UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
1-2360
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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
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(State of incorporation) (IRS employer identification number)
Armonk, New York 10504
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(Address of principal executive offices) (Zip Code)
914-499-1900
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
1934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The registrant has 1,809,089,785 shares of common stock outstanding at
June 30, 1999.
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Index
Page
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Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Earnings for the three and six months
ended June 30, 1999 and 1998 .......................................... 1
Consolidated Statement of Financial Position at June 30, 1999
and December 31, 1998 ................................................. 3
Consolidated Statement of Cash Flows for the six months ended
June 30, 1999 and 1998 ................................................ 5
Notes to Consolidated Financial Statements .............................. 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition ......................................... 10
Part II - Other Information ................................................. 21
<PAGE>
Part I - Financial Information
ITEM 1. Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions except Three Months Ended Six Months Ended
per share amounts) June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenue:
Hardware $ 9,379 $ 7,714 $17,963 $15,032
Global Services 7,988 6,969 15,538 13,310
Software 3,126 2,866 6,046 5,510
Global Financing 743 712 1,448 1,431
Enterprise Investments/Other 669 562 1,227 1,158
------- ------- ------- -------
Total revenue 21,905 18,823 42,222 36,441
Cost:
Hardware 6,699 5,347 12,949 10,566
Global Services 5,721 5,065 11,288 9,695
Software 520 548 1,075 1,088
Global Financing 332 377 643 757
Enterprise Investments/Other 409 340 785 739
------- ------- ------- -------
Total cost 13,681 11,677 26,740 22,845
------- ------- ------- -------
Gross profit 8,224 7,146 15,482 13,596
Operating expenses:
Selling, general and administrative 2,846 3,812 6,783 7,531
Research, development and engineering 1,293 1,220 2,474 2,399
------- ------- ------- -------
Total operating expenses 4,139 5,032 9,257 9,930
Operating income 4,085 2,114 6,225 3,666
Other income, principally interest 155 130 289 280
Interest expense 197 161 371 340
------- ------- ------- -------
Net income before income taxes 4,043 2,083 6,143 3,606
Income tax provision 1,652 631 2,282 1,118
------- ------- ------- -------
Net income 2,391 1,452 3,861 2,488
Preferred stock dividends 5 5 10 10
------- ------- ------- -------
Net income applicable to
common shareholders $ 2,386 $ 1,447 $ 3,851 $ 2,478
======= ======= ======= =======
(The accompanying notes are an integral part of the financial statements.)
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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS - (CONTINUED)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998* 1999 1998*
---- ---- ---- ----
Earnings per share of common
stock - assuming dilution $ 1.28 $ 0.75 $ 2.05 $ 1.28
Earnings per share of common
stock - basic $ 1.32 $ 0.77 $ 2.12 $ 1.31
Average number of common
shares outstanding: (millions)
Assuming dilution 1,870.6 1,928.7 1,876.6 1,939.0
Basic 1,812.1 1,879.2 1,818.0 1,889.8
Cash dividends per common share $ 0.12 $ 0.11 $ 0.23 $ 0.21
* Adjusted to reflect a two-for-one stock split effective May 10, 1999.
(The accompanying notes are an integral part of the financial statements.)
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<PAGE>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
ASSETS
(Dollars in millions except At June 30, At December 31,
per share amounts) 1999 1998
----------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 5,465 $ 5,375
Marketable securities -- at fair value,
which approximates market 1,776 393
Notes and accounts receivable -- trade,
net of allowances 19,727 20,271
Sales-type leases receivable 6,299 6,510
Inventories, at lower of average cost or net
realizable value
Finished goods 1,272 1,088
Work in process and raw materials 3,767 4,112
------- -------
Total inventories 5,039 5,200
Prepaid expenses and other current assets 5,146 4,611
------- -------
Total current assets 43,452 42,360
Plant, rental machines and other property 40,015 44,870
Less: Accumulated depreciation 22,762 25,239
------- -------
Plant, rental machines and other property -- net 17,253 19,631
Software 613 599
Investments and sundry assets 22,029 23,510
------- -------
Total assets $83,347 $86,100
======= =======
(The accompanying notes are an integral part of the financial statements.)
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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in millions except At June 30, At December 31,
per share amounts) 1999 1998
----------- ---------------
Liabilities and Stockholders' Equity
Current liabilities:
Taxes $ 3,397 $ 3,125
Accounts payable and accruals 17,851 19,797
Short-term debt 14,713 13,905
-------- ---------
Total current liabilities 35,961 36,827
Long-term debt 14,330 15,508
Other long-term liabilities 12,574 12,818
Deferred income taxes 1,324 1,514
-------- ---------
Total liabilities 64,189 66,667
Stockholders' equity:
Preferred stock - par value $.01
per share 247 247
Shares authorized: 150,000,000
Shares issues: 1999 - 2,546,011
1998 - 2,546,011
Common stock - par value
$.20 per share 11,638 10,121
Shares authorized: 4,687,500,000
Shares issued: 1999 - 1,869,868,949
1998 - 1,853,738,104*
Retained earnings 13,542 10,141
Treasury stock - at cost (3,866) (133)
Shares: 1999 - 40,779,164
1998 - 1,924,293*
Employee benefits trust (2,564) (1,854)
Shares: 1999 - 20,000,000
1998 - 20,000,000*
Accumulated gains and losses
not affecting retained earnings 161 911
Total stockholders' equity 19,158 19,433
-------- --------
Total liabilities and stockholders' equity $ 83,347 $ 86,100
======== ========
* Adjusted to reflect a two-for-one stock split effective May 10, 1999.
(The accompanying notes are an integral part of the financial statements.)
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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
(Dollars in millions) 1999 1998
---- ----
Cash flow from operating activities:
Net income $ 3,861 $ 2,488
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation 3,669 2,054
Amortization of software 203 283
Gain on disposition of fixed and other assets (3,796) (128)
Changes in operating assets and liabilities (417) (1,357)
------- -------
Net cash provided from operating activities 3,520 3,340
------- -------
Cash flow from investing activities:
Payments for plant, rental machines and
other property, net of proceeds (2,155) (2,403)
Investment in software (209) (120)
Purchases of marketable securities and other
investments (2,693) (1,150)
Proceeds from sale of the IBM Global Network 4,081 --
Proceeds from marketable securities and other
investments 1,505 812
------- -------
Net cash provide from (used in) investment
activities 529 (2,861)
------- -------
Cash flow from financing activities:
Proceeds from debt issuance 2,986 4,106
Payments to settle debt (3,274) (2,326)
Short-term borrowings less than 90 days -- net 177 (560)
Common stock transactions -- net (3,259) (3,272)
Cash dividends paid (433) (412)
------- -------
Net cash used in financing activities (3,803) (2,464)
------- -------
Effect of exchange rate changes on
cash and cash equivalents (156) (37)
------- -------
Net change in cash and cash equivalents 90 (2,022)
Cash and cash equivalents at January 1 5,375 7,106
------- -------
Cash and cash equivalents at June 30 $ 5,465 $ 5,084
======= =======
(The accompanying notes are an integral part of the financial statements.)
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Notes to Consolidated Financial Statements
1. In the opinion of the management of International Business Machines
Corporation (the company), all adjustments necessary to a fair statement of the
results for the unaudited three- and six-month periods have been made.
2. The Accumulated gains and losses not affecting retained earnings line of
stockholders' equity comprises foreign currency translation adjustments and
unrealized gains and losses on marketable securities. Net income ($2,391 million
and $1,452 million) plus the decrease in foreign currency translation
adjustments ($162 million and $90 million) plus unrealized losses on marketable
securities ($24 million and $22 million) totaled $2,205 million and $1,340
million for the three-month periods ended June 30, 1999 and 1998, respectively.
Net income ($3,861 million and $2,488 million) plus the decrease in foreign
currency translation adjustments ($752 million and $181 million) plus unrealized
gains/losses on marketable securities ($2 million and $18 million) totaled
$3,111 million and $2,289 million for the six-month periods ended June 30, 1999
and 1998, respectively.
3. In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date Of FASB
Statement No. 133. This statement defers the effective date of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, to fiscal years
beginning after June 15, 2000, although early adoption is encouraged. SFAS No.
133 establishes accounting and reporting standards for derivative instruments.
It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and to measure those
instruments at fair value. Additionally, the fair value adjustments will affect
either stockholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes and, if so, the nature
of the hedging activity. The company will adopt this standard as of January 1,
2001. Management does not expect the adoption to have a material effect on the
company's results of operations; however, the effect on the company's financial
position depends on the fair values of the company's derivatives and related
financial instruments at the date of adoption.
4. The tables on pages 29 through 32 of this Form 10-Q reflect the results of
the company's segments consistent with the company's management system. These
results are not necessarily a depiction that is in conformity with generally
accepted accounting principles, e.g., employee retirement plan costs are
developed using actuarial assumptions on a country-by-country basis and
allocated to the segments on headcount. A different result could be arrived at
for any segment if actuarial assumptions unique to each segment were used.
Performance measurement is based on income before income taxes (pre-tax income).
These results are used, in part, by management, both in evaluating the
performance of, and in allocating resources to, each of the segments.
5. On January 26, 1999, the company's Board of Directors approved a two-for-one
stock split effective May 10, 1999. On April 27, 1999, the stockholders of the
company approved amendments to the Certificate of Incorporation to increase the
number of authorized shares of common stock from 1,875 million to 4,687.5
million, which was required to effect that stock split. In addition, the
amendment reduced the par value of the common shares from $.50 to $.20 per
share. Common stockholders of record at the close of business on May 10, 1999
received one additional share for each share held.
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<PAGE>
Notes to Consolidated Financial Statements - (continued)
All share and per share data presented in the Consolidated Financial
Statements reflect the two-for-one stock split.
6. The second quarter 1999 results include a pre-tax benefit of $1,610 million
($687 million after tax, or $.37 per diluted common share) related to the sale
of IBM's Global Network, actions within the company's Technology Group, and a
change in estimate related to the depreciable life of personal computers used
within the company. That benefit is reflected in Selling, general and
administrative expense.
Sale of Global Network. In December 1998, the company announced that it
would sell its Global Network business to AT&T for $5 billion. The IBM Global
Network generated revenues of approximately $1.2 billion in 1998.
During the second quarter of 1999, the company completed the sales of its
Global Network businesses in the United States, Japan, the United Kingdom, and
Ireland, for approximately $4,192 million. More than 3,500 IBM employees joined
AT&T as a result of the sales to date. The company expects the sales of the
Global Network in the remaining countries to be substantially completed in the
third quarter.
The company recognized a pre-tax gain of $3,430 million on the sales
($2,102 million after tax, or $1.12 per diluted common share). The net gain
reflects dispositions of Plant, rental machines and other property of $310
million and other assets of $181 million, and contractual obligations of $283
million.
Technology Group Actions. During the second quarter, the company approved
and implemented actions designed to better align the operations of IBM's
Technology Group with that group's strategic direction in view of the
competitive environment, overcapacity in the industry and resulting pricing
pressures. The actions affect the Microelectronics Division (MD) and the Storage
Systems Division (SSD) of the company's Technology Group. The company expects
these actions to be substantially completed by the first half of 2000. The
actions and the resulting improvement in the cost structure are intended to
enable the company to enhance its profitability within MD and SSD in the future.
During the second quarter, the company recorded a charge of $1,416 million
($1,174 million after tax, or $.62 per diluted common share) related to the
Technology Group actions. The charge included $190 million related to employee
termination benefits and $1,226 million of other costs as described below. (The
table on page 9 identifies the portion of the total charge that relates to
investment and other asset write downs and the portion that relates to
liabilities as of June 30, 1999.)
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<PAGE>
Notes to Consolidated Financial Statements - (continued)
The actions within MD have two objectives. First, they address a
prolonged, industry-wide downturn in memory chip prices that has affected the
results of the company's semiconductor business and are intended to enable the
company to reconfigure the assets and capabilities of the division to allow more
focus on the faster-growth, higher-margin custom logic portion of the MD
business. After evaluating alternatives to mitigate the effect of memory price
pressures and negotiating with other members of joint ventures, the company
acted to minimize its dependence on high-volume manufacturing of DRAM memory
components businesses while shifting its resources toward the faster-growth,
higher-margin custom chip area. The DRAM actions affect one of the company's
European manufacturing facilities and a joint venture partnership in the United
States. Second, the actions within MD enhance the company's ability to more cost
effectively manage a partnership agreement that was formed to produce CMOS-based
logic components.
The company will reduce its internal DRAM capacity by converting its
manufacturing facility in Essonnes, France from DRAM to custom logic over an
18-month period. The company will effect that conversion through a joint venture
established in the second quarter with Infineon Technologies, a subsidiary of
Siemens. The partners will share equally in the capacity output of the venture.
The company used assets whose net book value is greater than their fair value to
fund its stake in the venture. The company recognized a charge in the second
quarter for the difference between net book value and fair value of those assets
as well as assets that were idled as a result of these actions and that will be
scrapped. Also in connection with the decisions related to the DRAM business,
the company executed contracts with various banks and other financing
institutions in the second quarter to sell and leaseback test equipment. The net
book value of the equipment was greater than the appraised fair value and the
company recognized a charge in the second quarter for that difference. The
company took a pre-tax charge of $829 million ($770 million after tax, $.41 per
diluted common share) related to the actions in Essonnes and the sale-leasebacks
of test equipment. That amount includes a $167 million pre-tax charge for
workforce reductions that affect approximately 790 employees (455 direct
manufacturing and 335 indirect manufacturing) in France. The terminations are
expected to be substantially completed by the end of the first quarter of 2000.
The company also participates in a 50/50 joint venture (Dominion
Semiconductor Company) with Toshiba Corporation to produce DRAM memory
components. In the second quarter, the company entered into an agreement whereby
Toshiba will assume the company's interest in Dominion effective December 31,
2000. The company will participate in the capacity output of Dominion at a
significantly reduced rate in the interim period. The company took a pre-tax
write-off of $171 million ($104 million after tax, or $.05 per diluted common
share) for its investment in the joint venture at the signing of the agreement
with Toshiba.
The company holds a majority interest in a joint venture (MiCRUS) with
Cirrus Logic Inc. (the partner) to produce CMOS-based logic components for IBM
and its partner based on contractual capacity agreements. In the second quarter,
the partner indicated that it will not require the output capacity that is
provided for in the partnership agreement. The company determined that the most
cost-effective manner in which to address the partner's desire to exit the
partnership agreement is to acquire the minority interest held by that partner.
Accordingly, the company acquired the minority interest late in the second
quarter and has waived its rights to
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<PAGE>
Notes to Consolidated Financial Statements - (continued)
seek compensation from the former partner for equipment leasehold cancellation
liabilities and lease rental payments for idle equipment. The company recognized
a pre-tax charge of $152 million ($92 million after tax, or $.05 per diluted
common share), as a result of this arrangement.
The company also announced aggressive steps to improve its competitive
position in the markets that SSD serves by merging server hard disk drive
product lines and realigning operations. The company will integrate all server
hard disk drives into a single low-cost design platform that uses common
development and manufacturing processes. The company will continue to transfer
manufacturing assembly and test operations to Hungary and Mexico. The company
expects to complete these actions by June 30, 2000.
The actions within SSD resulted in second quarter pre-tax charges of $264
million ($208 million after tax, or $.11 per diluted common share). That amount
includes write-downs to fair value of equipment (a) that is being idled and will
be scrapped ($123 million), (b) under contract for sale and delivery by December
31, 1999 ($27 million), and (c) subject to sale-leaseback agreements ($91
million write-down of the equipment to appraised fair value). The pre-tax amount
for SSD actions also includes a charge of $23 million in workforce reductions
that affect approximately 900 employees (780 direct manufacturing and 120
indirect manufacturing) in the United States. The terminations are expected to
be substantially completed by December 31, 1999, with 105 terminations in the
first half of 2000.
Summary. The following table identifies the significant components of the
pre-tax charge related to Technology Group actions, the investments and other
asset write-downs in the quarter, and the liability as of June 30, 1999:
(Dollars in millions) Liability
Created
Total Investment & in the
Pre-tax Other Asset Second Liability as of
Charges Write-Downs Quarter June 30, 1999
MD Actions
Essonnes
Equipment $ 662 $ 662 $ -- $ --
Employee Terminations 167 -- 167 167
Dominion Investment 171 171 -- --
MiCRUS Investment 152 -- 152 152
SSD Actions
Equipment 241 241 -- --
Employee Terminations 23 -- 23 23
------ ------ ------ ------
Total Actions $1,416 $1,074 $ 342 $ 342
====== ====== ====== ======
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Notes to Consolidated Financial Statements - (continued)
Change in Estimate. The company developed a Client Standardization
Strategy for IBM's internal desktop asset management designed to ensure that IBM
deploys standard platforms to provide common interfaces among IBM organizations.
To achieve optimal productivity, the acquisition and rollout of standard use
software must be aligned with compatible hardware. New software typically is
designed to be used with technology that is no more than three years old. Thus,
personal computers (PCs) used within IBM will be replaced, on average, by the
end of their third year in use instead of the current practice of five years.
As a result of the Strategy and the change in estimate of PC useful life,
the company recognized a charge in the second quarter of $404 million ($241
million after tax, $.13 per diluted common share). The remaining book value of
the assets will be depreciated over the remaining new useful life. In the second
quarter, the company wrote off the net book value of PCs that were 3 years or
older and, therefore, had no remaining useful life. The net effect on future
operations is expected to be minimal as the increased depreciation due to the
shorter life will be offset by the lower depreciable base attributable to the
write off of PCs older than three years.
7. Subsequent Events: The company announced on July 12, 1999, that it will
acquire Sequent Computer Systems Inc. for approximately $810 million. Under
terms of the deal, the company will pay Sequent stockholders $18 in cash for
each share of Sequent common stock. The completion of the acquisition is subject
to Sequent stockholder and regulatory approvals.
The company announced on July 27, 1999, that it will acquire Mylex
Corporation, a leading developer of technology for moving, storing, protecting
and managing data in desktop and networked environments. The company will pay
$12 for each outstanding share of Mylex common stock, or approximately $240
million. The completion of the acquisition is subject to regulatory and other
approvals.
During July 1999, the company completed the sales of its Global Network
business in France, Germany, Switzerland, Norway, Denmark, Austria, Sweden,
Finland, Iceland, Liechtenstein, Belgium, Spain, Netherlands, Luxembourg,
Curacao and Monaco for approximately $500 million.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
The company's second-quarter and first-half results reflect continued
building on strategic priorities in services, software and the sale of
leadership technology to the marketplace. The services business continued to
show excellent results. The software unit had very good performance, with strong
results from the company's database, transaction processing and Tivoli products.
Although the company saw price pressures in some areas of technology, the
company's technology business nevertheless performed well overall in a difficult
environment. The company had very good growth in its S/390 servers, with
shipments of S/390 computing power more than doubling year over year. The
RS/6000 revenue showed marked improvement
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<PAGE>
in the second quarter. The Personal Systems group continued to demonstrate
strong year-over-year sales growth.
The company's second quarter actions in the microelectronics and storage
areas are intended to improve the competitiveness of the company's technology
business and to further strengthen the company's overall business portfolio.
While the results for the second quarter and the first six months of 1999
were strong, the company still faces uncertainties in the remainder of 1999
including ongoing weakness in some parts of Asia and Latin America, continued
price pressure in personal computers, HDDs and semiconductors, and the unknown
effect of the Year 2000 issue on customer purchases. The company will continue
to focus on increasing revenue with particular emphasis on addressing customers'
needs to build integrated e-business solutions through the use of the company's
hardware, services, software and technology. In addition, the company continues
to invest judiciously, reduce infrastructure and optimize the deployment of the
company's employees and resources to maintain or improve its pre-tax margins.
Result of Operations
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue $21,905 $18,823 $42,222 $36,441
Cost 13,681 11,677 26,740 22,845
------- ------- ------- -------
Gross profit $ 8,224 $ 7,146 $15,482 $13,596
Gross profit margin 37.5% 38.0% 36.7% 37.3%
Net income $ 2,391 $ 1,452 $ 3,861 $ 2,488
Earnings per share of
common stock:
Assuming dilution $ 1.28 $ 0.75* $ 2.05 $ 1.28*
Basic $ 1.32 $ 0.77* $ 2.12 $ 1.31*
* Adjusted to reflect a two-for-one stock split effective May 10, 1999.
As a result of the company's share repurchase program, the average number
of common shares outstanding assuming dilution was lower by 58.1 million than
the second quarter in 1998 and by 62.4 million than the first six months of
1998. The average number of shares assuming dilution was 1,870.6 million in the
second quarter of 1999 and 1,876.6 million for the first six months of 1999.
There were 1,809.1 million shares outstanding at June 30, 1999.
Revenue for the three months ended June 30, 1999 increased 16.4 percent
versus the same period last year (also 16.4 percent in constant currency).
Services revenue growth remained strong and software continued to display
improved year-to-year growth in middleware offerings.
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<PAGE>
Results of Operations - (continued)
Hardware revenue grew 21.6 percent as the personal computer business continued
its year-over-year improvement.
Revenue for the second quarter of 1999 from the company's end-user
businesses totaled $10.0 billion from the Americas, an increase of 16.3 percent
(about 18 percent in constant currency) compared with the same period last year.
Latin America, which is about 10 percent of the Americas, showed improvement
with revenues growing at 8 percent on a constant currency basis, compared with a
10 percent decline in the first quarter of 1999. Revenue from Europe/Middle
East/Africa was $6.4 billion, up 13.7 percent (about 17 percent in constant
currency). Asia-Pacific revenue grew 19.5 percent (about 9 percent in constant
currency) to $3.6 billion. As in the first quarter of 1999, key areas outside of
Japan continued to show strong double-digit growth. Japan revenue was basically
flat in the second quarter following modest growth in the first quarter of 1999.
OEM revenue across all geographies was $1.9 billion, a 20.6 percent increase
(about 20 percent in constant currency) compared with the second quarter of
1998.
The company's overall gross profit margin was 37.5 percent in the second
quarter compared with 38.0 percent in the same period of 1998. The decline in
gross profit margin continues to reflect the changing mix of the company's
business to services, and a decline in margins in the company's hardware
business related to a shift from servers to personal computers which have a
lower gross profit margin.
The company's $4.2 billion second quarter expenses include the actions
that are described in Note No. 6 to the Consolidated Financial Statements on
pages 7 through 10. The company's expense-to-revenue ratio improved 7.8 points
in the quarter. The actions contributed to a 7.3 point improvement in the
expense-to-revenue ratio in the second quarter of 1999.
The company's tax rate was 40.8 percent in the second quarter compared
with 30.3 percent in the year-earlier period. The increase was principally due
to the second quarter actions taken by the company.
Hardware
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Total revenue $ 9,379 $ 7,714 $17,963 $15,032
Total cost 6,699 5,347 12,949 10,566
------- ------- ------- -------
Gross profit $ 2,680 $ 2,367 $ 5,014 $ 4,466
Gross profit margin 28.6% 30.7% 27.9% 29.7%
Revenue from hardware for the second quarter and first six months of 1999
increased 21.6 percent and 19.4 percent, respectively, when compared with the
same periods in 1998.
Despite continued pricing pressures, personal computer revenue had very
strong growth in the second quarter and first six months of 1999, compared with
the same periods in 1998.
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The Results of Operations - (continued)
increases were driven by higher revenue for both commercial and consumer
personal computers and a richer mix to mobile and Netfinity server products. The
company continues to focus on expanding its direct channel customers; improving
its indirect channel efficiency through its advanced fulfillment initiative,
expanding its co-location program and focusing on turnover of high-cost parts;
increasing focus on fast growing small- and medium- size businesses; and
realizing more opportunity in businesses that are tied to the personal
computer-like services, software and financing.
Technology revenue increased for both the second quarter and first six
months of 1999 when compared with year-ago periods. The increases were driven by
strong growth in HDD storage, custom logic and storage tape products. Despite
very strong growth in HDD revenue, these products continue to be affected by
pricing pressures.
During the second quarter of 1999, the company signed two major technology
contracts. Acer signed a seven-year contract valued at $8 billion and Nintendo
signed a multi-year contract valued at $1 billion to purchase technology from
the company.
The actions that the company took in the second quarter of 1999 are aimed
directly at strengthening the Technology Group over the long term. These actions
are intended to shift the focus of the Technology Group to higher margin
businesses and more efficient operations.
Server revenue increased slightly in the second quarter of 1999 and was
flat for the first six months of 1999, versus the same period of 1998. S/390 had
strong revenue growth as demand continued for the G5 and the new G6 models. The
S/390 servers are increasingly being used in e-business, Enterprise Resource
Planning (ERP) and business intelligence. RS/6000 showed improvement in the
second quarter with good revenue growth and was up slightly on a six-month
basis. The new H70 SMP model, an enterprise server, was well received by
customers in the second quarter. AS/400 declined in the second quarter and first
six months of 1999, when compared with the second quarter and first six months
of 1998. While volumes grew, revenue was down reflecting a change in the mix
within the AS/400 product line. In addition, Europe (where the AS/400 has
traditionally been well received) had declining revenue due to poor sales
execution, and North America revenue grew modestly.
Hardware sales gross profit for the second quarter and first six months of
1999 increased 13.2 percent and 12.3 percent, respectively, from comparable
periods in 1998. The hardware gross profit margin decreased 2.1 points and 1.8
points, respectively, from the prior year. Pricing pressures associated with
personal computers, hard disk drives and memory chip prices drove the declines
in gross profit margins from the same periods in 1998. Additionally, the change
in mix between personal systems and servers had a negative effect on the gross
profit margin and a lower model mix in the mobile HDDs (in which some customers'
capacity needs are being met by new mid-range products, rather than the more
profitable high-end mobile products) also affected gross profit for the second
quarter. Those declines were partially offset by improved margins for personal
computers and S/390 products.
-13-
<PAGE>
Results of Operations - (continued)
Global Services
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Total revenue $ 7,988 $ 6,969 $15,538 $13,310
Total cost 5,721 5,065 11,288 9,695
------- ------- ------- -------
Gross profit $ 2,267 $ 1,904 $ 4,250 $ 3,615
Gross profit margin 28.4% 27.3% 27.4% 27.2%
Global Services revenue increased 14.6 percent and 16.7 percent,
respectively, in the second quarter and first six months of 1999, when compared
with the same periods of last year. The increase in revenue was driven by strong
growth in strategic outsourcing, systems integration and product support
services across all geographies. Networking revenue was up slightly for the
quarter and had good growth for the six-month period, despite the sale of a
portion of the IBM Global Network to AT&T during the second quarter of 1999.
These increases were partially offset by lower revenue associated with
maintenance offerings. New contract signings in the second quarter were $9.5
billion. Most of those contracts are for strategic outsourcing agreements and
involve a full spectrum of the company's services and product offerings. Those
signings include 11 deals that individually are valued at over $100 million.
Global Services gross profit dollars increased in the second quarter and
first six months of 1999 by 19.1 percent and 17.6 percent, respectively, when
compared with year-ago periods. The improvement in gross profit dollars and
margin was a result of improved services margins in systems integration and
strategic outsourcing primarily in EMEA, which more than offset the changing mix
away from the higher-margin maintenance business. Maintenance margins were flat
year over year.
Software
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Total revenue $3,126 $2,866 $6,046 $5,510
Total cost 520 548 1,075 1,088
------ ------ ------ ------
Gross profit $2,606 $2,318 $4,971 $4,422
Gross profit margin 83.4% 80.9% 82.2% 80.2%
Revenue from software for the second quarter and first six months of 1999
increased 9.1 percent and 9.7 percent, respectively, over comparable periods in
1998. The growth continues to be driven by the company's middleware products
which comprise data management, transaction processing, Tivoli systems
management, and Lotus Notes messaging and collaboration across both IBM and
non-IBM platforms. Middleware is the software that powers the infrastructure of
the company's e-business solutions. The company continues to
-14-
<PAGE>
Results of Operations - (continued)
focus on helping customers use its software to transform their businesses to
e-businesses, particularly in collaboration with the company's Global Services
Group and channel partners.
Operating-systems software revenue was flat for the second quarter and
showed growth for the six months of 1999, when compared with year-ago periods.
The increase in the six months revenue was primarily driven by S/390 and RS/6000
offerings.
Software gross profit dollars for both the second quarter and first six
months of 1999 increased 12.4 percent versus the same periods in 1998. The
improvement in gross profit dollars and margin is due to increased revenue and
lower levels of amortization costs associated with previously deferred
development spending, partially offset by higher vendor royalty payments due
primarily to increased volumes.
Global Financing
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Total revenue $ 743 $ 712 $1,448 $1,431
Total cost 332 377 643 757
------ ------ ------ ------
Gross profit $ 411 $ 335 $ 805 $ 674
Gross profit margin 55.3% 47.2% 55.6% 47.2%
Global Financing revenue increased 4.3 percent and 1.2 percent,
respectively, for the second quarter and first six months of 1999, when compared
with the same periods of 1998. The increases in revenue were driven by growth in
customer financing, as well as increased financing of software and services in
North America and Europe. These increases were partially offset by lower used
equipment sales. Financing originations increased by nearly 30 percent in the
quarter to $11.0 billion, with strong growth in both customer and commercial
financing year to year. In addition, the company increased its asset base in
North America with the acquisition of Comdisco's mainframe lease portfolio.
Global Financing gross profit dollars increased 22.7 percent and 19.4
percent, respectively, for the second quarter and first six months of 1999,
versus the same periods of 1998. The increase was driven by lower cost of
borrowing and by Global Financing's continued increased use of the company's
Global Treasury Centers rather than external banks as a funding source.
-15-
<PAGE>
Results of Operations - (continued)
Enterprise Investments / Other
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Total revenue $ 669 $ 562 $1,227 $1,158
Total cost 409 340 785 739
------ ------ ------ ------
Gross profit $ 260 $ 222 $ 442 $ 419
Gross profit margin 38.9% 39.6% 36.0% 36.2%
Revenue from Enterprise Investments/Other increased 19.1 percent and 6.0
percent, respectively, for the second quarter and first six months of 1999,
versus comparable periods in 1998. The increases were driven primarily by strong
second-quarter growth in point-of-sale terminals and good growth in CATIA
software.
The Enterprise Investments/Other gross profit dollars increased 17.1
percent and 5.5 percent, respectively, in the second quarter and first six
months of 1999, versus the same periods of 1998. The increases were primarily
driven by the increased revenue from point-of-sale terminals.
Expenses
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Selling, general and
administrative $ 2,846 $ 3,812 $ 6,783 $ 7,531
Percentage of revenue 13.0% 20.3% 16.1% 20.7%
Research, development
and engineering $ 1,293 $ 1,220 $ 2,474 $ 2,399
Percentage of revenue 5.9% 6.5% 5.9% 6.6%
Selling, general and administrative expense for the second quarter and
first six months of 1999 decreased 25.3 percent and 9.9 percent, respectively,
from the same periods in 1998. The decreases were driven by the net benefit of
$1,610 million associated with the actions taken in the second quarter. (See
Note No. 6 to the Consolidated Financial Statements on pages 7 through 10 for
further information).
The company continues to manage aggressively its infrastructure expense
and its overall portfolio to allow for investment in growth segments of the
business. Key ongoing investments include software marketing, major marketing
campaigns and new offerings for small and medium business opportunities, as well
as the e-business campaign. These types of expenditures are consistent with the
company's ongoing objective of growing revenue while improving the
expense-to-revenue ratio over time.
-16-
<PAGE>
Results of Operations - (continued)
Research, development and engineering expense increased 5.9 percent and
3.1 percent, respectively, for the second quarter and first six months of 1999,
when compared with the same periods of 1998. The increases reflect the company's
continued investments in high-growth opportunities like e-business, Tivoli
systems management and Lotus products. Interest on total borrowings of the
company and its subsidiaries, which includes interest expense and interest costs
associated with rentals and financing, amounted to $389 million and $752 million
for the second quarter and first six months of 1999, respectively. Of these
amounts, the company capitalized $11 million for the second quarter and $15
million for the first six months of 1999.
The effective tax rate for the quarter ended June 30, 1999, was 40.8
percent versus 30.3 percent for the same period in 1998. The 10.5 point increase
was principally due to the second-quarter actions taken by the company.
The effective tax rate for the first six months of 1999 was 37.1 percent
versus 31.0 percent for the same period in 1998. The 6.1 point increase from the
1998 rate was primarily a result of the same factors that affected the second
quarter effective tax rate.
Financial Condition
During the first half of 1999, the company continued to make significant
investments to fund its future growth and increase shareholder value. These
included expenditures of $2,741 million for Research, development and
engineering, $2,865 million in Plant, rental machines and other property and
$3,732 million for the repurchase of the company's common shares. The company
had $7,241 million in Cash and cash equivalents and Marketable securities at
June 30, 1999.
Cash Flow
(Dollars in millions) Six Months Ended
June 30,
----------------------
1999 1998
---- ----
Net cash provided from (used in):
Operating activities $ 3,520 $ 3,340
Investing activities 529 (2,861)
Financing activities (3,803) (2,464)
Effect of exchange rate changes on cash
and cash equivalents (156) (37)
------- -------
Net change in cash and cash equivalents $ 90 $(2,022)
======= =======
-17-
<PAGE>
Financial Condition - (continued)
Working Capital
(Dollars in millions) At June 30, At December 31,
1999 1998
----------- ---------------
Current assets $43,452 $42,360
Current liabilities 35,961 36,827
------- -------
Working capital $ 7,491 $ 5,533
Current ratio 1.21:1 1.15:1
Current assets increased $1,092 million from year-end 1998 with increases
of $1,473 million in Cash and cash equivalents and Marketable securities, and
$535 million in Prepaid expenses and other current assets, offset by decreases
of $755 million in accounts receivable ($544 million in Notes and accounts
receivable and $211 million in Sales-type lease receivables) and $161 million in
Inventories. The increase in Cash and cash equivalents and Marketable securities
resulted primarily from cash generated from operations and the net proceeds from
the sale of a portion of the IBM Global Network, offset by stock repurchases and
capital expenditures. Prepaid expenses and other current assets reflect the
seasonal increase in prepaid expenses from typically lower year-end levels. The
decline in accounts receivable is attributable to the collection of
traditionally higher year-end accounts receivable balances, while inventory
declines were driven by personal computer and storage systems inventory
reductions.
Current liabilities declined $866 million with declines of $1,946 million
in Accounts payable and accruals (resulting primarily from seasonal declines in
these balances from their normally higher year-end levels), offset by increases
of $808 million in Short-term debt and $272 million in Taxes payable.
Investments
During the first half of 1999, the company continued to invest in its
rapidly growing services business, primarily in the management of customers'
information technology, as well as in manufacturing capacity for hard disk
drives and microelectronics. The company's capital investment for Plant, rental
machines and other property was $2,865 million during the first half of 1999 and
$2,778 million for the first half of 1998.
In addition to software development expense included in Research,
development and engineering expense, the company capitalized $209 million of
software costs during the first half of 1999, an increase of $89 million from
the comparable period in 1998. Amortization of capitalized software costs was
$203 million during the first half of 1999, a decline of $80 million from the
comparable 1998 period.
Investments and sundry assets were $22,029 million at June 30, 1999, a
decrease of $1,481 million from year-end 1998, resulting primarily from
decreases in non-current sales-type lease receivables and deferred tax assets.
-18-
<PAGE>
Financial Condition - (continued)
Other Non-Current Liabilities
Other non-current liabilities of $12,574 million at June 30, 1999,
declined $244 million from year-end 1998 primarily in postretirement benefits
and non-U.S. retirement reserves.
Debt and Equity
(Dollars in millions) At June 30, At December 31,
1999 1998
----------- ---------------
Global financing debt $26,902 $27,754
Non-global financing debt 2,141 1,659
------- -------
Total debt $29,043 $29,413
Stockholders' equity $19,158 $19,433
Debt/capitalization 60.3% 60.2%
EBITDA / interest expense 9x 8x
Non-global financing:
Debt/capitalization 12.8% 9.9%
EBITDA/interest expense 17x 15x
Global financing debt/equity 6.0:1 6.5:1
Total debt decreased $370 million from year-end 1998 as debt supporting
the growth in global financing assets decreased $852 million, and non-global
financing debt increased $482 million. Stockholders' equity declined $275
million from December 31, 1998, as the increase in the company's retained
earnings was more than offset by the common share repurchases.
Liquidity
The company maintains a $10.0 billion committed global credit facility as
part of its ongoing efforts to ensure appropriate levels of liquidity. As of
June 30, 1999, $9,062 million of this confirmed line of credit remained unused
and available for future use.
At June 30, 1999, the company had an outstanding balance of $515 million
in assets under management from the securitization of loans, leases and trade
receivables.
Year 2000
The "Year 2000 issue" arises because many computer hardware and software
systems use only two digits to represent the year. As a result, these systems
and programs may not process dates beyond 1999, which may cause errors in
information or systems failures. Assessments of the potential effects of the
Year 2000 issues vary markedly among different companies, governments,
consultants, economists and commentators, and it is not possible to predict what
-19-
<PAGE>
Year 2000 - (continued)
the actual impact may be. Given this uncertainty, the company recognizes the
need to remain vigilant and is continuing its analysis, assessment and planning
for the various Year 2000 issues, across its business.
With respect to its internal systems, the potential Year 2000 impacts
extend beyond the company's information technology systems to its manufacturing
and development systems and physical facilities. The company has been addressing
these issues using the same five-part methodology it recommends to its
customers: (1) assessment and strategy; (2) detailed analysis and planning; (3)
implementation; (4) maintaining readiness of converted systems; and (5) Project
Office Management. The company has completed most conversion and testing
efforts, with extended system integration testing and contingency planning
projects scheduled throughout 1999. The company estimates that at the conclusion
of its various Year 2000 efforts, including conversion, testing and contingency
planning, it will have spent a total of approximately $575 million over a
multi-year period. Although the company believes its efforts will be successful,
any failure or delay could result in the disruption of business and in the
company incurring substantial expense. To minimize any such potential impact,
the company has initiated a global contingency planning effort designed to
support critical business operations.
As part of its ordinary course product development efforts, the company's
current product and service offerings have been designed to be Year 2000 ready.
The Year 2000 readiness of the company's customers varies, and the company is
actively encouraging its customers to prepare their own systems, making
available a broad array of product, service and educational offerings to assist
them (see the IBM Year 2000 Home Page at http://www.ibm.com/IBM/year2000/).
Efforts by customers to address Year 2000 issues may absorb a substantial part
of their information technology budgets in the near term, and customers may
either delay or accelerate the deployment and implementation of new applications
and systems. While this behavior may increase demand for certain of the
company's products and services, including its Year 2000 offerings, it could
also soften demand for other offerings or change customer buying practices from
past trends. These events could affect the company's revenues or change its
revenue patterns.
The company is continuing its assessment of the Year 2000 readiness of its
key suppliers in an effort to establish that the company has adequate resources
for required supplies and components. With respect to third-party products that
the company may remarket or provide with the company's offering (such as
third-party software pre-loaded on the company's personal computers), the
company relies on its business partners and other third parties to be
responsible for the Year 2000 readiness of their offerings. A failure of the
company's suppliers, business partners and other third parties to address
adequately their Year 2000 readiness could affect the company's business. As
part of its contingency planning efforts, the company is identifying alternate
sources or strategies where necessary if significant exposures are identified.
Further, some commentators believe that a significant amount of litigation
will arise from Year 2000 issues. The company continues to believe that it has
good defenses to any such claims brought against it.
Finally, the Year 2000 presents a number of other risks and uncertainties
that could affect the company, including utilities failures, competition for
personnel skilled in the resolution of
-20-
<PAGE>
Year 2000 - (continued)
Year 2000 issues, and the nature of government responses to the issues, among
others. While the company continues to believe that the Year 2000 matters
discussed above will not have a material impact on its business, financial
condition or results of operations, it remains uncertain whether or to what
extent the company may be affected.
The Year 2000 statements set forth above are designated as "Year 2000
Readiness Disclosures" pursuant to the Year 2000 Information and Readiness
Disclosure Act (P.L. 105-271).
Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q (including statements in the Year 2000
discussion above) may constitute "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements
involve a number of risks, uncertainties and other factors that could cause
actual results to differ materially, including the company's failure to continue
to develop and market new and innovative products and services and to keep pace
with technological change; competitive pressures; failure to obtain or protect
intellectual property rights; the ultimate impact of the various Year 2000
issues on the company's business, financial condition or results of operations;
quarterly fluctuations in revenues and volatility of stock prices; the company's
ability to attract and retain key personnel; currency and customer financing
risks; dependence on certain suppliers; changes in the financial or business
condition of the company's distributors or resellers; the company's ability to
successfully manage acquisitions and alliances; legal, political and economic
changes and other risks, uncertainties and factors discussed elsewhere in this
Form 10-Q, in the company's other filings with the Securities and Exchange
Commission or in materials incorporated therein by reference.
Part II - Other Information
ITEM 2 (c.) Changes in Securities and Use of Proceeds
On April 26, 1999, in reliance on Regulation S and pursuant to an employee
benefit plan established and administered in accordance with the laws of
Ireland, Mercer Limited purchased 429 shares of IBM's capital stock on behalf of
foreign nationals domiciled abroad (or on temporary assignment in the United
States) and employed by affiliates of the registrant. The purchase price per
share was $206.375 for a total price, excluding commissions, of $88,535.
-21-
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
The International Business Machines Corporation held its Annual Meeting of
Stockholders on April 27, 1999. For more information on the following proposals,
see the company's proxy statement dated March 23, 1999, the relevant portions of
which are incorporated herein by reference.
(1) The stockholders elected each of the twelve nominees to the Board of
Directors for a one-year term:
DIRECTOR FOR WITHHELD
------------------- ----------- ---------
C. Black 736,341,039 5,238,516
K. I. Chenault 736,013,859 5,565,696
J. Dormann 736,537,919 5,041,636
L. V. Gerstner, Jr. 736,197,557 5,381,998
N.O. Keohane 735,844,815 5,734,740
C. F. Knight 736,360,631 5,218,924
M. Makihara 736,143,611 5,435,944
L. A. Noto 736,418,384 5,161,171
J. B. Slaughter 735,868,684 5,710,871
A. Trotman 736,234,310 5,345,245
L. C. van Wachem 736,200,005 5,379,550
C. M. Vest 736,227,422 5,352,133
(2) The stockholders ratified the appointment of PricewaterhouseCoopers
LLP as independent auditor of the company:
For 737,050,740
Against 1,619,416
Abstain 2,909,399
-----------
Total 741,579,555
(3) The stockholders approved an amendment of the Certificate of
Incorporation to increase the authorized common shares and effect a
two-for-one common stock split:
For 718,296,759
Against 20,463,140
Abstain 2,819,656
-----------
Total 741,579,555
-22-
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders - (continued)
(4) The stockholders approved the adoption of the IBM 1999 Long-Term
Performance Plan:
For 396,298,469
Against 187,293,051
Abstain 7,914,439
Broker No Vote 150,073,596
-----------
Total 741,579,555
(5) The stockholders approved Annual Incentive Compensation Terms for
Certain Executives:
For 672,927,431
Against 58,655,838
Abstain 9,996,286
-----------
Total 741,579,555
(6) The stockholders defeated a shareholder proposal on Executive
Compensation:
For 56,612,979
Against 520,326,369
Abstain 14,566,611
Broker No Vote 150,073,596
-----------
Total 741,579,555
ITEM 6 (a). Exhibits
Exhibit Number
11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios.
22 The company's proxy statement dated March 23, 1999, containing the
full text of the proposals referred to in Item 4, which was
previously filed electronically, is hereby incorporated by
reference.
27 Financial Data Schedule
-23-
<PAGE>
ITEM 6 (b). Reports on Form 8-K
The company filed Form 8-K on April 22, 1999, to incorporate by reference
into Registration Statement No. 333-70521 on Form S-3, effective March 9, 1999,
the Agency Agreement dated March 11, 1999, among International Business Machines
Corporation, Chase Securities Inc., Credit Suisse First Boston Corporation,
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated and Salomon Smith Barney Inc. No financial statements
were filed with this Form 8-K.
The company filed Form 8-K on April 23, 1999, with respect to the
company's financial results for the period ended March 31, 1999 and included
unaudited consolidated financial statements for the period ended March 31, 1999.
The company filed Form 8-K on April 28, 1999, with respect to the
stockholders approval to increase the number of authorized shares of common
stock from 1,875 million to 4,687.5 million, which was required to effect a
two-for-one stock split approved by the company's Board of Directors on January
26, 1999. The Form 8-K included pro-forma financial statements to reflect the
two-for-one stock split on historical data and the company's Certificate of
Incorporation as amended through April 28, 1999.
-24-
<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 12, 1999
By: /s/ Mark Loughridge
---------------------------------------
Mark Loughridge
Vice President and Controller
-25-
EXHIBIT 11
COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE
(UNAUDITED)
For Quarter Ended
------------------------------
June 30, 1999 June 30, 1998
------------- -------------
Number of shares on which basic earnings
per share is calculated:
Average outstanding during period 1,812,074,414 1,879,223,476*
Add - Incremental shares under stock
compensation plans 58,575,124 49,471,050*
-------------- --------------
Number of shares on which
diluted earnings per share is calculated 1,870,649,538 1,928,694,526*
============== ==============
Net income applicable to common
shareholders (millions) $ 2,386 $ 1,447
Less - net income applicable to
contingently issuable shares (millions) 0 0
-------------- --------------
Net income on which diluted
earnings per share is calculated (millions) $ 2,386 $ 1,447
============== ==============
Diluted earnings per share $ 1.28 $ .75*
Basic earnings per share $ 1.32 $ .77*
* Adjusted to reflect a two-for-one stock split effective May 10, 1999.
Stock options to purchase 287,300 shares as of June 30, 1999 were outstanding,
but were not included in the computation of diluted earnings because the
options' exercise price was greater than the average market price of the common
shares and, therefore, the effect would have been antidilutive. In addition,
3,031,183 restricted stock units as of June 30, 1999 relating to the company's
Long-Term Performance Plan were not included in the computation of diluted
earnings as their effect would have been antidilutive. Net income applicable to
common shareholders excludes preferred stock dividends of $5 million for the
three months ended June 30, 1999 and 1998.
-26-
<PAGE>
COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE - (continued)
(UNAUDITED)
For Six Months Ended
-------------------------------
June 30, 1999 June 30, 1998
------------- -------------
Number of shares on which basic earnings
per share is calculated:
Average outstanding during period 1,817,953,371 1,889,822,044*
Add - Incremental shares under stock
compensation plans 58,683,577 49,143,298*
-------------- --------------
Number of shares on which diluted
earnings per share is calculated 1,876,636,948 1,938,965,342*
============== ==============
Net income applicable to common
shareholders (millions) $ 3,851 $ 2,478
Less - net income applicable to
contingently issuable shares (millions) 0 0
-------------- --------------
Net income on which diluted earnings
per share is calculated (millions) $ 3,851 $ 2,478
============== ==============
Diluted earnings per share $ 2.05 $ 1.28*
Basic earnings per share $ 2.12 $ 1.31*
* Adjusted to reflect a two-for-one stock split effective May 10, 1999.
Stock options to purchase 417,500 shares as of June 30, 1999 and 93,758 shares
as of June 30, 1998 were outstanding, but were not included in the computation
of diluted earnings because the options' exercise price was greater than the
average market price of the common shares, and therefore, the effect would have
been antidilutive. In addition, 2,953,924 restricted stock units as of June 30,
1999 relating to the company's Long-Term Performance Plan were not included in
the computation of diluted earnings as their effect would have been
antidilutive. Net income applicable to common shareholders excludes preferred
stock dividends of $10 million for the six months ended June 30, 1999 and 1998.
-27-
EXHIBIT 12
COMPUTATION OF RATIO OF NET INCOME TO FIXED CHARGES AND
NET INCOME TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
FOR SIX MONTHS ENDED JUNE 30
(UNAUDITED)
(Dollars in millions)
1999 1998
---- ----
Income before income taxes (1) $6,137 $3,598
Add: Fixed charges, excluding
capitalized interest 973 1,027
------ ------
Net income as adjusted $7,110 $4,625
====== ======
Fixed charges:
Interest expense $ 739 $ 789
Capitalized interest 15 11
Portion of rental expense representative of
interest 234 238
------ ------
Total fixed charges $ 988 $1,038
====== ======
Preferred stock dividends (2) 15 14
------ ------
Combined fixed charges and preferred stock
dividends $1,003 $1,052
====== ======
Ratio of net income to fixed charges 7.20 4.46
Ratio of net income to combined fixed charges
and preferred stock dividends 7.09 4.40
(1) Income before income taxes excludes the company's share in the income and
losses of less-than-fifty percent-owned affiliates.
(2) Included in the ratio computation are preferred stock dividends of $10
million for the first six months of 1998 and 1997, or $15 million and $14
million, respectively, representing the pre-tax income that would be required to
cover those dividend requirements based on the company's effective tax rate for
the six months ended June 30, 1999 and 1998.
-28-
<PAGE>
SEGMENT INFORMATION
(UNAUDITED)
Hardware Segments
--------------------------------
Personal Global
(Dollars in millions) Technology Systems Server Services
- --------------------------------------------------------------------------------
Quarter Ended June 30, 1999:
External revenue $ 3,062 $ 3,873 $ 2,349 $ 7,988
Internal revenue 1,013 7 92 628
------- ------- ------- -------
Total revenue $ 4,075 $ 3,880 $ 2,441 $ 8,616
======= ======= ======= =======
Pre-tax income (loss) $ 130 $ (153) $ 516 $ 1,137
======= ======= ======= =======
Revenue year-to-year change 5.1% 50.1% 3.0% 13.4%
Pre-tax income year-to-year
change (53.7)% 64.9% (6.4)% 19.8%
Pre-tax income margin 3.2% (3.9)% 21.1% 13.2%
Quarter Ended June 30, 1998:
External revenue $ 2,778 $ 2,578 $ 2,273 $ 6,969
Internal revenue 1,101 7 98 632
------- ------- ------- -------
Total revenue $ 3,879 $ 2,585 $ 2,371 $ 7,601
======= ======= ======= =======
Pre-tax income (loss) $ 281 $ (436) $ 551 $ 949
======= ======= ======= =======
Pre-tax income margin 7.2% (16.9)% 23.2% 12.5%
Reconciliations to IBM as Reported:
Quarter Ended Quarter Ended
(Dollars in millions) June 30, 1999 June 30, 1998
------------- -------------
Revenue:
Total reportable segments $ 23,946 $ 20,963
Eliminations/other (2,041) (2,140)
-------- --------
Total IBM Consolidated $ 21,905 $ 18,823
======== ========
Pretax income:
Total reportable segments $ 2,557 $ 2,099
Sales of IBM's Global Network 3,430 0
Second quarter actions (1,820) 0
Eliminations/other (124) (16)
-------- --------
Total IBM Consolidated $ 4,043 $ 2,083
======== ========
-29-
<PAGE>
<TABLE>
<CAPTION>
Global Enterprise Total
(Dollars in millions) Software Financing Investments Segments
- ----------------------------------------------------------------------------------------------
Quarter Ended June 30, 1999:
<S> <C> <C> <C> <C>
External revenue $ 3,126 $ 764 $ 661 $21,823
Internal revenue 182 198 3 2,123
------- ------- ------- -------
Total revenue $ 3,308 $ 962 $ 664 $23,946
======= ======= ======= =======
Pre-tax income (loss) $ 700 $ 328 $ (101) $ 2,557
======= ======= ======= =======
Revenue year-to-year change 8.8% 6.1% 14.7% 14.2%
Pre-tax income year-to-year
change 11.8% 13.5% 37.3% 21.8%
Pre-tax income margin 21.2% 34.1% (15.2)% 10.7%
Quarter Ended June 30, 1998:
External revenue $ 2,866 $ 741 $ 566 $18,771
Internal revenue 175 166 13 2,192
------- ------- ------- -------
Total revenue $ 3,041 $ 907 $ 579 $20,963
======= ======= ======= =======
Pre-tax income (loss) $ 626 $ 289 $ (161) $ 2,099
======= ======= ======= =======
Pre-tax income margin 20.6% 31.9% (27.8)% 10.0%
</TABLE>
-30-
<PAGE>
SEGMENT INFORMATION
(UNAUDITED)
Hardware Segments
Personal Global
(Dollars in millions) Technology Systems Server Services
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1999:
External revenue $ 5,932 $ 7,462 $ 4,422 $15,538
Internal revenue 1,911 14 165 1,297
------- ------- ------- -------
Total revenue $ 7,843 $ 7,476 $ 4,587 $16,835
======= ======= ======= =======
Pre-tax income (loss) $ 200 $ (242) $ 1,014 $ 2,110
======= ======= ======= =======
Revenue year-to-year change 2.5% 49.4% 0.0% 15.3%
Pre-tax income year-to-year change (61.5)% 72.9% (4.2)% 25.9%
Pre-tax income margin 2.6% (3.2)% 22.1% 12.5%
Six Months Ended June 30, 1998:
External revenue $ 5,545 $ 4,992 $ 4,408 $13,310
Internal revenue 2,106 13 178 1,291
------- ------- ------- -------
Total revenue $ 7,651 $ 5,005 $ 4,586 $14,601
======= ======= ======= =======
Pre-tax income (loss) $ 519 $ (894) $ 1,059 $ 1,676
======= ======= ======= =======
Pre-tax income margin 6.8% (17.9)% 23.1% 11.5%
Reconciliations to IBM as Reported:
Six Months Ended Six Months Ended
(Dollars in millions) June 30, 1999 June 30, 1998
---------------- ----------------
Revenue:
Total reportable segments $ 46,297 $ 40,589
Eliminations/other (4,075) (4,148)
-------- --------
Total IBM Consolidated $ 42,222 $ 36,441
======== ========
Pretax income:
Total reportable segments $ 4,891 $ 3,838
Sales of IBM's Global Network 3,430 0
Second quarter actions (1,820) 0
Eliminations/other (358) (232)
-------- --------
Total IBM Consolidated $ 6,143 $ 3,606
======== ========
-31-
<PAGE>
<TABLE>
<CAPTION>
Global Enterprise Total
(Dollars in millions) Software Financing Investments Segments
- ----------------------------------------------------------------------------------------------
Six Months Ended June 30, 1999:
<S> <C> <C> <C> <C>
External revenue $ 6,046 $ 1,488 $ 1,210 $42,098
Internal revenue 393 405 14 4,199
------- ------- ------- -------
Total revenue $ 6,439 $ 1,893 $ 1,224 $46,297
======= ======= ======= =======
Pre-tax income (loss) $ 1,357 $ 625 $ (173) $ 4,891
======= ======= ======= =======
Revenue year-to-year change 9.7% 5.6% 13.1% 14.1%
Pre-tax income year-to-year change 11.1% 10.0% 44.4% 27.4%
Pre-tax income margin 21.1% 33.0% (14.1)% 10.6%
Six Months Ended June 30, 1998:
External revenue $ 5,510 $ 1,466 $ 1,058 $36,289
Internal revenue 361 327 24 4,300
------- ------- ------- -------
Total revenue $ 5,871 $ 1,793 $ 1,082 $40,589
======= ======= ======= =======
Pre-tax income (loss) $ 1,221 $ 586 $ (311) $ 3,838
======= ======= ======= =======
Pre-tax income margin 20.8% 31.7% (28.7)% 9.4%
</TABLE>
-32-
<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, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCAIL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,465
<SECURITIES> 1,776
<RECEIVABLES> 19,727
<ALLOWANCES> 0
<INVENTORY> 5,039
<CURRENT-ASSETS> 43,452
<PP&E> 40,015
<DEPRECIATION> 22,762
<TOTAL-ASSETS> 83,347
<CURRENT-LIABILITIES> 35,961
<BONDS> 0
0
247
<COMMON> 11,638
<OTHER-SE> 7,273
<TOTAL-LIABILITY-AND-EQUITY> 83,347
<SALES> 17,963
<TOTAL-REVENUES> 42,222
<CGS> 12,949
<TOTAL-COSTS> 26,740
<OTHER-EXPENSES> 9,257
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 371
<INCOME-PRETAX> 6,143
<INCOME-TAX> 2,282
<INCOME-CONTINUING> 3,861
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,861
<EPS-BASIC> 2.12
<EPS-DILUTED> 2.05
</TABLE>
