UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000
1-2360
------
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
New York 13-0871985
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(State of incorporation) (IRS employer identification number)
Armonk, New York 10504
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(Address of principal executive offices) (Zip Code)
914-499-1900
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
1934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The registrant has 1,772,836,653 shares of common stock outstanding at
March 31, 2000.
Index
Page
----
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Earnings for the three months
ended March 31, 2000 and 1999 ................................... 1
Consolidated Statement of Financial Position at
March 31, 2000 and December 31, 1999 ............................ 3
Consolidated Statement of Cash Flows for the three months
ended March 31, 2000 and 1999 ................................... 5
Notes to Consolidated Financial Statements ........................... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition .................. 8
Part II - Other Information ................................................ 17
Item 6(a). Exhibits
Exhibit 99 Reclassified Segment Results 1999 and 1998 .............. 25
Attachment I -- Segment Revenue and Pre-tax Income Results 1999 ... 25
Attachment II -- Segment Revenue and Pre-tax Income Results 1998 .. 35
Attachment III -- Segment Asset Information 1999 and 1998 ......... 45
Attachment IV -- Consolidated Statement of Earnings 1999 .......... 47
Attachment V -- Consolidated Statement of Earnings 1998 ........... 49
Part I - Financial Information
ITEM 1. Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions except Three Months Ended
per share amounts) March 31,
------------------------
2000 1999*
-------- --------
Revenue:
Hardware $ 7,712 $ 8,751
Global Services 7,552 7,550
Software 2,927 2,920
Global Financing 816 705
Enterprise Investments/Other 341 391
-------- --------
Total revenue 19,348 20,317
Cost:
Hardware 5,593 6,352
Global Services 5,597 5,567
Software 584 555
Global Financing 384 311
Enterprise Investments/Other 179 274
-------- --------
Total cost 12,337 13,059
-------- --------
Gross profit 7,011 7,258
Expense:
Selling, general and administrative 3,706 3,937
Research, development and
engineering 1,172 1,181
Other income (189) (134)
Interest expense 152 174
-------- --------
Total expense 4,841 5,158
Income before income taxes 2,170 2,100
Income tax provision 651 630
-------- --------
Net income 1,519 1,470
Preferred stock dividends 5 5
======== ========
Net income applicable to common
shareholders $ 1,514 $ 1,465
======== ========
* Reclassified to conform with 2000 presentation.
(The accompanying notes are an integral part of the financial statements.)
-1-
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS - (CONTINUED)
(UNAUDITED)
Three Months Ended
March 31,
------------------------
2000 1999
-------- --------
Earnings per share of common
stock - assuming dilution $ 0.83 $ 0.78
Earnings per share of common
stock - basic $ 0.85 $ 0.80
Average number of common
shares outstanding: (millions)
Assuming dilution 1,830.0 1,882.9
Basic 1,777.2 1,823.8
Cash dividends per common share $ 0.12 $ 0.11
(The accompanying notes are an integral part of the financial statements.)
-2-
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS
(Dollars in millions) At March 31,
2000 At December 31,
(Unaudited) 1999
------------ ---------------
Assets
Current assets:
Cash and cash equivalents $ 3,285 $ 5,043
Marketable securities -- at fair value,
which approximates market 321 788
Notes and accounts receivable -- trade, net of
allowances 19,735 21,398
Sales-type leases receivable 5,585 6,220
Inventories, at lower of average cost or net
realizable value
Finished goods 1,305 1,162
Work in process and raw materials 3,765 3,706
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Total inventories 5,070 4,868
Prepaid expenses and other current assets 5,143 4,838
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Total current assets 39,139 43,155
Plant, rental machines and other property 39,117 39,616
Less: Accumulated depreciation 22,158 22,026
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Plant, rental machines and other property -- net 16,959 17,590
Software 742 663
Investments and sundry assets 25,924 26,087
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Total assets $82,764 $87,495
======= =======
(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)
LIABILITIES AND STOCKHOLDERS' EQUITY
At March 31,
(Dollars in millions except 2000 At December 31,
per share amounts) (Unaudited) 1999
----------- ---------------
Liabilities and Stockholders' Equity
Current liabilities:
Taxes $ 3,882 $ 4,792
Accounts payable and accruals 17,885 20,556
Short-term debt 13,844 14,230
-------- --------
Total current liabilities 35,611 39,578
Long-term debt 14,295 14,124
Other long-term liabilities 12,004 11,928
Deferred income taxes 1,336 1,354
-------- --------
Total liabilities 63,246 66,984
Stockholders' equity:
Preferred stock - par value $.01 per share 247 247
Shares authorized: 150,000,000
Shares issued: 2000 - 2,546,011
1999 - 2,546,011
Common stock - par value $.20 per share 12,449 11,762
Shares authorized: 4,687,500,000
Shares issued: 2000 - 1,883,901,605
1999 - 1,876,665,245
Retained earnings 18,085 16,878
Treasury stock - at cost (9,514) (7,375)
Shares: 2000 - 91,064,952
1999 - 72,449,015
Employee benefits trust (2,408) (2,162)
Shares: 2000 - 20,000,000
1999 - 20,000,000
Accumulated gains and losses not
affecting retained earnings 659 1,161
-------- --------
Total stockholders' equity 19,518 20,511
-------- --------
Total liabilities and stockholders' equity $ 82,764 $ 87,495
======== ========
(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 THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
(Dollars in millions) 2000 1999*
------- -------
Cash flow from operating activities:
Net income $ 1,519 $ 1,470
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation 1,125 1,294
Amortization of software 103 110
Gain on disposition of fixed and other assets (242) (120)
Changes in operating assets and liabilities (1,510) (878)
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Net cash provided from operating activities 995 1,876
------- -------
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (712) (957)
Investment in software (145) (97)
Purchases of marketable securities and other
investments (129) (256)
Proceeds from marketable securities and other
investments 602 349
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Net cash used in investing activities (384) (961)
------- -------
Cash flow from financing activities:
Proceeds from debt issuance 1,279 2,059
Payments to settle debt (1,151) (1,568)
Short-term borrowings less than 90 days -- net (259) 356
Common stock transactions -- net (1,953) (1,931)
Cash dividends paid (221) (208)
------- -------
Net cash used in financing activities (2,305) (1,292)
------- -------
Effect of exchange rate changes on
cash and cash equivalents (64) (143)
------- -------
Net change in cash and cash equivalents (1,758) (520)
Cash and cash equivalents at January 1 5,043 5,375
------- -------
Cash and cash equivalents at March 31 $ 3,285 $ 4,855
======= =======
* Reclassified to conform with 2000 presentation.
(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.
2. The Accumulated gains and losses not affecting retained earnings line of
stockholders' equity comprises foreign currency translation adjustments and
unrealized gains and losses on marketable securities. Net income ($1,519 million
and $1,470 million) offset by the decline in foreign currency translation
adjustments ($108 million and $590 million) less unrealized (losses)/gains on
marketable securities [($394) million and $26 million] was $1,017 million and
$906 million for the three-month periods ended March 31, 2000 and 1999,
respectively.
3. In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date Of FASB
Statement No. 133. This statement defers the effective date of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, to fiscal years
beginning after June 15, 2000, although early adoption is encouraged. SFAS No.
133 establishes accounting and reporting standards for derivative instruments.
It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and to measure those
instruments at fair value. Additionally, the fair value adjustments will affect
either stockholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes and, if so, the nature
of the hedging activity. The company will adopt this standard as of January 1,
2001. Management does not expect the adoption to have a material effect on the
company's results of operations; however, the effect on the company's financial
position depends on the fair values of the company's derivatives and related
financial instruments at the date of adoption.
4. The tables on pages 21 and 22 of this Form 10-Q reflect the results of the
company's segments consistent with the company's management system. These
results are not necessarily a depiction that is in conformity with generally
accepted accounting principles, e.g., employee retirement plan costs are
developed using actuarial assumptions on a country-by-country basis and
allocated to the segments on headcount. A different result could be arrived at
for any segment if actuarial assumptions unique to each segment were used.
Performance measurement is based on income before income taxes (pre-tax income).
These results are used by management, both in evaluating the performance of, and
in allocating resources to, each of the segments.
Effective in the first quarter of 2000, the segment results reflect
changes the company made in the organization of its business segments and its
expense allocation methodology. Organizationally, the company's major operations
continue to comprise three hardware product segments--Technology, Personal
Systems, and Enterprise Systems (previously Server); a Global Services segment;
a Software segment; a Global Financing segment and an Enterprise Investments
segment. The segments are based on several factors, including customer base,
homogeneity of products, technology and delivery channels.
In the first quarter of 2000, the company reorganized the Server Group and
renamed it the Enterprise Systems Group. In accordance with that organizational
change, the company transferred system-level product businesses from the
Technology segment to the Enterprise
-6-
Notes to Consolidated Financial Statements - (continued)
Systems segment. Those system-level product businesses are the company's
enterprise storage product (known as "Shark"), tape subsystems, the company's
storage area network program and Networking Hardware Division products. The
reorganized group will focus on cross-server customer requirements for Web
servers, enterprise servers, mid-market servers, and for storage subsystems
across all computing environments.
Also in the first quarter of 2000, the company transferred the Retail
Store Solutions (RSS) business, a leader in providing point of sale solutions,
to the Personal Systems segment from the Enterprise Investment segment. RSS fits
well with Personal Systems' Edge of Network initiative to provide customers with
network-based solutions enabled by purpose-optimized devices.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
131, Disclosures about Segments of an Enterprise and Related Information, the
company reclassified external and internal revenue, pre-tax income, assets,
depreciation/amortization and capital expenditures/investment software in its
segment results to reflect the organizational changes and product transfers
between the segments. Exhibit 99 (attachments I - III) present those
reclassified results for the four quarters and full years 1999 and 1998.
Also in accordance with SFAS No. 131, Exhibit 99 (attachments I - III)
reflect the company's decision to allocate to specific segments some expense
items that previously were unallocated (certain infrastructure reductions and
currency exchange gains and losses). The company also enhanced its pre-existing
practice of allocating shared expenses, where practical, based on measurable
drivers of expense to give a more precise representation of the expenses that
are associated with each segment. The results for 1999 and 1998 (full years and
the quarters) have been reclassified consistent with the company's management
system to facilitate management's analysis and year-to-year comparison of
segment results.
Exhibit 99 (attachments IV and V) present the company's Consolidated
Statement of Earnings for the four quarters and full years 1999 and 1998
reclassified to reflect the organizational and product transfers discussed
above.
-7-
Notes to Consolidated Financial Statements - (continued)
5. The following table provides the liability balances at March 31, 2000 for
actions that the company took in 1999:
Liability Liability Cash Liability
Created as of Payments/ as of
in 1999 12/31/99 Other Adj. 3/31/00
------- -------- ---------- -------
Technology Group
MD Actions:
DRAM
Employee Terminations (1) $167 $149 $ 30 $119
Investment in joint venture (2) 152 152 0 152
SSD Actions:
Employee Terminations (3) 23 7 7 0
---- ---- ---- ----
Total $342 $308 $ 37 $271
==== ==== ==== ====
(1) Workforce reductions that affect approximately 790 employees (455 direct
manufacturing and 335 indirect manufacturing) in France. The workforce
reductions were substantially completed as of March 31, 2000. The
liability as of March 31, 2000, relates to future payments to those
terminated employees over their remaining lives.
(2) Acquisition of minority interest in joint venture and charges for
equipment leasehold cancellation liabilities and lease rental payments for
idle equipment.
(3) The company substantially completed the workforce reductions for the 210
U.S.employees who were remaining at December 31, 1999.
6. Subsequent Events: On April 25, 2000, the company announced that the Board of
Directors approved an increase in the quarterly dividend of 8 percent from $.12
to $.13 per common share. The dividend is payable June 10, 2000, to shareholders
of record of May 10, 2000.
On April 25, 2000, the Board of Directors authorized the company to
repurchase up to an additional $3.5 billion of IBM common shares. The company
plans to repurchase the shares in the open market from time to time, based on
market conditions.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 2000
The company's first-quarter results reflect a transitional period for the
company. The revenue decline in the first quarter of 2000 was driven by three
factors: the Y2K slowdown, a significant unanticipated shortfall in revenue from
the company's hard disk drive (HDD) business and a series of actions (announced
last year) that improved profitability but reduced revenue.
As expected, the Y2K lockdowns for many of the company's large customers
continued well into the first quarter of 2000, affecting demand for System/390
and commercial personal computers, and new contract signings for Global
Services. In addition, Y2K services ended. At the end of the first quarter, the
company saw a significant increase in the pace of new business activity, most
notably in Global Services in Strategic Outsourcing contracts. Also, System/390
-8-
customers began to employ new applications on their mainframes as they absorbed
most of their remaining excess Y2K test capacity.
The company had a significant shortfall in its HDD revenue as a result of
not shipping its new 10,000 RPM drive when expected. The company plans to ship
the new drive shortly, but not in volume until the second half of 2000.
The company took actions in the past four quarters that improved
profitability but adversely affected revenue in the first quarter of 2000. In
the second quarter of 1999, the company took actions that were designed to
better align the operations and cost structure of its Technology Group with that
Group's strategic direction. In the third quarter of 1999, the company entered
into a sale of intellectual property to and a global alliance with Cisco Sytems,
Inc. (Cisco) that decreased networking hardware revenue, but created a broad
relationship with Cisco under which the company and Cisco will offer a full
spectrum of services and work together to provide end-to-end solutions for
customers' e-business and networking needs.
The company also took a number of initiatives in the personal computer
business at the end of 1999; The company changed its approach in the U.S. and
European retail channels in favor of reaching consumers over the Web. In the
first quarter of 2000, the company increased the percentage of business going
through the direct channel, and reduced dealer inventories in the indirect
channel to record low levels by limiting sales into the channel. The company
also was more selective on special-bid activity and announced a new low-cost
personal computer.
Results of Operations
(Dollars in millions) Three Months Ended
March 31
---------------------
2000 1999
------- -------
Revenue $19,348 $20,317
Cost 12,337 13,059
------- -------
Gross profit $ 7,011 $ 7,258
Gross profit margin 36.2% 35.7%
Net income $ 1,519 $ 1,470
Earnings per share of
common stock:
Assuming dilution $ 0.83 $ 0.78
Basic $ 0.85 $ 0.80
As a result of the company's share repurchase program, the average number
of common shares outstanding assuming dilution was lower by 52.9 million than
the first quarter of 1999. The average number of shares assuming dilution was
1,830.0 million in the first quarter of 2000 and 1,882.9 million for the first
quarter of 1999. There were 1,772.8 million shares outstanding at March 31,
2000.
-9-
Results of Operations - (continued)
Revenue for the three months ended March 31, 2000 decreased 4.8 percent
from the same period last year (3 percent decrease at constant currency).
Hardware revenue decreased as Personal Systems, Enterprise Systems and
Technology revenue declined versus the first quarter of 1999. Global Services
revenue was flat due to growth in Strategic Outsourcing and Integrated
Technology Services, offset by a sharp year-over-year decline in Y2K services
activity and the loss of revenue from the sale of the Global Network. Software
revenue was flat as the company's middleware product lines showed growth, while
operating systems revenue declined. Global Financing revenue increased 15.8
percent and Enterprise Investment/Other revenue declined 12.6 percent.
Revenue for the first quarter of 2000 from the company's end-user
businesses was $8.4 billion from the Americas, a decrease of 3.7 percent (4
percent decrease at constant currency) compared with the same period last year.
Revenue from Europe/Middle East/Africa was $5.4 billion, down 13.3 percent (4
percent decrease at constant currency). Asia-Pacific revenue grew 14.9 percent
(8 percent increase at constant currency) to $4.0 billion. OEM revenue across
all geographies was $1.4 billion, an 18.8 percent decrease (19 percent decrease
at constant currency) compared with the first quarter of 1999.
The company's total gross profit margin was 36.2 percent in the first
quarter compared with 35.7 percent in the first quarter a year ago.
Total first-quarter expenses declined 6.1 percent, and the company
improved its expense-to-revenue ratio by 0.4 points year over year to 25.0
percent.
Hardware
(Dollars in millions) Three Months Ended
March 31
--------------------
2000 1999
------ ------
Total revenue $7,712 $8,751
Total cost 5,593 6,352
------ ------
Gross profit $2,119 $2,399
Gross profit margin 27.4% 27.4%
Revenue from hardware for the first quarter of 2000 declined 11.9 percent
(11 percent at constant currency) when compared with the same period in 1999.
Personal Systems revenue declined year-over-year as the company took
initiatives to improve long-term profitability. These steps included bringing
dealer inventories to record low levels while reducing low-profitability special
bid activity. In addition, the company changed its approach in the U.S. and
European retail channels in favor of reaching consumers over the Web. While
overall personal computer revenue declined, Netfinity server products and
Thinkpad revenue increased in the quarter.
-10-
Results of Operations - (continued)
Enterprise Systems revenue declined in the first quarter of 2000 versus
the first quarter of 1999. Revenue from System/390, storage products
(specifically tape and direct access storage devices) and networking hardware
declined from the first quarter of 1999. These declines were partially offset by
revenue growth in the Web server product line, which includes RS/6000 and NUMA-Q
products, with particularly strong demand for the RS/6000 S80 model. AS/400
revenue increased year-over-year, especially in mid-range and high-end servers.
Technology revenue decreased in the first quarter of 2000 versus the
comparable period in 1999. The decrease was driven by lower DRAM revenue as a
result of the steps the company took in the second quarter of 1999 to minimize
its dependence on high-volume manufacturing of DRAM memory components. In
addition, HDD revenue declined due primarily to not shipping the company's new
10,000 RPM drives. These decreases were partially offset by higher revenue from
custom logic chips.
Hardware gross profit dollars for the first quarter of 2000 decreased 11.7
percent from the comparable period in 1999, primarily due to lower revenue in
the first quarter of 2000 versus the first quarter of 1999. The hardware gross
profit margin was flat versus the prior year, although the microelectronics
margin improved as a result of the actions taken within the company's DRAM
business in 1999. In addition, gross profit margins for AS/400 and Web server
improved year-over-year. These increases were offset by lower gross profit
margins associated with System/390, storage products and OEM storage technology.
Personal Systems margins were flat compared with first quarter 1999 margins.
Global Services
(Dollars in millions) Three Months Ended
March 31
--------------------
2000 1999
------ ------
Total revenue $7,552 $7,550
Total cost 5,597 5,567
------ ------
Gross profit $1,955 $1,983
Gross profit margin 25.9% 26.3%
Global Services revenue was flat (up 1 percent at constant currency) in
the first quarter of 2000 compared with the same period last year. Revenue was
adversely affected by two events: the sale in 1999 of the IBM Global Network to
AT&T and a sharp year-over-year decline in Y2K services activity. After
adjusting for those factors, Global Services revenue (excluding maintenance)
increased 9 percent (10 percent at constant currency) compared with the same
period last year. Maintenance revenue was flat (up 1 percent at constant
currency) in the first quarter of 2000 versus the same period in 1999. Growth in
Strategic Outsourcing Services and Integrated Technology Services revenue in the
first quarter of 2000 was partially offset by lower revenue from Business
Innovation Services and the sale of the Global Network. The company signed $8.6
billion in services contracts in the first quarter of 2000.
-11-
Results of Operations - (continued)
Global Services gross profit dollars decreased 1.4 percent in the first
quarter of 2000, compared with the year-ago period. The decline in gross profit
dollars and margin was a result of a lower margin in Integrated Technology
Services partially offset by an improved margin in Strategic Outsourcing
Services.
Software
(Dollars in millions) Three Months Ended
March 31
--------------------
2000 1999
------ ------
Total revenue $2,927 $2,920
Total cost 584 555
------ ------
Gross profit $2,343 $2,365
Gross profit margin 80.0% 81.0%
Revenue from software for the first quarter of 2000 was flat
year-over-year (up 3 percent at constant currency) over the comparable period in
1999. The company's middleware products (which comprise data management,
transaction processing, Tivoli systems management, and Lotus Notes messaging and
collaboration across both IBM and non-IBM platforms) had revenue growth of 5
percent over the first three months of 1999. The company continues to focus on
helping customers use its software to transform their businesses into
e-businesses, particularly in collaboration with the company's Global Services
and channel partners.
The company's middleware products continued to grow due to the company's
ability to integrate; the growing participation on non-IBM platforms and the
expanding market coverage as more partnerships were formed with Independent
Software Vendors, Web Integrators and service providers; and a dedicated sales
staff of 6,600 people.
Operating-systems software revenue declined 11 percent in the first
quarter of 2000 when compared with the year-ago period. The decline in the first
quarter revenue was primarily driven by AS/400 products. While AS/400 hardware
revenue grew in the quarter, a large portion of the growth came from systems
upgrades, which generate less incremental operating-systems revenue than sales
of new systems.
Software gross profit dollars for the first quarter of 2000 declined 0.9
percent versus the same period in 1999. The decline in gross profit dollars and
margin was due primarily to higher vendor royalty payments and purchased vendor
software.
-12-
Results of Operations - (continued)
Global Financing
(Dollars in millions) Three Months Ended
March 31
--------------------
2000 1999
------ ------
Total revenue $816 $705
Total cost 384 311
------ ------
Gross profit $432 $394
Gross profit margin 52.9% 55.9%
First quarter 2000 Global Financing revenue increased 15.8 percent
(17 percent at constant currency) compared with the same period of 1999. Growth
in used equipment sales, commercial financing and continued growth in financing
of software and services drove the increase in revenue.
Global Financing gross profit dollars increased 9.6 percent for the first
quarter of 2000 versus the same period in 1999. The gross profit margin declined
3.0 points primarily driven by the mix toward more used equipment sales and a
lower gross profit margin on used equipment year-over-year.
Enterprise Investments / Other
(Dollars in millions) Three Months Ended
March 31
--------------------
2000 1999
------ ------
Total revenue $341 $391
Total cost 179 274
------ ------
Gross profit $162 $117
Gross profit margin 47.6% 29.7%
Revenue from Enterprise Investments/Other decreased 12.6 percent (13
percent at constant currency) in the first three months of 2000, versus the
comparable period in 1999. The first quarter 2000 revenue decreased as a result
of the company's decision in 1999 to discontinue certain product lines such as
automated teller machines, and lower revenue from CATIA software products.
The Enterprise Investments/Other gross profit dollars increased 38.5
percent in the first quarter of 2000, versus the same periods of 1999. The
increase was primarily a result of the company's discontinued product lines.
-13-
Results of Operations - (continued)
Expenses
(Dollars in millions) Three Months Ended
March 31
----------------------
2000 1999
------- -------
Selling, general and administrative $ 3,706 $ 3,937
Percentage of revenue 19.2% 19.4%
Research, development and engineering $ 1,172 $ 1,181
Percentage of revenue 6.1% 5.8%
Selling, general and administrative expense decreased 5.9 percent in the
first three months of 2000 compared with the same period in 1999. The company
continues to manage aggressively its infrastructure expense and its overall
portfolio to allow for investment in growth segments of the business. Also, the
company continues to partner more with other companies to build industry
solutions and continues to benefit from growth in licensing of its intellectual
property.
Research, development and engineering expense decreased 0.8 percent for
the first three months of 2000 compared with the same period of 1999.
Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and interest costs associated with rentals and
financing was $348 million for the first quarter of 2000, of which the company
capitalized $7 million.
The effective tax rate for the first three months of 2000 and 1999 was
30.0 percent.
Financial Condition
During the first quarter of 2000, the company continued to make
significant investments to fund its future growth and increase shareholder
value. These investments included expenditures of $1,323 million for Research,
development and engineering, $963 million for Plant, rental machines and other
property and $2,144 million for the repurchase of the company's common shares.
The company had $3,606 million in Cash and cash equivalents and Marketable
securities at March 31, 2000.
-14-
Financial Condition - (continued)
Cash Flow
(Dollars in millions) Three Months Ended
March 31
----------------------
2000 1999
------- -------
Net cash provided from (used in):
Operating activities $ 995 $ 1,876
Investing activities (384) (961)
Financing activities (2,305) (1,292)
------- -------
Effect of exchange rate changes on cash
and cash equivalents (64) (143)
------- -------
Net change in cash and cash equivalents $(1,758) $ (520)
Working Capital
(Dollars in millions) At March 31, At December 31,
2000 1999
------------ ---------------
Current assets $39,139 $43,155
Current liabilities 35,611 39,578
------- -------
Working capital $ 3,528 $ 3,577
Current ratio 1.10:1 1.09:1
Current assets decreased $4,016 million from year-end 1999 primarily due
to decreases of $2,225 million in Cash and cash equivalents and Marketable
securities and $2,298 million in Accounts receivable partially offset by
increases of $305 million in Prepaid expenses and other current assets and $202
million in net Inventories. The decrease in Cash and cash equivalents and
Marketable securities resulted primarily from capital expenditures, retirement
of debt and stock repurchases, partially offset by cash generated from
operations which declined primarily due to tax payments made in the first
quarter of 2000. The decline in accounts receivable was attributable to the
collection of typically higher year-end accounts receivable balances. The
increase in prepaid expenses and other current assets reflects seasonal
increases from year-end levels. Net Inventories increased primarily within
Microelectronics, Storage Systems and Personal Systems Group, offset by a
decline in Enterprise Systems Group.
Current liabilities decreased $3,967 million from year-end 1999 with
declines of $2,671 million in Accounts payable and other accruals, and $910
million in Taxes payable (resulting primarily from declines in these balances
from typically higher year-end levels), and $386 million in Short-term debt.
Investments
During the first three months of 2000, the company invested $963 million
in Plant, rental machines and other property, a decline of $135 million from the
comparable 1999 period. The company invested in its services business, primarily
in the management of customers' information technology, as well as in
manufacturing capacity for hard disk drives and microelectronics.
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Financial Condition - (continued)
Debt and Equity
In addition to software development expense included in Research,
development and engineering expense, the company capitalized $145 million of
software costs during the first three months of 2000, an increase of $48 million
from the comparable period in 1999. Amortization of capitalized software costs
was $103 million during the first three months of 2000, a decline of $7 million
from the comparable 1999 period.
Investments and sundry assets were $25,924 million at March 31, 2000, a
decrease of $163 million from year-end 1999, resulting primarily from declines
in non-current receivables and deferred tax assets partially offset by an
increase in prepaid pension assets.
(Dollars in millions) At March 30, At December 31,
2000 1999
------------ ---------------
Global financing debt $ 25,966 $ 26,799
Non-global financing debt 2,173 1,555
-------- --------
Total debt $ 28,139 $ 28,354
Stockholders' equity $ 19,518 $ 20,511
Debt/capitalization 59.0% 58.0%
EBITDA / interest expense 9x 9x
Non-global financing:
Debt/capitalization 13.0% 9.0%
EBITDA/interest expense 19x 19x
Global financing debt/equity 5.2:1 5.5:1
Total debt decreased $215 million from year-end 1999 as debt supporting
global financing assets decreased $833 million and non-global financing debt
increased $618 million. Stockholders' equity decreased $993 million from
December 31, 1999, as the increase in the company's retained earnings was more
than offset by the common share repurchases.
Liquidity
The company maintains a $10.0 billion committed global credit facility as
part of its ongoing efforts to ensure appropriate levels of liquidity. As of
March 31, 2000, $9,239 million of this confirmed line of credit remained unused
and available for future use.
On March 31, 2000, the company issued a $1.0 billion, 5.375 percent
Eurobond due March 31, 2005, the net proceeds of which were used for general
corporate purposes.
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Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including the
company's failure to continue to develop and market new and innovative products
and services and to keep pace with technological change; competitive pressures;
failure to obtain or protect intellectual property rights; the ultimate effect
of the various Year 2000 issues on the company's business, financial condition
or results of operations; quarterly fluctuations in revenues and volatility of
stock prices; the company's ability to attract and retain key personnel;
currency and customer financing risks; dependence on certain suppliers; changes
in the financial or business condition of the company's distributors or
resellers; the company's ability to successfully manage acquisitions and
alliances; legal, political and economic changes and other risks, uncertainties
and factors discussed elsewhere in this Form 10-Q, in the company's other
filings with the Securities and Exchange Commission or in materials incorporated
therein by reference.
Part II - Other Information
ITEM 6 (a). Exhibits
Exhibit Number
11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios.
27 Financial Data Schedule.
99 Reclassified Segment Results 1999 and 1998.
ITEM 6 (b). Reports on Form 8-K
The company filed Form 8-K on January 20, 2000, with respect to the
company's financial results for the periods ended December 31, 1999 and included
the unaudited Consolidated Statement of Earnings, Consolidated Statement of
Financial Position and Segment Data for the periods ended December 31, 1999.
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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 11, 2000
By: /s/ Mark Loughridge
---------------------------------
Mark Loughridge
Vice President and Controller
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