01—Abstract
Summary
Summary of the 10-K filed March 28, 1995. Cited figures are marked; the original filing is the authoritative source.
International Business Machines Corporation's 10-K for fiscal 1994 shows a company that returned to profitability after two years of heavy restructuring.
Revenue was $64.05 billiona, roughly flat-to-up 2.1% from $62.72 billion in 1993, and net earnings were $3.02 billion ($5.02 per share), compared with a net loss of $8.10 billion in 1993. No restructuring charges were recorded in 1994, versus $8.9 billion in 1993 and $11.6 billion in 1992. The turnaround was helped by the $248 million after-tax gain on the sale of Federal Systems Company to Loral, and by a $192 million after-tax drag from shortening software amortization periods.
Excluding the FSC gain and the amortization change, IBM reported adjusted earnings of about $2.97 billionb, or $4.92 per share. The balance sheet improved meaningfully. Total debt fell from $27.3 billion to $22.1 billion, the long-term debt-to-equity ratio dropped from 77.2% to 53.6%, working capital rose to $12.1 billion, and stockholders' equity grew to $23.4 billion.
Operating cash flow increased to $11.8 billionc from $8.3 billion. Management is still under pressure: hardware gross margins are being squeezed by pricing competition, especially in mainframes and personal computers, and services revenue growth is coming at lower margins than hardware. Management also set a goal of cutting annual expenses by $8.0 billion from 1992 levels by mid-1996, and it authorized up to $2.5 billion in open-market share repurchases and a tender offer for preferred stock.
The filing's principal risks are continued hardware price erosion, the shift toward lower-margin services, weakness in personal computers and storage, and currency volatility, particularly in Mexico and Brazil. Other disclosed items include a securities class action over 1992 disclosures, which management does not expect to be material, and a reduced reliance on receivables securitization, with $1.8 billiond in assets under management, down from $3.1 billion a year earlier.
02—Key points
Key Highlights
- Revenue of $64.05 billion in 1994, up about 2.1% from $62.72 billion in 1993, with U.S. revenue reported at $24.1 billion (down 6.2%, or up 3.0% adjusted for the FSC sale) and Asia-Pacific up 13.4%
- Net earnings returned to $3.02 billion ($5.02 per share) from a 1993 net loss of $8.10 billion; excluding the FSC gain and software amortization change, adjusted EPS was $4.92
- No restructuring charges in 1994, compared with $8.9 billion in 1993 and $11.6 billion in 1992, with the company targeting $8.0 billion in annual expense reductions versus 1992 levels by mid-1996
- Total debt cut to $22.1 billion from $27.3 billion, and long-term debt-to-equity fell to 53.6% from 77.2%; working capital rose to $12.1 billion
- Gross profit margin of 39.5%, up from 38.5% in 1993, though hardware margins remain under pressure from competitive pricing in mainframes and personal computers
- Operating cash flow rose to $11.8 billion from $8.3 billion, and 'core' cash flow from operations was about $6.9 billion
- Board authorized up to $2.5 billion in open-market common stock repurchases (January 1995) and a tender offer for preferred stock, of which 34.1 million depositary shares were purchased
03—Questions
Frequently Asked Questions
Why did IBM return to profitability in 1994 after large losses in 1992 and 1993?
The turnaround came mainly from the completed restructuring programs, which eliminated the large restructuring charges that drove the 1993 loss. Operating expenses fell sharply, with SG&A down 12.9% and R&D down 21.5%, and 1994 also included a $248 million after-tax gain on the sale of Federal Systems Company. Management attributes the improved performance to right-sizing, productivity gains, and expense controls.
How much of the 1994 earnings came from one-time or non-operating items?
The $248 million after-tax gain from the FSC sale raised 1994 earnings, while the change in software amortization periods reduced them by $192 million after tax. Net of these two items, adjusted 1994 net earnings were $2.97 billion, or $4.92 per share, versus the reported $3.02 billion, or $5.02 per share. Other income, mostly interest, rose to $1.4 billion, but exchange losses largely offset that increase.
What are the main risks to IBM's hardware and services business going forward?
Management expects continued price and margin pressure across hardware offerings, especially mainframe processors, personal computers, and storage, where revenue fell 26.1% in 1994. Services revenue is growing rapidly, but at lower margins than hardware, and maintenance revenue and margins are under pressure from competition. Currency disruptions in Mexico and Brazil also remain a concern, with the company citing a $27 million exchange loss in Mexico in late 1994.
How strong is IBM's balance sheet and liquidity position?
The balance sheet improved significantly. Stockholders' equity rose to $23.4 billion from $19.7 billion, total debt dropped by $5.2 billion, and the current ratio improved to 1.41:1 from 1.18:1. The company had $9.4 billion of unused capacity under its $10.0 billion committed global credit facility, and it cut its reliance on receivables securitization, with the net balance falling to $1.8 billion from $3.1 billion.
What capital return and share actions did IBM announce?
On January 31, 1995, the board authorized repurchases of up to $2.5 billion of common stock on the open market. In January 1995 the company also made a tender offer for its Series A Preferred Stock at $25.00 per depositary share, and it bought 34.1 million depositary shares under that offer. Common dividends were $1.00 per share in 1994, down from $1.58 in 1993, which included a $.25 quarterly rate in 1994 after cuts. As of the filing date, about 584 million voting shares were outstanding.
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