IBM 2013 First-Quarter Form 10-Q Summary
Business context and reporting period
International Business Machines Corporation (IBM) reported unaudited consolidated results for the three months ended March 31, 2013, compared with the first quarter of 2012. IBM operates across services, software, systems and technology, and financing. Its reportable segments are Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. Interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $23.408 billion | $24.673 billion | Down 5.1% reported; down 3.2% at constant currency |
| Gross profit / margin | $10.678 billion / 45.6% | $11.118 billion / 45.1% | Profit down 4.0%; margin up 0.6 points |
| Income before taxes | $3.606 billion | $3.836 billion | Down 6.0%; margin 15.4% |
| Net income | $3.032 billion | $3.066 billion | Down 1.1%; net margin 13.0%, up 0.5 points |
| Diluted EPS | $2.70 | $2.61 | Up 3.4% |
| Operating diluted EPS (non-GAAP) | $3.00 | $2.78 | Up 7.9% |
| Operating cash flow | $4.023 billion | $4.291 billion | Down $269 million |
| Free cash flow (company-defined) | $1.696 billion | $1.865 billion | Down $169 million |
IBM attributed EPS growth partly to share repurchases: diluted weighted-average shares fell 4.3% year over year, and the company repurchased 12.3 million shares for $2.593 billion. Q1 dividends paid were $948 million; cash dividend per share was $0.85.
Reported revenue by segment was $9.605 billion for Global Technology Services, $4.484 billion for Global Business Services, $5.572 billion for Software, $3.106 billion for Systems and Technology, and $499 million of external revenue for Global Financing. Systems and Technology was the weakest segment, down 17.2%; Global Services revenue fell 4.0%, while Software declined 0.5% and Global Financing external revenue increased 1.9%.
Financial position and liquidity
- At March 31, 2013, cash and cash equivalents were $10.585 billion and marketable securities were $1.407 billion, for combined cash and marketable securities of $11.992 billion.
- Total debt was $33.397 billion, versus $33.269 billion at year-end 2012. Current and long-term debt were $8.725 billion and $24.672 billion, respectively. Consolidated debt-to-capitalization was 63.5%; IBM’s core ratio, excluding Global Financing debt and equity, was 34.3%.
- Current assets were $48.949 billion and current liabilities $42.122 billion; working capital was $6.827 billion and the current ratio was 1.16:1.
- Total assets were $117.258 billion, total liabilities $98.044 billion, and total equity $19.214 billion. IBM cited a $10 billion global credit facility and said it had no European sovereign debt securities.
- Operating cash flow declined year over year, primarily from a lower accounts-receivable clearance rate and higher income-tax payments. Company-defined free cash flow also reflected higher cash taxes, partly offset by lower capital spending and the timing of 401(k) contributions.
Material changes and management commentary
- Revenue fell across most major businesses, with foreign exchange—especially the weaker yen—contributing to the reported decline. Systems and Technology was affected by product transitions and execution challenges; Power Systems revenue fell 31.9%, System x fell 9.1%, and Storage fell 11.4%. The segment recorded a $405 million pretax loss, compared with a $105 million loss a year earlier.
- Management said software and System z deals failed to close before quarter-end, weighing on results, and expected rollover transactions and improved sales execution to support Q2. System z revenue rose 7.0% in Q1; management forecast double-digit Q2 growth for System z and mid-single-digit constant-currency growth for Software.
- Global Services pretax income grew 9.9% and its estimated backlog increased 1.0% reported (5% at constant currency) year over year. Services signings increased 43.8% reported. Management expected both Global Services segments to achieve approximately 2% constant-currency revenue growth in the second half.
- Management maintained its 2013 outlook for GAAP diluted EPS of at least $15.53 and operating diluted EPS of at least $16.70. It expected Q2 operating EPS growth similar to Q1 before workforce-rebalancing charges, and projected improved second-half EPS growth, with double-digit Q4 growth versus the prior year excluding expected gains.
- IBM expected approximately $1 billion of pretax workforce-rebalancing charges in Q2, mostly outside the U.S.; management said expected second-half gains should approximately offset the charges for the full year. The company also forecast a two-point currency headwind to reported revenue for Q2 and the full year, and estimated yen movements could reduce Q2 EPS by about $0.10.
- Management expected 2013 retirement-related plan costs of approximately $3.1 billion, about $700 million above 2012. It anticipated an effective tax rate of approximately 25% for the remaining three quarters and approximately 24% for the full year. IBM expected cash-tax payments to reduce year-over-year free cash flow by about $2.4 billion for 2013; it did not expect to overcome that impact.
- After quarter-end, the board approved a quarterly dividend of $0.95 per share, payable June 10, 2013, and authorized an additional $5 billion for share repurchases. IBM also announced its acquisition of UrbanCode on April 22; purchase accounting was not complete when the filing was issued.
Risks, contingencies, and unusual items
- IBM described ongoing litigation, intellectual-property disputes, employment and pension matters, environmental proceedings, and tax examinations. It said recorded legal liabilities were not material, but it could not estimate reasonably possible losses or ranges for certain matters; outcomes could affect results or cash flows in a particular period.
- IBM disclosed that the U.S. Department of Justice was investigating allegations related to Poland, Argentina, Bangladesh, and Ukraine, as well as IBM’s global Foreign Corrupt Practices Act compliance program and public-sector business. IBM said it was cooperating.
- Brazilian non-income-tax disputes involved an approximate $600 million potential amount for applicable years; IBM said it believed it would prevail and that the amount was not a meaningful indicator of liability. Other tax matters include a disputed foreign tax benefit of approximately $1.273 billion included in unrecognized tax benefits.
- IBM reported $5.581 billion of unrecognized tax benefits at March 31, 2013. Receivables in Portugal, Italy, Ireland, Greece, and Spain totaled approximately $2.6 billion net of allowances, about 8% of total net trade and financing receivables.
- Q1’s effective tax rate of 15.9% benefited from discrete tax items, including approximately $135 million related to the retroactive 2012 American Taxpayer Relief Act and approximately $125 million from state legislation. Retirement-related costs rose 22.4% to $754 million, driven in part by higher recognized actuarial losses.
- IBM reported no material nonfinancial-asset impairments in the quarter and no troubled debt restructurings. Management noted that financing-receivable credit quality, currency movements, pension funding, market access, and litigation could affect future results and liquidity.
- Management stated that disclosure controls and procedures were effective at quarter-end and that there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deferred Software and System z deals closed in Q2 as expected, and whether Systems and Technology returned to profitability excluding restructuring charges.
- Actual timing and amount of the approximately $1 billion Q2 workforce-rebalancing charge, and whether second-half gains offset it for the full year.
- Progress toward the 2013 GAAP and operating EPS targets, considering currency, cash taxes, and the stated tax-rate assumptions.
- Cash conversion and receivables collection trends, including whether the forecast $2.4 billion full-year cash-tax headwind materialized.
- Changes in total debt, share repurchases, dividend payments, and Global Financing receivable quality and reserves.
- Developments in the DOJ investigation, significant legal and tax contingencies, and potential pension funding requirements.