UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1994
1-2360
______________________
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
____________________________________________________
(Exact name of registrant as specified in its charter)
New York 13-0871985
______________________ __________________________________
(State of incorporation) (IRS employer identification number)
Armonk, New York 10504
______________________________________ ________
(Address of principal executive offices) (Zip Code)
914-765-1900
_____________________________
(Registrant's telephone number)
The registrant has 583,126,080 shares of common stock outstanding
at March 31, 1994.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO
________ ________.
INDEX
_____
Page
____
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Operations for the three months
ended March 31, 1994 and 1993 . . . . . . . . . . . . . 1
Consolidated Statement of Financial Position at
March 31, 1994 and December 31, 1993 . . . . . . . . . . 3
Consolidated Statement of Cash Flows for the three months
ended March 31, 1994 and 1993. . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . 7
Part II - Other Information . . . . . . . . . . . . . . . . . . 12
ITEM 1.
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31:
(UNAUDITED)
(Dollars in millions) 1994 1993
Revenue: _______ _______
Hardware sales $ 6,268 $ 5,737
Software 2,583 2,521
Services 1,836 1,909
Maintenance 1,768 1,804
Rentals and financing 918 1,087
_______ _______
Total Revenue 13,373 13,058
Cost:
Hardware sales 4,379 4,072
Software 1,260 937
Services 1,557 1,497
Maintenance 871 919
Rentals and financing 366 471
_______ _______
Total Cost 8,433 7,896
_______ _______
Gross Profit 4,940 5,162
Operating Expenses:
Selling, general and administrative 3,149 4,076
Research, development and engineering 1,100 1,356
Restructuring charges -- --
_______ _______
Total Operating Expenses 4,249 5,432
_______ _______
Operating Income (Loss) 691 (270)
Other Income, principally interest 408 195
Interest Expense 414 305
_______ _______
Earnings (Loss) before Income Taxes 685 (380)
Income Tax Provision (Benefit) 293 (95)
_______ _______
Net Earnings (Loss) before change in
accounting principle 392 (285)
Cumulative effect of change in accounting
for postemployment benefits -- (114)
_______ _______
Net Earnings (Loss) 392 (399)
Preferred stock dividends 21 -
_______ _______
Net Earnings (Loss) available to
common shareholders $ 371 $ (399)
======= =======
- 1 -
ITEM 1.
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS - (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31:
(UNAUDITED)
(Dollars in millions except
for per share amounts) 1994 1993
_______ _______
Per-share of common stock amounts:
Before change in accounting principle $ .64 $ (.50)
Cumulative effect of change in accounting
for postemployment benefits -- (.20)
_______ _______
Net Earnings (Loss) $ .64 $ (.70)
======= =======
Average number of shares
outstanding (millions) 582.1 570.6
Cash dividends per common share $ .25 $ .54
(The accompanying notes are an integral part of the financial statements.)
- 2 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
ASSETS
(Dollars in millions) At March 31 At December 31
1994 1993
___________ ______________
Current Assets:
Cash $ 1,225 $ 873
Cash equivalents 6,886 4,988
Marketable securities - at cost, which
approximates market 840 1,272
Notes and accounts receivable - net
of allowances 11,489 12,984
Sales-type leases receivable 6,426 6,428
Inventories, at lower of average cost or market
Finished goods 1,729 1,906
Work in process 5,562 5,539
Raw materials 99 120
________ ________
Total Inventories 7,390 7,565
Prepaid expenses and other current assets 4,909 5,092
________ ________
Total Current Assets 39,165 39,202
Plant, Rental Machines and Other Property 48,317 47,504
Less: Accumulated depreciation 31,040 29,983
________ ________
Plant, Rental Machines and Other Property-Net 17,277 17,521
Investments and Other Assets:
Software, less accumulated
amortization (1994, $10,742; 1993, $10,143) 3,263 3,703
Investments and sundry assets 20,167 20,687
________ ________
Total Investments and Other Assets 23,430 24,390
________ ________
Total Assets $ 79,872 $ 81,113
======== ========
(The accompanying notes are an integral part of the financial statements.)
- 3 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in millions) At March 31 At December 31
1994 1993
___________ _____________
Current Liabilities:
Taxes $ 997 $ 1,589
Accounts payable and accruals 18,437 19,464
Short-term debt 11,942 12,097
________ ________
Total Current Liabilities 31,376 33,150
Long-Term Debt 14,937 15,245
Other Liabilities 11,160 11,177
Deferred Income Taxes 1,825 1,803
________ ________
Total Liabilities 59,298 61,375
Stockholders' Equity:
Preferred stock - par value $.01 per share 1,091 1,091
Shares authorized - 150,000,000
Shares issued: 1994 - 11,250,000
1993 - 11,250,000
Common stock - par value $1.25 per share 7,063 6,980
Shares authorized - 750,000,000
Shares issued: 1994 - 583,126,080
1993 - 581,388,475
Retained earnings 10,234 10,009
Translation and other adjustments 2,186 1,658*
________ ________
Total Stockholders' Equity 20,574 19,738
________ ________
Total Liabilities and Stockholders' Equity $ 79,872 $ 81,113
======== ========
* Restated to conform to 1994 presentation.
- 4 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31:
(UNAUDITED)
(Dollars in millions) 1994 1993
_______ _______
Cash Flow from Operating Activities:
Net Earnings (Loss) $ 392 $ (285)
Adjustments to reconcile net earnings (loss) to
cash provided from operating activities:
Effect of restructuring charges (680) (389)
Depreciation 1,093 1,388
Amortization of software 733 439
Changes in operating assets and liabilities 805 143
Loss (Gain) on disposition of investment assets (264) 70
_______ _______
Net cash provided from operating activities 2,079 1,366
_______ _______
Cash Flow from Investing Activities:
Payments for plant, rental machines
and other property, net of proceeds (503) (401)
Investment in software (293) (313)
Purchases of marketable securities and
other investments (472) (578)
Proceeds from marketable securities and
other investments 972 992
Proceeds from sale of Federal Systems Company 1,503 -
_______ _______
Net cash provided from (used in) investing activities 1,207 (300)
_______ _______
Cash Flow from Financing Activities:
Proceeds from new debt 1,808 1,885
Payments to settle debt (3,072) (1,351)
Short-term borrowings less
than 90 days - net 398 (329)
Common stock transactions - net 82 (98)
Cash dividends paid (159) (308)
_______ _______
Net cash used in financing activities (943) (201)
_______ _______
Effect of Exchange Rate Changes
on Cash and Cash Equivalents (93) (184)
_______ _______
Net Change in Cash and Cash Equivalents 2,250 681
Cash and Cash Equivalents at January 1 5,861 4,446
_______ _______
Cash and Cash Equivalents at March 31 $ 8,111 $ 5,127
======= =======
(The accompanying notes are an integral part of the financial statements.)
- 5 -
Notes to Consolidated Financial Statements
1. In the opinion of the management of International Business Machines
Corporation (the company), all adjustments necessary to a fair statement of
the results for the unaudited three month periods have been made. In
addition to the adjustments for normal recurring accruals, the company
recorded charges of $.3 billion for software writedowns in the first quarter
of 1994. See note four below.
2. The company implemented Statement of Financial Accounting Standards
(SFAS) 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective January 1, 1994. This statement required certain debt
and equity securities to be classified as either Trading, Available-for-Sale
or Held-to-Maturity. Trading securities are recorded at fair value and any
unrealized gains or losses are charged to earnings. Available-for-Sale
securities are recorded at fair value and any unrealized gains or losses are
included in stockholders' equity. Held-to-Maturity securities are recorded at
amortized cost. As a result of adopting this statement, there was no impact
to the Consolidated Statement of Operations and the Consolidated Statement of
Financial Position was not materially affected. Prior years' consolidated
financial statements have not been restated to reflect this change.
3. The sale of the Federal Systems Company (FSC) to Loral Corporation was
effective January 1, 1994, with a final settlement date of March 1, 1994, for
$1.503 billion in cash. This transaction resulted in an after-tax net gain of
$248 million ($.43 per common share) to the company's first-quarter 1994
results. The net gain reflects the impact of certain contractual, employee
postemployment, and other obligations that the company recorded as part of the
sale. The sale also resulted in a decrease of $752 million in prepaid
expenses and other current assets, which represents the net assets associated
with FSC. Additionally, as a result of this sale, approximately 10,000 people
have either transferred to Loral, retired, or are on a preretirement leave
from the company. For informational purposes only, the Consolidated Statement
of Operations for 1993, has been calculated on a quarterly basis to show the
effects of removing the FSC operating revenues, costs, and expenses and is
shown in Exhibit 99 on page 14. The restated information is presented
voluntarily and is provided solely to assist in understanding the quarterly
effect of the sale.
4. The company changed its software amortization periods effective January
1, 1994. This change was a result of a continuing review of the company's
portfolio of software offerings, software amortization periods, and
recoverability of the capitalized investment on software products. The change
reduces amortization periods to a maximum of four years to recognize more
rapid advances in software technology and a shorter period over which to
recover capitalized costs. Amortization periods formerly ranged up to six
years. This change resulted in an after-tax writedown of $192 million ($.33
per common share). The on-going impact of this change will increase software
costs by about $25 million per quarter.
5. The translation and other adjustments line of Stockholders' Equity
includes equity translation adjustments of $2,197 million at March 31, 1994,
and $1,658 million at December 31, 1993.
- 6 -
6. The Consolidated Statement of Financial Position includes balances
relative to restructuring programs in Accounts Payable and Accruals of
approximately $4.3 billion and in Other Liabilities of approximately $1.6
billion at March 31, 1994. At December 31, 1993, Accounts Payable and
Accruals included a restructuring balance of approximately $5.1 billion and
Other Liabilities had a restructuring balance of approximately $1.6 billion.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE QUARTER ENDED MARCH 31, 1994
The company has continued to review its business operations with a view to
improving its competitive position and results from operations in light of the
rapidly changing market for its products and services. The information
technology industry's demand has slowed, and it is suffering from sluggish
worldwide economic growth. The company's recent business results reflect
these realities, as well as the shift in the mix of its revenue to offerings
with lower gross profit margins, such as services and personal computers.
Overall, the company's hardware offerings remain under price and gross
profit margin pressure. High-end processors have suffered the most severe
margin erosion on a year-to-year basis, although first-quarter 1994 margins
remain stable from fourth-quarter 1993. Personal computers have remained a
low margin and very competitive business. Recent volume trends have been
positive for the personal computer and RISC System/6000* products. Other
hardware areas are expected to remain under competitive pressure consistent
with recent experience. The company's services offerings, other than
maintenance, are growing rapidly, but are at lower profit margins than the
company's hardware products have been in the past. Due to the changing mix of
revenue and associated gross profit margins, it remains uncertain as to when
the pressure on the company's cost structure will be diminished.
Results of Operations
The company's earnings and revenue for the quarter ended March 31, 1994,
increased from those of a year ago. The company had first-quarter 1994 net
earnings of $392 million ($.64 per common share) compared with a net loss of
$285 million ($.50 per common share) before the cumulative effect of SFAS 112,
"Employers' Accounting for Postemployment Benefits," of $114 million ($.20 per
common share) in the first quarter of 1993. First-quarter 1994 revenues were
$13.4 billion, a two percent increase from the same period of last year.
The company's first-quarter 1994 results include an after-tax gain of
$248 million ($.43 per common share) from the sale of FSC and an after-tax
writedown of $192 million ($.33 per common share) relating to a change in
software amortization periods. The company's first-quarter 1994 performance
also does not reflect results from FSC, which were included in the
first-quarter and full-year 1993 results. Excluding these three items, the
company's overall revenues grew six percent in the first quarter of 1994
compared with the same period of 1993 and net earnings were $336 million ($.54
per common share). The average number of shares outstanding in the first
quarter of 1994 was 582.1 million compared with 570.6 million in the same
period of last year.
- 7 -
Results of Operations - (continued)
The company's first quarter results had revenue growth in all
geographies, except Canada, which was down slightly from first-quarter 1993.
Expenses declined significantly and the company's overall gross profit margin,
excluding the effects of the software writedown, was 39.2 percent in the first
quarter of 1994, compared with an overall margin of 39.5 percent a year
earlier. Including the software writedown, the gross margin was 36.9 percent.
This is the sixth straight quarter where the overall gross profit margin has
been relatively stable between 38 and 39 percent. Although the results are
encouraging, the company believes that improvements are still needed in many
areas to ensure long-term success.
Revenue from hardware sales was $6.3 billion, an increase of 9.2 percent
from the comparable period of 1993. The increase was driven by strong
personal computer sales in all geographies, improved RISC System/6000 revenues
and AS/400* revenues up slightly over the same period in 1993. Mainframe and
high-end storage product revenues declined when compared with the same period
in 1993.
Hardware sales gross profit was $1.9 billion, an increase of 13.4 percent
over the first quarter of 1993. The hardware sales gross profit margin was
30.1 percent, an increase of 1.1 points over the comparable period of 1993.
Although the hardware sales gross profit increased, it is still impacted by
the continuing pricing pressures for high-end products and personal computers,
as well as the shift in revenue to personal computers, which carry a lower
gross profit margin, and are proportionally a larger part of hardware sales.
Software revenue was $2.6 billion, an increase of 2.5 percent from
first-quarter 1993 levels. Software gross profit was $1.3 billion, a decrease
of 16.4 percent when compared to the same period in 1993. Software gross
profit margin was 51.2 percent, a decrease of 11.6 points from the first
quarter of 1993. The gross profit and gross profit margin decreases were a
result of the software change described in footnote four on page six.
Excluding the effects of this change, gross profit would have increased 2.2
percent and the gross profit margin would have been 62.7 percent for the
first-quarter 1994.
Services revenue was $1.8 billion, a decrease of 3.8 percent when
compared to the first quarter of 1993. Gross profit was $.3 billion, a
decrease of 31.9 percent from first-quarter 1993 and the gross profit margin
was 15.3 percent, a decrease of 6.3 points from comparable period in 1993.
The first-quarter 1994 results do not include operational results from FSC,
which were included in the first-quarter 1993 results. When adjusted for the
effects of the FSC sale, services revenue would have increased 21.2 percent,
gross profit would have decreased 26.6 percent, and the gross profit margin
would have decreased 9.9 points, first-quarter 1994 versus first-quarter 1993.
Services gross profit improvement is a focus item for the company.
- 8 -
Results of Operations - (continued)
Maintenance revenue was $1.8 billion, a decrease of 2.0 percent from 1993
first quarter levels. Gross profit amounted to $.9 billion, an increase of
1.2 percent. The gross profit margin was 50.7 percent, up 1.6 points over the
same period in 1993. Maintenance continues to be a competitive business with
revenue and gross profit margins expected to remain under pressure.
Rentals and financing revenue was $.9 billion, a decrease of 15.5 percent
from the first quarter of 1993. Gross profit amounted to $.6 billion, a
decrease of 10.2 percent from first-quarter 1993. The gross profit margin was
60.2 percent, an increase of 3.6 points over the comparable period in 1993.
The decline in revenue and gross profit in 1994 is a result of lower high-end
hardware placements in the first-quarter 1994 as compared to first-quarter
1993.
Selling, general and administrative expense was $3.1 billion, a decrease
of 22.8 percent from 1993. The decrease includes the before-tax gain from the
FSC sale. Without this gain, selling, general and administrative expense
declined 13.4 percent from 1993. Research, development and engineering
expense amounted to $1.1 billion, a decrease of 18.8 percent from 1993. These
decreases reflect the company's continued focus on productivity, restructuring
programs, and expense controls.
Other Income, principally interest, was $.4 billion, substantially higher
when compared to the first quarter of 1993. The increase was due primarily to
higher levels of cash and higher interest rates notably in Brazil, whose
economic environment is highly inflationary. Although Other Income increased,
exchange losses from currency revaluations of cash largely offset this
increase.
Interest expense not included as cost of financing was $.4 billion, an
increase of 35.5 percent over 1993. The increase is primarily as a result of
higher levels of local currency debt notably in Brazil, whose economic
environment is highly inflationary, where interest rates are high. Although
interest expense increased, this increase was substantially offset by exchange
gains resulting from revaluations of the associated debt.
Exchange gains and losses are recorded as part of selling, general and
administrative expense.
The company has substantial business interests in Brazil where the
government is expected to introduce new monetary measures intended to reduce
inflation and stabilize the local currency. Although the company does not
anticipate a material adverse financial impact, it continues to monitor the
progress of these governmental actions.
Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and interest costs associated with rentals and
financing, amounted to $624 million for the first quarter of 1994. Of this
amount, $9 million was capitalized.
The effective tax rate for the three months of 1994 was 42.8 percent
versus 25.0 percent for the same period in 1993. This increase was due to a
number of factors, including the mix of earnings and weighting of tax rates on
a country-by-country basis.
- 9 -
Financial Condition
The Consolidated Statement of Financial Position at March 31, 1994,
reflects improvement in the company's financial condition from December 31,
1993, with increases in cash and stockholders equity, and decreases in total
assets, outstanding debt, and total liabilities.
Working capital at March 31, 1994, was $7.8 billion compared to $6.0
billion at December 31, 1993. Although total current assets remained
approximately at year-end 1993 levels, cash, cash equivalents, and marketable
securities increased $1.8 billion, offset by decreases in accounts receivable
of $1.4 billion, inventories of $.2 billion, and prepaid expenses of $.2
billion. The increase in cash and cash equivalents is primarily attributable
to the proceeds from the sale of FSC, and cash generated from operations,
offset by payments to settle outstanding debt. The decrease in accounts
receivable largely results from the normally lower volumes associated with the
first quarter.
Current liabilities decreased $1.8 billion from December 31, 1993, due to
declines in accounts payable and accruals of $1.0 billion, taxes of $.6
billion, and short-term debt of $.2 billion. The decrease in accounts payable
and accruals is due to the normal seasonal decline of the accounts payable
accrual balances from their year-end levels, as well as lower restructuring
accrual balances, due to separation payments to employees as a result of the
company's ongoing work force reduction programs.
The company's capital expenditures for plant and other property were
approximately $.3 billion for the first quarter of 1994, a decrease of $.2
billion from the same period in 1993.
In addition to software development expense included in research,
development and engineering expense, the company capitalized $.3 billion of
software costs during the first quarter of 1994, down slightly from the amount
capitalized in the comparable 1993 period. Ongoing amortization of
capitalized software costs amounted to $.4 billion in the first quarter of
both 1994 and 1993. Additionally, the company incurred $.3 billion in
accelerated amortization of capitalized software costs resulting from
the software change described in footnote four on page six.
Long-term debt declined from $15.2 billion at year-end 1993 to $14.9
billion at March 31, 1994, resulting from the company's ongoing efforts to
reduce its overall debt obligations. Other non-current liabilities remained
at $11.2 billion from December 31, 1993.
Stockholders' equity increased from $19.7 billion at December 31, 1993 to
$20.5 billion at March 31, 1994, as a result of increases in net retained
earnings of $.2 billion, capital stock of $.1 billion, and equity translation
adjustments of $.5 billion due to the majority of worldwide currencies
strengthening versus the U.S. dollar during the period.
For the three months ended March 31, 1994, the company had an overall net
increase in cash and cash equivalents of $2.2 billion compared to a net
increase of $.7 billion for the same period in 1993.
- 10 -
Financial Condition - (continued)
Net cash provided from operating activities was $2.1 billion for the
first three months of 1994, versus $1.4 billion in the comparable 1993 period.
The period-to-period improvement in cash flow from operations is mainly driven
by lower accounts receivable balances offset by a decrease in liabilities.
Net cash provided from investing activities was $1.2 billion for the
first three months of 1994, compared to a net use of funds in the amount of
$.3 billion in the same period of 1993. The increased cash flow from
investing activities compared to the 1993 period is primarily attributable to
the proceeds derived from the sale of FSC in March 1994.
Net cash used in financing activities amounted to $.9 billion for the
three months ended March 31, 1994, an increase of $.7 billion from the
comparable 1993 period, principally the result of the company's ongoing
efforts to reduce its overall outstanding debt obligations.
The company has continued to take actions to further enhance its
liquidity. During the first quarter of 1994, the company received
approximately $1.2 billion in cash proceeds from the sale and securitization
of primarily trade receivables to investors. The majority of this activity is
related to existing revolving securitization programs. Additionally, during
the first quarter, the company issued, in lieu of purchasing on the open
market, 1.7 million shares of common stock to be sold to employees under the
IBM Employees Stock Purchase Plan.
- 11 -
Part II - Other Information
Item 6(a). Exhibits
Exhibit Number
11 Statement re: computation of per share earnings.
99 Quarterly Consolidated Statement of Operations - Recalculated 1993.
Item 6(b). Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1994.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
International Business Machines Corporation
(Registrant)
Date: May 10, 1994
By:
J. B. York
___________________________________________
J. B. York
Chief Financial Officer
* AS/400 and RISC System/6000 are trademarks of the
International Business Machines Corporation.
- 12 -