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 SEPTEMBER 30, 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 587,172,215 shares of common stock outstanding
at September 30, 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 l2 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been sub-
ject 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 and nine
months ended September 30, 1994 and 1993 . . . . . . . . . . 1
Consolidated Statement of Financial Position at
September 30, 1994 and December 31, 1993 . . . . . . . . . . 3
Consolidated Statement of Cash Flows for the nine months
ended September 30, 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 . . . . . . . . . . . . . . . . . . . . . 16
ITEM 1. INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1994 1993 1994 1993
Revenue: ________ ________ ________ ________
Hardware sales $ 7,753 $ 6,957 $ 21,716 $ 20,220
Software 2,755 2,648 8,065 7,884
Services 2,306 2,289 6,434 6,550
Maintenance 1,813 1,823 5,377 5,484
Rentals and financing 804 1,026 2,564 3,182
________ ________ ________ ________
15,431 14,743 44,156 43,320
Cost:
Hardware sales 5,130 4,858 14,647 14,153
Software 1,041 1,026 3,322 2,995
Services 1,866 1,986 5,266 5,481
Maintenance 925 854 2,701 2,635
Rentals and financing 315 417 1,022 1,318
________ ________ ________ ________
9,277 9,141 26,958 26,582
________ ________ ________ ________
Gross Profit 6,154 5,602 17,198 16,738
Operating Expenses:
Selling, general and
administrative 3,885 4,259 10,969 12,822
Research, development and
engineering 1,053 1,372 3,245 4,104
Restructuring charges -- -- -- 8,945
________ ________ ________ ________
4,938 5,631 14,214 25,871
Operating Income (Loss) 1,216 (29) 2,984 (9,133)
Other Income, principally interest 221 293 1,108 646
Interest Expense 233 346 1,010 973
________ ________ ________ ________
Earnings (Loss) before Income Taxes 1,204 (82) 3,082 (9,460)
Income Tax Provision (Benefit) 494 (34) 1,292 (1,091)
________ ________ ________ ________
Net Earnings (Loss) before change in
accounting principle 710 (48) 1,790 (8,369)
Cumulative effect of change in
accounting for postemployment
benefits -- -- -- 114
________ ________ ________ ________
Net Earnings (Loss) 710 (48) 1,790 (8,483)
Preferred stock dividends 21 22 63 27
________ ________ ________ ________
Net Earnings (Loss) applicable to
common shareholders $ 689 $ (70) $ 1,727 $ (8,510)
======== ======== ======== ========
- 1 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS - (CONTINUED)
(UNAUDITED)
(Dollars in millions except Three Months Ended Nine Months Ended
for per share amounts) September 30 September 30
___________________ ____________________
1994 1993 1994 1993
________ ________ _________ _______
Per share of common stock amounts
after preferred stock dividend:
Before change in accounting
principle $ 1.18 $ (.12) $ 2.96 $(14.70)
Cumulative effect of change in
accounting for income taxes -- -- -- (.20)
_______ _______ _______ _______
Net earnings (loss) $ 1.18 $ (.12) $ 2.96 $(14.90)
======= ======= ======= =======
Average number of common
shares outstanding (millions) 586.3 572.5 584.1 571.1
Cash dividends per common share $ .25 $ .25 $ .75 $ 1.33
(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
At September 30 At December 31
(Dollars in millions) 1994 1993
_______________ ______________
Current Assets:
Cash $ 1,012 $ 873
Cash Equivalents 8,310 4,988
Marketable securities - at cost, which
approximates market 1,482 1,272
Notes and accounts receivable -
net of allowances 12,079 12,984
Sales-type leases receivable 6,565 6,428
Inventories, at lower of average cost or market
Finished goods 1,195 1,906
Work in process 5,439 5,539
Raw materials 370 120
________ ___________
Total Inventories 7,004 7,565
Prepaid expenses and other current assets 3,698 5,092
________ ___________
Total Current Assets 40,150 39,202
Plant, Rental Machines and Other Property 47,433 47,504
Less: Accumulated depreciation 31,095 29,983
________ ___________
Plant, Rental Machines and Other Property - net 16,338 17,521
Investments and Other Assets:
Software, less accumulated
amortization (1994, $10,608; 1993, $10,143) 3,059 3,703
Investments and sundry assets 19,521 20,687
________ ___________
Total Investments and Other Assets 22,580 24,390
________ ___________
Total Assets $ 79,068 $ 81,113
======== ===========
- 3 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
At September 30 At December 31
(Dollars in millions) 1994 1993
_______________ ______________
Current Liabilities:
Taxes $ 1,482 $ 1,589
Accounts payable and accruals 16,558 19,464
Short-term debt 10,240 12,097
________ ________
Total Current Liabilities 28,280 33,150
Long-Term Debt 14,077 15,245
Other Liabilities 12,291 11,177
Deferred Income Taxes 1,957 1,803
________ ________
Total Liabilities 56,605 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 7,273 6,980
Shares authorized: 750,000,000
Shares issued: 1994 - 587,172,215
1993 - 581,388,475
Retained earnings 11,297 10,009
Translation and other adjustments 2,802 1,658
________ ________
Total Stockholders' Equity 22,463 19,738
________ ________
Total Liabilities and Stockholders' Equity $ 79,068 $ 81,113
======== ========
(The accompanying notes are an integral part of the financial statements.)
- 4 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30:
(UNAUDITED)
(Dollars in millions) 1994 1993
________ ________
Cash Flow from Operating Activities:
Net Earnings (Loss) $ 1,790 $ (8,369)
Adjustments to reconcile net earnings (loss) to cash
provided from operating activities:
Effect of restructuring charges (1,976) 5,032
Depreciation 3,223 3,674
Amortization of software 1,604 1,321
Changes in operating assets and liabilities 4,226 629
(Gain) Loss on disposition of investment assets (501) 66
_______ _______
Net cash provided from operating activities 8,366 2,353
_______ _______
Cash Flow from Investing Activities:
Payments for plant, rental machines
and other property, net of proceeds (1,047) (1,662)
Investment in software (958) (1,064)
Purchases of marketable securities and
other investments (2,442) (1,592)
Proceeds from marketable securities and
other investments 2,193 1,876
Proceeds from sale of Federal Systems Company 1,503 --
_______ _______
Net cash used in investing activities (751) (2,442)
_______ _______
Cash Flow from Financing Activities:
Proceeds from new debt 4,315 9,082
Payments to settle debt (6,891) (6,016)
Proceeds from preferred stock -- 1,091
Short-term borrowings less
than 90 days - net (1,383) (2,042)
Common stock transactions - net 292 (13)
Cash dividends paid (492) (758)
_______ _______
Net cash (used in) provided from financing
activities (4,159) 1,344
_______ _______
Effect of Exchange Rate Changes
on Cash and Cash Equivalents 5 (367)
_______ _______
Net Change in Cash and Cash Equivalents 3,461 888
Cash and Cash Equivalents at January 1 5,861 4,446
_______ _______
Cash and Cash Equivalents at September 30 $ 9,322 $ 5,334
======= =======
(The accompanying notes are an integral part of the financial statements.)
- 5 -
Notes to Consolidated Financial Statements
__________________________________________
1. In the opinion of management of International Business Machines Corpo-
ration (the company), all adjustments necessary to a fair statement of the
results for the unaudited three and nine month periods have been made. In
addition to the adjustments for normal recurring accruals, the company re-
corded charges of $.3 billion for software writedowns and an after-tax
gain of $248 million for the sale of its Federal Systems Company (FSC) in
the first quarter of 1994 and restructuring charges of $8.9 billion in the
second quarter of 1993.
2. Earnings (loss) per share amounts were computed by dividing earnings
(loss) after deduction of preferred stock dividends by the average number
of common shares outstanding.
3. The translation and other adjustments line of Stockholders' Equity in-
cludes equity translation adjustments of $2,802 million at September 30,
1994, and $1,658 million at December 31, 1993. Other adjustments are in-
cluded but amount to less than $1 million for both periods.
4. The Consolidated Statement of Financial Position at September 30, 1994
includes balances relative to restructuring programs of approximately $2.3
billion in Accounts Payable and Accruals, $.8 billion in Other Liabil-
ities, and $2.6 billion in Plant, Rental Machines and Other property pro-
vided for capacity related actions. At December 31, 1993 the approximate
restructuring balances were $5.1 billion in Accounts Payable and Accruals,
$1.6 billion in Other Liabilities, and $3.6 billion in Plant Rental Ma-
chine and Other Property. The company continues to make progress in im-
plementing specific restructuring plans and utilizing the associated
reserves as the plans are implemented and completed. The company is ex-
pected to complete a number of restructuring actions in the fourth quarter
of 1994, which will reduce the balances significantly. At that time, the
company may find it necessary to redesignate by category (work-force re-
lated, manufacturing capacity, and excess space) reserve balances, based
upon actual experience versus the original restructuring plans.
5. A supplemental Consolidated Statement of Operations schedule has been
provided for informational purposes only, to exclude the effects of the
FSC sale and software writedowns recorded in the first quarter of 1994.
The third-quarter 1993 results excludes FSC results and the first nine
months of 1993 excludes the effects of the $8.9 billion restructuring
charge, the cumulative effect of implementing Statement of Financial Ac-
counting Standards (SFAS) 112, "Employers' Accounting for Postemployment
Benefits," and FSC results. These supplemental statements are shown in
exhibit 99 on pages 19 and 20. This information is presented voluntarily
and is provided solely to assist in understanding the effects of these
items on the Consolidated Statement of Operations.
6. Subsequent Event: On October 5, 1994, the company announced major
changes to its U.S. Retirement Plan that will take place starting in 1995.
A new formula for calculating retirement benefits will be phased in over a
five-year period and current formulas will continue for employees retiring
through year-end 2000. In general, the company's retirement plan obli-
gation will continue to grow over time, but at lower amounts per year than
in the past. The change is not expected to have an immediate cash impact
on the company and will help to manage plan costs.
- 6 -
7. Subsequent Event: On October 19, 1994, Moody's Investors Service up-
graded its short-term debt rating for IBM and its rated subsidiaries to
"Prime-1" from "Prime-2."
8. Subsequent Event: On October 25, 1994, the company's Board of Directors
approved management's plan to revert to purchasing IBM common stock on the
open market, for sale to employees under the IBM Employee Stock Purchase
Plan.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
____________________________________
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
________________________________________________
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994
______________________________________________________
The company continued to make steady progress in stabilizing its oper-
ations, rebuilding its balance sheet, and making its cost structure more
competitive during the third quarter of 1994. Total expenses declined
12.9 percent, or $734 million, compared with the third quarter of 1993,
revenues increased for the third consecutive quarter, and gross profit
margins held steady for the eighth quarter in a row. In addition, the
company completed the first nine months of 1994 with cash and marketable
securities of $10.8 billion, an increase of $3.7 billion since December
31, 1993, while reducing total debt by $3.0 billion to $24.3 billion at
September 30, 1994.
Although the company is showing improved performance, it must continue
to focus on executing its product transitions, improving time to market,
and completion of planned capacity and work-force reductions.
RESULTS OF OPERATIONS
_____________________
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1994 1993 1994 1993
________ ________ ________ ________
Revenue $ 15,431 $ 14,743 $ 44,156 $ 43,320
Cost 9,277 9,141 26,958 26,582
________ ________ ________ ________
Gross profit $ 6,154 $ 5,602 $ 17,198 $ 16,738
Gross profit margin 39.9% 38.0% 38.9% 38.6%
Net earnings (loss) $ 710 $ (48) $ 1,790 $ (8,483)
The company recorded third-quarter 1994 net earnings of $1.18 per com-
mon share, compared to a net loss of $.12 per common share for the same
period of 1993. Third-quarter 1994 revenues increased 4.7 percent, but
increased 8.5 percent after adjusting for the sale of FSC. The average
number of common shares outstanding for the period was 586.3 million in
1994 versus 572.5 million in 1993.
- 7 -
RESULTS OF OPERATIONS - (CONTINUED)
___________________________________
Net earnings for the nine months ended September 30, 1994 were $1,790
million ($2.96 per common share) compared to a net loss of $437 million
before restructuring charges and the cumulative effect of SFAS 112 for the
comparable period of last year (a loss of $8.5 billion and $14.90 per com-
mon share after restructuring charges and the accounting change). Net
earnings, when adjusted for the FSC sale and the effect of a software
amortization change recorded in the first quarter of 1994, were $1,735
million ($2.86 per common share)
Revenues for the nine months ended September 30, 1994 were $44.2
billion, up 1.9 percent from the prior year's $43.3 billion. Adjusted for
the FSC sale, revenues increased 5.7 percent year over year. The average
number of shares outstanding for the nine-month period was 584.1 million
in 1994 and 571.1 million in 1993.
Third-quarter 1994 revenues increased in Europe, Asia, Canada, and the
United States compared with last year's third quarter. Specifically,
European revenues were $5.3 billion, Asia-Pacific revenues were $2.8
billion and Canada revenues were $633 million; an increase of 12.9 per-
cent, 15.7 percent and 19.4 percent, respectively, over the comparable pe-
riod of last year. U.S. revenues were $6.0 billion, an increase of 2.5
percent compared with the same period of 1993, after adjusting for the FSC
sale. Revenues from Latin America decreased 2.8 percent from the third
quarter of last year, to $667 million.
Currency had virtually no impact on the company's third-quarter net
results, because revenue gains realized from currency were largely offset
by currency-related increases in costs and expenses. Revenues when ad-
justed for the FSC sale, on a constant currency basis grew approximately 6
percent in the third quarter of 1994 versus the third quarter of 1993.
Hardware Sales
______________
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ___________________
1994 1993 1994 1993
________ ________ ________ ________
Total revenue $ 7,753 $ 6,957 $ 21,716 $ 20,220
Total cost 5,130 4,858 14,647 14,153
________ ________ ________ ________
Gross profit $ 2,623 $ 2,099 $ 7,069 $ 6,067
Gross profit margin 33.8% 30.2% 32.6% 30.0%
Revenue from hardware sales for the third quarter and first nine
months of 1994 increased 11.4 percent and 7.4 percent, respectively, over
comparable periods in 1993.
The hardware sales revenue increase was driven by continued growth in
RISC System/6000*, Original Equipment Manufacturer (OEM) products, and
personal computers on both a third-quarter and nine-month basis. Although
personal computer revenues grew on a worldwide basis, U.S. results re-
mained sluggish.
- 8 -
RESULTS OF OPERATIONS - (CONTINUED)
___________________________________
AS/400* hardware sales showed strong revenue growth in the third quar-
ter, resulting from strong customer acceptance of the new AS/400 Advanced
Series products announced in the second quarter of 1994. Revenue on a
nine-month basis was flat year over year.
High-end mainframe revenues increased for the first time since the
second quarter of 1992 in the third quarter, but continued to show a de-
cline on a nine-months basis. High-end volumes continued to show strong
growth in the third quarter, although revenue continues to be impacted by
competitive pricing pressures.
The company's storage products revenue declined, when compared to 1993
third-quarter and nine-months results, due to continued pricing pressures
and lower volumes associated with high-end storage devices.
Hardware gross profit for the third quarter and first nine months of
1994, increased 25.0 percent and 16.5 percent, respectively, over the same
periods in 1993. The increase in gross profit dollars and margins was
driven primarily by cost improvements from high-end mainframes, offset by
lower personal computer margins. Although margins increased, they con-
tinue to be affected by competitive pricing pressures on high-end products
and personal computers.
Software
________
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
____________________ ___________________
1994 1993 1994 1993
________ ________ ________ ________
Total revenue $ 2,755 $ 2,648 $ 8,065 $ 7,884
Total cost 1,041 1,026 3,322 2,995
________ ________ ________ ________
Gross profit $ 1,714 $ 1,622 $ 4,743 $ 4,889
Gross profit margin 62.2% 61.3% 58.8% 62.0%
Revenue from software for the third quarter and first nine months of
1994, increased 4.0 percent and 2.3 percent, respectively, over comparable
periods in 1993. The third-quarter increase in revenue was primarily
driven by one-time charge software associated with the strong AS/400 and
RISC System/6000 shipments in the quarter. On a nine-month basis, one-
time charge software revenue was flat.
Software gross profit for the third quarter increased 5.7 percent and
for the first nine months decreased 3.0 percent, when compared to the same
periods in 1993. The nine-month gross profit and gross profit margin were
affected by the accounting charges related to the software amortization
change implemented in the first quarter of 1994. Excluding the effects of
this change, gross profit would have increased 3.1 percent and the gross
profit margin would have been 62.5 percent for the first nine months of
1994.
- 9 -
RESULTS OF OPERATIONS - (CONTINUED)
___________________________________
Services Other Than Maintenance
_______________________________
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ___________________
1994 1993 1994 1993
________ ________ ________ ________
Total revenue $ 2,306 $ 2,289 $ 6,434 $ 6,550
Total cost 1,866 1,986 5,266 5,481
________ ________ ________ ________
Gross profit $ 440 $ 303 $ 1,168 $ 1,069
Gross profit margin 19.1% 13.2% 18.2% 16.3%
Services revenue for the third quarter increased .7 percent and for
the first nine months decreased 1.8 percent when compared to the same pe-
riods of 1993. Services gross profit for the third quarter and first nine
months increased 45.2 percent and 9.3 percent, respectively, over compara-
ble periods in 1993. The third quarter and nine months of 1994 results do
not include operational results from FSC, which were included in the com-
parable 1993 results. When adjusted for the effects of the sale, services
revenue increased 26.6 percent for the three months and 24.0 percent for
the nine months, versus the same periods in 1993. Services gross profit
increased 60.0 percent and 20.7 percent, respectively, versus comparable
periods in 1993 after adjustments for the FSC sale, and the gross profit
margins increased 4.0 points for the third quarter and decreased .5 points
for the first nine months of 1994. The growth in revenue for the third
quarter and first nine months of 1994 was primarily from increased activ-
ity in managed operations for both systems and networking activity.
Maintenance
___________
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1994 1993 1994 1993
________ ________ ________ ________
Total revenue $ 1,813 $ 1,823 $ 5,377 $ 5,484
Total cost 925 854 2,701 2,635
________ ________ ________ ________
Gross profit $ 888 $ 969 $ 2,676 $ 2,849
Gross profit margin 49.0% 53.2% 49.8% 52.0%
- 10 -
RESULTS OF OPERATIONS - (CONTINUED)
___________________________________
Revenue from maintenance for the third quarter of 1994 was flat and
for the first nine months of 1994 decreased 2.0 percent, when compared to
the same periods in 1993. Maintenance gross profit for the third quarter
and first nine months of 1994 decreased 8.4 percent and 6.1 percent, re-
spectively, versus the same periods in 1993. Maintenance revenue and
gross profit margins are expected to continue to be adversely affected by
the competitive environment and resulting pricing pressures on maintenance
offerings.
Rentals and Financing
_____________________
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1994 1993 1994 1993
________ ________ ________ ________
Total revenue $ 804 $ 1,026 $ 2,564 $ 3,182
Total cost 315 417 1,022 1,318
________ ________ ________ ________
Gross profit $ 489 $ 609 $ 1,542 $ 1,864
Gross profit margin 60.8% 59.4% 60.1% 58.6%
Rentals and financing revenue for the third quarter and first nine
months of 1994 decreased 21.6 percent and 19.4 percent, respectively, from
the same periods in 1993. Gross profit in the third quarter and nine
months of 1994 declined 24.5 percent and 22.5 percent, respectively, com-
pared to the same periods in 1993. The decreases are the results of lower
financing of IBM products, when compared to the same periods of 1993.
Expenses
________
Total expenses declined 13.9 percent, or $734 million, compared with
the third quarter of 1993. Through the first nine months of 1994, total
expense fell $2.8 billion, excluding the gain from the sale of FSC, over
the same period of last year. From year-end 1992 through September 30,
1994, the company's expenses have been reduced by a cumulative $5.6
billion.
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1994 1993 1994 1993
________ ________ ________ ________
Selling, general and
administrative $ 3,885 $ 4,259 $ 10,969 $ 12,822
Percentage of revenue 25.2% 28.9% 24.8% 29.6%
Research, development and
engineering $ 1,053 $ 1,372 $ 3,245 $ 4,104
Percentage of revenue 6.8% 9.3% 7.3% 9.5%
- 11 -
RESULTS OF OPERATIONS - (CONTINUED)
___________________________________
Selling, general and administrative expense for the third quarter and
first nine months of 1994 decreased 8.8 percent and 14.4 percent, respec-
tively, from the same periods in 1993. The nine month decrease includes
the before-tax gain from the FSC sale. Without this gain, selling, gen-
eral and administrative expense declined 11.4 percent from the first nine
months of 1993. These decreases reflect the company's continued focus on
productivity and process re-engineering, restructuring programs, and ex-
pense controls.
Research, development and engineering expense for the third quarter
and for the nine months of 1994 decreased 23.3 percent and 20.9 percent,
respectively, when compared to the same periods in 1993. These decreases
reflect the company's actions to scrutinize development efforts and repri-
oritize them to growth areas, eliminate duplicate development efforts, as
well as the company's continued focus on productivity and process re-
engineering, restructuring programs, and expense controls.
Other Income, principally interest, amounted to $221 million and
$1,108 million for the third quarter and first nine months of 1994, re-
spectively, a decrease of 24.4 percent and an increase of 71.5 percent
when compared to the same periods in 1993. The decrease in the third
quarter was primarily due to the new Brazilian monetary policy implemented
in July, 1994, which helped to dramatically reduce inflation and interest
rates. The increase for the first nine months was due primarily to higher
levels of cash and higher interest rates notably in Brazil, whose economic
environment was highly inflationary, prior to the introduction of the new
monetary policy. Although Other Income increased, exchange losses from
currency revaluations of cash largely offset this increase.
Interest expense not included as cost of financing was $233 million
and $1,010 million for the third quarter and first nine months of 1994,
respectively, a decrease of 32.6 percent and an increase of 3.9 percent
when compared to the same periods in 1993. The decrease in the third
quarter was primarily driven by the new Brazilian monetary policy, which
dramatically reduced inflation and interest rates. The increase for the
first nine months was primarily a result of higher levels of local cur-
rency debt, notably in Brazil, whose economic environment was highly in-
flationary, with high interest rates. Although interest expense
increased, this increase is substantially offset by exchange gains result-
ing from revaluations of the associated debt. Interest on total bor-
rowings of the company, which includes interest expense and interest costs
associated with rentals and financing, amounted to $424 million and $1,600
million for the third quarter and first nine months of 1994, respectively.
Of these amounts, $4 million for the third quarter and $18 million for the
first nine months were capitalized.
Exchange gains and losses are recorded as part of selling, general and
administrative expense.
- 12 -
RESULTS OF OPERATIONS - (CONTINUED)
___________________________________
The effective tax rate for the quarter ended September 30, 1994, was
41.0 percent, versus 41.3 percent tax benefit for the same period in
1993. The effective tax rate for the first nine months of 1994 was 41.9
percent, versus an 11.5 percent tax benefit for the same period in 1993.
The increase is primarily the result of restructuring charges recorded in
the second quarter of 1993 not being fully tax effected, as well as the
mix of earnings and corresponding weighting of tax rates on a country-by-
country basis.
FINANCIAL CONDITION
___________________
The Consolidated Statement of Financial Position at September 30, 1994
reflects continued 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
_______________
(Dollars in millions) At September 30 At December 31
1994 1993
_______________ ______________
Current assets $ 40,150 $ 39,202
Current liabilities 28,280 33,150
________ ________
Working capital $ 11,870 $ 6,052
Working capital at September 30, 1994 increased $5.8 billion from
December 31, 1993. Current assets increased $.9 billion from year-end
1993 levels, with decreases in accounts receivable of $.8 billion, prepaid
expenses of $1.4 billion, and inventories of $.6 billion, offset by an in-
crease of $3.7 billion in cash, cash equivalents, and marketable securi-
ties. The increase in cash, cash equivalents, and marketable securities
is primarily attributable to cash generated from operations, and proceeds
from the sale of FSC, offset by payments to settle outstanding debt. The
decrease in accounts receivable largely reflects improved collection expe-
rience, particularly in the U.S. and Europe. Lower prepaid expense bal-
ances result from the disposition of FSC net assets which were being held
for sale, as well as a decrease in current period tax assets relative to
implementation of the company's workforce reduction actions. The decrease
in inventories from year-end 1993 levels is associated with ongoing ef-
forts to "right-size" the company's inventories, particularly personal
computer inventories.
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FINANCIAL CONDITION - (CONTINUED)
_________________________________
Current liabilities decreased $4.9 billion from December 31, 1993 due
to declines in accounts payable and accruals of $2.9 billion, short-term
debt of $1.9 billion, and taxes payable of $.1 billion. The decrease in
accounts payable and accruals is due to the normal seasonal decline of ac-
counts payable balances from year-end levels, as well as lower restructur-
ing accrual balances resulting from separation payments to employees
associated with the company's ongoing work force reduction programs. The
decline in short-term debt is driven by the company's ongoing efforts to
reduce its overall outstanding debt obligations.
Investments
___________
The company's capital expenditures for plant and other property were
approximately $1.6 billion for the first nine months of both 1994 and
1993.
In addition to software development expense included in research, de-
velopment and engineering expense, the company capitalized $.9 billion of
software costs during the first nine months of 1994, down $.2 billion from
the amount capitalized in the comparable 1993 period. Ongoing amorti-
zation of capitalized software costs amounted to $1.3 billion in the first
nine months of both 1994 and 1993. Additionally, the company incurred $.3
billion in accelerated amortization of capitalized software costs result-
ing from the software amortization change implemented in the first quarter
of 1994.
Long-Term Debt and Equity
_________________________
Long-term debt declined from $15.2 billion at year-end 1993 to $14.1
billion at September 30, 1994, due to the company's continuing focus on
reduction of its outstanding debt obligations, principally non-customer
financing debt.
Stockholders' equity increased from $19.7 billion at December 31,
1993, to $22.5 billion at September 30, 1994 as a result of increases in
net retained earnings of $1.3 billion, capital stock of $.3 billion, and,
due to the majority of worldwide currencies strengthening versus the U.S.
dollar during the period, equity translation adjustments of $1.2 billion.
Cash Flow
_________
(Dollars in millions) Nine Months Ended
September 30
_______________________
1994 1993
________ ________
Net cash provided from (used in):
Operating activities $ 8,366 $ 2,353
Investment activities (751) (2,442)
Financing activities (4,159) 1,344
Effect of exchange rate changes
on cash and cash equivalents 5 (367)
________ ________
Net change in cash and cash equivalents $ 3,461 $ 888
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FINANCIAL CONDITION - (CONTINUED)
_________________________________
The period-to-period improvement in cash flow from operations is
mainly driven by increased earnings and lower accounts receivable bal-
ances, offset by a decrease in liabilities resulting primarily from lower
restructuring accrual balances due to separation payments to employees.
The improved cash flow from investing activities compared to the 1993
period is attributable to the proceeds derived from the sale of FSC in the
first quarter of 1994.
The period-to-period decrease in cash flow from financing activities
is principally the result of the company's ongoing efforts to reduce its
overall outstanding debt obligations.
Liquidity
_________
During the nine months of 1994, the company received total cash pro-
ceeds of approximately $10.5 billion from the sale and securitization of
primarily trade receivables. The net cash impact from these activities
was not material since the majority of such receivables are related to ex-
isting revolving securitization programs with collections generally occur-
ring within 30-60 days. Additionally, through September 30, 1994, the
company issued, in lieu of purchasing on the open market, 4.9 million
shares of common stock to be sold to employees under the IBM Employee
Stock Purchase Plan. The company also contributed .7 million shares of
common stock, as well as cash to the IBM Retirement Plan Trust Fund.
Other Matters
_____________
Although the basic business of the company has been built from within,
it has made important acquisitions as well as dispositions. It is antic-
ipated that more transactions may occur. As the timing and significance
of future transactions will depend upon opportunities, it is not practical
to identify any particular timetable or targets, nor does the company be-
lieve that it is prudent to comment in advance of reaching a firm deal,
particularly as premature statements are likely to make it more difficult
for the company to accomplish its objectives.
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PART II - OTHER INFORMATION
___________________________
ITEM 6 (a). Exhibits
____________________
Exhibit Number
11 Statement re: computation of per share earnings.
99 Supplemental Consolidated Statement of Operations schedules.
ITEM 6 (b). Reports on Form 8-K
________________________________
No reports on Form 8-K were filed during the third 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: November 9, 1994
______________________
By:
J. B. York
___________________________________________
J. B. York
Senior Vice President and
Chief Financial Officer
* RISC System/6000 and Application System/400 are trademarks or registered
trademarks of the International Business Machines Corporation.
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