UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
1-2360
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact ame of registrant as specified in its charter)
New York |
|
13-0871985 |
(State of incorporation) |
|
(IRS employer identification number) |
Armonk, New York |
|
10504 |
(Address of principal executive offices) |
|
(Zip Code) |
914-499-1900
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
|
Accelerated filer o |
|
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The registrant has 1,377,955,258 shares of common stock outstanding at September 30, 2007.
Index
2
Part I - Financial Information
ITEM 1. Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
(Dollars in millions except per share amounts) |
|
2007 |
|
2006* |
|
2007 |
|
2006* |
|
||||
Revenue:* |
|
|
|
|
|
|
|
|
|
||||
Services |
|
$ |
13,657 |
|
$ |
12,033 |
|
$ |
39,152 |
|
$ |
35,540 |
|
Sales |
|
9,833 |
|
9,994 |
|
28,916 |
|
27,872 |
|
||||
Financing |
|
629 |
|
591 |
|
1,852 |
|
1,755 |
|
||||
Total revenue |
|
24,119 |
|
22,617 |
|
69,920 |
|
65,166 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cost:* |
|
|
|
|
|
|
|
|
|
||||
Services |
|
9,855 |
|
8,691 |
|
28,356 |
|
25,835 |
|
||||
Sales |
|
3,960 |
|
4,131 |
|
11,827 |
|
11,875 |
|
||||
Financing |
|
348 |
|
304 |
|
977 |
|
862 |
|
||||
Total cost |
|
14,163 |
|
13,126 |
|
41,160 |
|
38,573 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
9,956 |
|
9,492 |
|
28,760 |
|
26,594 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Expense and other income: |
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
5,324 |
|
5,121 |
|
16,044 |
|
14,639 |
|
||||
Research, development and engineering |
|
1,524 |
|
1,543 |
|
4,568 |
|
4,520 |
|
||||
Intellectual property and custom development income |
|
(270 |
) |
(242 |
) |
(721 |
) |
(659 |
) |
||||
Other (income) and expense |
|
(95 |
) |
(174 |
) |
(528 |
) |
(616 |
) |
||||
Interest expense |
|
193 |
|
70 |
|
396 |
|
207 |
|
||||
Total expense and other income |
|
6,676 |
|
6,317 |
|
19,759 |
|
18,091 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income from continuing operations before income taxes |
|
3,280 |
|
3,174 |
|
9,001 |
|
8,503 |
|
||||
Provision for income taxes |
|
918 |
|
952 |
|
2,534 |
|
2,551 |
|
||||
Income from continuing operations |
|
2,362 |
|
2,222 |
|
6,467 |
|
5,952 |
|
||||
* Reclassified to conform with 2007 presentation; see Note 1 on page 8 for additional information.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
3
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS (continued)
(UNAUDITED)
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
(Dollars in millions except per share amounts) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Discontinued Operations |
|
|
|
|
|
|
|
|
|
||||
Loss from discontinued operations, net of tax |
|
(1 |
) |
(0 |
) |
(1 |
) |
(0 |
) |
||||
Net income |
|
$ |
2,361 |
|
$ |
2,222 |
|
$ |
6,466 |
|
$ |
5,952 |
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings/(loss) per share of common stock: |
|
|
|
|
|
|
|
|
|
||||
Assuming dilution: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
1.68 |
|
$ |
1.45 |
|
$ |
4.42 |
|
$ |
3.81 |
|
Discontinued operations |
|
(0.00 |
) |
(0.00 |
) |
(0.00 |
) |
(0.00 |
) |
||||
Total |
|
$ |
1.68 |
|
$ |
1.45 |
|
$ |
4.42 |
|
$ |
3.81 |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
1.72 |
|
$ |
1.47 |
|
$ |
4.50 |
|
$ |
3.87 |
|
Discontinued operations |
|
(0.00 |
) |
(0.00 |
) |
(0.00 |
) |
(0.00 |
) |
||||
Total |
|
$ |
1.72 |
|
$ |
1.47 |
|
$ |
4.50 |
|
$ |
3.87 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average number of common shares outstanding: (millions) |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Assuming dilution |
|
1,405.8 |
|
1,534.3 |
|
1,463.1 |
|
1,560.5 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
1,371.4 |
|
1,513.2 |
|
1,436.0 |
|
1,538.6 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash dividends per common share |
|
$ |
0.40 |
|
$ |
0.30 |
|
$ |
1.10 |
|
$ |
0.80 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
4
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
ASSETS
(Dollars in millions) |
|
At September 30, |
|
At December 31, |
|
||
Assets: |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
9,295 |
|
$ |
8,022 |
|
Marketable securities |
|
4,528 |
|
2,634 |
|
||
Notes and accounts receivable trade (net of allowances of $214 in 2007 and $221 in 2006) |
|
10,186 |
|
10,789 |
|
||
Short-term financing receivables (net of allowances of $253 in 2007 and $307 in 2006) |
|
13,529 |
|
15,095 |
|
||
Other accounts receivable (net of allowances of $11 in 2007 and $15 in 2006) |
|
1,086 |
|
964 |
|
||
Inventories, at lower of average cost or market: |
|
|
|
|
|
||
Finished goods |
|
804 |
|
506 |
|
||
Work in process and raw materials |
|
2,051 |
|
2,304 |
|
||
Total inventories |
|
2,855 |
|
2,810 |
|
||
Deferred taxes |
|
1,969 |
|
1,806 |
|
||
Prepaid expenses and other current assets |
|
3,140 |
|
2,539 |
|
||
Total current assets |
|
46,588 |
|
44,660 |
|
||
|
|
|
|
|
|
||
Plant, rental machines and other property |
|
38,316 |
|
36,521 |
|
||
Less: Accumulated depreciation |
|
23,479 |
|
22,082 |
|
||
Plant, rental machines and other property net |
|
14,836 |
|
14,440 |
|
||
Long-term financing receivables |
|
10,267 |
|
10,068 |
|
||
Prepaid pension assets |
|
11,906 |
|
10,629 |
|
||
Intangible assets net |
|
2,162 |
|
2,202 |
|
||
Goodwill |
|
13,843 |
|
12,854 |
|
||
Investments and sundry assets |
|
9,007 |
|
8,381 |
|
||
Total assets |
|
$ |
108,609 |
|
$ |
103,234 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
5
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
At September 30, |
|
At December 31, |
|
||
(Dollars in millions except per share amounts) |
|
2007 |
|
2006* |
|
||
Liabilities and Stockholders Equity: |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Taxes |
|
$ |
2,564 |
|
$ |
4,670 |
|
Short-term debt |
|
16,546 |
|
8,902 |
|
||
Accounts payable |
|
6,732 |
|
7,964 |
|
||
Compensation and benefits |
|
4,394 |
|
4,595 |
|
||
Deferred income |
|
8,826 |
|
8,587 |
|
||
Other accrued expenses and liabilities |
|
5,948 |
|
5,372 |
|
||
Total current liabilities |
|
45,011 |
|
40,091 |
|
||
|
|
|
|
|
|
||
Long-term debt |
|
18,775 |
|
13,780 |
|
||
Retirement and nonpension postretirement benefit obligations |
|
13,619 |
|
13,553 |
|
||
Deferred income |
|
2,980 |
|
2,502 |
|
||
Other liabilities |
|
7,678 |
|
4,801 |
|
||
Total liabilities |
|
88,063 |
|
74,728 |
|
||
|
|
|
|
|
|
||
Stockholders equity: |
|
|
|
|
|
||
|
|
|
|
|
|
||
Common stock - par value $0.20 per share and additional paid-in capital |
|
34,705 |
|
31,271 |
|
||
Shares authorized: 4,687,500,000 |
|
|
|
|
|
||
Shares issued: 2007 - 2,050,734,542 |
|
|
|
|
|
||
Retained earnings |
|
57,298 |
|
52,432 |
|
||
|
|
|
|
|
|
||
Treasury stock - at cost |
|
(63,943 |
) |
(46,296 |
) |
||
Shares: 2007 - 672,779,284 |
|
|
|
|
|
||
|
|
|
|
|
|
||
Accumulated gains and (losses) not affecting retained earnings |
|
(7,513 |
) |
(8,901 |
) |
||
|
|
|
|
|
|
||
Total stockholders equity |
|
20,546 |
|
28,506 |
|
||
|
|
|
|
|
|
||
Total liabilities and stockholders equity |
|
$ |
108,609 |
|
$ |
103,234 |
|
* Reclassified to conform with 2007 presentation.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
6
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
(Dollars in millions) |
|
2007 |
|
2006* |
|
||
Cash flow from operating activities from continuing operations: |
|
|
|
|
|
||
Net Income |
|
$ |
6,467 |
|
$ |
5,952 |
|
Loss from discontinued operations |
|
(1 |
) |
(0 |
) |
||
Adjustments to reconcile income from continuing operations to cash provided from operating activities: |
|
|
|
|
|
||
Depreciation |
|
2,989 |
|
2,893 |
|
||
Amortization of intangibles |
|
875 |
|
790 |
|
||
Stock-based compensation |
|
539 |
|
621 |
|
||
Net gain on asset sales and other |
|
(302 |
) |
(88 |
) |
||
Changes in operating assets and liabilities, net of acquisitions/divestitures |
|
376 |
|
(483 |
) |
||
|
|
|
|
|
|
||
Net cash provided by operating activities from continuing operations |
|
10,943 |
|
9,685 |
|
||
|
|
|
|
|
|
||
Cash flow from investing activities from continuing operations: |
|
|
|
|
|
||
Payments for plant, rental machines and other property, net of proceeds from dispositions |
|
(2,870 |
) |
(2,776 |
) |
||
Investment in software |
|
(669 |
) |
(585 |
) |
||
Acquisition of businesses, net of cash acquired |
|
(718 |
) |
(882 |
) |
||
Divestiture of businesses, net of cash transferred |
|
310 |
|
|
|
||
Purchases of marketable securities and other investments |
|
(24,350 |
) |
(20,388 |
) |
||
Proceeds from sale of marketable securities and other investments |
|
22,524 |
|
18,715 |
|
||
|
|
|
|
|
|
||
Net cash used in investing activities from continuing operations |
|
(5,773 |
) |
(5,915 |
) |
||
|
|
|
|
|
|
||
Cash flow from financing activities from continuing operations: |
|
|
|
|
|
||
Proceeds from new debt |
|
16,053 |
|
292 |
|
||
Payments to settle debt |
|
(4,026 |
) |
(1,448 |
) |
||
Short-term borrowings less than 90 days net |
|
371 |
|
369 |
|
||
Common stock repurchases |
|
(18,357 |
) |
(6,687 |
) |
||
Common stock transactions other |
|
3,433 |
|
804 |
|
||
Cash dividends paid |
|
(1,593 |
) |
(1,231 |
) |
||
|
|
|
|
|
|
||
Net cash used in financing activities from continuing operations |
|
(4,119 |
) |
(7,901 |
) |
||
|
|
|
|
|
|
||
Effect of exchange rate changes on cash and cash equivalents |
|
230 |
|
56 |
|
||
Net cash used in discontinued operations - operating activities |
|
(9 |
) |
(9 |
) |
||
|
|
|
|
|
|
||
Net change in cash and cash equivalents |
|
1,273 |
|
(4,084 |
) |
||
|
|
|
|
|
|
||
Cash and cash equivalents at January 1 |
|
8,022 |
|
12,568 |
|
||
|
|
|
|
|
|
||
Cash and cash equivalents at September 30 |
|
$ |
9,295 |
|
$ |
8,484 |
|
* Reclassified to conform with 2007 presentation.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
7
Notes to Consolidated Financial Statements
1. Basis of Presentation: The accompanying consolidated financial statements and footnotes thereto are unaudited. In the opinion of the management of International Business Machines Corporation (the company), these statements include all adjustments, which are of a normal recurring nature, necessary to present a fair statement of the companys results of operations, financial position and cash flows.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, expenses and gains and losses not affecting retained earnings that are reported in the Consolidated Financial Statements and accompanying disclosures. Actual results may be different. See the companys 2006 Annual Report for a discussion of the companys critical accounting estimates.
Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the companys 2006 Annual Report.
In the first quarter of 2007, the company changed the presentation of revenue and cost in the Consolidated Statement of Earnings to reflect the categories of Services, Sales and Financing. Previously, the presentation included Global Services, Hardware, Software, Global Financing and an Other category. In the past, these categories were aligned with the companys reportable segment presentation of external revenue and cost. However, as the company moves toward delivering solutions which bring integrated software and services capabilities to its clients, the alignment between segments and categories will diverge. Therefore, there are situations where the Services segments could include software revenue, and conversely, the Software segment may have services revenue. The change was made to avoid possible confusion between the segment revenue and cost presentation and the required category presentation in the Consolidated Statement of Earnings.
The change only impacts the format for the presentation of the companys revenue and cost in the Consolidated Statement of Earnings and does not reflect any change in the companys reportable segment results or in the companys organizational structure. The periods presented in this Form 10-Q are reported on a comparable basis. The management discussion and analysis of revenue and gross profit from continuing operations will focus on the segment view, as this is how the business is managed and is the best reflection of the companys operating results and strategy.
Within the financial tables in this Form 10-Q, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts.
2. Accounting Changes: In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115, which will become effective in 2008. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. The company will adopt this Statement in fiscal year 2008 and does not expect the adoption of this Statement to have a material effect on the companys Consolidated Financial Statements.
In September 2006, the FASB finalized SFAS No. 157, Fair Value Measurements, which will become effective in 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of SFAS No. 157 will be applied prospectively to fair value measurements and disclosures beginning in the first quarter of 2008 and is not expected to have a material effect on the companys Consolidated Financial Statements.
In the first quarter of 2007, the company adopted SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB Statement No. 140, that provides guidance on accounting for separately recognized servicing assets and servicing liabilities. In accordance with the provisions of SFAS No. 156, separately recognized servicing assets and servicing liabilities must be initially measured at fair value, if practicable. Subsequent to initial recognition, the company may use either the amortization method or the fair value measurement method to account for servicing assets and servicing liabilities within the scope of this Statement. The adoption of this Statement did not have a material effect on the companys Consolidated Financial Statements.
In the first quarter of 2007, the company adopted SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140, which permits fair value remeasurement for any hybrid
8
financial instrument that contains an embedded derivative that otherwise would require bifurcation in accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of this Statement did not have a material effect on the companys Consolidated Financial Statements.
The company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. See Note 3 below for additional information, including the effects of adoption on the companys Consolidated Statement of Financial Position.
3. FIN 48: As highlighted in Note 2 above, the company adopted the provisions of FIN 48 on January 1, 2007.
The cumulative effect of adopting FIN 48 was a decrease in tax reserves and an increase of $117 million to the January 1, 2007 Retained earnings balance. Upon adoption, the liability for income taxes associated with uncertain tax positions at January 1, 2007 was $2,414 million. This liability can be reduced by $458 million of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes and timing adjustments. The net amount of $1,956 million, if recognized, would favorably affect the companys effective tax rate. In addition, consistent with the provisions of FIN 48, the company reclassified $1,971 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date. These non-current income tax liabilities are recorded in Other liabilities in the Consolidated Statement of Financial Position.
Interest and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded in the Consolidated Statement of Financial Position at January 1, 2007 was $126 million; of this amount, $95 million was also reclassified from current to non-current liabilities upon adoption of FIN 48.
With limited exception, the company is no longer subject to U.S. federal, state and local or non-U.S. income tax audits by taxing authorities for years through 2000. During the first quarter of 2007, the U.S. Internal Revenue Service commenced its audit of the companys U.S. income tax returns for 2004 and 2005. The company anticipates that this audit will be completed by the end of 2008. The company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
For the three month and nine month periods ending September 30, 2007, there were no material changes related to tax reserves that impacted the companys effective tax rate.
4. Stockholders Equity: The following table summarizes Net income plus gains and (losses) not affecting retained earnings (net of tax), a component of Stockholders equity in the Consolidated Statement of Financial Position:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
(Dollars in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Net income |
|
$ |
2,361 |
|
$ |
2,222 |
|
$ |
6,466 |
|
$ |
5,952 |
|
Gains and (losses) not affecting retained earnings (net of tax): |
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments |
|
325 |
|
(74 |
) |
675 |
|
563 |
|
||||
Prior service costs, net gains/(losses) and transition assets/(obligations)* |
|
252 |
|
|
|
722 |
|
|
|
||||
Minimum pension liability adjustments* |
|
|
|
|
|
|
|
1,432 |
|
||||
Net unrealized gains on marketable securities |
|
84 |
|
32 |
|
131 |
|
10 |
|
||||
Net unrealized (losses)/gains on cash flow hedge derivatives |
|
(178 |
) |
81 |
|
(140 |
) |
(305 |
) |
||||
Total gains and (losses) not affecting retained earnings |
|
484 |
|
39 |
|
1,388 |
|
1,701 |
|
||||
Net income plus gains and (losses) not affecting retained earnings |
|
$ |
2,845 |
|
$ |
2,261 |
|
$ |
7,853 |
|
$ |
7,652 |
|
* For additional information, see Note V on page 101 in the 2006 IBM Annual Report.
9
5. Stock-Based Compensation: Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in the Consolidated Statement of Earnings:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
(Dollars in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Cost |
|
$ |
41 |
|
$ |
54 |
|
$ |
131 |
|
$ |
162 |
|
Selling, general and administrative |
|
122 |
|
136 |
|
357 |
|
394 |
|
||||
Research, development and engineering |
|
15 |
|
22 |
|
52 |
|
64 |
|
||||
Other (income) and expense |
|
|
|
|
|
(1 |
) |
|
|
||||
Pre-tax stock-based compensation cost |
|
177 |
|
212 |
|
539 |
|
621 |
|
||||
Income tax benefits |
|
(45 |
) |
(75 |
) |
(188 |
) |
(220 |
) |
||||
Total stock-based compensation cost |
|
$ |
132 |
|
$ |
137 |
|
$ |
351 |
|
$ |
401 |
|
The reduction in pre-tax stock-based compensation cost for the three months and nine months ended September 30, 2007, as compared to the corresponding periods in the prior year, was principally the result of a reduction in the level of stock option grants ($51 million and $91 million, respectively) offset by an increase related to restricted and performance-based stock units ($16 million and $11 million, respectively). The effects on stock-based compensation cost related to the formation of a joint venture based on the companys Printing Systems Division are included in Other (income) and expense above and in the Consolidated Statement of Earnings for the nine-month period ended September 30, 2007.
As of September 30, 2007, the balance of $1,165 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted-average period of approximately three years.
There were no significant capitalized stock-based compensation costs at September 30, 2007 and 2006.
6. Retirement-Related Benefits: The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the total retirement-related benefit plans impact on income from continuing operations before income taxes.
(Dollars in millions) |
|
2007 |
|
2006 |
|
Yr. to Yr. |
|
||
Retirement-related planscost: |
|
|
|
|
|
|
|
||
Defined benefit and contribution pension planscost |
|
$ |
557 |
|
$ |
498 |
|
11.8 |
% |
Nonpension postretirement plans-cost |
|
97 |
|
97 |
|
0.0 |
|
||
Total |
|
$ |
654 |
|
$ |
595 |
|
9.9 |
% |
(Dollars in millions) |
|
2007 |
|
2006 |
|
Yr. to Yr. |
|
||
Retirement-related planscost: |
|
|
|
|
|
|
|
||
Defined benefit and contribution pension planscost |
|
$ |
1,631 |
|
$ |
1,542 |
|
5.8 |
% |
Nonpension postretirement planscost |
|
294 |
|
290 |
|
1.4 |
|
||
Total |
|
$ |
1,925 |
|
$ |
1,832 |
|
5.1 |
% |
10
The following tables provide the components of the cost/(income) for the companys pension plans:
Cost/(Income) of Pension Plans
(Dollars in millions) |
|
U.S. Plans |
|
Non-U.S. Plans |
|
||||||||
For the three months ended September 30: |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Service cost |
|
$ |
186 |
|
$ |
193 |
|
$ |
149 |
|
$ |
144 |
|
Interest cost |
|
646 |
|
614 |
|
441 |
|
399 |
|
||||
Expected return on plan assets |
|
(926 |
) |
(904 |
) |
(627 |
) |
(583 |
) |
||||
Amortization of transition assets |
|
|
|
|
|
(1 |
) |
(2 |
) |
||||
Amortization of prior service cost |
|
15 |
|
15 |
|
(30 |
) |
(31 |
) |
||||
Recognized actuarial losses |
|
170 |
|
196 |
|
229 |
|
204 |
|
||||
Net periodic pension costU.S. plan and material non-U.S. plans |
|
91 |
* |
114 |
* |
161 |
** |
131 |
** |
||||
Cost of other defined benefit plans |
|
34 |
|
27 |
|
46 |
|
39 |
|
||||
Total net periodic pension cost for all defined benefit plans |
|
125 |
|
141 |
|
207 |
|
170 |
|
||||
Cost of defined contribution plans |
|
102 |
|
90 |
|
123 |
|
97 |
|
||||
Total retirement plan cost recognized in the Consolidated Statement of Earnings |
|
$ |
227 |
|
$ |
231 |
|
$ |
330 |
|
$ |
267 |
|
* Represents the qualified portion of the IBM Personal Pension Plan.
** Represents the qualified and non-qualified portion of material non-U.S. Plans.
(Dollars in millions) |
|
U.S. Plans |
|
Non-U.S. Plans |
|
||||||||
For the nine months ended September 30: |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Service cost |
|
$ |
559 |
|
$ |
577 |
|
$ |
414 |
|
$ |
457 |
|
Interest cost |
|
1,939 |
|
1,841 |
|
1,248 |
|
1,169 |
|
||||
Expected return on plan assets |
|
(2,778 |
) |
(2,710 |
) |
(1,844 |
) |
(1,726 |
) |
||||
Amortization of transition assets |
|
|
|
|
|
(2 |
) |
(4 |
) |
||||
Amortization of prior service cost |
|
45 |
|
45 |
|
(92 |
) |
(59 |
) |
||||
Recognized actuarial losses |
|
510 |
|
589 |
|
660 |
|
607 |
|
||||
Net periodic pension costU.S. plan and material non-U.S. plans |
|
275 |
* |
342 |
* |
384 |
** |
444 |
** |
||||
Cost of other defined benefit plans |
|
96 |
|
82 |
|
212 |
|
117 |
|
||||
Total net periodic pension cost for all defined benefit plans |
|
371 |
|
424 |
|
596 |
|
561 |
|
||||
Cost of defined contribution plans |
|
315 |
|
282 |
|
349 |
|
275 |
|
||||
Total retirement plan cost recognized in the Consolidated Statement of Earnings |
|
$ |
686 |
|
$ |
706 |
|
$ |
945 |
|
$ |
836 |
|
* Represents the qualified portion of the IBM Personal Pension Plan.
** Represents the qualified and non-qualified portion of material non-U.S. Plans.
In 2007, the company expects to contribute to its non-U.S. defined benefit plans approximately $584 million, of which $556 million is the legally mandated minimum contribution for the companys non-U.S. Plans. In the first nine months of 2007, the company contributed approximately $383 million to its non-U.S. Plans, as compared to $1,676 million contributed in the first nine months of 2006.
During the second quarter of 2007, the company initiated changes to the investment strategy of its U.S. defined benefit plan:
The 2007 target asset allocation was modified, primarily by reducing public equity securities and increasing debt securities from 33 percent to 43 percent of total plan assets;
Duration of debt securities was increased; and
11
The use of derivatives, including interest rate swaps and swaptions, was increased in the fixed income portfolio to further mitigate the effects of future interest rate changes on the level of pension surplus.
These changes, which were completed in the third quarter, are designed to reduce the potential negative impact that equity markets or interest rates might have on the funded status of the U.S. defined benefit pension plan. These changes are not expected to impact the expected long-term rate of return on assets of 8.0 percent. (See Note V, Retirement-Related Benefits, pages 107 through 109 in the companys 2006 Annual Report for additional information).
The following table provides the components of the cost for the companys nonpension postretirement plans:
Cost/(Income) of Nonpension Postretirement Plans
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
(Dollars in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Service cost |
|
$ |
16 |
|
$ |
15 |
|
$ |
50 |
|
$ |
46 |
|
Interest cost |
|
78 |
|
78 |
|
233 |
|
230 |
|
||||
Amortization of prior service cost |
|
(15 |
) |
(16 |
) |
(45 |
) |
(47 |
) |
||||
Recognized actuarial losses |
|
4 |
|
7 |
|
16 |
|
22 |
|
||||
Net periodic postretirement plan cost U.S. Plan |
|
83 |
|
84 |
|
254 |
|
251 |
|
||||
Cost of non-U.S. Plans |
|
14 |
|
13 |
|
40 |
|
39 |
|
||||
Total nonpension postretirement plan cost recognized in the Consolidated Statement of Earnings |
|
$ |
97 |
|
$ |
97 |
|
$ |
294 |
|
$ |
290 |
|
The company received a $23.8 million subsidy in the third quarter of 2007 and $38.4 million for the first nine months of 2007 in connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003. A portion of this amount is used by the company to reduce its obligation and expense related to the plan, and the remainder is contributed to the plan to reduce contributions required by the participants. For further information related to the Medicare Prescription Drug Act, see page 110 in the companys 2006 Annual Report.
In addition, the company made a $500 million voluntary cash contribution to the U.S. nonpension postretirement plan in March of 2007. This advance funding was in addition to ongoing contributions of approximately $400 million that will be made in 2007 which will be utilized to pay current year benefits. The $500 million contribution will be used to fund benefit payments in future years.
7. Accelerated Share Repurchase: In May 2007, IBM International Group, a wholly-owned foreign subsidiary of the company (the Foreign Subsidiary) repurchased 118.8 million shares of common stock for $12.5 billion under accelerated share repurchase agreements with three banks (the Accelerated Repurchase).
Pursuant to the Accelerated Repurchase agreements, executed on May 25, 2007, the Foreign Subsidiary paid an initial purchase price of $105.18 per share for the repurchase. The initial purchase price is subject to adjustment based on the volume weighted average price of IBM common stock over a settlement period of three months for each of the banks. The adjustment will also reflect certain other amounts including the banks carrying costs, compensation for ordinary dividends declared by the company during the settlement period and interest benefits for receiving the $12.5 billion payment in advance of the anticipated purchases by each bank of shares in the open market during its settlement period. The adjustment amount can be settled in cash, registered shares or unregistered shares at the Foreign Subsidiarys option. Under the Accelerated Repurchase, the Foreign Subsidiary will have a separate settlement with each of the three banks. The first settlement occurred on September 6, 2007, resulting in a settlement payment to the bank of $151.8 million. The amount was paid in cash at the election of the Foreign Subsidiary in accordance with the provisions of the Accelerated Repurchase and was recorded as an adjustment to Stockholders equity in the Consolidated Statement of Financial Position on the settlement date.
12
The remaining two settlements are expected to occur in December 2007 and March 2008, and any amounts to be paid or received by the Foreign Subsidiary under any of the settlement alternatives in connection with the price adjustment will be recorded as an adjustment to Stockholders equity in the Consolidated Statement of Financial Position on each of the settlement dates.
The estimated fair value of the cash settlement and share settlement alternatives under the Accelerated Repurchase as of September 30, 2007 would result in the payment of approximately $764 million or 6.7 million registered shares, or 6.8 million unregistered shares respectively, by the Foreign Subsidiary. In comparison, each $1 increase in the volume weighted average share price would increase these estimates by approximately $79.2 million or approximately 0.7 million registered and unregistered shares under the cash settlement and share settlement alternatives, respectively. The Foreign Subsidiary cannot be required to deliver more than 238 million shares if it elects the share settlement options for the two remaining settlements, regardless of the volume weighted average share price.
8. Acquisitions: During the nine months ended September 30, 2007, the company completed eight acquisitions at an aggregate cost of $838 million. The closing of the Telelogic AB acquisition, announced in the second quarter, is conditioned upon satisfactory completion of regulatory reviews in the European Union. Regulatory reviews in the U.S. have been completed.
The Software segment completed six acquisitions: in the first quarter, Consul Risk Management International BV and Vallent Corporation, both privately held companies. Four acquisitions were completed in the third quarter: Watchfire Corporation, WebDialogs Inc. and Princeton Softech Inc., all privately held companies, and DataMirror Corporation, a publicly held company. Each acquisition further complemented and enhanced the companys portfolio of product offerings.
Global Technology Services (GTS) completed two acquisitions in the first quarter: Softek Storage Solutions Corporation (Softek) and DM Information Systems, Ltd. (DMIS), both privately held companies. Softek augments the companys unified data mobility offerings and worldwide delivery expertise for managing data in storage array, host and virtualized IT environments. DMIS will enhance and complement the companys Technology Service offerings.
Purchase price consideration was paid in cash. These acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.
The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of September 30, 2007.
|
|
Amortization |
|
|
|
|
(Dollars in millions) |
|
Life (yrs.) |
|
Acquisitions |
|
|
Current assets |
|
|
|
$ |
156 |
|
Fixed assets/non-current |
|
|
|
26 |
|
|
Intangible assets: |
|
|
|
|
|
|
Goodwill |
|
N/A |
|
700 |
|
|
Completed technology |
|
3 7 |
|
55 |
|
|
Client relationships |
|
3 7 |
|
94 |
|
|
Other |
|
2 5 |
|
16 |
|
|
In-process research and development |
|
|
|
|
|
|
Total assets acquired |
|
|
|
1,047 |
|
|
Current liabilities |
|
|
|
(123 |
) |
|
Non-current liabilities |
|
|
|
(86 |
) |
|
Total liabilities assumed |
|
|
|
(209 |
) |
|
Total purchase price |
|
|
|
$ |
838 |
|
The acquisitions were accounted for as purchase transactions, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. None of the goodwill is deductible for tax purposes. The overall weighted-average life of the identified amortizable intangible assets acquired is 4.5 years. With the exception of goodwill, these identified intangible assets will be amortized over their useful lives. Goodwill of $700 million was assigned to the Software ($636 million) and Global Technology Services ($64 million) segments.
13
9. Printing Systems Divestiture: In January 2007, the company announced an agreement with Ricoh Company Limited (Ricoh), a publicly traded company, to form a joint venture company based on IBMs Printing System Division (a division of the Systems and Technology segment). See Note X, Subsequent Events in the companys 2006 Annual Report.
The company initially created a wholly-owned subsidiary, InfoPrint Solutions Company, LLC (InfoPrint), by contributing specific assets and liabilities from its printer business. The companys Printing System Division generated approximately $1 billion of revenue in 2006. The InfoPrint portfolio includes solutions for production printing for enterprises and commercial printers as well as solutions for office workgroup environments and industrial segments. On June 1, 2007 (closing date), the company divested 51 percent of its interest in InfoPrint to Ricoh. The company will divest its remaining 49 percent ownership to Ricoh quarterly over the next three years from the closing date. At September 30, 2007, the companys ownership in InfoPrint is 44.9 percent.
The total consideration the company agreed to on January 24, 2007 (the date the definitive agreement was signed) was $725 million which was paid in cash to the company on the closing date. The cash received was consideration for the initial 51 percent acquisition of InfoPrint by Ricoh as well as a prepayment for the remaining 49 percent to be acquired and certain royalties and services to be provided by the company to InfoPrint. Final consideration for this transaction will be determined at the end of the three-year period based upon the participation in the profits and losses recorded by the equity partners. The company evaluated its ownership and participation in InfoPrint under the requirements of FIN 46(R), Consolidation of Variable Interest Entities. The company concluded that InfoPrint meets the requirements of a variable interest entity, the company is not the primary beneficiary of the entity and that deconsolidation of the applicable net assets was appropriate. The companys investment in InfoPrint will be accounted for under the equity method of accounting.
The company will provide maintenance services for one year, certain hardware products for three years and other information technology and business process services to InfoPrint for up to five years. The company assessed the fair value of these arrangements, and, as a result, deferred $274 million of the proceeds. This amount will be recorded as revenue, primarily in the companys services segments, as services are provided to InfoPrint.
The royalty agreements are related to the use of certain of the companys trademarks for up to ten years. The company assessed the fair value of these royalty agreements, and, as a result, deferred $116 million of the proceeds. This amount will be recognized as Intellectual property and custom development income as it is earned in subsequent periods.
Net assets contributed, transaction related expenses and provisions were $90 million, resulting in an expected total pre-tax gain of $245 million, of which $81 million was recorded in Other (income) and expense in the Consolidated Statement of Earnings in the second quarter of 2007.
The deferred pre-tax gain of $164 million was primarily related to: (1) the transfer of the companys remaining 49 percent interest in InfoPrint to Ricoh, and, (2) the transfer of certain maintenance services employees to InfoPrint. The company will recognize this amount over a three year period as the remaining ownership interest is divested and the employees are transferred. The pre-tax gain will be recorded in Other (income) and expense in the Consolidated Statement of Earnings.
14
10. Intangible Assets Including Goodwill: The following schedule details the companys intangible asset balances by major asset class:
|
|
At September 30, 2007 |
|
|||||||
(Dollars in millions) |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
|||
Capitalized software |
|
$ |
1,937 |
|
$ |
(830 |
) |
$ |
1,107 |
|
Client-related |
|
1,062 |
|
(460 |
) |
601 |
|
|||
Completed technology |
|
512 |
|
(177 |
) |
335 |
|
|||
Strategic alliances |
|
103 |
|
(103 |
) |
|
|
|||
Patents/Trademarks |
|
127 |
|
(52 |
) |
75 |
|
|||
Other(a) |
|
192 |
|
(146 |
) |
46 |
|
|||
Total |
|
$ |
3,931 |
|
$ |
(1,770 |
) |
$ |
2,162 |
|
|
|
At December 31, 2006 |
|
|||||||
(Dollars in millions) |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
|||
Capitalized software |
|
$ |
1,871 |
|
$ |
(837 |
) |
$ |
1,034 |
|
Client-related |
|
1,038 |
|
(424 |
) |
614 |
|
|||
Completed technology |
|
500 |
|
(128 |
) |
372 |
|
|||
Strategic alliances |
|
104 |
|
(89 |
) |
15 |
|
|||
Patents/Trademarks |
|
112 |
|
(29 |
) |
83 |
|
|||
Other(a) |
|
264 |
|
(179 |
) |
84 |
|
|||
Total |
|
$ |
3,888 |
|
$ |
(1,686 |
) |
$ |
2,202 |
|
(a) Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.
The net carrying amount of intangible assets decreased $40 million during the first nine months of 2007 primarily due to the amortization of existing intangible asset balances, partially offset by net increases in software capitalization and acquired intangible assets. The aggregate intangible asset amortization expense was $295 million and $875 million for the third quarter and first nine months of 2007, respectively, versus $259 million and $790 million for the third quarter and first nine months of 2006, respectively. In addition, in the first nine months of 2007, the company retired $797 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.
The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at September 30, 2007:
2007 (for Q4) |
|
$ |
290 million |
|
2008 |
|
$ |
913 million |
|
2009 |
|
$ |
515 million |
|
2010 |
|
$ |
223 million |
|
2011 |
|
$ |
120 million |
|
15
The changes in the goodwill balances, by reportable segment, for the nine months ended September 30, 2007, are as follows:
(Dollars in millions) |
|
Balance |
|
Goodwill |
|
Purchase |
|
Divestitures |
|
Foreign |
|
Balance |
|
||||||
Global Technology Services |
|
$ |
2,700 |
|
$ |
64 |
|
$ |
(10 |
) |
$ |
|
|
$ |
93 |
|
$ |
2,847 |
|
Global Business Services |
|
3,811 |
|
|
|
(5 |
) |
|
|
200 |
|
4,006 |
|
||||||
Systems and Technology |
|
214 |
|
|
|
|
|
|
|
1 |
|
215 |
|
||||||
Software |
|
6,129 |
|
636 |
|
(2 |
) |
|
|
12 |
|
6,775 |
|
||||||
Global Financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
12,854 |
|
$ |
700 |
|
$ |
(17 |
) |
$ |
|
|
$ |
305 |
|
$ |
13,843 |
|
* Primarily consists of foreign currency translation adjustments.
There were no goodwill impairment losses recorded during the nine months ended September 30, 2007.
11. Segments: The tables on pages 57 and 58 of this Form 10-Q reflect the results of the companys reportable segments consistent with the management system used by the companys chief operating decision maker. These results are not necessarily a depiction that is in conformity with generally accepted accounting principles (GAAP). For example, employee retirement plan costs are developed using actuarial assumptions on a country-by-country basis and allocated to the segments based on headcount. A different result could occur for any segment if actuarial assumptions unique to each segment were used. Performance measurement is based on income before income taxes (pre-tax income). These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments.
12. Restructuring-Related Liabilities: The following table provides a roll forward of the current and non-current liability balances for actions taken in the following periods: (1) the second quarter of 2005; (2) the fourth-quarter 2002 actions associated with the acquisition of the PricewaterhouseCoopers consulting business; (3) the second quarter of 2002 associated with the Microelectronics Division and the rebalancing of both the companys workforce and leased space resources; (4) the 2002 actions associated with the hard disk drive (HDD) business for reductions in workforce, manufacturing capacity and space; (5) the actions taken in 1999; and (6) actions that took place prior to 1994. See the companys 2006 Annual Report, Note R on page 93 for additional information on the actions taken in 2005.
(Dollars in millions) |
|
Liability |
|
Payments |
|
Other |
|
Liability |
|
||||
Current: |
|
|
|
|
|
|
|
|
|
||||
Workforce |
|
$ |
163 |
|
$ |
(117 |
) |
$ |
63 |
|
$ |
109 |
|
Space |
|
88 |
|
(37 |
) |
32 |
|
83 |
|
||||
Other |
|
6 |
|
|
|
1 |
|
7 |
|
||||
Total Current |
|
$ |
257 |
|
$ |
(154 |
) |
$ |
96 |
|
$ |
199 |
|
|
|
|
|
|
|
|
|
|
|
||||
Non-current: |
|
|
|
|
|
|
|
|
|
||||
Workforce |
|
$ |
531 |
|
$ |
|
|
$ |
14 |
|
$ |
545 |
|
Space |
|
109 |
|
|
|
(22 |
) |
87 |
|
||||
Total Non-current |
|
$ |
640 |
|
$ |
|
|
$ |
(8 |
) |
$ |
631 |
|
* The other adjustments column in the table above principally includes the reclassification of non-current to current and foreign currency translation adjustments. In addition, during the nine-month period ended September 30, 2007, net adjustments were recorded to (1) increase previously recorded liabilities for actions taken prior to 1994 ($7.8 million); (2) reduce previously recorded liabilities for actions taken in the second quarter of 2005 ($3.1 million), second-quarter 2002 ($1.1 million) and fourth-quarter 2002 ($0.5 million). Of the net increase of $3.1 million, $4.6 million was included in Selling, general and administrative expense and a $1.5 million reduction was recorded in Other (income) and expense. In addition, interest expense (accretion) of $22.4 million was recorded in Selling, general and administrative expense and $3.1 million was recorded in Other (income) and expense.
16
13. Contingencies: The company is involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property (IP), product liability, employment, benefits, securities, and environmental matters. These actions may be commenced by a number of different parties, including competitors, partners, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. The following is a summary of some of the more significant legal matters involving the company.
The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by The SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&Ts Unix IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the companys distribution of AIX and Dynix and contribution of code to Linux. The company has asserted counterclaims, including breach of contract, violation of the Lanham Act, unfair competition, intentional torts, unfair and deceptive trade practices, breach of the General Public License that governs open source distributions, promissory estoppel and copyright infringement. In October 2005, the company withdrew its patent counterclaims in an effort to simplify and focus the issues in the case and to expedite their resolution. Motions for summary judgment were heard in March 2007, and the court has not yet issued its decision. On August 10, 2007, the court in another suit, The SCO Group, Inc. v. Novell, Inc., issued a decision and order determining, among other things, that Novell is the owner of UNIX and UnixWare copyrights, and obligating SCO to recognize Novells waiver of SCOs claims against IBM and Sequent for breach of UNIX license agreements. At the request of the court in SCO v. IBM, on August 31, 2007, each of the parties filed a status report with the court concerning the effect of the August 10th Novell ruling on the SCO v. IBM case, including the pending motions. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed.
In May 2005, the Louisiana Supreme Court denied the companys motion to review and reverse a Louisiana state courts certification of a nationwide class in a case filed against the company in 1995. The class consists of certain former employees who left the company in 1992, and their spouses, claiming damages based on the companys termination of an education assistance program. On July 3, 2007, the company and the plaintiffs filed a proposed class settlement agreement with the 19th Judicial District Court for the Parish of East Baton Rouge, Louisiana, where the legal action was filed. On October 1, 2007, the Court gave its final approval of the proposed settlement pursuant to which IBM will pay certain amounts to eligible individuals who took or would have taken an education course within a specified period after departing the company. As part of the settlement, IBM will also make contributions to support engineering education for women and minorities. Class members have until mid-December 2007 to file an appeal of the Courts order approving the settlement.
In July 2005, two lawsuits were filed in the United States District Court for the Southern District of New York related to the companys disclosures concerning first-quarter 2005 earnings and the expensing of equity compensation. Pursuant to an Order from the Court dated March 28, 2006, the two lawsuits were consolidated into a single action captioned In re International Business Machines Corp. Securities Litigation. Plaintiffs filed a corrected consolidated amended complaint dated May 19, 2006, in which they named the company and IBMs Senior Vice President and Chief Financial Officer as defendants and alleged that defendants made certain misrepresentations and omissions in violation of Section 10(b), and Rule 10b-5 thereunder, and Section 20(a) of the Securities Exchange Act of 1934. On September 20, 2006, the Court denied a Motion to Dismiss that was filed by IBM. On March 12, 2007, the plaintiffs class was certified; class notifications were mailed on or about May 30, 2007.
In January 2004, the Seoul District Prosecutors Office in South Korea announced it had brought criminal bid-rigging charges against several companies, including IBM Korea and LG IBM (a joint venture between IBM Korea and LG Electronics, which has since been dissolved, effective January, 2005) and had also charged employees of some of those entities with, among other things, bribery of certain officials of government-controlled entities in Korea and bid rigging. IBM Korea and LG IBM cooperated fully with authorities in these matters. A number of individuals, including former IBM Korea and LG IBM employees, were subsequently found guilty and sentenced. IBM Korea and LG IBM were also required to pay fines. Debarment orders were imposed at different times, covering a period of no more than a year from the date of issuance, which barred IBM Korea from doing business directly with certain government-controlled entities in Korea. All debarment orders have since expired and when they were in force did not prohibit IBM Korea from selling products and services to business partners who sold to government-controlled entities in Korea. In addition, the U.S. Department of Justice and the SEC have both contacted the company in connection with this matter.
On November 29, 2006, the company filed a lawsuit against Platform Solutions, Inc. (PSI) in the United States District Court for the Southern District of New York. IBM filed its amended complaint on August 17, 2007 and asserted claims for patent infringement, trade secret misappropriation, copyright infringement, tortious interference and breach of contract in
17
connection with PSIs development and marketing of a computer system that PSI says is compatible with IBMs S/390 and System z architectures. IBM also sought a declaratory judgment that its refusal to license its patents to PSI and certain of its software for use on PSI systems does not violate the antitrust laws. IBM seeks damages and injunctive relief. On September 21, 2007, PSI answered the amended complaint and asserted counterclaims against IBM for alleged monopolization and attempted monopolization, tying, violations of New York and California statutes proscribing unfair competition, tortious interference with the acquisition of PSI by a third party and promissory estoppel. PSI also sought declaratory judgments of noninfringement of IBMs patents and patent invalidity. Discovery is proceeding and the court has ordered that the case be ready for trial in the Fall of 2008.
In October 2003, a purported collective action lawsuit was filed against IBM in the United States District Court for the Northern District of California by ten former IBM employees alleging, on behalf of themselves and allegedly similarly situated former employees, that the company engaged in a pattern and practice of discriminating against employees on the basis of age when it terminated employees, both in connection with reductions in force and individualized determinations. Initially, the District Court dismissed the lawsuit on the basis of release agreements signed by all the plaintiffs. On appeal, the Ninth Circuit reversed the trial courts finding that the release barred these claims, and in January 2007, after denial of IBMs petition for rehearing, the matter was returned to the trial court for further proceedings. On October 3, 2007, the court dismissed with prejudice plaintiffs claim for relief under the Older Workers Benefit Protection Act, and dismissed with leave to amend plaintiffs claim asserting disparate impact age discrimination with respect to individualized terminations.
The company is a defendant in a civil lawsuit brought in Tokyo District Court by Tokyo Leasing Co., Ltd., which seeks to recover losses that it allegedly suffered after IXI Co., Ltd. initiated civil rehabilitation (bankruptcy) proceedings in Japan and apparently failed to pay Tokyo Leasing amounts for which Tokyo Leasing now seeks to hold IBM and others liable. The claims in this suit include tort and breach of contract.
The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as Superfund, or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.
The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian authorities regarding non-income tax assessments and non-income tax litigation matters. These matters principally relate to claims for taxes on the importation of computer software. The total amounts related to these matters are approximately $2 billion, including amounts currently in litigation and other amounts. In addition, the company has received an income tax assessment from Mexican authorities relating to the deductibility of certain warranty payments. In response, the company has filed an appeal in the Mexican Federal Fiscal court. The total potential amount related to this matter for all applicable years is approximately $500 million. The company believes it will prevail on these matters and that these amounts are not meaningful indicators of liability.
In accordance with SFAS No. 5, Accounting for Contingencies, (SFAS No. 5), the company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and proceedings are reviewed at least quarterly and provisions are taken or adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Any recorded liabilities for the above items, including any changes to such liabilities for the quarter ended September 30, 2007, were not material to the Consolidated Financial Statements. Based on its experience, the company believes that the damage amounts claimed in the matters referred to above are not a meaningful indicator of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of the matters previously discussed. While the company will continue to defend itself vigorously in all such matters, it is possible that the companys business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.
Whether any losses, damages or remedies finally determined in any such claim, suit, investigation or proceeding could reasonably have a material effect on the companys business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses or damages; the structure and type of any
18
such remedies; the significance of the impact any such losses, damages or remedies may have on the companys Consolidated Financial Statements; and the unique facts and circumstances of the particular matter which may give rise to additional factors.
14. Commitments: The companys extended lines of credit include unused amounts of $4,358 million and $2,895 million at September 30, 2007 and December 31, 2006, respectively. A portion of these amounts was available to the companys business partners to support their working capital needs. In addition, the company committed to provide future financing to its customers in connection with customer purchase agreements for approximately $2,919 million and $2,496 million at September 30, 2007 and December 31, 2006, respectively.
The company has applied the disclosure provisions of FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to its agreements that contain guarantee or indemnification clauses. These disclosure provisions expand those required by SFAS No. 5 by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantors performance is remote. The following is a description of arrangements in which the company is the guarantor.
The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain IP rights, specified environmental matters, third-party performance of non-financial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making an adverse claim pursuant to the procedures specified in the particular contract, which procedures typically allow the company to challenge the other partys claims. Further, the companys obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the company may have recourse against third parties for certain payments made by the company.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the companys obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the companys business, financial condition or results of operations.
In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $30 million and $32 million at September 30, 2007 and December 31, 2006, respectively.
Changes in the companys warranty liability balance are presented in the following table:
(Dollars in millions) |
|
2007 |
|
2006 |
|
||
Balance at January 1 |
|
$ |
582 |
|
$ |
754 |
|
Current period accruals |
|
331 |
|
337 |
|
||
Accrual adjustments to reflect actual experience |
|
(23 |
) |
70 |
|
||
Charges incurred |
|
(478 |
) |
(571 |
) |
||
Balance at September 30 |
|
$ |
412 |
|
$ |
590 |
|
The decrease in the warranty liability balance was primarily driven by a reduction in estimated future costs as a result of the divestiture of the companys Personal Computing business to Lenovo Group Limited (Lenovo) in April 2005.
15. Subsequent Events: On October 22, 2007, IBM International Group Capital LLC, an indirect, wholly-owned subsidiary of the company, issued $1.5 billion of 5-year term notes. The proceeds from this debt issue will be utilized to reduce the 364-day floating rate term loan associated with the second-quarter accelerated share repurchase. (See Note 7 on pages 12 and 13 for additional information).
On October 30, 2007, the company announced that the Board of Directors approved a quarterly dividend of $0.40 per common share. The dividend is payable December 10, 2007 to shareholders of record on November 9, 2007.
19
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007*
Snapshot
|
|
|
|
|
|
Yr. To Yr. |
|
||
|
|
|
|
|
|
Percent/ |
|
||
(Dollars in millions except per share amounts) |
|
|
|
|
|
Margin |
|
||
Three months ended September 30: |
|
2007 |
|
2006 |
|
Change |
|
||
Revenue |
|
$ |
24,119 |
|
$ |
22,617 |
|
6.6 |
%** |
Gross profit margin |
|
41.3 |
% |
42.0 |
% |
(0.7 |
)pts. |
||
Total expense and other income |
|
$ |
6,676 |
|
$ |
6,317 |
|
5.7 |
% |
Total expense and other income to revenue ratio |
|
27.7 |
% |
27.9 |
% |
(0.3 |
)pts. |
||
Provision for income taxes |
|
$ |
918 |
|
$ |
952 |
|
(3.6 |
)% |
Income from continuing operations |
|
$ |
2,362 |
|
$ |
2,222 |
|
6.3 |
% |
Net income margin |
|
9.8 |
% |
9.8 |
% |
(0.0 |
)pts. |
||
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
$ |
1.68 |
|
$ |
1.45 |
|
15.9 |
% |
Basic |
|
$ |
1.72 |
|
$ |
1.47 |
|
17.0 |
% |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
1,405.8 |
|
1,534.3 |
|
(8.4 |
)% |
||
Basic |
|
1,371.4 |
|
1,513.2 |
|
(9.4 |
)% |
* |
|
The following Results of Continuing Operations discussion does not include the hard disk drive (HDD) business that the company sold to Hitachi, Ltd. on December 31, 2002. The HDD business was accounted for as a discontinued operation under generally accepted accounting principles. There was a $1 million loss from Discontinued Operations in the third quarter and first nine months of 2007 versus no gain or loss in the third quarter and first nine months of 2006. |
|
|
|
** |
|
3.0 percent adjusted for currency |
Within the Management Discussion, selected references to adjusted for currency or at constant currency are made so that the financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the companys business performance.
In the third quarter, total revenue increased 6.6 percent as reported, 3.0 percent adjusted for currency, versus the third quarter of 2006. Pre-tax income from continuing operations was $3,280 million, up 3.3 percent compared to the prior year. Diluted earnings per share from continuing operations was $1.68 in the quarter, an increase of 15.9 percent year-to-year.
As the quarter developed, the company took actions to effectively manage its business in an uncertain economic environment, including a disciplined focus on spending and productivity, while maintaining investments in high growth areas.
The third quarter financial results were driven by strong revenue growth in Global Services. Total revenue growth in the services businesses was 13.8 percent, the best overall growth rate in four years. These results reflect the actions that the company has been taking to accelerate its services revenue growth, while continuing to improve profitability. Global Business Services increased 15.9 percent and Global Technology Services grew 12.8 percent versus the prior year.
Software segment revenue increased 6.5 percent year-to-year. Performance was good in small and medium-sized transactions ($1 million or less), however, clients deferred several large deals late in the quarter. The Systems and Technology business was impacted by product transitions and a difficult year-to-year compare in System z. Revenue decreased 10.4 percent, 6.0 percent excluding the divested printing business (see Note 9 on page 14). Global Financing revenue increased 6.1 percent driven by improved used equipment sales.
Geographic results were balanced led by Asia Pacific which grew 9.4 percent (6 percent adjusted for currency); Europe grew 11.3 percent (4 percent adjusted for currency) and Americas had revenue growth of 3.8 percent (3 percent adjusted for currency). In addition, the company continued to benefit from its investments and strong growth in its emerging country
20
markets where revenue grew 19.3 percent (10 percent adjusted for currency). Revenue growth by industry sector was mixed with strong growth in Public, up 11.2 percent (8 percent adjusted for currency) and Communications, up 10.4 percent (7 percent adjusted for currency). The Financial Services sector, the largest of the companys industry sectors, was weaker, growing 5.4 percent (1 percent adjusted for currency) driven by the U.S.
The gross profit margin was 41.3 percent in the third quarter versus 42.0 percent in the third quarter of 2006. The decrease in the gross profit margin was primarily driven by a mix shift among the segments and a lower margin in the Software business. Global Financings margin declined 4.0 points primarily due to used equipment sales margins.
Total expense and other income increased over the year-earlier period by 5.7 percent. The rate of growth declined from prior periods. The increase was primarily due to continuing investments in acquisitions, currency impacts and interest expense which was driven by the debt related to the accelerated share repurchase in the second quarter. The ratio of Total expense to revenue decreased 0.3 points to 27.7 percent for the third quarter versus the comparable period of 2006.
The effective tax rate for the third quarter of 2007 was 28.0 percent versus 30.0 percent in the third quarter of 2006.
Cash flow from operating activities was $4,484 million, an increase of $476 million versus the third quarter of 2006 and an improvement of $1,040 million compared to the second quarter of 2007.
Total Global Services signings were $11.8 billion in the third quarter of 2007 as compared to $10.5 billion for the three months ended September 30, 2006. The estimated total Global Services backlog was $116 billion at September 30, 2007, flat versus June 30, 2007 and an increase of $7 billion versus September 30, 2006.
|
|
|
|
|
|
Yr. To Yr. |
|
||
|
|
|
|
|
|
Percent/ |
|
||
(Dollars in millions except per share amounts) |
|
|
|
|
|
Margin |
|
||
Nine months ended September 30: |
|
2007 |
|
2006 |
|
Change |
|
||
Revenue |
|
$ |
69,920 |
|
$ |
65,166 |
|
7.3 |
%** |
Gross profit margin |
|
41.1 |
% |
40.8 |
% |
0.3 |
pts. |
||
Total expense and other income |
|
$ |
19,759 |
|
$ |
18,091 |
|
9.2 |
% |
Total expense and other income to revenue ratio |
|
28.3 |
% |
27.8 |
% |
0.5 |
pts. |
||
Provision for income taxes |
|
$ |
2,534 |
|
$ |
2,551 |
|
(0.7 |
)% |
Income from continuing operations |
|
$ |
6,467 |
|
$ |
5,952 |
|
8.7 |
% |
Net income margin |
|
9.2 |
% |
9.1 |
% |
0.1 |
pts. |
||
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
$ |
4.42 |
|
$ |
3.81 |
|
16.0 |
% |
Basic |
|
$ |
4.50 |
|
$ |
3.87 |
|
16.3 |
% |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
1,463.1 |
|
1,560.5 |
|
(6.2 |
)% |
||
Basic |
|
1,436.0 |
|
1,538.6 |
|
(6.7 |
)% |
|
|
9/30/07 |
|
12/31/06 |
|
|
|
||
Assets |
|
$ |
108,609 |
|
$ |
103,234 |
|
5.2 |
% |
Liabilities |
|
$ |
88,063 |
|
$ |
74,728 |
|
17.8 |
% |
Equity |
|
$ |
20,546 |
|
$ |
28,506 |
|
(27.9 |
)% |
** 4.2 percent adjusted for currency
For the first nine months of 2007, total revenue increased 7.3 percent as reported, 4.2 percent adjusted for currency, versus the prior year. Pre-tax income from continuing operations was $9,001 million, a 5.9 percent increase compared to the first nine months of 2006. Diluted earnings per share from continuing operations was $4.42, reflecting a 16.0 percent improvement year-to-year. In the second quarter, the company executed a $12.5 billion accelerated share repurchase, and, in total, repurchased approximately nine percent of the common shares outstanding at March 31, 2007.
Revenue performance in the first nine months was led by both Global Services businesses and Software. Geographically, Asia Pacific had the strongest performance, with improvement in Europe as well. Performance in the emerging country markets remains very strong, with revenue growth of 24.9 percent (18 percent adjusted for currency) in the first nine months of 2007 versus the first nine months of 2006.
21
The gross profit margin for the first nine months of 2007 was 41.1 percent, an improvement of 0.3 points versus the prior year. The continued focus on productivity initiatives in Global Services, combined with an improved hardware margin, has led to the overall margin improvement.
Total expense and other income increased 9.2 percent in the first nine months of 2007. This increase was primarily driven by the continuing investments to drive future business growth and develop higher value capabilities. In addition, interest expense increased $189 million primarily driven by the debt related to the accelerated share repurchase.
The effective tax rate for the first nine months of 2007 was 28.2 percent versus 30.0 percent for the comparable period in 2006.
For the first nine months of 2007, cash flow from operating activities was $10,943 million, an increase of $1,259 million versus the first nine months of 2006.
Assets increased $5,375 million from December 31, 2006 to September 30, 2007 primarily due to the effects of currency (approximately $3,400 million). Cash and cash equivalents and Marketable securities increased $3,166 million, Prepaid pension assets increased $1,277 million, Investments and sundry assets increased $626 million, prepaid expenses increased $601 million, Goodwill increased $989 million and Plant, rental machines and other property net increased $397 million during the first nine months of 2007. These increases were partially offset by a decline in short-term financing receivables of $1,566 million and a decline of $603 million in accounts receivable during the first nine months of 2007.
Liabilities increased $13,335 million from December 31, 2006 driven by an increase in short- and long-term debt, primarily related to the accelerated share repurchase.
Stockholders equity declined $7,960 million in the first nine months of 2007 primarily due to the companys common stock repurchases, including the accelerated share repurchase transaction, partially offset by an increase in Retained earnings of $4,866 million and an increase in Common stock of $3,434 million.
Third Quarter and First Nine Months in Review
Results of Continuing Operations
Segment Details
The following table presents each reportable segments external revenue as a percentage of total external segment revenue.
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
September 30, |
|
September 30, |
|
||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Global Technology Services |
|
38.1 |
% |
35.9 |
% |
37.7 |
% |
36.7 |
% |
Global Business Services |
|
19.2 |
|
17.6 |
|
18.9 |
|
18.2 |
|
Total Global Services |
|
57.2 |
|
53.5 |
|
56.6 |
|
54.9 |
|
Systems and Technology |
|
20.5 |
|
24.3 |
|
21.0 |
|
23.0 |
|
Global Financing |
|
2.6 |
|
2.6 |
|
2.6 |
|
2.7 |
|
Total Systems and Technology and Global Financing |
|
23.1 |
|
26.9 |
|
23.6 |
|
25.7 |
|
Software |
|
19.6 |
|
19.6 |
|
19.8 |
|
19.4 |
|
Total |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
22
The following is an analysis of the third quarter and first nine months of 2007 versus the third quarter and first nine months of 2006 reportable segment external revenue and gross margin results.
(Dollars in millions) |
|
2007 |
|
2006 |
|
Yr. to Yr. |
|
Yr. to Yr. |
|
||
Revenue: |
|
|
|
|
|
|
|
|
|
||
Global Technology Services |
|
$ |
9,093 |
|
$ |
8,058 |
|
12.8 |
% |
8.8 |
% |
Gross margin |
|
30.6 |
% |
30.2 |
% |
0.3 |
pts. |
|
|
||
Global Business Services |
|
4,586 |
|
3,959 |
|
15.9 |
% |
12.1 |
% |
||
Gross margin |
|
22.9 |
% |
22.8 |
% |
0.1 |
pts. |
|
|
||
Systems and Technology |
|
4,898 |
|
5,466 |
|
(10.4 |
)% |
(12.9 |
)% |
||
Gross margin |
|
38.5 |
% |
38.2 |
% |
0.3 |
pts. |
|
|
||
Software |
|
4,694 |
|
4,406 |
|
6.5 |
% |
2.6 |
% |
||
Gross margin |
|
84.2 |
% |
85.3 |
% |
(1.1 |
)pts. |
|
|
||
Global Financing |
|
623 |
|
587 |
|
6.1 |
% |
2.5 |
% |
||
Gross margin |
|
44.6 |
% |
48.6 |
% |
(4.0 |
)pts. |
|
|
||
Other |
|
225 |
|
141 |
|
59.3 |
% |
55.7 |
% |
||
Gross margin |
|
2.7 |
% |
13.6 |
% |
(11.0 |
)pts. |
|
|
||
Total revenue |
|
$ |
24,119 |
|
$ |
22,617 |
|
6.6 |
% |
3.0 |
% |
Gross profit |
|
$ |
9,956 |
|
$ |
9,492 |
|
4.9 |
% |
|
|
Gross margin |
|
41.3 |
% |
42.0 |
% |
(0.7 |
)pts. |
|
|
(Dollars in millions) |
|
2007 |
|
2006 |
|
Yr. to Yr. |
|
Yr. to Yr. |
|
||
Revenue: |
|
|
|
|
|
|
|
|
|
||
Global Technology Services |
|
$ |
26,106 |
|
$ |
23,732 |
|
10.0 |
% |
6.6 |
% |
Gross margin |
|
29.9 |
% |
29.7 |
% |
0.1 |
pts. |
|
|
||
Global Business Services |
|
13,108 |
|
11,746 |
|
11.6 |
% |
8.5 |
% |
||
Gross margin |
|
23.7 |
% |
22.6 |
% |
1.1 |
pts. |
|
|
||
Systems and Technology |
|
14,520 |
|
14,900 |
|
(2.5 |
)% |
(4.8 |
)% |
||
Gross margin |
|
36.9 |
% |
35.8 |
% |
1.2 |
pts. |
|
|
||
Software |
|
13,723 |
|
12,554 |
|
9.3 |
% |
5.7 |
% |
||
Gross margin |
|
84.3 |
% |
84.6 |
% |
(0.3 |
)pts. |
|
|
||
Global Financing |
|
1,834 |
|
1,744 |
|
5.1 |
% |
2.2 |
% |
||
Gross margin |
|
47.2 |
% |
50.8 |
% |
(3.7 |
)pts. |
|
|
||
Other |
|
630 |
|
491 |
|
28.4 |
% |
26.2 |
% |
||
Gross margin |
|
11.2 |
% |
9.4 |
% |
1.8 |
pts. |
|
|
||
Total revenue |
|
$ |
69,920 |
|
$ |
65,166 |
|
7.3 |
% |
4.2 |
% |
Gross profit |
|
$ |
28,760 |
|
$ |
26,594 |
|
8.1 |
% |
|
|
Gross margin |
|
41.1 |
% |
40.8 |
% |
0.3 |
pts. |
|
|
23
Global Services
|
|
|
|
|
|
Yr. to Yr. |
|
||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
||
For the three months ended September 30: |
|
2007 |
|
2006 |
|
Change |
|
||
Global Services Revenue: |
|
$ |
13,679 |
|
$ |
12,017 |
|
13.8 |
% |
Global Technology Services |
|
$ |
9,093 |
|
$ |
8,058 |
|
12.8 |
% |
Strategic Outsourcing |
|
4,729 |
|
4,281 |
|
10.5 |
|
||
Integrated Technology Services |
|
2,096 |
|
1,824 |
|
14.9 |
|
||
Maintenance |
|
1,712 |
|
1,515 |
|
13.0 |
|
||
Business Transformation Outsourcing |
|
556 |
|
439 |
|
26.7 |
|
||
Global Business Services |
|
$ |
4,586 |
|
$ |
3,959 |
|
15.9 |
% |
|
|
|
|
|
|
Yr. to Yr. |
|
||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
||
For the nine months ended September 30: |
|
2007 |
|
2006 |
|
Change |
|
||
Global Services Revenue: |
|
$ |
39,214 |
|
$ |
35,478 |
|
10.5 |
% |
Global Technology Services |
|
$ |
26,106 |
|
$ |
23,732 |
|
10.0 |
% |
Strategic Outsourcing |
|
13,632 |
|
12,618 |
|
8.0 |
|
||
Integrated Technology Services |
|
6,054 |
|
5,309 |
|
14.0 |
|
||
Maintenance |
|
4,859 |
|
4,430 |
|
9.7 |
|
||
Business Transformation Outsourcing |
|
1,561 |
|
1,376 |
|
13.4 |
|
||
Global Business Services |
|
$ |
13,108 |
|
$ |
11,746 |
|
11.6 |
% |
The companys two services segments, Global Technology Services and Global Business Services, had combined revenue of $13.7 billion, an increase of 13.8 percent (10 percent adjusted for currency) in the third quarter and $39.2 billion, an increase of 10.5 percent (7 percent adjusted for currency) in the first nine months of 2007, respectively, when compared to same periods of 2006. The company has made considerable progress implementing its strategies across the global services offerings. The actions taken have resulted in strong and balanced contribution across all geographies, industry segments and business lines.
Global Technology Services (GTS) revenue increased 12.8 percent (9 percent adjusted for currency) and 10.0 percent (7 percent adjusted for currency) in the third quarter and first nine months of 2007, respectively, versus the third quarter and first nine months of 2006. GTS delivered double-digit revenue growth across all geographies, business lines and sectors. Total signings in GTS increased 12 percent in the third quarter of 2007, with longer term signings increasing 19 percent while shorter term signings decreased 3 percent.
Strategic Outsourcing (SO) revenue was up 10.5 percent (6 percent adjusted for currency) in the third quarter and 8.0 percent (5 percent adjusted for currency) in the first nine months of 2007, respectively, versus the same periods in 2006. Revenue growth was driven by a combination of good signings performance over the past twelve months, continued lower base erosion and sales of new business into existing accounts. SO signings in the third quarter of 2007 increased 46 percent when compared to the third quarter of 2006.
Business Transformation Outsourcing (BTO) revenue was up 26.7 percent (22 percent adjusted for currency) year to year. For the first nine months of 2007, BTO revenue increased 13.4 percent (10 percent adjusted for currency) versus the first nine months of 2006. Third quarter BTO signings declined 66 percent year to year. Signings in this business can be inconsistent period to period.
Integrated Technology Services (ITS) revenue increased 14.9 percent (11 percent adjusted for currency) in the third quarter and 14.0 percent (11 percent adjusted for currency) in the first nine months of 2007 when compared to the same periods in 2006. Revenue growth was driven primarily by increased signings in 2006 and the first half of 2007 as well as contribution from the acquisition of Internet Security Systems (ISS). ITS signings in the quarter decreased 3 percent year to year.
Maintenance revenue increased 13.0 percent (9 percent adjusted for currency) and 9.7 percent (6 percent adjusted for currency) in the third quarter and first nine months of 2007, respectively, versus the same periods in the prior year. The maintenance business continues to benefit from providing availability services on non-IBM IT equipment. Services provided to InfoPrint Solutions drove 7 points of the revenue growth in the quarter and 3 points of growth for the first nine months. See note 9 on page 14 for additional information on this services agreement.
24
Global Business Services (GBS) revenue increased 15.9 percent (12 percent adjusted for currency) and 11.6 percent (9 percent adjusted for currency) in the third quarter and first nine months of 2007, respectively, versus the year ago periods. Revenue increased in all geographies and sectors, with the strongest growth in Communications, Distribution, Public and Small and Medium Businesses. From an offering perspective, Financial Management Services, Human Capital Management and Supply Chain were the strongest. In addition, good progress has been made in the Application Management Business and the company continues to have success building out its global capabilities. Total signings in GBS increased 13 percent in the third quarter of 2007. Longer term signings increased 80 percent while shorter term signings decreased 6 percent. Although down this quarter, shorter term signings have increased 6 percent over the trailing twelve months.
|
|
|
|
|
|
Yr. To Yr. |
|
||
|
|
|
|
|
|
Percent/ |
|
||
(Dollars in millions) |
|
|
|
|
|
Margin |
|
||
For the three months ended September 30: |
|
2007 |
|
2006 |
|
Change |
|
||
Global Services gross profit: |
|
|
|
|
|
|
|
||
Global Technology Services |
|
$ |
2,781 |
|
$ |
2,437 |
|
14.1 |
% |
Gross profit margin |
|
30.6 |
% |
30.2 |
% |
0.3 |
pts. |
||
Global Business Services |
|
1,051 |
|
904 |
|
16.2 |
% |
||
Gross profit margin |
|
22.9 |
% |
22.8 |
% |
0.1 |
pts |
||
|
|
|
|
|
|
Yr. To Yr. |
|
||
|
|
|
|
|
|
Percent/ |
|
||
(Dollars in millions) |
|
|
|
|
|
Margin |
|
||
For the nine months ended September 30: |
|
2007 |
|
2006 |
|
Change |
|
||
Global Services gross profit: |
|
|
|
|
|
|
|
||
Global Technology Services |
|
$ |
7,795 |
|
$ |
7,058 |
|
10.4 |
% |
Gross profit margin |
|
29.9 |
% |
29.7 |
% |
0.1 |
pts. |
||
Global Business Services |
|
3,102 |
|
2,649 |
|
17.1 |
% |
||
Gross profit margin |
|
23.7 |
% |
22.6 |
% |
1.1 |
pts. |
||
Global Technology Services gross profit increased 14.1 percent in the third quarter and 10.4 percent in the first nine months of 2007 compared to the same periods of 2006, with gross profit margins improving 0.3 points and 0.1 points, respectively. The GTS segment pre-tax margin was 10.8 percent in the third quarter of 2007, an improvement of 1.2 points versus third-quarter 2006 and 2.2 points from the second quarter of 2007. The margin improvement is driven primarily by the benefits from restructuring, productivity improvements and revenue growth. The segment pre-tax margin for the first nine months of 2007 decreased 0.6 points year to year to 9.1 percent, reflecting increased investments in sales and delivery, the impact of acquisitions and restructuring costs.
Transformation actions taken in Global Business Services over the past two years have resulted in profitable growth. GBS gross profit increased 16.2 percent to $1.1 billion for the third quarter and 17.1 percent to $3.1 billion for the first nine months of 2007 versus the same periods of 2006. Gross profit margins improved 0.1 points and 1.1 points year to year in the third quarter and first nine months, respectively. Segment pre-tax margin was 10.7 percent in the third quarter and 10.5 percent in the first nine months of 2007, an improvement of 1.3 points and 1.4 points, respectively, versus the prior year periods. This is the ninth consecutive quarter of pre-tax margin improvement in GBS. The margin expansion has been driven primarily by revenue growth, on-going productivity and utilization initiatives and good expense management.
25
Global Services Signings
In the third quarter of 2007, total Global Services signings increased 12 percent year to year to $11,765 million. Longer term signings were $6,930 million, an increase of 29 percent year to year. Shorter term signings decreased 5 percent to $4,835 million. GTS signings were $7,132 million and GBS signings were $4,633 million in the third quarter of 2007. The company signed 9 deals greater than $100 million in the quarter and the total Global Services backlog was estimated at $116 billion, an increase of $7 billion when compared to September 30, 2006 and flat versus June 30, 2007.
Global Technology Services Signings
|
|
Three Months Ended |
|
Nine Months Ended |