UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
1-2360
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(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-0871985
---------------------- ------------------------------------
(State of incorporation) (IRS employer identification number)
Armonk, New York 10504
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
914-765-1900
-----------------------------
(Registrant's telephone number)
The registrant has 517,545,830 shares of common stock outstanding at
September 30, 1996.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
1934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
INDEX
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Page
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Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Operations for the three and nine
months ended September 30, 1996 and 1995 ................... 1
Consolidated Statement of Financial Position at
September 30, 1996 and December 31, 1995 ................... 2
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1996 and 1995 ........................... 4
Notes to Consolidated Financial Statements ................... 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ......... 6
Part II - Other Information ......................................... 15
ITEM 1. INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS - (UNAUDITED)
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------------
1996 1995 1996 1995
Revenue: -------- -------- -------- --------
Hardware sales $ 8,372 $ 7,745 $ 24,656 $ 24,131
Services 3,932 3,133 10,864 8,619
Software 3,102 3,134 9,334 9,079
Maintenance 1,723 1,849 5,226 5,547
Rentals and financing 933 893 2,724 2,644
-------- -------- -------- ------
Total revenue 18,062 16,754 52,804 50,020
Cost:
Hardware sales 5,282 4,952 16,002 14,938
Services 3,219 2,501 8,755 6,860
Software 986 1,078 2,907 3,149
Maintenance 904 911 2,731 2,679
Rentals and financing 413 391 1,191 1,178
-------- -------- -------- --------
Total cost 10,804 9,833 31,586 28,804
-------- -------- -------- --------
Gross profit 7,258 6,921 21,218 21,216
Operating expenses:
Selling, general and
administrative 4,175 3,858 11,761 11,374
Research, development and
engineering 1,115 1,035 3,322 2,922
Purchased in-process research
and development -- 1,840 435 1,840
-------- -------- -------- --------
Total operating expenses 5,290 6,733 15,518 16,136
Operating income 1,968 188 5,700 5,080
Other income, principally interest 183 208 526 692
Interest expense 172 159 526 527
-------- -------- -------- --------
Earnings before income taxes 1,979 237 5,700 5,245
Income tax provision 694 775 2,294 2,778
-------- -------- -------- --------
Net earnings (loss) 1,285 (538) 3,406 2,467
Preferred stock dividends and 5 5 15 57
transaction costs -------- -------- -------- --------
Net earnings (loss) applicable to
common shareholders $ 1,280 $ (543) $ 3,391 $ 2,410
======== ======== ======== ========
Net earnings (loss) per share
of common stock $ 2.45 $ (.96) $ 6.36 $ 4.19
Average number of common shares
outstanding (millions) 521.8 564.6 533.3 575.1
Cash dividends per common share $ .35 $ .25 $ .95 $ .75
(The accompanying notes are an integral part of the financial statements.)
- 1 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
ASSETS
At September 30 At December 31
(Dollars in millions) 1996 1995
--------------- --------------
Current assets:
Cash $ 1,602 $ 1,746
Cash equivalents 5,204 5,513
Marketable securities - at cost, which
approximates market 196 442
Notes and accounts receivable -
net of allowances 15,843 17,441
Sales-type leases receivable 5,533 5,961
Inventories, at lower of average cost or market
Finished goods 1,509 1,241
Work in process 5,590 4,990
Raw materials 67 92
-------- --------
Total inventories 7,166 6,323
Prepaid expenses and other current assets 3,835 3,265
-------- --------
Total current assets 39,379 40,691
Plant, rental machines and other property 42,113 43,981
Less: Accumulated depreciation 25,437 27,402
-------- --------
Plant, rental machines and other property - net 16,676 16,579
Software, less accumulated
amortization (1996, $11,903; 1995, $11,276) 1,694 2,419
Investments and sundry assets 20,247 20,603
-------- --------
Total assets $ 77,996 $ 80,292
======== ========
- 2 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
At September 30 At December 31
(Dollars in millions) 1996 1995
--------------- --------------
Current liabilities:
Taxes $ 2,115 $ 2,634
Accounts payable and accruals 15,494 17,445
Short-term debt 13,462 11,569
-------- --------
Total current liabilities 31,071 31,648
Long-term debt 9,669 10,060
Other liabilities 14,093 14,354
Deferred income taxes 1,795 1,807
-------- --------
Total liabilities 56,628 57,869
Stockholders' equity:
Preferred stock - par value $.01 per share 253 253
Shares authorized: 150,000,000
Shares issued: 1996 - 2,610,711
1995 - 2,610,711
Common stock - par value $1.25 per share 7,998 7,488
Shares authorized: 750,000,000
Shares issued: 1996 - 554,139,324
1995 - 548,199,013
Retained earnings 14,407 11,630
Translation adjustments 2,504 3,036
Treasury stock, at cost (3,939) (41)
Shares: 1996 - 36,593,494
1995 - 424,583
Net unrealized gain on marketable securities 145 57
-------- --------
Total stockholders' equity 21,368 22,423
-------- --------
Total liabilities and stockholders' equity $ 77,996 $ 80,292
======== ========
(The accompanying notes are an integral part of the financial statements.)
- 3 -
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30:
(UNAUDITED)
(Dollars in millions) 1996 1995
-------- --------
Cash flow from operating activities:
Net earnings $ 3,406 $ 2,467
Adjustments to reconcile net earnings to cash
provided from operating activities:
Depreciation 2,722 2,887
Amortization of software 986 1,185
Effect of restructuring charges (1,091) (1,721)
Purchased in-process research and development 435 1,840
Changes in operating assets and liabilities (223) 331
Gain on disposition of fixed and other assets (262) (124)
------- -------
Net cash provided from operating activities 5,973 6,865
------- -------
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (2,896) (1,886)
Investment in software (204) (652)
Purchases of marketable securities and
other investments (1,065) (860)
Proceeds from marketable securities and
other investments 731 2,789
Acquisition of Lotus Development Corp. - net -- (2,875)
Acquisition of Tivoli Systems, Inc. - net (716) --
------- -------
Net cash used in investing activities (4,150) (3,484)
------- -------
Cash flow from financing activities:
Proceeds from new debt 6,087 4,294
Payments to settle debt (3,869) (6,729)
Short-term borrowings less
than 90 days - net (314) 1,756
Preferred stock transactions - net -- (854)
Common stock transactions - net (3,503) (3,021)
Cash dividends paid (521) (448)
------- -------
Net cash used in financing activities (2,120) (5,002)
------- -------
Effect of exchange rate changes
on cash and cash equivalents (156) 139
------- -------
Net change in cash and cash equivalents (453) (1,482)
Cash and cash equivalents at January 1 7,259 7,922
------- -------
Cash and cash equivalents at September 30 $ 6,806 $ 6,440
======= =======
(The accompanying notes are an integral part of the financial statements.)
- 4 -
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 and nine month periods have been made. In
addition to the adjustments for normal recurring accruals, the company recorded
charges in the first quarter of 1996 of approximately $435 million, associated
with the write-off of purchased in-process research and development associated
with the acquisition of Tivoli Systems Inc. and Object Technology International
Inc. Also in the third quarter of 1995, the company recorded charges of
approximately $1.8 billion, associated with the write-off of purchased
in-process research and development associated with the acquisition of the Lotus
Development Corporation.
2. Earnings (loss) per share amounts were computed by dividing earnings (loss)
after deduction of preferred stock dividends by the average number of common
shares outstanding.
3. A supplemental Consolidated Statement of Operations schedule has been
provided for informational purposes only, to exclude the effects of the
write-off of purchased in-process research and development associated with the
Tivoli Systems Inc. and Object Technology International Inc. acquisitions
recorded in the first quarter of 1996, as well as the Lotus Development
Corporation acquisition recorded in the third quarter of 1995. The supplemental
statement is shown shown in exhibit 99 on page 19. This information is presented
voluntarily and is provided solely to assist in understanding the effect of
these items on the Consolidated Statement of Operations.
4. Subsequent Event: On October 22, 1996, IBM Canada Limited completed the sale
of Celestica Inc., IBM Canada's wholly-owned manufacturing subsidiary to Onex
Corporation. This sale will not have a material impact on the company's
financial position or results of operations.
Celestica was established as a wholly-owned subsidiary of IBM Canada Limited in
January, 1994. Located in Toronto, Canada, Celestica produces memory products,
power systems and provides contract manufacturing services for customers in
Canada and around the world. Celestica has over 1,000 full-time employees.
Onex Corporation is a Canadian-based diversified company that operates through
autonomous companies that include Sky Chefs, Inc., Tower Automotive, Inc.,
Vencap, Inc., and Imperial Parking Limited.
- 5 -
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
The company's third quarter results continued to demonstrate good revenue
growth as well as improved hardware margins versus the third quarter of 1995.
Total revenue increased 11 percent at constant currency and over the past seven
quarters has averaged 8 percent at constant currency. During the third quarter
of 1996, the company continued to repurchase common shares, spending
approximately $1.3 billion to buy back nearly 12 million shares.
Results of Operations
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenue $ 18,062 $ 16,754 $ 52,804 $ 50,020
Cost 10,804 9,833 31,586 28,804
-------- -------- -------- --------
Gross profit $ 7,258 $ 6,921 $ 21,218 $ 21,216
Gross profit margin 40.2% 41.3% 40.2% 42.4%
Net earnings (loss) $ 1,285 $ (538) $ 3,406 $ 2,467
The company recorded third-quarter 1996 net earnings of $2.45 per common
share, compared with a loss of $.96 per common share in the third quarter of
last year. The third quarter 1995 results included a one-time charge of
approximately $1.8 billion ($3.26 per common share) associated with the
company's acquisition of the Lotus Development Corporation. Excluding this
charge, third-quarter 1995 earnings were $1.3 billion, or $2.30 per common
share. Total revenue increased 7.8 percent over the same period of 1995 to $18.1
billion. The average number of common shares outstanding for the period was
521.8 million in 1996 versus 564.6 million in 1995.
Net earnings for the nine months ended September 30, 1996 were $6.36 per
common share compared with earnings of $4.19 in the first nine months of 1995.
The 1996 results included a one-time charge of approximately $435 million ($.80
per common share) related to the acquisition of Tivoli Systems Inc. and Object
Technology International Inc. and the 1995 results included a one-time charge of
approximately $1.8 billion ($3.26 per common share) related to the Lotus
Development Corporation acquisition. Excluding these items, the company's
adjusted earnings per common share were $7.16 for the first nine months of 1996
versus $7.39 per common share for the comparable 1995 period. Total revenue for
the nine months ended September 30, 1996 was up 5.6 percent from the prior year.
The average number of common shares outstanding for the period was 533.3 million
in 1996 versus 575.1 million in 1995.
- 6 -
Results of Operations - (continued)
Revenue grew in all geographic areas except Europe, where revenue was
essentially flat. Specifically, revenue from the United States totalled $7.4
billion, up 13.5 percent from the same period last year. Asia Pacific revenue
grew 8.2 percent to $3.5 billion, Latin America revenue rose 11.9 percent to
$811 million, and revenue from Canada increased 14.6 percent to $796 million.
European revenue was essentially unchanged year-over-year at $5.6 billion.
Currency had about a 3 percentage point negative impact on revenue results
in the third quarter. This compares with an approximate 3 percentage point
favorable impact in the third quarter of 1995 and an approximate 5 percentage
point negative effect in the second quarter of this year. Excluding the effects
of currency, Asia-Pacific revenue climbed 19.4 percent and European revenue grew
1.2 percent.
Total expenses increased 9.0 percent in the quarter excluding the $1.8
billion charge associated with the Lotus Development Corporation acquisition in
1995. This increase was due primarily to on-going work force separation charges,
advertising and promotional expenses associated with the Olympics, and increased
spending due to acquisitions and investments made by the company in 1995 and
1996.
Hardware Sales
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $ 8,372 $ 7,745 $ 24,656 $ 24,131
Total cost 5,282 4,952 16,002 14,938
-------- -------- -------- --------
Gross profit $ 3,090 $ 2,793 $ 8,654 $ 9,193
Gross profit margin 36.9% 36.1% 35.1% 38.1%
Revenue from hardware sales increased 8.1 percent and 2.2 percent,
respectively, in the third quarter and first nine months of 1996, when compared
to the same periods of last year. Hardware sales revenue was negatively affected
by approximately 3 points from currency in both the third quarter and first nine
months of 1996.
The increase in hardware sales revenue in the third quarter of 1996 was
driven by strong growth in both personal computers and AS/400* servers. Storage
products revenue increased primarily as a result of growth in low-end Original
Equipment Manufacturer (OEM) products. These increases were partially offset by
RISC System/6000* revenue which was down slightly compared to last year.
System/390* server purchase revenue was down versus last year. Total delivery of
mainframe computing power, including shipments placed with end-users through
both operating leases and service offerings, increased 77 percent as measured in
MIPS (millions of instruction per second) versus last year. Semiconductor
revenue also decreased from the previous year as a result of continuing
industry-wide pricing pressures.
- 7 -
Results of Operations - (continued)
The hardware sales revenue increase for the first nine months of 1996
versus 1995, was driven by growth in personal computers, AS/400 servers,
RISC/6000 products and low-end OEM storage products. These increases were
partially offset by decreases in System/390 server revenue, lower high-end
storage products revenue and a decline in semiconductor revenue.
Hardware sales gross profit dollars for the third quarter of 1996 increased
10.6 percent over the comparable period in 1995. The increase in gross profit
dollars and margin was driven by improved margins in personal computers, low-end
OEM storage products and System/390 servers.
Hardware sales gross profit dollars for the first nine months of 1996
declined 5.9 percent compared to the same period of 1995. This decrease in gross
profit dollars and margin was primarily due to a shift in revenue mix away from
higher margin products to personal computer products, which have a lower margin,
as well as price reductions associated with memory products. In addition, most
other hardware products continue to be affected by competitive pricing
pressures.
Services Other Than Maintenance
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $ 3,932 $ 3,133 $ 10,864 $ 8,619
Total cost 3,219 2,501 8,755 6,860
-------- -------- -------- --------
Gross profit $ 713 $ 632 $ 2,109 $ 1,759
Gross profit margin 18.1% 20.2% 19.4% 20.4%
Services revenue increased 25.5 percent and 26.0 percent, respectively, in
the third quarter and first nine months of 1996, when compared to the same
periods of last year. Services revenue was negatively affected by about 3 points
and 4 points, respectively, from currency in the third quarter and first nine
months of 1996. The revenue increases were primarily driven by continued growth
in outsourcing for both system and networking activity, as well as availability
services and systems integration.
Services gross profit dollars increased in the third quarter and first nine
months of 1996, 12.8 percent and 19.9 percent, respectively, when compared to
year-ago periods. The third quarter 1996 gross profit margin was negatively
affected by lower utilization rates resulting from increased hiring in the
quarter and the seasonal effect of summer vacation, particularly in Europe.
- 8 -
Results of Operations - (continued)
Software
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $ 3,102 $ 3,134 $ 9,334 $ 9,079
Total cost 986 1,078 2,907 3,149
-------- -------- -------- --------
Gross profit $ 2,116 $ 2,056 $ 6,427 $ 5,930
Gross profit margin 68.2% 65.5% 68.9% 65.3%
Revenue from software for the third quarter of 1996 decreased 1.0 percent
from the comparable period in 1995. The revenue for the first nine months of
1996 increased 2.8 percent over the same period last year. The increase for the
first nine months of 1996 over the previous year was primarily driven by
products offered by Lotus Development Corporation as well as strong growth in
other distributed software products. While software revenue, adjusted for
currency, grew in the third quarter compared to 1995, the rate of increase
compared to the first and second quarters of 1996 was slowed by the inclusion of
Lotus' revenue for the first time in the third quarter 1995 results. The
increase in both the third quarter and nine months revenue was somewhat offset
by lower host-based computer software revenue associated with System/390 and
AS/400. In addition, the third-quarter and first-nine months' results were
negatively affected by currency by approximately 2 and 3 points, respectively,
in 1996.
Software gross profit for the third quarter and first nine months of
1996 increased 2.9 percent and 8.4 percent, respectively, when
compared to the same periods in 1995. These increases were primarily
driven by the company's continuing shift toward a more iterative software
development process which results in expensing a larger percentage of software
development spending and capitalizing less. This results in lower amortization
costs going forward and improved software margins, with an increase in
research, development and engineering expense in the current period.
Maintenance
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $ 1,723 $ 1,849 $ 5,226 $ 5,547
Total cost 904 911 2,731 2,679
-------- -------- -------- --------
Gross profit $ 819 $ 938 $ 2,495 $ 2,868
Gross profit margin 47.5% 50.7% 47.7% 51.7%
- 9 -
Results of Operations - (continued)
Maintenance revenue for the third quarter and first nine months of 1996
decreased 6.8 percent and 5.8 percent, respectively, over comparable periods in
1995. The third quarter and nine-months revenue had an approximate negative
effect of about 3 points from currency in 1996.
Maintenance gross profit dollars decreased 12.7 percent and 13.0 percent,
respectively, in the third quarter and first nine months of 1996, when compared
to the same periods of 1995. Maintenance revenue and gross profit margin
continue to be affected by the competitive environment and resulting pricing
pressures on maintenance offerings, as well as more revenue being driven by
mid-range and low-end products which have a lower margin.
Rentals and Financing
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $ 933 $ 893 $ 2,724 $ 2,644
Total cost 413 391 1,191 1,178
-------- -------- -------- --------
Gross profit $ 520 $ 502 $ 1,533 $ 1,466
Gross profit margin 55.8% 56.3% 56.3% 55.5%
Rentals and financing revenue increased 4.4 percent and 3.0 percent,
respectively, for the third quarter and first nine months of 1996, when compared
to the same periods of last year. The 1996 increase primarily reflects an
increase in System/390 placements. Rentals and financing were negatively
affected by currency by approximately 2 and 3 percentage points, respectively,
in the third quarter and first nine months of 1996.
Rentals and financing gross profit dollars for the third quarter and first
nine months of 1996 increased 3.6 percent and 4.6 percent, respectively, over
comparable periods in 1995. These increases are due to lower interest rates and
a changing country mix.
Expenses
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Selling, general and
administrative $ 4,175 $ 3,858 $ 11,761 $ 11,374
Percentage of revenue 23.1% 23.0% 22.3% 22.7%
Research, development and
engineering $ 1,115 $ 1,035 $ 3,322 $ 2,922
Percentage of revenue 6.2% 6.2% 6.3% 5.8%
- 10 -
Results of Operations - (continued)
Selling, general and administrative expense for the third quarter and first
nine months of 1996 increased 8.2 percent and 3.4 percent, respectively, when
compared to the same periods of last year. The increases were a result of higher
advertising and promotion expense associated with the 1996 Olympic games and
spending associated with new acquisitions and investments made by the company in
the second half of 1995 and 1996. In addition, the third quarter and first nine
months of 1996 results also included $152 million and $465 million,
respectively, for net expense primarily associated with work force separation
charges.
Research, development and engineering expense increased 7.7 percent and
13.7 percent, respectively, for the third quarter and first nine months of 1996,
from the same periods of 1995. These increases were result of lower
capitalization rates for software development in 1996 versus 1995, which has the
effect of increasing research, development and engineering expense.
Additionally, expenses associated with the Lotus Development Corporation are
included in the 1996 results, where the 1995 results only included third quarter
activity.
The first nine months 1996 results included a charge of $435 million for
purchased-in process research and development expense associated with the
acquisition of Tivoli Systems, Inc. and Object Technology International, Inc. in
the first quarter of 1996. The third quarter and first nine months of 1995
included a $1.8 billion charge associated with the Lotus Development Corporation
acquisition recorded in the third quarter of 1995. These amounts have been
separately identified on the company's Consolidated Statement of Operations.
Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and interest costs associated with rentals and
financing, amounted to $385 million and $1,164 million for the third quarter and
first nine months of 1996, respectively. Of these amounts, $10 million for the
third quarter and $24 million for the first nine months were capitalized.
The effective tax rate for the quarter ended September 30, 1996 was 35.1
percent, versus 326.6 percent for the same period of 1995. The third quarter
1995 effective tax rate was impacted by the $1.8 billion charge associated with
the acquisition of the Lotus Development Corporation, which did not give rise to
a tax benefit. Excluding this item, the effective tax rate from operations would
have been 37.3 percent. The 2.2 point decrease in the effective tax rate from
operations in 1996 versus 1995 is due to the use of deferred tax assets and the
mix of earnings and corresponding weighting of tax rates on a country-by-country
basis. The company continues to perform assessments of the realizability of the
net deferred tax assets.
- 11 -
Results of Operations - (continued)
The effective tax rate for the first nine months of 1996 was 40.3 percent,
versus 53.0 percent for the same period in 1995. Excluding the $435 million
charge for Tivoli Systems Inc. and Object Technology International Inc., the
effective tax rate from operations for the first nine months of 1996 was 37.4
percent. Excluding the $1.8 billion Lotus Development Corporation charge, the
effective tax rate from operations for the first nine months of 1995, would have
been 39.2 percent. The 1.8 point decrease from the 1995 rate was a result of the
same factors that impacted the third quarter effective tax rate after adjusting
for the Lotus charge.
Financial Condition
The Consolidated Statement of Financial Position at September 30, 1996
reflects a number of actions taken by the company during 1996, including
expenditures of $3.9 billion for the repurchase of common stock, $1.0 billion
net cash for the acquisitions of Tivoli Systems Inc., Object Technology
International, Inc. and others, and $1.1 billion in payments relating to
restructuring programs announced in prior years.
Working Capital
(Dollars in millions) At September 30 At December 31
1996 1995
--------------- --------------
Current assets $ 39,379 $ 40,691
Current liabilities 31,071 31,648
-------- --------
Working capital $ 8,308 $ 9,043
Total current assets declined $1.3 billion from year-end 1995 with declines
in total cash, cash equivalents, and marketable securities of $.7 billion and
accounts receivable of $2.0 billion, offset by increases of $.8 billion in
inventories and $.6 billion in prepaid expenses. The decline in total cash, cash
equivalents, and marketable securities results primarily from the stock
repurchases, strategic acquisitions, and work force separation payments, offset
by cash generated from operations. The decrease in accounts receivable is
attributable to collection of traditionally higher year-end accounts receivable
balances. The increase in inventories is primarily due to a softening in demand
for microelectronic memory products; while the increase in prepaid expenses is
due to the normal increase in these balances from year-end levels.
Total current liabilities declined $.6 billion from December 31, 1995, with
declines of $2.5 billion in accruals, taxes and accounts payable, offset by an
increase of $1.9 billion in short-term debt. The decrease in accruals, taxes and
accounts payable relates to the seasonal decline in these balances from their
normally higher year-end levels, while short-term debt increased primarily in
support of customer financing.
The company's capital expenditures for plant, rental machines and other
property were approximately $3.8 billion for the nine months ended September 30,
1996, an increase of approximately $.9 billion from the comparable 1995 period,
driven primarily by continued investment in the company's microelectronics and
outsourcing businesses.
- 12 -
Financial Condition - (continued)
Investments
In addition to software development expense included in research,
development and engineering expense, the company capitalized $.2 billion of
software costs during the nine months ended September 30, 1996, versus the $.7
billion capitalized in the comparable 1995 period. Amortization of capitalized
software costs amounted to $1.0 billion during the first nine months of 1996
versus $1.2 billion for the comparable 1995 period.
Investments and sundry assets were $20.2 billion at September 30, 1996, a
decrease of $.4 billion from December 31, 1995, resulting from a decrease of $.8
billion in non-current sales-type leases, and $.5 billion in deferred tax and
other assets, offset by increases of $.3 billion in investments in business
alliances, $.2 billion in goodwill related to the company's strategic
acquisitions, and $.4 billion in prepaid pension cost.
Long Term Liabilities and Stockholders' Equity
Other non-current liabilities, at $14.1 billion, decreased $.2 billion from
December 31, 1995, primarily the result of declines in restructuring accrual
balances, partially offset by increases in non-current postretirement benefit
liabilities.
Stockholders' equity declined from $22.4 billion at December 31, 1995 to
$21.4 billion, resulting from $3.9 billion in common stock repurchases and a $.5
billion decline in equity translation adjustments, offset by $.5 billion in the
exercise of stock options, an increase of $2.8 billion in retained earnings, and
$.1 billion in net unrealized gains on marketable securities.
Cash Flow
(Dollars in millions) Nine Months Ended
June 30
------------------
1996 1995
------- -------
Net cash provided from (used in):
Operating activities $ 5,973 $ 6,865
Investing activities (4,150) (3,484)
Financing activities (2,120) (5,002)
Effect of exchange rate changes
on cash and cash equivalents (156) 139
------- -------
Net change in cash and cash equivalents $ (453) $(1,482)
------- -------
- 13 -
Financial Condition - (continued)
For the nine months ended September 30, 1996, the company had an overall
net decrease in cash and cash equivalents of $.5 billion compared to a net
decrease of $1.5 billion for the same period in 1995.
Net cash provided from operating activities was $6.0 billion for the
nine-months ended September 30, 1996, versus $6.9 billion in the comparable
period of 1995. The period-to-period decrease in cash flow from operations is
primarily a result of lower cash inflows relative to net changes in operating
assets and liabilities and purchased in-process research and development,
partially offset by improved net earnings and lower work force separation
payments in the first nine months of 1996.
Net cash used in investing activities was $4.2 billion for the nine month
period ended September 30, 1996, compared to $3.5 billion in the comparable 1995
period. The increase in funds utilized in investing activities is attributable
to increased capital expenditures driven primarily by continued investment in
the company's outsourcing and microelectronics businesses, offset by lower
expenditures for strategic acquisitions in the 1996 period. Additionally, there
were substantially less net proceeds from the sale of marketable securities and
other investments, as well as lower capitalization of software development
during the 1996 period versus the comparable 1995 period.
Net cash used in financing activities amounted to $2.1 billion for the nine
months ended September 30, 1996. This decrease of $2.9 billion from the
comparable 1995 period was the result of decreased preferred stock repurchase
activity partially offset by increased common stock transactions in the 1996
period. Additionally, overall debt financing activities provided $1.9 billion in
cash during the nine month period of 1996 versus cash utilization of $.7 billion
during the comparable 1995 period.
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
September 30, 1996, $9.4 billion of this confirmed line of credit remains unused
and available for future use.
At September 30, 1996, the company had a net balance of $.9 billion in
assets under management from the securitization of lease and trade receivables.
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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 Supplemental Consolidated Statement of Operations schedule.
ITEM 6 (b). Reports on Form 8-K
A Form 8-K dated July 25,1996 was filed with respect to the company's
financial results for the periods ended June 30, 1996 and included unaudited
consolidated financial statements for the periods ended June 30, 1996.
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
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(Registrant)
Date: November 13, 1996
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By:
John R. Joyce
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John R. Joyce
Vice President and Controller
* AS/400, System/390 and RISC/6000 are trademarks or registered
trademarks of the International Business Machines Corporation.
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