quarter effective tax rate.
Financial Condition
- -------------------
During the first half of 1996, the company took a number of actions which
are reflected in the Consolidated Statement of Financial Position at June 30,
1996. These include expenditures of $2.6 billion for the repurchase of common
stock, $1.0 billion net cash for the acquisitions of Tivoli Systems Inc., Object
Technology International, Inc., Data Sciences Limited and others, and $.9
billion in work force separation payments relating to restructuring programs
announced in prior years.
- 11 -
<PAGE>
Financial Condition - (continued)
- ----------------------------------
Working Capital
- ---------------
(Dollars in millions) At June 30 At December 31
1996 1995
---------- ----------
Current assets $ 38,936 $ 40,691
Current liabilities 30,629 31,648
-------- --------
Working capital $ 8,307 $ 9,043
Total current assets declined $1.8 billion from year-end 1995 with declines
in total cash, cash equivalents, and marketable securities of $1.3 billion and
accounts receivable of $1.5 billion, offset by increases of $.4 billion in
inventories and $.6 billion in prepaid expenses. The decline in total cash, cash
equivalents, and marketable securities results primarily from the stock
repurchases, strategic acquisitions, and work force separation payments, offset
by cash generated from operations. The decrease in accounts receivable is
attributable to collection of traditionally higher year-end accounts receivable
balances. The increase in inventories is primarily due to a softening in demand
for microelectronic memory products; while the increase in prepaid expenses is
due to the normal increase in these balances from year-end levels.
Total current liabilities declined $1.0 billion from December 31, 1995,
with declines of $3.0 billion in accruals, taxes and accounts payable, offset by
an increase of $2.0 billion in short-term debt. The decrease in accruals, taxes
and accounts payable relates to the seasonal decline in these balances from
their normally higher year-end levels, while short-term debt increased in
support of customer financing.
Investments
- -----------
The company's capital expenditures for plant, rental machines and other
property were approximately $2.3 billion for the six months ended June 30, 1996,
an increase of approximately $.6 billion from the comparable 1995 period, driven
primarily by continued investment in the company's microelectronics and
outsourcing businesses.
In addition to software development expense included in research, de-
velopment and engineering expense, the company capitalized $.1 billion of
software costs during the six months ended June 30, 1996, versus the $.5 billion
capitalized in the comparable 1995 period. Amortization of capitalized software
costs amounted to $.7 billion during the first half of 1996 versus $.8 billion
for the comparable 1995 period.
Investments and sundry assets were $20.3 billion at June 30, 1996, a
decrease of $.3 billion from December 31, 1995, resulting from a decrease of $.7
billion in non-current sales-type leases, and $.5 billion in deferred tax and
other assets, offset by increases of $.3 billion in investments in business
alliances, $.3 billion in goodwill related to the acquisition of Tivoli Systems,
Inc., and $.3 billion in prepaid pension cost.
- 12 -
<PAGE>
Financial Condition - (continued)
- ---------------------------------
Long Term Liabilities and Stockholders' Equity
- ----------------------------------------------
Other non-current liabilities at $14.0 billion decreased $.3 billion from
December 31, 1995, primarily the result of currency re-valuations.
Stockholders' equity declined from $22.4 billion at December 31, 1995 to
$21.5 billion, resulting from $2.6 billion in common stock repurchases and a $.5
billion decline in equity translation adjustments, offset by $.4 billion in the
exercise of stock options and an increase of $1.7 billion in retained earnings.
Cash Flow
- ---------
(Dollars in millions) Six Months Ended
June 30
---------------
1996 1995
-------- --------
Net cash provided from (used in):
Operating activities $ 2,743 $ 4,642
Investing activities (3,043) 91
Financing activities (909) (3,194)
Effect of exchange rate changes
on cash and cash equivalents (154) 432
-------- -------
Net change in cash and cash equivalents $(1,363) $ 1,971
-------- -------
For the six months ended June 30, 1996, the company had an overall net
decrease in cash and cash equivalents of $1.4 billion compared to a net increase
of $2.0 billion for the same period in 1995.
Net cash provided from operating activities was $2.7 billion for the six
months ended June 30, 1996, versus $4.6 billion in the comparable period of
1995. The period-to-period decrease in cash flow from operations is primarily a
result of lower cash inflows relative to net changes in operating assets and
liabilities, as well as lower net earnings in the 1996 period, partially offset
by lower work force separation payments in the first half of 1996.
- 13 -
<PAGE>
Financial Condition - (continued)
- --------------------------------
Net cash used in investing activities was $3.0 billion for the six month
period ended June 30, 1996, compared to a $.1 billion net source of funds in the
comparable 1995 period. The increase in funds utilized in investing activities
is attributable to the company's strategic acquisitions (including Tivoli
Systems, Inc., Object Technology International, Inc., and Data Sciences Limited)
and capital expenditures, offset by lower capitalization of software development
in the 1996 period. Additionally, there were substantially less proceeds from
the sale of marketable securities and other investments during the first half of
1996 versus the comparable 1995 period.
Net cash used in financing activities amounted to $.9 billion for the six
months ended June 30, 1996. This decrease of $2.3 billion from the comparable
1995 period was the result of decreased preferred stock repurchase activity
partially offset by increased common stock transactions in the 1996 period.
Additionally, overall debt financing activities provided $1.7 billion in cash
during the first half of 1996 versus cash utilization of $.2 billion during the
comparable 1995 period.
Liquidity
- ---------
At June 30, 1996, the company had a net balance of $1.0 billion in assets
under management from the securitization of lease and trade receivables.
Part II - Other Information
-------------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Annual Meeting of Stockholders of International Business Machines
Corporation was held on April 30, 1996.
(1) Each of the eleven nominees to the Board of Directors was elected for a
one-year term by the stockholders:
DIRECTOR FOR WITHHELD
C. Black 435,783,125 3,300,678
H. Brown 435,286,781 3,797,022
J. Dormann 435,843,063 3,240,740
L. V. Gerstner, Jr. 435,710,764 3,373,039
N. O. Keohane 435,335,999 3,747,804
C. F. Knight 435,873,297 3,210,506
L. A. Noto 435,835,043 3,248,760
J. B. Slaughter 435,313,947 3,769,856
A. Trotman 435,836,614 3,247,189
L. C. van Wachem 435,824,985 3,258,818
C. M. Vest 435,682,256 3,401,547
- 14 -
<PAGE>
Part II - Other Information
---------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders (continued)
- --------------------------------------------------------------------------
(2) The appointment of Price Waterhouse LLP as independent auditors of the
company was ratified:
For 432,314,482
Not For 1,389,427
Abstain 5,379,894
Total 439,083,803
(3) The stockholders defeated a proposal recommending that IBM affirm its
political non-partisanship:
For 21,783,474
Not For 320,852,390
Abstain 24,748,156
Broker No Vote 71,699,783
Total 439,083,803
ITEM 6 (a). Exhibits
Exhibit Number
11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios.
23 The company's proxy statement dated March 18, 1996,
containing the full text of the proposals referred to
in Item 4, which was previously filed electronically,
is hereby incorporated by reference.
99 Supplemental Consolidated Statement of Operations schedule.
ITEM 6 (b). Reports on Form 8-K
- -------------------------------
No reports on Form 8-K were filed during the second quarter of 1996.
- 15 -
<PAGE>
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 9, 1996
By:
John R. Joyce
--------------------------------------------
John R. Joyce
Vice President and Controller
* RISC System/6000, Application System/400, and System/390 are trademarks or
registered trademarks of the International Business Machines Corporation.
- 16 -
EXHIBIT 11
COMPUTATION OF FULLY DILUTED EARNINGS PER
SHARE UNDER TREASURY STOCK METHOD SET FORTH
IN ACCOUNTING PRINCIPLES BOARD OPINION NO. 15
For Quarter Ended
-------------------------------
June 30, 1996 June 30, 1995
------------- -------------
Number of shares on which earnings
per share is based:
Average outstanding during period 533,879,895 575,354,667
Add - Incremental shares under stock
option and stock purchase plans 9,289,771 8,582,886
- Incremental shares related to
5 3/4% CGI convertible bonds - 7,669,727
----------- -----------
Number of shares on which fully diluted
earnings per share is based 543,169,666 591,607,280
----------- -----------
Net earnings available to common
shareholders (millions) $ 1,342 $ 1,711
- Net earnings effect of
interest on 5 3/4% CGI convertible
bonds (millions) - 5
----------- -----------
Net earnings on which fully
diluted earnings per share
is based (millions) $ 1,342 $ 1,716
=========== ===========
Fully diluted earnings per share $ 2.47 $ 2.90
Published earnings per share $ 2.51 $ 2.97
<PAGE>
COMPUTATION OF FULLY DILUTED EARNINGS PER
SHARE UNDER TREASURY STOCK METHOD SET FORTH
IN ACCOUNTING PRINCIPLES BOARD OPINION NO. 15 - (CONTINUED)
For Six Months Ended
--------------------------------
June 30, 1996 June 30, 1995
------------- -------------
Number of shares on which earnings
per share is based:
Average outstanding during period 539,091,709 580,290,595
Add - Incremental shares under stock
option and stock purchase plans 10,207,423 7,806,924
- Incremental shares related to
5 3/4% CGI convertible bonds - 7,684,947
----------- -----------
Number of shares on which fully diluted
earnings per share is based 549,299,132 595,782,466
----------- -----------
Net earnings available to common
shareholders (millions) $ 2,111 $ 2,953
- Net earnings effect of
interest on 5 3/4% CGI convertible
bonds (millions) - 9
----------- -----------
Net earnings on which fully
diluted earnings per share
is based (millions) $ 2,111 $ 2,962
=========== ===========
Fully diluted earnings per share $ 3.84 $ 4.97
Published earnings per share $ 3.92 $ 5.09
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
FOR SIX MONTHS ENDED JUNE 30:
(UNAUDITED)
(Dollars in millions)
1996 1995
-------- --------
Earnings before income taxes(1) $ 3,709 $ 5,040
Add:
Fixed charges, excluding capitalized interest 977 1,014
------- -------
Earnings as adjusted $ 4,686 $ 6,054
======= =======
Fixed charges:
Interest expense 779 802
Capitalized interest 14 10
Portion of rental expense representative of
interest 198 212
------- -------
Total fixed charges $ 991 $ 1,024
======= =======
Preferred stock dividends(2) 18 17
Combined fixed charges and preferred stock
dividends $ 1,009 $ 1,041
======= =======
Ratio of earnings to fixed charges 4.73 5.91
Ratio of earnings to combined fixed charges and
preferred stock dividends 4.64 5.82
(1) Earnings before income taxes excludes the company's share in the income and
losses of less-than-fifty percent-owned affiliates.
(2) The company reported preferred stock dividends and transaction costs of $10
million and $52 million for the six months ended June 30, 1996 and 1995,
respectively. Excluded from the ratio computation for the six months ended
June 30, 1995 are transaction costs of $42 million relating to the
repurchase of Series A 7 1/2 percent preferred stock depositary shares.
Included are preferred stock dividends of $10 million, for the six months
ended June 30, 1996 and 1995 or $18 million and $17 million representing
the pre-tax earnings which would be required to cover such dividend
requirements based on the company's effective income tax rate for the six
months ended June 30, 1996 and 1995, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM
CORPORATION'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,896
<SECURITIES> 481
<RECEIVABLES> 16,246
<ALLOWANCES> 0
<INVENTORY> 6,720
<CURRENT-ASSETS> 38,936
<PP&E> 42,810
<DEPRECIATION> 26,473
<TOTAL-ASSETS> 77,474
<CURRENT-LIABILITIES> 30,629
<BONDS> 0
0
253
<COMMON> 7,921
<OTHER-SE> 13,354
<TOTAL-LIABILITY-AND-EQUITY> 77,474
<SALES> 16,284
<TOTAL-REVENUES> 34,742
<CGS> 10,720
<TOTAL-COSTS> 20,782
<OTHER-EXPENSES> 10,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 354
<INCOME-PRETAX> 3,721
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 2,121
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,121
<EPS-PRIMARY> 3.92
<EPS-DILUTED> 3.84
</TABLE>
EXHIBIT 99
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS(1)
SUPPLEMENTAL SCHEDULE (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Hardware sales $ 8,576 $ 8,659 $ 16,284 $ 16,386
Services 3,734 3,041 6,932 5,486
Software 3,195 3,072 6,232 5,945
Maintenance 1,754 1,877 3,503 3,698
Rentals and financing 924 882 1,791 1,751
------ ------ ------- -------
Total revenue 18,183 17,531 34,742 33,266
Cost:
Hardware sales 5,715 5,190 10,720 9,985
Services 2,959 2,386 5,536 4,360
Software 1,009 1,066 1,921 2,071
Maintenance 915 868 1,827 1,768
Rentals and financing 394 390 778 787
------ ------ ------- ------
Total cost 10,992 9,900 20,782 18,971
------ ----- ------ ------
Gross profit 7,191 7,631 13,960 14,295
Operating expenses:
Selling, general and
administrative 3,889 3,883 7,586 7,516
Research, development and
engineering 1,116 .974 2,207 1,887
----- ---- ----- -----
Total operating expenses 5,005 4,857 9,793 9,403
Operating income 2,186 2,774 4,167 4,892
Other income, principally interest 193 238 343 484
Interest expense 205 188 354 368
----- ------ ----- -----
Earnings before income taxes 2,174 2,824 4,156 5,008
Income tax provision 827 1,108 1,600 2,003
----- ------ ----- -----
Net earnings 1,347 1,716 2,556 3,005
Preferred stock dividends and
transaction costs 5 5 10 52
----- ------ ----- -----
Net earnings applicable to
common shareholders $ 1,342 $ 1,711 $ 2,546 $ 2,953
======= ======= ======= =======
Net earning per share of
common stock $ 2.51 $ 2.97 $ 4.72 $ 5.09
</TABLE>
(1) Supplemental information provided for comparative purposes.
Six months 1996 excludes non-recurring, non-tax deductible charge of $435
million ($.80 per common share) for purchased in-process research and
development in connection with the acquisitions of Tivoli Systems Inc. and
Object Technology International Inc.
