01—Abstract
Summary
Summary of the 10-K filed March 28, 1994. Cited figures are marked; the original filing is the authoritative source.
IBM's 1993 Form 10-K shows a year of deep losses and restructuring.
Revenue fell 2.8% to $62.7 billiona from $64.5 billion, and the company posted a net loss of $8.1 billion, or $14.22 per share, after $8.9 billion in pre-tax restructuring charges. Excluding restructuring, IBM was roughly break-even: pre-restructuring earnings before taxes were about $148 million, and the net loss before restructuring and accounting changes was $.07 per share after preferred dividends. Gross profit margin compressed from 45.6% to 38.5%, driven by hardware price pressure and a mix shift toward lower-margin services and personal computers.
Hardware sales fell 9.4%, with mainframe processor revenue down 27.6%, while services grew 32.1% but at a 30.5% gross margin. The balance sheet weakened significantly. Stockholders' equity dropped from $27.6 billion to $19.7 billionb, and long-term debt rose to 77.2% of equity from 46.5%.
IBM issued $1.8 billionc of notes and debentures and $1.1 billion of Series A preferred stock in June 1993, and it arranged a $10.0 billion committed global credit facility in December 1993. Rating agencies downgraded the company during 1993: Standard & Poor's moved senior debt from AA- to A, and Moody's moved it from A1 to A3. Operating cash flow was $8.3 billion, and management expects roughly $7.0 billion in annual expense savings by 1996 from restructuring actions.
Management also said further restructuring may be required if industry demand does not recover as assumed, and it noted that the Federal Systems Company sale to Loral for $1.503 billiond closed March 1, 1994. For investors, the key questions are whether the cost program can restore margins as revenue shifts toward services, whether the company can stabilize its credit profile, and whether the restructuring reserves (about $10.2 billion still unutilized) will translate into cash outflows that weigh on future earnings.
02—Key points
Key Highlights
- Net loss of $8.1 billion ($14.22 per share) in 1993, driven by $8.9 billion in restructuring charges; excluding restructuring, results were roughly break-even.
- Revenue declined 2.8% to $62.7 billion; gross profit margin fell from 45.6% to 38.5%, reflecting hardware price pressure and mix shift to services and PCs.
- Hardware sales fell 9.4% to $30.6 billion, with processor revenue down 27.6%, while services revenue grew 32.1% to $9.7 billion at a lower 14.7% margin.
- Stockholders' equity fell to $19.7 billion from $27.6 billion; long-term debt/equity rose to 77.2% from 46.5%.
- Credit ratings were downgraded during 1993 (S&P senior debt AA- to A; Moody's A1 to A3), and a $10.0 billion committed global credit facility was established in December 1993.
- Management targets about $7.0 billion in annual expense savings by 1996, but warns that further special charges may be needed if industry demand does not recover as assumed.
- Dividend cut: common dividends fell to $1.58 per share in 1993 from $4.84 in 1992, and the quarterly rate was reduced to $.25.
03—Questions
Frequently Asked Questions
Why did IBM report such a large loss in 1993?
The loss was driven mainly by $8.9 billion in pre-tax restructuring charges covering work-force reductions (about 110,000 planned positions), manufacturing capacity reductions, and excess space. Limited tax benefits on these charges meant the net loss was $8.1 billion. Before restructuring and accounting changes, the company was roughly break-even.
Is IBM's core business still profitable?
Only marginally. Pre-restructuring earnings before taxes were about $148 million on $62.7 billion of revenue. Gross margins have declined each year from 1991 to 1993, from 50.5% to 38.5%, as hardware pricing pressure and the shift to lower-margin services and personal computers reduced profitability.
How strong is IBM's balance sheet and liquidity position?
Liquidity is adequate but leverage has increased. Total debt was $27.3 billion, and equity fell to $19.7 billion, pushing long-term debt to equity to 77.2%. Operating cash flow was $8.3 billion, and IBM secured a $10.0 billion committed credit facility. Ratings were lowered during 1993, with a negative outlook from Standard & Poor's.
What is the outlook for cost savings and future charges?
Management expects about $7.0 billion in annual expense savings by 1996 from restructuring actions. It also cautioned that if its assumptions about future industry demand and revenue growth prove wrong, additional special charges will be needed. About $10.2 billion of restructuring reserves remained unutilized at year-end 1993, with cash outflows expected mainly in 1994 and 1995.
Did IBM divest any businesses, and how might that affect results?
IBM agreed to sell its Federal Systems Company to Loral Corporation for $1.575 billion (the closing reference in Item 7 states $1.503 billion in cash), which closed on March 1, 1994. FSC had 1993 revenue of $2.3 billion and net earnings of $58 million. Any gain depends on the future performance of the FAA Advanced Automation System contract, which the FAA was re-examining.
04—Continue