IBM 2013 Q2 Form 10-Q Summary
Business context and reporting period. International Business Machines Corporation’s unaudited filing covers the quarter and six months ended June 30, 2013, compared with the same 2012 periods. IBM operates across services, software, systems and technology, and financing. Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance and condition
| Metric | Q2 2013 | Six months 2013 |
|---|---|---|
| Revenue | $24.924 billion; down 3.3% year over year (down 1.4% at constant currency) | $48.332 billion; down 4.2% (down 2.3% at constant currency) |
| Gross margin | 48.7%, up 1.0 percentage point | 47.2%, up 0.8 percentage point |
| Net income | $3.226 billion; down 16.9% | $6.258 billion; down 9.9% |
| Diluted GAAP EPS | $2.91; down 12.9% | $5.60; down 5.9% |
| Operating diluted EPS (non-GAAP) | $3.22; down 8.3% | $6.23; down 1.0% |
| Cash from operating activities | $3.175 billion | $7.197 billion, versus $8.726 billion in 2012 |
| Free cash flow (management measure) | $2.7 billion | $4.382 billion, versus $5.529 billion in 2012 |
For the first half, reported diluted EPS included a 4.4% reduction in weighted-average diluted shares, primarily from repurchases. IBM returned $8.141 billion through gross repurchases and dividends; cash dividends paid were $1.996 billion. Q2 operating EPS excluding workforce-rebalancing charges in both comparison periods was up 8.3% year over year; the comparable first-half increase was 8.2%. These adjusted comparisons are non-GAAP measures.
At June 30, cash and cash equivalents were $9.558 billion and marketable securities were $799 million; management reported cash and marketable securities of $10.356 billion. Total debt was $34.122 billion, up $853 million from year-end 2012. Current assets were $47.911 billion and current liabilities $41.037 billion; working capital was $6.874 billion and the current ratio 1.17:1. The core debt-to-capitalization ratio was 39.1%, versus 36.1% at year-end; the consolidated ratio was 65.6%, versus 63.7%. IBM cited a $10 billion global credit facility and continuing access to capital markets.
Material changes and operating drivers
- Workforce actions: Q2 workforce-rebalancing charges were $1.011 billion pretax, compared with $155 million in Q2 2012. Management said most 2013 actions were taken in Q2 and expected benefits in the second half.
- Segments: Q2 Software revenue rose 4.1% (5.2% at constant currency), led by key branded middleware, up 9.1%. Global Services revenue fell 3.5% (0.7% at constant currency). Systems and Technology revenue fell 11.8%; Global Financing external revenue fell 5.8%. For the first half, Systems and Technology revenue was down 14.3%, while Software was up 1.9%.
- Services backlog: Estimated Global Services backlog was $140.5 billion, up 3.2% year over year (6.9% at constant currency). Q2 signings rose 19.9% to $16.418 billion.
- Cash flow and spending: First-half operating cash flow declined $1.529 billion, with management citing higher income-tax payments, lower receivables collections and increased cash use to fulfill services contracts. Investing cash use fell versus 2012, mainly because of lower acquisition spending.
- Retirement costs: First-half retirement-related plan costs rose 25.4% to $1.460 billion, largely due to higher recognized actuarial losses. Total retirement and nonpension postretirement obligations on the balance sheet declined $2.455 billion from year-end.
Guidance, management commentary and risks
In July, IBM updated its 2013 outlook: at least $15.08 GAAP diluted EPS and at least $16.25 operating (non-GAAP) diluted EPS on its “all-in” view. Separately, it expected at least $16.90 operating EPS excluding the Q2 workforce-rebalancing charge. A substantial divestiture-related gain expected in the earlier outlook was unlikely to close by year-end; IBM said it would not accelerate or undervalue a transaction to meet that timing. IBM continued to target at least $20 operating EPS in 2015.
Management expected currency to reduce reported revenue growth by about 3 percentage points in the second half at then-current exchange rates. It expected effective and operating tax rates of about 25% in each of the next two quarters and about 23% for full-year 2013. Higher cash-tax payments were expected to create an approximately $2 billion full-year headwind versus 2012; IBM therefore did not expect 2013 free cash flow to increase year over year. Management said this was not expected to impair funding of acquisitions, repurchases or dividends through its 2015 roadmap.
- Acquisitions: IBM completed its approximately $2.0 billion SoftLayer cloud acquisition on July 8, after quarter-end; initial purchase accounting was incomplete at filing. It announced a proposed acquisition of CSL International, expected to close in Q3.
- Legal, regulatory and tax matters: IBM disclosed ongoing investigations, claims and proceedings, including U.S. DOJ and SEC inquiries related to alleged Foreign Corrupt Practices Act matters in Poland and other countries, and an SEC investigation into cloud-revenue reporting. The filing says IBM is cooperating. IBM also reported approximately $650 million in potential Brazilian non-income-tax matters and said it believes it will prevail. For many proceedings, IBM could not estimate reasonably possible losses; recorded legal liabilities and changes were not material to the financial statements.
- Other exposures: IBM highlighted currency and customer-credit risks, pension funding uncertainty, and possible effects from economic conditions. Net receivables in Portugal, Italy, Ireland, Greece and Spain were approximately $2.5 billion. The company estimated 2013 total retirement-related plan costs of about $2.9 billion and legally mandated non-U.S. pension contributions of about $600 million.
- Other notable items: A discrete tax agreement benefit contributed to the lower Q2 tax rate; management cited an approximately $288 million deferred-tax valuation-allowance reassessment benefit, partly offset by an approximately $177 million charge related to intercompany IP licensing. The Board approved a $0.95 quarterly dividend after quarter-end. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the updated 2013 GAAP and operating EPS targets were achieved, and how the workforce-rebalancing costs and expected benefits affected results.
- Whether the divestiture-related gain closed, and the resulting effect on the “all-in” outlook and longer-term earnings trajectory.
- Whether revenue and backlog improvements in Software and Services translated into sustained growth, while Systems and Technology remained under pressure.
- Whether cash taxes, working-capital movements and other factors kept full-year free cash flow below 2012, and how IBM funded shareholder returns and acquisitions.
- Developments in the FCPA and cloud-revenue investigations, tax disputes, and other contingencies for which IBM did not estimate potential losses.
- Trends in financing-receivable credit quality, pension costs and funding requirements, and currency effects.