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 MARCH 31, 1998
1-2360
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(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
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(Exact name of registrant as specified in its charter)
New York 13-0871985
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(State of incorporation) (IRS employer identification number)
Armonk, New York 10504
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(Address of principal executive offices) (Zip Code)
914-499-1900
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
1934 during the preceding 12 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 942,902,483 shares of common stock outstanding at March
31, 1998.
INDEX
Page
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Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Earnings for the three months
ended March 31, 1998 and 1997 . . . . . . . . . . . . . 1
Consolidated Statement of Financial Position at
March 31, 1998 and December 31, 1997 . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the three months
ended March 31, 1998 and 1997. . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . . . 5
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . 13
ITEM 1.
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31:
(UNAUDITED)
(Dollars in millions except for per share amounts) 1998 1997
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Revenue:
Hardware sales $ 7,120 $ 7,761
Services 5,008 4,095
Software 3,018 2,950
Maintenance 1,476 1,603
Rentals and financing 996 899
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Total revenue 17,618 17,308
Cost:
Hardware sales 5,102 5,244
Services 3,952 3,297
Software 771 912
Maintenance 782 853
Rentals and financing 561 410
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Total cost 11,168 10,716
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Gross profit 6,450 6,592
Operating expenses:
Selling, general and administrative 3,719 3,684
Research, development and engineering 1,179 1,069
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Total operating expenses 4,898 4,753
Operating income 1,552 1,839
Other income, principally interest 150 185
Interest expense 179 172
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Earnings before income taxes 1,523 1,852
Income tax provision 487 657
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Net earnings 1,036 1,195
Preferred stock dividends 5 5
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Net earnings applicable to
common shareholders $ 1,031 $ 1,190
======= =======
Net earnings per share of common stock - basic $ 1.08 $ 1.19
Net earnings per share of common
stock - assuming dilution $ 1.06 $ 1.16
Average number of common shares
outstanding: (millions)
Basic 950.2 1,003.4
Diluted 973.3 1,023.0
Cash dividends per common share $ .20 $ .175
(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
(Dollars in millions) At March 31 At December 31
1998 1997*
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Current assets:
Cash and cash equivalents $ 5,495 $ 7,106
Marketable securities - at cost, which
approximates market 394 447
Notes and accounts receivable - net
of allowances 16,248 18,106
Sales-type leases receivable 5,802 5,720
Inventories, at lower of average cost or market
Finished goods 1,288 1,090
Work in process and raw materials 4,104 4,049
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Total inventories 5,392 5,139
Prepaid expenses and other current assets 4,240 3,900
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Total current assets 37,571 40,418
Plant, rental machines and other property 42,097 42,133
Less: accumulated depreciation 23,874 23,786
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Plant, rental machines and other property - net 18,223 18,347
Software, less accumulated amortization
(1998, $12,575; 1997, $12,610) 784 819
Investments and sundry assets 21,366 21,915
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Total assets $77,944 $81,499
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* Reclassified to conform to 1998 presentation.
(The accompanying notes are an integral part of the financial statements.)
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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in millions) At March 31 At December 31
1998 1997*
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Current liabilities:
Taxes $ 1,969 $ 2,381
Accounts payable and accruals 15,356 17,896
Short-term debt 12,667 13,230
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Total current liabilities 29,992 33,507
Long-term debt 15,029 13,696
Other liabilities 12,702 12,993
Deferred income taxes 1,356 1,487
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Total liabilities 59,079 61,683
Stockholders' equity:
Preferred stock - par value $.01 per share 252 252
Shares authorized - 150,000,000
Shares issued: 1998 - 2,597,261
1997 - 2,597,261
Common stock - par value $.50 per share 8,788 8,601
Shares authorized - 1,875,000,000
Shares issued: 1998 - 972,071,803
1997 - 969,015,351
Retained earnings 11,815 11,010
Treasury stock - at cost (1,942) (86)
Shares: 1998 - 19,169,320
1997 - 923,955
Employee benefits trust - at cost (860) (860)
Shares: 1998 - 10,000,000
1997 - 10,000,000
Gains and losses not affecting
retained earnings 812 899
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Total stockholders' equity 18,865 19,816
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Total liabilities and stockholders' equity $77,944 $81,499
======= =======
* Reclassified to conform to 1998 presentation.
(The accompanying notes are an integral part of the financial statements.)
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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31:
(UNAUDITED)
(Dollars in millions) 1998 1997
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Cash flow from operating activities:
Net earnings $ 1,036 $ 1,195
Adjustments to reconcile net earnings to
cash provided from operating activities:
Depreciation 1,073 916
Amortization of software 150 280
Effect of restructuring charges (85) (218)
Gain on disposition of fixed and other assets (72) (27)
Changes in operating assets and liabilities (1,161) (1,797)
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Net cash provided from operating activities 941 349
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (1,078) (1,053)
Investment in software (68) (65)
Purchases of marketable securities and
other investments (702) (114)
Proceeds from marketable securities and
other investments 435 158
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Net cash used in investing activities (1,413) (1,074)
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Cash flow from financing activities:
Proceeds from new debt 2,717 2,192
Payments to settle debt (1,522) (885)
Short-term borrowings less
than 90 days - net (343) (166)
Common stock transactions - net (1,753) (1,847)
Cash dividends paid (197) (181)
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Net cash used in financing activities (1,098) (887)
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Effect of exchange rate changes
on cash and cash equivalents (41) (116)
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Net change in cash and cash equivalents (1,611) (1,728)
Cash and cash equivalents at January 1 7,106 7,687
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Cash and cash equivalents at March 31 $ 5,495 $ 5,959
======= =======
(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 month period have been made.
2. The company implemented Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income," effective January 1, 1998. This standard
requires that the total changes in equity resulting from revenue, expenses, and
gains and losses, including those which do not affect retained earnings, be
reported. Accordingly, these amounts which are comprised of net earnings,
foreign currency translation adjustments, and unrealized gains and losses on
marketable securities were $949 million and $349 million for the three month
periods ending March 31, 1998 and 1997, respectively.
3. Subsequent Events: On April 28, 1998, the company announced that the Board of
Directors had approved a quarterly dividend increase of 10 percent from $.20 to
$.22 per common share payable June 10, 1998, to shareholders of record on May 8,
1998. In addition, the Board of Directors authorized the company to repurchase
up to an additional $3.5 billion of IBM common stock shares. The company plans
to buy shares on the open market from time-to-time, depending on market
conditions.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 1998
The company's first quarter results were adversely impacted, as expected,
by acquisition charges, Olympic marketing expenses, currency and weakness in
Asia. In addition, the personal computer business suffered from severe price
competition that was greater than anticipated. Offsetting these problems and
demonstrating once again the strength of the company's broad portfolio, the
non-personal computer businesses performed better than expected. In particular,
services, software, mid-range servers and OEM products had a strong quarter.
(Dollars in millions) Three Months Ended
March 31
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1998 1997
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Revenue $ 17,618 $ 17,308
Cost 11,168 10,716
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Gross profit $ 6,450 $ 6,592
Gross profit margin 36.6% 38.1%
Net earnings $ 1,036 $ 1,195
- 5 -
The company recorded first-quarter 1998 diluted earnings per common share
of $1.06 compared with diluted earnings per common share of $1.16 in the first
quarter of 1997. First-quarter 1998 net earnings totaled $1.0 billion compared
with $1.2 billion in the year-earlier period. Revenue increased 1.8 percent (up
about 6 percent in constant currency) in the first quarter of 1998 to $17.6
billion. The average number of common shares outstanding for the period was
950.2 million compared with 1.0 billion in the first quarter of 1997.
Results of Operations
On an as-reported basis, first quarter revenue in the United States was
$7.6 billion, an increase of 4.5 percent from the same period a year ago.
Revenue from Europe/Middle East/Africa increased by 2.3 percent to $5.4 billion.
Asia-Pacific revenue was $3.2 billion, a decline of 6.2 percent from first
quarter of 1997. Revenue from Latin America totaled $741 million, up 5.8 percent
compared with the year-ago period. Revenue from Canada grew 5.5 percent to $695
million compared to the same period last year.
Excluding the effects of currency, European revenue grew approximately 9
percent, while Latin America revenue climbed about 8 percent and Canadian
revenue increased about 10 percent year-over-year. Asia-Pacific revenue would
have grown approximately 2 percent from the same period of 1997.
The total gross profit margin was 36.6 percent in the first quarter
compared to 38.1 percent in the first quarter of last year. In the first quarter
of 1998, gross margin improvement in services and software was offset by
declines in hardware and rentals and financing margins.
Total first-quarter 1998 expenses, which included acquisition charges and
spending to support the Olympics, increased 3.9 percent.
The company's tax rate was 32.0 percent in the first quarter compared with
35.5 percent a year ago.
Hardware Sales
(Dollars in millions) Three Months Ended
March 31
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1998 1997
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Total revenue $ 7,120 $ 7,761
Total cost 5,102 5,244
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Gross profit $ 2,018 $ 2,517
Gross profit margin 28.3% 32.4%
- 6 -
Results of Operations - (continued)
Hardware sales revenue declined 8.2 percent when compared to the first
quarter of 1997. Revenue from hardware sales was negatively affected by
approximately 3 percentage points from currency in the quarter.
The hardware sales decline was due principally to the weakness in personal
computers as a result of the severe price pressures this quarter. AS/400 revenue
increased and RS/6000 revenue was flat. System/390 revenue declined as a result
of year-over-year price reductions and on-going product transitions, while
shipments of System/390 computing power grew about 45 percent (as measured in
MIPS, or millions of instructions per second). Storage products revenue
increased, with continued strength in OEM sales of hard disk drives.
Semiconductor revenue grew strongly despite the declines in memory chip prices
in the quarter.
Hardware sales gross profit dollars decreased 19.8 percent when compared
to the first quarter of 1997. The decrease was primarily driven by pricing
pressures associated with personal computers, hard disk drives and memory chip
prices when compared to the first quarter of 1997. These declines were partially
offset by improved margins for System/390 and AS/400 products.
Services Other Than Maintenance
(Dollars in millions) Three Months Ended
March 31
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1998 1997
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Total revenue $ 5,008 $ 4,095
Total cost 3,952 3,297
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Gross profit $ 1,056 $ 798
Gross profit margin 21.1% 19.5%
Services revenue increased 22.3 percent, when compared to the first
quarter of 1997. Services revenue was negatively affected by about 5 percentage
points from currency in the quarter. The increase was driven by strong growth in
all categories of service offerings. The company signed service agreements
totaling about $6.8 billion in the quarter. Services gross profit dollars
increased by 32.3 percent over the first quarter of 1997.
- 7 -
Results of Operations - (continued)
Software
(Dollars in millions) Three Months Ended
March 31
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1998 1997
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Total revenue $ 3,018 $ 2,950
Total cost 771 912
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Gross profit $ 2,247 $ 2,038
Gross profit margin 74.5% 69.1%
Revenue from software increased 2.3 percent from the first quarter of
1997. Software revenue was negatively affected by approximately 5 percentage
points from currency in the quarter. The increase was a result of higher
host-based computer software revenue associated with AS/400 products and growth
from distributed software offerings, primarily from Tivoli.
Software gross profit dollars increased 10.3 percent versus the first
quarter of 1997. The increase was primarily a result of lower amortization costs
incurred in the first quarter of 1998 versus 1997.
Maintenance
(Dollars in millions) Three Months Ended
March 31
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1998 1997
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Total revenue $ 1,476 $ 1,603
Total cost 782 853
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Gross profit $ 694 $ 750
Gross profit margin 47.0% 46.8%
Maintenance revenue decreased 7.9 percent from the first quarter of 1997.
Maintenance revenue was negatively impacted by about 5 percentage points from
currency in the quarter. The gross profit dollars decreased 7.5 percent when
compared to the first quarter of 1997. Maintenance revenue and gross profit
margins continue to be affected by price reductions on maintenance offerings.
- 8 -
Results of Operations - (continued)
Rentals and Financing
(Dollars in millions) Three Months Ended
March 31
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1998 1997
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Total revenue $ 996 $ 899
Total cost 561 410
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Gross profit $ 435 $ 489
Gross profit margin 43.6% 54.4%
Rentals and financing revenue increased 10.7 percent when compared to the
same period in 1997. Revenue from rentals and financing was negatively affected
by approximately 3 percentage points from currency in the quarter. The increase
in revenue was primarily due to higher operating lease activity in 1998 versus
the first quarter of 1997. Gross profit dollars declined 11.0 percent when
compared to the first quarter of 1997. The decrease was primarily a result of a
trend towards financing a greater volume of low-end products and faster revenue
growth in the more competitive U.S. market.
Expenses
(Dollars in millions) Three Months Ended
March 31
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1998 1997
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Selling, general and
administrative $ 3,719 $ 3,684
Percentage of revenue 21.1% 21.3%
Research, development and
engineering $ 1,179 $ 1,069
Percentage of revenue 6.7% 6.2%
Selling, general and administrative expense increased 1.0 percent from
first quarter 1997. Currency had a benefit of about 3 percentage points in the
first quarter of 1998. The increase was primarily driven by increased spending
associated with the Olympics in the first quarter of 1998. The company continues
to reduce infrastructure expense, reduce expense associated with low-growth
businesses and invest in growth segments in a disciplined manner.
Research, development and engineering expense increased 10.2 percent from
the first quarter of 1997. The increase was due to the charges associated with
the acquisition of Software Artistry, Inc. and CommQuest Technologies in the
first quarter of 1998.
- 9 -
Results of Operations - (continued)
Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and interest costs associated with rentals and
financing, amounted to $408 million for the first quarter of 1998. Of this
amount, $4 million was capitalized.
The effective tax rate for the three months of 1998 was 32.0 percent
versus 35.5 percent for the same period in 1997. The 3.5 point decrease in the
effective tax rate in 1998 versus 1997 was primarily the result of the mix of
earnings and the corresponding weighting of tax rates on a country- by-country
basis, as the company continued to expand into markets with lower effective tax
rates.
Financial Condition
The company has continued to make significant investments during the first
quarter to fund its future growth and increase shareholder value. These included
expenditures of $1.8 billion for the repurchase of the company's common shares,
$1.3 billion for research, development and engineering, and $1.2 billion in
plant, rental machines and other property. The company had $5.9 billion in cash,
cash equivalents and marketable securities at March 31, 1998.
Cash Flow
(Dollars in millions) Three Months Ended
March 31
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1998 1997
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Net cash provided from (used in):
Operating activities $ 941 $ 349
Investing activities (1,413) (1,074)
Financing activities (1,098) (887)
Effect of exchange rate changes
on cash and cash equivalents (41) (116)
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Net change in cash and cash equivalents $(1,611) $(1,728)
- 10 -
Financial Condition - (continued)
Working Capital
(Dollars in millions) At March 31 At December 31
1998 1997
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Current assets $ 37,571 $ 40,418
Current liabilities 29,992 33,507
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Working capital $ 7,579 $ 6,911
Current ratio 1.25:1 1.21:1
The company's current ratio improved to 1.25 to 1. Current assets declined
$2.8 billion from year-end 1997 with declines $1.7 billion in cash, cash
equivalents, and marketable securities and $1.8 billion in accounts receivable,
offset by an increase of $.3 billion in prepaid expenses. The decrease in cash,
cash equivalents and marketable securities results primarily from the share
repurchases, and capital expenditures, offset by cash generated from operations
and debt financing. The decline in accounts receivable was attributable to the
lower volumes normally associated with the first quarter, while prepaid expenses
reflect the seasonal increase in prepaid expenses from year-end levels.
Current liabilities declined $3.5 billion, with declines of $2.9 billion
in accruals, taxes and accounts payable (resulting primarily from seasonal
declines in these balances from their normally higher year-end levels), and $.6
billion in short-term debt.
Investments
During the first quarter of 1998, the company continued to invest in its
rapidly growing services business, primarily in the management of customers'
information technology and also invested in manufacturing capacity for hard disk
drives and microelectronics. The company's capital investments for plant, rental
machines and other property were $1.2 billion during the first quarter of 1998,
a decrease of $.1 billion from the comparable 1997 period.
In addition to software development expenses included in research,
development and engineering expense, the company capitalized $.1 billion of
software costs during the first three months of both 1998 and 1997. Amortization
of capitalized software costs amounted to $.2 billion and $.3 billion during the
first quarter of 1998 and 1997, respectively.
Investments and sundry assets were $21.4 billion at March 31, 1998, a
decrease of $.5 billion from year-end 1997, resulting primarily from a decrease
in non-current sales-type lease receivables and deferred tax assets, partially
offset by an increase in the company's investment in business alliances.
- 11 -
Financial Condition - (continued)
Other Non-Current Liabilities
Other non-current liabilities of $12.7 billion at March 31, 1998, declined
$.3 billion from year-end 1997 primarily due to reductions in restructuring
accrual balances related to prior restructuring programs, and in non-U.S.
retirement reserves.
Debt and Equity
(Dollars in millions) At March 31 At December 31
1998 1997
----------- --------------
"Core" debt $ 3,402 $ 3,102
Global financing debt 24,294 23,824
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Total debt $ 27,696 $ 26,926
Stockholders' Equity $ 18,865 $ 19,816
Debt/capitalization 59.5% 57.6%
Global financing debt/equity 6.8:1 6.5:1
Total debt increased $.8 billion from year-end 1997, as debt in support of
growth in global financing assets increased $.5 billion and "core" debt
increased $.3 billion. Stockholders' equity declined $1.0 billion from December
31, 1997, as the increase in the company's retained earnings was more than
offset by the common share repurchases.
Liquidity
The company maintains a $10.0 billion committed global credit facility as
part of its ongoing efforts to ensure appropriate levels of liquidity. At March
31, 1998, $9.1 billion of this confirmed line of credit remained unused and
available for future use.
At March 31, 1998, the company had an outstanding balance of $1.1 billion
of assets under management from the securitization of loans, leases and trade
receivables.
On January 6, 1998, the company issued $700 million of 6.5 percent
Debentures due January 15, 2028, the net proceeds of which were used for general
corporate purposes.
In February 26, 1998, Standard and Poor's upgraded its credit rating for
IBM and its rated subsidiaries senior debt to A+ from A, and its preferred stock
rating to A from A-.
- 12 -
Financial Condition - (continued)
Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute 'forward looking
statements' within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including the
company's failure to continue to develop and market new and innovative products
and services and to keep pace with technological change; competitive pressures;
failure to obtain or protect intellectual property rights; the ultimate impact
of the various Year 2000 issues on the company's business, financial condition
or results of operations; quarterly fluctuations in revenues and volatility of
stock prices; the company's ability to attract and retain key personnel;
currency and customer financing risks; dependence on certain suppliers; changes
in the financial or business condition of the company's distributors or
resellers; the company's ability to successfully manage acquisitions and
alliances; legal, political and economic changes and other risks, uncertainties
and factors discussed in the company's other filings with the Securities and
Exchange Commission and in materials incorporated therein by reference,
including the company's Form 10-K filed on March 30, 1998.
Part II - Other Information
Item 6(a). Exhibits
Exhibit Number
11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios.
Item 6(b). Reports on Form 8-K
A Form 8-K dated January 6, 1998, was filed to incorporate by reference
into Registration Statement No. 333-40669 on Form S-3, effective December 10,
1997, the Underwriting Agreement dated January 6, 1998, among International
Business Machines Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Bear, Stearns & Co. Inc., Chase Securities Inc., Lehman Brothers
Inc., and Morgan Stanley & Co. Incorporated. In addition, the Form of the 6.50%
Debenture due 2028 was filed. No financial statements were filed with the Form
8-K.
A Form 8-K dated January 20, 1998 was filed with respect to the company's
financial results for the periods ended December 31, 1997, and included
unaudited consolidated financial statements for the periods ended December 31,
1997.
- 13 -
Part II - Other Information - (continued)
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 14, 1998
By:
John R. Joyce
-------------------------------------------
John R. Joyce
Vice President and Controller
- 14 -