IBM 2012 Second-Quarter Form 10-Q Summary
Business context and period. International Business Machines Corporation (IBM) filed this unaudited quarterly report for the three and six months ended June 30, 2012. IBM operates across services, software, systems and technology, and financing. Comparisons below are with the corresponding 2011 periods unless stated otherwise.
Financial results
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Revenue | $25.783 billion; down 3.3% reported, up 0.5% at constant currency | $50.456 billion; down 1.6% reported, up 0.8% at constant currency |
| Gross profit margin | 47.6%, up 1.2 percentage points | 46.4%, up 1.0 point |
| Income before taxes | $5.161 billion; up 5.7% | $8.997 billion; up 3.4% |
| Net income | $3.881 billion; up 5.9% | $6.948 billion; up 6.5% |
| Net income margin | 15.1%, up 1.3 points | 13.8%, up 1.0 point |
| Diluted EPS (GAAP) | $3.34; up 11.3% | $5.95; up 12.3% |
| Diluted EPS (operating, non-GAAP) | $3.51; up 13.6% | $6.29; up 14.4% |
IBM’s operating (non-GAAP) measure excludes specified acquisition-related and retirement-related items; it is not a substitute for GAAP results. Share repurchases contributed to EPS growth as diluted weighted-average shares fell 4.9% in Q2 and 5.1% in the first half.
Cash flow and liquidity. First-half operating cash flow was $8.726 billion, versus $8.071 billion a year earlier. Management-reported free cash flow, excluding changes in Global Financing receivables, was $5.529 billion, up $1.370 billion. Investing activities used $3.913 billion, including $1.925 billion for acquisitions; financing activities used $5.678 billion. Cash and marketable securities totaled $11.187 billion at June 30. Working capital was $8.489 billion and the current ratio was 1.22.
Total debt was $32.435 billion, up $1.115 billion from year-end 2011; the consolidated debt-to-capitalization ratio was 61.2%, compared with 60.7%. IBM reported a $10 billion global credit facility and stated it had no European sovereign debt holdings in its investment portfolio. Long-term debt carrying value was $24.766 billion; estimated fair value was $27.688 billion.
Material changes and operating performance
- Revenue was pressured by currency and a strong prior-year comparison: IBM estimated currency reduced reported Q2 revenue growth by nearly four percentage points, or about $1 billion.
- Software revenue was flat in Q2 and up 2.5% for the first half; software pre-tax income increased 7.9% and 9.7%, respectively.
- Global Services revenue declined 2.9% in Q2 and 1.2% in the first half, but combined segment pre-tax income rose 17.9% and 14.6%, respectively, alongside margin expansion.
- Systems and Technology revenue fell 9.0% in Q2 and 7.9% in the first half. Segment pre-tax income fell 40.4% in Q2 and 75.3% in the first half, with lower gross margins.
- Growth markets revenue increased 2.5% in Q2 and 5.3% in the first half as reported; constant-currency growth was 8% and 9%. BRIC revenue grew 5.0% and 7.2% as reported, respectively.
- IBM completed eight acquisitions in the first half for aggregate consideration of $2.205 billion. It also signed an agreement to sell Retail Store Solutions to Toshiba Tec for $850 million, with approximately $800 million expected in cash, subject to closing conditions and staged closings.
Outlook, commentary and risks
In July 2012, IBM raised its full-year 2012 diluted EPS expectations to at least $14.40 GAAP and $15.10 operating (non-GAAP). The operating target excludes $0.46 per share of acquisition-related charges and $0.24 per share of non-operating retirement-related costs. Management expected second-half currency headwinds and anticipated a $450–$550 million pre-tax gain from the Retail Store Solutions sale, recognized as closings occur. Its longer-term 2015 roadmap targets at least $20 operating diluted EPS.
Management highlighted continued opportunity in cloud, business analytics, Smarter Planet and growth markets, alongside productivity, margin improvement and shareholder returns. It expected second-half workforce-rebalancing charges to be slightly higher than in the first half, focused on non-U.S. operations. The reported first-half effective tax rate of 22.8% included a one-time Latin American tax restructuring benefit; IBM expected a full-year rate near 24%, or about 25% excluding that benefit.
Key risks include weaker economic conditions and IT spending, currency movements, customer credit quality and financing exposures, competition, execution of growth and productivity plans, acquisitions, cybersecurity and data privacy, pension costs, tax examinations, and litigation and environmental matters. IBM noted approximately $2.3 billion of net receivables in Portugal, Italy, Ireland, Greece and Spain. It disclosed ongoing legal matters whose possible losses could not be estimated; recorded legal liabilities were not material. IBM also reported a $550 million potential amount related to Brazilian non-income-tax disputes, while stating it believed it would prevail. A court awarded IBM $52 million plus interest and costs in its Indiana dispute on July 18, 2012; the state said it intended to appeal.
Other notable items: first-half retirement-related plan cost rose 19.4% to $1.164 billion, mainly reflecting higher recognized actuarial losses. IBM expected approximately $700 million of legally mandated non-U.S. pension contributions in 2012. The Board approved a quarterly dividend of $0.85 per share in July. Management stated disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether constant-currency growth, margin expansion and share repurchases can continue to offset reported revenue weakness; assess segment trends, particularly Systems and Technology.
- Progress toward the revised 2012 EPS targets, including assumptions for currency, the expected divestiture gain, and the tax benefit included in first-half results.
- Cash conversion and capital allocation: reconcile management’s free-cash-flow measure with GAAP operating cash flow, capital spending, acquisitions, dividends and repurchases.
- Debt growth, financing-receivable quality, pension obligations and required contributions; monitor exposures to weaker economies and the disclosed European countries.
- Closing and gain-recognition timing for the Toshiba Tec transaction, and developments in material legal, tax and environmental matters.