Why did IBM's revenue and earnings decline in 2002?

Revenue fell 2.3% as customers cut IT spending, with Hardware and Global Financing down more than the growth in Global Services and Software. Income from continuing operations dropped about 35%, reflecting lower gross margins, $1.5 billion of restructuring actions, higher bad debt provisions, and PwCC acquisition-related costs.

Is IBM's growing services business offsetting weakness in hardware?

Partly. Global Services revenue rose 4% and its share of total revenue grew to 44.8%, with $53 billion in new contracts and a $112 billion backlog. However, Hardware revenue fell 10.3%, and the Systems Group and Personal Systems Group both declined, so services growth did not fully replace lost hardware revenue.

What does the disk drive divestiture mean for IBM's financials?

IBM sold its hard disk drive business to Hitachi on December 31, 2002, for up to $2 billion in gross proceeds. The business is reported as discontinued operations, producing a $1.8 billion after-tax loss in 2002. IBM also signed a five-year supply agreement with Hitachi to meet most of its disk drive needs.

How strong is IBM's balance sheet and cash position?

The balance sheet remains solid. IBM ended 2002 with $5.4 billion in cash and equivalents plus $0.6 billion in marketable securities, a current ratio of 1.21:1, and a credit rating of A+ from S&P and A1 from Moody's. Non-Global Financing debt is low at 10.2% of capitalization, and the company has a $20 billion shelf registration filed in January 2003.

What risks and outlook items should investors watch in 2003?

Key watch items include continued weak IT spending, rising bad debt provisions in Global Financing's Communications exposure, roughly $500 million lower pension income in 2003, and the possible loss of the ETI tax benefit, which could push the effective tax rate above its roughly 30% expected level. Offsetting these are expected cost savings of about $900 million from 2002 actions and the continued shift toward services and open standards.

IBM 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 10, 2003. Cited figures are marked; the original filing is the authoritative source.

IBM's 2002 10-K shows a year of declining top-line revenue, offset by a major strategic reshaping of the business.

Total revenue fell 2.3% to $81.2 billion^a (3% at constant currency), driven mainly by weak corporate IT spending. Global Services and Software grew, but this was more than offset by lower Hardware and Global Financing revenue. Services is becoming the center of gravity: Global Services reached 44.8% of revenue, and services contract signings totaled $53 billion against a backlog of $112 billion, up from $102 billion.

Profitability weakened. Gross margin slipped to 37.3% from 38.4%, and income from continuing operations dropped 35% to $5.3 billion^b, or $3.07 per diluted share, compared with $4.59 a year earlier. Net income fell to $3.6 billion, reduced by a $1.8 billion loss from discontinued operations, mainly the disk drive business sold to Hitachi.

Management took significant restructuring charges and acquisitions in 2002. The company acquired PricewaterhouseCoopers Consulting for $3.5 billion^c, bought Rational Software for about $2.1 billion in February 2003, and recorded roughly $1.5 billion of second- and fourth-quarter 2002 actions, including workforce and facility reductions. It also made a $3.96 billion contribution to fund the U.S. pension plan, mostly in stock and cash, and a $2.77 billion reduction in equity from a minimum pension liability for certain non-U.S. plans.

Cash generation remained solid: operating cash flow from continuing operations was $13.8 billion^d, and the company repurchased $4.2 billion of its own shares. Share repurchases and dividends together returned substantial capital, while debt-to-capital remained low at 10.2% on non-Global Financing debt. Looking ahead, IBM frames its strategy around "e-business on demand," open standards such as Linux, and cost reductions it expects to yield roughly $900 million of incremental savings in 2003.

Management also flagged risks: a higher provision for bad debts in Global Financing tied to the Communications sector, lower pension income (about $500 million less in 2003), and a possible loss of the ETI tax benefit that could raise the effective tax rate from about 30%. Overall, the filing presents a company in transition, with stable cash flow and a larger services base, but with pressure on margins and earnings that depends on whether services growth and cost savings can offset hardware weakness.

02—Key points

Key Highlights

Revenue declined 2.3% to $81.2 billion (3% at constant currency), mainly from lower corporate IT spending, while Global Services and Software grew.
Global Services revenue rose 4.0% to $36.4 billion, now 44.8% of total revenue, and services backlog grew to $112 billion from $102 billion.
Diluted EPS from continuing operations fell to $3.07 from $4.59, and total diluted EPS was $2.06 after a $1.8 billion loss from discontinued operations.
Gross profit margin contracted to 37.3% from 38.4%, driven by weaker Global Services and Hardware margins.
Operating cash flow from continuing operations was $13.8 billion, funding $4.75 billion in plant investment, $4.75 billion in R&D, and $4.2 billion in share repurchases.
Strategic moves included the $3.5 billion PwCC acquisition, the sale of the hard disk drive business to Hitachi, and the pending $2.1 billion Rational Software purchase.
Non-Global Financing debt rose to $2.2 billion, a 10.2% debt-to-capital ratio, while Global Financing's bad debt provision increased to $576 million.

03—Questions

Frequently Asked Questions

Why did IBM's revenue and earnings decline in 2002?
Revenue fell 2.3% as customers cut IT spending, with Hardware and Global Financing down more than the growth in Global Services and Software. Income from continuing operations dropped about 35%, reflecting lower gross margins, $1.5 billion of restructuring actions, higher bad debt provisions, and PwCC acquisition-related costs.
Is IBM's growing services business offsetting weakness in hardware?
Partly. Global Services revenue rose 4% and its share of total revenue grew to 44.8%, with $53 billion in new contracts and a $112 billion backlog. However, Hardware revenue fell 10.3%, and the Systems Group and Personal Systems Group both declined, so services growth did not fully replace lost hardware revenue.
What does the disk drive divestiture mean for IBM's financials?
IBM sold its hard disk drive business to Hitachi on December 31, 2002, for up to $2 billion in gross proceeds. The business is reported as discontinued operations, producing a $1.8 billion after-tax loss in 2002. IBM also signed a five-year supply agreement with Hitachi to meet most of its disk drive needs.
How strong is IBM's balance sheet and cash position?
The balance sheet remains solid. IBM ended 2002 with $5.4 billion in cash and equivalents plus $0.6 billion in marketable securities, a current ratio of 1.21:1, and a credit rating of A+ from S&P and A1 from Moody's. Non-Global Financing debt is low at 10.2% of capitalization, and the company has a $20 billion shelf registration filed in January 2003.
What risks and outlook items should investors watch in 2003?
Key watch items include continued weak IT spending, rising bad debt provisions in Global Financing's Communications exposure, roughly $500 million lower pension income in 2003, and the possible loss of the ETI tax benefit, which could push the effective tax rate above its roughly 30% expected level. Offsetting these are expected cost savings of about $900 million from 2002 actions and the continued shift toward services and open standards.

04—Continue

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