Exhibit 13
FINANCIAL REPORT
42. Report of Management
43. Report of Independent Accountants
44. Management Discussion
56. Consolidated Financial Statements
Earnings
Financial Position
Cash Flows
Stockholders' Equity
60. Notes To Consolidated Financial Statements
60. A Signicant Accounting Policies
62. B Accounting Changes
63. C Inventories
63. D Plant, Rental Machines and Other Property
64. E Investments and Sundry Assets
64. F Debt
66. G Taxes
68. H Selling and Advertising
68. I Research, Development and Engineering
69. J Interest on Debt
69. K Other Liabilities and Environmental
69. L Contingencies
70. M Customer Financing
73. N Rental Expense and Lease Commitments
73. O Stock-Based Compensation Plans
75. P Stock Repurchases
76. Q Retirement Plans
78. R Nonpension Postretirement Benefits
79. S Lines of Credit
80. T Sale and Securitization of Receivables
80. U Financial Instruments
82. V Subsequent Event
82. W Segment Information
84. X Geographic Areas
86. Five-Year Comparison of Selected Financial Data
86. Selected Quarterly Data
41.
REPORT OF MANAGEMENT
International Business Machines Corporation and Subsidiary Companies
Responsibility for the integrity and objectivity of the financial information
presented in this Annual Report rests with IBM management. The accompanying
financial statements have been prepared in conformity with generally accepted
accounting principles, applying certain estimates and judgments as required.
IBM maintains an effective internal control structure. It consists, in part,
of organizational arrangements with clearly dened lines of responsibility and
delegation of authority, and comprehensive systems and control procedures. We
believe this structure provides reasonable assurance that transactions are
executed in accordance with management authorization, and that they are
appropriately recorded, in order to permit preparation of financial statements
in conformity with generally accepted accounting principles and to adequately
safeguard, verify and maintain accountability of assets. An important element
of the control environment is an ongoing internal audit program.
To assure the effective administration of internal control, we carefully
select and train our employees, develop and disseminate written policies and
procedures, provide appropriate communication channels, and foster an
environment conducive to the effective functioning of controls. We believe
that it is essential for the company to conduct its business affairs in
accordance with the highest ethical standards, as set forth in the IBM
Business Conduct Guidelines. These guidelines, translated into numerous
languages, are distributed to employees throughout the world, and
reemphasized through internal programs to assure that they are understood and
followed.
Price Waterhouse LLP, independent accountants, is retained to examine IBM's
financial statements. Its accompanying report is based on an examination
conducted in accordance with generally accepted auditing standards, including
a review of the internal control structure and tests of accounting procedures
and records.
The Audit Committee of the Board of Directors is composed solely of outside
directors, and is responsible for recommending to the Board the independent
accounting firm to be retained for the coming year, subject to stockholder
approval. The Audit Committee meets periodically and privately with the
independent accountants, with our internal auditors, as well as with IBM
management, to review accounting, auditing, internal control structure and
financial reporting matters.
/s/ Louis V. Gerstner, Jr. /s/ G. Richard Thoman
Louis V. Gerstner, Jr. G. Richard Thoman
Chairman of the Board and Senior Vice President
and and
Chief Executive Officer Chief Financial Officer
42.
REPORT OF INDEPENDENT ACCOUNTANTS
International Business Machines Corporation and Subsidiary Companies
To the Stockholders and Board of Directors of International Business Machines
Corporation:
In our opinion, the accompanying consolidated financial statements, appearing
on pages 56 through 85, present fairly, in all material respects, the
financial position of International Business Machines Corporation and its
subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
January 20, 1997
43.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
OVERVIEW
IBM's financial performance in 1996 reflects continued progress towards its
strategic goals of revenue growth, an expanded portfolio of industry-specific
customer solutions, especially through network computing, and an increasingly
competitive cost and expense structure.
The company reported record revenue of nearly $ 76 billion, 30 percent net
earnings growth over 1995 and ended the year with over $ 8 billion in cash.
The company also continued to align itself for strategic growth by investing
almost $ 20 billion in critical high-growth and advanced technology
businesses, research and development, acquisitions and repurchases of its
common shares.
The growth in revenue was principally due to the continued transition of
revenue mix to the company's high-growth businesses. Revenue from services,
personal computers and distributed software offerings grew strongly year over
year. At the same time, while System/390* revenue declined due to pricing
pressures, its total installed base grew nearly 25 percent, well above the 14
percent growth rate of just two years ago as customers continued to move to
integrated network solutions.
The company's results were also affected adversely by the continued weakness
of the European economy and the continued strengthening of the U.S. dollar.
Without the currency effect, year-to-year revenue growth would have been 9
percent compared with the reported growth of 6 percent.
LOOKING FORWARD
While excellent progress was made in 1996, the company must continue to
implement strategic actions to further improve its competitiveness. These
actions include an on-going focus on revenue growth and stable net income
margins, while at the same time maintaining a strong balance sheet and cash
flows for long-term growth.
44.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
RESULTS OF OPERATIONS
(Dollars in millions except per share amounts) 1996 1995 1994
Revenue $ 75,947 $ 71,940 $ 64,052
Cost 45,408 41,573 38,768
-------- -------- --------
Gross profit 30,539 30,367 25,284
Gross profit margin 40.2% 42.2% 39.5%
Total expense 21,952 22,554 20,129
-------- -------- --------
Net earnings before income taxes $ 8,587 $ 7,813 $ 5,155
-------- -------- --------
-------- -------- --------
Net earnings $ 5,429 $ 4,178 $ 3,021
-------- -------- --------
-------- -------- --------
Net earnings per share of common stock $ 10.24 $ 7.23 $ 5.02
-------- -------- --------
-------- -------- --------
Revenue grew 5.6 percent as reported and 8.6 percent when currency impacts
are removed. This increase was primarily driven by the high-growth areas of
the company's product portfolio: services, personal computers and distributed
software offerings including those from Lotus Development Corporation (Lotus)
and Tivoli Systems, Inc. (Tivoli). The following table provides the company's
percent of revenue by category:
1996 1995 1994
Hardware sales 47.8% 49.5% 50.5%
Services 20.9 17.7 15.2
Software 17.2 17.6 17.7
Maintenance 9.2 10.3 11.3
Rentals and financing 4.9 4.9 5.3
-------- -------- --------
Total 100.0% 100.0% 100.0%
-------- -------- --------
-------- -------- --------
The overall gross profit margin at 40.2 percent decreased 2.0 points from
1995, following a 2.7 point increase in 1995 over 1994. The 1996 decline was
primarily a result of the company's continued shift to the higher growth
sources of revenue, most notably, services and personal computers. These
businesses have lower gross profit margins than the company's more
traditional high-end hardware offerings. The increase in 1995 was primarily
driven by improved margins in hardware sales resulting from cost improvements
across most major product lines.
The following table is provided for informational purposes only, to exclude
the effects of certain items on the company's net earnings.
(Dollars in millions except per share amounts) 1996 1995* 1994
Net earnings after tax as reported $ 5,429 $ 4,178 $ 3,021
Purchased in-process
research and development (pages 54 and 55) 435 1,840 -
Effects of Federal Systems Company (FSC) sale (page 55) - - (248)
Software amortization change - - 192
------- ------- -------
Adjusted net earnings $ 5,864 $ 6,018 $ 2,965
------- ------- -------
------- ------- -------
Adjusted net earnings per share of common stock $ 11.06 $ 10.46 $ 4.92
------- ------- -------
------- ------- -------
*Reclassified to conform to 1996 presentation.
45.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
HARDWARE SALES
(Dollars in millions) 1996 1995 1994
Revenue $ 36,316 $ 35,600 $32,344
Cost 23,396 21,862 21,300
-------- -------- --------
Gross profit $ 12,920 $13,738 $11,044
-------- -------- --------
-------- -------- --------
Gross profit margin 35.6% 38.6% 34.1%
Information on revenue by classes of similar products or services is included
in note W, "Segment Information," on pages 82 and 83. The product trends
addressed in this discussion and in that disclosure are indicative, in all
material respects, of hardware sales activity.
Revenue from hardware sales increased 2.0 percent from 1995, following an
increase of 10.1 percent in 1995 from 1994. Gross profit dollars from
hardware sales decreased 6.0 percent from 1995, following an increase of 24.4
percent in 1995 from 1994.
Revenue from servers decreased 1.4 percent from 1995, following a 9.0 percent
increase versus 1994. The 1996 decrease was primarily driven by lower revenue
from System/390, although total delivery of mainframe computing power,
including shipments placed with end-users through both operating leases and
service offerings, increased 49 percent as measured in MIPS (millions of
instructions per second) versus last year. The System/390 revenue decrease
was partially offset by higher revenue from AS/400*, RISC System/6000* and
personal computer servers. The 1995 increase reflected higher revenue across
all server products when compared to 1994 levels.
Personal system client revenue grew 13.8 percent from 1995, following a 15.1
percent increase in 1995 from 1994. The 1996 increase was driven by higher
revenue from personal computers, especially consumer products, partially
offset by lower revenue from RISC System/6000. The 1995 increase over 1994
resulted from higher revenue across all personal system client products.
Storage products revenue, including products sold primarily through the
Original Equipment Manufacturer (OEM) channel, decreased 4.1 percent in 1996
from 1995, following an increase of 4.8 percent in 1995 from 1994. The
decline in 1996 is a result of lower revenue associated with high-end storage
products due to continuing price competition. This decrease was partially
offset by strong revenue growth in hard disk drive (HDD) storage and tape
products when compared to 1995 levels. These product areas in 1996 accounted
for more revenue than high-end storage products. The 1995 increase versus
1994 was primarily driven by strong growth in HDD storage products, partially
offset by lower revenue from high-end storage and tape products.
OEM hardware revenue declined 9.1 percent in 1996 versus 1995, following a
35.5 percent increase in 1995 over 1994. The 1996 decrease was driven by
lower semiconductor revenue due to continuing industry-wide pricing
pressures.
46.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
The decrease in the 1996 hardware sales gross profit margin was driven by the
mix of revenue to lower gross profit products, such as personal computers,
and by lower OEM semiconductor margins. The increase in the 1995 hardware
gross profit margin was driven by improved gross profit margins on
System/390, personal computers, RISC System/6000 servers and OEM products.
The overall hardware sales margin continues to be adversely impacted by
pricing pressures across all products.
SERVICES
(Dollars in millions) 1996 1995 1994
Revenue $ 15,873 $ 12,714 $ 9,715
Cost 12,647 10,042 7,769
-------- -------- -------
Gross profit $ 3,226 $ 2,672 $ 1,946
-------- -------- -------
-------- -------- -------
Gross profit margin 20.3% 21.0% 20.0%
Services revenue increased 24.8 percent in 1996 from 1995 and 30.9 percent in
1995 over 1994. These increases are primarily in the areas of managed
operations of systems and networks, systems integration design and
development, availability services and consulting engagements. In 1996, the
company signed services contracts worth more than $ 27 billion. To meet the
growing demands in its services businesses, the company hired more than
15,000 new employees while maintaining a consistent level of gross
profitability.
SOFTWARE
(Dollars in millions) 1996 1995 1994
Revenue $ 13,052 $ 12,657 $ 11,346
Cost 4,082 4,428 4,680
-------- -------- --------
Gross profit $ 8,970 $ 8,229 $ 6,666
-------- -------- --------
-------- -------- --------
Gross profit margin 68.7% 65.0% 58.8%
Software revenue increased 3.1 percent in 1996 from 1995, following an
increase of 11.6 percent in 1995 from 1994. The increase in 1996 was driven
by distributed software offerings including Lotus Notes*, cc:Mail* and
systems management software from Tivoli, partially offset by lower host-based
computer software revenue associated with System/390 and AS/400. The increase
in 1995 was primarily due to revenue from Lotus products in the second half
of 1995, after the acquisition.
Software gross profit dollars increased 9.0 percent in 1996 from 1995,
following an increase of 23.4 percent in 1995 from 1994. The increase in 1995
from 1994 was affected by a change in the amortization period for software
products in 1994. Excluding the effect of this change, the gross profit
dollars would have increased 18.2 percent. The increase in gross profit
dollars in both 1996 and 1995 was driven primarily by the company's
continuing shift towards a more iterative software development process. As a
result, a larger percentage of software development spending was expensed,
and less was capitalized ($ .3 billion in 1996, compared to $ .8 billion in
1995), yielding lower costs of amortization.
47.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Maintenance
(Dollars in millions) 1996 1995 1994
Revenue $ 6,981 $ 7,409 $ 7,222
Cost 3,659 3,651 3,635
------- ------- -------
Gross profit $ 3,322 $ 3,758 $ 3,587
------- ------- -------
------- ------- -------
Gross profit margin 47.6% 50.7% 49.7%
Maintenance revenue decreased 5.8 percent in 1996 from 1995, following an
increase of 2.6 percent in 1995 from 1994. Gross profit dollars decreased
11.6 percent, following an increase of 4.8 percent in 1995 from 1994. Revenue
and gross profit margins in 1996 were lower due to continued price reductions.
Rentals and Financing
(Dollars in millions) 1996 1995 1994
Revenue $ 3,725 $ 3,560 $ 3,425
Cost 1,624 1,590 1,384
------- ------- -------
Gross profit $ 2,101 $ 1,970 $ 2,041
------- ------- -------
------- ------- -------
Gross profit margin 56.4% 55.4% 59.6%
Rentals and financing revenue increased 4.6 percent in 1996 from 1995,
following an increase of 3.9 percent in 1995 over 1994. In both 1996 and
1995, revenue increased as new originations of operating leases for high-end
products outpaced the expiration of older leases. The mix of operating lease
originations and hardware sales of these products remained constant year to
year. Gross profit dollars increased 6.6 percent from 1995, following a
decline of 3.4 percent in 1995 from 1994. The increase was primarily a result
of higher margins on operating leases and lower interest rates. The decrease
in 1995 was a reflection of both declining volumes and rental prices on
high-end products. The financing results are discussed in more detail in note
M, "Customer Financing," on pages 70 through 72.
48.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
OPERATING EXPENSES
(Dollars in millions) 1996 1995* 1994
Selling, general and administrative $ 16,854 $ 16,766 $ 15,916
Percentage of revenue 22.2% 23.3% 24.8%
Research, development and engineering $ 4,654 $ 4,170 $ 4,363
Percentage of revenue 6.1% 5.8% 6.8%
Purchased in-process research and development $ 435 $ 1,840 $ -
*Reclassified to conform to 1996 presentation.
Selling, general and administrative (SG&A) expense remained essentially flat
in 1996 compared to 1995. The company's shift towards investments in more
variable based high-yield programs, such as advertising, business partner
programs, expenditures associated with new acquisitions and investments and
its continued focus on reducing fixed infrastructure costs yielded a 1.1
point improvement in the expense to revenue ratio in 1996. The 1996 and 1995
results included $ 669 million and $ 626 million, respectively, associated
with infrastructure reductions. The 1995 results also included a one-time
gain of $ 175 million due to the settlement of certain contractual
obligations resulting from the 1994 FSC sale. The company continues to focus
on productivity, reengineering, expense controls and prioritization of
spending in order to maintain competitive expense to revenue levels.
Research, development and engineering expense increased 11.6 percent in 1996
from 1995, following a decrease of 4.4 percent in 1995 from 1994. The
increase in 1996 is primarily a result of the company's change in the
software development process as discussed in the Software section on page 47.
In addition, the on-going activities of Lotus and Tivoli are included in 1996
results, as compared to 1995 which included only Lotus activity from July to
December 1995.
Purchased in-process research and development in 1996 and 1995 was primarily
associated with the Tivoli and Lotus acquisitions, respectively.
Provision for Income Taxes
The provision for income taxes resulted in an effective tax rate of 37
percent for 1996, as compared to the 1995 effective tax rate of 47 percent.
Without the effect of expensing the purchased in-process research and
development with no corresponding tax effect, the 1996 and 1995 effective tax
rates would have been 35 percent and 38 percent, respectively. The reduction
in the 1996 tax rate is due to the company's continued expansion into markets
with lower effective tax rates, as well as the use of foreign tax credits to
offset the tax effect of dividend repatriation from non-U.S. affiliates.
The company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) 109, "Accounting for Income Taxes," which provides that a
valuation allowance should be recognized to reduce the deferred tax asset to
the amount that is more likely than not to be realized. In assessing the
likelihood of realization, management considered estimates of future taxable
income, which are based primarily on recent financial performance.
49.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Fourth Quarter
For the quarter ended December 31, 1996, the company had revenue of $ 23.1
billion, a 5.6 percent increase over the same period of 1995. Net earnings in
the fourth quarter were $ 2,023 million ($ 3.93 per common share), compared
to net earnings of $ 1,711 million ($ 3.09 per common share) in the fourth
quarter of 1995.
Fourth-quarter revenue increased in the United States, Asia-Pacific and Latin
America, and declined in Canada. Specifically, revenue from the United States
increased 12.1 percent year over year to $ 8.8 billion. Revenue from the
company's Europe, Middle East, and Africa unit was $ 8.1 billion, essentially
flat from 1995 to 1996. Asia-Pacific revenue grew 6.2 percent to $ 4.3
billion, while revenue in Latin America was $ 1.1 billion, an increase of 3.9
percent. Revenue from Canada declined 2.4 percent to $ .8 billion.
Currency had an approximately 3 percentage point negative impact on the
company's revenue results in the fourth quarter. This compares with an
approximately 2 percentage point positive revenue effect in the fourth
quarter of 1995. At constant currency in the fourth quarter of 1996, European
revenue would have grown 3 percent and Asia-Pacific revenue would have
increased 14 percent.
Hardware sales revenue was $ 11.7 billion, an increase of 1.7 percent
compared to the fourth quarter of 1995. Personal computer revenue grew year
over year in both commercial and consumer categories. AS/400, storage product
and networking hardware revenue also increased. System/390 and OEM hardware
revenue declined, while RISC System/6000 revenue was essentially flat.
Services revenue was $ 5.0 billion, an increase of 22.3 percent compared to
the fourth quarter of last year. This increase reflects the continued
strength across the company's services categories, including managed
operations of systems and networks, systems integration design and
development and availability services.
Software revenue grew 3.9 percent year over year to $ 3.7 billion. The
increase was driven by strong growth of Lotus and Tivoli distributed software
products, offset by lower host-based computer software revenue.
Maintenance revenue decreased 5.8 percent from 1995's fourth quarter, due to
continuing competitive pricing pressures. Rentals and financing grew 9.4
percent from 1995's fourth quarter due to increased operating leases of
high-end products.
The company's overall gross profit margin was 40.3 percent in the fourth
quarter, compared to 41.7 percent in the same period of 1995. This decrease
was a result of the continuing shift of revenue to lower margin offerings
including services and personal systems.
Total expenses declined 2.3 percent year over year, while the
expense-to-revenue ratio decreased from 29.8 percent to 27.8 percent. This
decline reflects the continuing efforts to shift toward investments in more
variable based spending programs and reductions in infrastructure
expenditures.
50.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Financial Condition
The company for the third consecutive year generated over $ 10 billion in
cash flow from operations which funded significant investments in plant,
rental machines and other property, strategic acquisitions, such as Tivoli
and Object Technology International, Inc., as well as common share
repurchases. The company ended 1996 with $ 8.1 billion in cash, up $ .4
billion from year-end 1995.
The company has access to global funding sources. During 1996, the company
issued debt in a variety of geographies to a diverse set of investors.
Significant funding was issued in the United States, Japan and Europe.
Funding was obtained across the range of debt maturities from short-term
commercial paper to long-term debt. In December 1996, the company issued $
850 million of debt which matures in 100 years. More information about
company debt is provided in note F, "Debt," on pages 64 and 65.
In December 1993, the company entered into a $ 10 billion committed global
credit facility to enhance the liquidity of funds. This facility was amended
in March 1996, and extended to March 2001. As of December 31, 1996, $ 9.4
billion was unused and available.
At year-end 1996, the company had an outstanding balance of $ 1.1 billion of
assets under management from the securitization of loans, leases and trade
receivables, compared to the year-end 1995 level of $ 1.2 billion. The
company retains access to additional funds through securitization, as
discussed in note T, "Sale and Securitization of Receivables," on page 80.
The rating agencies continued their review of the company's debt. In December
1996, Fitch Investors Service upgraded its credit ratings for the company and
its rated subsidiaries' senior long-term debt to AA- from A+. Fitch also
upgraded the company's preferred stock to A+ from A. They continue to rate
commercial paper at F-1+.
In January 1997, Standard and Poor's revised its outlook on the company and
its rated subsidiaries to positive from stable and affirmed its ratings of
senior debt at A, commercial paper at A-1, and preferred stock at A-.
Moody's Investors Service rates the senior long-term debt of the company and
its rated subsidiaries as A1, the commercial paper as Prime-1, and the
company's preferred stock as "a1."
Duff & Phelps rates the company and its rated subsidiaries' senior long-term
debt as A+, commercial paper as Duff 1, and the company's preferred stock as A.
51.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Cash Flows
The company's cash flows from operating, investing and financing activities
as prescribed by generally accepted accounting principles and reflected in
the Consolidated Statement of Cash Flows on page 58, are summarized in the
following table:
(Dollars in millions) 1996 1995 1994
Net cash provided from (used in):
Operating activities $ 10,275 $ 10,708 $ 11,793
Investing activities (5,723) (5,052) (3,426)
Financing activities (3,952) (6,384) (6,412)
Effect of exchange rate changes
on cash and cash equivalents (172) 65 106
-------- -------- --------
Net change in cash and cash equivalents $ 428 $ (663) $ 2,061
-------- -------- --------
-------- -------- --------
Working Capital
At December 31:
(Dollars in millions) 1996 1995
Current assets $ 40,695 $ 40,691
Current liabilities 34,000 31,648
-------- --------
Working capital $ 6,695 $ 9,043
-------- --------
-------- --------
Current ratio 1.20:1 1.29:1
-------- --------
-------- --------
The company continued to maintain a strong current ratio of 1.20 to 1.
Current assets remained essentially flat due to aggressive inventory and
accounts receivable management. The company's overall inventories declined $
.5 billion driven primarily by inventory management process improvements,
particularly in personal computers. While trade accounts receivable was
essentially unchanged from December 31, 1995, collections improved, resulting
in a nearly $ 1 billion reduction, which offset record fourth-quarter revenue.
Current liabilities were higher primarily due to increases in short-term debt
associated with customer financing. Short-term borrowings were used to take
advantage of generally more favorable interest rates.
Investments
The company's investments for plant, rental machines and other property were
$ 5.9 billion for 1996, an increase of $ 1.1 billion from 1995. The increase
reflects continued investment in the company's rapidly growing services
business, particularly management of customers' information technology, as
well as storage products and the advanced technology area of microelectronics.
In addition to software development expenses included in research,
development and engineering, the company capitalized $ .3 billion of software
costs during 1996 versus $ .8 billion capitalized in 1995. Amortization of
capitalized software costs amounted to $ 1.4 billion for 1996, a decrease of
$ .3 billion from 1995.
Investments and sundry assets were $ 21.6 billion at the end of 1996, an
increase of $ 1.0 billion from 1995, primarily the result of increases in
prepaid pension assets, the company's investment in business alliances and
goodwill associated with strategic acquisitions, primarily Tivoli. See note
E, "Investments and Sundry Assets," on page 64 for additional information.
52.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Debt and Equity
(Dollars in millions) 1996 1995
"Core" debt $ 2,202 $ 1,907
Customer financing debt 20,627 19,722
-------- --------
Total debt $ 22,829 $ 21,629
-------- --------
-------- --------
Stockholders' equity $ 21,628 $ 22,423
-------- --------
-------- --------
Debt/capitalization 51.4% 49.1%
"Core" debt/capitalization 10.7% 8.5%
Customer financing debt/equity 6.3:1 6.3:1
Total debt increased $ 1.2 billion from year-end 1995, driven by an increase
of $ .9 billion in debt to support the growth in customer financing assets
and $ .3 billion in "core" debt. The company's "core" debt to capitalization
ratio is at a conservative 10.7 percent and the customer financing debt to
equity has been maintained at 6.3 to 1.
Stockholders' equity declined 3.5 percent to $ 21.6 billion from December 31,
1995. The company's strong net earnings were reduced by the company's
significant common share repurchases, dividend payments and the stronger
dollar effect on the company's foreign net assets. See page 59, "Consolidated
Statement of Stockholders' Equity," for additional information.
Currency Rate Fluctuations
Since approximately 84 percent of the company's non-U.S. revenue was derived
from affiliates operating in local currency environments, the company's
results are affected by changes in the relative values of non-U.S. currencies
to the U.S. dollar. Worldwide currencies weakened versus the U.S. dollar in
1996, which resulted in assets and liabilities denominated in local
currencies being translated into fewer dollars. The currency rate changes
also resulted in an unfavorable impact on revenue of approximately 3 percent
in 1996, compared to a favorable impact in 1995 and 1994 of 4 percent and 2
percent, respectively.
In high-inflation environments, primarily parts of Latin America, translation
adjustments are reflected in period income, as required by SFAS 52, "Foreign
Currency Translation." Generally, the company minimizes currency risk in
these countries by linking prices and contracts to U.S. dollars, by financing
operations locally and through foreign currency hedge contracts.
The company uses a variety of financial hedging instruments to minimize
currency risks related to customer financing transactions and the
repatriation of dividends and royalties. Further discussion on currency and
hedging appears in note U, "Financial Instruments," on pages 80 through 82.
53.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Financing Risks
Customer financing is an integral part of the company's total worldwide
offerings. Financial results of customer financing can be found in note M,
"Customer Financing," on pages 70 through 72. Inherent in customer financing
are certain risks: credit, interest rate, currency and residual value. The
company manages credit risk through comprehensive credit evaluations and
pricing practices. To manage the risks associated with an uncertain interest
rate environment, the company pursues a funding strategy of substantially
matching the terms of its debt with the terms of its assets. Currency risks
are managed by denominating liabilities in the same currency as the assets.
Residual value risk is managed by developing projections of future equipment
values at lease inception, reevaluating these projections periodically, and
effectively deploying remarketing capabilities to recover residual values and
potentially earn a profit. In 1996 and 1995, the remarketing effort generated
profits. The following table depicts an approximation of the unguaranteed
residual value maturities for the company's sales-type leases, as well as a
projection of net book value of operating leases at the end of the lease
terms as of December 31, 1994, 1995 and 1996. The following table excludes
approximately $ 50 million of estimated residual value associated with
non-information technology equipment.
Total Run Out of 1996 Residual Value Balance
------------------------- --------------------------------------
(Dollars in millions) 1994 1995 1996 1997 1998 1999 2000 and
beyond
Sales-type leases $ 535 $ 470 $ 471 $ 130 $ 155 $ 160 $ 26
Operating leases 140 295 480 160 165 140 15
----- ----- ----- ----- ----- ----- ----
Total residual value $ 675 $ 765 $ 951 $ 290 $ 320 $ 300 $ 41
----- ----- ----- ----- ----- ----- ----
----- ----- ----- ----- ----- ----- ----
Acquisitions and Divestitures
On March 1, 1996, the company acquired all outstanding shares of Tivoli for
approximately $ 800 million ($ 716 million in net cash). On July 5, 1995, the
company acquired all outstanding shares of Lotus for approximately $ 3.2
billion ($ 2.9 billion in net cash). The company engaged a nationally
recognized, independent appraisal firm to express an opinion on the fair
market value of the assets of each of the acquisitions to serve as a basis
for allocation of the purchase price to the various classes of assets. The
company allocated the total purchase prices as follows:
1996 1995
(Dollars in millions) Tivoli Lotus
Tangible and intangible net assets $ 140 $ 1,157
Purchased in-process research and development 417 1,840
Goodwill 280 540
Deferred tax liabilities related to identifiable intangible assets (37) (291)
----- -------
Total $ 800 $ 3,246
----- -------
----- -------
Purchased in-process research and development represented the value of
software products still in the development stage and not considered to have
reached technological feasibility.
54.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
In addition, the acquisition of Object Technology International, Inc.,
resulted in a valuation of purchased in-process research and development
amounting to $ 18 million, bringing the total amount of purchased in-process
research and development in 1996 to $ 435 million. In accordance with
applicable accounting rules, the $ 435 million was expensed upon acquisition
in the first quarter of 1996 and the $ 1,840 million was expensed upon
acquisition in the third quarter of 1995.
The sale of FSC to Loral Corporation for $ 1.503 billion in cash had a
closing date of March 1, 1994, and was effective January 1, 1994. This
transaction resulted in an after-tax net gain of $ 248 million ($ .43 per
common share) in the company's first-quarter 1994 results. In the fourth
quarter of 1995, the company recorded a before-tax gain of $ 175 million due
to the conclusion of contractual obligations between the company and Loral
Corporation.
Employees
Percentage Changes
1996 1995 1994 1996-95 1995-94
IBM/wholly owned subsidiaries 240,615 225,347 219,839 6.8 2.5
Less than wholly owned subsidiaries 28,033 26,868 23,200 4.3 15.8
Complementary 37,000 38,000 35,000 (2.6) 8.6
As of December 31, 1996, employees of IBM and its wholly owned subsidiaries
increased 15,268 from 1995 mainly due to hiring in high-growth areas of the
business - services, personal computers and Lotus, as well as expansion in
emerging geographic markets and acquisition of business entities such as
Tivoli.
The moderate growth in less than wholly owned subsidiaries was due primarily
to investments in the company's growing worldwide services business, as well
as in emerging geographic markets such as China.
The company's complementary work force comprises equivalent full-time
employees hired under temporary, part-time and limited-term employment
arrangements to meet specific business needs in a flexible and cost-effective
manner.
55.
CONSOLIDATED STATEMENT OF EARNINGS
International Business Machines Corporation and Subsidiary Companies
(Dollars in millions except per share amounts)
For the year ended December 31: Notes 1996 1995* 1994
Revenue:
Hardware sales $ 36,316 $ 35,600 $ 32,344
Services 15,873 12,714 9,715
Software 13,052 12,657 11,346
Maintenance 6,981 7,409 7,222
Rentals and financing M 3,725 3,560 3,425
- ---------------------------------------------------------------------------------------
Total revenue 75,947 71,940 64,052
- ---------------------------------------------------------------------------------------
Cost:
Hardware sales 23,396 21,862 21,300
Services 12,647 10,042 7,769
Software 4,082 4,428 4,680
Maintenance 3,659 3,651 3,635
Rentals and financing 1,624 1,590 1,384
- ---------------------------------------------------------------------------------------
Total cost 45,408 41,573 38,768
- ---------------------------------------------------------------------------------------
Gross profit 30,539 30,367 25,284
- ---------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative H 16,854 16,766 15,916
Research, development and engineering I 4,654 4,170 4,363
Purchased in-process research and development I 435 1,840 -
- ---------------------------------------------------------------------------------------
Total operating expenses 21,943 22,776 20,279
- ---------------------------------------------------------------------------------------
Operating income 8,596 7,591 5,005
Other income, principally interest 707 947 1,377
Interest expense J 716 725 1,227
- ---------------------------------------------------------------------------------------
Earnings before income taxes 8,587 7,813 5,155
Provision for income taxes G 3,158 3,635 2,134
- ---------------------------------------------------------------------------------------
Net earnings 5,429 4,178 3,021
Preferred stock dividends and transaction costs 20 62 84
- ---------------------------------------------------------------------------------------
Net earnings applicable
to common shareholders $ 5,409 $ 4,116 $ 2,937
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Net earnings per share of common stock $ 10.24 $ 7.23 $ 5.02
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Average number of common shares outstanding:
1996 - 528,352,094; 1995 - 569,384,029; 1994 - 584,958,699
*Reclassified to conform to 1996 presentation.
The notes on pages 60 through 85 are an integral part of this statement.
56.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
International Business Machines Corporation and Subsidiary Companies
(Dollars in millions)
At December 31: Notes 1996 1995
Assets
Current assets:
Cash and cash equivalents $ 7,687 $ 7,259
Marketable securities U 450 442
Notes and accounts receivable - trade, net of allowances 16,515 16,450
Sales-type leases receivable 5,721 5,961
Other accounts receivable 931 991
Inventories C 5,870 6,323
Prepaid expenses and other current assets 3,521 3,265
- ------------------------------------------------------------------------------------------------
Total current assets 40,695 40,691
- ------------------------------------------------------------------------------------------------
Plant, rental machines and other property D 41,893 43,981
Less: Accumulated depreciation 24,486 27,402
- ------------------------------------------------------------------------------------------------
Plant, rental machines and other property - net 17,407 16,579
- ------------------------------------------------------------------------------------------------
Software, less accumulated amortization
(1996, $ 12,199; 1995, $ 11,276) 1,435 2,419
Investments and sundry assets E 21,595 20,603
- ------------------------------------------------------------------------------------------------
Total assets $ 81,132 $ 80,292
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Taxes $ 3,029 $ 2,634
Short-term debt F 12,957 11,569
Accounts payable 4,767 4,511
Compensation and benefits 2,950 2,914
Deferred income 3,640 3,469
Other accrued expenses and liabilities 6,657 6,551
- ------------------------------------------------------------------------------------------------
Total current liabilities 34,000 31,648
- ------------------------------------------------------------------------------------------------
Long-term debt F 9,872 10,060
Other liabilities K 14,005 14,354
Deferred income taxes G 1,627 1,807
- ------------------------------------------------------------------------------------------------
Total liabilities 59,504 57,869
- ------------------------------------------------------------------------------------------------
Contingencies L
Stockholders' equity:
Preferred stock, par value $.01 per share -
shares authorized: 150,000,000
shares issued: 1996 - 2,610,711; 1995 - 2,610,711 P 253 253
Common stock, par value $1.25 per share -
shares authorized: 750,000,000
shares issued: 1996 - 509,070,542; 1995 - 548,199,013 P&V 7,752 7,488
Retained earnings 11,189 11,630
Translation adjustments 2,401 3,036
Treasury stock, at cost (shares: 1996 - 1,089,533; 1995 - 424,583) (135) (41)
Net unrealized gain on marketable securities 168 57
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 21,628 22,423
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 81,132 $ 80,292
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
The notes on pages 60 through 85 are an integral part of this statement.
57.
CONSOLIDATED STATEMENT OF CASH FLOWS
International Business Machines Corporation and Subsidiary Companies
(Dollars in millions)
For the year ended December 31: 1996 1995 1994
Cash flow from operating activities:
Net earnings $ 5,429 $ 4,178 $ 3,021
Adjustments to reconcile net earnings to cash
provided from operating activities:
Depreciation 3,676 3,955 4,197
Amortization of software 1,336 1,647 2,098
Effect of restructuring charges (1,491) (2,119) (2,772)
Purchased in-process research and development 435 1,840 -
Deferred income taxes 11 1,392 825
Gain on disposition of fixed and other assets (300) (339) (11)
Other changes that (used) provided cash:
Receivables (650) (530) 653
Inventories 196 107 1,518
Other assets (980) (1,100) 187
Accounts payable 319 659 305
Other liabilities 2,294 1,018 1,772
- -------------------------------------------------------------------------------------------
Net cash provided from operating activities 10,275 10,708 11,793
- -------------------------------------------------------------------------------------------
Cash flow from investing activities:
Payments for plant, rental machines and other property (5,883) (4,744) (3,078)
Proceeds from disposition of plant, rental machines
and other property 1,314 1,561 900
Acquisition of Lotus Development Corporation - net - (2,880) -
Acquisition of Tivoli Systems, Inc. - net (716) - -
Investment in software (295) (823) (1,361)
Purchases of marketable securities and other investments (1,613) (1,315) (3,866)
Proceeds from marketable securities and other investments 1,470 3,149 2,476
Proceeds from the sale of Federal Systems Company - - 1,503
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (5,723) (5,052) (3,426)
- -------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from new debt 7,670 6,636 5,335
Short-term borrowings less than 90 days - net (919) 2,557 (1,948)
Payments to settle debt (4,992) (9,460) (9,445)
Preferred stock transactions - net - (870) (10)
Common stock transactions - net (5,005) (4,656) 318
Cash dividends paid (706) (591) (662)
- -------------------------------------------------------------------------------------------
Net cash used in financing activities (3,952) (6,384) (6,412)
- -------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (172) 65 106
- -------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 428 (663) 2,061
Cash and cash equivalents at January 1 7,259 7,922 5,861
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 7,687 $ 7,259 $ 7,922
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Supplemental data:
Cash paid during the year for:
Income taxes $ 2,229 $ 1,453 $ 649
Interest $ 1,563 $ 1,720 $ 2,132
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
The notes on pages 60 through 85 are an integral part of this statement.
58.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
International Business Machines Corporation and Subsidiary Companies
Net
(Dollars in millions) Unrealized
Gain on
Preferred Common Retained Translation Treasury Marketable
Stock Stock Earnings Adjustments Stock Securities Total
1994
Stockholders' equity, January 1, 1994 $ 1,091 $ 6,980 $ 10,009 $ 1,658 $ - $ - $ 19,738
Net earnings 3,021 3,021
Cash dividends declared - common stock (585) (585)
Cash dividends declared - preferred stock (84) (84)
Preferred stock purchased and retired
(105,000 shares) (10) (10)
Common stock issued under employee
plans (6,120,255 shares) 318 318
Common stock issued to U.S. pension
plan fund (671,030 shares) 39 39
Purchases (1,401,740 shares) and sales
(934,919 shares) of treasury stock
under employee plans - net (9) (34) (43)
Tax reductions - employee plans 5 5
Other 1,014 1,014
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1994 1,081 7,342 12,352 2,672 (34) - 23,413
1995
Net earnings 4,178 4,178
Cash dividends declared - common stock (572) (572)
Cash dividends declared - preferred stock (20) (20)
Common stock purchased and retired
(50,906,300 shares) (655) (4,209) (4,864)
Preferred stock purchased and retired
(8,534,289 shares) (828) (42) (870)
Common stock issued under employee
plans (4,271,948 shares) 279 279
Purchases (4,662,047 shares) and sales
(4,706,964 shares) of treasury stock
under employee plans - net (57) (7) (64)
Conversion of debentures (6,653,121 shares) 471 471
Tax reductions - employee plans 51 51
Other 364 57 421
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1995 253 7,488 11,630 3,036 (41) 57 22,423
1996
Net earnings 5,429 5,429
Cash dividends declared - common stock (686) (686)
Cash dividends declared - preferred stock (20) (20)
Common stock purchased and retired
(48,975,700 shares) (710) (5,046) (5,756)
Common stock issued under employee
plans (9,847,229 shares) 811 (13) 798
Purchases (4,457,166 shares) and sales
(3,792,216 shares) of treasury stock
under employee plans - net (105) (94) (199)
Tax reductions - employee plans 163 163
Other (635) 111 (524)
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1996 $ 253 $ 7,752 $ 11,189 $ 2,401 $ (135) $ 168 $ 21,628
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
The notes on pages 60 through 85 are an integral part of this statement.
59.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
A Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of International
Business Machines Corporation and its majority owned subsidiary companies.
Investments in business entities in which IBM does not have control, but has
the ability to exercise significant influence over operating and financial
policies (generally 20-50 percent ownership), are accounted for by the equity
method. Other investments are accounted for by the cost method.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions the company may undertake in the
future, actual results ultimately may differ from the estimates.
Revenue
Revenue from hardware sales or sales-type leases is recognized when the
product is shipped. Revenue from one-time-charge licensed software is
recognized when the program is shipped with an appropriate deferral for
post-contract customer support. This deferral is earned over the support
period. Revenue from monthly software licenses is recognized as license fees
accrue; from maintenance and services over the contractual period or as the
services are performed; from rentals and operating leases, monthly as the
fees accrue; and from financing at level rates of return over the term of the
lease or receivable. Revenue is reduced for estimated customer returns and
allowances.
Income Taxes
Income tax expense is based on reported earnings before income taxes.
Deferred income taxes reflect the impact of temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. In accordance with SFAS 109, "Accounting
for Income Taxes," these deferred taxes are measured by applying currently
enacted tax laws.
Translation of Non-U.S. Currency Amounts
Assets and liabilities of non-U.S. subsidiaries that operate in a local
currency environment are translated to U.S. dollars at year-end exchange
rates. Income and expense items are translated at average rates of exchange
prevailing during the year. Translation adjustments are accumulated in a
separate component of stockholders' equity. Inventories and plant, rental
machines and other non-monetary assets and liabilities of non-U.S.
subsidiaries and branches that operate in U.S. dollars, or whose economic
environment is highly inflationary, are translated at approximate exchange
rates prevailing when acquired. All other assets and liabilities are
translated at year-end exchange rates. Inventories charged to cost of sales
and depreciation are translated at historical exchange rates. All other
income and expense items are translated at average rates of exchange
prevailing during the year. Gains and losses that result from translation are
included in earnings.
60.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Financial Instruments
In the normal course of business, the company enters into a variety of
derivative financial instruments solely for the purpose of currency exchange
rate and interest rate risk management. Refer to note U, "Financial
Instruments," on pages 80 though 82 for descriptions of these financial
instruments, including the methods used to account for them.
In assessing the fair value of its financial instruments, both derivative and
non-derivative, the company uses a variety of methods and assumptions, which
are based on market conditions and risks existing at each balance sheet date.
Quoted market prices or dealer quotes for the same or similar instrument were
used for the majority of marketable securities, long-term investments and
long-term debt. Other techniques, such as option pricing models, estimated
discounted value of future cash flows, replacement cost and termination cost,
have been used to determine fair value for the remaining financial
instruments. These values represent a general approximation of possible value
and may never actually be realized.
Cash Equivalents
All highly liquid investments with a maturity of three months or less at date
of purchase are carried at fair value and considered to be cash equivalents.
Inventories
Raw materials, work in process and finished goods are stated at the lower of
average cost or market.
Depreciation
Plant, rental machines and other property are carried at cost, and
depreciated over their estimated useful lives using the straight-line method.
Software
Costs related to the conceptual formulation and design of licensed programs
are expensed as research and development. Costs incurred subsequent to
establishment of technological feasibility to produce the finished product
are capitalized. The annual amortization of the capitalized amounts is the
greater of the amount computed based on the estimated revenue distribution
over the products' revenue-producing lives, or the straight-line method, and
is applied over periods ranging up to four years. Periodic reviews are
performed to ensure that unamortized program costs remain recoverable from
future revenue. Costs to support or service licensed programs are charged
against income as incurred, or when related revenue is recognized, whichever
occurs first.
Retirement Plans and Nonpension Postretirement Benefits
Current service costs of retirement plans and postretirement healthcare and
life insurance benefits are accrued in the period. Prior service costs
resulting from amendments to the plans are amortized over the average
remaining service period of employees expected to receive benefits.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Goodwill
Goodwill is charged to earnings on a straight-line basis over the periods
estimated to be benefited, currently not exceeding five years.
Common Stock
Common stock refers to the $ 1.25 par value capital stock as designated in
the company's Certificate of Incorporation. Net earnings per common share
amount is computed by dividing earnings after deduction of preferred stock
dividends and transaction costs by the average number of common shares
outstanding in the period.
B Accounting Changes
The company implemented new accounting standards in 1996, 1995 and 1994. None
of these standards had a material effect on the financial position or results
of operations of the company.
In 1996, the company adopted the American Institute of Certified Public
Accountants Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities." This SOP provides authoritative guidance on the recognition,
measurement, display and disclosure of environmental remediation liabilities.
In 1996, the company implemented the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." See note O, "Stock-Based
Compensation Plans," on pages 73 through 75 for further information.
In June 1996, the Financial Accounting Standards Board issued SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This standard provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. While the standard requires implementation in
1997, the company is already generally in compliance.
Effective January 1, 1995, the company implemented SFAS 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." These
standards prescribe impairment measurements and reporting related to certain
loans.
The company implemented SFAS 116, "Accounting for Contributions Received and
Contributions Made," effective January 1, 1995. This standard requires that
the fair value of contributions, including unconditional promises to give, be
recognized as expense in the period made.
In 1995, the company implemented SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard
prescribes the method for asset impairment evaluation for long-lived assets
and certain identifiable intangibles that are either held and used or to be
disposed of. The company was generally in conformance with this standard
prior to adoption.
62.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
In 1995, the company adopted the American Institute of Certified Public
Accountants SOP 93-7, "Reporting on Advertising Costs." This SOP provides
guidance on financial reporting of advertising costs in annual financial
statements. The company was generally in conformance with this SOP prior to
adoption. See note H, "Selling and Advertising," on page 68 for additional
disclosure on advertising expenses.
Effective January 1, 1994, the company implemented SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." This standard addresses
the accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
See note U, "Financial Instruments," on pages 80 though 82 for further
information.
C Inventories
At December 31:
(Dollars in millions) 1996 1995
Finished goods $ 1,413 $ 1,241
Work in process 4,377 4,990
Raw materials 80 92
-------- --------
Total $ 5,870 $ 6,323
-------- --------
-------- --------
D Plant, Rental Machines and Other Property
At December 31:
(Dollars in millions) 1996 1995
Land and land improvements $ 1,208 $ 1,348
Buildings 12,073 12,653
Plant, laboratory and office equipment 24,824 26,658
-------- --------
38,105 40,659
Less: Accumulated depreciation 22,935 25,604
-------- --------
15,170 15,055
Rental machines 3,788 3,322
Less: Accumulated depreciation 1,551 1,798
-------- --------
2,237 1,524
Total $ 17,407 $ 16,579
-------- --------
-------- --------
63.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
E Investments and Sundry Assets
At December 31:
(Dollars in millions) 1996 1995
Net investment in sales-type leases* $ 13,345 $ 14,007
Less: Current portion - net 5,721 5,961
-------- --------
7,624 8,046
Deferred taxes 3,246 3,376
Prepaid pension cost 3,324 2,535
Non-current customer loan receivables 2,622 2,390
Installment payment receivables 830 844
Investments in business alliances 884 509
Goodwill, less accumulated amortization
(1996, $ 1,300; 1995, $ 913) 1,067 870
Other investments and sundry assets 1,998 2,033
-------- --------
Total $ 21,595 $ 20,603
-------- --------
-------- --------
*These leases relate principally to IBM equipment and are generally for terms
ranging from three to five years. Net investment in sales-type leases
includes unguaranteed residual values of approximately $471 million and $470
million at December 31, 1996 and 1995, respectively, and is reflected net of
unearned income at these dates of approximately $2,000 million and $2,100
million, respectively. Scheduled maturities of minimum lease payments
outstanding at December 31, 1996, expressed as a percentage of the total, are
approximately as follows: 1997, 47 percent; 1998, 30 percent; 1999, 16
percent; 2000, 5 percent; and 2001 and beyond, 2 percent.
F Debt
Short-term debt
At December 31:
(Dollars in millions) 1996 1995
Commercial paper $ 6,069 $ 4,933
Short-term loans 3,966 3,755
Long-term debt: Current maturities 2,922 2,881
-------- --------
Total $ 12,957 $ 11,569
-------- --------
-------- --------
The weighted-average interest rates for commercial paper at December 31, 1996
and 1995, were approximately 5.6 percent and 5.7 percent, respectively.
The weighted-average interest rates for short-term loans at December 31, 1996
and 1995, were approximately 5.7 percent and 6.6 percent, respectively.
64.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Long-term debt
At December 31:
(Dollars in millions) Maturities 1996 1995
U.S. Dollars:
Debentures:
7% 2025 $ 600 $ 600
7% 2045 150 150
7-1/8% 2096 850 -
7-1/2% 2013 550 550
8-3/8% 2019 750 750
Notes:
5-1/2% to 7-1/2% 1997-2002 3,025 3,025
7-1/2% to 9-1/2% 1997-2000 174 186
Medium-term note program: 6.0% average 1997-2009 1,851 1,730
Other U.S. dollars: 5.9% to 8.9% 1997-2012 330 416
-------- -------
8,280 7,407
Other currencies (average interest rate
at December 31, 1996, in parentheses):
Japanese yen (2.8%) 1997-2014 4,028 4,149
Swiss francs 1996 - 43
Canadian dollars (11.0%) 1997-1999 5 431
French francs (10.1%) 1997-2002 282 358
Australian dollars (6.7%) 1997-1998 44 320
Other (11.6%) 1996-2017 188 256
-------- -------
12,827 12,964
Less: Net unamortized discount 33 23
-------- -------
12,794 12,941
Less: Current maturities 2,922 2,881
-------- -------
Total $ 9,872 $10,060
-------- -------
-------- -------
Annual maturities in millions of dollars on long-term debt outstanding at
December 31, 1996, are as follows: 1997, $2,922; 1998, $1,462; 1999, $1,469;
2000, $2,478; 2001, $386; 2002 and beyond, $4,110.
65.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
G Taxes
(Dollars in millions) 1996 1995 1994
For the year ended December 31:
Earnings before income taxes:
U.S. operations $ 3,025 $ 2,149 $ 1,574
Non-U.S. operations 5,562 5,664 3,581
-------- -------- --------
$ 8,587 $ 7,813 $ 5,155
-------- -------- --------
-------- -------- --------
The provision for income taxes by geographic
operations is as follows:
U.S. operations $ 1,137 $ 1,538 $ 654
Non-U.S. operations 2,021 2,097 1,480
-------- -------- --------
Total provision for income taxes $ 3,158 $ 3,635 $ 2,134
-------- -------- --------
-------- -------- --------
The components of the provision for income
taxes by taxing jurisdiction are as follows:
U.S. federal:
Current $ 727 $ 85 $ 49
Deferred 83 1,075 74
-------- -------- --------
810 1,160 123
U.S. state and local:
Current 158 65 68
Deferred (353) - -
-------- -------- --------
(195) 65 68
Non-U.S.:
Current 2,262 2,093 1,192
Deferred 281 317 751
-------- -------- --------
2,543 2,410 1,943
-------- -------- --------
Total provision for income taxes 3,158 3,635 2,134
Social security, real estate, personal property
and other taxes 2,584 2,566 2,465
-------- -------- --------
Total taxes $ 5,742 $ 6,201 $ 4,599
-------- -------- --------
-------- -------- --------
The effect of tax law changes on deferred tax assets and liabilities did not
have a significant impact on the company's effective tax rate.
66.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
The significant components of activities that gave rise to deferred tax
assets and liabilities included on the balance sheet were as follows:
Deferred Tax Assets
At December 31:
(Dollars in millions) 1996 1995*
Employee benefits $ 3,554 $ 3,374
Capitalized research and development 1,478 1,772
Restructuring charges 1,323 2,003
Asset impairments 1,304 1,424
Alternative minimum tax credits 1,016 859
Deferred income 993 306
General business credits 452 452
Foreign tax loss carryforwards 368 303
Equity alliances 340 407
Intracompany sales and services 194 325
State and local tax loss carryforwards 166 236
Depreciation 123 172
Foreign tax credits - 1,183
Other 2,411 2,463
-------- --------
Gross deferred tax assets 13,722 15,279
Less: Valuation allowance 2,239 3,868
-------- --------
Net deferred tax assets $ 11,483 $ 11,411
-------- --------
-------- --------
Deferred Tax Liabilities
Sales-type leases $ 3,126 $ 2,898
Retirement benefits 1,967 1,919
Depreciation 1,702 1,787
Software costs deferred 648 967
Other 1,465 1,320
-------- --------
Gross deferred tax liabilities $ 8,908 $ 8,891
-------- --------
-------- --------
*Reclassified to conform to 1996 presentation.
The estimated reversal periods for the largest deductible temporary
differences are: Employee benefits - 1 to 30 years; Capitalized research and
development - 1 to 7 years; Restructuring - 1 to 5 years.
The valuation allowance applies to U.S. federal tax credits, state and local
net deferred tax assets and net operating loss carryforwards, and net
operating losses in certain foreign jurisdictions that may expire before the
company can utilize them. The net change in the total valuation allowance for
the year ended December 31, 1996, was principally due to the use of available
foreign tax credits in conjunction with the repatriation of dividends from
foreign subsidiaries and any resulting benefit in the current year was
substantially reduced by the additional tax cost associated with the dividend
repatriation. It is reasonably possible that the deferred tax asset valuation
allowance could continue to decrease in the near term, depending on the
company's ability to generate sufficient taxable income in multiple tax
jurisdictions.
67.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
The consolidated effective income tax rate was 37 percent in 1996, 47 percent
in 1995 and 41 percent in 1994.
A reconciliation of the company's effective tax rate to the statutory U.S.
federal tax rate is as follows:
For the year ended December 31: 1996 1995 1994
Statutory rate 35% 35% 35%
Foreign tax differential 2 2 5
State and local 1 1 1
U.S. valuation allowance (6) (2) -
Other 3 2 -
---- ---- ----
Effective rate before purchased in-process
research and development 35% 38% 41%
Purchased in-process research and development 2 9 -
---- ---- ----
Effective rate 37% 47% 41%
For tax return purposes, the company has available tax credit carryforwards
of approximately $ 1,673 million, of which $ 1,016 million have an indefinite
carryforward period, $ 184 million expire in 1999 and the remainder
thereafter. The company also has state and local and foreign tax loss
carryforwards, the tax effect of which is $ 534 million. Most of these
carryforwards have an indefinite carryforward period.
Undistributed earnings of non-U.S. subsidiaries included in consolidated
retained earnings amounted to $ 12,111 million at December 31, 1996, $ 12,565
million at December 31, 1995 and $ 11,280 million at December 31, 1994. These
earnings, which reflect full provision for non-U.S. income taxes, are
indefinitely reinvested in non-U.S. operations or will be remitted
substantially free of additional tax.
H Selling and Advertising
Selling and advertising expenses are charged against income as incurred.
Advertising and promotional expense included in SG&A expense amounted to $
1,569 million, $ 1,315 million and $ 977 million in 1996, 1995 and 1994,
respectively.
I Research, Development and Engineering
Research, development and engineering expenses amounted to $ 4,654 million in
1996, $ 4,170 million in 1995 and $ 4,363 million in 1994. Expenditures for
product-related engineering included in these amounts were $ 720 million, $
783 million and $ 981 million in 1996, 1995 and 1994, respectively.
Expenditures of $ 3,934 million in 1996, $ 3,387 million in 1995 and $ 3,382
million in 1994 were made for research and development activities covering
basic scientific research and the application of scientific advances to the
development of new and improved products and their uses. Of these amounts,
software-related activities were $ 1,726 million, $ 1,157 million and $ 793
million in 1996, 1995 and 1994, respectively.
Purchased in-process research and development was $ 435 million and $ 1,840
million, for 1996 and 1995, respectively.
68.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
J Interest on Debt
Interest paid and accrued on borrowings of the company and its subsidiaries
amounted to $ 1,565 million in 1996, $ 1,600 million in 1995 and $ 2,006
million in 1994. Of these amounts, $ 31 million in 1996, $ 23 million in 1995
and $ 20 million in 1994 were capitalized. The remainder was charged to cost
of rentals and financing, and interest expense. The year-to-year decrease in
interest expense was primarily a result of lower average interest rates which
were 7.0 percent, 7.2 percent and 8.0 percent in 1996, 1995 and 1994,
respectively.
K Other Liabilities and Environmental
Other liabilities consists principally of accruals for nonpension
postretirement benefits for U.S. employees and indemnity and retirement plan
reserves for non-U.S. employees. More detailed discussion of these
liabilities appears in note R, "Nonpension Postretirement Benefits," on pages
78 and 79, and note Q, "Retirement Plans," on pages 76 through 78. In
addition, accruals associated with prior year infrastructure reduction
actions amounted to $ 2.8 billion at December 31, 1996.
In addition, the company continues to participate in environmental
assessments and cleanups at a number of locations, including operating
facilities, previously owned facilities and Superfund sites. The company
accrues for all known environmental liabilities for remediation cost when a
cleanup program becomes probable and costs can be reasonably estimated.
Estimated environmental costs associated with post-closure activities, such
as the removal and restoration of chemical storage facilities and monitoring,
are accrued when the decision is made to close a facility. The amounts
accrued, which do not reflect any insurance recoveries, were $ 244 million
and $ 223 million at December 31, 1996 and 1995, respectively.
The amounts accrued do not cover sites that are in the preliminary stages of
investigation where neither the company's percentage of responsibility nor
the extent of cleanup required has been identified. Also excluded is the cost
of internal environmental protection programs that are primarily preventive
in nature. Estimated environmental costs are not expected to materially
impact the financial position or results of the company's operations in
future periods. However, environmental cleanup periods are protracted in
length, and environmental costs in future periods are subject to changes in
environmental remediation regulations.
L Contingencies
On February 25, 1993, a consolidated and amended class action complaint was
filed against the company in the United States District Court for the
Southern District of New York alleging violations of Section 12 of the
Securities Act of 1933 and Section 10 of the Securities Exchange Act of 1934.
The complaint alleges, among other matters, that the company disseminated
false and misleading statements concerning its financial condition and
dividends during certain periods of 1992, as a result of which plaintiffs
were injured in connection with their purchases of IBM stock during the
period of September 30, 1992, through December 14, 1992. The plaintiffs seek
money damages. On February 3, 1997, Judge Jed S. Rakoff issued an order
granting the company's motion for summary judgment in this case in its
entirety. The company does not believe that the ultimate outcome of this
matter will have a material effect on its results of operations or its
financial position.
69.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
M Customer Financing
The primary focus of IBM's worldwide customer financing offerings is to support
customers in their acquisitions of the company's products and services. This
support is provided both by IBM and through its financing subsidiaries, the
results of which are presented in this note in a consistent manner.
The following schedules reflect the financial position, net earnings and cash
flows for customer financing in comparison to the company's consolidated
results with customer financing results reflected on an equity basis. This
involves presenting within a single line item the investment and related
return from customer financing as reflected in the company's consolidated
financial statements. For the statement of financial position, customer
financing's assets net of related liabilities, and after elimination of applic
able intracompany transactions, are shown separately as a single line item,
Investment in customer financing. Eliminations primarily pertain to internal
mark-ups to fair value on equipment held on operating leases. With respect to
the statement of earnings, net earnings for customer financing before
applicable taxes and after elimination of related intracompany transactions,
are included in the line description, Other income. The provision for income
taxes for customer financing is based on the statutory income tax rate of
each country, calculated on a separate return basis. For the statement of
cash flows, certain cash flow activities are reclassified to be consistent
with the classification of such activities reflected in the company's
Consolidated Statement of Cash Flows. Such reclassifications primarily
pertain to cash flow activity related to financing receivables.
Because customer financing is different in nature from the company's
manufacturing, development and services businesses, management believes that
the aforementioned type of comparative disclosure enhances the understanding
and analysis of the consolidated financial statements.
70.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Statement of Financial Position
IBM with
At December 31: Customer Financing
Customer Financing on an Equity Basis
(Dollars in millions) 1996 1995* 1996 1995*
Assets:
Cash and cash equivalents $ 1,433 $ 808 $ 6,254 $ 6,451
Notes and accounts receivable - - 10,063 10,981
Net investment in capital leases 13,430 14,096 - -
Working capital financing receivables 4,030 3,886 - -
Loans receivable 6,428 5,481 - -
Inventories 98 87 5,788 6,252
Plant, rental machines and other
property, net of accum. depreciation 3,988 2,924 15,229 15,101
Other assets 2,386 1,564 15,010 14,501
Investment in customer financing - - 5,613 4,768
-------- ------- -------- --------
Total assets $ 31,793 $28,846 $ 57,957 $ 58,054
-------- ------- -------- --------
-------- ------- -------- --------
Liabilities and stockholders' equity:
Taxes, accrued expenses and
other liabilities $ 7,915 $ 5,992 $ 34,127 $ 33,724
Debt 20,627 19,722 2,202 1,907
-------- ------- -------- --------
Total liabilities 28,542 25,714 36,329 35,631
Stockholders' equity/invested capital 3,251 3,132 21,628 22,423
-------- ------- -------- --------
Total liabilities and
stockholders' equity $ 31,793 $28,846 $ 57,957 $ 58,054
-------- ------- -------- --------
-------- ------- -------- --------
*Reclassified to conform to 1996 presentation.
Statement of Earnings
IBM with
For the year ended December 31: Customer Financing Customer Financing
on an Equity Basis
(Dollars in millions) 1996 1995 1994 1996 1995 1994
Finance and other income:
Finance income $ 2,048 $ 2,110 $ 2,026 $ - $ - $ -
Rental income, net 509 415 338 590 469 589
Sales 809 1,001 1,160 71,798 67,588 59,991
Other income 320 367 933 1,381 1,473 1,423
------- ------- ------- ------- ------- -------
Total finance and other income 3,686 3,893 4,457 73,769 69,530 62,003
Interest and other costs and
expenses 2,426 2,782 3,245 65,182 61,717 56,848
------- ------- ------- ------- ------- -------
Net earnings before
income taxes 1,260 1,111 1,212 8,587 7,813 5,155
Provision for income taxes 531 428 505 3,158 3,635 2,134
------- ------- ------- ------- ------- -------
Net earnings $ 729 $ 683 $ 707 $ 5,429 $ 4,178 $ 3,021
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
71.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Statement of Cash Flows
For the year ended December 31: IBM with
Customer Financing
Customer Financing on an Equity Basis
(Dollars in millions) 1996 1995 1994 1996 1995 1994
Net cash provided from
operating activities $ 5,314 $ 3,712 $ 2,669 $ 8,217 $ 9,250 $ 8,393
Net cash used in
investing activities (5,544) (3,968) (249) (3,435) (3,338) (2,446)
Net cash provided from (used in)
financing activities 872 (198) (3,294) (4,824) (6,186) (3,118)
Effect of exchange rate changes
on cash and cash equivalents (17) (42) 82 (155) 107 24
------- ------- ------- ------- ------- -------
Net change in cash and cash
equivalents 625 (496) (792) (197) (167) 2,853
Cash and cash equivalents at
January 1 808 1,304 2,096 6,451 6,618 3,765
------- ------- ------- ------- ------- -------
Cash and cash equivalents at
December 31 $ 1,433 $ 808 $ 1,304 $ 6,254 $ 6,451 $ 6,618
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Customer financing debt at December 31, 1996, consisted of borrowings with
external financial institutions of $ 14,127 million and intracompany
borrowings of $ 6,500 million. Intracompany borrowings are made pursuant to
loan agreements between the parties at interest rates approximating market
rates.
Customer financing earnings yielded a return on average invested capital of
22.7 percent in 1996, compared to 22.6 percent in 1995. Included within these
results are intracompany services and fees received for tax benefits provided
to the company resulting from tax deferrals generated by financing
transactions. Such fees are eliminated from the Consolidated Statement of
Earnings. The 1994 earnings included income resulting from IBM Credit
Corporation's litigation settlement with Comdisco, Inc., and from IBM Credit
Corporation's sale of IBM Credit Investment Management Corporation.
72.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
N Rental Expense and Lease Commitments
Rental expense, including amounts charged to inventories and fixed assets and
excluding amounts previously reserved, was $ 1,210 million in 1996, $ 1,145
million in 1995 and $ 1,276 million in 1994. The table below depicts gross
minimum rental commitments under non-cancelable leases, amounts related to
vacant space which the company had previously reserved and sublease income
commitments. These amounts generally reflect activities related to office
space.
Beyond
(Dollars in millions) 1997 1998 1999 2000 2001 2001
Gross rental commitments $ 1,129 $ 1,005 $ 888 $ 761 $ 580 $ 1,722
Vacant space 322 283 231 215 167 438
Sublease income commitments 119 110 96 84 66 129
O Stock-Based Compensation Plans
The company applies Accounting Principles Board (APB) Opinion 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock-based compensation plans. A description of the terms of the
company's stock-based compensation plans follows:
Long-Term Performance Plan
Incentive awards are provided to officers and other key employees under the
terms of the IBM 1994 Long-Term Performance Plan (the "Plan"), which was
approved by stockholders in April 1994. The Plan is administered by the
Executive Compensation and Management Resources Committee of the Board of
Directors. The committee determines the type and terms of the award to be
granted, including vesting provisions. Awards may include stock options,
stock appreciation rights (SARs), restricted stock, cash, stock or any
combination thereof. The number of shares that may be issued under the Plan
for awards granted wholly or partly in stock during the five-year term of the
Plan is 29.1 million, which approximated 5 percent of the outstanding common
stock as determined on February 10, 1994. Prior to April 25, 1994, awards
were issued under the IBM 1989 Long-Term Performance Plan. There were
approximately 13.0 million, 21.0 million and 27.8 million unused shares
available for granting under the 1994 Long-Term Performance Plan as of
December 31, 1996, 1995 and 1994, respectively.
Awards under the Plan resulted in compensation expense of $ 203.9 million, $
106.3 million and $ 139.1 million, that was included in net earnings before
income taxes, in 1996, 1995 and 1994, respectively. Such awards include those
that settle in cash, such as SARs, and restricted stock grants.
73.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Stock Option Grants
Stock options granted under the Plan allow the purchase of IBM's common stock
at 100 percent of the market price on the date of grant and typically expire
10 years from the date of grant. The following table summarizes option
activity of the Plan during 1996, 1995 and 1994:
1996 1995 1994
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise No. of Shares Exercise No. of Shares Exercise No. of Shares
Price under Option Price under Option Price under Option
Balance at January 1 $ 78 34,282,903 $ 68 34,063,317 $ 83 29,260,724
Options granted 126 7,679,529 77 6,468,702 54 6,863,219
Options exercised 71 (9,651,311) 51 (3,695,789) 44 (235,044)
Options terminated 121 (1,593,460) 103 (2,553,327) 91 (1,825,582)
----- ---------- ----- ---------- ----- ----------
Balance at December 31 $ 88 30,717,661 $ 78 34,282,903 $ 68 34,063,317
----- ---------- ----- ---------- ----- ----------
----- ---------- ----- ---------- ----- ----------
Exercisable at December 31 $ 83 15,301,922 $ 91 19,176,410 $ 103 16,666,537
----- ---------- ----- ---------- ----- ----------
----- ---------- ----- ---------- ----- ----------
The shares under option at December 31, 1996, were at the following exercise
prices:
Options
Options Outstanding Currently Exercisable
Wtd. Avg. Wtd. Avg. Wtd. Avg.
No. of Exercise Contractual No. of Exercise
Exercise Price Range Options Price Life (in years) Options Price
$43 - 99 18,570,322 $ 64 7 10,678,111 $ 65
$100 - 139 11,398,198 122 7 3,890,671 117
$140 & over 749,141 160 2 733,140 160
---------- ----------
30,717,661 15,301,922
---------- ----------
---------- ----------
IBM Employees Stock Purchase Plan
The IBM Employees Stock Purchase Plan (ESPP) enables substantially all
regular employees to purchase full or fractional shares of IBM common stock
through payroll deductions of up to 10 percent of eligible compensation. The
price an employee pays is 85 percent of the average market price on the last
day of an applicable pay period.
During 1996, 1995 and 1994, employees purchased 3,230,928; 4,479,340 and
6,576,030 shares, all of which were treasury shares, for which $ 324 million,
$ 344 million and $ 350 million was paid to IBM, respectively.
There were approximately 20.1 million, 23.3 million and 15.1 million reserved
unissued shares available for purchase, as previously approved by
stockholders, at December 31, 1996, 1995 and 1994, respectively.
74.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Pro Forma Disclosure
In applying APB Opinion 25, no expense was recognized for stock options
granted under the Plan and for employee stock purchases under the ESPP.
Beginning in 1995, SFAS 123, "Accounting for Stock-Based Compensation,"
required that a fair market value of all awards of stock-based compensation
be determined using standard techniques and that pro forma net earnings and
earnings per share be disclosed as if the resulting stock-based compensation
amounts were recorded in the Consolidated Statement of Earnings as follows:
1996 1995
(Dollars in millions except per share amounts) As reported Pro forma As reported Pro forma
Net earnings applicable to common shareholders $ 5,409 $ 5,267 $ 4,116 $ 4,020
Net earnings per share of common stock $ 10.24 $ 9.97 $ 7.23 $ 7.06
The above pro forma amounts, for purposes of SFAS 123, reflect the portion of
the estimated fair value of awards earned in 1996 and 1995. The aggregate
fair value of awards granted is earned ratably over the vesting or service
period and is greater than that included in the pro forma amounts.
The company used the Black-Scholes model to value the stock options granted
in 1996 and 1995. The weighted average assumptions used to estimate the value
of the options included in the pro forma amounts, and the weighted average
estimated fair value of an option granted are as follows:
1996 1995
Term (years)* 5/6 5/6
Volatility** 22.0% 21.0%
Risk-free interest rate (zero coupon
U.S. Treasury note) 6.0% 7.0%
Dividend yield 1.2% 2.0%
Weighted average fair value $ 40 $ 23
*Option term is based on tax incentive options (5 years) and non-tax incentive
options (6 years).
**To determine volatility the company measured the daily price changes of the
stock over the most recent 5 and 6 year periods.
P Stock Repurchases
In 1996 and 1995, the Board of Directors authorized the company to purchase
up to $ 13.5 billion of IBM common stock. During 1996 and 1995, the company
repurchased 49,465,200 common shares at a cost of $ 5,810 million and
50,906,300 common shares at a cost of $ 4,864 million, respectively. The
repurchases resulted in a reduction of $ 61,831,500 and $ 63,632,875 in the
stated capital (par value) associated with common stock in 1996 and 1995,
respectively. The repurchased shares were retired and restored to the status
of authorized but unissued shares. At December 31, 1996, approximately $ 2.8
billion of Board authorized repurchases remained. The company plans to
purchase shares on the open market from time to time, depending on market
conditions.
During 1995, the IBM Board of Directors authorized the company to purchase
all of its outstanding Series A 7 1/2 percent preferred stock depositary
shares. The company repurchased 8,534,289 shares at a cost of $ 870 million
during 1995, which resulted in a reduction of $ 85,343 in the stated capital
(par value) associated with preferred stock. The repurchased shares were
retired and restored to the status of authorized but unissued shares. No
shares were repurchased in 1996. The company plans to purchase remaining
shares on the open market and in private transactions from time to time,
depending on market conditions.
75.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Q Retirement Plans
The company and its subsidiaries have defined benefit and defined
contribution retirement plans covering substantially all regular employees.
The cost of the defined contribution plans was not material. The aggregate
worldwide cost of the defined benefit plans for 1996, 1995 and 1994 was $
(137) million, $ 165 million and $ 678 million, respectively, as follows:
Net Periodic Pension Cost
U.S. Plan Non-U.S. Plans
1996 1995 1994 1996 1995 1994
Expected long-term rate of
return on plan assets 9.25% 9.25% 9.5% 6.5-10% 6.25-10% 5.5-9%
(Dollars in millions)
Service cost $ 412 $ 315 $ 542 $ 378 $ 386 $ 467
Interest cost on the projected
benefit obligation 2,125 2,098 2,033 1,292 1,325 1,107
Return on plan assets:
Actual (4,849) (5,500) 327 (2,543) (1,848) 329
Deferred 2,148 2,958 (2,826) 1,075 403 (1,540)
Net amortizations (121) (123) (65) 28 12 19
Settlement (gains)/curtailment losses - - - (102) 128 269
------- ------- ------- ------- --------- -------
Net periodic pension cost $ (285) $ (252) $ 11 $ 128 $ 406 $ 651
------- ------- ------- ------- --------- -------
------- ------- ------- ------- --------- -------
Total net periodic pension
cost for all non-U.S. plans $ 148 $ 417 $ 667
------- --------- -------
------- --------- -------
Net periodic pension cost is determined using the Projected Unit Credit
actuarial method. Settlement gains in 1996 reflect principally the transfer
of assets to defined contribution plans upon election by the employees in
certain countries. Curtailment losses in 1995 and 1994 resulted from the
significant reductions in the expected years of future service caused by
termination programs and represent the immediate recognition of associated
prior service cost and a portion of previously unrecognized actuarial losses.
In 1994, the company introduced a non-qualified U.S. Supplemental Executive
Retirement Plan (SERP) effective January 1, 1995, which will be phased in
over three years. The SERP, which is unfunded, provides eligible executives
defined pension benefits outside the IBM Retirement Plan, based on average
earnings, years of service and age at retirement. At December 31, 1996 and 199
5, the projected benefit obligation was $ 93 million and $ 82 million,
respectively. The net unrecognized costs of the SERP were $ 57 million and $
64 million, and the amounts included in the Consolidated Statement of
Financial Position were pension liabilities of $ 36 million and $ 18 million
as of December 31, 1996 and 1995, respectively. These amounts are in addition
to the U.S. retirement plan financial information included herein.
76.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
The table below provides information on the status of the U.S. and material
non-U.S. defined benefit retirement plans:
Funded Status
U.S. Plan Non-U.S. Plans
1996 1995 1996 1995
Assumptions:
Discount rate 7.75% 7.25% 4.5-8.5% 4.5-9.0%
Long-term rate of
compensation increase 5% 5% 2.3-6.5% 1.5-6.5%
(Dollars in millions)
Actuarial present value of benefit obligations:
Vested benefit obligation $ (26,355) $ (26,413) $ (17,380) $ (17,788)
Accumulated benefit obligation $ (27,698) $ (28,070) $ (18,273) $ (18,771)
Projected benefit obligation $ (29,729) $ (30,235) $ (19,739) $ (20,294)
Plan assets at fair value 34,281 31,209 20,808 19,693
--------- --------- --------- ---------
Projected benefit obligation less
than (in excess of) plan assets 4,552 974 1,069 (601)
Unrecognized net (gain) loss (1,421) 1,976 (1,539) (436)
Unrecognized prior service cost 193 230 248 267
Unrecognized net asset established
at January 1, 1986 (1,052) (1,193) (110) (143)
--------- --------- --------- ---------
Prepaid pension cost (pension liability)
recognized in the Consolidated
Statement of Financial Position $ 2,272 $ 1,987 $ (332) $ (913)
--------- --------- --------- ---------
--------- --------- --------- ---------
The U.S. plan's projected benefit obligation decreased in 1996 primarily as a
result of a change in the discount rate assumption, as required under SFAS
87, "Employers' Accounting for Pensions," which decreased the projected
benefit obligation by approximately $ 1,700 million. The effect on the
company's results of operations and financial position from changes in the
estimates and assumptions used in computing pension expense and prepaid
pension cost or pension liability is mitigated by the delayed recognition
provisions of SFAS 87 with the exception of the effects of settlement gains,
curtailment losses and early terminations, which are recognized immediately.
It is the company's practice to fund amounts for pensions sufficient to meet
the minimum requirements set forth in applicable employee benefit laws and
with regard to local tax laws. Additional amounts are contributed from time
to time when deemed appropriate by the company. Liabilities for amounts in
excess of these funding levels are accrued and reported in the company's
Consolidated Statement of Financial Position. The assets of the various plans
include corporate equities, government securities, corporate debt securities
and income-producing real estate.
77.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
U.S. Plan: U.S. regular, full-time and part-time employees are covered by a
noncontributory plan which is funded by company contributions to an
irrevocable trust fund, which is held for the sole benefit of employees. In
1994, the company announced major changes to the plan that took effect in
1995. Under a new formula, which is being phased in over five years,
retirement benefits will be determined based on points accumulated for each
year worked and final average compensation period. To preserve benefits of
employees close to retirement, service and earnings credit will continue to
accrue under the prior formula through the year 2000, and upon retirement,
these employees will receive the benefit from either the new or prior
formulas, whichever is higher. Benefits become vested upon the completion of
five years of service. The number of individuals receiving benefits at
December 31, 1996 and 1995, was 101,293 and 92,133, respectively.
Non-U.S. Plans: Most subsidiaries and branches outside the U.S. have
retirement plans covering substantially all regular employees, under which
funds are deposited under various fiduciary-type arrangements, annuities are
purchased under group contracts or reserves are provided. Retirement benefits
are based on years of service and the employee's compensation, generally
during a fixed number of years immediately prior to retirement. The ranges of
assumptions used for the non-U.S. plans reflect the different economic environ-
ments within various countries.
R Nonpension Postretirement Benefits
The company and its U.S. subsidiaries have defined benefit postretirement
plans that provide medical, dental and life insurance for retirees and
eligible dependents. Plan cost maximums for those who retired prior to
January 1, 1992, will take effect beginning with the year 2001. Plan cost
maximums for all other employees take effect upon retirement.
The table below provides information on the status of the U.S. plans:
Funded Status
1996 1995
Assumed discount rate 7.75% 7.25%
(Dollars in millions)
Accumulated postretirement benefit obligation:
Retirees $ (5,454) $ (5,661)
Fully eligible active plan participants (512) (704)
Other active plan participants (487) (653)
-------- --------
Total (6,453) (7,018)
Plan assets at fair value 559 886
-------- --------
Accumulated postretirement benefit obligation in
excess of plan assets (5,894) (6,132)
Unrecognized net loss 378 718
Unrecognized prior service cost (902) (660)
-------- --------
Accrued postretirement benefit cost recognized
in the Consolidated Statement of Financial Position $ (6,418) $ (6,074)
-------- --------
-------- --------
The accumulated postretirement benefit obligation was determined by
application of the terms of medical, dental and life insurance plans,
including the effects of established maximums on covered costs, together with
relevant actuarial assumptions. These actuarial assumptions included a
projected healthcare cost trend rate of 6 percent. In 1996, the accumulated
postretirement benefit obligation decreased by $ 565 million primarily from
the change, as required by SFAS 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions," in the assumed discount rate.
78.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
The effect of a 1 percent annual increase in the assumed healthcare cost
trend rate would increase the accumulated postretirement benefit obligation
at December 31, 1996, by approximately $ 27 million; the 1996 annual costs
would not be materially affected.
It is the company's practice to fund amounts for postretirement benefits with
an independent trustee, as deemed appropriate from time to time. The plan
assets include various domestic fixed income securities. The accounting for
the plan is based on the written plan.
Net periodic postretirement benefit cost for U.S. retirees for the years
ended December 31 included the following components:
1996 1995 1994
Expected long-term rate of return on plan assets 9.25% 9.25% 9.5%
(Dollars in millions)
Service cost $ 43 $ 40 $ 51
Interest cost on the accumulated
postretirement benefit obligation 478 520 512
Actual return on plan assets (68) (198) 22
Net amortizations and deferrals (87) (7) (163)
------ ------ ------
Net periodic postretirement benefit cost $ 366 $ 355 $ 422
------ ------ ------
------ ------ ------
Certain of the company's non-U.S. subsidiaries have similar plans for
retirees. However, most retirees outside the United States are covered by
government-sponsored and administered programs, and the obligations and cost
of these programs are not significant to the company.
S Lines of Credit
The company maintains a $ 10.0 billion committed global credit facility.
Unused committed lines of credit from this global facility and other existing
committed and uncommitted lines of credit at December 31, 1996, were $ 13.9
billion, compared to $ 14.6 billion at December 31, 1995. Interest rates on
borrowings vary from country to country depending on local market conditions.
79.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
T Sale and Securitization of Receivables
At year-end 1996, the company had a net balance of $ 1.1 billion in assets
under management from the securitization of loans, leases and trade
receivables, compared to $ 1.2 billion at year-end 1995. The company received
total cash proceeds of approximately $ 4.0 billion and $ 3.4 billion in 1996
and 1995, respectively, from the sale and securitization of these receivables
and assets. No material gain or loss resulted from these transactions.
Recourse amounts associated with the aforementioned sales and securitization
activities are expected to be minimal, and adequate reserves are in place to
cover potential losses.
U Financial Instruments
The following presents information on certain significant on- and off-balance
sheet financial instruments, including derivatives.
Financial Instruments On-Balance Sheet (excluding derivatives)
Financial assets with carrying values approximating fair value include cash
and cash equivalents, marketable securities, notes and other accounts
receivable and other investments. Financial liabilities with carrying values
approximating fair value include accounts payable and other accrued expenses
and liabilities, as well as short-term and long-term debt.
The following table summarizes the company's marketable securities and other
investments, all of which were considered available for sale.
Marketable securities and other investments
At December 31:
Carrying Value
(Dollars in millions) 1996 1995
Current marketable securities:
U.S. government securities $ 108 $ 222
Time deposits and other bank obligations 283 93
Non-U.S. government securities and
other fixed-term obligations 59 127
------ ------
Total $ 450 $ 442
------ ------
------ ------
Non-current marketable securities:*
U.S. government securities $ 99 $ -
Time deposits and other bank obligations 127 97
Non-U.S. government securities and
other fixed-term obligations 155 72
------ ------
Total $ 381 $ 169
------ ------
------ ------
Other investments:*
Alliance investments on cost method $ 320 $ 128
------ ------
------ ------
*Included within Investments and sundry assets on the Consolidated Statement
of Financial Position.
80.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Financial Instruments Off-Balance Sheet (excluding derivatives)
IBM has guaranteed certain loans and financial commitments of affiliates. The
fair market values of these financial guarantees were $ 787 million and $ 794
million at December 31, 1996 and 1995, respectively. Additionally, the
company is contingently liable for commitments of various ventures to which
it is a party, certain receivables sold with recourse and other contracts.
These commitments, which in the aggregate were approximately $ 400 million
and $ 200 million at December 31, 1996 and 1995, respectively, are not expected
to have a material adverse effect on the company's financial position or
results of operations.
The company's dealers had unused lines of credit available from IBM for
working capital financing of approximately $ 2.1 billion and $ 1.0 billion at
December 31, 1996 and 1995, respectively.
Derivative Financial Instruments
The following table summarizes the notional value, carrying value and fair
value of the company's derivative financial instruments on and off the
balance sheet. The notional value at year end provides an indication of the
extent of the company's involvement in such instruments, but does not
represent exposure to market risk.
At December 31, 1996 At December 31, 1995
Notiona Carrying Fair Notional Carrying Fair
(Dollars in millions) Value Value Value* Value Value Value*
Interest rate and
currency contracts $ 18,700 $ (70) $ (117) $ 13,600 $ (88) $ (161)
Option contracts 10,100 92 81 4,800 18 41
--------- ----- ------ --------- ------ -------
Total $ 28,800 $ 22 $ (36) $ 18,400 $ (70) $ (120)
--------- ----- ------ --------- ------ -------
--------- ----- ------ --------- ------ -------
Bracketed amounts are liabilities.
*The estimated fair value of derivatives both on- and off-balance sheet at
December 31, 1996 and 1995, consists of assets of $258 million and $153
million and liabilities of $294 million and $273 million, respectively.
The majority of the company's derivative transactions relates to the matching
of liabilities to assets associated with its worldwide customer financing
business. The company issues debt, using the most efficient capital markets
and products, which may result in a currency or interest rate mismatch.
Interest rate swaps or currency swaps are then used to match the interest
rates and currencies of its debt to the related customer financing
receivables. These swap contracts are principally one to five years in
duration. The company uses an internal regional center to manage the cash of
its subsidiaries. This regional center principally uses currency swaps to
convert cash flows in a cost-effective manner, predominantly for the
company's European subsidiaries. The terms of the swaps are generally less
than one year.
Interest and currency rate differentials accruing under interest rate and
currency swap contracts related to the customer financing business are
recognized over the life of the contracts in interest expense, and the
effects of contracts related to intracompany funding are recognized over the
life of the contract in interest income. When the terms of the underwriting
instrument are modified, or if it ceases to exist for whatever reason, all
changes in fair value of the swap contracts are recognized in income each
period until they mature.
81.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Additionally, the company uses derivatives to limit its exposure to loss
resulting from fluctuations in foreign currency exchange rates on anticipated
cash transactions between foreign subsidiaries and the parent company. The
company receives significant dividends, intracompany royalties and net payments
for goods and services from its non-U.S. subsidiaries. In anticipation of these
foreign currency flows, and given the volatility of the currency markets, the
company selectively employs foreign currency options to manage the currency
risk. The terms of these instruments are generally less than one year.
For purchased options that hedge anticipated transactions, gains and losses
are deferred and recognized in other income in the same period that the
underlying transaction occurs, expires or is otherwise terminated. At
December 31, 1996 and 1995, there were no material deferred gains or losses.
The premiums associated with entering into option contracts are generally
amortized over the life of the options and are not material to the company's
results. Unamortized premiums are included in prepaid assets. All written
options are marked to market monthly and are not material to the company's
results.
The company has used derivative instruments as an element of its risk
management strategy for many years. Although derivatives entail a risk of
non-performance by counterparties, the company manages this risk by
establishing explicit dollar and term limitations that correspond to the
credit rating of each carefully selected counterparty. The company has not
sustained a material loss from these instruments nor does it anticipate any
material adverse effect on its results of operations or financial position in
the future.
V Subsequent Event
On January 28, 1997, the IBM Board of Directors declared a two-for-one common
stock split, subject to the approval of stockholders of an increase in the
number of common shares authorized from 750 million to 1,875 million.
The record date for the split is currently expected to be on or after May 9,
1997, with distribution of the split shares to follow on or after May 27,
1997.
W Segment Information
IBM is in the business of providing customer solutions through the use of
advanced information technologies. The company operates primarily in the
single industry segment that creates value by offering a variety of solutions
that include, either singularly or in some combination, services, software,
systems, products, financing and technologies. The schedule on page 83 shows
revenue by classes of similar products or services. Financial information by
geographic area is summarized in note X, "Geographic Areas," on pages 84 and
85.
For purposes of classifying similar information technology products, general
purpose computer systems that operate on a large class of applications are
classified as processor servers when the systems are simultaneously used by
multiple users at one time, or as clients when the systems are used by one
user at a time. Servers include the System/390, AS/400, RISC System/6000 and
personal computer server products. Personal systems clients include personal
computers and RISC System/6000 client products. Other clients include
display-based terminals and consumer and financial systems. Storage consists
of externally attached direct access storage devices, tape storage devices
and HDD storage files sold to external customers. Other peripherals consists
of advanced function printers and telecommunication devices. OEM hardware
consists primarily of revenue from the sale of semiconductors.
82.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
These hardware classes of products represent groupings that perform similar
functions, as opposed to the complete spectrum of products associated with
IBM's product divisions. Accordingly, they do not represent the full range of
any division's offerings, which could include related peripherals, software
and maintenance.
Services represents a wide range of service offerings including consulting,
education, systems integration design and development, managed operations of
systems and networks and availability services. Software includes
applications and systems software for both host and distributed systems.
Maintenance consists of separately billed charges for maintenance. Financing
and other is composed primarily of financing revenue and products and
supplies not otherwise classified.
Some products logically fit in more than one class and are assigned to a
specific class based on a variety of factors. Over time, products tend to
overlap, merge into or split from existing classes as a result of changing
technologies, market perceptions and/or customer use. For example, market
demand may create requirements for technological enhancements to permit a
peripheral product to be functionally integrated with a display, a
telecommunication device and a processor to form a workstation. Such interchan
geability and technological progress tend to make year-to-year comparisons
less valid than they would be in an industry less subject to rapid change.
Revenue by Classes of Similar Products or Services
Consolidated U.S. Only
(Dollars in millions) 1996 1995* 1994* 1996 1995* 1994*
Information technology:
Processors:
Servers** $ 12,421 $ 12,597 $ 11,553 $ 4,365 $ 4,464 $ 3,958
Clients:
Personal systems** 12,747 11,199 9,731 5,090 4,401 4,046
Other clients** 1,178 1,478 1,538 429 480 463
Peripherals:
Storage** 4,632 4,828 4,608 2,390 1,970 1,767
Other peripherals** 2,304 2,085 2,006 860 764 810
OEMhardware 2,697 2,968 2,191 1,738 1,975 1,285
Services 15,873 12,714 9,715 6,129 4,606 3,709
Software 13,052 12,657 11,346 4,377 4,117 3,926
Maintenance 6,981 7,409 7,222 2,525 2,618 2,648
Financing and other 4,062 4,005 4,142 1,492 1,394 1,506
-------- -------- -------- ------- ------- -------
Total $ 75,947 $ 71,940 $ 64,052 $29,395 $26,789 $24,118
-------- -------- -------- ------- ------- -------
-------- -------- -------- ------- ------- -------
**Reclassified to conform to 1996 presentation.
**Hardware only, includes applicable rental revenue, excludes functions not
embedded, software and maintenance.
83.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
X Geographic Areas
Sales and services in the United States and Canada are managed as a single
enterprise. However, in compliance with SFAS 14, "Financial Reporting for
Segments of a Business Enterprise," the United States is reported as a separate
geographic area. Canadian operations are included in the "Americas" area.
Non-U.S. subsidiaries operating in local currency environments account for
approximately 84 percent of the company's non-U.S. revenue. The remaining 16
percent is from subsidiaries and branches operating in U.S. dollars or in
highly inflationary environments.
In the Europe/Middle East/Africa area, European operations accounted for
approximately 95 percent of revenue in 1996, 1995 and 1994.
Interarea transfers consist principally of completed machines, subassemblies
and parts and software. Machines, subassemblies and parts are generally
transferred at an intracompany selling price. Software transfers represent
license fees paid by non-U.S. subsidiaries. The intracompany selling price
that relates to fixed asset transfers is capitalized and depreciated by the
importing area.
84.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
(Dollars in millions) 1996 1995 1994
United States
Revenue - Customers $ 29,395 $ 26,789 $ 24,118
Interarea transfers 10,196 10,553 6,336
-------- -------- --------
Total $ 39,592 $ 37,342 $ 30,454
Net earnings 1,782 599 969
Assets at December 31 39,724 38,584 37,156
Europe/Middle East/Africa
Revenue - Customers $ 25,280 $ 25,238 $ 23,034
Interarea transfers 2,455 2,530 1,787
-------- -------- --------
Total $ 27,735 $ 27,768 $ 24,821
Net earnings 1,474 2,271 1,086
Assets at December 31 21,732 24,066 25,816
Asia Pacific
Revenue - Customers $ 14,752 $ 13,892 $ 11,365
Interarea transfers 2,781 2,698 1,876
-------- -------- --------
Total $ 17,533 $ 16,590 $ 13,241
Net earnings 1,466 1,098 567
Assets at December 31 12,152 12,789 12,619
Americas
Revenue - Customers $ 6,520 $ 6,021 $ 5,535
Interarea transfers 5,123 5,333 4,257
-------- -------- --------
Total $ 11,643 $ 11,354 $ 9,792
Net earnings 578 324 498
Assets at December 31 8,123 7,530 7,783
Eliminations
Revenue $(20,556) $(21,114) $(14,256)
Net earnings 129 (114) (99)
Assets (599) (2,677) (2,283)
Consolidated
Revenue $ 75,947 $ 71,940 $ 64,052
Net earnings 5,429 4,178 3,021
Assets at December 31 81,132 80,292 81,091
-------- -------- --------
-------- -------- --------
85.
International Business Machines Corporation and Subsidiary Companies
Five-Year Comparison of Selected Financial Data
(Dollars in millions except per share amounts) 1996 1995 1994 1993 1992
For the year:
Revenue $ 75,947 $ 71,940 $ 64,052 $ 62,716 $ 64,523
Net earnings (loss) before
changes in accounting principles 5,429 4,178 3,021 (7,987) (6,865)
Per share of common stock 10.24 7.23 5.02 (14.02) (12.03)
Effect of accounting changes* - - - (114) 1,900
Per share of common stock - - - (.20) 3.33
Net earnings (loss) 5,429 4,178 3,021 (8,101) (4,965)
Per share of common stock 10.24 7.23 5.02 (14.22) (8.70)
Cash dividends paid on common stock 686 572 585 905 2,765
Per share of common stock 1.30 1.00 1.00 1.58 4.84
Investment in plant, rental machines
and other property 5,883 4,744 3,078 3,232 4,698
Return on stockholders' equity 24.8% 18.5% 14.3% - -
At end of year:
Total assets $ 81,132 $ 80,292 $ 81,091 $ 81,113 $ 86,705
Net investment in plant, rental machines
and other property 17,407 16,579 16,664 17,521 21,595
Working capital 6,695 9,043 12,112 6,052 2,955
Total debt 22,829 21,629 22,118 27,342 29,320
Stockholders' equity 21,628 22,423 23,413 19,738 27,624
*1993, postemployment benefits; 1992, income taxes.
Selected Quarterly Data
(Dollars in millions except per share and stock prices)
Net Per Share Common Stock
Gross Earnings Earnings Stock Prices**
Revenue Profit (Loss) (Loss) Dividends High Low
1996
First quarter $ 16,559 $ 6,769 $ 774 $ 1.41 $ .25 $ 128.88 $ 83.13
Second quarter 18,183 7,191 1,347 2.51 .35 120.88 96.13
Third quarter 18,062 7,258 1,285 2.45 .35 127.88 89.13
Fourth quarter 23,143 9,321 2,023 3.93 .35 166.00 123.13
-------- -------- ------- ------- ------
Total $ 75,947 $ 30,539 $ 5,429 $ 10.24* $ 1.30
-------- -------- ------- ------- ------
-------- -------- ------- ------- ------
1995
First quarter $ 15,735 $ 6,664 $ 1,289 $ 2.12 $ .25 $ 85.13 $ 70.25
Second quarter 17,531 7,631 1,716 2.97 .25 99.38 82.25
Third quarter 16,754 6,921 (538) (.96) .25 114.63 91.63
Fourth quarter 21,920 9,151 1,711 3.09 .25 102.38 87.75
-------- -------- ------- ------- ------
Total $ 71,940 $ 30,367 $ 4,178 $ 7.23* $ 1.00
-------- -------- ------- ------- ------
-------- -------- ------- ------- ------
**The sum of the quarter's earnings per share does not equal the year-to-date
earnings per share due to changes in average share
calculations. This is in accordance with prescribed reporting requirements.
**The stock prices reflect the high and low prices for IBM's common stock on
the New York Stock Exchange composite tape for the last two years.
86.