UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
1-2360
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(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
-------------------------------------------
(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
---------------- -----
(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 1,754,379,601 shares of common stock outstanding at
September 30, 2000.
<PAGE>
Index
Page
----
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Earnings for the three and nine
months ended September 30, 2000 and 1999 ........................... 1
Consolidated Statement of Financial Position at
September 30, 2000 and December 31, 1999 ........................... 3
Consolidated Statement of Cash Flows for the nine months
ended September 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 ............................................... 20
<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 Nine Months Ended
per share amounts) September 30, September 30,
---------------------- ----------------------
2000 1999* 2000 1999*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Hardware $ 9,451 $ 9,065 $ 26,314 $ 27,438
Global Services 8,230 7,898 23,966 23,436
Software 2,918 3,010 9,027 9,056
Global Financing 859 774 2,494 2,222
Enterprise Investments/Other 323 397 979 1,214
-------- -------- -------- --------
Total revenue 21,781 21,144 62,780 63,366
Cost:
Hardware 6,815 6,750 19,062 19,953
Global Services 6,042 5,715 17,603 17,003
Software 549 567 1,690 1,642
Global Financing 404 335 1,157 978
Enterprise Investments/Other 170 213 513 744
-------- -------- -------- --------
Total cost 13,980 13,580 40,025 40,320
-------- -------- -------- --------
Gross profit 7,801 7,564 22,755 23,046
Expense:
Selling, general and administrative 3,726 3,501 11,299 10,284
Research, development and engineering 1,261 1,383 3,702 3,857
Other income (173) (134) (492) (423)
Interest expense 183 185 499 556
-------- -------- -------- --------
Total expense 4,997 4,935 15,008 14,274
Income before income taxes 2,804 2,629 7,747 8,772
Income tax provision 841 867 2,324 3,149
-------- -------- -------- --------
Net income 1,963 1,762 5,423 5,623
Preferred stock dividends 5 5 15 15
-------- -------- -------- --------
Net income applicable to common
shareholders $ 1,958 $ 1,757 $ 5,408 $ 5,608
======== ======== ======== ========
</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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share of common
stock - assuming dilution $ 1.08 $ 0.93 $ 2.97 $ 2.99
Earnings per share of common
stock - basic $ 1.11 $ 0.97 $ 3.06 $ 3.09
Average number of common
shares outstanding: (millions)
Assuming dilution 1,809.8 1,869.6 1,819.3 1,874.7
Basic 1,758.1 1,805.2 1,767.6 1,813.7
Cash dividends per common share $ 0.13 $ 0.12 $ 0.38 $ 0.35
</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 September 30,
(Dollars in millions) 2000 At December 31,
(Unaudited) 1999
---------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,880 $ 5,043
Marketable securities -- at fair value,
which approximates market 153 788
Notes and accounts receivable -- trade, net of
allowances 21,898 21,398
Sales-type leases receivable 4,806 6,220
Inventories, at lower of average cost or net
realizable value
Finished goods 1,212 1,162
Work in process and raw materials 3,697 3,706
------- -------
Total inventories 4,909 4,868
Prepaid expenses and other current assets 5,391 4,838
------- -------
Total current assets 40,037 43,155
Plant, rental machines and other property 38,086 39,616
Less: Accumulated depreciation 21,757 22,026
------- -------
Plant, rental machines and other property -- net 16,329 17,590
Software 759 663
Investments and sundry assets 26,751 26,087
------- -------
Total assets $83,876 $87,495
======= =======
</TABLE>
(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 - (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
At September 30,
(Dollars in millions except 2000 At December 31,
per share amounts) (Unaudited) 1999
--------------- ---------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Taxes $ 3,802 $ 4,792
Accounts payable and accruals 18,315 20,556
Short-term debt 10,695 14,230
-------- --------
Total current liabilities 32,812 39,578
Long-term debt 18,676 14,124
Other long-term liabilities 11,499 11,928
Deferred income taxes 1,342 1,354
-------- --------
Total liabilities 64,329 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 12,895 11,762
Shares authorized: 4,687,500,000
Shares issued: 2000 - 1,892,134,368
1999 - 1,876,665,245
Retained earnings 21,429 16,878
Treasury stock - at cost (12,592) (7,375)
Shares: 2000 - 117,754,767
1999 - 72,449,015
Employee benefits trust (2,272) (2,162)
Shares: 2000 - 20,000,000
1999 - 20,000,000
Accumulated gains and losses not
affecting retained earnings (160) 1,161
-------- --------
Total stockholders' equity 19,547 20,511
-------- --------
Total liabilities and stockholders' equity $ 83,876 $ 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 NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in millions) 2000 1999
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net income $ 5,423 $ 5,623
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation 3,285 5,010
Amortization of software 346 319
Gain on disposition of fixed and other assets (710) (4,554)
Changes in operating assets and liabilities (3,796) 362
------- -------
Net cash provided from operating activities 4,548 6,760
------- -------
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (2,501) (3,373)
Investment in software (406) (321)
Purchases of marketable securities and other
investments (850) (2,754)
Proceeds from marketable securities and other
investments 1,335 1,081
Proceeds from sale of the IBM Global Network -- 4,808
------- -------
Net cash used in investing activities (2,422) (559)
------- -------
Cash flow from financing activities:
Proceeds from debt issuance 7,719 4,658
Payments to settle debt (6,711) (5,639)
Short-term borrowings less than 90 days -- net 377 (650)
Common stock transactions -- net (4,817) (4,544)
Cash dividends paid (694) (656)
------- -------
Net cash used in financing activities (4,126) (6,831)
------- -------
Effect of exchange rate changes on
cash and cash equivalents (163) (163)
------- -------
Net change in cash and cash equivalents (2,163) (793)
Cash and cash equivalents at January 1 5,043 5,375
------- -------
Cash and cash equivalents at September 30 $ 2,880 $ 4,582
======= =======
</TABLE>
(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 nine-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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 1,963 $ 1,762 $ 5,423 $ 5,623
Gains and losses not affecting
retained earnings (net of tax):
Foreign currency translation
adjustments (243) 276 (536) (476)
Net unrealized (losses)/gains on
marketable securities (29) 193 (785) 195
------- ------- ------- -------
Accumulated gains and losses
not affecting retained earnings $ 1,691 $ 2,231 $ 4,102 $ 5,342
======= ======= ======= =======
</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. The actual effect
on the company's financial statements will depend on the fair value of the
company's derivatives and related financial instruments at the date of adoption.
The effect is also contingent upon the outcome of current deliberations on
certain issues by the Derivatives Implementation Group (DIG) and the approval of
the DIG's recommendations by the Financial Accounting Standards Board (FASB). As
a result of the uncertainty surrounding the forthcoming guidance by the FASB,
the estimated effect of implementation on income before income taxes is expected
to be between a charge of $25 million and a benefit of $50 million.
Additionally, the adoption of the new standard is estimated to result in an
increase in stockholders' equity of approximately $300 million. These estimates
are based on market information and the company's portfolio of derivatives and
related financial instruments as of September 30, 2000.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides
- 6 -
<PAGE>
Notes to Consolidated Financial Statements - (continued)
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 will complete its review of SAB 101 by the end of the
fourth quarter of 2000.
On March 16, 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus in EITF 00-2, Accounting for Web
Site Development Costs. This issue deals with how an entity should account for
costs incurred to develop a Web site. The consensus is effective as of the first
quarter beginning after June 30, 2000. As a result of this consensus, the
company changed its accounting policies to capitalize certain phases of Web site
development costs which were previously expensed as incurred. The company will
amortize these amounts on a straight-line basis over two years. As a result of
this consensus, the company has capitalized $37 million as of September 30,
2000, and this amount is included in the caption "Software" in the Consolidated
Statement of Financial Position.
4. The tables on pages 25 through 28 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. Third-quarter and first nine months of 1999 results have been
reclassified to conform with the 2000 presentation.
5. The third quarter 1999 results included a pre-tax benefit of $201 million
($63 million after tax, or $.03 per diluted common share) related to the sale of
IBM's Global Network, actions within the company's Technology Group, and charges
for acquired in-process research and development related to three purchase
acquisitions.
Sale of the 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 third quarter of 1999, the company sold its Global Network
business in 34 countries for approximately $727 million, bringing the
year-to-date total to 38 countries and $4,919 million. The company recognized a
pre-tax gain of $586 million on the third-quarter sales ($366 million after tax,
or $.19 per diluted common share).
- 7 -
<PAGE>
Notes to Consolidated Financial Statements - (continued)
Technology Group Actions. On August 31, 1999, the company announced that
the Networking Hardware Division (NHD) of the company's Technology Group entered
into a global alliance with Cisco Systems, Inc. (Cisco) comprising an agreement
by Cisco to purchase IBM technology over the next five years; a strategic
relationship with IBM Global Services under which the two companies will offer a
full spectrum of services and jointly developed solutions for customers'
e-business and networking needs; and the sale to Cisco of intellectual property
(IP) related to routing and switching technology.
As a result of the announcement of the alliance, demand for the router and
switch products from both existing and new customers abruptly deteriorated.
Thus, the company took a pre-tax charge totaling $178 million ($109 million
after tax, or $.06 per diluted common share) related to a write-down to net
realizable value of its inventory of router and switch products ($144 million)
and related contract cancellation fees ($34 million).
During the second quarter of 1999, the company approved and implemented
actions designed to better align the operations of IBM's Technology Group with
that group's strategic direction in view of the competitive environment,
overcapacity in the industry and resulting pricing pressures. As part of those
actions, the company announced (in the second quarter) aggressive steps to
improve the competitive position of its Storage Systems Division (SSD) by
merging server hard disk drive product lines and realigning operations. The
company integrated all server hard disk drives into a single low-cost design
platform that uses common development and manufacturing processes. The company
took a pre-tax charge of $264 million in the second quarter and those actions
were completed by the first half of 2000.
The actions within SSD resulted in additional third-quarter 1999 pre-tax
charges of $96 million ($83 million after tax, or $.04 per diluted common
share). That amount included write-downs to fair value of equipment (a) that was
idle and scrapped ($42 million), (b) under contract for sale ($7 million), and
(c) subject to sale-leaseback agreements ($47 million write-down of the
equipment to appraised fair value).
The following table provides the liability balances at September 30, 2000
for actions that the company took in 1999:
<TABLE>
<CAPTION>
Liability Liability
(Dollars in Millions) as of as of
12/31/1999 Payments Other Adj.* 9/30/2000
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
MD Actions:
DRAM
Employee Terminations (1) $149 $ 40 $(11) $ 98
MiCRUS Investment (2) 152 152 -- --
SSD Actions:
Employee Terminations (3) 7 7 -- --
---- ---- ---- ----
Total $308 $199 $(11) $ 98
==== ==== ==== ====
</TABLE>
(1) The liability as of September 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.
- 8 -
<PAGE>
Notes to Consolidated Financial Statements - (continued)
Acquisitions. On September 24, 1999, the company acquired all of the
outstanding capital stock of Sequent Computer Systems, Inc. (Sequent) for
approximately $828 million or $18 for each outstanding share of Sequent common
stock. Sequent was an acknowledged leader in systems based on NUMA (non-uniform
memory access) architecture.
On September 29, 1999, the company completed the acquisition of Mylex
Corporation (Mylex) for approximately $259 million or $12 for each outstanding
share of Mylex common stock. Mylex was a leading developer of technology for
moving, storing, protecting and managing data in desktop and networked
environments.
On September 27, 1999, the company acquired DASCOM, Inc., (DASCOM) an
industry leader in Web-based and enterprise-security technology, for
approximately $115 million.
The company accounted for each acquisition as a purchase transaction. The
effects of these acquisitions on the company's consolidated financial statements
were not material. In connection with the acquisitions of Sequent, Mylex and
DASCOM, the company recorded a pre-tax charge for research, development and
engineering of $111 million ($111 million after tax, or $.06 per diluted common
share) for acquired in-process research and development (IPR&D). At the date of
each acquisition, the IPR&D projects had not yet reached technological
feasibility and had no alternative future uses. The value of the IPR&D reflects
the relative value and contribution of the acquired research and development to
the company's existing research or product times.
6. Subsequent Events: On October 31, 2000, the Board of Directors authorized the
company to repurchase up to an additional $3.5 billion of IBM common shares. The
company plans to repurchase the shares in the open market from time to time,
based on market conditions.
On October 31, 2000, the Board of Directors elected Sidney Taurel, 51,
chairman, and chief executive officer of Eli Lilly and Company, to the board,
bringing the number of IBM directors to 15.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
The company's third quarter results showed diluted earnings per share
growth of 16.1 percent versus the same quarter of 1999 and an accelerated growth
in revenue relative to the first half of 2000. Revenue declined by 5 percent in
the first quarter of 2000, declined 1 percent in the second quarter of 2000 and
increased 3 percent in the third quarter of 2000, versus the comparable periods
in 1999. The company's revenue in the third quarter was affected by three items.
First, demand for the company's microelectronics products from both internal and
external customers far exceeded the company's ability to supply components.
Secondly, the upcoming release of the company's new high-end server slowed
demand for the S/390 family of servers. Finally, parts of the company's software
business slowed unexpectedly in September. Additionally, currency had a negative
effect on revenue as the U.S. dollar has continued to
- 9 -
<PAGE>
strengthen against other currencies on a year-to-year basis. On the positive
side, Global Services revenue continued to overtake the Y2K pause that pressured
the first half of 2000, and the company's personal computer business rebounded
with strong demand for Netfinity servers and Thinkpad products. The company
continues to believe that the breadth of its portfolio and strength of its
global position has allowed it to produce consistently good earnings. The
company expects its broad portfolio will be even more important to its success
going forward.
Results of Operations
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $21,781 $21,144 $62,780 $63,366
Cost 13,980 13,580 40,025 40,320
------- ------- ------- -------
Gross profit $ 7,801 $ 7,564 $22,755 $23,046
Gross profit margin 35.8% 35.8% 36.2% 36.4%
Net income $ 1,963 $ 1,762 $ 5,423 $ 5,623
Earnings per share of
common stock:
Assuming dilution $ 1.08 $ 0.93 $ 2.97 $ 2.99
Basic $ 1.11 $ 0.97 $ 3.06 $ 3.09
</TABLE>
As a result of the company's share repurchase program, the average number
of common shares outstanding assuming dilution was lower by 59.8 million than
the third quarter in 1999 and by 55.4 million than the first nine months of
1999. The average number of shares assuming dilution was 1,809.8 million in the
third quarter of 2000 and 1,819.3 million for the first nine months of 2000.
There were 1,754.4 million shares outstanding at September 30, 2000.
Revenue for the three months ended September 30, 2000 increased 3.0
percent versus the same period last year (6 percent at constant currency).
Hardware revenue improved 4.2 percent driven by higher personal computer,
microelectronics, high-end disk drive and Web server revenue, partially offset
by lower AS/400, S/390 and HDD (hard disk drive) revenue. Global Services
revenue increased 4.2 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 declined 3.0 percent due to sales execution
issues late in the third quarter and an industry-wide transition in the system
management software marketplace, which had an adverse effect on the company's
Tivoli products. Revenue from Global Financing increased 11.0 percent and
revenue from Enterprise Investments/Other declined 18.7 percent year-over-year.
Revenue for the third quarter of 2000 from the company's end-user
businesses totaled $9.7 billion from the Americas, an increase of 0.9 percent (1
percent increase at constant currency) compared with the same period last year.
Revenue from Europe/Middle East/Africa was $5.6 billion, down 3.4 percent (up 8
percent at constant currency). Asia-Pacific revenue grew 18.0 percent (17
percent at constant currency) to $4.3 billion. OEM (Original Equipment
Manufacturer) revenue across all geographies was $2.1 billion, a 4.4 percent
increase (5 percent at constant currency) compared with the third quarter of
1999.
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<PAGE>
Results of Operations - (continued)
The company's overall gross profit margin of 35.8 percent in the third
quarter of 2000 and 36.4 percent in the third quarter of last year (or 35.8
percent excluding the 1999 actions).
Third-quarter expense was 5.0 billion and the expense-to-revenue ratio was
22.9 percent, compared with 23.3 percent in the year-earlier period (or 24.9
percent excluding the 1999 actions).
The company's tax rate was 30.0 percent in the third quarter compared with
33.0 percent in the year-earlier period (or 30.0 percent excluding the 1999
actions).
Net income for the nine months ended September 30, 2000 was $5.4 billion,
or $2.97 per diluted common share, compared with net income of $5.6 billion, or
$2.99 per diluted common share, in the year-earlier period (or net income of
$4.9 billion, or $2.59 per diluted common share, in 1999 after excluding the
after-tax net benefit from the sale of the IBM Global Network and other 1999
actions). Revenue for the nine months ended September 30, 2000 was $62.8
billion, a decrease of 0.9 percent (up 1 percent in constant currency) compared
with $63.4 billion for the nine months of 1999.
Hardware
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $ 9,451 $ 9,065 $26,314 $27,438
Total cost 6,815 6,750 19,062 19,953
------- ------- ------- -------
Gross profit $ 2,636 $ 2,315 $ 7,252 $ 7,485
Gross profit margin 27.9% 25.5% 27.6% 27.3%
Revenue from Hardware for the third quarter of 2000 increased 4.2 percent
and decreased 4.1 percent for the first nine months of 2000 when compared with
the same periods in 1999.
Technology revenue increased for the third quarter of 2000 and declined
for the first nine months of 2000 when compared with year-ago periods. The
increase in third quarter revenue was driven by strong growth in custom logic
and network technology products, partially offset by lower revenue for HDDs. The
decline in revenue for the first nine months of 2000 was driven by lower HDD
revenue, partially offset by strong revenue growth from microelectronics
products, primarily custom logic chips. The company experienced two supply
constraints in the third quarter of 2000, the first was with wafers and the
second was with ceramic substrates. In both cases, strong demand for these
products from both internal users and external OEM customers exceeded the
company's ability to supply these components. The company has initiated both
short-and long-term plans designs to help meet these increased requirements. The
company announced on October 10, 2000, plans to invest $5.0 billion in the
following projects: (1) building an advanced chip-making facility in East
Fishkill, New York; (2) expanding its chip-making capacity in Burlington,
Vermont and Yasu, Japan, as well as a joint venture in Essonnes, France; and (3)
expanding its organic and ceramic chip packaging operations worldwide.
- 11 -
<PAGE>
Results of Operations - (continued)
Enterprise Systems revenue declined in the third quarter and the first
nine months of 2000, versus the same periods of 1999. Revenue from the Web
server product line, which primarily consists of RS/6000 products, increased in
the third quarter and the first nine months of 2000 compared with the same
periods of 1999. Customer acceptance of the S80 model continued to be strong,
but RS/6000 products were supply constrained in the third quarter. In addition,
revenue from the company's storage systems products, which includes Shark, grew
for the third quarter and declined for the first nine months of 2000 compared
with year-ago periods. S/390 revenue declined, and computing power as measured
in MIPS (millions of instructions per second) declined 2 percent in the third
quarter of 2000 when compared to the same quarter in 1999, although installed
MIPS inventory increased 25 percent from a year ago. S/390 demand slowed in the
third quarter of 2000 in anticipation of new models that were announced in early
October. AS/400 revenue declined for the third quarter and first nine months of
2000 versus the year earlier periods. Demand for the new models was strong, but
revenue declined due to supply constraints.
Personal Systems revenue increased in the third quarter and declined for
the first nine months of 2000 versus the same periods in 1999. The increase in
third quarter revenue was driven by Netfinity servers and mobile products
partially offset by lower desktop and retail store revenue. The company
continues to take initiatives to improve long-term profitability of these
products.
Hardware gross profit dollars increased 13.9 percent and declined 3.1
percent, respectively, for the third quarter and first nine months of 2000 from
comparable periods in 1999. The Hardware gross profit margin increased 2.4
points and 0.3 points, respectively, for the third quarter and first nine months
of 2000 when compared to the same periods of the prior year. The increase in
gross profit margin was primarily driven by improved margins in microelectronics
and personal computers, although some of the improvement was offset due to the
mix of revenue to lower gross profit margin products e.g., microelectronics and
personal computers.
Global Services
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $ 8,230 $ 7,898 $23,966 $23,436
Total cost 6,042 5,715 17,603 17,003
------- ------- ------- -------
Gross profit $ 2,188 $ 2,183 $ 6,363 $ 6,433
Gross profit margin 26.6% 27.6% 26.5% 27.5%
Global Services revenue increased 4.2 percent and 2.3 percent in the third
quarter and first nine months of 2000, respectively, when compared with the same
periods of last year. Revenue comparisons were adversely 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 9 percent for both the third quarter and first nine
months of 2000 versus the same periods in 1999. The third quarter revenue
increase was driven
- 12 -
<PAGE>
Results of Operations - (continued)
by Strategic Outsourcing Services, Integrated Technology Services and Business
Innovation Services partially offset by the sale of the IBM Global Network and a
decline in Y2K services. Nine months revenue growth was driven by Strategic
Outsourcing Services and Integrated Technology Services, partially offset by
lower revenue from Business Innovation Services primarily due to decline in Y2K
activity and the sale of the IBM Global Network. Maintenance revenue grew 3
percent and 1 percent, respectively, for the third quarter and first nine months
of 2000, versus the comparable 1999 periods. New contract signings were strong
in the third quarter at $13.3 billion and backlog is now at $81 billion at the
end of the third quarter. Those signings included 14 contracts individually
valued at over $100 million and 2 contracts individually valued at over $1
billion.
The company's discrete e-business services revenue grew very strongly in
the third quarter and first nine months of 2000 when compared with year-earlier
periods. The company continues to invest in the required skills, and
capabilities by having hired over 3,000 consultants this quarter for Business
Innovation Services up from 2,500 hires in the second quarter of 2000 to support
the company's high-demand offerings like CRM and Supply Chain Management. The
company continues to invest in the development of solutions such as e-commerce,
e-marketplaces and Web hosting. The company also provides e-enablement by
building and supporting customers' Web infrastructures and storage area
networks.
Global Services gross profit dollars were flat in the third quarter and
declined 1.1 percent for the first nine months of 2000, when compared with
year-ago periods. The gross profit margins declined 1 point for both the third
quarter and first nine months of 2000 when compared with the same periods in
1999. The decline in gross profit margin was driven by lower utilization rates
in Business Innovation Services and Integrated Technology Services due to the
rapid hiring and retraining associated with rebalancing its skills toward
e-business services. The third quarter gross profit margin decline was partially
offset by a maintenance gross profit margin increase of 2 points in the third
quarter of 2000, while the gross profit margin for the first nine months of 2000
was flat compared with year-ago periods.
Software
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $2,918 $3,010 $9,027 $9,056
Total cost 549 567 1,690 1,642
------ ------ ------ ------
Gross profit $2,369 $2,443 $7,337 $7,414
Gross profit margin 81.2% 81.2% 81.3% 81.9%
Revenue from software for the third quarter and first nine months of 2000
decreased 3.0 percent and 0.3 percent, respectively, over comparable periods in
1999. Operating-systems software revenue declined 8 percent in the third quarter
and 10 percent for the first nine months of 2000 when compared with year-ago
periods. The declines were driven by lower AS/400, Web server and S/390
offerings due to hardware product supply constraints and product transitions.
- 13 -
<PAGE>
Results of Operations - (continued)
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 lower revenue of 1
percent in the third quarter of 2000 and grew 4 percent for the first nine
months of 2000 versus comparable periods of 1999. Middleware revenue growth
slowed during the third quarter as the company experienced some sales execution
issues late in the quarter which resulted in a number of contracts in process
not being closed during the quarter. In addition, Tivoli's revenue declined as
it was affected by a transition in the systems management software marketplace.
Tivoli's business has been based on large integrated systems management
solutions. The customers' emphasis is now shifting to software products that
focus on specific problems such as managing pervasive devices, security and
storage management. While the company's core product revenue has suffered from
this transition, new Tivoli products that manage pervasive devices or address
security are currently off to a strong start and more products are under
development. 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.
Software gross profit dollars for both the third quarter and first nine
months of 2000 decreased 3.1 percent and 1.1 percent, respectively, versus the
same periods in 1999. The decline in gross profit dollars was due to lower
revenue and higher services costs, partially offset by lower levels of
amortization costs associated with previously deferred development spending.
Global Financing
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $ 859 $ 774 $2,494 $2,222
Total cost 404 335 1,157 978
------ ------ ------ ------
Gross profit $ 455 $ 439 $1,337 $1,244
Gross profit margin 53.0% 56.7% 53.6% 56.0%
Global Financing revenue increased 11.0 percent and 12.2 percent for the
third quarter and first nine months of 2000, respectively, 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 3.8 percent and 7.5
percent, respectively, for the third quarter and first nine months of 2000,
versus the same periods of 1999. The increases in gross profit dollars were
primarily driven by higher sales of used equipment and growth in commercial
financing.. The gross profit margin declined 3.7 points and 2.4 points,
respectively, for the third quarter and first nine months of 2000, versus the
same periods of 1999. The declines were driven by the mix towards more used
equipment sales which have a lower gross profit margin.
- 14 -
<PAGE>
Results of Operations - (continued)
Enterprise Investments / Other
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Total revenue $ 323 $ 397 $ 979 $1,214
Total cost 170 213 513 744
------ ------ ------ ------
Gross profit $ 153 $ 184 $ 466 $ 470
Gross profit margin 47.5% 46.2% 47.6% 38.6%
Revenue from Enterprise Investments/Other decreased 18.7 percent and 19.3
percent, respectively, for the third quarter and first nine 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.
The Enterprise Investments/Other gross profit dollars decreased 16.5
percent in the third quarter and essentially flat for the first nine months of
2000, versus the same periods of 1999. The decreases were primarily driven by
lower revenue associated with the product lines discontinued in 1999.
Expenses
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selling, general and administrative $ 3,726 $ 3,501 $ 11,299 $ 10,284
Percentage of revenue 17.1% 16.6% 18.0% 16.2%
Research, development and engineering $ 1,261 $ 1,383 $ 3,702 $ 3,857
Percentage of revenue 5.8% 6.5% 5.9% 6.1%
</TABLE>
Selling, general and administrative (SG&A) expense for the third quarter
and first nine months of 2000 increased 6.4 percent and 9.9 percent,
respectively, from the same periods in 1999. The increase in the third quarter
of 2000 was primarily driven by the 1999 actions including the net pre-tax
benefit of $456 million associated with the sale of the IBM Global Network,
actions within SSD for write-downs to fair value of equipment and the contract
cancellation fees associated with the sale of IP by NHD in the third quarter of
1999. (See Note No. 5 to the Consolidated Financial Statements on pages 7
through 9 for further information). The increase in the first nine months of
2000 reflects the net pre-tax benefit of $2,066 million associated with the sale
of the IBM Global Network and the actions taken in the second and third quarter
of 1999 to better align the operations of the company's Technology Group with
that group's strategic direction. Excluding the 1999 actions, SG&A expense for
the third quarter and first nine months of 2000 would have decreased 5.8 percent
and 8.5 percent, respectively, versus the same period in 1999.
- 15 -
<PAGE>
Results of Operations - (continued)
The company continues to manage aggressively its infrastructure expense,
discretionary spending, occupancy costs, 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 (dynamic random access memory). Expense has
also benefited from gains associated with asset sales throughout the year. The
effect of currency also was a benefit to SG&A expense in both the third quarter
and first nine months of 2000.
Research, development and engineering expense decreased 8.8 percent and
4.0 percent, respectively, for the third quarter and first nine months of 2000,
when compared with the same periods of 1999. The decreases reflect a $111
million pre-tax charge taken in the third quarter of 1999 for in-process
research and development associated with the acquisition of Sequent, Mylex and
DASCOM. (See Note No. 5 to the Consolidated Financial Statements on pages 7
through 9 for further information). Those acquisitions are intended to improve
the company's long-term competitiveness in the server, storage and Web-security
markets, respectively. Research, development and engineering expense for the
third quarter and first nine months of 2000, excluding the 1999 charge for
in-process research and development, would have decreased 0.9 percent and 1.2
percent, respectively, 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 $372 million and $1,071 million for the third quarter and
first nine months of 2000, respectively. Of these amounts, the company
capitalized $8 million for the third quarter and capitalized $23 million for the
first nine months of 2000.
Other income increased 29.1 percent and 16.3 percent, respectively, for
the third quarter and first nine months of 2000 versus the same periods of 1999.
The increases were primarily a result of gains from sales of available-for-sale
securities held by the company.
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. For the third
quarter and the first nine months of 2000, the benefit was approximately $ 291
million and $897 million, respectively, which represented an increase of $44
million and $305 million, respectively, over the same period in 1999. 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 September 30, 2000, was 30.0
percent versus 33.0 percent for the same period in 1999 (or 30.0 percent after
excluding 3.0 points due to the IBM Global Network sale and other third-quarter
actions taken by the company in 1999).
- 16 -
<PAGE>
Results of Operations - (continued)
The effective tax rate for the first nine months of 2000 was 30.0 percent
versus 35.9 percent for the same period in 1999. The 5.9 point decrease from the
1999 rate was primarily a result of the same factors that affected the third
quarter effective tax rate.
Financial Condition
During the first nine months of 2000, the company continued to make
significant investments to fund its future growth and increase shareholder
value. These investments included expenditures of $4,073 million for Research,
development and engineering, $3,770 million for Plant, rental machines and other
property and $5,279 million for the repurchase of the company's common shares.
The company had $3,033 million in Cash and cash equivalents and Marketable
securities at September 30, 2000.
Cash Flow
(Dollars in millions) Nine Months Ended
September 30,
------------------------
2000 1999
---- ----
Net cash provided from (used in):
Operating activities $ 4,548 $ 6,760
Investing activities (2,422) (559)
Financing activities (4,126) (6,831)
Effect of exchange rate changes on cash
and cash equivalents (163) (163)
------- -------
Net change in cash and cash equivalents $(2,163) $ (793)
======= =======
Cash flows from operating activities in the first nine months of 2000
declined $2,212 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 used in investing activities increased $1,863 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 $872 million from the 1999 period.
Cash flows used in financing activities decreased $2,705 million due
primarily to an increase in debt financing in the first nine months of 2000.
- 17 -
<PAGE>
Financial Condition - (continued)
Working Capital
(Dollars in millions) At September 30, At December 31,
2000 1999
---------------- ---------------
Current assets $40,037 $43,155
Current liabilities 32,812 39,578
------- -------
Working capital $ 7,225 $ 3,577
Current ratio 1.22:1 1.09:1
Current assets declined $3,118 million from year-end 1999 with decreases
of $2,798 million in Cash and cash equivalents and Marketable securities and
$914 million in accounts receivable ($1,414 million in Sales-type leases
receivable partially offset by an increase of $500 million in Notes and accounts
receivable), partially offset by an increase of $553 million in Prepaid expenses
and other current assets and $41 million in Inventories. 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. The increase in Prepaid expenses and other current
assets reflects seasonal increases from year-end levels. The increase in
inventories primarily reflect higher inventory levels within Personal Systems
Group.
Current liabilities declined $6,766 million with declines of $3,535
million in Short-term debt, $2,241 million in Accounts payable and accruals
(resulting primarily from seasonal declines in these balances from their
normally higher year-end levels), and $990 million in Taxes payable primarily
due to a large tax payment made in the first quarter of 2000, relating to the
sale of the IBM Global Network in 1999.
Investments
During the first nine months of 2000, the company invested $3,770 million
in Plant, rental machines and other property, a decline of $447 million from the
comparable 1999 period. The company's investments were in its Global 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 $406 million of
software costs (both internal use and licensed programs, and Website development
costs primarily recorded in SG&A expense) during the first nine months of 2000,
an increase of $85 million from the comparable period in 1999. Amortization of
capitalized software costs was $346 million during the first nine months of
2000, an increase of $27 million from the comparable 1999 period.
- 18 -
<PAGE>
Financial Condition - (continued)
Investments and sundry assets were $26,751 million at September 30, 2000,
an increase of $664 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 September 30, At December 31,
2000 1999
---------------- ---------------
Global financing debt $27,552 $26,799
Non-global financing debt 1,819 1,555
------- -------
Total debt $29,371 $28,354
Stockholders' equity $19,547 $20,511
Debt/capitalization 60.0% 58.0%
EBITDA / interest expense 10x 9x
Non-global financing:
Debt/capitalization 10.8% 9.0%
EBITDA/interest expense 22x 19x
Global financing debt/equity 6.1:1 5.5:1
Total debt increased $1,017 million from year-end 1999 as debt supporting
the growth in global financing assets increased $753 million, and non-global
financing debt increased $264 million. Stockholders' equity declined $964
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.
Liquidity
The company maintains a $10.0 billion committed global credit facility as
part of its ongoing efforts to ensure appropriate levels of liquidity. As of
September 30, 2000, $9,226 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 fluctuations and customer
financing risks; dependence on certain suppliers; changes in the financial or
business condition
- 19 -
<PAGE>
Forward Looking and Cautionary Statements - (continued)
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 6 (a). Exhibits
Exhibit Number
11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios.
27 Financial Data Schedule.
ITEM 6 (b). Reports on Form 8-K
The company filed Form 8-K on July 20, 2000, with respect to the company's
financial results for the periods ended June 30, 2000 and included the unaudited
Consolidated Statement of Earnings, Consolidated Statement of Financial Position
and Segment Data for the periods ended June 30, 2000.
The company filed Form 8-K on September 25, 2000, to incorporate by
reference into Registration Statement No. 333-37034 on Form S-3, effective June
20, 2000, the Underwriting Agreement dated September 13, 2000, among
International Business Machines Corporation, Deutsche Bank AG London, UBS AG,
acting through its business group UBS Warburg, ABN AMRO Bank N.V., Bear, Stearns
International Limited, BNP Paribas, Chase Manhattan International Limited,
Credit Suisse First Boston (Europe) Limited and Salomon Brothers International
Limited. In addition, the Form of Floating Rate Note due September 26, 2002 was
filed. No financial statements were filed with this Form 8-K.
- 20 -
<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 Machine Corporation
------------------------------------------
(Registrant)
Date: November 13, 2000
By:
/s/ Mark Loughridge
-------------------------------------
Mark Loughridge
Vice President and Controller
- 21 -
