IBM 2011 Q1 Form 10-Q Summary
Business context and reporting period. International Business Machines Corporation (IBM) filed this unaudited quarterly report for the three months ended March 31, 2011. Comparisons are with the three months ended March 31, 2010, except balance-sheet comparisons, which are with December 31, 2010. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2011 | Comparable period / change |
|---|---|---|
| Revenue | $24,607 | $22,857; up 7.7% reported and 5.0% adjusted for currency |
| Gross profit / margin | $10,858 / 44.1% | $9,976 / 43.6% |
| Income before income taxes | $3,817 | $3,515; up 8.6% |
| Net income / net margin | $2,863 / 11.6% | $2,601 / 11.4%; net income up 10.1% |
| Diluted EPS | $2.31 | $1.97; up 17.3% |
| Operating EPS (non-GAAP) | $2.41 | $2.00; up 20.5% |
| Cash from operating activities | $3,792 | $4,437; down $644 |
| Cash and marketable securities | $13,245 at March 31 | Up $1,594 from year-end |
| Total debt | $30,256 at March 31 | $28,624 at year-end |
| Working capital / current ratio | $7,137 / 1.18:1 | $7,554 / 1.19:1 at year-end |
IBM reported a 25.0% effective tax rate, compared with 26.0% a year earlier. Weighted-average diluted shares fell 6.2% to 1,240.0 million, primarily reflecting repurchases. The quarterly dividend paid was $0.65 per share.
Management-defined free cash flow, excluding Global Financing receivables, was $798, down from $1,432 in Q1 2010. IBM repurchased $4,045 of shares and paid $795 in dividends during the quarter. Operating cash flow declined largely because net income tax payments were $766 higher year over year.
Material changes and business drivers
- Systems and Technology revenue grew 18.7% (16.4% adjusted for currency), with growth across all reported brands; its gross margin expanded 4.7 percentage points.
- Software revenue rose 5.8%; excluding the divested product lifecycle management (PLM) business, it grew 9.6% (8% adjusted for currency). Key branded middleware revenue increased 15.7%.
- Global Services revenue increased 6.2% (3.1% adjusted for currency). Estimated services backlog was $142.2 billion, up $8.2 billion reported year over year; total signings fell 14.3% to $10.5 billion.
- Growth-market revenue increased 17.5% (12.3% adjusted for currency); revenue in the BRIC countries rose 25.6% (21.5% adjusted for currency).
- Global Financing external revenue declined 4.0%, but segment pre-tax income increased 21.5% to $519, helped by higher gross profit and lower credit-loss provisions.
- IBM’s new segment and management reporting approach, effective January 1, 2011, presents operating earnings and excludes specified acquisition-related and non-operating retirement costs. Prior-year segment data was reclassified; non-GAAP measures are not directly comparable to GAAP without the filing’s reconciliations.
Outlook, commentary and risks
- In April 2011, IBM raised its full-year 2011 expectations to at least $12.73 GAAP diluted EPS and $13.15 operating (non-GAAP) diluted EPS, from January expectations of $12.56 and $13.00, respectively. The non-GAAP outlook excludes $0.38 per share of acquisition-related charges and $0.05 per share of non-operating retirement-related costs.
- IBM reiterated its 2015 objective of at least $20 operating diluted EPS and described revenue growth, operating leverage and share repurchases as key drivers. It expects approximately $50 billion of repurchases and $20 billion of dividends over the roadmap period.
- Management expected 2011 retirement-plan costs of approximately $1.9 billion, about $500 million above 2010, including approximately $1.9 billion operating cost and approximately zero non-operating cost. It expected legally mandated non-U.S. pension contributions of about $900 million in 2011.
- The Japan earthquake and tsunami caused immaterial damage at certain IBM sites and an immaterial first-quarter charge. IBM reported no material change to customer credit risk or material supply disruption at the time of filing, but noted possible continuing power outages and related operating costs.
- Unusual year-over-year comparisons include the $591 million gain from the PLM divestiture in Q1 2010; Q1 2011 included $215 million of net gains from securities and investment assets and $222 million of workforce-reduction charges. IBM also cited currency transaction losses and derivative gains in other income and expense.
- Contingencies include ongoing litigation and investigations, including U.S. and European antitrust matters, a $9 million jury award in the Acqis patent case subject to post-trial motions, Health Net-related data privacy class actions, environmental claims, and tax disputes. IBM agreed to a $10 million SEC settlement related to alleged Foreign Corrupt Practices Act violations, subject to court approval. It reported approximately $650 million of potential Brazilian non-income-tax matters, while stating it believes it will prevail and that the amount is not a meaningful indicator of liability. The company said recorded legal liabilities were not material; outcomes remain uncertain.
- Key risks identified include economic and IT-spending conditions, execution of growth and productivity plans, cybersecurity, intellectual property, acquisitions, currency, customer credit and financing, pension assumptions, tax matters, litigation, suppliers, and political or legal conditions. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Review the GAAP-to-non-GAAP reconciliations and exclusions underlying the $13.15 operating EPS outlook and reported operating EPS growth.
- Assess whether the fall in operating cash flow and management-defined free cash flow is temporary, and how ongoing repurchases, dividends and debt funding affect liquidity.
- Track debt growth, the current ratio, and the $10 billion global credit facility alongside IBM’s substantial cash and marketable securities.
- Monitor services signings, backlog conversion, and whether strong growth in Systems and Technology and software persists.
- Follow the outcomes and potential financial effects of the legal, tax, privacy and environmental matters, as well as Japan-related disruption and costs.