IBM — Q2 2010 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated results; amounts below are U.S. dollars in millions unless otherwise noted.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $23,724 | $23,250 | $46,581 | $44,962 |
| Gross profit | $10,809 | $10,581 | $20,785 | $20,012 |
| Gross margin | 45.6% | 45.5% | 44.6% | 44.5% |
| Income before taxes | $4,575 | $4,262 | $8,090 | $7,385 |
| Net income | $3,386 | $3,103 | $5,987 | $5,398 |
| Diluted EPS | $2.61 | $2.32 | $4.57 | $4.02 |
| Operating cash flow | $3,766 | $4,741 | $8,203 | $9,127 |
- Q2 revenue grew 2.0% as reported and 1.6% at constant currency; net income rose 9.1% and diluted EPS rose 12.5%. H1 revenue increased 3.6% as reported (0.8% at constant currency), net income 10.9%, and diluted EPS 13.7%.
- Q2 net income margin was 14.3%, up from 13.3%; H1 was 12.9%, up from 12.0%. Management attributed EPS gains to revenue, operating leverage, a lower tax rate and share repurchases.
- H1 investing cash outflow was $2,645, including $1,009 of acquisitions and $1,586 of net property spending. Financing cash outflow was $7,114, including $8,121 of repurchases and $1,551 of dividends. Cash declined $1,858 to $10,325.
- At June 30, cash and marketable securities were $12,241; current assets $44,895 and current liabilities $34,993, yielding working capital of $9,902 and a 1.28 current ratio. Total debt was $26,650, up $551 from year-end; consolidated debt-to-capitalization was 55.7%, versus 53.4%.
Segments and material changes
- Q2 segment revenue increased in Global Technology Services (1.4%), Global Business Services (3.3%), Software (2.1%) and Systems and Technology (3.4%); Global Financing declined 4.1%.
- Software was a key profit contributor: Q2 pre-tax income rose 7.4% to $1,988 and margin expanded 1.3 points to 33.3%. Key branded middleware revenue rose 9.4%.
- Systems and Technology Q2 pre-tax income fell 33.8% to $221, with margin down 2.9 points to 5.3%; System z and Power Systems revenue declined, while System x, storage and retail solutions grew.
- Global Services signings fell 12.1% in Q2 to $12,299, principally from lower outsourcing signings and delayed large contract extensions. IBM said new outsourcing business signings grew and expected greater near-term revenue contribution from these than from extensions. Services backlog was $129 billion.
- Q2 gross margin edged up 0.1 point. H1 pre-tax results include a $591 gain on the PLM divestiture; IBM also recorded $576 of workforce-reduction expense in SG&A. The prior-year comparison included a $298 gain on the Geodis logistics divestiture.
Outlook, commentary and risks
- In July, IBM raised its 2010 diluted EPS expectation to at least $11.25. Management expected second-half Global Services growth and margin expansion, Software revenue performance similar to Q2, and improving Systems and Technology growth and double-digit second-half pre-tax income growth. These are forward-looking expectations, not guarantees.
- Management’s stated 2015 objective was at least $20 per share of operating EPS, a non-GAAP measure. IBM said it would begin presenting operating and non-operating results in 2011 alongside GAAP reporting.
- Management estimated 2010 retirement-related plan cost at approximately $1.5 billion and the normal-course effective tax rate at 26.0%–26.5%. Legally mandated non-U.S. pension contributions were expected to be about $900 million in 2010.
- IBM completed six acquisitions in H1 for aggregate consideration of $1,176. It had announced acquisitions of Sterling Commerce (about $1.4 billion) and Coremetrics, both expected to close later in 2010; BigFix closed July 19. These transactions entail execution and integration risk.
- Contingencies include intellectual-property and antitrust matters, environmental and personal-injury claims involving the former Endicott site, and tax disputes. IBM disclosed approximately $600 million of potential remaining Brazilian non-income tax matters, while stating it believed it would prevail. Recorded liabilities for disclosed matters were not material, but outcomes were uncertain.
- Other risks cited include economic and IT-spending weakness, currency movements, customer credit and financing risk, pension and tax matters, data security, acquisitions, litigation, and the ability to meet growth and productivity objectives. IBM reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash flow and free cash flow recover from H1 declines, and how much cash is deployed to repurchases, dividends and acquisitions.
- Progress toward the at-least-$11.25 2010 diluted EPS outlook; distinguish GAAP results from the 2015 operating EPS objective.
- Whether Systems and Technology margins improve with planned product launches, and whether Global Services signings and backlog convert into revenue.
- Debt, liquidity and pension funding trends, including the effect of currency and financing-receivable activity.
- Developments in material legal and tax contingencies, including the Brazilian tax matters and antitrust investigations.