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, 2001
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)
914-499-1900
(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 1,737,417,527 shares of common stock outstanding at
March 31, 2001.
Index
Page
----
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Earnings for the three months
ended March 31, 2001 and 2000 .................................... 1
Consolidated Statement of Financial Position at
March 31, 2001 and December 31, 2000 ............................. 3
Consolidated Statement of Cash Flows for the three months
ended March 31, 2001 and 2000 .................................... 5
Notes to Consolidated Financial Statements ............................ 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ......... 13
Part II - Other Information ................................................. 23
Item 6(a). Exhibits
Exhibit 99 Reclassified Segment Results 2000 and 1999 ................ 30
Attachment I -- Segment Revenue and Pre-tax Income Results 2000 ... 30
Attachment II -- Segment Revenue and Pre-tax Income Results 1999 .. 35
Attachment III -- Segment Asset Information 2000 and 1999 ......... 40
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,
-----------------------
2001 2000*
-------- --------
Revenue:
Hardware $ 8,547 $ 7,712
Global Services 8,471 7,552
Software 2,918 2,927
Global Financing 832 816
Enterprise Investments/Other 276 341
-------- --------
Total revenue 21,044 19,348
Cost:
Hardware 5,969 5,593
Global Services 6,311 5,597
Software 579 584
Global Financing 438 461
Enterprise Investments/Other 139 179
-------- --------
Total cost 13,436 12,414
-------- --------
Gross profit 7,608 6,934
Expense:
Selling, general and administrative 3,808 3,706
Research, development and
engineering 1,203 1,172
Other income 36 (189)
Interest expense 72 75
-------- --------
Total expense 5,119 4,764
Income before income taxes 2,489 2,170
Provision for income taxes 739 651
-------- --------
Net income 1,750 1,519
Preferred stock dividends 5 5
-------- --------
Net income applicable to common
shareholders $ 1,745 $ 1,514
======== ========
* Reclassified to conform with 2001 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,
--------------------
2001 2000
---- ----
Earnings per share of common
stock:
Assuming dilution $ 0.98 $ 0.83
Basic $ 1.00 $ 0.85
Average number of common
shares outstanding: (millions)
Assuming dilution 1,781.2 1,830.0
Basic 1,740.9 1,777.2
Cash dividends per common share $ 0.13 $ 0.12
(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,
2001 At December 31,
(Unaudited) 2000
----------- ----
Assets
Current assets:
Cash and cash equivalents $ 3,793 $ 3,563
Marketable securities -- at fair value,
which approximates market 74 159
Notes and accounts receivable -- trade, net of
allowances 9,145 10,447
Short-term financing receivables 16,849 18,705
Other accounts receivable 1,405 1,574
Inventories, at lower of average cost or net
realizable value
Finished goods 1,638 1,446
Work in process and raw materials 3,374 3,319
------- -------
Total inventories 5,012 4,765
Deferred taxes 2,350 2,701
Prepaid expenses and other current assets 3,347 1,966
------- -------
Total current assets 41,975 43,880
Plant, rental machines and other property 38,365 38,455
Less: Accumulated depreciation 21,851 21,741
------- -------
Plant, rental machines and other property -- net 16,514 16,714
Long-term financing receivables 12,056 13,308
Investments and sundry assets 14,245 14,447
------- -------
Total assets $84,790 $88,349
======= =======
(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 2001 At December 31,
per share amounts) (Unaudited) 2000
----------- ----
Liabilities and Stockholders' Equity
Current liabilities:
Taxes $ 4,168 $ 4,827
Accounts payable and accruals 17,824 21,374
Short-term debt 10,910 10,205
-------- --------
Total current liabilities 32,902 36,406
Long-term debt 17,923 18,371
Other liabilities 12,499 12,948
-------- --------
Total liabilities 63,324 67,725
Stockholders' equity:
Preferred stock - par value $.01 per share 247 247
Shares authorized: 150,000,000
Shares issued and outstanding:
2001 and 2000 - 2,546,011
Common stock - par value $.20 per share 12,938 12,400
Shares authorized: 4,687,500,000
Shares issued: 2001 - 1,898,662,493
2000 - 1,893,940,595
Retained earnings 25,160 23,784
Treasury stock - at cost (14,789) (13,800)
Shares: 2001 - 141,244,966
2000 - 131,041,411
Employee benefits trust (1,927) (1,712)
Shares: 2001 and 2000 - 20,000,000
Accumulated gains and losses not
affecting retained earnings (163) (295)
-------- --------
Total stockholders' equity 21,466 20,624
-------- --------
Total liabilities and stockholders' equity $ 84,790 $ 88,349
======== ========
(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) 2001 2000
---- ----
Cash flow from operating activities:
Net income $ 1,750 $ 1,519
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation 1,084 1,125
Amortization of software 149 103
Loss/(gain) on disposition of fixed and other assets 55 (242)
Changes in operating assets and liabilities (1,103) (1,510)
------- -------
Net cash provided from operating activities 1,935 995
------- -------
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (1,276) (712)
Investment in software (134) (145)
Purchases of marketable securities and other
investments (74) (129)
Proceeds from marketable securities and other
investments 102 602
------- -------
Net cash used in investing activities (1,382) (384)
------- -------
Cash flow from financing activities:
Proceeds from new debt 578 1,279
Payments to settle debt (1,052) (1,151)
Short-term borrowings/(repayments) less than 90
days -- net 1,364 (259)
Common stock transactions -- net (926) (1,953)
Cash dividends paid (234) (221)
------- -------
Net cash used in financing activities (270) (2,305)
------- -------
Effect of exchange rate changes on
cash and cash equivalents (53) (64)
------- -------
Net change in cash and cash equivalents 230 (1,758)
Cash and cash equivalents at January 1 3,563 5,043
------- -------
Cash and cash equivalents at March 31 $ 3,793 $ 3,285
======= =======
(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, which are of a normal recurring
nature, necessary to a fair statement of the results for the unaudited
three-month periods have been made.
2. The following table summarizes Net income plus gains and losses not affecting
retained earnings.
(Dollars in millions) Three Months Ended
March 31,
----------------------
2001 2000
------- -------
Net Income $ 1,750 $ 1,519
------- -------
Gains and losses not affecting
retained earnings (net of tax):
Foreign currency translation
adjustments (374) (108)
Net unrealized (losses)/gains on
marketable securities (1) (394)
Net unrealized gains/(losses) on
derivatives 507 --
------- -------
Total gains/(losses) not affecting
retained earnings 132 (502)
------- -------
Net income plus gains and losses
not affecting retained earnings $ 1,882 $ 1,017
======= =======
3. On January 1, 2001, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments.
Specifically, SFAS No. 133 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. As of January 1, 2001, the
adoption of the new standard resulted in a cumulative effect net-of-tax increase
of $219 million to Accumulated gains or losses not affecting retained earnings
in the stockholders' equity section of the Consolidated Statement of Financial
Position and a cumulative effect net-of-tax charge of $6 million included in
Selling, general and administrative expense in the Consolidated Statement of
Earnings.
Derivative Instruments Accounting Policy
In the normal course of business, the company uses a variety of derivative
financial instruments primarily to manage currency exchange rate and interest
rate risk.
All derivatives are recognized on the balance sheet at fair value and are
generally reported in Prepaid expenses and other current assets, Investments and
sundry assets, Accounts payable and
-6-
Notes to Consolidated Financial Statements - (continued)
accruals or Other liabilities in the Consolidated Statement of Financial
Position. Classification of each derivative as current or non-current is based
upon the duration of each instrument. To qualify for hedge accounting, the
company requires that the instruments are effective in reducing the risk
exposure that they are designated to hedge. For instruments that are associated
with the hedge of an anticipated transaction, hedge effectiveness criteria also
require that it be probable that the underlying transaction will occur.
Instruments that meet established accounting criteria are formally designated as
hedges at the inception of the contract. These criteria demonstrate that the
derivative is expected to be highly effective at offsetting changes in fair
value of the underlying exposure both at inception of the hedging relationship
and on an ongoing basis. The assessment for effectiveness is formally documented
at hedge inception and reviewed at least quarterly throughout the designated
hedge period.
The company applies hedge accounting in accordance with SFAS No. 133,
whereby the company designates each derivative as a hedge of (1) the fair value
of a recognized asset or liability or of an unrecognized firm commitment ("fair
value" hedge); (2) the variability of anticipated cash flows of a forecasted
transaction or the cash flows to be received or paid related to a recognized
asset or liability ("cash flow" hedge); or (3) a hedge of a long-term investment
("net investment" hedge) in a foreign operation. From time to time, however, the
company may enter into derivatives that economically hedge certain of its risks,
even though hedge accounting is not allowed by SFAS No. 133 or is not applied by
the company. In these cases, there generally exists a natural hedging
relationship in which changes in fair value of the derivative, which are
recognized currently in earnings, acts as an economic offset to changes in the
fair value of the underlying hedged item(s).
Changes in the value of a derivative that is designated as a fair value
hedge, along with offsetting changes in fair value of the underlying hedged
exposure, are recorded in earnings each period. For hedges of interest rate
risk, the fair value adjustments are recorded as adjustments to interest expense
and cost of Global Financing in the Consolidated Statement of Earnings. For
hedges of currency risk associated with on-balance sheet assets or liabilities,
derivative fair value adjustments generally are recognized in Selling, general
and administrative expense in the Consolidated Statement of Earnings. Changes in
the value of a derivative that is designated as a cash flow hedge are recorded
in the Accumulated gains and losses not affecting retained earnings section of
stockholders' equity. When earnings are affected by the variability of the
underlying cash flow, the applicable amount of the gain or loss from the
derivative that is deferred in stockholders' equity is released to earnings and
reported in Interest expense, Cost, or Selling, general and administrative
expense in the Consolidated Statement of Earnings based on the nature of the
underlying cash flow hedged. Effectiveness for net investment hedging
derivatives is measured on a spot to spot basis. The effective portion of
changes in the fair value of derivatives and other non-derivative risk
management instruments designated as net investment hedges are recorded as
foreign currency translation adjustments in the Accumulated gains and losses not
affecting retained earnings section of stockholders' equity. Changes in the fair
value of the portion of a net investment hedging derivative excluded from the
effectiveness assessment are recorded in interest expense.
When the terms of an underlying transaction are modified, or when the
underlying hedged item ceases to exist, all changes in the fair value of the
instrument are included in earnings each period until the instrument matures.
When the underlying transaction ceases to exist, a hedged
-7-
Notes to Consolidated Financial Statements - (continued)
asset or liability is no longer adjusted for changes in its fair value.
Derivatives that are not designated as hedges, as well as the portion of a
derivative excluded from the effectiveness assessment (the time value component
of option contracts) and changes in the value of derivatives which do not offset
the underlying hedged item throughout the designated hedge period (collectively,
"ineffectiveness"), are recorded in earnings each period and generally are
reported in Selling, general and administrative expense.
Derivatives and Hedging
The company operates in approximately 40 functional currencies and is a
significant lender and a borrower in the global markets. In the normal course of
business, the company is exposed to the impact of interest rate changes and
foreign currency fluctuations. The company limits these risks by following
established risk management policies and procedures including use of derivatives
and, where cost-effective, financing with debt in the currencies in which assets
are denominated. For interest rate exposures, derivatives are used to align rate
movements between the interest rates associated with the company's lease and
other financial assets and the interest rates associated with its financing
debt. Derivatives are also used to manage the related cost of debt. For currency
exposures, derivatives are used to limit the effects of foreign exchange rate
fluctuations on financial results.
The company does not use derivatives for trading or speculative purposes,
nor is it a party to leveraged derivatives. Further, the company has a policy of
only entering into contracts with carefully selected major financial
institutions based upon their credit ratings and other factors and maintains
strict dollar and term limits that correspond to the institution's credit
rating. When viewed in conjunction with the underlying and offsetting exposure
that the derivatives are designed to hedge, the company has not sustained a
material loss from these instruments nor does it anticipate any material adverse
effect on its net income or financial position in the future from the use of
derivatives.
In its hedging programs, the company employs the use of forwards, interest
rate and currency swaps, options, caps, floors or a combination thereof
depending upon the underlying exposure.
A brief description of the major hedging programs follows:
Debt risk management
The company issues debt on the global capital markets, principally to fund
its Global Financing lease and loan portfolio. Access to cost-effective
financing can result in interest rate and/or currency mismatches with the
underlying assets. To manage these mismatches and to reduce overall interest
cost, the company generally uses interest-rate and currency instruments,
principally swaps, to convert specific fixed-rate debt issuances into
variable-rate debt (i.e., fair value hedges) and to convert specific variable
rate debt and anticipated commercial paper issuances to fixed rates (i.e., cash
flow hedges). The resulting cost of funds is lower than that which would have
been available if debt with matching characteristics was issued directly. On a
limited basis, the company also uses interest rate and/or currency swaps to
manage the risk profile of its debt and financing assets on a portfolio basis
(i.e., included in the caption
-8-
Notes to Consolidated Financial Statements - (continued)
"Non-hedge/other" in the table on page 10). The weighted average remaining
maturity of all swaps in the debt risk management program is approximately six
years.
Long term investments in foreign subsidiaries ("net investment")
A significant portion of the company's foreign denominated debt portfolio
is designated as a hedge to reduce the volatility in stockholders' equity caused
by changes in foreign currency exchange rates in the functional currency of
major foreign subsidiaries with respect to the U.S. dollar. The company also
uses currency swaps and other foreign currency contracts for this risk
management purpose. The currency effects of these hedges (a net gain of
approximately $371 million for the current period, net of tax) are reflected in
the Accumulated gains and losses not affecting retained earnings section of
stockholders' equity, thereby offsetting a portion of the translation of the
applicable foreign subsidiaries' net assets.
Anticipated royalties and intercompany transactions
The company's operations generate significant non-functional currency
intercompany payments for royalties and goods and services among the company's
non-U.S. subsidiaries and with the parent company. In anticipation of these
foreign currency cash flows, and in view of the volatility of the currency
markets, the company selectively employs foreign currency forwards and option
contracts to manage its currency risk. The terms of these derivative instruments
are less than eighteen months, commensurate with the underlying hedged
anticipated cash flows. The effective portion of the gain or loss of these
contracts is reported in earnings when the underlying transactions occur.
Classification of derivative gains and losses in the Consolidated Statement of
Earnings is consistent with the recognition of the specific underlying
transactions hedged.
Subsidiary cash and foreign currency asset/liability management
The company uses its Global Treasury Centers to manage the cash of its
subsidiaries. These centers principally use currency swaps to convert cash flows
in a cost-effective manner, predominantly for the company's European
subsidiaries. In addition, the company uses foreign exchange forward contracts
to hedge, on a net basis, the foreign currency exposure of a portion of the
company's non-functional currency assets and liabilities. The terms of these
forward and swap contracts are generally less than one year. The changes in fair
value from these contracts and from the underlying hedged exposures are
generally offsetting and are recorded in Selling, general and administrative
expense in the Consolidated Statement of Earnings.
Other derivatives
The company holds warrants in connection with certain investments which,
although not designated as hedging instruments are deemed derivatives since they
contain net share settlement clauses. During the quarter, the company recorded
the change in the fair value of these warrants in earnings.
-9-
Notes to Consolidated Financial Statements - (continued)
The following table summarizes the net fair value of the company's
derivative and other risk management instruments at March 31, 2001 included in
the Consolidated Statement of Financial Position.
- -------------------------------------------------------------------------------------------
Dollars in Millions ------------------- Hedge Designation ---------------------
Risk Management Program Fair Value Cash Flow Net Investment Non-Hedge/Other
- ----------------------- ---------- --------- -------------- ---------------
Global Financing Risk
Management $427 ($22) ($10)
Long Term Investments in
Foreign Subsidiaries ("Net
Investments")
- - Debt (7,533)*
- - Derivatives --
Anticipated Royalties and
Intercompany Transactions 853
Subsidiary Cash and Foreign
Currency Asset/Liability
Management 88
All Other 3
----------------------------------------------------------
TOTALS $427(1) $831(2) ($7,533) $81(3)
* Represents fair value of foreign denominated debt issuances formally
designated as a hedges of net investment.
(1) Comprises assets of $428 million and liabilities of $1 million.
(2) Comprises assets of $865 million and liabilities of $34 million.
(3) Comprises assets of $131 million and liabilities of $50 million.
- -------------------------------------------------------------------------------------------
Accumulated Derivative Gains or Losses
As illustrated, the company makes extensive use of cash flow hedges,
principally in the anticipated royalties and intercompany transactions risk
management program. In connection with the company's cash flow hedges, it has
recorded approximately $507 million of net gains in Accumulated gains and losses
not affecting retained earnings as of March 31, 2001, net of tax, of which
approximately $421 million is expected to be reclassified to net income within
the next twelve months to provide an economic offset to the impact of the
underlying anticipated cash flows hedged.
The following table summarizes activity in Accumulated gains or losses not
affecting retained earnings section of stockholders' equity related to all
derivatives classified as cash flow hedges held by the company during the period
January 1, 2001 (the date of the company's adoption of SFAS No. 133) through
March 31, 2001:
(in millions, net of tax) Dr/(Cr)
- --------------------------------------------------------------------------------
Cumulative effect of adoption SFAS No. 133 as of
January 1, 2001 ($219)
Gains/(losses) reclassified into earnings from equity 83
Changes in fair value of derivatives (371)
-----
Accumulated derivative (gain)/loss included in gains or
losses not affecting retained earnings as of March 31, 2001 ($507)
- --------------------------------------------------------------------------------
-10-
Notes to Consolidated Financial Statements - (continued)
As of March 31, 2001, there were no significant gains or losses on
derivative transactions or portions thereof that were either ineffective as
hedges, excluded from the assessment of hedge effectiveness, or where the
underlying exposure did not occur; nor are there any anticipated in the normal
course of business.
4. Effective January 1, 2001, interest expense is presented in Cost of Global
Financing in the Consolidated Statement of Earnings if the related external
borrowings to support the Global Financing business were issued by either the
company or its Global Financing units (see pages 21 and 22 for a discussion of
Global Financing debt and interest expense). In prior periods, the caption only
included interest related to direct external borrowings of Global Financing
units. Prior period results have been reclassified to conform with the current
period presentation and reclassified amounts are presented in the following
table.
2000
- ---- Full
($ in millions) 1Q 2Q 3Q 4Q Year
-- -- -- -- ----
Global Financing
Gross profit margin 43.5% 45.2% 41.7% 42.9% 43.3%
Consolidated
Gross profit margin 35.8% 36.3% 35.4% 37.3% 36.3%
Interest expense $ 75 $ 84 $ 86 $ 102 $ 347
1999
- ---- Full
($ in millions) 1Q 2Q 3Q 4Q Year
-- -- -- -- ----
Global Financing
Gross profit margin 44.5% 41.7% 43.2% 39.1% 41.9%
Consolidated
Gross profit margin 35.3% 37.1% 35.3% 36.4% 36.0%
Interest expense $ 93 $ 96 $ 81 $ 82 $ 352
5. The tables on pages 26 and 27 of this Form 10-Q reflect the results of the
company's segments consistent with its management system used by the company's
chief operating decision maker. 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 occur 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, in part, by management, both in
evaluating the performance of, and in allocating resources to, each of the
segments.
Effective in the first quarter of 2001, the segment results reflect
changes the company made in the organization of its hardware business segments.
These changes include the transfer of the
-11-
Notes to Consolidated Financial Statements - (continued)
xSeries (Intel-based) servers from the Personal Systems Group to the Enterprise
Systems Group - server division, and the transfer of the printing systems
division from the Technology Group to the newly formed Personal and Printing
Systems Group, consisting of the realigned personal computer division, retail
store solutions division and the printing systems division.
In accordance with 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 in 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 2000 and 1999.
6. The following table provides the liability balances for restructuring actions
that the company took through 1993 and special actions in 1999:
Liability Liability
as of as of
12/31/2000 Payments Other Adj.(c) 3/31/2001
---------- -------- ------------- ---------
Current:
Workforce (a) $148 $ 52 $ 30 $126
Space (b) 91 18 27 100
---- ---- ---- ----
Total $239 $ 70 $ 57 $226
Non-current:
Workforce (a) $470 $ -- $(58) $412
Space (b) 384 -- (40) 344
---- ---- ---- ----
Total $854 $ -- $(98) $756
(a) Workforce accruals relate to terminated employees who are no longer
working for the company, but who were granted annual payments to
supplement their state pensions in certain countries. These contractually
required payments will continue until the former employee dies.
(b) Space accruals are for ongoing obligations to pay rent for vacant space
that could not be sublet or space that was sublet at rates lower than the
committed lease arrangement. The length of these obligations varies by
lease with the longest extending through 2012.
(c) Principally represents reclassification of non-current to current and
currency translation adjustments.
7. Subsequent Events: On April 24, 2001, the company announced that the Board of
Directors approved an increase in the quarterly dividend of 8 percent from $.13
to $.14 per common share. The dividend is payable June 9, 2001, to shareholders
of record of May 10, 2001.
On April 24, 2001, 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.
On April 24, 2001, the company announced it will pay $1 billion in cash
for Informix Corporation's database software business. The Informix acquisition
will provide the company with a leading database system used in data
warehousing, business intelligence and transaction-handling systems used by more
than 100,000 customers. The transaction is expected to be completed in the third
quarter of 2001 and is expected to be accounted for using the purchase method.
-12-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 2001
The company's first-quarter results included diluted earnings per share of
$.98, an increase of 18.1 percent versus the first quarter of 2000. The
company's first-quarter 2001 revenue totaled $21.0 billion, an increase of 8.8
percent (14 percent at constant currency) compared with the first quarter of
last year. First-quarter 2001 net income was $1.75 billion, a 15.2 percent
increase from the year-earlier period.
The company's first-quarter results reflected the continued momentum the
company saw building in the second half of 2000. The company's strategies
continued to take hold as the marketplace continued to move in the company's
direction. Customers are increasingly placing value on solutions over products.
In addition, the company experienced increasing demand for its products and
services driven by its growing technology leadership in both hardware and
software. The first quarter results also reflected several other factors that
continued to differentiate the company from its competitors - particularly its
diversified worldwide portfolio of businesses and its strategic focus in key
growth areas such as services, middleware and technology.
The company recognizes that the U.S. market remains volatile and
uncertain, and other regions of this global market are feeling some of the same
pressures. The company is not immune to a major, worldwide economic downturn.
The company's diverse portfolio of businesses, however, is designed to deliver
steady annual results over the long-term.
Results of Operations
(Dollars in millions) Three Months Ended
March 31,
---------------------------
2001 2000
------- -------
Revenue $21,044 $19,348
Cost 13,436 12,414
------- -------
Gross profit $ 7,608 $ 6,934
Gross profit margin 36.1% 35.8%
Net income $ 1,750 $ 1,519
Earnings per share of
common stock:
Assuming dilution $ 0.98 $ 0.83
Basic $ 1.00 $ 0.85
The average number of common shares outstanding assuming dilution was
lower by 48.8 million than the first quarter of 2000, primarily, as a result of
the company's share repurchase program. The average number of shares assuming
dilution was 1,781.2 million in the first quarter of 2001
-13-
Results of Operations - (continued)
and 1,830.0 million for the first quarter of 2000. There were 1,737.4 million
shares outstanding at March 31, 2001.
Revenue for the three months ended March 31, 2001 increased 8.8 percent
from the same period last year (14 percent at constant currency). Hardware
revenue increased 10.8 percent (15 percent at constant currency) as Technology,
Personal and Printing Systems and Enterprise Systems revenue grew versus the
first quarter of 2000. Global Services revenue increased 12.2 percent (18
percent at constant currency). Software revenue was essentially flat (up 5
percent at constant currency) as the company's middleware product lines showed
growth, while operating systems revenue declined. Global Financing revenue
increased 2.1 percent (5 percent at constant currency) and Enterprise
Investments/Other revenue declined 19.2 percent (14 percent at constant
currency).
In the Americas, first-quarter revenue was $9.0 billion, an increase of
6.3 percent (7 percent at constant currency) from the same period last year.
Revenue from Europe/Middle East/Africa was $5.6 billion, up 3.2 percent (11
percent at constant currency). Asia-Pacific revenue grew 7.6 percent (18 percent
at constant currency) to $4.3 billion. OEM revenue across all geographies was
$2.1 billion, a 47.9 percent increase (49 percent at constant currency) compared
with the first quarter of 2000.
The company's total gross profit margin was 36.1 percent in the first
quarter of 2001 compared with 35.8 percent in the first quarter of 2000.
First-quarter expense was $5.1 billion. The company's expense-to-revenue
ratio improved by 0.3 points year over year to 24.3 percent.
The company's tax rate in the first quarter was 29.7 percent compared with
30.0 percent in the first quarter of last year.
Hardware
(Dollars in millions) Three Months Ended
March 31,
------------------------
2001 2000
------ ------
Total revenue $8,547 $7,712
Total cost 5,969 5,593
------ ------
Gross profit $2,578 $2,119
Gross profit margin 30.2% 27.4%
Revenue from hardware for the first quarter of 2001 increased 10.8 percent
(15 percent at constant currency) when compared with the same period in 2000.
Effective in the first quarter of 2001, the segment results reflect
changes the company made in the organization of its hardware business segments.
These changes are more fully discussed in Note 5 on page 11. All amounts
disclosed herein for all years have been reclassified to conform with these
changes.
-14-
Results of Operations - (continued)
Personal and Printing Systems revenue increased year-over-year as a result
of strong ThinkPad and NetVista shipments. This increase was partially offset by
lower revenue from retail stores solutions and printing systems products.
Enterprise Systems revenue increased as IBM eServer revenue had a strong
quarter. The UNIX-based pSeries revenue grew strongly and the PC-based xSeries
experienced solid revenue growth as well. The z900 mainframe MIPS (millions of
instructions per second) grew 40 percent. The iSeries integrated server platform
revenue declined in the first quarter as customers anticipated new offerings due
in the second quarter of 2001 that will have Linux capability. Storage products
also had strong revenue growth in the quarter driven by Shark.
Technology revenue demonstrated very strong growth in the quarter. The
increase was driven by the company's advanced technologies being utilized in
three fast growing areas: networking, pervasive and enterprise IT. The strong
revenue growth in the quarter reflects the progress the company has made
bringing supply on line for both internal and outsourced products. In addition,
HDD (hard disk drive) revenue increased year-over-year and increased for the
second consecutive quarter, despite the fact that the personal computer industry
was under strong pressure. The revenue associated with the company's 10,000 RPM
drives increased over the prior year period. Although revenue increased in the
storage areas, HDDs remain a challenging segment of this industry.
Hardware gross profit dollars for the first quarter of 2001 increased 21.7
percent and the gross profit margin increased 2.8 points, from the comparable
period in 2000. These increases were primarily driven by improved gross profit
margins in personal computers reflecting continued improvement due to migration
to the direct channel, as well as a revenue mix toward mobile products. In
addition, microelectronic product margins increased due to shift to higher
margin custom logic products. eSeries servers and storage products gross profit
margins improved as well.
Global Services
(Dollars in millions) Three Months Ended
March 31,
------------------------
2001 2000
------ ------
Total revenue $8,471 $7,552
Total cost 6,311 5,597
------ ------
Gross profit $2,160 $1,955
Gross profit margin 25.5% 25.9%
Global Services revenue, including maintenance, increased 12.2 percent (18
percent at constant currency) in the first quarter of 2001 compared with the
same period last year. Global Services revenue, excluding maintenance, grew 15.2
percent (21 percent at constant currency). Maintenance revenue declined 2.7
percent (up 2 percent at constant currency) in the first quarter of 2001 versus
the same period in 2000.
-15-
Results of Operations - (continued)
Strategic Outsourcing Services revenue increased with strong growth in the
Asia/Pacific area. Business Innovation Services grew as the company has
successfully made the transition from custom integration and Y2K remediation to
e-business offerings. Integrated Technology Services, excluding maintenance,
increased as demand for the company's expertise in infrastructure services and
enablement continued this quarter. The company signed $10.2 billion in services
contracts in the first quarter of 2001, the largest first quarter signings in
the company's history. These signings included eight deals over $100 million
each plus one deal over $1 billion and the services backlog at March 31, 2001,
stands at approximately $87 billion.
Global Services gross profit dollars increased 10.4 percent in the first
quarter of 2001, compared with the year-ago period. The gross profit margin
decline of 0.4 points was a result of faster growth of services revenue over
maintenance and the rebalancing of resources to meet the demand for new
e-business skills.
Software
(Dollars in millions) Three Months Ended
March 31,
------------------------
2001 2000
------ ------
Total revenue $2,918 $2,927
Total cost 579 584
------ ------
Gross profit $2,339 $2,343
Gross profit margin 80.2% 80.0%
Revenue from software for the first quarter of 2001 was essentially flat
year-over-year (up 5 percent at constant currency). 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 1 percent (6 percent at constant
currency) over the first three months of 2000. The middleware revenue growth was
driven by strong growth in MQSeries, DB2 database and WebSphere offerings. These
increases were partially offset by lower revenue from Tivoli and Lotus products
which continued with portfolio transitions. Operating-systems software revenue
declined 3 percent (up 2 percent at constant currency) in the first quarter of
2001 when compared with the year-ago period. The decline in the first quarter
revenue was primarily driven by lower revenue from zSeries software products.
Software gross profit dollars and gross profit margin for the first
quarter of 2001 were essentially flat versus the same period in 2000.
-16-
Results of Operations - (continued)
Global Financing
(Dollars in millions) Three Months Ended
March 31,
----------------------
2001 2000
---- ----
Total revenue $832 $816
Total cost 438 461
---- ----
Gross profit $394 $355
Gross profit margin 47.3% 43.5%
First quarter 2001 Global Financing revenue increased 2.1 percent (5
percent at constant currency) compared with the same period of 2000. Growth in
commercial and customer financing drove the increase in revenue, partially
offset by lower used equipment sales.
Global Financing gross profit dollars increased 11.0 percent for the first
quarter of 2001 versus the same period in 2000. The gross profit margin
increased 3.8 points primarily driven by better margins on used equipment sales
year-over-year and a shift towards more financing revenue than used equipment
sales. Financing revenue carries a higher gross profit margin than used
equipment sales. See Note 4 on page 11 for additional information regarding Cost
of Global Financing reclassification effective January 1, 2001. All amounts
disclosed herein for all years presented have been reclassified to conform with
these changes.
Enterprise Investments / Other
(Dollars in millions) Three Months Ended
March 31,
----------------------
2001 2000
---- ----
Total revenue $276 $341
Total cost 139 179
---- ----
Gross profit $137 $162
Gross profit margin 49.5% 47.6%
Revenue from Enterprise Investments/Other decreased 19.2 percent (14
percent at constant currency) in the first three months of 2001 versus the
comparable period in 2000. The decrease was primarily driven by lower software
revenue versus last year.
The Enterprise Investments/Other gross profit dollars decreased 16.0
percent in the first quarter of 2001, versus the same periods of 2000, primarily
as a result of lower software revenue in the first quarter of 2001.
-17-
Results of Operations - (continued)
Expenses
(Dollars in millions) Three Months Ended
March 31,
--------------------
2001 2000
---- ----
Selling, general and administrative $ 3,808 $ 3,706
Percentage of revenue 18.1% 19.2%
Research, development and engineering $ 1,203 $ 1,172
Percentage of revenue 5.7% 6.1%
Selling, general and administrative (SG&A) expense increased 2.8 percent
(6 percent at constant currency) in the first three months of 2001 compared with
the same period in 2000. SG&A expense increased in 2001 as a result of lower
benefits from licensing of intellectual property and increased
compensation-related spending. The company continues to make excellent progress
in its operating expense management driven by its continued focus on
productivity. The expense-to-revenue ratio declined 1.1 points from the first
quarter of 2000.
Research, development and engineering expense increased 2.6 percent for
the first three months of 2001 compared with the same period of 2000. The
expense-to-revenue ratio improved 0.4 points year-over-year.
Other income decreased 119.2 percent in the first quarter of 2001 versus
the first quarter of 2000. The decline was primarily the result of a $116
million write-down of certain equity investments for other-than-temporary market
declines.
Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and interest costs associated with Global Financing
was $368 million for the first quarter of 2001, of which the company capitalized
$7 million. See page 22 for a discussion regarding the classification of
interest expense in the Consolidated Statement of Earnings.
The effective tax rate for the first three months of 2001 was 29.7 percent
versus 30.0 percent in the first quarter of 2000.
Included in the company's cost and expense was approximately $84 million
of benefit for retirement-related plans, including pension plans and nonpension
postretirement benefit plans, for the quarter ended March 31, 2001. The
comparable amount for the first quarter of 2000 was approximately $42 million.
The company realized cost and expense reductions of approximately $339 million
and approximately $255 million due to the funded status of its pension plans for
the quarter ended March 31, 2001 and 2000, respectively. The 2001 cost and
expense reduction is net of approximately $25 million associated with the
pension benefit improvement in the U.S. Plan effective January 1, 2001.
Future effects of retirement-related plans on the operating results of the
company depend on economic conditions, employee demographics, mortality rates
and investment performance.
-18-
Financial Condition
During the first quarter of 2001, the company's continued strong financial
performance enabled it to make significant investments to fund its future growth
and increase shareholder value. These investments included expenditures of
$1,327 million for Research, development and engineering, $1,433 million for
Plant, rental machines and other property and $1,339 million for the repurchase
of the company's common shares. The company had $3,867 million in Cash and cash
equivalents and Marketable securities at March 31, 2001.
Cash Flow
(Dollars in millions) Three Months Ended
March 31,
----------------------
2001 2000
------- -------
Net cash provided from/(used in):
Operating activities $ 1,935 $ 995
Investing activities (1,382) (384)
Financing activities (270) (2,305)
------- -------
Effect of exchange rate changes on cash
and cash equivalents (53) (64)
------- -------
Net change in cash and cash equivalents $ 230 $(1,758)
======= =======
Cash flows from operating activities in the first three months of 2001
increased $940 million from the comparable 2000 period. This primarily resulted
from the company's improvement in net income, as well as the collection of
accounts receivable which reflected strong year-end 2000 business volumes,
offset by a decline in cash flows for accounts payable and other accruals.
Cash flows used in investing activities increased by $998 million from the
comparable 2000 period. Payments for plant, rental machines and other property
net of proceeds drove the increase from the comparable 2000 period, primarily
for investments in the company's Global Services business and in manufacturing
capacity for microelectronics and storage products. Proceeds from marketable
securities and other investments declined from the 2000 period.
Cash flows used in financing activities in the first three months of 2001
decreased $2,035 million from the comparable 2000 period due primarily to an
increase in debt financing and a decrease in stock repurchases.
-19-
Financial Condition - (continued)
Working Capital
(Dollars in millions) At March 31, At December 31,
2001 2000
------- -------
Current assets $41,975 $43,880
Current liabilities 32,902 36,406
------- -------
Working capital $ 9,073 $ 7,474
Current ratio 1.28:1 1.21:1
Current assets decreased $1,905 million from year-end 2000 primarily due
to decreases of $3,327 million in Accounts receivable ($1,856 million in
Short-term financing receivables, $1,302 million in Notes and accounts
receivable and $169 in Other accounts receivable) and $351 million in deferred
taxes, partially offset by increases of $1,381 million in Prepaid expenses and
other current assets, $247 million in Inventories and $145 million in Cash and
cash equivalents and Marketable securities. 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
primarily resulted from the recognition of derivative instrument assets relative
to the company's January 1, 2001 adoption of SFAS No. 133. Inventories increased
primarily within Enterprise Systems Group and storage systems offset by a
decline in Personal and Printing Systems Group inventories.
Current liabilities decreased $3,504 million from year-end 2000 with
declines of $3,550 million in Accounts payable and other accruals, and $659
million in Taxes payable (resulting primarily from declines in these balances
from typically higher year-end levels), partially offset by an increase of $705
million in Short-term debt.
Investments
During the first quarter of 2001, the company invested $1,433 million in
Plant, rental machines and other property, an increase of $470 million from the
comparable 2000 period. The company invested in its services business, primarily
in the management of customers' information technology, as well as in
manufacturing capacity for HDDs and microelectronics.
In addition to software development expense included in Research,
development and engineering expense, the company capitalized $134 million of
software costs during the first three months of 2001, a decrease of $11 million
from the comparable period in 2000. Amortization of capitalized software costs
was $149 million during the first quarter of 2001, an increase of $46 million
from the comparable 2000 period.
Investments and sundry assets were $14,245 million at March 31, 2001, a
decrease of $202 million from year-end 2000, resulting primarily from declines
in alliance investments including the write-down of certain equity investments
for other-than-temporary market declines and deferred tax assets partially
offset by an increase in prepaid pension assets.
-20-
Financial Condition - (continued)
The company has remaining authorization as of March 31, 2001, to purchase
$1,381 million of IBM common shares in the open market. On April 24, 2001, 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.
On April 24, 2001, the company announced it will pay $1 billion in cash
for Informix Corporation's database software business. The transaction is
expected to be completed in the third quarter of 2001 and the company expects to
fund this acquisition through normal operations.
Debt and Equity
Global Financing
(Dollars in millions) At March 31, At December 31,
2001 2000
---- ----
Assets* $37,209 $40,822
Debt ** 27,080 27,514
Equity 3,977 4,142
Debt/Equity 6.8x 6.6x
* Global Financing assets include cash, financing receivables, intercompany
amounts, rental machine fixed assets and other assets.
** Global Financing debt includes debt of the company and of Global Financing
units that support the Global Financing business.
The Global Financing segment is a financial services business and is,
therefore, more debt dependent than the company's other businesses. In the first
quarter of 2001, Global Financing debt to equity ratio increased to 6.8x, which
is within management's acceptable target range.
Non-Global Financing
Debt* $ 1,753 $ 1,062
Debt/Capitalization 9.1% 6.1%
EBITDA/Interest Expense** 26x 24x
* Non-global financing debt is the company's total external debt less the
Global Financing debt described in the Global Financing table above.
** EBITDA is earnings before interest and taxes, plus depreciation and
amortization, adjusted for minimum rental commitments. The interest
expense used in the denominator represents the company's total interest
expense less the Global Financing interest expense.
The increase in non-global financing debt in the first quarter of 2001 is
based on seasonal patterns of the company's cash flows. The level of non-global
financing debt is generally low at year-end periods due to strong fourth quarter
cash flows. Non-global financing debt increases in the first quarter due to
weaker cash flows and increased requirements for cash in the first quarter
period.
-21-
Financial Condition - (continued)
Global Financing provides financing predominately for the company's
external customers but also provides financing for the company including the
funding to support the Global Services business' long-term customer services
contracts. All of these financing arrangements are at arms-length rates based
upon market conditions. The company manages and measures the Global Financing
business as if it approximates a stand-alone business that includes both the
external financing and company financing described above. Accordingly, the
Global Financing debt above and Global Financing Cost of financing below support
both of these Global Financing activities.
All intercompany transactions are eliminated in the Consolidated Statement
of Earnings and therefore, the financing revenue associated with the financing
provided by Global Financing to the company is eliminated in consolidation.
Accordingly, the interest expense from the company's external borrowings that
supports such financing revenue is classified in the Interest expense caption of
the Consolidated Statement of Earnings as opposed to the Cost of financing
caption. The reconciliation of these amounts is as follows:
(Dollars in millions)
Global Non-Global Consolidated
Financing Financing Eliminations Results
--------- --------- ------------ -------
Cost of financing $344 $ -- $(55) $289
Interest expense -- 17 55 72
Stockholders' equity increased $842 million from December 31, 2000,
primarily due to the increase in the company's retained earnings partially
offset by the company's ongoing stock repurchase program.
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, 2001, $9,264 million of this confirmed line of credit remained unused
and available for future use. The company has other committed and uncommitted
lines of credit with approximately $4 billion unused and available for future
use at March 31, 2001.
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; quarterly
fluctuations in revenues and volatility of stock prices; the company's ability
to attract and retain key personnel; currency fluctuations and customer
-22-
Forward Looking and Cautionary Statements - (continued)
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.
99 Reclassified Segment Results 2000 and 1999.
ITEM 6 (b). Reports on Form 8-K
The company filed Form 8-K on January 17, 2001, with respect to the
company's financial results for the periods ended December 31, 2000, and
included the unaudited Consolidated Statement of Earnings, Consolidated
Statement of Financial Position and Segment Data for the periods ended December
31, 2000. In addition, IBM's Chief Financial Officer, John R. Joyce's
fourth-quarter earnings presentation to security analysts on Wednesday,
January 17, 2001 was filed as Attachment II of the Form 8-K.
The company filed Form 8-K on January 29, 2001, IBM's Chief Financial
Officer, John R. Joyce's fourth quarter 2000 earnings presentation to security
analysts on January 17, 2001, including final cash flow numbers. No financial
statements were filed with this Form 8-K.
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 15, 2001
By:
/s/ Mark Loughridge
---------------------------------------
Mark Loughridge
Vice President and Controller
-23-