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International Business Machines 8-K 2012

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of Report:  April 17, 2012

(Date of earliest event reported)

 

INTERNATIONAL BUSINESS MACHINES
CORPORATION

(Exact name of registrant as specified in its charter)

 

New York

 

1-2360

 

13-0871985

(State of Incorporation)

 

(Commission File Number)

 

(IRS employer Identification No.)

 

ARMONK, NEW YORK

 

10504

(Address of principal executive offices)

 

(Zip Code)

 

914-499-1900

(Registrant’s telephone number)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o            Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 



 

Item 2.02.   Results of Operations and Financial Condition.

 

The registrant’s press release dated April 17, 2012, regarding its financial results for the period ended March 31, 2012, including consolidated financial statements for the period ended March 31, 2012, is Attachment I of this Form 8-K. Attachment II are the slides for IBM’s Chief Financial Officer Mark Loughridge’s first quarter earnings presentation on April 17, 2012, as well as certain reconciliation and other information (“Non-GAAP Supplemental Materials”) for information in Attachment I (press release), Attachment II (slides) and in Mr. Loughridge’s presentation. All of the information in Attachment I and II is hereby filed.

 

IBM’s web site (www.ibm.com) contains a significant amount of information about IBM, including financial and other information for investors (www.ibm.com/investor/).  IBM encourages investors to visit its various web sites from time to time, as information is updated and new information is posted.

 

2



 

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, hereunto duly authorized.

 

 

Date: April 17, 2012

 

 

 

 

 

 

By:

/s/ James J. Kavanaugh

 

 

 

 

James J. Kavanaugh

 

 

Vice President and Controller

 

 

3



 

ATTACHMENT I

 

IBM REPORTS 2012 FIRST-QUARTER RESULTS

 

·                  Diluted EPS:

 

—    GAAP: $2.61, up 13 percent;

—    Operating (non-GAAP): $2.78, up 15 percent;

 

·                  Net income:

 

—    GAAP: $3.1 billion, up 7 percent;

—    Operating (non-GAAP): $3.3 billion, up 9 percent;

 

·                  Gross profit margin:

 

—    GAAP: 45.1 percent, up 0.9 points;

—    Operating (non-GAAP): 45.7 percent, up 1.2 points;

 

·                  Revenue: $24.7 billion, flat, up 1 percent adjusting for currency;

·                  Free cash flow of $1.9 billion, up $1.1 billion;

·                  Software revenue up 5 percent, 7 percent adjusting for currency;

·                  Services revenue up 1 percent:

 

—    Services pre-tax income up 11 percent;

 

·                  Services backlog of $139 billion, down 2 percent, up 1 percent adjusting for currency;

·                  Systems and Technology revenue down 7 percent, 6 percent adjusting for currency;

·                  Growth markets revenue up 9 percent;

·                  Business analytics revenue up 14 percent;

·                  Smarter Planet revenue up more than 25 percent;

·                  Cloud revenue doubled first-quarter 2011 revenue;

·                  Full-year 2012 operating (non-GAAP) EPS expectations raised to at least $15.00 from at least $14.85.

 

ARMONK, N.Y., April 17, 2012 . . . IBM (NYSE: IBM) today announced first-quarter 2012 diluted earnings of $2.61 per share, compared with diluted earnings of $2.31 per share in the first quarter of 2011, an increase of 13 percent.  Operating (non-GAAP) diluted earnings were $2.78 per share, compared with operating diluted earnings of $2.41 per share in the first quarter of 2011, an increase of 15 percent.

 

First-quarter net income was $3.1 billion compared with $2.9 billion in the first quarter of 2011, an increase of 7 percent.  Operating (non-GAAP) net income was $3.3 billion compared with $3.0 billion in the first quarter of 2011, an increase of 9 percent.

 

Total revenues for the first quarter of 2012 of $24.7 billion were flat (up 1 percent, adjusting for currency) from the first quarter of 2011.

 

“In the first quarter, we drove strong profit and earnings per share growth.  We delivered another excellent software performance, expanded services margins, and continued the momentum in our growth initiatives,” said Ginni Rometty, IBM president and chief executive officer.  “Our investments in growth market countries continued to generate strong revenue growth across software, hardware and services while contributing to the company’s ongoing margin expansion.

 

“Based on this performance, we are raising our 2012 full-year operating earnings per share expectations to at least $15.00.”

 

First-Quarter GAAP — Operating (non-GAAP) Reconciliation

 

First-quarter operating (non-GAAP) diluted earnings exclude $0.17 per share of charges: $0.11 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.06 per share for retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

 

1



 

Full-Year 2012 Expectations

 

IBM raised its expectations for full-year 2012 GAAP diluted earnings per share to at least $14.27 from at least $14.16; and operating (non-GAAP) diluted earnings per share to at least $15.00 from at least $14.85.  The 2012 operating (non-GAAP) earnings expectations exclude $0.73 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

 

Geographic Regions

 

The Americas’ first-quarter revenues were $10.5 billion, an increase of 1 percent (up 2 percent, adjusting for currency) from the 2011 period.  Revenues from Europe/Middle East/Africa were $7.6 billion, down 2 percent (up 1 percent, adjusting for currency).  Asia-Pacific revenues increased 4 percent (up 1 percent, adjusting for currency) to $6.1 billion.  OEM revenues were $509 million, down 17 percent compared with the 2011 first quarter.

 

Growth Markets

 

Revenues from the company’s growth markets increased 9 percent (up 9 percent, adjusting for currency) and 40 countries had double digit revenue growth at constant currency.  Revenues in the BRIC countries — Brazil, Russia, India and China — increased 10 percent (up 11 percent, adjusting for currency).

 

Services

 

Global Technology Services segment revenues increased 2 percent (up 3 percent, adjusting for currency) to $10.0 billion.  Global Business Services segment revenues were down 2 percent (down 1 percent, adjusting for currency) to $4.6 billion.

 

Pre-tax income from Global Technology Services increased 20 percent and pre-tax margin increased to 14.3 percent.  Global Business Services pre-tax income decreased 6 percent and pre-tax margin decreased to 12.5 percent.

 

The estimated services backlog at March 31 was $139 billion, down 2 percent year over year at actual rates (up 1 percent, adjusting for currency). Services backlog at the end of a quarter measures the current value of work under contract expected to be recognized as revenue in future quarters.

 

Software

 

Revenues from the Software segment were $5.6 billion, an increase of 5 percent (up 7 percent, adjusting for currency) compared with the first quarter of 2011.   Software pre-tax income increased 12 percent and pre-tax margin increased to 30.2 percent.

 

Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.5 billion, an increase of 7 percent (up 8 percent, adjusting for currency) versus the first quarter of 2011.  Operating systems revenues of $590 million increased 9 percent (up 10 percent, adjusting for currency) compared with the prior-year quarter.

 

Revenues from the WebSphere family of software products increased 16 percent year over year.  Information Management software revenues increased 5 percent.  Revenues from Tivoli software increased 5 percent.  Revenues from Lotus software were flat, and Rational software increased 1 percent.

 

Revenues from the company’s business analytics operations across services, software and hardware segments increased 14 percent.

 

Hardware

 

Revenues from the Systems and Technology segment totaled $3.7 billion for the quarter, down 7 percent (down 6 percent, adjusting for currency) from the first quarter of 2011.  Systems and Technology pre-tax income decreased $236 million.

 

Total systems revenues decreased 6 percent (down 6 percent, adjusting for currency).    Revenues from Power Systems were flat compared with the 2011 period.  Revenues from System x were also flat.  Revenues from System z mainframe server products decreased 25 percent compared with the year-ago period.  Total delivery of

 

2



 

System z computing power, as measured in MIPS (millions of instructions per second), decreased 5 percent.  Revenues from System Storage decreased 4 percent, and revenues from Retail Store Solutions decreased 13 percent year over year.  Revenues from Microelectronics OEM decreased 13 percent.

 

Financing

 

Global Financing segment revenues decreased 5 percent (down 4 percent, adjusting for currency) in the first quarter to $490 million.  Pre-tax income for the segment decreased 1 percent to $512 million.

 

***

 

The company’s total gross profit margin was 45.1 percent in the 2012 first quarter compared with 44.1 percent in the 2011 first-quarter period.  Total operating (non-GAAP) gross profit margin was 45.7 percent in the 2012 first quarter compared with 44.5 percent in the 2011 first-quarter period, with increases in Global Technology Services and Global Business Services.

 

Total expense and other income increased 3 percent to $7.3 billion compared with the prior-year period.  S,G&A expense of $5.9 billion increased 1 percent year over year. R,D&E expense of $1.6 billion increased 1 percent compared with the year-ago period.  Intellectual property and custom development income decreased to $255 million compared with $262 million a year ago.  Other (income) and expense was income of $58 million compared with prior-year income of $202 million.  Interest expense increased to $110 million compared with $93 million in the prior year.

 

Total operating (non-GAAP) expense and other income increased 3 percent to $7.2 billion compared with the prior-year period.  Operating (non-GAAP) S,G&A expense of $5.8 billion was flat compared with prior-year expense.  Operating (non-GAAP) R,D&E expense of $1.6 billion was flat compared with the year-ago period.

 

Pre-tax income of $3.8 billion and pre-tax margin of 15.5 percent were flat compared with the prior-year period.  Operating (non-GAAP) pre-tax income increased 3 percent to $4.1 billion and pre-tax margin was 16.7 percent, up 0.5 points.

 

IBM’s tax rate was 20.1 percent, down 4.9 points year over year; operating (non-GAAP) tax rate was 20.6 percent, down 4.4 points.  The lower tax rate was due to a one-time benefit associated with a tax restructuring in Latin America.  The benefit offset the company’s first-quarter workforce rebalancing expense, similar to first-quarter 2011 when a one-time gain from asset sales offset workforce rebalancing expenses.  The company expects its full-year 2012 effective tax rate on a GAAP and operating (non-GAAP) basis to be in the range of 24 percent; and excluding the one-time benefit in the first quarter, the rate is expected to be in the range of 25 percent.

 

Net income margin increased 0.8 points to 12.4 percent.  Total operating (non-GAAP) net income margin increased 1.1 points to 13.2 percent.

 

The weighted-average number of diluted common shares outstanding in the first-quarter 2012 was 1.17 billion compared with 1.24 billion shares in the same period of 2011.  As of March 31, 2012, there were 1.15 billion basic common shares outstanding.

 

Debt, including Global Financing, totaled $32.1 billion, compared with $31.3 billion at year-end 2011.  From a management segment view, Global Financing debt totaled $23.6 billion versus $23.3 billion at year-end 2011, resulting in a debt-to-equity ratio of 7.0 to 1.  Non-global financing debt totaled $8.5 billion, an increase of $469 million since year-end 2011, resulting in a debt-to-capitalization ratio of 32.7 percent from 32.0 percent.

 

IBM ended the first-quarter 2012 with $12.3 billion of cash on hand and generated free cash flow of $1.9 billion, excluding Global Financing receivables, up approximately $1.1 billion year over year.  The company returned $3.9 billion to shareholders through $0.9 billion in dividends and $3.0 billion of share repurchases.  The balance sheet remains strong, and the company is well positioned to support the business over the long term.

 

Forward-Looking and Cautionary Statements

 

Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on the company’s current assumptions regarding future business

 

3



 

and financial performance.  These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and corporate IT spending budgets; the company’s failure to meet growth and productivity objectives, a failure of the company’s innovation initiatives; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results and purchases, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers and business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels; the company’s ability to successfully manage acquisitions and alliances; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Q, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference.  Any forward-looking statement in this release speaks only as of the date on which it is made.  The company assumes no obligation to update or revise any forward-looking statements.

 

Presentation of Information in this Press Release

 

In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors:

 

IBM results and expectations —

 

·      presenting operating (non-GAAP) earnings per share amounts and related income statement items;

·      presenting non-global financing debt-to-capitalization ratio;

·      adjusting for free cash flow;

·      adjusting for currency (i.e., at constant currency);

·      adjusting for one-time tax benefit.

 

The rationale for management’s use of non-GAAP measures is included as part of the supplemental materials presented within the first-quarter earnings materials.  These materials are available on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II (“Non-GAAP Supplemental Materials”) to the Form 8-K that includes this press release and is being submitted today to the SEC.

 

Conference Call and Webcast

 

IBM’s regular quarterly earnings conference call is scheduled to begin at 4:30 p.m. EDT, today.  Investors may participate by viewing the Webcast at www.ibm.com/investor/1q12.  Presentation charts will be available on the Web site shortly before the Webcast.

 

Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).

 

4



 

INTERNATIONAL BUSINESS MACHINES CORPORATION

COMPARATIVE FINANCIAL RESULTS

(Unaudited; Dollars in millions except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

Percent

 

 

 

2012

 

2011

 

Change

 

 

 

 

 

 

 

 

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Technology Services

 

$

10,035

 

$

9,863

 

1.7

%

Gross profit margin

 

35.3

%

33.8

%

 

 

 

 

 

 

 

 

 

 

Global Business Services

 

4,637

 

4,710

 

-1.5

%

Gross profit margin

 

28.0

%

27.4

%

 

 

 

 

 

 

 

 

 

 

Software

 

5,600

 

5,308

 

5.5

%

Gross profit margin

 

87.0

%

87.0

%

 

 

 

 

 

 

 

 

 

 

Systems and Technology

 

3,749

 

4,019

 

-6.7

%

Gross profit margin

 

34.2

%

37.8

%

 

 

 

 

 

 

 

 

 

 

Global Financing

 

490

 

516

 

-5.1

%

Gross profit margin

 

50.7

%

53.5

%

 

 

 

 

 

 

 

 

 

 

Other

 

162

 

190

 

-14.9

%

Gross profit margin

 

-74.8

%

-93.3

%

 

 

 

 

 

 

 

 

 

 

TOTAL REVENUE

 

24,673

 

24,607

 

0.3

%

 

 

 

 

 

 

 

 

GROSS PROFIT

 

11,118

 

10,858

 

2.4

%

Gross profit margin

 

45.1

%

44.1

%

 

 

 

 

 

 

 

 

 

 

EXPENSE AND OTHER INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

S,G&A

 

5,886

 

5,826

 

1.0

%

Expense to revenue

 

23.9

%

23.7

%

 

 

 

 

 

 

 

 

 

 

R,D&E

 

1,601

 

1,587

 

0.9

%

Expense to revenue

 

6.5

%

6.4

%

 

 

 

 

 

 

 

 

 

 

Intellectual property and custom development income

 

(255

)

(262

)

-2.5

%

Other (income) and expense

 

(58

)

(202

)

-71.2

%

Interest expense

 

110

 

93

 

17.7

%

 

 

 

 

 

 

 

 

TOTAL EXPENSE AND OTHER INCOME

 

7,283

 

7,041

 

3.4

%

Expense to revenue

 

29.5

%

28.6

%

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

3,836

 

3,817

 

0.5

%

Pre-tax margin

 

15.5

%

15.5

%

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

769

 

954

 

-19.4

%

Effective tax rate

 

20.1

%

25.0

%

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

3,066

 

$

2,863

 

7.1

%

 

 

 

 

 

 

 

 

Net income margin

 

12.4

%

11.6

%

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE OF COMMON STOCK:

 

 

 

 

 

 

 

ASSUMING DILUTION

 

$

2.61

 

$

2.31

 

13.0

%

BASIC

 

$

2.65

 

$

2.34

 

13.2

%

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING(M’s):

 

 

 

 

 

 

 

ASSUMING DILUTION

 

1,174.2

 

1,240.0

 

 

 

BASIC

 

1,159.1

 

1,222.2

 

 

 

 

5



 

INTERNATIONAL BUSINESS MACHINES CORPORATION

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Unaudited)

 

 

 

At

 

At

 

 

 

March 31,

 

December 31,

 

(Dollars in Millions)

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

11,835

 

$

11,922

 

Marketable securities

 

500

 

 

Notes and accounts receivable - trade
(net of allowances of $272 in 2012 and $256 in 2011)

 

10,012

 

11,179

 

Short-term financing receivables
(net of allowances of $282 in 2012 and $311 in 2011)

 

15,160

 

16,901

 

Other accounts receivable
(net of allowances of $9 in 2012 and $11 in 2011)

 

1,669

 

1,481

 

Inventories, at lower of average cost or market:

 

 

 

 

 

Finished goods

 

696

 

589

 

Work in process and raw materials

 

2,058

 

2,007

 

 

 

 

 

 

 

Total inventories

 

2,754

 

2,595

 

Deferred taxes

 

1,617

 

1,601

 

Prepaid expenses and other current assets

 

5,299

 

5,249

 

 

 

 

 

 

 

Total Current Assets

 

48,847

 

50,928

 

 

 

 

 

 

 

Property, plant and equipment

 

40,441

 

40,124

 

Less: Accumulated depreciation

 

26,496

 

26,241

 

 

 

 

 

 

 

Property, plant and equipment

 

13,946

 

13,883

 

Long-term financing receivables
(net of allowances of $58 in 2012 and $38 in 2011)

 

10,549

 

10,776

 

Prepaid pension assets

 

2,974

 

2,843

 

Deferred taxes

 

3,100

 

3,503

 

Goodwill

 

27,468

 

26,213

 

Intangible assets - net

 

3,641

 

3,392

 

Investments and sundry assets

 

4,822

 

4,895

 

 

 

 

 

 

 

Total Assets

 

$

115,347

 

$

116,433

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Taxes

 

$

2,184

 

$

3,313

 

Short-term debt

 

6,293

 

8,463

 

Accounts payable

 

7,416

 

8,517

 

Compensation and benefits

 

4,370

 

5,099

 

Deferred income

 

13,269

 

12,197

 

Other accrued expenses and liabilities

 

4,677

 

4,535

 

 

 

 

 

 

 

Total Current Liabilities

 

38,209

 

42,123

 

 

 

 

 

 

 

Long-term debt

 

25,760

 

22,857

 

Retirement and nonpension postretirement benefit obligations

 

17,579

 

18,374

 

Deferred income

 

3,904

 

3,847

 

Other liabilities

 

9,112

 

8,996

 

 

 

 

 

 

 

Total Liabilities

 

94,563

 

96,197

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

IBM Stockholders’ Equity:

 

 

 

 

 

Common stock

 

48,800

 

48,129

 

Retained earnings

 

107,036

 

104,857

 

Treasury stock — at cost

 

(114,020

)

(110,963

)

Accumulated other comprehensive income/(loss)

 

(21,115

)

(21,885

)

 

 

 

 

 

 

Total IBM stockholders’ equity

 

20,701

 

20,138

 

 

 

 

 

 

 

Noncontrolling interests

 

82

 

97

 

 

 

 

 

 

 

Total Equity

 

20,783

 

20,236

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

115,347

 

$

116,433

 

 

6



 

INTERNATIONAL BUSINESS MACHINES CORPORATION

CASH FLOW ANALYSIS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in Millions)

 

2012

 

2011

 

 

 

 

 

 

 

Net Cash from Operating Activities per GAAP:

 

$

4,291

 

$

3,792

 

 

 

 

 

 

 

Less: the change in Global Financing (GF) Receivables

 

1,424

 

1,936

 

 

 

 

 

 

 

Net Cash from Operating Activities
(Excluding GF Receivables)

 

2,867

 

1,856

 

 

 

 

 

 

 

Capital Expenditures, Net

 

(1,002

)

(1,058

)

 

 

 

 

 

 

Free Cash Flow
(Excluding GF Receivables)

 

1,865

 

798

 

 

 

 

 

 

 

Acquisitions

 

(1,319

)

(51

)

Dividends

 

(870

)

(795

)

Share Repurchase

 

(3,015

)

(4,045

)

Non-GF Debt

 

657

 

1,027

 

Other (includes GF Receivables, GF Debt)

 

3,094

 

4,660

 

 

 

 

 

 

 

Change in Cash, Cash Equivalents and Short-term Marketable Securities

 

$

413

 

$

1,594

 

 

7



 

INTERNATIONAL BUSINESS MACHINES CORPORATION

SEGMENT DATA

(Unaudited)

 

 

 

FIRST-QUARTER 2012

 

 

 

 

 

 

 

 

 

Pre-tax

 

 

 

 

 

Revenue

 

Income/

 

Pre-tax

 

(Dollars in Millions)

 

External

 

Internal

 

Total

 

(Loss)

 

Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

SEGMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Technology Services

 

$

10,035

 

$

293

 

$

10,328

 

$

1,480

 

14.3

%

% change

 

1.7

%

-4.6

%

1.6

%

19.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Business Services

 

4,637

 

182

 

4,820

 

601

 

12.5

%

% change

 

-1.5

%

-8.8

%

-1.8

%

-6.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software

 

5,600

 

840

 

6,439

 

1,945

 

30.2

%

% change

 

5.5

%

1.2

%

4.9

%

12.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Systems and Technology

 

3,749

 

151

 

3,900

 

(105

)

-2.7

%

% change

 

-6.7

%

-38.2

%

-8.5

%

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Financing

 

490

 

485

 

975

 

512

 

52.6

%

% change

 

-5.1

%

-2.5

%

-3.8

%

-1.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL REPORTABLE SEGMENTS

 

$

24,511

 

$

1,951

 

$

26,462

 

$

4,434

 

16.8

%

% change

 

0.4

%

-6.1

%

-0.1

%

4.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eliminations / Other

 

162

 

(1,951

)

(1,789

)

(598

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL IBM CONSOLIDATED

 

$

24,673

 

$

0

 

$

24,673

 

$

3,836

 

15.5

%

% change

 

0.3

%

 

 

0.3

%

0.5

%

 

 

 

NM - Not Meaningful

 

 

 

FIRST-QUARTER 2011

 

 

 

 

 

 

 

 

 

Pre-tax

 

 

 

 

 

Revenue

 

Income/

 

Pre-tax

 

(Dollars in Millions)

 

External

 

Internal

 

Total

 

(Loss)

 

Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

SEGMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Technology Services

 

$

9,863

 

$

307

 

$

10,170

 

$

1,238

 

12.2

%

 

 

 

 

 

 

 

 

 

 

 

 

Global Business Services

 

4,710

 

200

 

4,910

 

640

 

13.0

%

 

 

 

 

 

 

 

 

 

 

 

 

Software

 

5,308

 

830

 

6,138

 

1,735

 

28.3

%

 

 

 

 

 

 

 

 

 

 

 

 

Systems and Technology

 

4,019

 

244

 

4,263

 

132

 

3.1

%

 

 

 

 

 

 

 

 

 

 

 

 

Global Financing

 

516

 

497

 

1,013

 

519

 

51.3

%

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL REPORTABLE SEGMENTS

 

$

24,416

 

$

2,078

 

$

26,494

 

$

4,264

 

16.1

%

 

 

 

 

 

 

 

 

 

 

 

 

Eliminations / Other

 

190

 

(2,078

)

(1,887

)

(447

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL IBM CONSOLIDATED

 

$

24,607

 

$

0

 

$

24,607

 

$

3,817

 

15.5

%

 

8



 

INTERNATIONAL BUSINESS MACHINES CORPORATION

U.S. GAAP TO OPERATING RESULTS RECONCILIATION

(Unaudited; Dollars in millions except per share amounts)

 

 

 

FIRST-QUARTER 2012

 

 

 

 

 

Acquisition-

 

Retirement-

 

 

 

 

 

 

 

Related

 

Related

 

Operating

 

 

 

GAAP

 

Adjustments*

 

Adjustments**

 

(Non-GAAP)

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

11,118

 

$

89

 

$

71

 

$

11,278

 

 

 

 

 

 

 

 

 

 

 

Gross Profit Margin

 

45.1

%

0.4

Pts

0.3

Pts

45.7

%

 

 

 

 

 

 

 

 

 

 

S,G&A

 

5,886

 

(84

)

(36

)

5,766

 

 

 

 

 

 

 

 

 

 

 

R,D&E

 

1,601

 

0

 

4

 

1,605

 

 

 

 

 

 

 

 

 

 

 

Other (Income) & Expense

 

(58

)

(1

)

0

 

(59

)

 

 

 

 

 

 

 

 

 

 

Total Expense & Other (Income)

 

7,283

 

(85

)

(32

)

7,166

 

 

 

 

 

 

 

 

 

 

 

Pre-Tax Income

 

3,836

 

173

 

102

 

4,111

 

 

 

 

 

 

 

 

 

 

 

Pre-Tax Income Margin

 

15.5

%

0.7

Pts

0.4

Pts

16.7

%

 

 

 

 

 

 

 

 

 

 

Provision for Income Taxes***

 

769

 

47

 

30

 

846

 

 

 

 

 

 

 

 

 

 

 

Effective Tax Rate

 

20.1

%

0.3

Pts

0.2

Pts

20.6

%

 

 

 

 

 

 

 

 

 

 

Net Income

 

3,066

 

126

 

73

 

3,265

 

 

 

 

 

 

 

 

 

 

 

Net Income Margin

 

12.4

%

0.5

Pts

0.3

Pts

13.2

%

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

2.61

 

$

0.11

 

$

0.06

 

$

2.78

 

 

9



 

 

 

FIRST-QUARTER 2011

 

 

 

 

 

Acquisition-

 

Retirement-

 

 

 

 

 

 

 

Related

 

Related

 

Operating

 

 

 

GAAP

 

Adjustments*

 

Adjustments**

 

(Non-GAAP)

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

10,858

 

$

85

 

$

14

 

$

10,957

 

 

 

 

 

 

 

 

 

 

 

Gross Profit Margin

 

44.1

%

0.3

Pts

0.1

pts

44.5

%

 

 

 

 

 

 

 

 

 

 

S,G&A

 

5,826

 

(76

)

(10

)

5,740

 

 

 

 

 

 

 

 

 

 

 

R,D&E

 

1,587

 

0

 

19

 

1,606

 

 

 

 

 

 

 

 

 

 

 

Other (Income) & Expense

 

(202

)

(4

)

0

 

(206

)

 

 

 

 

 

 

 

 

 

 

Total Expense & Other (Income)

 

7,041

 

(80

)

10

 

6,971

 

 

 

 

 

 

 

 

 

 

 

Pre-Tax Income

 

3,817

 

165

 

4

 

3,986

 

 

 

 

 

 

 

 

 

 

 

Pre-Tax Income Margin

 

15.5

%

0.7

Pts

0.0

Pts

16.2

%

 

 

 

 

 

 

 

 

 

 

Provision for Income Taxes***

 

954

 

48

 

(6

)

997

 

 

 

 

 

 

 

 

 

 

 

Effective Tax Rate

 

25.0

%

0.2

Pts

-0.2

Pts

25.0

%

 

 

 

 

 

 

 

 

 

 

Net Income

 

2,863

 

117

 

10

 

2,990

 

 

 

 

 

 

 

 

 

 

 

Net Income Margin

 

11.6

%

0.5

Pts

0.0

Pts

12.1

%

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

2.31

 

$

0.09

 

$

0.01

 

$

2.41

 

 


*  Includes amortization of acquired intangible assets and other acquisition-related charges.

**  Includes retirement-related items driven by changes to plan assets and liabilities primarily related to market performance.

***  Tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

 

Contact:

IBM

 

Mike Fay, 914-499-6107

 

mikefay@us.ibm.com

 

 

 

John Bukovinsky, 732-618-3531

 

jbuko@us.ibm.com

 

10



 

 1Q 2012 Earnings Presentation April 17, 2012 ATTACHMENT II

 


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Forward Looking Statements and Non-GAAP Information Certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company's current assumptions regarding future business and financial performance. Those statements by their nature address matters that are uncertain to different degrees. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company's filings with the SEC. Copies are available from the SEC, from the IBM web site, or from IBM Investor Relations. Any forward-looking statement made during this presentation speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. These charts and the associated remarks and comments are integrally related, and are intended to be presented and understood together. In an effort to provide additional and useful information regarding the company’s financial results and other financial information as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, certain non-GAAP information including "operating earnings" and other "operating" financial measures. The rationale for management’s use of this non-GAAP information, the reconciliation of that information to GAAP, and other related information are included in supplemental materials entitled “Non-GAAP Supplemental Materials” that are posted on the Company’s investor relations web site at http://www.ibm.com/investor/1q12/ The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated April 17, 2012.

 


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1Q 2012 Highlights 1Q Segment highlights: Continued momentum in Software: Revenue +7% @CC, Profit +12% Services Profit +11%; growth markets revenue +10% @CC Systems & Technology declined vs. strong 1Q11; continued share gain in Power Expanded gross, pre-tax, and net operating margins Strong Cash Flow supports investment and shareholder returns In April, announced new class of computing; benefit in second half +$1.1B yr/yr $1.9B Free Cash Flow +9% yr/yr $3.3B Operating Net Income +15% yr/yr $2.78 Operating (Non-GAAP) EPS Flat, 1% yr/yr @CC $24.7B Revenue Increasing expectations to at least $15.00 of Operating EPS in 2012

 


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Key Financial Metrics 4.4 pts 20.6% Tax Rate 1.1 pts 13.2% NI Margin 0.5 pts 16.7% PTI Margin 1.2 pts 45.7% GP Margin B/(W) Yr/Yr 1Q12 P&L Ratios (Operating) 1% @CC 9% $3.3 NI – Operating 15% $2.78 EPS – Operating Flat $24.7 Revenue B/(W) Yr/Yr 1Q12 P&L Highlights 3.5 14.0 $17.7 Last 12 Mos. Cash Balance @ Mar. 31 Dividends Share Repurchase Free Cash Flow (excl GF Receivables) Cash Highlights 12.3 0.9 3.0 $1.9 1Q12 $ in Billions, except EPS

 


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Expense Summary (3 pts) 2 pts 0 pts Base (2 pts) 2 pts (3%) $7.2 Operating Expense & Other Income (18%) 0.1 Interest Expense (71%) (0.1) Other (Income)/Expense (3%) (0.3) IP and Development Income (2 pts) 1 pts Flat 1.6 RD&E – Operating (2 pts) 1 pts Flat $5.8 SG&A – Operating Acq.* Currency B/(W) Yr/Yr 1Q12 $ in Billions B/(W) Yr/Yr Drivers * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges Notes: 1Q12 includes workforce rebalancing of $225M; one-time tax benefit 1Q11 includes workforce rebalancing of $222M; investment gain of ($203M)

 


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Revenue and Gross Profit Margin by Segment 45.7% 50.7% 34.2% 87.0% 28.0% 35.3% 1Q12 1.2 pts (2.8 pts) (3.6 pts) (0.1 pts) 0.7 pts 1.5 pts B/(W) Yr/Yr Pts 7% 5% 5.6 Software 1Q12 1% Flat $24.7 Total Revenue & Operating GP Margin (4%) (5%) 0.5 Global Financing (6%) (7%) 3.7 Systems & Technology (1%) (2%) 4.6 Global Business Services 3% 2% $10.0 Global Technology Services B/(W) Yr/Yr Rptd @CC $ in Billions Operating Gross Profit Margin Revenue Strong Software performance; GP Margin driven by Services and Mix

 


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Expense Summary (3 pts) 2 pts 0 pts Base (2 pts) 2 pts (3%) $7.2 Operating Expense & Other Income (18%) 0.1 Interest Expense (71%) (0.1) Other (Income)/Expense (3%) (0.3) IP and Development Income (2 pts) 1 pts Flat 1.6 RD&E – Operating (2 pts) 1 pts Flat $5.8 SG&A – Operating Acq.* Currency B/(W) Yr/Yr 1Q12 $ in Billions B/(W) Yr/Yr Drivers * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges Notes:  1Q12 includes workforce rebalancing of $225M; one-time tax benefit 1Q11 includes workforce rebalancing of $222M; investment gain of ($203M)

 


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20% $1.5 Pre-Tax Income 2.2 pts 14.3% PTI Margin @CC Rptd 1Q12 1.5 pts 35.3% Gross Margin (External) 3% 2% $10.0 Revenue (External) B/(W) Yr/Yr Services Segments Global Technology Services (GTS) Global Business Services (GBS) Double-digit growth in Pre-Tax Income 1Q12 Revenue (% of Total Services) $ in Billions (6%) $0.6 Pre-Tax Income (0.6 pts) 12.5% PTI Margin @CC Rptd 1Q12 0.7 pts 28.0% Gross Margin (External) (1%) (2%) $4.6 Revenue (External) B/(W) Yr/Yr $ in Billions 1Q12 @CC Rptd GTS 1% (1%) Flat Flat 4% 3% (2%) Services Backlog $139B (2%) Consulting & Systems Integration (1%) GBS Outsourcing GBS Yr/Yr 1Q12 Revenue Flat Maintenance 3% Integrated Technology Services 2% GTS Outsourcing GTS Outsourcing 40% GBS C&SI 24% Maint. 13% ITS 16% GBS Outsourcing 7%

 


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Software Segment 12% $1.9 Pre-Tax Income @CC Rptd 1Q12 1.9 pts 30.2% PTI Margin (0.1 pts) 87.0% Gross Margin (External) 7% 5% $5.6 Revenue (External) B/(W) Yr/Yr @CC Rptd 7% 5% 8% 2% 1% 6% 6% 17% 5% Total Software 4% Total Middleware 7% Key Branded Middleware 1% Rational Flat Lotus Yr/Yr 1Q12 Revenue 5% Tivoli 5% Information Management 16% WebSphere Family 1Q12 Revenue (% of Total Software) Key Branded Middleware 62% Operating Systems 11% Other Middleware 19% Other 8% $ in Billions Strong performance in growth initiatives

 


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Systems & Technology Segment nm ($0.1) Pre-Tax Income @CC Rptd 1Q12 (5.8 pts) (2.7%) PTI Margin (3.6 pts) 34.2% Gross Margin (External) (6%) (7%) $3.7 Revenue (External) B/(W) Yr/Yr $ in Billions 1Q12 Revenue (% of Total Sys & Tech) Servers 65% Storage 19% Micro OEM 12% RSS Yr/Yr 1Q12 Revenue (6%) (13%) (6%) (12%) (3%) Flat 1% (24%) @CC Flat Power Systems (6%) Total Systems (7%) Total Systems & Technology (13%) Microelectronics OEM (13%) Retail Store Solutions (4%) Storage Flat System x Rptd (25%) System z Continued competitive displacements in Power

 


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Cash Flow Analysis $0.3 ($1.2) $0.4 Change in Cash & Marketable Securities 2.3 1.7 (15.0) (3.5) 0.0 (1.8) 16.6 (4.1) 20.7 (0.8) $19.8 FY11 (1.6) 3.1 Other (includes GF A/R & GF Debt) (0.4) 0.7 Non-GF Debt 1.0 (3.0) Share Repurchases (0.1) (0.9) Dividends 0.0 0.0 Divestitures (1.3) (1.3) Acquisitions 1.1 1.9 Free Cash Flow (excluding GF Receivables) 0.1 (1.0) Net Capital Expenditures B/(W) Yr/Yr 1Q12 1.0 2.9 Net Cash from Operations (excluding GF Receivables) (0.5) 1.4 Less: Global Financing Receivables $0.5 $4.3 Net Cash from Operations $ in Billions Strong Free Cash Flow performance

 


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7.2 32% 20.2 96.2 31.3 23.3 8.0 64.9 116.4 35.1 69.4 $11.9 Dec. 11 7.0 33% 20.8 94.6 32.1 23.6 8.5 62.5 115.3 32.7 70.3 $12.3 Mar. 12 7.0 25% 22.8 90.2 30.3 23.7 6.5 59.9 113.0 32.3 67.4 $13.2 Mar. 11 Equity Total Liabilities Total Debt Global Financing Debt Non-GF Debt* Global Financing Leverage Non-GF Debt / Capital Other Liabilities Total Assets Global Financing Assets Non-GF Assets* Cash & Marketable Securities Balance Sheet Summary $ in Billions * Includes eliminations of inter-company activity

 


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1Q11 Operating EPS Revenue Growth @ Actual Margin Expansion Share Repurchases 1Q12 Operating EPS Operating EPS Bridge – 1Q11 to 1Q12 $0.01 $0.21 $0.15 $2.41 $2.78

 


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1Q 2012 Summary Continued strength in growth initiatives Growth markets +9% yr/yr Business analytics +14% yr/yr Cloud doubled yr/yr Smarter Planet >25% yr/yr High value content contributes to margin expansion Expanded margins Operating gross profit margin +1.2 pts Operating net margin +1.1 pts Strong cash performance supports investment and shareholder returns 2010 2015e $11.67 At least $20 2011 $13.44 2012e $15.00+ Increasing expectations to at least $15.00 of Operating EPS in 2012 Operating EPS

 


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[LOGO]

 


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Supplemental Materials Currency – Year/Year Comparison Supplemental Segment Information – Global Services Supplemental Segment Information – Systems & Technology, Software Global Financing Portfolio Revenue by Key Industry Sales Unit Cash Flow (FAS 95) Non-GAAP Supplemental Materials Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items, Constant Currency Cash Flow, Debt-to-Capital Ratio, Effective Tax Rate Reconciliation of Operating Earnings Per Share GAAP to Operating (Non-GAAP) Bridge – 1Q 2012 GAAP to Operating (Non-GAAP) Bridge – 1Q 2011 GAAP to Operating (Non-GAAP) Bridge – 1Q 2012 GAAP to Operating (Non-GAAP) Bridge – 1Q 2011 Reconciliation of Free Cash Flow (excluding GF Receivables) Reconciliation of Revenue Growth Reconciliation of B/(W) Yr/Yr Expense Drivers – 1Q12 Reconciliation of Debt-to-Capital Ratio Reconciliation of Operating EPS Bridge 1Q11 to 1Q12 Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding Supplemental Materials

 


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Currency – Year/Year Comparison Flat $24.7 Revenue As Reported (1 pts) (0.2) Currency Impact 1% $24.9 Revenue @CC Yr/Yr (US$B) ~(0-1 pts) (4%) 1% (3%) 4Q12 ~(3pts) 1% (3%) (10%) 2Q12 ~(3 pts) (4%) (1%) (8%) 3Q12 80 0.63 0.76 4/16 Spot (1 pts) 4% (2%) (4%) Yr/Yr 1Q12 IBM Revenue Impact 79 Yen 0.64 Pound 0.76 Euro Yr/Yr @ 4/16 Spot Quarterly Averages per US $ Supplemental Materials

 


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Supplemental Segment Information – 1Q 2012 $1 Quarter-to-Quarter ($4) Year-to-Year Change in Backlog due to Currency 20% 16% $5.5 Outsourcing - GTS O/S, GBS O/S (AMS) 11% 9% 6.3 Transactional - ITS, Consulting & AMS SI (incl. US Federal) 15% 12% $11.8 Total Signings Backlog $ in Billions @CC Yr/Yr 1Q12 Global Services $1 ($3) $139 Total Backlog ($2) ($5) $91 Outsourcing Backlog Signings $ in Billions @CC Yr/Yr 1Q12 Global Services Note: Actual backlog calculated using March 31 currency spot rates 3% 2% Total GTS Flat Flat Maintenance (1%) (2%) Total GBS Flat Flat Maintenance 4% 3% Integrated Tech Services (1%) (2%) GBS C&SI 2% 1% Total Outsourcing @CC Yr/Yr Global Services 1% Flat Total Transactional Revenue Growth Flat (1%) GBS Outsourcing 3% 2% GTS Outsourcing Supplemental Revenue Information Supplemental Backlog / Signings Information Supplemental Materials

 


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Supplemental Segment Information – 1Q 2012 Share GP% @CC Yr/Yr Systems & Technology (6%) (13%) (6%) (12%) (3%) Flat 1% (24%) = = (7%) Total Systems & Technology (13%) Microelectronics OEM (6%) Total Systems (13%) Retail Store Solutions (4%) Storage Flat System x Revenue Growth Flat Power Systems (25%) System z Revenue Growth 7% 5% Total Software 14% 13% Other Software/Services 10% 9% Operating Systems 5% 4% Total Middleware (1%) (2%) Other Middleware 8% 7% Key Branded Middleware 2% 1% Rational 1% Flat Lotus @CC Yr/Yr Software 6% 5% Tivoli 6% 5% Information Management 17% 16% WebSphere Family Supplemental Materials

 


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20 Global Financing Portfolio 1Q12 – $25.1B Net External Receivables Supplemental Materials 1Q12 4Q11 1Q11 Identified Loss Rate 0.8% 0.8% 1.2% Anticipated Loss Rate 0.5% 0.5% 0.3% Reserve Coverage 1.3% 1.3% 1.5% Client Days Delinquent Outstanding 2.8 1.9 3.3 Commercial A/R > 30 Days $68M $37M $25M 24% 38% 22% 10% 5% 1% 0% 10% 20% 30% 40% Aaa-A3 Baa1-Baa3 Ba1-Ba2 Ba3-B1 B2-B3 Caa-D Investment Grade 62% Non-Investment Grade 38%

 


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1% Flat $24.7 Total IBM 8% 6% 5.2 General Business 1Q12 1% Flat 2.3 Communications Flat Flat 2.3 Distribution 3% 2% 2.5 Industrial 3% 3% 3.8 Public (2%) (2%) $7.1 Financial Services B/(W) Yr/Yr Rptd @CC Revenue by Key Industry Sales Unit $ in Billions General Business Comms Distribution Industrial Public Financial Services Supplemental Materials

 


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Cash Flow (FAS 95) ($0.1) 0.2 (2.3) 0.6 (3.0) (0.9) 1.0 (2.2) 0.1 (1.3) 0.0 (1.0) 4.3 1.4 (1.5) 0.2 1.2 $3.1 1Q12 $2.1 0.1 (2.3) 0.9 (4.0) (0.8) 1.6 0.5 1.6 (0.1) 0.0 (1.1) 3.8 1.9 (2.4) 0.2 1.2 $2.9 1Q11 Net Change in Cash & Cash Equivalents Working Capital / Other Effect of Exchange Rate changes on Cash Net Cash used in Financing Activities Common Stock Transactions - Other Common Stock Repurchases Dividends Debt, net of payments & proceeds Net Cash used in Investing Activities Marketable Securities / Other Investments, net Acquisitions, net of cash acquired Divestitures, net of cash transferred Capital Expenditures, net of payments & proceeds Net Cash provided by Operating Activities Global Financing A/R Stock-based Compensation Depreciation / Amortization of Intangibles Net Income from Operations $ in Billions Supplemental Materials

 


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Non-GAAP Supplemental Materials In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, the following Non-GAAP information which management believes provides useful information to investors. Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items Management presents certain financial measures excluding the effects of certain acquisition-related charges, non-operating retirement-related costs, and any related tax impacts. Management uses the term "operating" to describe this view of the company's financial results and other financial information. For acquisitions, these measures exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable restructuring and related expenses, and tax charges related to acquisition integration. For retirement-related costs, the company has characterized certain items as operating and others as non-operating. The company includes service cost, amortization of prior service cost and the cost of defined contribution plans in its operating results. Non-operating retirement-related costs include interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements, multi-employer plan costs, pension insolvency costs, and other costs. Non-operating costs primarily relate to changes in pension plan assets and liabilities which are tied to market performance, and management considers these costs to be outside the operational performance of the business. Management’s calculation of these operating measures, as presented, may differ from similarly titled measures reported by other companies. Overall, management believes that providing investors with an operating view as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans, improves visibility to management decisions and their impacts on operational performance, enables better comparison to peer companies, and allows the company to provide a long term strategic view of the business going forward. For the 2015 earnings per share roadmap, the company is utilizing an operating view to establish its objectives and track its progress. Effective January 1, 2011, the company’s segment financial results and performance reflect operating earnings, consistent with the company’s management and measurement system. Constant Currency Management refers to growth rates at constant currency or adjusting for currency so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the company's business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Supplemental Materials

 


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Non-GAAP Supplemental Materials Cash Flow Management uses a free cash flow measure to evaluate the company’s operating results, plan share repurchase levels, evaluate strategic investments and assess the company’s ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. The company defines free cash flow as net cash from operating activities less the change in Global Financing receivables and net capital expenditures, including the investment in software. A key objective of the Global Financing business is to generate strong returns on equity, and increasing receivables is the basis for growth. Accordingly, management considers Global Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and cash flow from operations that exclude the effect of Global Financing receivables. Debt-to-Capital Ratio Management presents its debt-to-capital ratio excluding the Global Financing business. A financing business is managed on a leveraged basis. The company funds its Global Financing segment using a debt-to-equity ratio target of approximately 7 to 1. Given this significant leverage, the company presents a debt-to-capital ratio which excludes the Global Financing segment debt and equity because the company believes this is more representative of the company’s core business operations. Effective Tax Rate Management presents the company’s effective tax rate excluding the effects of a one-time tax benefit. Management believes this measure is more representative of the company’s ongoing effective tax rate and provides additional insight into, and clarifies the basis for, historical and/or future effective tax rates, which may be more useful for investors. Supplemental Materials

 


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Non-GAAP Supplemental Materials Reconciliation of Operating Earnings Per Share IBM Operating EPS (Non-GAAP) Acquisition-Related Charges * Amortization of Purchased Intangibles Other Acquisition-Related Charges Non-Operating Retirement-Related Items IBM GAAP EPS Adjustments 2012 Expectations $14.27+ $15.00+ $0.47 $0.43 $0.04 $0.26 * Includes acquisitions closed as of 3/31/2012 The above serves to reconcile the Non-GAAP financial information contained in the “1Q 2012 Highlights” and “1Q 2012 Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials

 


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Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 1Q 2012 (59) 0 (1) (58) Other Income & Expense 7,166 (32) (85) 7,283 Total Operating Expense & Other Income 846 30 47 769 Tax *** $2.78 $0.06 $0.11 $2.61 Diluted Earnings Per Share 3,265 73 126 3,066 Net Income 4,111 102 173 3,836 Pre-Tax Income 1,605 4 0 1,601 RD&E 5,766 (36) (84) 5,886 SG&A $11,278 $71 $89 $11,118 Gross Profit Operating (Non-GAAP) Retirement-related Adjustments** Acquisition-related Adjustments* GAAP $ in Millions, except EPS * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “1Q 2012 Highlights,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials

 


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Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 1Q 2011 (206) 0 (4) (202) Other Income & Expense 6,971 10 (80) 7,041 Total Operating Expense & Other Income 997 (6) 48 954 Tax *** $2.41 $0.01 $0.09 $2.31 Diluted Earnings Per Share 2,990 10 117 2,863 Net Income 3,986 4 165 3,817 Pre-Tax Income 1,606 19 0 1,587 RD&E 5,740 (10) (76) 5,826 SG&A $10,957 $14 $85 $10,858 Gross Profit Operating (Non-GAAP) Retirement-related Adjustments** Acquisition-related Adjustments* GAAP $ in Millions, except EPS * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “1Q 2012 Highlights,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials

 


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13.2% 0.3 pts 0.5 pts 12.4% Net Income Margin 20.6% 0.2 pts 0.3 pts 20.1% Tax Rate *** 16.7% 0.4 pts 0.7 pts 15.5% PTI Margin 45.7% 0.3 pts 0.4 pts 45.1% Gross Profit Margin Operating (Non-GAAP) Retirement-related Adjustments ** Acquisition-related Adjustments* GAAP * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 1Q 2012 The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” and “1Q 2012 Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials

 


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12.1% 0.0 pts 0.5 pts 11.6% Net Income Margin 25.0% (0.2 pts) 0.2 pts 25.0% Tax Rate *** 16.2% 0.0 pts 0.7 pts 15.5% PTI Margin 44.5% 0.1 pts 0.3 pts 44.1% Gross Profit Margin Operating (Non-GAAP) Retirement-related Adjustments ** Acquisition-related Adjustments* GAAP * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. Non-GAAP Supplemental Materials GAAP to Operating (Non-GAAP) Bridge – 1Q 2011 The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” and “1Q 2012 Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials

 


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Non-GAAP Supplemental Materials $17.7 Free Cash Flow (excluding GF Receivables) (4.0) Net Capital Expenditures 12 months ended 3/31/12 21.7 Net Cash from Operations (excluding GF Receivables) (1.3) Less: Global Financing Receivables $20.3 Net Cash from Operations $ in Billions Reconciliation of Free Cash Flow (excluding GF Receivables) The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” discussion in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials

 


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Non-GAAP Supplemental Materials Reconciliation of Revenue Growth @CC As Rptd 10% 14% 17% 9% 10% (7%) 9% 13% 19% 8% 8% (4%) Growth Markets – Services Growth Markets – ITS Growth Markets – System x Canada UK Japan 1Q12 Yr/Yr The above serves to reconcile the Non-GAAP financial information contained in the “1Q 2012 Highlights,” “Revenue by Geography,” “Services Segments” and “Systems and Technology Segment” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials

 


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1 pts 0 pts 1 pts Currency (2 pts) 0 pts (2 pts) Acquisitions 2 pts 1 pts 1 pts Base Operating Expense & Other Income 2 pts 0 pts 2 pts Currency (2 pts) 0 pts (2 pts) Acquisitions SG&A 1 pts 0 pts 1 pts Currency (2 pts) 0 pts (2 pts) Acquisitions 0 pts 0 pts 0 pts Base RD&E (3 pts) 0 pts (3 pts) Base Operating (Non-GAAP) Non-GAAP Adjustments GAAP Non-GAAP Supplemental Materials Reconciliation of B/(W) Yr/Yr Expense Drivers – 1Q12 The above serves to reconcile the Non-GAAP financial information contained in the “Expense Summary” discussion in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials

 


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Reconciliation of Debt-to-Capital Ratio 25% 57% 1Q11 33% 61% 1Q12 FY11 32% 61% Non-Global Financing Debt / Capital IBM Consolidated Debt / Capital The above serves to reconcile the Non-GAAP financial information contained in the “Balance Sheet Summary” discussion in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures. Non-GAAP Supplemental Materials Supplemental Materials

 


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* Includes amortization of purchased intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance Non-GAAP Supplemental Materials Reconciliation of Operating EPS Bridge 1Q11 to 1Q12 The above serves to reconcile the Non-GAAP financial information contained in the “Operating EPS Bridge – 1Q11 to 1Q12” discussion in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these Non-GAAP financial measures. $2.78 $0.06 $0.11 $2.61 1Q12 EPS 0.15 0.01 0.00 0.14 Share repurchases 0.21 0.04 0.02 0.15 Margin expansion 0.01 0.00 0.00 0.01 Revenue growth @ actual $2.41 $0.01 $0.09 $2.31 1Q11 EPS Operating (Non-GAAP) Retirement-related Adjustments** Acquisition-related Adjustments* GAAP Supplemental Materials

 


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