UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000
1-2360
------
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
-------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-0871985
-------- ----------
(State of incorporation) (IRS employer identification number)
Armonk, New York 10504
---------------- -----
(Address of principal executive offices) (Zip Code)
914-499-1900
------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
1934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The registrant has 1,760,704,711 shares of common stock outstanding at
June 30, 2000.
<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, 2000 and 1999 ........................... 1
Consolidated Statement of Financial Position at
June 30, 2000 and December 31, 1999 ........................... 3
Consolidated Statement of Cash Flows for the six months
ended June 30, 2000 and 1999 .................................. 5
Notes to Consolidated Financial Statements ......................... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ...... 9
Part II - Other Information .............................................. 19
<PAGE>
Part I - Financial Information
ITEM 1. Consolidated Financial Statements
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,
------------------ ----------------
2000 1999* 2000 1999*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Hardware $ 9,151 $ 9,622 $ 16,863 $ 18,373
Global Services 8,184 7,988 15,736 15,538
Software 3,182 3,126 6,109 6,046
Global Financing 819 743 1,635 1,448
Enterprise Investments/Other 315 426 656 817
-------- -------- -------- --------
Total revenue 21,651 21,905 40,999 42,222
Cost:
Hardware 6,654 6,851 12,247 13,203
Global Services 5,964 5,721 11,561 11,288
Software 557 520 1,141 1,075
Global Financing 369 332 753 643
Enterprise Investments/Other 164 257 343 531
-------- -------- -------- --------
Total cost 13,708 13,681 26,045 26,740
-------- -------- -------- --------
Gross profit 7,943 8,224 14,954 15,482
Expense:
Selling, general and administrative 3,867 2,846 7,573 6,783
Research, development and
engineering 1,269 1,293 2,441 2,474
Other income (130) (155) (319) (289)
Interest expense 164 197 316 371
-------- -------- -------- --------
Total expense 5,170 4,181 10,011 9,339
Income before income taxes 2,773 4,043 4,943 6,143
Income tax provision 832 1,652 1,483 2,282
-------- -------- -------- --------
Net income 1,941 2,391 3,460 3,861
Preferred stock dividends 5 5 10 10
-------- -------- -------- --------
Net income applicable to common
shareholders $ 1,936 $ 2,386 $ 3,450 $ 3,851
======== ======== ======== ========
</TABLE>
* Reclassified to conform with 2000 presentation.
(The accompanying notes are an integral part of the financial statements.)
-1-
<PAGE>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share of common
stock - assuming dilution $ 1.06 $ 1.28 $ 1.89 $ 2.05
Earnings per share of common
stock - basic $ 1.10 $ 1.32 $ 1.95 $ 2.12
Average number of common
shares outstanding: (millions)
Assuming dilution 1,818.0 1,870.6 1,824.0 1,876.6
Basic 1,767.6 1,812.1 1,772.4 1,818.0
Cash dividends per common share $ 0.13 $ 0.12 $ 0.25 $ 0.23
</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
ASSETS
<TABLE>
<CAPTION>
At June 30, At December 31,
(Dollars in millions) 2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,987 $ 5,043
Marketable securities -- at fair value,
which approximates market 274 788
Notes and accounts receivable -- trade, net of
allowances 21,145 21,398
Sales-type leases receivable 5,056 6,220
Inventories, at lower of average cost or net
realizable value
Finished goods 1,038 1,162
Work in process and raw materials 3,721 3,706
------- -------
Total inventories 4,759 4,868
Prepaid expenses and other current assets 5,216 4,838
------- -------
Total current assets 39,437 43,155
Plant, rental machines and other property 38,506 39,616
Less: Accumulated depreciation 21,872 22,026
------- -------
Plant, rental machines and other property -- net 16,634 17,590
Software 740 663
Investments and sundry assets 26,138 26,087
------- -------
Total assets $82,949 $87,495
======= =======
</TABLE>
(The accompanying notes are an integral part of the financial statements.)
-3-
<PAGE>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
At June 30, At December 31,
(Dollars in millions except 2000 1999
per share amounts) ---- ----
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Taxes $ 3,690 $ 4,792
Accounts payable and accruals 17,857 20,556
Short-term debt 12,315 14,230
-------- --------
Total current liabilities 33,862 39,578
Long-term debt 16,859 14,124
Other long-term liabilities 11,660 11,928
Deferred income taxes 1,394 1,354
-------- --------
Total liabilities 63,775 66,984
Stockholders' equity:
Preferred stock - par value $.01 per share 247 247
Shares authorized: 150,000,000
Shares issued and outstanding: 2000 - 2,546,011
1999 - 2,546,011
Common stock - par value $.20 per share 12,570 11,762
Shares authorized: 4,687,500,000
Shares issued: 2000 - 1,887,704,696
1999 - 1,876,665,245
Retained earnings 19,750 16,878
Treasury stock - at cost (11,287) (7,375)
Shares: 2000 - 106,999,985
1999 - 72,449,015
Employee benefits trust (2,218) (2,162)
Shares: 2000 - 20,000,000
1999 - 20,000,000
Accumulated gains and losses not
affecting retained earnings 112 1,161
-------- --------
Total stockholders' equity 19,174 20,511
-------- --------
Total liabilities and stockholders' equity $ 82,949 $ 87,495
======== ========
</TABLE>
(The accompanying notes are an integral part of the financial statements.)
-4-
<PAGE>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
(Dollars in millions) 2000 1999*
---- -----
Cash flow from operating activities:
Net income $ 3,460 $ 3,861
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation 2,246 3,669
Amortization of software 220 203
Gain on disposition of fixed and other assets (425) (3,796)
Changes in operating assets and liabilities (3,016) (417)
------- -------
Net cash provided from operating activities 2,485 3,520
------- -------
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (1,571) (2,155)
Investment in software (262) (209)
Purchases of marketable securities and other
investments (453) (2,292)
Proceeds from marketable securities and other
investments 880 1,104
Proceeds from sale of the IBM Global Network -- 4,081
------- -------
Net cash (used in) provided from
investment activities (1,406) 529
------- -------
Cash flow from financing activities:
Proceeds from debt issuance 4,796 2,986
Payments to settle debt (4,048) (3,274)
Short-term borrowings less than 90 days -- net 290 177
Common stock transactions -- net (3,624) (3,259)
Cash dividends paid (458) (433)
------- -------
Net cash used in financing activities (3,044) (3,803)
------- -------
Effect of exchange rate changes on
cash and cash equivalents (91) (156)
------- -------
Net change in cash and cash equivalents (2,056) 90
Cash and cash equivalents at January 1 5,043 5,375
------- -------
Cash and cash equivalents at June 30 $ 2,987 $ 5,465
======= =======
* Reclassified to conform with 2000 presentation.
(The accompanying notes are an integral part of the financial statements.)
-5-
<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. The following table summarizes the Accumulated gains and losses not affecting
retained earnings.
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 1,941 $ 2,391 $ 3,460 $ 3,861
Gains and losses not affecting
retained earnings (net of tax):
Foreign currency translation
adjustments (184) (162) (293) (752)
Net unrealized (losses)/gains on
marketable securities (363) (24) (756) 2
------- ------- ------- -------
Accumulated gains and losses
not affecting retained earnings $ 1,394 $ 2,205 $ 2,411 $ 3,111
======= ======= ======= =======
</TABLE>
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 and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities an amendment of FASB Statement No. 133, issued in June 2000,
establish accounting and reporting standards for derivative instruments. They
require 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 these standards 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.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The company is
currently reviewing the provisions of SAB 101. The company expects to complete
its review of SAB 101 by the end of the fourth quarter of 2000.
-6-
<PAGE>
Notes to Consolidated Financial Statements - (continued)
4. The tables on pages 27 through 30 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.
Effective in the first quarter of 2000, results reflect changes the
company made in the organization of its business segments, including the
transfer of the systems-level product businesses from the Technology segment to
the Enterprise Systems segment and the transfer of point-of-sale products from
the Enterprise Investments segment to the Personal Systems segment. Also
reflected are changes the company made in its expense allocation methodology,
allocating expense items previously unallocated and enhancing shared expense
allocations. Second-quarter and first-half 1999 results have been reclassified
to conform with the 2000 presentation.
5. 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, a change in estimate related to the depreciable life of
personal computers used within the company and actions within the company's
Technology Group. That benefit is reflected in Selling, general and
administrative expense.
Sale of IBM Global Network. In December 1998, the company announced that
it would sell its Global Network business to AT&T for $5 billion.
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. 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).
Change in Estimate. As a result of a change in estimate of the useful life
of personal computers (PCs), from five years to three years, the company
recognized a charge in the second quarter of 1999 for $404 million ($241 million
after tax, $.13 per diluted common share). The company wrote off the net book
value of PCs that were 3 years or older and therefore, had no remaining useful
life. The remaining book value of the assets will be depreciated over the
remaining new 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.
Technology Group Actions. During the second quarter of 1999, the company
implemented actions that were designed to better align the operations and cost
structure 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 affected the Microelectronics Division (MD) and
the Storage Systems Division (SSD) of the company's Technology Group.
-7-
<PAGE>
Notes to Consolidated Financial Statements - (continued)
During the second quarter of 1999, 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.
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:
<TABLE>
<CAPTION>
Liability
Investment & Created Liability
(Dollars in millions) Total Pre- Other Asset in the as of
tax Write- Second June 30,
Charges Downs Quarter 1999
<S> <C> <C> <C> <C>
MD Actions:
DRAM
Equipment (1) $ 662 $ 662 $ -- $ --
Employee Terminations (2) 167 -- 167 167
Dominion Investment (3) 171 171 -- --
MiCRUS Investment (4) 152 -- 152 152
SSD Actions:
Equipment (5) 241 241 -- --
Employee Terminations (6) 23 -- 23 23
------ ------ ------ ------
Total Actions $1,416 $1,074 $ 342 $ 342
====== ====== ====== ======
</TABLE>
(1) Represents (a) the difference between net book value and fair value of
assets that were contributed to a joint venture, (b) the book value of
assets that were idled as a result of the MD actions and that were
scrapped and (c) the difference between the net book value and the
appraised fair value of test equipment subject to sale-leaseback
agreements. The leased test equipment is being used and appropriately
expensed.
(2) Workforce reductions that affect approximately 790 employees (455 direct
manufacturing and 335 indirect manufacturing) in France.
(3) Write-off of investment in joint venture at the signing of the agreement
with Toshiba Corporation.
(4) Acquisition of minority interest in MICRUS and charges for equipment
leasehold cancellation liabilities and lease rental payments for idle
equipment.
(5) Represents (a) the book value of assets that were idled as a result of the
SSD actions and scrapped, (b) write-downs to fair value of equipment under
contract for sale and delivery by December 31, 1999, and March 31, 2000,
and (c) the difference between the net book value and the appraised fair
value of equipment subject to sale-leaseback agreements. The leased
equipment is being used and appropriately expensed.
(6) Workforce reductions that affect approximately 900 employees (780 direct
manufacturing and 120 indirect manufacturing) in the United States.
-8-
<PAGE>
Notes to Consolidated Financial Statements - (continued)
The following table provides the liability balances at June 30, 2000 for
actions that the company took in 1999:
<TABLE>
<CAPTION>
Liability Liability
as of as of
12/31/1999 Payments Other Adj.* 6/30/2000
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
MD Actions:
DRAM
Employee Terminations (1) $149 $ 32 $ 5 $112
MiCRUS Investment (2) 152 152 -- --
SSD Actions:
Employee Terminations (3) 7 7 -- --
---- ---- ---- ----
Total $308 $191 $ 5 $112
==== ==== ==== ====
</TABLE>
(1) The liability as of June 30, 2000, relates to future payments to those
terminated employees over their remaining lives.
(2) The MiCRUS semiconductor operation was sold to Philips Semiconductors
during June 2000.
(3) The company completed the workforce reductions for the 210 U.S. employees
who were remaining at December 31, 1999.
* Represents translation adjustments due to currency fluctuations.
In June 2000, the company reached an agreement to sell its MiCRUS
semiconductor operations to Philips Semiconductors, an affiliate of Royal
Philips Electronics. In the second quarter of 1999 the company accrued shutdown
costs associated with the MiCRUS operations. The liability created was primarily
for lease termination charges for equipment under the MiCRUS operation. Since
June 1999, shutdown activities have been underway and were completed in June
2000. The liabilities accrued for in the second quarter of 1999 have been
utilized during the second quarter of 2000. In addition, the company recorded a
gain of $40 million from the sale of assets associated with this sale in the
second quarter of 2000.
6. Subsequent Event: On July 25, 2000, the company announced that Samuel J.
Palmisano and John M. Thompson had been elected to the IBM Board of Directors.
In addition, the company announced on July 24, 2000, that Mr. Palmisano had been
named president and chief operating officer of IBM and Mr. Thompson had been
named IBM Vice Chairman, reporting to IBM Chairman and Chief Executive Officer
Louis V. Gerstner, Jr.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
The company's second-quarter and first-half results were in line with the
company's expectations. The company had experienced three quarters of slow
revenue growth, driven by a combination of Y2K slowdown and a series of actions
taken to improve the company's business portfolio and long-term profitability.
Revenue performance for the second quarter was constrained by several
factors: currency negatively affected revenue growth by one point, hard disk
drives (HDDs) and personal
-9-
<PAGE>
computers while improving quarter to quarter were a drag on revenue growth, as
were some parts of the company's server business.
During the second quarter the company began to see a shift in momentum in
several areas. The services business saw significant increases in new contract
signings which totaled $20 billion for the quarter. A number of product areas
also experienced strong growth, including Web management software, e-business
consulting, Web hosting, systems integration and wireless chips. The company
also experienced a firming of its server business, particularly Web servers
which showed strong revenue growth, as well as high-end disk drive revenue, led
by the company's advanced Shark product.
Result of Operations
(Dollars in millions) Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Revenue $21,651 $21,905 $40,999 $42,222
Cost 13,708 13,681 26,045 26,740
------- ------- ------- -------
Gross profit $ 7,943 $ 8,224 $14,954 $15,482
Gross profit margin 36.7% 37.5% 36.4% 36.7%
Net income $ 1,941 $ 2,391 $ 3,460 $ 3,861
Earnings per share of
common stock:
Assuming dilution $ 1.06 $ 1.28 $ 1.89 $ 2.05
Basic $ 1.10 $ 1.32 $ 1.95 $ 2.12
As a result of the company's share repurchase program, the average number
of common shares outstanding assuming dilution was lower by 52.6 million than
the second quarter in 1999 and the first six months of 1999. The average number
of shares assuming dilution was 1,818.0 million in the second quarter of 2000
and 1,824.0 million for the first six months of 2000. There were 1,760.7 million
shares outstanding at June 30, 2000.
Revenue for the three months ended June 30, 2000 decreased 1.2 percent
versus the same period last year (flat at constant currency). Hardware revenue
declined 4.9 percent driven by lower System/390, AS/400 and storage revenue
partially offset by increased microelectronics and Web server revenue. Revenue
from Global Services increased 2.4 percent in the quarter but was adversely
affected by the sale of the IBM Global Network to AT&T in 1999 and by a
year-over-year decline in Y2K services. Software revenue increased 1.7 percent
as middleware software showed growth, partially offset by lower operating
systems revenue primarily due to lower AS/400 software revenue. Revenue from
Global Financing increased 10.1 percent and revenue from Enterprise
Investments/Other declined 25.9 percent year-over-year.
Revenue for the second quarter of 2000 from the company's end-user
businesses totaled $9.7 billion from the Americas, a decrease of 3.1 percent (3
percent decrease at constant currency) compared with the same period last year.
Revenue from Europe/Middle East/Africa was $5.9 billion, down 8.5 percent (flat
at constant currency). Asia-Pacific revenue grew 19.9 percent (13 percent at
constant currency) to $4.3 billion. OEM revenue across all
-10-
<PAGE>
Results of Operations - (continued)
geographies was $1.8 billion, a 6.2 percent decrease (7 percent in constant
currency) compared with the second quarter of 1999.
The company's overall gross profit margin was 36.7 percent in the second
quarter compared with 37.5 percent in the same period of 1999. 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 microelectronics products which have
a lower gross profit margin.
The company's second quarter expenses were $5.2 billion and the expense to
revenue ratio was 23.9 percent compared with 19.1 percent in the year earlier
period (or 26.4 percent after excluding a 7.3 point improvement from the IBM
Global Network sale and other 1999 actions). The actions are described in Note
No. 5 to the Consolidated Financial Statements on pages 7 through 9.
The company's tax rate was 30.0 percent in the second quarter compared
with 40.8 percent in the year-earlier period. The decrease was principally due
to the IBM Global Network sale and other 1999 actions.
Hardware
(Dollars in millions) Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $ 9,151 $ 9,622 $16,863 $18,373
Total cost 6,654 6,851 12,247 13,203
------- ------- ------- -------
Gross profit $ 2,497 $ 2,771 $ 4,616 $ 5,170
Gross profit margin 27.3% 28.8% 27.4% 28.1%
Revenue from hardware for the second quarter and first six months of 2000
decreased 4.9 percent and 8.2 percent, respectively, when compared with the same
periods in 1999.
Enterprise Systems revenue declined for both the second quarter and first
six months of 2000. Revenue from the Web server product line, which includes
RS/6000 S80 models and NUMA-Q products increased as customer acceptance of the
S80 model continued to be strong. At the end of the second quarter, the company
began shipping mid-range servers using copper technology. In addition, revenue
from the company's enterprise storage products including Shark accelerated in
the second quarter showing growth for the second quarter and first six months of
2000 compared to year-ago periods. These increases were offset by lower revenue
from System/390, other storage products (specifically tape products) and AS/400.
Although System/390 revenue declined, computing power as measured in MIPS
(millions of instructions per second) increased 1 percent reversing the trend of
decline that started in the back half of 1999 and concluded with an 8 percent
decline in the first quarter of 2000. In the second quarter of 2000, the company
announced new models of the AS/400 which began shipping at the end of July 2000.
As a result, second-quarter revenue declined as customers awaited the
availability of the new models.
-11-
<PAGE>
Results of Operations - (continued)
Technology revenue increased for the second quarter and declined for the
six months of 2000 when compared with year-ago periods. The increase for the
second quarter was driven by strong growth in custom logic products partially
offset by lower revenue for HDDs, as a result of not shipping the company's new
10,000 RPM drives. The decline in revenue for the first six months of 2000 was
driven by lower HDD revenue, partially offset by strong revenue growth from
microelectronics products primarily custom logic chips.
Personal Systems revenue declined for the second quarter and first six
months of 2000 versus the same periods in 1999 as the company continued to take
initiatives to improve long-term profitability. During the second quarter, the
company replaced or refreshed over 50 percent of its product offerings with new,
lower cost products that better match customers' needs. In addition, revenue was
affected by the constrained supply from one of the company's major suppliers of
planar boards used on the Netfinity and ThinkPad lines. The company is
aggressively addressing this problem and expects resolution by the end of the
third quarter of 2000.
Hardware sales gross profit for the second quarter and first six months of
2000 decreased 9.8 percent and 10.7 percent, respectively, from comparable
periods in 1999. The hardware gross profit margin decreased 1.5 points and 0.7
points, respectively, from the prior year although microelectronics gross profit
margin improved as a result of actions taken within the company's DRAM business
in 1999. Gross profit margins improved for the second quarter and first six
months of 2000 for AS/400 and Personal Systems products. These increases were
offset by lower gross profit margins associated with System/390, Web Server,
storage products and OEM storage technology. In addition, in the second quarter
of 2000, there was a shift away from server revenue towards microelectronics
which has a lower gross profit margin.
Global Services
(Dollars in millions) Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $ 8,184 $ 7,988 $15,736 $15,538
Total cost 5,964 5,721 11,561 11,288
------- ------- ------- -------
Gross profit $ 2,220 $ 2,267 $ 4,175 $ 4,250
Gross profit margin 27.1% 28.4% 26.5% 27.4%
Global Services revenue increased 2.4 percent and 1.3 percent,
respectively, in the second quarter and first six months of 2000, when compared
with the same periods of last year. Revenue was affected by two events: the sale
of the IBM Global Network to AT&T and a decline in Y2K services activity. After
adjusting for those factors, Global Services revenue (excluding maintenance)
increased 10 percent and 9 percent for the second quarter and first six months
of 2000 versus the same periods of 1999. Growth in Strategic Outsourcing
Services and Integrated Technology Services revenue in the second quarter and
first six months of 2000 was partially offset by lower revenue from Business
Innovation Services (primarily due to a decline in Y2K activity) and the sale of
the IBM Global Network. Maintenance revenue grew 1 percent in the second quarter
of 2000 and was flat for the first six months of 2000 when compared to the same
periods of 1999. New contract signings in the second quarter were over $20
billion and the
-12-
<PAGE>
Results of Operations - (continued)
backlog is now at $75 billion. Those signings included 20 deals that
individually were valued at over $100 million and three deals individually
valued at over $1 billion.
The company's discrete e-business services revenue grew very strongly in
the second quarter and first six months of 2000 when compared with the
year-earlier periods. The company continued to invest in the required skills and
capabilities by hiring 1,800 people to address e-business and high growth
offerings, while retraining almost 3,000 employees through its e-mobilization
efforts. In addition, the company has opened 12 of 16 e-business innovation
centers in the U.S., Europe and Asia. The company continues to invest in the
development of solutions such as e-commerce, e-marketplaces and web hosting. The
company also provides more e-enablement by building and supporting customers'
web infrastructures and storage area networks.
Global Services gross profit dollars decreased in the second quarter and
first six months of 2000 by 2.1 percent and 1.7 percent, respectively, when
compared with year-ago periods. The decline in gross profit dollars and margin
was a result of lower utilization rates in Business Innovation Services and
Integrated Technology Services due to the rapid hiring and retraining the
company has been doing to rebalance its skills towards e-business. The
maintenance margin declined 1 point in the second quarter of 2000 and was flat
for the first six months of 2000 when compared to the same periods of 1999.
Software
(Dollars in millions) Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $3,182 $3,126 $6,109 $6,046
Total cost 557 520 1,141 1,075
------ ------ ------ ------
Gross profit $2,625 $2,606 $4,968 $4,971
Gross profit margin 82.5% 83.4% 81.3% 82.2%
Revenue from software for the second quarter and first six months of 2000
increased 1.7 percent and 1.0 percent, respectively, over comparable periods in
1999. 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) had revenue growth of 7
percent and 6 percent, respectively, for the second quarter and first six months
of 2000 versus comparable periods of 1999. Middleware is the software that
powers the infrastructure of the company's e-business solutions. The company
continues to focus on helping customers use its software to transform their
businesses to e-businesses, particularly in collaboration with Global Services
and channel partners.
Operating-systems software revenue declined 12 percent for the second
quarter and first six months of 2000, when compared with year-ago periods. The
decreases were primarily due to lower AS/400 software revenue as a result of
product transitions.
-13-
<PAGE>
Results of Operations - (continued)
Software gross profit dollars for the second quarter of 2000 increased 0.7
percent and were flat for the six months of 2000 versus the same periods in
1999. The increase in gross profit dollars in the second quarter of 2000 was due
to increased revenue and lower levels of amortization costs, partially offset by
higher services costs and vendor royalty payments. The year-to-date dynamics
reflected a similar pattern as the second quarter, except the services costs and
royalty payments more closely offset the increase in revenue and lower
amortization costs.
Global Financing
(Dollars in millions) Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $ 819 $ 743 $1,635 $1,448
Total cost 369 332 753 643
------ ------ ------ ------
Gross profit $ 450 $ 411 $ 882 $ 805
Gross profit margin 55.0% 55.3% 53.9% 55.6%
Global Financing revenue increased 10.1 percent and 12.9 percent,
respectively, for the second quarter and first six months of 2000, when compared
with the same periods of 1999. The increases in revenue were primarily driven by
growth in used equipment sales and commercial financing.
Global Financing gross profit dollars increased 9.4 percent and 9.5
percent, respectively, for the second quarter and first six months of 2000,
versus the same periods of 1999. The increase in gross profit dollars was
primarily driven by higher sales of used equipment and an improving gross profit
margin on these sales. The gross profit margins declined 0.3 points and 1.7
points, respectively, for the second quarter and first six months of 2000 versus
the same periods of 1999. The declines were primarily driven by the mix towards
more used equipment sales.
Enterprise Investments / Other
(Dollars in millions) Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $315 $426 $656 $817
Total cost 164 257 343 531
---- ---- ---- ----
Gross profit $151 $169 $313 $286
Gross profit margin 47.9% 39.6% 47.7% 34.8%
Revenue from Enterprise Investments/Other decreased 25.9 percent and 19.5
percent, respectively, for the second quarter and first six months of 2000,
versus comparable periods in 1999. The decreases were driven primarily by the
company's decision in 1999 to discontinue certain product lines such as
automated teller machines.
-14-
<PAGE>
Results of Operations - (continued)
The Enterprise Investments/Other gross profit dollars decreased 10.3
percent and increased 10.2 percent, respectively, in the second quarter and
first six months of 2000, versus the same periods of 1999. The decrease in the
second quarter of 2000 was primarily driven by lower revenue associated with
product lines discontinued in the second quarter of 1999. The increase in gross
profit dollars for the first six months of 2000 was primarily due to the shift
in mix of revenue to software products, which have a higher gross profit margin
than the hardware product lines the company discontinued in 1999.
Expenses
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selling, general and administrative $ 3,867 $ 2,846 $ 7,573 $ 6,783
Percentage of revenue 17.9% 13.0% 18.5% 16.1%
Research, development and engineering $ 1,269 $ 1,293 $ 2,441 $ 2,474
Percentage of revenue 5.9% 5.9% 6.0% 5.9%
</TABLE>
Selling, general and administrative (SG&A) expense for the second quarter
and first six months of 2000 increased 35.9 percent and 11.7 percent,
respectively, from the same periods in 1999. The increases were driven by the
net benefit of $1,610 million associated with the sale of the IBM Global Network
and other actions taken in the second quarter of 1999. (See Note No. 5 to the
Consolidated Financial Statements on pages 7 through 9 for further information).
Excluding the 1999 actions, SG&A expense decreased 13.2 percent for the second
quarter of 2000 and 9.8 percent for the first six months of 2000 compared with
the same periods of 1999.
The company continues to manage aggressively its infrastructure expense
and its overall portfolio to allow for investment in growth segments of the
business. The company remains focused on maintaining affordable expense levels.
The company continues to benefit from growth in licensing its intellectual
property, as well as lower expenses from the sale of the IBM Global Network and
actions taken in 1999 to exit businesses like networking hardware and DRAM.
Expense benefited from gains associated with asset sales related to the MiCRUS
semiconductor operations (See Note No. 5 to the Consolidated Financial
Statements on page 9 for further information) and the sale of various parcels of
land. Commission and compensation related expenses in the second quarter of 2000
were lower in some of the business units reflecting their year-to-year dynamics,
particularly against a strong second quarter last year and the effect of
currency which also was a benefit to SG&A expense in both the second quarter and
first six months of 2000.
Research, development and engineering expense decreased 1.8 percent and
1.3 percent, respectively, for the second quarter and first six months of 2000,
when compared with the same periods of 1999.
Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and interest costs associated with rentals and
financing, amounted to $351 million and
-15-
<PAGE>
Results of Operations - (continued)
$699 million for the second quarter and first six months of 2000, respectively.
Of these amounts, the company capitalized $8 million for the second quarter and
$15 million for the first six months of 2000.
For the twelve months ended December 31, 1999, the company realized cost
and expense reductions of $762 million (as noted in Footnote W on pages 86-88 of
the 1999 IBM Annual Report) due to the funded status of its pension plans. Of
the total 1999 annual savings, the conversion to the amended U.S. pension plan,
the Personal Pension Account (PPA), which was announced in the second quarter of
1999, contributed an estimated $167 million. In 2000, the company continues to
benefit from the returns generated by its pension plan assets. Through the first
six months of 2000, the benefit was approximately $606 million which represented
an increase of $261 million over the same period in 1999, with only $20 million
of the increase due to the PPA conversion. These cost and expense reductions
were offset by other salary and benefit increases. Future effects of pension
plans on the operating results of the company depend on economic conditions and
investment performance.
The effective tax rate for the quarter ended June 30, 2000, was 30.0
percent versus 40.8 percent for the same period in 1999 (or 30.0 percent after
excluding 10.8 points due to the IBM Global Network sale and other
second-quarter actions taken by the company in 1999).
The effective tax rate for the first six months of 2000 was 30.0 percent
versus 37.1 percent for the same period in 1999. The 7.1 point decrease from the
1999 rate was primarily a result of the same factors that affected the second
quarter effective tax rate.
Financial Condition
During the first half of 2000, the company continued to make significant
investments to fund its future growth and increase shareholder value. These
investments included expenditures of $2,688 million for Research, development
and engineering, $2,372 million for Plant, rental machines and other property
and $3,906 million for the repurchase of the company's common shares. The
company had $3,261 million in Cash and cash equivalents and Marketable
securities at June 30, 2000.
Cash Flow
(Dollars in millions) Six Months Ended
June 30,
--------
2000 1999
---- ----
Net cash provided from (used in):
Operating activities $ 2,485 $ 3,520
Investing activities (1,406) 529
Financing activities (3,044) (3,803)
Effect of exchange rate changes on cash
and cash equivalents (91) (156)
------- -------
Net change in cash and cash equivalents $(2,056) $ 90
======= =======
-16-
<PAGE>
Financial Condition - (continued)
Cash flows from operating activities in the first half of 2000 declined
$1,035 million from the 1999 period primarily due to tax payments made in 2000
relating to the sale of the IBM Global Network in 1999.
Cash flows from investing activities declined $1,935 million from the
comparable 1999 period. The 1999 period included the proceeds from the sale of
the IBM Global Network partially offset by payments to purchase marketable
securities and other investments. Payments for plant, rental machines and other
property net of proceeds declined $584 million from the 1999 period.
Cash flows from financing activities increased $759 million due primarily
to an increase in debt financing in the first half of 2000.
Working Capital
(Dollars in millions) At June 30, At December 31,
2000 1999
---- ----
Current assets $39,437 $43,155
Current liabilities 33,862 39,578
------- -------
Working capital $ 5,575 $ 3,577
Current ratio 1.16:1 1.09:1
Current assets declined $3,718 million from year-end 1999 with decreases
of $2,570 million in Cash and cash equivalents and Marketable securities, $1,417
million in accounts receivable ($253 million in Notes and accounts receivable
and $1,164 million in Sales-type leases receivable) and $109 million in
Inventories offset by an increase of $378 million in Prepaid expenses and other
current assets. The decrease in Cash and cash equivalents and Marketable
securities resulted primarily from capital expenditures and stock repurchases
partially offset by cash generated from operations and the net proceeds from the
issuances of debt and the disposition of marketable securities and other
investments. The decline in accounts receivable is attributable to the
collection of traditionally higher year-end accounts receivable balances.
Inventory declines primarily resulted from inventory reductions within the
Enterprise Systems and Technology Groups. The increase in Prepaid expenses and
other current assets reflects seasonal increases from year-end levels.
Current liabilities declined $5,716 million with declines of $2,699
million in Accounts payable and accruals (resulting primarily from seasonal
declines in these balances from their normally higher year-end levels), $1,915
million in Short-term debt and $1,102 million in Taxes payable primarily due to
a large tax payment made in the first quarter of 2000, relating to the IBM
Global Network sale in 1999.
-17-
<PAGE>
Financial Condition - (continued)
Investments
During the first half of 2000, the company invested $2,372 million in
Plant, rental machines and other property, a decline of $493 million from the
comparable 1999 period. The company's investments were in its services business,
primarily in the management of customers' information technology, as well as in
manufacturing capacity for HDDs and microelectronics.
In addition to software development expense included in Research,
development and engineering expense, the company capitalized $262 million of
software costs (both internal use and licensed programs) during the first half
of 2000, an increase of $53 million from the comparable period in 1999.
Amortization of capitalized software costs was $220 million during the first
half of 2000, an increase of $17 million from the comparable 1999 period.
Investments and sundry assets were $26,138 million at June 30, 2000, an
increase of $51 million from year-end 1999, resulting primarily from increases
in non-current sales-type lease receivables and prepaid pension assets offset by
decreases in alliance investments and non-current customer loan receivables and
installment receivables.
Debt and Equity
(Dollars in millions) At June 30, At December 31,
2000 1999
---- ----
Global financing debt $26,687 $26,799
Non-global financing debt 2,487 1,555
------- -------
Total debt $29,174 $28,354
Stockholders' equity $19,174 $20,511
Debt/capitalization 60.3% 58.0%
EBITDA / interest expense 10x 9x
Non-global financing:
Debt/capitalization 14.6% 9.0%
EBITDA/interest expense 21x 19x
Global financing debt/equity 5.7:1 5.5:1
Total debt increased $820 million from year-end 1999 as non-global
financing debt increased $932 million and debt supporting the growth in global
financing assets decreased $112 million. Stockholders' equity declined $1,337
million from December 31, 1999, resulting primarily from the common share
repurchases and the decrease in the accumulated gains and losses not affecting
retained earnings partially offset by the increase in retained earnings.
-18-
<PAGE>
Financial Condition - (continued)
Liquidity
The company maintains a $10.0 billion committed global credit facility as
part of its ongoing efforts to ensure appropriate levels of liquidity. As of
June 30, 2000, $8,931 million of this confirmed line of credit remained unused
and available for future use.
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 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; 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 4. Submission of Matters to a Vote of Security Holders
The International Business Machines Corporation held its Annual Meeting of
Stockholders on April 25, 2000. For more information on the following proposals,
refer to the company's proxy statement dated March 13, 2000, 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 1,404,881,977 30,200,208
K. I. Chenault 1,387,020,375 48,061,810
J. Dormann 1,388,002,008 47,080,177
L. V. Gerstner, Jr. 1,403,310,759 31,771,426
N.O. Keohane 1,404,163,447 30,918,738
C. F. Knight 1,402,530,650 32,551,535
M. Makihara 1,404,360,928 30,721,257
L. A. Noto 1,404,837,803 30,244,382
J. B. Slaughter 1,403,940,049 31,142,136
A. Trotman 1,403,718,749 31,363,436
L. C. van Wachem 1,402,844,191 32,237,994
C. M. Vest 1,404,600,103 30,482,082
-19-
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders - (continued)
(2) The stockholders ratified the appointment of PricewaterhouseCoopers
LLP as independent accountants of the company:
For 1,398,698,173
Against 27,495,262
Abstain 8,888,750
-------------
Total 1,435,082,185
(3) The stockholders approved the adoption of the IBM 2000 Employee Stock
Purchase Plan:
For 1,342,388,113
Against 80,401,645
Abstain 12,292,427
-------------
Total 1,435,082,185
(4) The stockholders defeated a shareholder proposal on Executive
Compensation:
For 84,596,479
Against 976,858,872
Abstain 39,910,004
Broker No Vote 333,716,830
-------------
Total 1,435,082,185
(5) The stockholders defeated a shareholder proposal on Pension and
Retirement Medical:
For 299,799,711
Against 763,637,144
Abstain 37,928,500
Broker No Vote 333,716,830
-------------
Total 1,435,082,185
-20-
<PAGE>
ITEM 6 (a). Exhibits
Exhibit Number
3 The By-laws of IBM as amended through July 25, 2000.
11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios.
22 The company's proxy statement dated March 13, 2000, 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
ITEM 6 (b). Reports on Form 8-K
The company filed Form 8-K on April 13, 2000, to incorporate by reference
into Registration Statement No. 333-70521 on Form S-3, effective March 9, 1999,
the Underwriting Agreement dated April 6, 2000, among International Business
Machines Corporation, Morgan Stanley & Co. International Limited,
Tokyo-Mitsubishi International PLC, Bear, Stearns & Co. Inc., Daiwa Securities
SB Capital Markets Europe Limited, Deutsche Bank AG London, J.P. Morgan
Securities Ltd., Nomura International PLC and Salomon Brothers International
Limited. In addition, the Form of the 0.9% Note due 2003 was filed. No financial
statements were filed with this Form 8-K.
The company filed Form 8-K on April 19, 2000, with respect to the
company's financial results for the period ended March 31, 2000 and included
unaudited Consolidated Statement of Earnings, Consolidated Statement of
Financial Position and Segment Data for the periods ended March 31, 2000.
The company filed Form 8-K on May 5, 2000, in order to reflect: (i) the
number of common shares carried over from a prior registration statement to the
registration statement for the 1995 IBM Employees Stock Purchase Plan (ESPP);
(ii) the balance of ESPP shares available as of March 31, 2000 after giving
effect to two common stock splits and to the utilization of ESPP shares through
such date, and (iii) the company's intent to carry over and utilize all common
shares remaining available under the 1995 ESPP registration statement in future
registration statements under Rule 429. No financial statements were filed with
this Form 8-K.
The company filed Form 8-K on June 28, 2000, to incorporate by reference
into Registration Statement No. 333-37034 on Form S-3, effective June 20, 2000,
the Agency Agreement dated June 22, 2000, 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.
-21-
<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 14, 2000
By:
Mark Loughridge
-----------------------------------
Mark Loughridge
Vice President and Controller
-22-
