The International Business Machines Corporation is an American IT and consulting company based in Armonk, New York. IBM is one of the world's leading companies for hardware, software and services in the IT sector and one of the largest consulting companies.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1995 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) 914-765-1900 _____________________________ (Registrant's telephone number) The registrant has 558,315,105 shares of common stock outstanding at September 30, 1995. 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 ________ ________.
<TABLE><CAPTION> INDEX _____ Page ____ <S> <C> Part I - Financial Information: Item 1. Consolidated Financial Statements Consolidated Statement of Operations for the three and nine months ended September 30, 1995 and 1994 . . . . . . . . . . 1 Consolidated Statement of Financial Position at September 30, 1995 and December 31, 1994 . . . . . . . . . . 2 Consolidated Statement of Cash Flows for the nine months ended September 30, 1995 and 1994 . . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . 7 Part II - Other Information . . . . . . . . . . . . . . . . . . . . . 16 </TABLE>
ITEM 1. INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS - (UNAUDITED) <TABLE><CAPTION> (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ___________________ ____________________ 1995 1994 1995 1994 Revenue: ________ ________ ________ ________ <S> <C> <C> <C> <C> Hardware sales $ 7,745 $ 7,753 $ 24,131 $ 21,716 Software 3,134 2,755 9,079 8,065 Services 3,133 2,306 8,619 6,434 Maintenance 1,849 1,813 5,547 5,377 Rentals and financing 893 804 2,644 2,564 ________ ________ ________ ______ Total revenue 16,754 15,431 50,020 44,156 Cost: Hardware sales 4,952 5,130 14,938 14,647 Software 1,078 1,041 3,149 3,322 Services 2,501 1,866 6,860 5,266 Maintenance 911 925 2,679 2,701 Rentals and financing 391 315 1,178 1,022 ________ ________ ________ ________ Total cost 9,833 9,277 28,804 26,958 ________ ________ ________ ________ Gross profit 6,921 6,154 21,216 17,198 Operating expenses: Selling, general and administrative 3,858 3,885 11,374 10,969 Research, development and engineering 1,035 1,053 2,922 3,245 Purchased incomplete software technology 1,840 -- 1,840 -- ________ ________ ________ ________ Total operating expenses 6,733 4,938 16,136 14,214 Operating income 188 1,216 5,080 2,984 Other income, principally interest 208 221 692 1,108 Interest expense 159 233 527 1,010 ________ ________ ________ ________ Earnings before income taxes 237 1,204 5,245 3,082 Income tax provision 775 494 2,778 1,292 ________ ________ ________ ________ Net (loss) earnings (538) 710 2,467 1,790 Preferred stock dividends and 5 21 57 63 transaction costs ________ ________ ________ ________ Net (loss) earnings applicable to common shareholders $ (543) $ 689 $ 2,410 $ 1,727 ======== ======== ======== ======== Net (loss) earnings per share of common stock $ (.96) $ 1.18 $ 4.19 $ 2.96 Average number of common shares outstanding (millions) 564.6 586.3 575.1 584.1 Cash dividends per common share $ .25 $ .25 $ .75 $ .75 (The accompanying notes are an integral part of the financial statements.) </TABLE> - 1 -
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) ASSETS <TABLE><CAPTION> At September 30 At December 31 (Dollars in millions) 1995 1994 _______________ ______________ <S> <C> <C> Current assets: Cash $ 1,259 $ 1,240 Cash equivalents 5,181 6,682 Marketable securities - at cost, which approximates market 511 2,632 Notes and accounts receivable - net of allowances 14,710 15,182 Sales-type leases receivable 6,018 6,351 Inventories, at lower of average cost or market Finished goods 1,487 1,442 Work in process 4,975 4,636 Raw materials 58 256 ________ ________ Total inventories 6,520 6,334 Prepaid expenses and other current assets 3,443 2,917 ________ ________ Total current assets 37,642 41,338 Plant, rental machines and other property 44,476 44,820 Less: Accumulated depreciation 28,043 28,156 ________ ________ Plant, rental machines and other property - net 16,433 16,664 Software, less accumulated amortization (1995, $11,027; 1994, $10,793) 2,740 2,963 Investments and sundry assets 20,687 20,126 Total assets $ 77,502 $ 81,091 ======== ======== - 2 - </TABLE>
<TABLE><CAPTION> INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (CONTINUED) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY At September 30 At December 31 (Dollars in millions) 1995 1994 _______________ ______________ Current liabilities: <S> <C> <C> Taxes $ 2,807 $ 1,771 Accounts payable and accruals 15,133 17,885 Short-term debt 11,076 9,570 ________ ________ Total current liabilities 29,016 29,226 Long-term debt 10,436 12,548 Other liabilities 14,245 14,023 Deferred income taxes 1,682 1,881 Contingent common stock repurchase commitment 459 -- Stockholders' equity: Preferred stock - par value $.01 per share 253 1,081 Shares authorized: 150,000,000 Shares issued: 1995 - 2,610,711 1994 - 11,145,000 Common stock - par value $1.25 per share 7,024 7,342 Shares authorized: 750,000,000 Shares issued: 1995 - 569,437,286 1994 - 588,180,244 Retained earnings 12,343 12,352 Translation and other adjustments 3,184 2,672 Treasury stock, at cost (1,140) (34) Shares: 1995 - 11,122,181 1994 - 469,500 ________ ________ Total stockholders' equity 21,664 23,413 ________ ________ Total liabilities and stockholders' equity $ 77,502 $ 81,091 ======== ======== (The accompanying notes are an integral part of the financial statements.) </TABLE> - 3 -
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30: (UNAUDITED) <TABLE><CAPTION> (Dollars in millions) 1995 1994* ________ ________ <S> <C> <C> Cash flow from operating activities: Net earnings $ 2,467 $ 1,790 Adjustments to reconcile net earnings to cash provided from operating activities: Effect of restructuring charges (1,721) (1,976) Depreciation 2,887 3,223 Amortization of software 1,185 1,604 Changes in operating assets and liabilities 331 4,441 (Gain) on disposition of investment assets (124) (501) Acquisition of Lotus incomplete software technology 1,840 -- _______ _______ Net cash provided from operating activities 6,865 8,581 _______ _______ Cash flow from investing activities: Payments for plant, rental machines and other property, net of proceeds (1,886) (1,262) Investment in software (652) (958) Purchases of marketable securities and other investments (860) (2,442) Acquisition of Lotus Development Corp. - net (2,875) -- Proceeds from marketable securities and other investments 2,789 2,193 Proceeds from sale of Federal Systems Company -- 1,503 _______ _______ Net cash (used in) investing activities (3,484) (966) _______ _______ Cash flow from financing activities: Proceeds from new debt 4,294 4,315 Payments to settle debt (6,729) (6,891) Short-term borrowings less than 90 days - net 1,756 (1,383) Preferred stock transactions - net (854) -- Common stock transactions - net (3,021) 292 Cash dividends paid (448) (492) _______ _______ Net cash (used in) financing activities (5,002) (4,159) _______ _______ Effect of exchange rate changes on cash and cash equivalents 139 5 _______ _______ Net change in cash and cash equivalents (1,482) 3,461 Cash and cash equivalents at January 1 7,922 5,861 _______ _______ Cash and cash equivalents at September 30 $ 6,440 $ 9,322 ======= ======= * Reclassified to conform with 1995 presentation. (The accompanying notes are an integral part of the financial statements.) </TABLE> - 4 -
Notes to Consolidated Financial Statements ------------------------------------------ 1. In the opinion of management of International Business Machines Corporation (the company), all adjustments necessary to a fair statement of the results for the unaudited three and nine month periods have been made. In addition to the adjustments for normal recurring accruals, the company recorded charges in the third quarter of 1995 of approximately $1.8 billion, associated with the purchase of incomplete software technology, as a result of the company's recent acquisition of the Lotus Development Corp. In the first quarter of 1994, the company recorded charges of $.3 billion for software writedowns and an after-tax gain of $248 million for the sale of its Federal Systems Company (FSC). 2. (Loss) earnings per share amounts were computed by dividing (loss) earnings after deduction of preferred stock dividends by the average number of common shares outstanding. 3. The translation and other adjustments line of stockholders' equity includes equity translation adjustments of $3,190 million at September 30, 1995, and $2,672 million at December 31, 1994. 4. The Consolidated Statement of Financial Position at September 30, 1995 includes balances relative to restructuring programs of approximately $.2 billion in accounts payable and accruals, and $.5 billion in plant, rental machines and other property. At December 31, 1994, the approximate restructuring balances were $1.3 billion in accounts payable and accruals, $.1 billion in other liabilities, and $.9 billion in plant, rental machines and other property. The company anticipates that these restructuring reserve balances will be fully utilized by December 31, 1995. 5. On July 5, 1995 the company acquired all outstanding shares of Lotus Development Corp. for approximately $3.2 billion in a transaction which has been accounted for under the purchase method. The company considers Lotus to be an applications-enabling software company engaged in high growth segments of the software market. A key element of the acquisition is the company's perception of the value of Lotus's Notes technology. This technology when fully developed can position the company as a leader in the workgroup computing market. Although Notes is a leading client-server based workgroup computing technology, it is the company's belief that it is not technologically advanced enough and that substantial development will be required to complete the software technology to meet the company's strategic goals. In view of the preceding, it is believed that the acquisition of Lotus provides the company with an opportunity to successfully advance workgroup technology from local area network environments to the enterprise-wide environments. The company engaged a nationally recognized, independent appraisal firm to express an opinion on the fair market value of the assets acquired to serve as a basis for allocation of the purchase price to the various classes of assets. - 5 -
Notes to Consolidated Financial Statements - (continued) -------------------------------------------------------- The appraisal included both tangible and identifiable intangible assets, as well as software technology. The company allocated the total purchase price and increased deferred tax liabilities by $305 million relating to the increased valuation of the assets acquired as follows: $ Millions __________ Tangible Net Assets $ 305 Identifiable Intangible Assets 542 Current Software Products 290 Software Technology Under Development 1,840 Goodwill 564 Deferred Tax Liabilities (305) __________ $ 3,236 The tangible net assets consist primarily of cash, accounts receivable, land, buildings, leasehold improvements, and other personal property. The identifiable intangible assets consist of trademarks ($369 million), assembled work force ($90 million), employee agreements ($78 million), and leasehold interests ($5 million). The identifiable intangible assets and goodwill will be amortized on a straight-line basis over a five year period. The software technology valuation was accomplished through the application of an income approach. Projected debt-free income, revenue net of provision for operating expenses, income taxes and returns on requisite assets were discounted to a present value. This approach was used for each of the Lotus product lines. Software technology was divided into two categories: - Current software products - Software technology under development Current software products included: - "Current products" representing products currently in the market-place as of the acquisition date. - "In development-complete" for products still in development stage and technologically feasible. The fair market value of the purchased current software products was determined to be $290 million. This amount was recorded as an asset and is being amortized on a straight-line basis over two years. - 6 -
Notes to Consolidated Financial Statements - (continued): --------------------------------------------------------- Software technology under development included the value of products still in the development stage and not considered to have reached technological feasibility stage. As a result of the valuation, the fair market value of the software technology under development was determined to be $1,840 million. In accordance with applicable accounting rules, this amount was expensed upon acquisition in the third quarter of 1995. 6. The company has outstanding put options on 4,750,000 shares of its common stock, exercisable on specific dates in 1995, giving other parties the right to sell shares of IBM common stock to the company at contractually specified prices. The contingent common stock repurchase commitment account represents the amount the company would be obligated to pay if all put options were exercised. 7. A supplemental Consolidated Statement of Operations schedule has been provided for informational purposes only, to exclude the effects of the charge associated with the Lotus Development Corp. acquisition in the third quarter of 1995, and the FSC sale and software writedowns recorded in the first quarter of 1994. This supplemental statement is shown in exhibit 99 on page 19. This information is presented voluntarily and is provided solely to assist in understanding the effects of these items on the Consolidated Statement of Operations. 8. Subsequent Event: On October 25, 1995, the company issued $600 million of 7% debentures due October 30, 2025, and $150 million 7% debentures due October 30, 2045. The net proceeds from the sale of debentures will be used for general corporate purposes. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 The company's third-quarter results showed revenue, earnings and earnings per share improvement over the third quarter of 1994, when the one-time charge of approximately $1.8 billion associated with the company's recent acquisition of the Lotus Development Corp. is excluded. Hardware sales revenue was disappointing in the third quarter, largely due to supply imbalances in System/390 servers and high-end storage products. The overall gross profit margin was 41.3 percent and the balance sheet remained strong. Total expenses, excluding the Lotus charge, declined 2 percent in the third quarter compared with the same period of last year. The company stated that its ongoing expense reduction and resource-balancing programs will include additional, limited work force reduction in some business units in the fourth quarter, primarily in overhead areas. Consolidations of leased space and related actions will also continue. These actions are expected to result in a charge of about $800 million, which will be included in the company's fourth-quarter results. - 7 -
Results of Operations --------------------- <TABLE><CAPTION> (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ___________________ ____________________ 1995 1994 1995 1994 ________ ________ ________ ________ <S> <C> <C> <C> <C> Revenue $ 16,754 $ 15,431 $ 50,020 $ 44,156 Cost 9,833 9,277 28,804 26,958 ________ ________ ________ ________ Gross profit $ 6,921 $ 6,154 $ 21,216 $17,198 Gross profit margin 41.3% 39.9% 42.4% 38.9% Net (loss) earnings $ (538) $ 710 $ 2,467 $ 1,790 </TABLE> The company recorded a third quarter 1995 loss of $.96 per common share, compared with earnings of $1.18 per common share, in the third quarter of last year. The third quarter 1995 results include a one-time charge of approximately $1.8 billion associated with the company's recent acquisition of the Lotus Development Corp. Excluding this charge, third-quarter 1995 earnings were $1.3 billion, or $2.30 per common share. Total revenue increased 8.6 percent over the same period of 1994 to $16.8 billion. The average number of common shares outstanding for the period was 564.6 million in 1995 versus 586.3 million in 1994. Net earnings for the nine months ended September 30, 1995, were $4.19 per common share, compared with earnings of $2.96 in the first nine months of 1994. The results include a one-time charge of approximately $1.8 billion associated with the Lotus acquisition and the 1994 results include an after-tax gain of $248 million from the sale of FSC and an after tax writedown of $192 million relating to a change in software amortization periods. Excluding these items, the company's adjusted earnings per common share were $7.39 for the first nine months of 1995 versus $2.86 per common share for the comparable 1994 period. Total revenue for the nine months ended September 30, 1995 was up 13.3 percent from the prior year. The average number of common shares outstanding for the period was 575.1 million in 1995 versus 584.1 million in 1994. Revenue increased in all geographic areas in the third quarter compared with the same period of last year. Revenue from the United States totaled $6.5 billion, up 8.5 percent from the same period last year. Revenue from Europe/Middle East/Africa totaled $5.6 billion, up 5.7 percent year-over-year, while Asia Pacific revenue was $3.3 billion, an increase of 14.0 percent. Revenue from Latin America was $725 million, up 8.7 percent, while revenue from Canada grew 9.6 percent to $694 million, when compared with the same period of 1994. Currency had about a 3 percentage point favorable impact on revenue results in the third quarter. This compares with a 6 percentage point positive impact in the first quarter of 1995 and a 7 percentage point positive effect in the second quarter of this year. - 8 -
Results of Operations - (continued) ----------------------------------- <TABLE><CAPTION> Hardware Sales (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ___________________ ___________________ 1995 1994 1995 1994 ________ ________ ________ ________ <S> <C> <C> <C> <C> Total revenue $ 7,745 $ 7,753 $ 24,131 $ 21,716 Total cost 4,952 5,130 14,938 14,647 ________ ________ ________ ________ Gross profit $ 2,793 $ 2,623 $ 9,193 $ 7,069 Gross profit margin 36.1% 33.8% 38.1% 32.6% </TABLE> Revenue from hardware sales for the third quarter of 1995 was comparable to the same period of 1994. Revenue from hardware sales for the first nine months of 1995 increased 11.1 percent over the comparable period in 1994. The third quarter and first nine-months revenue had a benefit of about 2 points and 5 points, respectively, from currency in 1995. The hardware sales in the third quarter were affected by lower System/390* revenue, as a result of ongoing price reductions, as well as supply shortages for CMOS models and lower AS/400* revenue due to product transitions. These decreases were offset by increased revenue for RISC/6000* products, personal computers and storage products. Storage products revenue grew primarily as a result of strong growth in low-end Original Equipment Manufacturer (OEM) products, offset by a decline in high-end storage products, which was attributable to supply shortages for RAMAC products. The hardware sales revenue increase for the first nine months of 1995, versus 1994, was driven by growth in RISC/6000 products, AS/400, personal computers and storage products, offset by a slight decline in System/390 revenue. Hardware sales gross profit dollars for the third quarter and first nine months of 1995 increased 6.5 percent and 30.0 percent, respectively, over comparable periods of 1994. The increase in third-quarter 1995 versus 1994 gross profit dollars and margin was driven by improved margins in personal computers, OEM products and RISC/6000 products, offset by lower margins on high-end storage products. The increase in gross profit dollars and margin for the first nine months of 1995 versus 1994 was a result of improved margins in personal computers, RISC/6000 products, System/390 and OEM, offset by lower high-end storage margins. The increases were driven by cost improvements as a result of prior restructuring actions, reengineering activities and increased revenue growth in key product areas. Although margins increased, they continue to be affected by competitive pricing pressures on high-end products and personal computers. - 9 -
Results of Operations - (continued) ----------------------------------- Software <TABLE><CAPTION> (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ____________________ ___________________ 1995 1994 1995 1994 ________ ________ ________ ________ <S> <C> <C> <C> <C> Total revenue $ 3,134 $ 2,755 $ 9,079 $ 8,065 Total cost 1,078 1,041 3,149 3,322 ________ ________ ________ ________ Gross profit $ 2,056 $ 1,714 $ 5,930 $ 4,743 Gross profit margin 65.5% 62.2% 65.3% 58.8% </TABLE> Revenue from software for the third quarter and first nine months of 1995 increased 13.7 percent and 12.6 percent, respectively, over comparable periods in 1994. The third-quarter and year-to-date increases in revenue were primarily driven by the Lotus results being included in the company's third quarter 1995 results for the first time. In addition, the third quarter and nine-month results had a benefit of about 3 points and 6 points, respectively, from currency in 1995. Software gross profit for the third quarter and first nine months of 1995 increased 20.0 percent and 25.0 percent, respectively, when compared to the same periods in 1994. The 1994 nine-month gross profit dollars and gross profit margin were affected by the accounting charges related to the software amortization change implemented in the first quarter of 1994. Excluding the effects of this change, 1995 gross profit dollars would have increased 17.7 percent and the gross profit margin would have increased 2.8 points from the first nine months of 1994. Services Other Than Maintenance ------------------------------- <TABLE><CAPTION> (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ___________________ ___________________ 1995 1994 1995 1994 ________ ________ ________ ________ <S> <C> <C> <C> <C> Total revenue $ 3,133 $ 2,306 $ 8,619 $ 6,434 Total cost 2,501 1,866 6,860 5,266 ________ ________ ________ ________ Gross profit $ 632 $ 440 $ 1,759 $ 1,168 Gross profit margin 20.2% 19.1% 20.4% 18.2% </TABLE> - 10 -
Results of Operations - (continued) ----------------------------------- Services revenue increased 35.9 percent and 34.0 percent, respectively, in the third quarter and first nine months of 1995, when compared to the same periods of last year. Services revenue benefited by about 4 points and 6 points, respectively, from currency in the third quarter and first nine months of 1995. The revenue increases were primarily driven by continued growth in managed operations for both system and networking activity, as well as availability services and systems integration. Services gross profit dollars increased in the third quarter and first nine months of 1995, 43.6 percent and 50.6 percent, respectively, when compared to year-ago periods. Maintenance <TABLE><CAPTION> (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ___________________ ____________________ 1995 1994 1995 1994 ________ ________ ________ ________ <S> <C> <C> <C> <C> Total revenue $ 1,849 $ 1,813 $ 5,547 $ 5,377 Total cost 911 925 2,679 2,701 ________ ________ ________ ________ Gross profit $ 938 $ 888 $ 2,868 $ 2,676 Gross profit margin 50.7% 49.0% 51.7% 49.8% </TABLE> Maintenance revenue for the third quarter and first nine months of 1995 increased 2.0 percent and 3.2 percent, respectively, over comparable periods in 1994. The third quarter and nine-months revenue had a benefit of about 3 points and 6 points, respectively, from currency in 1995. Maintenance revenue continues to be affected by the competitive environment and resulting pricing pressures on maintenance offerings. Maintenance gross profit dollars increased 5.6 percent and 7.2 percent, respectively, in the third quarter and first nine months of 1995, when compared to the same periods of 1994. Rentals and Financing <TABLE><CAPTION> (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ___________________ ____________________ 1995 1994 1995 1994 ________ ________ ________ ________ <C> <C> <C> <C> <C> Total revenue $ 893 $ 804 $ 2,644 $ 2,564 Total cost 391 315 1,178 1,022 ________ ________ ________ ________ Gross profit $ 502 $ 489 $ 1,466 $ 1,542 Gross profit margin 56.3% 60.8% 55.5% 60.1% </TABLE> - 11 -
Results of Operations - (continued) ----------------------------------- Rentals and financing revenue increased 11.0 percent and 3.1 percent, respectively, for the third quarter and first nine months of 1995, when compared to the same periods of last year. Rentals and financing revenue had a benefit of about 3 percent and 5 percent, respectively, from currency in the third quarter and first nine months of 1995. The 1995 results reflect a substantial increase in new financing originations versus 1994. Rentals and financing gross profit dollars increased 2.7 percent in the third quarter of 1995 and declined 4.9 percent for the first nine months of 1995, when compared to the same periods of the prior year. The decrease for the nine months of 1995 is a reflection of declining prices on high-end products and the rental business over the past few years and to changing country mix. Expenses <TABLE><CAPTION> (Dollars in millions) Three Months Ended Nine Months Ended September 30 September 30 ___________________ ____________________ 1995 1994 1995 1994 ________ ________ ________ ________ <S> <C> <C> <C> <C> Selling, general and administrative $ 3,858 $ 3,885 $ 11,374 $ 10,969 Percentage of revenue 23.0% 25.2% 22.7% 24.8% Research, development and engineering $ 1,035 $ 1,053 $ 2,922 $ 3,245 Percentage of revenue 6.2% 6.8% 5.8% 7.3% </TABLE> Selling general and administrative expense decreased .7 percent in the third quarter of 1995 and increased 3.7 percent for the first nine months of 1995, when compared to the same periods of 1994. Excluding the effects of currency and the increased expenses due to the acquisition of Lotus in the third quarter of 1995, selling, general and administrative expense would have decreased about 7 percent from 1994 levels. The first nine months results of 1994 included the gain from the sale of FSC. Excluding the increased expenses from the date of the Lotus acquisition and currency effects in 1995 and the FSC gain in 1994, selling general and administrative expense would have decreased by about 3 percent. Research, development and engineering expense, which is primarily performed in the United States, decreased 1.7 percent and 9.9 percent, respectively, for the third quarter and first nine months of 1995, from comparable periods in 1994. These decreases reflect the company's focus on productivity and expense controls. Incomplete software technology was a result of the $1.8 billion charge taken in the third quarter of 1995 associated with the acquisition of Lotus. - 12 -
Results of Operations - (continued) ----------------------------------- Other income, principally interest and interest expense, decreased from 1994 first-nine-month levels due primarily to the switch to the REAL currency in Brazil in July, 1994. This change reduced the company's interest income and interest expense, as well as the exchange gains and losses associated with local currency cash deposits and borrowings, which are a component of selling, general and administrative expense. Interest on total borrowings of the company and its subsidiaries, which includes interest expense and interest costs associated with rentals and financing, amounted to $384 million and $1,186 million for the third quarter and first nine months of 1995, respectively. Of these amounts, $6 million for the third quarter and $16 million for the first nine months were capitalized. The effective tax rate for the quarter ended September 30, 1995 was 326.6 percent, versus 41.0 percent for the same period of 1994. The third quarter 1995 effective tax rate is impacted by the $1.8 billion charge associated with the acquisition of Lotus, which does not give rise to a tax benefit. Excluding this item, the effective tax rate from operations would have been 37.3 percent. The 3.7 point decrease in the effective tax rate from operation in 1995 versus 1994, was primarily the result of the mix of earnings and corresponding weighting of tax rates on a country-by-country basis. The effective tax rate for the first nine months of 1995 was 53.0 percent, versus 41.9 percent for the same period in 1994. Excluding the $1.8 billion Lotus charge, the effective tax rate from operations for the first nine months of 1995, would have been 39.2 percent. The 2.7 point decrease from the 1994 rate was a result of the same factors that impacted the third quarter effective tax rate after adjusting for the Lotus charge. Financial Condition ------------------- The company's financial position at September 30, 1995 reflects a decrease in total assets of $3.6 billion from December 31, 1994, principally in cash, cash equivalents and marketable securities. This is primarily the result of expenditures of $4.1 billion for common and preferred stock repurchases, $2.9 billion net cash for the acquisition of the Lotus Development Corp., and $1.7 billion in restructuring payments related to restructuring charges incurred in prior periods, offset by improved net earnings. Working Capital (Dollars in millions) At September 30 At December 31 1995 1994 _______________ ______________ Current assets $ 37,642 $ 41,338 Current liabilities 29,016 29,226 ________ ________ Working capital $ 8,626 $ 12,112 - 13 -
Financial Condition - (continued) --------------------------------- Total current assets declined $3.7 billion from year-end 1994 with declines in cash, cash equivalents, and marketable securities of $3.6 billion and accounts receivable of $.8 billion, offset by increases of $.2 billion in inventories and $.5 billion in prepaid expenses. The decrease in cash, cash equivalents and marketable securities results primarily from the stock repurchases, restructuring payments, and Lotus acquisition, offset by cash generated from operations; while the decrease in accounts receivable is due to improved accounts receivable collections worldwide. Inventories have generally increased to meet anticipated fourth quarter demand, and the increase in prepaid expense results primarily from the seasonal increase in deferred account and prepaid activity from year-end levels. Total current liabilities declined $.2 billion from December 31, 1994, as accounts payable and accruals declined $2.7 billion, offset by increases of $1.0 billion in taxes payable and $1.5 billion in short-term debt. The decrease in accounts payable and accruals relates to the normal seasonal decline in accounts payable from their year-end levels, as well as lower restructuring accrual balances resulting from the implementation of the company's restructuring programs. The increase in taxes payable is driven by the improvement in the company's operating results, while the increase in short-term debt is due largely to the reclassification of current maturities of long-term debt to short-term. Investments The company's capital expenditures for plant, rental machines and other property were approximately $2.9 billion for the nine months ended September 30, 1995, an increase of approximately $.9 billion from the comparable 1994 period, reflecting the company's continuing investment in high-growth advanced technology areas such as microelectronics. In addition to software development expense included in research, development and engineering expense, the company capitalized $.7 billion of software costs during the nine months ended September 30, 1995, down $.2 billion from the amount capitalized in the comparable 1994 period. Amortization of capitalized software costs amounted to $1.2 billion in the nine month period ended September 30, 1995, and $1.6 billion for the comparable 1994 period (including $.3 billion in accelerated amortization resulting from the software amortization change implemented in the first quarter of 1994). Investments and sundry assets were $20.7 billion at September 30, 1995, an increase of $.6 billion from December 31, 1994, primarily the result of increases in non-current notes and accounts receivable, pension assets and the goodwill associated with the acquisition of the Lotus Development Corp., offset by declines in non-current sales-type leases, and deferred tax assets. Long-Term Debt and Equity Long-term debt was $10.4 billion at September 30, 1995, a decrease of $2.1 billion from year-end 1994, due to the reclassification of current maturities of long-term debt to short-term. Other non-current liabilities at $14.2 billion increased $.2 billion from December 31, 1994, principally due to the impact of currency fluctuations on these balances. - 14 -
Financial Condition - (continued) -------------------------------- Stockholders' equity declined from $23.4 billion at December 31, 1994, to $21.7 billion, primarily the result of the implementation of the stock repurchase programs announced in January of 1995. Cash Flow (Dollars in millions) Nine Months Ended September 30 _______________________ 1995 1994 ________ ________ Net cash provided from (used in): Operating activities $ 6,865 $ 8,581 Investing activities (3,484) (966) Financing activities (5,002) (4,159) Effect of exchange rate changes on cash and cash equivalents 139 5 ________ ________ Net change in cash and cash equivalents $ (1,482) $ 3,461 For the nine months ended September 30, 1995, the company had an overall net decrease in cash and cash equivalents of $1.5 billion compared to a net increase of $3.5 billion for the same period in 1994. Net cash provided from operating activities was $6.9 billion for the nine months ended September 30, 1995, versus $8.6 billion in the comparable period of 1994. Cash flows from operations for the 1995 period reflect the improvement in net earnings, offset by a decline in cash flows due to changes in operating assets and liabilities primarily resulting from the significant improvement in accounts receivable collections in 1994. Net cash used in investing activities was $3.5 billion for the nine month period ended September 30, 1995, compared to a $.8 billion net use of funds in the equivalent 1994 period. The increase in funds utilized in investing activities is attributable to the company's acquisition of the Lotus Development Corp. in July of 1995, partially offset by cash inflows from the sale of marketable securities during 1995. In addition, the 1994 period is impacted by the proceeds from the sale of FSC. Net cash used in financing activities amounted to $5.0 billion for the nine months ended September 30, 1995. The increase of $1.0 billion from the comparable 1994 period was principally the result of implementation of the company's preferred and common stock repurchase programs, offset by higher levels of short-term borrowings. Liquidity At September 30, 1995, the company had a net balance of $1.0 billion in assets under management from the securitization of lease and trade receivables. On August 28, 1995, Moody's Investors Service upgraded its credit rating on the senior long-term debt of IBM and its rated subsidiaries to "A-1" from "A-3", and on IBM's preferred stock to "A-1" from "Baa-1". - 15 -
Part II - Other Information --------------------------- ITEM 6 (a). Exhibits -------------------- Exhibit Number 11 Statement re: computation of per share earnings. 99 Supplemental Consolidated Statement of Operations schedule. ITEM 6 (b). Reports on Form 8-K -------------------------------- No reports on Form 8-K were filed during the third quarter of 1995. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. International Business Machines Corporation ___________________________________________ (Registrant) Date: November 13, 1995 _______________________ By: James M. Alic ___________________________________________ James M. Alic Vice President and Controller * AS/400, System/390 and RISC/6000 are trademarks or registered trademarks of the International Business Machines Corporation. - 16 -