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 JUNE 30, 1998
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 933,062,970 shares of common stock outstanding at June
30, 1998.
INDEX
Page
----
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Statement of Earnings for the three and six
months ended June 30, 1998 and 1997 . . . . . . . . . . 1
Consolidated Statement of Financial Position at
June 30, 1998 and December 31, 1997 . . . . . . . . . . 3
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997 . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . 6
Part II - Other Information . . . . . . . . . . . . . . . . . . 16
ITEM 1. INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions except Three Months Ended Six Months Ended
per share amounts) June 30 June 30
------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenue:
Hardware sales $ 7,523 $ 8,616 $ 14,643 $ 16,377
Services 5,603 4,612 10,611 8,707
Software 3,228 3,084 6,246 6,034
Maintenance 1,480 1,632 2,956 3,235
Rentals and financing 989 928 1,985 1,827
-------- -------- -------- --------
Total revenue 18,823 18,872 36,441 36,180
Cost:
Hardware sales 5,241 5,559 10,343 10,803
Services 4,378 3,664 8,330 6,961
Software 755 907 1,525 1,819
Maintenance 741 873 1,523 1,726
Rentals and financing 562 468 1,124 878
-------- -------- -------- --------
Total cost 11,677 11,471 22,845 22,187
-------- -------- -------- --------
Gross profit 7,146 7,401 13,596 13,993
Operating expenses:
Selling, general and 3,812 3,958 7,531 7,642
administrative
Research, development and
engineering 1,220 1,221 2,399 2,290
-------- -------- -------- --------
Total operating expenses 5,032 5,179 9,930 9,932
Operating income 2,114 2,222 3,666 4,061
Other income, principally interest 130 137 280 322
Interest expense 161 179 340 351
-------- -------- -------- --------
Earnings before income taxes 2,083 2,180 3,606 4,032
Income tax provision 631 734 1,118 1,391
-------- -------- -------- --------
Net earnings 1,452 1,446 2,488 2,641
Preferred stock dividends 5 5 10 10
-------- -------- -------- --------
Net earnings applicable to
common shareholders $ 1,447 $ 1,441 $ 2,478 $ 2,631
======== ======== ======== ========
-1-
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS - (continued)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------- --------------------
1998 1997 1998 1997
------------------- --------------------
Net earnings per share of
common stock - basic $ 1.54 $ 1.46 $ 2.62 $ 2.64
Net earnings per share of
common stock - assuming dilution $ 1.50 $ 1.43 $ 2.56 $ 2.58
Average number of common
shares outstanding: (millions)
Basic 939.6 986.9 944.9 995.1
Diluted 964.3 1,010.4 969.5 1,019.2
Cash dividends per common share $ .22 $ .20 $ .42 $ .375
(The accompanying notes are an integral part of the financial statements.)
-2-
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
ASSETS
At June 30 At December 31
(Dollars in millions) 1998 1997*
----------- --------------
Current assets:
Cash and cash equivalents $ 5,084 $ 7,106
Marketable securities - at cost, which
approximates market 387 447
Notes and accounts receivable -
net of allowances 15,816 18,106
Sales-type leases receivable 5,769 5,720
Inventories, at lower of average cost or market
Finished goods 1,269 1,090
Work in process and raw materials 4,352 4,049
-------- --------
Total inventories 5,621 5,139
Prepaid expenses and other current assets 4,334 3,900
-------- --------
Total current assets 37,011 40,418
Plant, rental machines and other property 42,436 42,133
Less: Accumulated depreciation 23,983 23,786
-------- --------
Plant, rental machines and other property - net 18,453 18,347
Software, less accumulated
amortization (1998, $12,682; 1997, $12,610) 703 819
Investments and sundry assets 20,945 21,915
-------- --------
Total assets $ 77,112 $ 81,499
======== ========
* Reclassified to conform to 1998 presentation.
(The accompanying notes are an integral part of the financial statements.)
-3-
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in millions except At June 30 At December 31
per share amounts) 1998 1997*
----------- --------------
Current liabilities:
Taxes $ 1,756 $ 2,381
Accounts payable and accruals 15,023 17,896
Short-term debt 13,271 13,230
-------- --------
Total current liabilities 30,050 33,507
Long-term debt 14,590 13,696
Other liabilities 12,522 12,993
Deferred income taxes 1,373 1,487
-------- --------
Total liabilities 58,535 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 9,107 8,601
Shares authorized: 1,875,000,000
Shares issued: 1998 - 976,994,457
1997 - 969,015,351
Retained earnings 13,037 11,010
Treasury stock - at cost (3,659) (86)
Shares: 1998 - 33,931,487
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 700 899
--------- --------
Total stockholders' equity 18,577 19,816
-------- --------
Total liabilities and stockholders' equity $ 77,112 $ 81,499
======== ========
* Reclassified to conform to 1998 presentation.
(The accompanying notes are an integral part of the financial statements.)
-4-
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30:
(UNAUDITED)
(Dollars in millions) 1998 1997
-------- -------
Cash flow from operating activities:
Net earnings $ 2,488 $ 2,641
Adjustments to reconcile net earnings to cash
provided from operating activities:
Effect of restructuring charges (177) (216)
Depreciation 2,054 1,861
Amortization of software 283 548
Gain on disposition of fixed and other assets (128) (70)
Changes in operating assets and liabilities (1,180) (1,830)
-------- -------
Net cash provided from operating activities 3,340 2,934
-------- -------
Cash flow from investing activities:
Payments for plant, rental machines
and other property, net of proceeds (2,403) (2,544)
Investment in software (120) (140)
Purchases of marketable securities and
other investments (1,150) (614)
Proceeds from marketable securities and
other investments 812 538
-------- -------
Net cash used in investment
activities (2,861) (2,760)
-------- -------
Cash flow from financing activities:
Proceeds from new debt 4,106 3,261
Payments to settle debt (2,326) (2,147)
Short-term borrowings less
than 90 days - net (560) 1,066
Common stock transactions - net (3,272) (3,043)
Cash dividends paid (412) (383)
-------- -------
Net cash used in financing activities (2,464) (1,246)
-------- -------
Effect of exchange rate changes
on cash and cash equivalents (37) (112)
-------- -------
Net change in cash and cash equivalents (2,022) (1,184)
Cash and cash equivalents at January 1 7,106 7,687
-------- -------
Cash and cash equivalents at June 30 $ 5,084 $ 6,503
======== =======
(The accompanying notes are an integral part of the financial statements.)
-5-
Notes to Consolidated Financial Statements
1. In the opinion of the management of International Business Machines
Corporation (the company), all adjustments necessary to a fair statement of the
results for the unaudited three and six month periods have been made.
2. The gains and losses not affecting retained earnings line of stockholders'
equity is comprised of foreign currency translation adjustments and unrealized
gains and losses on marketable securities. Net earnings and gains and losses not
affecting retained earnings amounted to $1,340 million and $1,487 million for
the three month periods ended June 30, 1998 and 1997, respectively. The amounts
for the six month periods ended June 30, 1998 and 1997 were $2,289 million and
$1,836 million, respectively.
3. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for fiscal years beginning after June 15, 1999, although early
adoption is permitted. Management is in the process of determining the impacts
to the company's financial statements as a result of the adoption of this
standard.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
The company's second-quarter and first-half results were mixed across its
portfolio of businesses as the company encountered a variety of discrete market
and economic conditions. During the second quarter, the company was faced with
intense price competition and inventory management challenges in the personal
computer channel, continuing price erosion in DRAM chips and hard disk drives,
the impact of the Asian economic crisis, and the continuing negative impact
associated with foreign currency translation. In addition, the announcement of
the G5 model of the System/390 processor family resulted in a market pause in
anticipation of the new model availability in late August. The impact of these
factors was principally on hardware revenue, similar to the first quarter, but
more pronounced due to the System/390 product transition. Despite these
challenges, the company continued to make progress towards its objectives on
many fronts. Services revenue in the second quarter grew by nearly $1 billion
over the same period last year and software displayed good revenue growth and
margin performance year-to-year. Also, the technology-driven OEM businesses,
continued to show strong growth and offer further investment opportunities for
the company.
Many of the market and economic dynamics experienced in the first half
will still be operative in the second half of 1998. However, some important
transitions will be behind the company, in particular, the System/390 product
transition. In addition, significant progress has occurred in executing to the
company's inventory management model for the personal computer channel.
-6-
Results of Operations
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenue $ 18,823 $ 18,872 $ 36,441 $ 36,180
Cost 11,677 11,471 22,845 22,187
-------- -------- -------- --------
Gross profit $ 7,146 $ 7,401 $ 13,596 $ 13,993
Gross profit margin 38.0% 39.2% 37.3% 38.7%
Net earnings $ 1,452 $ 1,446 $ 2,488 $ 2,641
Net earnings were $1,452 million or $1.50 per diluted common share for the
three months ended June 30, 1998, compared with net earnings of $1,446 million
or $1.43 per diluted common share in the second quarter of 1997. Net earnings
for the six months ended June 30, 1998 were $2.5 billion or $2.56 per diluted
common share compared with net earnings of $2.6 billion or $2.58 per diluted
common share in the comparable period last year.
As a result of the company's share repurchase program, the average number
of common shares outstanding were lower by 47.3 million to 939.6 million shares
in the second quarter and by 50.2 million to 944.9 million shares on a six
months basis versus comparable periods in 1997.
Revenue for the three months ended June 30, 1998 was flat as reported and
up 4% on a constant currency basis as the company continued to experience
category performance similar to the first quarter of 1998. Services revenue
growth remained strong while software continued to display improved year to year
growth dynamics. However, the hardware category deteriorated further from its
first quarter performance due to personal computer and OEM price pressures and
the System/390 product transition. For the period ended June 30, 1998, revenue
increased 0.7 percent as reported and approximately 5% on a constant currency
basis versus last year.
On an as-reported basis, second-quarter revenue in the United States was
$8.2 billion, an increase of 3.8 percent from the same period of 1997. Revenue
from Europe/Middle East/Africa grew 2.0 percent to $5.8 billion and revenue from
Canada increased 13.3 percent to $790 million. Asia-Pacific revenue was $3.3
billion, a decline of 13.1 percent. Revenue from Latin America totaled $782
million, a decrease of 7.7 percent compared with the second quarter of 1997.
Excluding the effects of currency translation, Asia-Pacific revenue grew 1
percent, European revenue grew 5 percent, Canada increased 19 percent and Latin
America declined 6 percent, versus the second-quarter 1997.
The overall gross profit margin for the three months ended June 30, 1998
was 38.0 percent or 1.2 points lower than the comparable period last year. The
decline on a year-to-year basis is consistent with the first quarter of 1998 and
continues to reflect the changing mix of the company's businesses which tends to
lower the overall gross profit margin. For the six months ended June 30, 1998,
overall gross profit margin of 37.3 percent was down 1.4 points versus last
year.
-7-
Results of Operations - (continued)
Total expenses declined 3.0 percent compared with last year's second
quarter. The company's expense-to-revenue ratio improved .8 points versus last
year.
The company's tax rate was 30.3 percent in the second quarter compared
with 33.7 percent in the year-earlier period as the company continued to benefit
from increased profit generation in markets with lower effective tax rates.
Hardware Sales
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Total revenue $ 7,523 $ 8,616 $ 14,643 $ 16,377
Total cost 5,241 5,559 10,343 10,803
-------- -------- -------- --------
Gross profit $ 2,282 $ 3,057 $ 4,300 $ 5,574
Gross profit margin 30.3% 35.5% 29.4% 34.0%
Revenue from hardware sales for the second quarter and first six months of
1998 declined 12.7 percent and 10.6 percent, respectively, when compared to the
same periods in 1997. On a constant currency basis, the year-to-year decrease
was 9 percent in the second quarter and 7 percent through the first half of
1998.
The hardware sales declines were due principally to continued weakness in
personal computers as a result of severe price competition and lower Systems/390
revenue as a result of price reductions and the G5 product transition. Reactions
to the G5 announcement have been positive and indications are that the G5 is
going to be a strong product and will be the most powerful server in the market.
RS/6000 revenue was lower for both the quarter and first six months of 1998,
versus comparable periods of 1997. AS/400 revenue was down slightly in the
second quarter, but increased on a six months basis when compared to the same
periods last year.
Revenue from storage products increased on both a second-quarter and six
months basis when compared to the same periods in 1997, due primarily to strong
sales of hard disk drives, partially offset by lower revenue for high-end
storage systems, which experienced a significant decline in Asia.
Semiconductor revenue declined in the second quarter and increased for the
first six months of 1998, when compared to the same periods in 1997. The decline
in the second quarter was primarily due to lower DRAM prices and an
Asian-related slow down in demand for ASICS products.
Hardware sales gross profit for the second quarter and first six months of
1998 decreased 25.4 percent and 22.9 percent, respectively from comparable
periods in 1997. The hardware gross profit margin decreased 5.2 points and 4.6
points, respectively, from the prior year. These decreases were primarily driven
by pricing pressures associated with personal computers, hard disk drives and
memory chip prices when compared to the same periods in 1997. These declines
were partially offset by improved margins for AS/400, RS/6000 and System/390
products.
-8-
Results of Operations - (continued)
Services Other Than Maintenance
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Total revenue $ 5,603 $ 4,612 $ 10,611 $ 8,707
Total cost 4,378 3,664 8,330 6,961
-------- -------- -------- --------
Gross profit $ 1,225 $ 948 $ 2,281 $ 1,746
Gross profit margin 21.9% 20.6% 21.5% 20.0%
Services revenue increased 21.5 percent and 21.9 percent, respectively, in
the second quarter and first six months of 1998, when compared to the same
period of last year. On a constant currency basis, growth rates in both the
quarter and the first half of 1998 would have improved 5 points to approximately
27 percent. The revenue increases were driven by continued strong growth in all
categories of service offerings. In the second quarter, new contract signings
amounted to $7.0 billion. Most of these contracts are for strategic outsourcing
agreements and require a full spectrum of the company's services.
Services gross profit dollars increased in the second quarter and first
six months of 1998 by 29.2 percent and 30.6 percent, respectively, when compared
to year-ago periods. The positive gross profit margin trend seen in the first
quarter continued in the second quarter as margin improved 1.3 points versus
last year due to improved utilization rates and contract management.
Software
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Total revenue $ 3,228 $ 3,084 $ 6,246 $ 6,034
Total cost 755 907 1,525 1,819
-------- -------- -------- --------
Gross profit $ 2,473 $ 2,177 $ 4,721 $ 4,215
Gross profit margin 76.6% 70.6% 75.6% 69.9%
Revenue from software for the second quarter and first six months of 1998
increased 4.6 percent and 3.5 percent, respectively, over comparable periods in
1997. The second-quarter and first-six months results were negatively affected
by approximately 4 and 5 percentage points, respectively, from currency in 1998.
The revenue increases are being driven by growth in the company's middleware
products consisting of data management, transaction processing, systems
management, and messaging and collaboration. On a constant currency basis,
operating systems revenue also showed double digit growth, primarily as a result
of AS/400 revenue.
-9-
Results of Operations - (continued)
Software gross profit dollars for the second quarter and first six months
of 1998 increased 13.6 and 12.0 percent, respectively, versus the same periods
in 1997. Software gross profit margins increased 6.0 percentage points and 5.7
percentage points, respectively, for the second quarter and first six months of
1998, when compared to the same periods of last year. The company continues to
see an improved margin due to lower levels of amortization associated with
deferred development costs.
Maintenance
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- -------
Total revenue $ 1,480 $ 1,632 $ 2,956 $ 3,235
Total cost 741 873 1,523 1,726
-------- -------- -------- -------
Gross profit $ 739 $ 759 $ 1,433 $ 1,509
Gross profit margin 49.9% 46.5% 48.5% 46.6%
Maintenance revenue for the second quarter and first six months of 1998
decreased 9.3 percent and 8.6 percent, respectively, from comparable periods in
1997. The second-quarter and first-six months revenue was negatively affected by
approximately 5 percentage points, respectively, from currency in 1998.
Maintenance gross profit dollars decreased 2.6 percent and 5.0 percent,
respectively, in the second quarter and first six months of 1998, when compared
to the same periods of 1997. While maintenance revenue continues to be impacted
by aggressive pricing dynamics, the gross profit margin has displayed a positive
trend in both the first and second quarter by virtue of effective cost
management actions.
Rentals and financing
(Dollars in millions) Three Months Ended Six Months Ended
June 30 June 30
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- -------
Total revenue $ 989 $ 928 $ 1,985 $ 1,827
Total cost 562 468 1,124 878
-------- -------- -------- -------
Gross profit $ 427 $ 460 $ 861 $ 949
Gross profit margin 43.1% 49.6% 43.4% 52.0%
Revenue from rentals and financing increased 6.6 percent and 8.6 percent,
respectively, for the second quarter and first six months of 1998, versus
comparable periods in 1997. The second-quarter and first-six months revenue was
negatively affected by approximately 3 percentage points, respectively, from
currency in 1997. The increases in revenue were driven by higher levels of
operating leases on low-end products.
-10-
Results of Operations - (continued)
Rentals and financing gross profit dollars decreased 7.2 percent and 9.3
percent, respectively, for the second quarter and first six months of 1998, 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 Six Months Ended
June 30 June 30
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- -------
Selling, general and
administrative $ 3,812 $ 3,958 $ 7,531 $ 7,642
Percentage of revenue 20.3% 21.0% 20.7% 21.1%
Research, development and
engineering $ 1,220 $ 1,221 $ 2,399 $ 2,290
Percentage of revenue 6.5% 6.5% 6.6% 6.3%
Selling, general and administrative expense for the second quarter and
first six months of 1998 decreased 3.7 percent and 1.4 percent, respectively,
from the same periods in 1997. Currency had a benefit of about 3 percentage
points for the second quarter and first six months of 1998, respectively, versus
the same periods in 1997. The company continues to aggressively manage
infrastructure expense and its overall portfolio to allow for investment in
growth segments of the business.
Research, development and engineering expense, was flat and increased 4.8
percent, respectively, for the second quarter and first six months of 1998, when
compared to the same periods of 1997. The increase in the six months of 1998 was
primarily due to the charges associated with the acquisition of Software
Artistry, Inc. and CommQuest Technologies in the first quarter of 1998.
Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and interest costs associated with rentals and
financing, amounted to $387 million and $795 million for the second quarter and
first six months of 1998, respectively. Of these amounts, $7 million for the
second quarter and $11 million for the first six months were capitalized.
The effective tax rate for the quarter ended June 30, 1998, was 30.3
percent, versus 33.7 percent for the same period in 1997. The decrease was
primarily the result of the source of earnings and corresponding weighting of
tax rates on a country-by-country basis, as the company continued to expand into
markets with lower effective tax rates.
-11-
Results of Operations - (continued)
The effective tax rate for the first six months of 1998 was 31.0 percent,
versus 34.5 percent for the same period in 1997. The 3.5 points decrease from
the 1997 rate was a result of the same factors that impacted the second quarter
effective tax rate.
Financial Condition
During the first half of 1998, the company continued to make significant
investments to fund its future growth and increase shareholder value. These
included expenditures of $2.7 billion for research, development and engineering,
$2.8 billion in plant, rental machines and other property and $3.6 billion for
the repurchase of the company's common shares. The company had $5.5 billion in
cash, cash equivalents and marketable securities at June 30, 1998.
Cash Flow
(Dollars in millions) Six Months Ended
June 30
------------------
1998 1997
------- -------
Net cash provided from (used in):
Operating activities $ 3,340 $ 2,934
Investing activities (2,861) (2,760)
Financing activities (2,464) (1,246)
Effect of exchange rate changes
on cash and cash equivalents (37) (112)
------- -------
Net change in cash and cash equivalents $(2,022) $(1,184)
Working Capital
(Dollars in millions) At June 30 At December 31
1998 1997
----------- --------------
Current assets $ 37,011 $ 40,418
Current liabilities 30,050 33,507
-------- --------
Working capital $ 6,961 $ 6,911
Current ratio 1.23:1 1.21:1
-12-
Financial Condition - (continued)
Current assets declined $3.4 billion from year-end 1997 with declines of
$2.1 billion in cash, cash equivalents and marketable securities, and $2.2
billion in accounts receivable, offset by increases of $.5 billion in inventory
and $.4 billion in prepaid expense. The decrease in cash, cash equivalents and
marketable securities resulted 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. Inventories
increased mainly due to ramp-up activity relative to new model introductions,
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
accounts payable and accruals (resulting primarily from seasonal declines in
these balances from their normally higher year-end levels), and $.6 billion in
taxes.
Investments
During the first half of 1998, the company continued to invest in its
rapidly growing services business, primarily in the management of customers'
information technology, as well as, in manufacturing capacity for hard disk
drives and microelectronics. The company's capital investment for plant, rental
machines and property was $2.8 billion during the first half of 1998, a decrease
of $.2 billion from the comparable 1997 period.
In addition to software development expense included in research,
development and engineering expense, the company capitalized $.1 billion of
software costs during the first half of both 1998 and 1997. Amortization of
capitalized software costs amounted to $.3 billion during the first half of
1998, a decline of $.3 billion from the comparable 1997 period.
Investments and sundry assets were $20.9 billion at June 30, 1998, a
decrease of $1.0 billion from year-end 1997, resulting primarily from a decrease
in non-current sales-type lease receivables and deferred tax assets.
Other Non-Current Liabilities
Other non-current liabilities of $12.5 billion at June 30, 1998, declined
$.5 billion from year-end 1997 primarily due to reductions in restructuring
accrual balances related to pre-1996 restructuring programs, and in
postretirement benefits and non-U.S. retirement reserves.
-13-
Financial Condition - (continued)
Debt and Equity
(Dollars in millions) At June 30 At December 31
1998 1997
------------ --------------
"Core" debt $ 3,614 $ 3,102
Global financing debt 24,247 23,824
-------- --------
Total debt $ 27,861 $ 26,926
Stockholders' equity $ 18,577 $ 19,816
Debt/capitalization 60.0% 57.6%
"Core" debt/capitalization 19.6% 16.1%
Global financing debt/equity 6.4:1 6.5:1
Total debt increased $.9 billion from year-end 1997, as "core" debt
increased $.5 billion, and debt in support of growth in global financing assets
increased $.4 billion. Stockholders' equity declined $1.2 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. As of
June 30, 1998, $8.7 billion of this confirmed line of credit remained unused and
available for future use.
At June 30, 1998, the company had an outstanding balance of $1.2 billion
in assets under management from the securitization of loans, leases and trade
receivables.
Year 2000
The "Year 2000 issue" arises because many computer hardware and software
systems use only two digits to represent the year. As a result, these systems
and programs may not process dates beyond 1999, which may cause errors in
information or systems failures. Assessments of the potential effects of the
Year 2000 issues vary markedly among different companies, governments,
consultants, economists and commentators, and it is not possible to predict what
the actual impact may be. Given this uncertainty, the company recognizes the
need to remain vigilant and is continuing its analysis, assessment and planning
for the various Year 2000 issues, across its business.
With respect to its internal systems, the potential Year 2000 impacts
extend beyond the company's information technology systems to its manufacturing
and development systems and physical facilities. The company is addressing these
issues, and aims to complete these efforts throughout 1999, including testing
phases. Although the company believes its efforts will be successful and does
not expect the costs of these efforts to be material, any failure or delay could
result in the disruption of business and in the
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Year 2000 - (continued)
company incurring substantial expense. To minimize any such potential impact,
the company has initiated a global contingency planning effort designed to
support critical business operations.
As part of its ordinary course product development efforts, the company's
current product and service offerings have been designed to be Year 2000 ready.
The Year 2000 readiness of the company's customers varies, and the company is
actively encouraging its customers to prepare their own systems, making
available a broad array of product, service and educational offerings to assist
them (see the IBM Year 2000 Home Page at http://www.ibm.com/IBM/year2000/).
Efforts by customers to address Year 2000 issues may absorb a substantial part
of their information technology budgets in the near term, and customers may
either delay or accelerate the deployment and implementation of new applications
and systems. While this behavior may increase demand for certain of the
company's products and services, including its Year 2000 offerings, it could
also soften demand for other offerings. These events could affect the company's
revenues or change its revenue patterns.
The company is also in the process of assessing the Year 2000 readiness of
its key suppliers, subcontractors and business partners. This project has been
undertaken with a view toward assuring that the company has adequate resources
for required supplies, components and complementary offerings, and the company
expects to complete this project early in 1999. A failure of the company's
suppliers, subcontractors and business partners to address adequately their Year
2000 readiness could affect the company's business. As part of its contingency
planning efforts, the company is preparing to identify alternate sources or
strategies where necessary if significant exposures are identified.
In addition, the company is aware of the potential for claims against it
and other companies for damages arising from products and services that were not
Year 2000 ready. The company continues to believe that any such claims against
it would be without merit.
Finally, the Year 2000 presents a number of other risks and uncertainties
that could affect the company, including utilities failures, competition for
personnel skilled in the resolution of Year 2000 issues, and the nature of
government responses to the issues, among others. While the company continues to
believe that the Year 2000 matters discussed above will not have a material
impact on its business, financial condition or results of operations, it remains
uncertain whether or to what extent the company may be affected.
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
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Forward Looking and Cautionary Statements - (continued)
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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of International Business Machines
Corporation was held on April 28, 1998. For more information on the following
proposals, see the company's proxy statement dated March 13, 1998, the relevant
portions of which are incorporated herein by reference.
(1) Each of the eleven nominees to the Board of Directors was elected
for a one-year term by the stockholders:
DIRECTOR FOR WITHHELD
C. Black 763,601,412 5,002,041
J. Dormann 763,787,920 4,815,533
L. V. Gerstner, Jr. 763,358,818 5,244,635
N. O. Keohane 763,100,615 5,502,838
C. F. Knight 763,775,338 4,828,115
M. Makihara 760,400,024 8,203,429
L. A. Noto 763,602,202 5,001,251
J. B. Slaughter 762,937,365 5,666,088
A. Trotman 763,702,286 4,901,167
L. C. van Wachem 763,432,491 5,170,962
C. M. Vest 763,355,302 5,248,151
(2) The appointment of Price Waterhouse LLP* as independent auditors of
the company was ratified:
For 764,043,702
Not For 1,954,759
Abstain 2,604,992
Total 768,603,453
(3) The stockholders defeated a shareholder proposal on Executive
Compensation:
For 38,211,948
Not For 563,467,429
Abstain 19,807,669
Broker No Vote 147,116,407
Total 768,603,453
* Effective July 1, 1998, Price Waterhouse LLP combined with Coopers &
Lybrand L.L.P. to form PricewaterhouseCoopers LLP.
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Part II - Other Information - (continued)
ITEM 6 (a). Exhibits
Exhibit Number
3 The By-laws of IBM as amended through June 30, 1998.
11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios.
22 The company's proxy statement dated March 13, 1998, containing the
full text of the proposals referred to in Item 4, which was
previously filed electronically, is hereby incorporated by
reference.
ITEM 6 (b). Reports on Form 8-K
A Form 8-K dated April 20, 1998 was filed with respect to the company's
financial results for the period ended March 31, 1998 and included unaudited
consolidated financial statements for the period ended March 31, 1998.
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: August 12, 1998
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By: Mark Loughridge
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Mark Loughridge
Vice President and Controller
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