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