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, 1997
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 972,170,729 shares of common stock outstanding at
September 30, 1997.
INDEX
-----
Page
----
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Earnings for the three and nine
months ended September 30, 1997 and 1996 . . . . . . . . . . 1
Consolidated Statement of Financial Position at
September 30, 1997 and December 31, 1996 . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . . . 7
Part II - Other Information . . . . . . . . . . . . . . . . . . . . 15
ITEM 1. INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions except Three Months Ended Nine Months Ended
per share amounts) September 30 September 30
------------------ -----------------
1997 1996 1997 1996
Revenue:
------- ------- ------- -------
Hardware sales $ 8,345 $ 8,372 $24,722 $24,656
Services 4,709 3,932 13,416 10,864
Software 3,039 3,102 9,073 9,334
Maintenance 1,574 1,723 4,809 5,226
Rentals and financing 938 933 2,765 2,724
------- ------- ------- -------
Total revenue 18,605 18,062 54,785 52,804
Cost:
Hardware sales 5,523 5,282 16,326 16,002
Services 3,756 3,219 10,717 8,755
Software 904 986 2,723 2,907
Maintenance 838 904 2,564 2,731
Rentals and financing 486 413 1,364 1,191
------- ------- ------- -------
Total cost 11,507 10,804 33,694 31,586
------- ------- ------- -------
Gross profit 7,098 7,258 21,091 21,218
Operating expenses:
Selling, general and
administrative 3,932 4,175 11,574 11,761
Research, development and
engineering 1,162 1,115 3,452 3,322
Purchased in-process research
and development -- -- -- 435
------- ------- ------- -------
Total operating expenses 5,094 5,290 15,026 15,518
Operating income 2,004 1,968 6,065 5,700
Other income, principally interest 162 183 484 526
Interest expense 183 172 534 526
------- ------- ------- -------
Earnings before income taxes 1,983 1,979 6,015 5,700
Income tax provision 624 694 2,015 2,294
------- ------- ------- -------
Net earnings 1,359 1,285 4,000 3,406
Preferred stock dividends and
transaction costs 5 5 15 15
------- ------- ------- -------
Net earnings applicable to
common shareholders $ 1,354 $ 1,280 $ 3,985 $ 3,391
======= ======= ======= =======
Net earnings per share of
common stock $ 1.38 $ 1.23* $ 4.03 $ 3.18*
Average number of common
shares outstanding (millions) 978.0 1,043.7* 989.4 1,066.7*
Cash dividends per common share $ .20 $ .175* $ .575 $ .475*
* Adjusted to reflect a two-for-one stock split effective May 9, 1997. (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) 1997 1996
--------------- --------------
Current assets:
Cash and cash equivalents $ 5,926 $ 7,687
Marketable securities - at cost, which
approximates market 560 450
Notes and accounts receivable -
net of allowances 16,078 17,446
Sales-type leases receivable 5,663 5,721
Inventories, at lower of average cost or market
Finished goods 1,371 1,413
Work in process 4,498 4,377
Raw materials 112 80
------- -------
Total inventories 5,981 5,870
Prepaid expenses and other current assets 3,982 3,521
------- -------
Total current assets 38,190 40,695
Plant, rental machines and other property 42,030 41,893
Less: Accumulated depreciation 24,109 24,486
------- -------
Plant, rental machines and other property - net 17,921 17,407
Software, less accumulated
amortization (1997, $12,415; 1996, $12,199) 912 1,435
Investments and sundry assets 21,270 21,595
------- -------
Total assets $78,293 $81,132
======= =======
(The accompanying notes are an integral part of the financial statements.)
-2-
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in millions except At September 30 At December 31
per share amounts) 1997 1996
--------------- --------------
Current liabilities:
Taxes $ 2,241 $ 3,029
Accounts payable and accruals 15,831 18,014
Short-term debt 12,518 12,957
--------- --------
Total current liabilities 30,590 34,000
Long-term debt 13,623 9,872
Other liabilities 12,988 14,005
Deferred income taxes 1,336 1,627
--------- --------
Total liabilities 58,537 59,504
Stockholders' equity:
Preferred stock - par value $.01 per share 253 253
Shares authorized: 150,000,000
Shares issued: 1997 - 2,597,261
1996 - 2,610,711
Common stock - par value $.50 per share 8,758 7,752
Shares authorized: 1,875,000,000
Shares issued: 1997 - 1,035,135,404
1996 - 1,018,141,084*
Retained earnings 14,572 11,189
Translation adjustments 1,281 2,401
Treasury stock - at cost (5,230) (135)
Net unrealized gain on marketable securities 122 168
--------- --------
Total stockholders' equity 19,756 21,628
--------- --------
Total liabilities and stockholders' equity $ 78,293 $ 81,132
========= ========
* Adjusted to reflect a two-for-one stock split on May 9, 1997.
(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) 1997 1996
------- -------
Cash flow from operating activities:
Net earnings $ 4,000 $ 3,406
Adjustments to reconcile net earnings to cash
provided from operating activities:
Effect of restructuring charges (317) (1,091)
Depreciation 2,818 2,722
Amortization of software 768 986
Purchased in-process research and development 36 435
Gain on disposition of fixed and other assets (163) (223)
Changes in operating assets and liabilities (2,051) (262)
------- -------
Net cash provided from operating activities 5,091 5,973
------- -------
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (3,875) (2,896)
Investment in software (227) (204)
Purchases of marketable securities and
other investments (1,244) (1,065)
Proceeds from marketable securities and
other investments 910 731
Acquisition of Tivoli Systems, Inc. - net -- (716)
------- -------
Net cash used in investment
activities (4,436) (4,150)
------- -------
Cash flow from financing activities:
Proceeds from new debt 6,969 6,087
Payments to settle debt (2,920) (3,869)
Short-term borrowings less
than 90 days - net (1,274) (314)
Common stock transactions - net (4,476) (3,503)
Cash dividends paid (584) (521)
------- -------
Net cash used in financing activities (2,285) (2,120)
------- -------
Effect of exchange rate changes
on cash and cash equivalents (131) (156)
------- -------
Net change in cash and cash equivalents (1,761) (453)
Cash and cash equivalents at January 1 7,687 7,259
------- -------
Cash and cash equivalents at September 30 $ 5,926 $ 6,806
======= =======
(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.
2. Earnings per share amounts were computed by dividing earnings after deduction
of preferred stock dividends by the average number of common shares outstanding.
3. Treasury stock within Stockholders' equity includes 62,964,675 common shares
amounting to $5,230.4 million and 53,800 preferred shares amounting to $1.4
million at September 30, 1997, and 2,179,066 common shares (adjusted to reflect
a two-for-one stock split on May 9, 1997) amounting to $135.2 million at
December 31, 1996.
4. The majority of the company's derivative transactions relates to the matching
of liabilities to assets associated with its worldwide customer financing
business. The company issues debt, using the most efficient capital markets and
products, which may result in a currency or interest rate mismatch. Interest
rate swaps or currency swaps are then used to match the interest rates and
currencies of its debt to the related customer financing receivables. These swap
contracts are principally one to five years in duration. The company uses an
internal regional center to manage the cash of its subsidiaries, predominately
for the company's European subsidiaries. This regional center principally uses
currency swaps to convert cash flows in a cost-effective manner. The terms of
the swaps are generally less than one year.
Interest and currency rate differentials accruing under interest rate and
currency swap contracts related to the customer financing business are
recognized over the life of the contracts in interest expense, and the effects
of contracts related to intracompany funding are recognized over the life of the
contract in interest income. When the terms of the instrument are modified, or
if it ceases to exist for whatever reason, all changes in fair value of the swap
contracts are recognized in income each period until they mature.
Additionally, the company uses derivatives to limit its exposure to loss
resulting from fluctuations in foreign currency exchange rates on anticipated
cash transactions between foreign subsidiaries and the parent company. The
company receives significant dividends, intracompany royalties and net payments
for goods and services from its non-U.S. subsidiaries. In anticipation of these
foreign currency flows, and given the volatility of the currency markets, the
company selectively employs foreign currency options to manage the currency
risks. The terms of these instruments are generally less than one year.
For purchased options that hedge anticipated transactions, gains and
losses are deferred and recognized in other income in the same period that the
underlying transaction occurs, expires or is otherwise terminated. At September
30, 1997 and December 31, 1996, there were no material deferred gains or losses.
The premiums associated with entering into option contracts are generally
amortized over the life of the options and are not
-5-
Notes to Consolidated Financial Statements - (continued)
material to the company's results. Unamortized premiums are included in prepaid
assets. All written options are marked to market monthly and are not material to
the company's results.
The company also enters into derivative transactions to moderate the
impact that an appreciation of the dollar relative to other currencies would
have on the translation of foreign earnings. These transactions do not qualify
as hedges for accounting purposes and the transactions have foreign exchange
gains and losses which are recorded in earnings as the earnings occur.
The company has used derivative instruments as an element of its risk
management strategy for many years. Although derivatives entail a risk of
non-performance by counterparties, the company manages this risk by establishing
explicit dollar and term limitations that correspond to the credit rating of
each carefully selected counterparty. The company has not sustained a material
loss from these instruments nor does it anticipate any material adverse effect
on its results of operations or financial position in the future.
5. A supplemental Consolidated Statement of Earnings schedule has been provided,
for information purposes only, to exclude the effects of the write-offs 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. The supplemental statement is shown in exhibit 99 on page 20.
This information is presented voluntarily and is provided solely to assist in
understanding the effects of these items on the Consolidated Statement of
Earnings.
6. On April 29, 1997, the stockholders of the company approved amendments to the
Certificate of Incorporation to increase the number of authorized shares of
common stock from 750 million to 1,875 million, which was required to effect a
two-for-one stock split approved by the company's Board of Directors on January
28, 1997. In addition, the amendments served to reduce the par value of the
common shares from $1.25 to $.50 per share. Common stockholders of record at the
close of business on May 9, 1997 received one additional share for each share
held. All share and per share data presented in the Consolidated Financial
Statements reflect the two-for-one stock split.
7. Subsequent Events: On October 28, 1997, the Board of Directors authorized the
company to repurchase up to an additional $3.5 billion of IBM common shares. The
company plans to buy shares on the open market from time-to-time, depending on
market conditions. Since, January 31, 1995, the company has repurchased
approximately $16 billion of its common stock under a series of earlier Board
authorizations.
Effective November 1, 1997, the company created an employee benefits trust
to which the company will contribute 10 million shares of treasury stock. The
company is authorized to instruct the trustee to sell such shares from time to
time and to use such proceeds from such sales, and any dividends paid or
earnings received on such stock, toward the partial satisfaction of the
company's obligations under certain of its compensation and benefit plans,
including its retiree medical plans. The shares held in trust are not considered
outstanding for earnings purposes until they are committed to be released and
the shares will be voted by the trustee in accordance with its fiduciary duties.
-6-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
The company's third quarter results showed a continuation of trends that
had been evident the last several quarters. The company continued to show
strength in services, System/390* servers, commercial PCs, and Lotus Notes* and
Tivoli distributed software. At the same time there was ongoing weakness in
consumer PCs and two of the company's key server products, RS/6000* and AS/400*,
were undergoing product transitions. Currency had a significant adverse impact
on the company's results (approximately $.14 per common share). Despite these
negative factors, the company showed good earnings and constant currency revenue
growth because of its broad and diversified product and services portfolio.
RESULTS OF OPERATIONS
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenue $ 18,605 $ 18,062 $ 54,785 $ 52,804
Cost 11,507 10,804 33,694 31,586
-------- -------- -------- --------
Gross profit $ 7,098 $ 7,258 $ 21,091 $ 21,218
Gross profit margin 38.2% 40.2% 38.5% 40.2%
Net earnings $ 1,359 $ 1,285 $ 4,000 $ 3,406
The company recorded third quarter 1997 earnings of $1.38 per common
share, compared with $1.23 per common share in the third quarter of last year.
Total revenue as reported increased 3.0 percent over the same period of 1996 to
$18.6 billion and excluding the effects of currency revenue grew approximately 8
percent. The average number of common shares outstanding for the period was
978.0 million in 1997 versus 1,043.7 million in 1996.
Net earnings for the nine months ended September 30, 1997, were $4.03 per
common share, compared with earnings of $3.18 per common share in the first nine
months of 1996. The company's first quarter 1996 results included a charge of
$435 million ($.40 per common share) relating to a non-recurring non-tax
deductible charge for purchased in-process research and development in
connection with the acquisition of Tivoli Systems Inc. ($417 million) and Object
Technology International Inc. ($18 million). Excluding this item, the company's
adjusted earnings per common share would have been $3.59 for the first nine
months of 1996. Total revenue for the nine months ended September 30, 1997, was
up 3.8 percent from the prior year to $54.8 billion. The average number of
common shares outstanding for the period was 989.4 million in 1997 versus
1,066.7 million in 1996.
-7-
Results of Operations - (continued)
On an as-reported basis, third quarter revenue in the United States was
$8.0 billion, an increase of 8.4 percent from the same period of 1996.
Asia-Pacific revenue grew 7.4 percent to $3.8 billion while revenue from Latin
America was up 9.9 percent to $891 million. Revenue from Europe/ Middle East/
Africa declined 6.3 percent to $5.2 billion and revenue from Canada declined 5.5
percent to $752 million.
Excluding the effects of currency, Asia-Pacific revenue grew approximately
15 percent, while European revenue climbed about 6 percent year-over-year.
Revenue from Canada declined approximately 5 percent on a constant currency
basis.
The company's total gross profit margin was 38.2 percent in the third
quarter of 1997 compared with 40.2 percent in the third quarter of last year.
Total third-quarter expenses declined 3.1 percent, largely as a result of
a 5.8 percent drop in selling, general and administrative expense. Research,
development and engineering expense rose 4.2 percent.
The company's tax rate was 31.5 percent in the third quarter compared with
35.1 percent in the third quarter of last year.
Hardware Sales
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Total revenue $ 8,345 $ 8,372 $ 24,722 $ 24,656
Total cost 5,523 5,282 16,326 16,002
-------- -------- -------- --------
Gross profit $ 2,822 $ 3,090 $ 8,396 $ 8,654
Gross profit margin 33.8% 36.9% 34.0% 35.1%
Revenue from hardware sales for the third quarter and first nine months of
1997 was essentially flat, when compared to the same periods in 1996. The
third-quarter and first nine-months revenue was negatively affected by
approximately 4 percentage points from currency in 1997.
Personal computer commercial revenue grew for both the third quarter and
first nine months of 1997, when compared to the same periods of last year.
Personal computer server revenue showed strong growth in all geographies.
Revenue from consumer personal computers was lower in the third quarter and
first nine months of 1997, versus comparable periods of 1996.
-8-
Results of Operations - (continued)
Revenue from storage products increased on both a third-quarter and
nine-months basis when compared to the same periods in 1996, due to strong sales
of hard disk drives and good growth in open-systems DASD and tape products.
These increases were partially offset by lower high-end DASD revenue, which
which continued to be affected by competitive price pressures.
Semiconductor revenue grew on both a third-quarter and nine-months basis
when compared to the same periods in 1996, as a result of strong growth in S-RAM
and custom logic products, partially offset by lower DRAM revenue.
These increases were offset by a decline in AS/400 and RS/6000 server
revenue both on a third-quarter and nine-months basis, when compared to the same
periods in 1996. These products continued to undergo major product transitions.
System/390 revenue was essentially flat in the third quarter and decreased on a
nine months basis, when compared to last year, while MIPS (millions of
instructions per second) increased approximately 36 percent and 34 percent,
respectively, when compared to the same periods of 1996.
Hardware sales gross profit for the third quarter and first nine months of
1997 decreased 8.7 percent and 3.0 percent, respectively, over comparable
periods in 1996. The decreases were primarily due to the increased proportion of
revenue from personal computers and semiconductor products which carry a lower
gross profit margin than AS/400 servers whose revenue had declined. These mix
effects were partially offset by cost improvements in storage products,
System/390 and semiconductors. In addition, most other hardware products
continued to be affected by competitive pricing pressures.
Services Other Than Maintenance
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Total revenue $4,709 $3,932 $13,416 $10,864
Total cost 3,756 3,219 10,717 8,755
------ ------ ------- -------
Gross profit $ 953 $ 713 $ 2,699 $ 2,109
Gross profit margin 20.3% 18.1% 20.1% 19.4%
Services revenue increased 19.7 percent and 23.5 percent, respectively, in
the third quarter and first nine months of 1997, when compared to the same
period of last year. Services revenue was negatively affected by approximately 6
percentage points from currency in the third quarter and first nine months of
1997. The revenue increases were across all categories of services offerings, as
well as in all geographies. Approximately $9 billion in new services contracts
were signed in the quarter.
Services gross profit dollars increased in the third quarter and first
nine months of 1997 by 33.7 percent and 28.0 percent, respectively, when
compared to year-ago periods.
-9-
Results of Operations - (continued)
Software
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Total revenue $ 3,039 $ 3,102 $ 9,073 $ 9,334
Total cost 904 986 2,723 2,907
-------- -------- -------- --------
Gross profit $ 2,135 $ 2,116 $ 6,350 $ 6,427
Gross profit margin 70.3% 68.2% 70.0% 68.9%
Revenue from software for the third quarter and first nine months of 1997
decreased 2.1 percent and 2.8 percent, respectively, over comparable periods in
1996. The third-quarter and first-nine months results were negatively affected
by approximately 7 and 5 percentage points, respectively, from currency in 1997.
The revenue decreases were a result of lower host based computer software
revenue associated with AS/400 and System/390 products. These decreases were
partially offset by revenue growth for distributed software offerings from Lotus
Notes and system management software from Tivoli.
Software gross profit dollars for the third quarter were essentially flat
and decreased 1.2 percent for the first nine months of 1997, versus the same
periods in 1996. Software gross profit margins increased 2.1 percentage points
and 1.1 percentage points, respectively, for the third quarter and first nine
months of 1997, when compared to the same periods of last year. The improvements
in the gross profit margins are the results of lower capitalization rates and
the associated reduction in amortization, partially offset by higher vendor
royalty costs.
Maintenance
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
1997 1996 1997 1996
-------- -------- -------- -------
Total revenue $ 1,574 $ 1,723 $ 4,809 $ 5,226
Total cost 838 904 2,564 2,731
-------- -------- -------- -------
Gross profit $ 736 $ 819 $ 2,245 $ 2,495
Gross profit margin 46.8% 47.5% 46.7% 47.7%
Maintenance revenue for the third quarter and first nine months of 1997
decreased 8.7 percent and 8.0 percent, respectively, over comparable periods in
1996. The third-quarter and first nine-months revenue was negatively affected by
approximately 6 and 5 percentage points, respectively, from currency in 1997.
Maintenance gross profit dollars decreased 10.1 percent and 10.0 percent,
respectively, in the third quarter and first nine months of 1997, when compared
to the same periods of 1996. Maintenance revenue and gross profit continued to
be affected by price reductions on maintenance offerings.
-10-
Results of Operations - (continued)
Rentals and financing
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
1997 1996 1997 1996
-------- -------- -------- -------
Total revenue $ 938 $ 933 $ 2,765 $ 2,724
Total cost 486 413 1,364 1,191
-------- -------- -------- -------
Gross profit $ 452 $ 520 $ 1,401 $ 1,533
Gross profit margin 48.2% 55.8% 50.7% 56.3%
Revenue from rentals and financing for the third quarter was essentially
flat and increased 1.5 percent for the first nine months of 1997, respectively,
versus comparable periods in 1996. The third-quarter and first nine-months
revenue was negatively affected by approximately 4 percentage points from
currency in 1997. The increases in revenue were primarily due to higher
operating lease activity, offset by decreased dealer financing in 1997 versus
the same periods in 1996.
Rentals and financing gross profit dollars decreased 13.1 percent and 8.6
percent, respectively, for the third quarter and first nine months of 1997, when
compared to the same periods of the prior year. The decline in gross profit
dollars and margin were principally due to a trend towards financing a greater
amount of low-end products and faster growth in the more competitive U.S.
market.
Expenses
(Dollars in millions) Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
1997 1996 1997 1996
-------- -------- -------- -------
Selling, general and
administrative $ 3,932 $ 4,175 $ 11,574 $11,761
Percentage of revenue 21.1% 23.1% 21.1% 22.3%
Research, development and
engineering $ 1,162 $ 1,115 $ 3,452 $ 3,322
Percentage of revenue 6.2% 6.2% 6.3% 6.3%
Selling, general and administrative expense for the third quarter and
first nine months of 1997 decreased 5.8 percent and 1.6 percent, respectively,
from the same periods in 1996. Currency had a benefit of about 4 percentage
points for the third quarter and first nine months of 1997 versus the same
periods in 1996. The company continues to invest in more variable based
programs, such as advertising, business partner programs, expenditures
associated with new acquisitions, while continuing to focus on reducing fixed
infrastructure costs.
-11-
Results of Operations - (continued)
Research, development and engineering expense increased 4.2 percent and
3.9 percent, respectively, for the third quarter and first nine months of 1997,
when compared to the same periods of 1996. These increases were primarily due to
continued investment to support the company's network computing solutions within
the company's industry-specific business units and investment in new
technologies for future products.
The first nine-months 1996 results included a non-tax deductible 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. This amount has been
separately identified on the company's Consolidated Statement of Earnings.
Interest on total borrowings of the company and its subsidiaries, which
included interest expense and interest costs associated with rentals and
financing, amounted to $407 million and $1,175 million for the third quarter and
first nine months of 1997, respectively. Of these amounts, $10 million for the
third quarter and $26 million for the first nine months were capitalized.
The effective tax rate for the quarter ended September 30, 1997, was 31.5
percent, versus 35.1 percent for the same period in 1996. The decrease is
primarily the result of the mix of earnings and corresponding weighting of tax
rates on a country-by-country basis. The company performs assessments of the
realizability of its net deferred tax assets on a regular basis.
The effective tax rate for the first nine months of 1997 was 33.5 percent,
versus 40.3 percent for the same period in 1996. The decrease was partially a
result of the $435 million charge associated with Tivoli Systems Inc. and Object
Technology Inc. acquisitions in the first quarter of 1996 that did not give rise
to a tax benefit. Excluding this charge, the effective tax rate for the first
nine months of 1996 would have been 37.4 percent. The additional decrease in the
nine months effective tax rate was primarily the result of the mix of earnings
and corresponding weighting of tax rates on a country-by-country basis.
Financial Condition
During 1997, the company has continued to make significant investments to
fund its future growth and increase shareholder value, including expenditures of
$4.5 billion for plant, rental machines and other property, $3.5 billion for
research, development and engineering and $5.2 billion for the repurchase of the
company's common shares. The company had $6.5 billion in cash, cash equivalents
and marketable securities on hand at September 30, 1997.
-12-
Financial Condition - (continued)
Cash Flow
(Dollars in millions) Nine Months Ended
September 30
------------------
1997 1996
------- -------
Net cash provided from (used in):
Operating activities $ 5,091 $ 5,973
Investing activities (4,436) (4,150)
Financing activities (2,285) (2,120)
Effect of exchange rate changes
on cash and cash equivalents (131) (156)
------- -------
Net change in cash and cash equivalents $(1,761) $ (453)
Working Capital
(Dollars in millions) At September 30 At December 31
1997 1996
--------------- --------------
Current assets $ 38,190 $ 40,695
Current liabilities 30,590 34,000
-------- --------
Working capital $ 7,600 $ 6,695
Current ratio 1.25:1 1.20:1
The company's current ratio improved to 1.25:1. Current assets declined
$2.5 billion from year-end 1996 with declines of $1.7 billion in cash, cash
equivalents, and marketable securities and $1.4 billion in accounts receivable,
offset by increases of $.5 billion in prepaid expenses and a slight increase in
inventories. The decrease in cash, cash equivalents and marketable securities
results primarily from the stock repurchases and capital expenditures, offset by
cash generated from operations and debt financing. The decline in accounts
receivable was attributable to the collection of traditionally higher year-end
accounts receivable balances, while prepaid expenses reflects a seasonal
increase from year-end levels.
Current liabilities declined $3.4, billion with declines of $3.0 billion
in accruals, taxes and accounts payable (resulting primarily from seasonal
declines in these balances from their normally higher year-end levels), and $.4
billion in short-term debt.
-13-
Financial Condition - (continued)
Investments
The company's capital expenditures for plant, rental machines and other
property were $4.5 billion for the nine-months ended September 30, 1997, an
increase of $.7 billion from the comparable 1996 period. This increase reflects
the company's continued investment in its rapidly growing outsourcing business,
as well as in the areas of storage products and microelectronics.
In addition to software development expense included in research,
development and engineering expense, the company capitalized $.2 billion of
software costs during the first nine months of both 1997 and 1996. Amortization
of capitalized software costs amounted to $.8 billion during the nine-months
ended September 30, 1997, a decline of $.2 billion from the comparable 1996
period.
Other Non-Current Liabilities
Other non-current liabilities of $13.0 billion at September 30, 1997,
declined $1.0 billion from year-end 1996 primarily due to reductions in
restructuring accrual balances related to pre-1996 restructuring programs, and
in non-U.S. retirement reserves.
Debt and Equity
(Dollars in millions) At September 30 At December 31
1997 1996
--------------- --------------
"Core" debt $ 2,727 $ 2,202
Customer financing debt 23,414 20,627
------- -------
Total debt $26,141 $22,829
Stockholders' equity $19,756 $21,628
Debt/capitalization 57.0% 51.4%
Customer financing debt/equity 6.4:1 6.3:1
Total debt increased $3.3 billion from year-end 1996 as debt in support of
customer financing increased $2.8 billion, and "core" debt increased $.5
billion. Stockholders' equity declined $1.9 billion from December 31, 1996 as
the increase in the company's retained earnings was more than offset by the
common share repurchases and the currency effect of the stronger U.S. dollar on
the company's foreign net assets.
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, 1997, $9.2 billion of this confirmed line of credit remains unused
and available for future use.
-14-
Financial Condition - (continued)
On July 30, 1997, the company issued $500 million of 6.45 percent Notes
due August 1, 2007, and $500 million of 6.22 percent Debentures due August 1,
2027. The net proceeds of these offerings were used for general corporate
purposes.
At September 30, 1997, the company had a net balance of $1.0 billion in
assets under management from the securitization of lease and trade receivables.
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 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 in the company's
other filings with the Securities and Exchange Commission, including its Form
8-K filed on July 21, 1997.
Part II - Other Information
ITEM 6 (a). Exhibits
Exhibit Number
3 By-laws of IBM as amended through July 29, 1997.
11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios.
99 Consolidated Statement of Earnings Supplemental Schedule.
-15-
Other Information - (continued)
ITEM 6 (b). Reports on Form 8-K
A Form 8-K dated July 21, 1997, was filed with respect to the company's
financial results for the period ended June 30, 1997, and included unaudited
consolidated financial statements for the period ended June 30, 1997.
A Form 8-K dated August 1, 1997, was filed to incorporate by reference
into Registration Statement No. 333-21073 on Form S-3, effective March 16, 1997,
the Underwriting Agreement dated July 30, 1997, among International Business
Machines Corporation, Morgan Stanley & Co. Incorporated, Bear Stearns & Co.
Inc., Goldman, Sachs & Co., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner
& Smith Incorporated and Salomon Brothers Inc. In addition, the Form of the $500
million 6.45 percent Notes due 2007 and the Form of the $500 million 6.22
percent Debentures due 2027 were incorporated by reference into Registration
statement No. 333-21073 on Form S-3, effective March 16, 1997, and were a part
of this Form 8-K. No financial statements were filed with the 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: November 10, 1997
-----------------------
By:
John R. Joyce
-------------------------------------------
John R. Joyce
Vice President and Controller
*System/390, AS/400 and RS/6000 are trademarks or registered trademarks of
the International Business Machines Corporation. Lotus Notes is a trademark of
Lotus Development Corporation.
-16-