IBM 2012 First-Quarter 10-Q Summary
Business context and period. International Business Machines Corporation (IBM) reported unaudited consolidated results for the three months ended March 31, 2012, compared with the first quarter of 2011. Amounts are in U.S. dollars; financial statements follow U.S. GAAP. IBM also presents “operating” results as a non-GAAP measure that excludes specified acquisition-related and retirement-related items.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / prior year-end | Change |
|---|---|---|---|
| Revenue | $24.673 billion | $24.607 billion | +0.3% reported; +1.0% adjusted for currency |
| Gross profit / margin | $11.118 billion / 45.1% | $10.858 billion / 44.1% | Profit +2.4%; margin +0.9 points |
| Income before taxes | $3.836 billion | $3.817 billion | +0.5% |
| Net income / margin | $3.066 billion / 12.4% | $2.863 billion / 11.6% | +7.1%; margin +0.8 points |
| Diluted GAAP EPS | $2.61 | $2.31 | +13.0% |
| Diluted operating EPS (non-GAAP) | $2.78 | $2.41 | +15.4% |
| Operating cash flow | $4.291 billion | $3.792 billion | +$499 million |
| Cash and marketable securities | $12.335 billion | $11.922 billion cash at Dec. 31, 2011 | — |
| Total debt | $32.053 billion | $31.320 billion at Dec. 31, 2011 | +$733 million |
| Working capital / current ratio | $10.638 billion / 1.28:1 | $8.805 billion / 1.21:1 at Dec. 31, 2011 | Working capital +$1.833 billion |
Operating cash flow exceeded the prior-year quarter, partly because of lower net tax payments. Investing activities used $2.230 billion, including $1.319 billion net cash for acquisitions; financing activities used $2.316 billion. The company-defined free cash flow was $1.865 billion, versus $798 million, excluding changes in Global Financing receivables and netting capital expenditures against operating cash flow excluding those receivables. IBM paid $870 million in dividends and repurchased $3.015 billion of shares.
Current assets were $48.847 billion and current liabilities $38.209 billion at quarter-end. Long-term debt was $25.760 billion. IBM reported a $10 billion global credit facility and stated that cash, cash flow and capital-market access supported its liquidity. Core debt-to-capitalization, excluding Global Financing debt and equity, was 32.7%, versus 32.0% at year-end; consolidated debt-to-capitalization was 60.7%.
Material changes and operating performance
- Software: Revenue rose 5.5% (6.6% adjusted for currency) to $5.600 billion; segment pre-tax income increased 12.1% to $1.945 billion. Key branded middleware revenue grew 6.6%.
- Global Services: External revenue increased 0.7% to $14.673 billion. Combined segment pre-tax income rose 10.8% to $2.081 billion, with a 1.3-point margin expansion. Global Technology Services grew revenue 1.7%; Global Business Services fell 1.5%, affected by Japan and the Public Sector. Services signings increased 12.1% reported.
- Systems and Technology: Revenue declined 6.7% to $3.749 billion, against a strong prior-year comparison. The segment moved from $132 million pre-tax income to a $105 million pre-tax loss, and gross margin fell 3.6 points to 34.2%.
- Global Financing: External revenue declined 5.1% to $490 million and pre-tax income declined 1.3% to $512 million. Its allowance for credit losses was 1.3% of gross financing receivables.
- Weighted-average diluted shares fell 5.3% year over year, primarily from repurchases. IBM repurchased 15.5 million shares in the quarter. Revenue growth was modest, while earnings per share also benefited from lower share count and a lower tax rate.
Outlook, commentary and notable items
- In April 2012, IBM raised its full-year 2012 minimum outlook to $14.27 GAAP diluted EPS and $15.00 operating diluted EPS, from January targets of $14.16 and $14.85. The operating target excludes $0.47 per share of acquisition-related charges and $0.26 per share of non-operating retirement costs. Management expected approximately 10% year-over-year EPS growth in each remaining 2012 quarter.
- Management expected Global Services to deliver double-digit profit growth for 2012, and Systems and Technology to return to revenue growth in the second half and achieve double-digit profitability. It cited new product introductions, including PureSystems, and anticipated that Japan would stabilize in the second half. Currency was expected to be a three-point headwind in Q2 and Q3 at April 16 rates.
- IBM expected a 2012 effective tax rate of about 24% as reported and operating, or about 25% excluding the first-quarter one-time Latin America tax-restructuring benefit. Q1 effective tax rate was 20.1%, versus 25.0% a year earlier.
- Management expected 2012 retirement-plan costs of approximately $2.3 billion, including about $1.9 billion of operating costs. Legally mandated non-U.S. pension contributions were expected to be approximately $800 million for 2012.
- IBM completed five acquisitions for an aggregate $1.441 billion, with $1.319 billion of acquisition cash outflow reported net of acquired cash. Goodwill increased by $1.067 billion from these deals. After quarter-end, IBM announced an agreement to acquire Varicent, expected to close in Q2.
- After quarter-end, IBM agreed to sell its Retail Store Solutions business for $850 million, expecting approximately $800 million cash net of working-capital adjustments and a pre-tax gain of $450–$550 million, subject to closing conditions. The board approved a $0.85 quarterly dividend, up from $0.75, and authorized an additional $7 billion for share repurchases.
- IBM disclosed routine legal, regulatory, environmental and tax matters. It said recorded liabilities for contingencies were not material, but it could not estimate reasonably possible losses for certain matters. Notable exposures include Brazil non-income tax disputes with a stated potential amount of approximately $600 million, which IBM believes it will prevail on; the Endicott environmental litigation; and the Indiana contract dispute following trial. Outcomes and timing remain uncertain.
- Management identified risks including weaker economic conditions and IT spending, competition, execution of growth initiatives and acquisitions, cybersecurity and data privacy, currency movements, pension and tax matters, customer credit quality, litigation, and access to capital markets. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether revenue growth, particularly in Software and growth markets, can offset continued weakness in Systems and Technology and uneven Global Business Services results.
- How much of EPS growth reflects operating performance versus repurchases and the one-time tax benefit; compare GAAP and company-defined non-GAAP measures and their reconciliations.
- Whether cash generation remains sufficient to fund acquisitions, dividends and buybacks while total debt rises; assess Global Financing separately from core operations.
- Progress against the 2012 EPS outlook, including the expected second-half improvement, product-cycle assumptions, currency headwinds and workforce-rebalancing costs.
- Developments in significant litigation and tax matters, pension funding and receivables exposure in Portugal, Italy, Ireland, Greece and Spain. The filing reports approximately $2.6 billion of net trade and financing receivables in those countries.
- Completion and financial effects of the Retail Store Solutions sale and Varicent acquisition, as well as the treatment and timing of the anticipated sale gain.