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, 1995
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 558,315,105 shares of common stock outstanding
at September 30, 1995.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act
of 1934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
________ ________.
INDEX
_____
Page
____
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Operations for the three and nine
months ended September 30, 1995 and 1994 . . . . . . . . . . 1
Consolidated Statement of Financial Position at
September 30, 1995 and December 31, 1994 . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1995 and 1994 . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . 5
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
___________________ ____________________
1995 1994 1995 1994
Revenue: ________ ________ ________ ________
Hardware sales $ 7,745 $ 7,753 $ 24,131 $ 21,716
Software 3,134 2,755 9,079 8,065
Services 3,133 2,306 8,619 6,434
Maintenance 1,849 1,813 5,547 5,377
Rentals and financing 893 804 2,644 2,564
________ ________ ________ ______
Total revenue 16,754 15,431 50,020 44,156
Cost:
Hardware sales 4,952 5,130 14,938 14,647
Software 1,078 1,041 3,149 3,322
Services 2,501 1,866 6,860 5,266
Maintenance 911 925 2,679 2,701
Rentals and financing 391 315 1,178 1,022
________ ________ ________ ________
Total cost 9,833 9,277 28,804 26,958
________ ________ ________ ________
Gross profit 6,921 6,154 21,216 17,198
Operating expenses:
Selling, general and
administrative 3,858 3,885 11,374 10,969
Research, development and
engineering 1,035 1,053 2,922 3,245
Purchased incomplete software
technology 1,840 -- 1,840 --
________ ________ ________ ________
Total operating expenses 6,733 4,938 16,136 14,214
Operating income 188 1,216 5,080 2,984
Other income, principally interest 208 221 692 1,108
Interest expense 159 233 527 1,010
________ ________ ________ ________
Earnings before income taxes 237 1,204 5,245 3,082
Income tax provision 775 494 2,778 1,292
________ ________ ________ ________
Net (loss) earnings (538) 710 2,467 1,790
Preferred stock dividends and 5 21 57 63
transaction costs ________ ________ ________ ________
Net (loss) earnings applicable to
common shareholders $ (543) $ 689 $ 2,410 $ 1,727
======== ======== ======== ========
Net (loss) earnings per share
of common stock $ (.96) $ 1.18 $ 4.19 $ 2.96
Average number of common shares
outstanding (millions) 564.6 586.3 575.1 584.1
Cash dividends per common share $ .25 $ .25 $ .75 $ .75
(The accompanying notes are an integral part of the financial statements.)
- 1 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
ASSETS
At September 30 At December 31
(Dollars in millions) 1995 1994
_______________ ______________
Current assets:
Cash $ 1,259 $ 1,240
Cash equivalents 5,181 6,682
Marketable securities - at cost, which
approximates market 511 2,632
Notes and accounts receivable -
net of allowances 14,710 15,182
Sales-type leases receivable 6,018 6,351
Inventories, at lower of average cost or market
Finished goods 1,487 1,442
Work in process 4,975 4,636
Raw materials 58 256
________ ________
Total inventories 6,520 6,334
Prepaid expenses and other current assets 3,443 2,917
________ ________
Total current assets 37,642 41,338
Plant, rental machines and other property 44,476 44,820
Less: Accumulated depreciation 28,043 28,156
________ ________
Plant, rental machines and other property - net 16,433 16,664
Software, less accumulated
amortization (1995, $11,027; 1994, $10,793) 2,740 2,963
Investments and sundry assets 20,687 20,126
Total assets $ 77,502 $ 81,091
======== ========
- 2 -
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) 1995 1994
_______________ ______________
Current liabilities:
Taxes $ 2,807 $ 1,771
Accounts payable and accruals 15,133 17,885
Short-term debt 11,076 9,570
________ ________
Total current liabilities 29,016 29,226
Long-term debt 10,436 12,548
Other liabilities 14,245 14,023
Deferred income taxes 1,682 1,881
Contingent common stock repurchase commitment 459 --
Stockholders' equity:
Preferred stock - par value $.01 per share 253 1,081
Shares authorized: 150,000,000
Shares issued: 1995 - 2,610,711
1994 - 11,145,000
Common stock - par value $1.25 per share 7,024 7,342
Shares authorized: 750,000,000
Shares issued: 1995 - 569,437,286
1994 - 588,180,244
Retained earnings 12,343 12,352
Translation and other adjustments 3,184 2,672
Treasury stock, at cost (1,140) (34)
Shares: 1995 - 11,122,181
1994 - 469,500 ________ ________
Total stockholders' equity 21,664 23,413
________ ________
Total liabilities and stockholders' equity $ 77,502 $ 81,091
======== ========
(The accompanying notes are an integral part of the financial statements.)
- 3 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30:
(UNAUDITED)
(Dollars in millions) 1995 1994*
________ ________
Cash flow from operating activities:
Net earnings $ 2,467 $ 1,790
Adjustments to reconcile net earnings to cash
provided from operating activities:
Effect of restructuring charges (1,721) (1,976)
Depreciation 2,887 3,223
Amortization of software 1,185 1,604
Changes in operating assets and liabilities 331 4,441
(Gain) on disposition of investment assets (124) (501)
Acquisition of Lotus incomplete software technology 1,840 --
_______ _______
Net cash provided from operating activities 6,865 8,581
_______ _______
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (1,886) (1,262)
Investment in software (652) (958)
Purchases of marketable securities and
other investments (860) (2,442)
Acquisition of Lotus Development Corp. - net (2,875) --
Proceeds from marketable securities and
other investments 2,789 2,193
Proceeds from sale of Federal Systems Company -- 1,503
_______ _______
Net cash (used in) investing activities (3,484) (966)
_______ _______
Cash flow from financing activities:
Proceeds from new debt 4,294 4,315
Payments to settle debt (6,729) (6,891)
Short-term borrowings less
than 90 days - net 1,756 (1,383)
Preferred stock transactions - net (854) --
Common stock transactions - net (3,021) 292
Cash dividends paid (448) (492)
_______ _______
Net cash (used in) financing activities (5,002) (4,159)
_______ _______
Effect of exchange rate changes
on cash and cash equivalents 139 5
_______ _______
Net change in cash and cash equivalents (1,482) 3,461
Cash and cash equivalents at January 1 7,922 5,861
_______ _______
Cash and cash equivalents at September 30 $ 6,440 $ 9,322
======= =======
* Reclassified to conform with 1995 presentation.
(The accompanying notes are an integral part of the financial statements.)
- 4 -
Notes to Consolidated Financial Statements
------------------------------------------
1. In the opinion of management of International Business Machines
Corporation (the company), all adjustments necessary to a fair
statement of the results for the unaudited three and nine month
periods have been made. In addition to the adjustments for normal
recurring accruals, the company recorded charges in the third quarter
of 1995 of approximately $1.8 billion, associated with the purchase of
incomplete software technology, as a result of the company's recent
acquisition of the Lotus Development Corp. In the first quarter
of 1994, the company recorded charges of $.3 billion for software
writedowns and an after-tax gain of $248 million for the sale of its
Federal Systems Company (FSC).
2. (Loss) earnings per share amounts were computed by dividing
(loss) earnings after deduction of preferred stock dividends by
the average number of common shares outstanding.
3. The translation and other adjustments line of stockholders' equity
includes equity translation adjustments of $3,190 million at September
30, 1995, and $2,672 million at December 31, 1994.
4. The Consolidated Statement of Financial Position at September 30,
1995 includes balances relative to restructuring programs of
approximately $.2 billion in accounts payable and accruals, and $.5
billion in plant, rental machines and other property. At December 31,
1994, the approximate restructuring balances were $1.3 billion in
accounts payable and accruals, $.1 billion in other liabilities, and
$.9 billion in plant, rental machines and other property. The
company anticipates that these restructuring reserve balances will be
fully utilized by December 31, 1995.
5. On July 5, 1995 the company acquired all outstanding shares of
Lotus Development Corp. for approximately $3.2 billion in a
transaction which has been accounted for under the purchase method.
The company considers Lotus to be an applications-enabling software
company engaged in high growth segments of the software market.
A key element of the acquisition is the company's perception of the
value of Lotus's Notes technology. This technology when fully
developed can position the company as a leader in the workgroup
computing market.
Although Notes is a leading client-server based workgroup computing
technology, it is the company's belief that it is not technologically
advanced enough and that substantial development will be required to
complete the software technology to meet the company's strategic goals.
In view of the preceding, it is believed that the acquisition of Lotus
provides the company with an opportunity to successfully advance
workgroup technology from local area network environments to the
enterprise-wide environments.
The company engaged a nationally recognized, independent appraisal firm
to express an opinion on the fair market value of the assets acquired
to serve as a basis for allocation of the purchase price to the various
classes of assets.
- 5 -
Notes to Consolidated Financial Statements - (continued)
--------------------------------------------------------
The appraisal included both tangible and identifiable intangible
assets, as well as software technology. The company allocated
the total purchase price and increased deferred tax liabilities by
$305 million relating to the increased valuation of the assets
acquired as follows:
$ Millions
__________
Tangible Net Assets $ 305
Identifiable Intangible Assets 542
Current Software Products 290
Software Technology Under
Development 1,840
Goodwill 564
Deferred Tax Liabilities (305)
__________
$ 3,236
The tangible net assets consist primarily of cash, accounts
receivable, land, buildings, leasehold improvements, and other
personal property. The identifiable intangible assets consist of
trademarks ($369 million), assembled work force ($90 million),
employee agreements ($78 million), and leasehold interests
($5 million). The identifiable intangible assets and goodwill will
be amortized on a straight-line basis over a five year period.
The software technology valuation was accomplished through the
application of an income approach. Projected debt-free income,
revenue net of provision for operating expenses, income taxes and
returns on requisite assets were discounted to a present value. This
approach was used for each of the Lotus product lines. Software
technology was divided into two categories:
- Current software products
- Software technology under development
Current software products included:
- "Current products" representing products currently in the
market-place as of the acquisition date.
- "In development-complete" for products still in development
stage and technologically feasible.
The fair market value of the purchased current software products was
determined to be $290 million. This amount was recorded as an asset
and is being amortized on a straight-line basis over two years.
- 6 -
Notes to Consolidated Financial Statements - (continued):
---------------------------------------------------------
Software technology under development included the value of products
still in the development stage and not considered to have reached
technological feasibility stage.
As a result of the valuation, the fair market value of the
software technology under development was determined to be $1,840
million. In accordance with applicable accounting rules, this amount
was expensed upon acquisition in the third quarter of 1995.
6. The company has outstanding put options on 4,750,000 shares of its
common stock, exercisable on specific dates in 1995, giving other
parties the right to sell shares of IBM common stock to the company at
contractually specified prices. The contingent common stock repurchase
commitment account represents the amount the company would be obligated
to pay if all put options were exercised.
7. A supplemental Consolidated Statement of Operations schedule has
been provided for informational purposes only, to exclude the effects
of the charge associated with the Lotus Development Corp. acquisition
in the third quarter of 1995, and the FSC sale and software writedowns
recorded in the first quarter of 1994. This supplemental statement is
shown in exhibit 99 on page 19. This information is presented
voluntarily and is provided solely to assist in understanding the
effects of these items on the Consolidated Statement of Operations.
8. Subsequent Event: On October 25, 1995, the company issued
$600 million of 7% debentures due October 30, 2025, and $150 million
7% debentures due October 30, 2045. The net proceeds from the sale of
debentures will be used for general corporate purposes.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
The company's third-quarter results showed revenue, earnings
and earnings per share improvement over the third quarter of 1994,
when the one-time charge of approximately $1.8 billion associated
with the company's recent acquisition of the Lotus Development Corp. is
excluded. Hardware sales revenue was disappointing in the third
quarter, largely due to supply imbalances in System/390 servers and
high-end storage products. The overall gross profit margin was 41.3
percent and the balance sheet remained strong. Total expenses,
excluding the Lotus charge, declined 2 percent in the third quarter
compared with the same period of last year. The company stated that
its ongoing expense reduction and resource-balancing programs will
include additional, limited work force reduction in some business
units in the fourth quarter, primarily in overhead areas.
Consolidations of leased space and related actions will also continue.
These actions are expected to result in a charge of about $800 million,
which will be included in the company's fourth-quarter results.
- 7 -
Results of Operations
---------------------
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1995 1994 1995 1994
________ ________ ________ ________
Revenue $ 16,754 $ 15,431 $ 50,020 $ 44,156
Cost 9,833 9,277 28,804 26,958
________ ________ ________ ________
Gross profit $ 6,921 $ 6,154 $ 21,216 $17,198
Gross profit margin 41.3% 39.9% 42.4% 38.9%
Net (loss) earnings $ (538) $ 710 $ 2,467 $ 1,790
The company recorded a third quarter 1995 loss of $.96 per common
share, compared with earnings of $1.18 per common share, in the third
quarter of last year. The third quarter 1995 results include a
one-time charge of approximately $1.8 billion associated with the
company's recent acquisition of the Lotus Development Corp. Excluding
this charge, third-quarter 1995 earnings were $1.3 billion, or $2.30
per common share. Total revenue increased 8.6 percent over the same
period of 1994 to $16.8 billion. The average number of common shares
outstanding for the period was 564.6 million in 1995 versus 586.3
million in 1994.
Net earnings for the nine months ended September 30, 1995, were
$4.19 per common share, compared with earnings of $2.96 in the first
nine months of 1994. The results include a one-time charge of
approximately $1.8 billion associated with the Lotus acquisition and
the 1994 results include an after-tax gain of $248 million from the
sale of FSC and an after tax writedown of $192 million relating to a
change in software amortization periods. Excluding these items, the
company's adjusted earnings per common share were $7.39 for the first
nine months of 1995 versus $2.86 per common share for the comparable
1994 period. Total revenue for the nine months ended September 30,
1995 was up 13.3 percent from the prior year. The average number of
common shares outstanding for the period was 575.1 million in 1995
versus 584.1 million in 1994.
Revenue increased in all geographic areas in the third quarter
compared with the same period of last year. Revenue from the United
States totaled $6.5 billion, up 8.5 percent from the same period last
year. Revenue from Europe/Middle East/Africa totaled $5.6 billion, up
5.7 percent year-over-year, while Asia Pacific revenue was $3.3
billion, an increase of 14.0 percent. Revenue from Latin America was
$725 million, up 8.7 percent, while revenue from Canada grew 9.6
percent to $694 million, when compared with the same period of 1994.
Currency had about a 3 percentage point favorable impact on
revenue results in the third quarter. This compares with a 6
percentage point positive impact in the first quarter of 1995 and a 7
percentage point positive effect in the second quarter of this year.
- 8 -
Results of Operations - (continued)
-----------------------------------
Hardware Sales
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ___________________
1995 1994 1995 1994
________ ________ ________ ________
Total revenue $ 7,745 $ 7,753 $ 24,131 $ 21,716
Total cost 4,952 5,130 14,938 14,647
________ ________ ________ ________
Gross profit $ 2,793 $ 2,623 $ 9,193 $ 7,069
Gross profit margin 36.1% 33.8% 38.1% 32.6%
Revenue from hardware sales for the third quarter of 1995 was
comparable to the same period of 1994. Revenue from hardware sales
for the first nine months of 1995 increased 11.1 percent over the
comparable period in 1994. The third quarter and first nine-months
revenue had a benefit of about 2 points and 5 points, respectively,
from currency in 1995.
The hardware sales in the third quarter were affected
by lower System/390* revenue, as a result of ongoing price
reductions, as well as supply shortages for CMOS models and lower
AS/400* revenue due to product transitions. These decreases were
offset by increased revenue for RISC/6000* products, personal computers
and storage products. Storage products revenue grew primarily as a
result of strong growth in low-end Original Equipment Manufacturer
(OEM) products, offset by a decline in high-end storage products,
which was attributable to supply shortages for RAMAC products.
The hardware sales revenue increase for the first nine months of
1995, versus 1994, was driven by growth in RISC/6000 products, AS/400,
personal computers and storage products, offset by a slight decline in
System/390 revenue.
Hardware sales gross profit dollars for the third quarter and first
nine months of 1995 increased 6.5 percent and 30.0 percent,
respectively, over comparable periods of 1994. The increase
in third-quarter 1995 versus 1994 gross profit dollars and margin
was driven by improved margins in personal computers, OEM
products and RISC/6000 products, offset by lower margins on high-end
storage products. The increase in gross profit dollars and margin
for the first nine months of 1995 versus 1994 was a result of
improved margins in personal computers, RISC/6000 products, System/390
and OEM, offset by lower high-end storage margins. The increases were
driven by cost improvements as a result of prior restructuring actions,
reengineering activities and increased revenue growth in key product
areas. Although margins increased, they continue to be affected by
competitive pricing pressures on high-end products and personal
computers.
- 9 -
Results of Operations - (continued)
-----------------------------------
Software
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
____________________ ___________________
1995 1994 1995 1994
________ ________ ________ ________
Total revenue $ 3,134 $ 2,755 $ 9,079 $ 8,065
Total cost 1,078 1,041 3,149 3,322
________ ________ ________ ________
Gross profit $ 2,056 $ 1,714 $ 5,930 $ 4,743
Gross profit margin 65.5% 62.2% 65.3% 58.8%
Revenue from software for the third quarter and first nine months
of 1995 increased 13.7 percent and 12.6 percent, respectively, over
comparable periods in 1994. The third-quarter and year-to-date
increases in revenue were primarily driven by the Lotus results being
included in the company's third quarter 1995 results for the first
time. In addition, the third quarter and nine-month results had a
benefit of about 3 points and 6 points, respectively, from currency
in 1995.
Software gross profit for the third quarter and first nine months
of 1995 increased 20.0 percent and 25.0 percent, respectively, when
compared to the same periods in 1994. The 1994 nine-month gross profit
dollars 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, 1995 gross
profit dollars would have increased 17.7 percent and the gross profit
margin would have increased 2.8 points from the first nine months of
1994.
Services Other Than Maintenance
-------------------------------
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ___________________
1995 1994 1995 1994
________ ________ ________ ________
Total revenue $ 3,133 $ 2,306 $ 8,619 $ 6,434
Total cost 2,501 1,866 6,860 5,266
________ ________ ________ ________
Gross profit $ 632 $ 440 $ 1,759 $ 1,168
Gross profit margin 20.2% 19.1% 20.4% 18.2%
- 10 -
Results of Operations - (continued)
-----------------------------------
Services revenue increased 35.9 percent and 34.0 percent,
respectively, in the third quarter and first nine months of 1995, when
compared to the same periods of last year. Services revenue benefited
by about 4 points and 6 points, respectively, from currency in the
third quarter and first nine months of 1995. The revenue increases were
primarily driven by continued growth in managed operations for both
system and networking activity, as well as availability services and
systems integration.
Services gross profit dollars increased in the third quarter and
first nine months of 1995, 43.6 percent and 50.6 percent, respectively,
when compared to year-ago periods.
Maintenance
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1995 1994 1995 1994
________ ________ ________ ________
Total revenue $ 1,849 $ 1,813 $ 5,547 $ 5,377
Total cost 911 925 2,679 2,701
________ ________ ________ ________
Gross profit $ 938 $ 888 $ 2,868 $ 2,676
Gross profit margin 50.7% 49.0% 51.7% 49.8%
Maintenance revenue for the third quarter and first nine months of
1995 increased 2.0 percent and 3.2 percent, respectively, over
comparable periods in 1994. The third quarter and nine-months revenue
had a benefit of about 3 points and 6 points, respectively, from
currency in 1995. Maintenance revenue continues to be affected by the
competitive environment and resulting pricing pressures on maintenance
offerings. Maintenance gross profit dollars increased 5.6 percent and
7.2 percent, respectively, in the third quarter and first nine months
of 1995, when compared to the same periods of 1994.
Rentals and Financing
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1995 1994 1995 1994
________ ________ ________ ________
Total revenue $ 893 $ 804 $ 2,644 $ 2,564
Total cost 391 315 1,178 1,022
________ ________ ________ ________
Gross profit $ 502 $ 489 $ 1,466 $ 1,542
Gross profit margin 56.3% 60.8% 55.5% 60.1%
- 11 -
Results of Operations - (continued)
-----------------------------------
Rentals and financing revenue increased 11.0 percent and 3.1
percent, respectively, for the third quarter and first nine months of
1995, when compared to the same periods of last year. Rentals and
financing revenue had a benefit of about 3 percent and 5 percent,
respectively, from currency in the third quarter and first nine months
of 1995. The 1995 results reflect a substantial increase in new
financing originations versus 1994.
Rentals and financing gross profit dollars increased 2.7 percent in
the third quarter of 1995 and declined 4.9 percent for the first nine
months of 1995, when compared to the same periods of the prior year.
The decrease for the nine months of 1995 is a reflection of declining
prices on high-end products and the rental business over the past few
years and to changing country mix.
Expenses
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1995 1994 1995 1994
________ ________ ________ ________
Selling, general and
administrative $ 3,858 $ 3,885 $ 11,374 $ 10,969
Percentage of revenue 23.0% 25.2% 22.7% 24.8%
Research, development and
engineering $ 1,035 $ 1,053 $ 2,922 $ 3,245
Percentage of revenue 6.2% 6.8% 5.8% 7.3%
Selling general and administrative expense decreased .7 percent in
the third quarter of 1995 and increased 3.7 percent for the first nine
months of 1995, when compared to the same periods of 1994. Excluding
the effects of currency and the increased expenses due to the
acquisition of Lotus in the third quarter of 1995, selling, general and
administrative expense would have decreased about 7 percent from 1994
levels. The first nine months results of 1994 included the gain from
the sale of FSC. Excluding the increased expenses from the date of the
Lotus acquisition and currency effects in 1995 and the FSC gain in
1994, selling general and administrative expense would have decreased
by about 3 percent.
Research, development and engineering expense, which is primarily
performed in the United States, decreased 1.7 percent and 9.9
percent, respectively, for the third quarter and first nine months of
1995, from comparable periods in 1994. These decreases reflect the
company's focus on productivity and expense controls.
Incomplete software technology was a result of the $1.8
billion charge taken in the third quarter of 1995 associated with the
acquisition of Lotus.
- 12 -
Results of Operations - (continued)
-----------------------------------
Other income, principally interest and interest expense, decreased
from 1994 first-nine-month levels due primarily to the switch to the
REAL currency in Brazil in July, 1994. This change reduced the
company's interest income and interest expense, as well as the exchange
gains and losses associated with local currency cash deposits and
borrowings, which are a component of selling, general and
administrative expense.
Interest on total borrowings of the company and its subsidiaries,
which includes interest expense and interest costs associated with
rentals and financing, amounted to $384 million and $1,186 million
for the third quarter and first nine months of 1995, respectively.
Of these amounts, $6 million for the third quarter and $16 million for
the first nine months were capitalized.
The effective tax rate for the quarter ended September 30, 1995 was
326.6 percent, versus 41.0 percent for the same period of 1994. The
third quarter 1995 effective tax rate is impacted by the $1.8 billion
charge associated with the acquisition of Lotus, which does not give
rise to a tax benefit. Excluding this item, the effective
tax rate from operations would have been 37.3 percent. The 3.7 point
decrease in the effective tax rate from operation in 1995 versus 1994,
was primarily the result of the mix of earnings and corresponding
weighting of tax rates on a country-by-country basis.
The effective tax rate for the first nine months of 1995 was 53.0
percent, versus 41.9 percent for the same period in 1994. Excluding
the $1.8 billion Lotus charge, the effective tax rate from operations
for the first nine months of 1995, would have been 39.2 percent. The
2.7 point decrease from the 1994 rate was a result of the same factors
that impacted the third quarter effective tax rate after adjusting for
the Lotus charge.
Financial Condition
-------------------
The company's financial position at September 30, 1995 reflects a
decrease in total assets of $3.6 billion from December 31, 1994,
principally in cash, cash equivalents and marketable securities. This
is primarily the result of expenditures of $4.1 billion for common and
preferred stock repurchases, $2.9 billion net cash for the acquisition
of the Lotus Development Corp., and $1.7 billion in restructuring
payments related to restructuring charges incurred in prior periods,
offset by improved net earnings.
Working Capital
(Dollars in millions) At September 30 At December 31
1995 1994
_______________ ______________
Current assets $ 37,642 $ 41,338
Current liabilities 29,016 29,226
________ ________
Working capital $ 8,626 $ 12,112
- 13 -
Financial Condition - (continued)
---------------------------------
Total current assets declined $3.7 billion from year-end 1994 with
declines in cash, cash equivalents, and marketable securities of $3.6
billion and accounts receivable of $.8 billion, offset by increases of
$.2 billion in inventories and $.5 billion in prepaid expenses. The
decrease in cash, cash equivalents and marketable securities results
primarily from the stock repurchases, restructuring payments, and Lotus
acquisition, offset by cash generated from operations; while the
decrease in accounts receivable is due to improved accounts receivable
collections worldwide. Inventories have generally increased to meet
anticipated fourth quarter demand, and the increase in prepaid
expense results primarily from the seasonal increase in deferred
account and prepaid activity from year-end levels.
Total current liabilities declined $.2 billion from
December 31, 1994, as accounts payable and accruals declined $2.7
billion, offset by increases of $1.0 billion in taxes payable and
$1.5 billion in short-term debt. The decrease in accounts payable and
accruals relates to the normal seasonal decline in accounts payable
from their year-end levels, as well as lower restructuring accrual
balances resulting from the implementation of the company's
restructuring programs. The increase in taxes payable is driven by the
improvement in the company's operating results, while the increase in
short-term debt is due largely to the reclassification of current
maturities of long-term debt to short-term.
Investments
The company's capital expenditures for plant, rental machines and
other property were approximately $2.9 billion for the nine months
ended September 30, 1995, an increase of approximately $.9 billion
from the comparable 1994 period, reflecting the company's continuing
investment in high-growth advanced technology areas such as
microelectronics.
In addition to software development expense included in research,
development and engineering expense, the company capitalized $.7
billion of software costs during the nine months ended September 30,
1995, down $.2 billion from the amount capitalized in the
comparable 1994 period. Amortization of capitalized software costs
amounted to $1.2 billion in the nine month period ended
September 30, 1995, and $1.6 billion for the comparable 1994 period
(including $.3 billion in accelerated amortization resulting from the
software amortization change implemented in the first quarter of 1994).
Investments and sundry assets were $20.7 billion at
September 30, 1995, an increase of $.6 billion from December 31, 1994,
primarily the result of increases in non-current notes and accounts
receivable, pension assets and the goodwill associated with the
acquisition of the Lotus Development Corp., offset by declines in
non-current sales-type leases, and deferred tax assets.
Long-Term Debt and Equity
Long-term debt was $10.4 billion at September 30, 1995, a decrease
of $2.1 billion from year-end 1994, due to the reclassification of
current maturities of long-term debt to short-term. Other non-current
liabilities at $14.2 billion increased $.2 billion from December 31,
1994, principally due to the impact of currency fluctuations on these
balances.
- 14 -
Financial Condition - (continued)
--------------------------------
Stockholders' equity declined from $23.4 billion at
December 31, 1994, to $21.7 billion, primarily the result of the
implementation of the stock repurchase programs announced in January
of 1995.
Cash Flow
(Dollars in millions) Nine Months Ended
September 30
_______________________
1995 1994
________ ________
Net cash provided from (used in):
Operating activities $ 6,865 $ 8,581
Investing activities (3,484) (966)
Financing activities (5,002) (4,159)
Effect of exchange rate changes
on cash and cash equivalents 139 5
________ ________
Net change in cash and cash equivalents $ (1,482) $ 3,461
For the nine months ended September 30, 1995, the company had an
overall net decrease in cash and cash equivalents of $1.5 billion
compared to a net increase of $3.5 billion for the same period in 1994.
Net cash provided from operating activities was $6.9 billion for
the nine months ended September 30, 1995, versus $8.6 billion in the
comparable period of 1994. Cash flows from operations for the 1995
period reflect the improvement in net earnings, offset by a decline in
cash flows due to changes in operating assets and liabilities primarily
resulting from the significant improvement in accounts receivable
collections in 1994.
Net cash used in investing activities was $3.5 billion for the nine
month period ended September 30, 1995, compared to a $.8 billion net
use of funds in the equivalent 1994 period. The increase in funds
utilized in investing activities is attributable to the company's
acquisition of the Lotus Development Corp. in July of 1995,
partially offset by cash inflows from the sale of marketable securities
during 1995. In addition, the 1994 period is impacted by the
proceeds from the sale of FSC.
Net cash used in financing activities amounted to $5.0 billion for
the nine months ended September 30, 1995. The increase of $1.0
billion from the comparable 1994 period was principally the result
of implementation of the company's preferred and common stock
repurchase programs, offset by higher levels of short-term borrowings.
Liquidity
At September 30, 1995, the company had a net balance of $1.0
billion in assets under management from the securitization of lease
and trade receivables.
On August 28, 1995, Moody's Investors Service upgraded its credit
rating on the senior long-term debt of IBM and its rated subsidiaries
to "A-1" from "A-3", and on IBM's preferred stock to "A-1" from
"Baa-1".
- 15 -
Part II - Other Information
---------------------------
ITEM 6 (a). Exhibits
--------------------
Exhibit Number
11 Statement re: computation of per share earnings.
99 Supplemental Consolidated Statement of Operations schedule.
ITEM 6 (b). Reports on Form 8-K
--------------------------------
No reports on Form 8-K were filed during the third quarter of 1995.
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 13, 1995
_______________________
By: James M. Alic
___________________________________________
James M. Alic
Vice President and Controller
* AS/400, System/390 and RISC/6000 are trademarks or registered
trademarks of the International Business Machines Corporation.
- 16 -