IBM 2009 Q3 Form 10-Q Summary
Business context and reporting period
International Business Machines Corporation (IBM) reported unaudited results for the three and nine months ended September 30, 2009, compared with the same 2008 periods. Management cited a challenging global economy and weaker customer spending, alongside its focus on higher-value businesses, productivity and margin expansion. Interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $23.566B | $25.302B | $68.528B | $76.623B |
| Gross profit margin | 45.1% | 43.3% | 44.7% | 42.7% |
| Income before taxes | $4.373B | $3.895B | $11.757B | $10.907B |
| Net income | $3.214B | $2.824B | $8.612B | $7.907B |
| Diluted EPS | $2.40 | $2.04 | $6.42 | $5.65 |
- Q3 revenue declined 6.9% as reported and 5.0% adjusted for currency; nine-month revenue fell 10.6% and 5.3%, respectively. Net income rose 13.8% in Q3 and 8.9% year to date; diluted EPS increased 17.6% and 13.6%.
- Operating cash flow for the first nine months was $14.325B, up $2.134B year over year. Free cash flow, excluding Global Financing accounts receivable, was $7.897B versus $6.433B.
- Cash and marketable securities totaled $11.512B at September 30. Total debt was $25.468B, down from $33.926B at December 31, 2008. Working capital was $10.486B and the current ratio was 1.32, compared with $6.568B and 1.15 at year-end.
- IBM reported a $10B global credit facility. Its core debt-to-capitalization ratio, excluding Global Financing debt and equity, was 14.2%, versus 48.7% at year-end; the consolidated ratio was 57.9%, versus 71.4%.
- For the first nine months, IBM paid $2.133B in dividends and repurchased $4.365B of common stock. The quarterly dividend was $0.55 per share.
Material changes and business performance
- Revenue declined across major segments, especially Systems and Technology, while profitability improved overall. Q3 segment revenue changes included Global Technology Services down 4.4%, Global Business Services down 11.5%, Software down 2.6%, Systems and Technology down 11.6%, and Global Financing down 15.4%.
- Software remained a profit driver: Q3 segment pretax income rose 21.2% to $1.850B, with a 32.1% pretax margin. Global Technology Services pretax income rose 23.8% to $1.471B; Global Business Services pretax income declined 8.9% to $659M. Systems and Technology pretax income fell 20.6% to $225M.
- Management attributed margin gains to improved services and software margins, a richer revenue mix, and expense controls. Total expense and other income fell 11.5% in Q3 and 13.5% year to date. The effective tax rate was 26.5% in Q3 and 26.8% year to date, versus 27.5% in both 2008 periods.
- Global Services signings were $11.809B in Q3, down 6.8%; estimated backlog was $134B, up $5B year over year as reported, but up $1B adjusted for currency. Management notes signings and backlog rely on estimates and are subject to change.
Outlook, commentary, risks and unusual items
- In October 2009, IBM raised its 2009 diluted EPS projection to at least $9.85 and said it expected revenue growth in Q4 at then-current exchange rates. Management expected approximately $3.5B of 2009 cost and expense savings, about $8B of Software pretax income and about $8B of Global Services combined segment pretax profit. It also expected double-digit Q4 year-over-year pretax profit growth in Systems and Technology.
- Management said it expected 2009 pretax retirement-related plan costs of about $1.3B and an effective tax rate of 26.7%. It expected legally mandated non-U.S. pension contributions of approximately $1.3B for 2009; $981M had been contributed in the first nine months.
- Notable items included a $298M pretax gain from the March sale of core logistics operations to Geodis and a $119M provision for losses related to a joint venture investment. Year-to-date other income also reflected derivative gains and the Geodis gain, partly offset by lower interest and investment income.
- Subsequent events: IBM completed the $1.2B cash acquisition of SPSS on October 2, agreed to acquire Wilshire Credit’s core operating assets, and agreed to transfer certain PLM software sales and support activities to Dassault Systèmes. IBM also authorized an additional $5B for share repurchases. The latter transactions were subject to closing conditions.
- Risks include continued weak IT spending, foreign-exchange movements, customer credit and financing-receivable losses, pension funding and market returns, competition, execution of acquisitions and growth initiatives, and legal, environmental and tax matters. IBM disclosed ongoing litigation and investigations; it cited approximately $600M of potential remaining Brazilian non-income-tax matters, while stating it believed it would prevail and that the amount was not a meaningful indicator of liability. Recorded legal liabilities were not material, but outcomes remain uncertain.
- IBM reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing does not provide a clear revised numerical target for the previously discussed 2010 EPS roadmap.
Important facts for investors to verify
- Whether revenue stabilizes as management expected, particularly in Systems and Technology, consulting, and economically sensitive markets.
- Whether cash generation remains strong after accounting for working-capital movements, tax refunds, pension contributions and lower revenue; Q3 cash flow benefited from changes in operating assets and liabilities.
- Progress toward the 2009 EPS, savings, segment-profit and tax-rate expectations, including the assumptions behind currency-sensitive guidance.
- Debt reduction, liquidity access, Global Financing receivable quality and allowance coverage; Global Financing’s allowance coverage rose to 2.3% from 2.0% at year-end.
- Potential effects and timing of tax examinations, litigation, environmental claims and pension funding, as well as the completion and financial impact of announced transactions.