01—Abstract
Summary
Summary of the 10-K filed February 24, 2009. Cited figures are marked; the original filing is the authoritative source.
International Business Machines Corporation (IBM) closed 2008 with record revenue of $103.6 billiona (up 4.9%, or 2.3% adjusted for currency), record pre-tax income from continuing operations of $16.7 billion (up 15.4%), and diluted EPS of $8.93 (up 24.4%).
Growth was driven by Global Services (Global Technology Services and Global Business Services, combined revenue of $58.9 billionb, up 8.8%) and Software ($22.1 billion, up 10.5%), which together generated roughly 82% of segment pre-tax profit. Gross margin improved 1.8 points to 44.1%, reflecting a mix shift toward higher-value offerings, pricing discipline and productivity. Net income rose 18.4% to $12.3 billion, helped partly by a lower effective tax rate of 26.2%.
Operating cash flow was a record $18.8 billionc, and free cash flow was $14.3 billion, which funded $10.6 billion of share repurchases and $2.6 billion of dividends. The balance sheet absorbed a major non-operating hit. Stockholders' equity fell 52.7% to $13.5 billion, almost entirely because of pension remeasurements after 2008 asset-market losses.
The net funded position of retirement plans swung to an under-funded $18.5 billiond, and the debt-to-capital ratio rose to 49.0%. Management characterizes the equity decline as non-cash and says it does not affect access to capital markets. Total debt declined $1.3 billion to $33.9 billion, and the company acquired Cognos and Telelogic in 2008 for a combined cost of roughly $5.9 billion, which lifted goodwill by about $3.9 billion.
Systems and Technology was the weak spot, with revenue down 9.5% and gross margin down 1.7 points amid a slowdown in x86 servers and the decline of legacy System i. Management guided to 2009 pre-tax retirement-related plan costs of about $1.5 billion, an expected effective tax rate of roughly 26.5%, and a continued focus on emerging markets. It also reaffirmed the long-term 2010 EPS roadmap of $9 to $10 per share.
The company cites a $117 billion Global Services backlog and about 65% of revenue generated outside the United States as sources of resilience. Investors should weigh the strong operating momentum against the pension-driven equity erosion, the exposure to a sharp slowdown in corporate IT spending, and the open IRS dispute over a proposed adjustment exceeding $2 billion.
02—Key points
Key Highlights
- Record 2008 revenue of $103.6 billion (+4.9%; +2.3% adjusted for currency) and record pre-tax income from continuing operations of $16.7 billion (+15.4%).
- Diluted EPS of $8.93, up 24.4%, supported by net income growth of 18.4% and roughly 90 million shares repurchased during 2008.
- Global Services (GTS and GBS, $58.9 billion revenue, +8.8%) and Software ($22.1 billion, +10.5%) generated about 82% of segment pre-tax profit; gross margin rose to 44.1% (+1.8 points).
- Record operating cash flow of $18.8 billion and free cash flow of $14.3 billion, with dividends raised to $0.50 per quarter from $0.40.
- Stockholders' equity fell 52.7% to $13.5 billion, driven by roughly $14.9 billion of non-cash pension remeasurement losses; retirement plans moved to an $18.5 billion net under-funded position.
- Systems and Technology revenue fell 9.5% and gross margin dropped 1.7 points on x86 server weakness and legacy System i decline, a notable soft spot in the portfolio.
- Open IRS dispute over a proposed adjustment with a pre-tax amount above $2 billion relating to 2004–2005 intercompany IP transfer valuation and tax credits, which the company intends to contest.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 24, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $103.63B$98.79B | +4.9% |
| Cost of Revenue | $57.97B$57.06B | +1.6% |
| Gross Profit | $45.66B$41.73B | +9.4% |
| R&D Expenses | $6.34B$6.15B | +3.0% |
| SG&A Expenses | $23.39B$22.06B | +6.0% |
| Interest Expense | $673.00M$611.00M | +10.1% |
| Net Income | $12.33B$10.42B | +18.4% |
| EPS (Basic) | $9.02$7.27 | +24.1% |
| EPS (Diluted) | $8.89$7.15 | +24.3% |
| Shares Outstanding (Basic) | 1.37B1.43B | −4.5% |
| Shares Outstanding (Diluted) | 1.39B1.46B | −4.7% |
05—Questions
Frequently Asked Questions
How did IBM's core business perform in 2008?
Revenue reached a record $103.6 billion, up 4.9% as reported and 2.3% adjusted for currency. Growth came from Global Services (up 8.8%) and Software (up 10.5%), while Systems and Technology declined 9.5%. Pre-tax income from continuing operations rose 15.4% to $16.7 billion, and gross margin improved to 44.1%.
Why did stockholders' equity drop so sharply?
Equity fell from $28.5 billion to $13.5 billion, mainly because of a $14.9 billion pension remeasurement loss recorded in accumulated other comprehensive income after equity markets fell in 2008. Share repurchases of about $10.6 billion and $3.6 billion of currency translation losses also contributed. Management states the decline is non-cash and does not affect its access to capital markets or ability to meet obligations.
How strong is IBM's cash generation and capital return program?
Operating cash flow was a record $18.8 billion and free cash flow was $14.3 billion. In 2008 the company returned about $10.6 billion through share repurchases and $2.6 billion through dividends, while spending about $6.3 billion on acquisitions, including Cognos and Telelogic. Cash and marketable securities ended the year at $12.9 billion, and the company had $18.3 billion of unused credit lines.
What are the main risks highlighted for investors?
Key risks include a downturn in corporate IT budgets, the company's ability to meet its internal productivity and globalization targets, pension funding needs in a prolonged market downturn, and exposure to currency fluctuations since more than 60% of revenue comes from outside the U.S. The filing also flags the IRS dispute over a proposed adjustment exceeding $2 billion and extensive litigation, including SCO v. IBM, and a Brazilian non-income tax exposure of about $2.0 billion in total.
What guidance did management provide for 2009?
Management expects 2009 pre-tax retirement-related plan costs of about $1.5 billion, roughly $100 million higher than 2008, and an effective tax rate near 26.5%. It expects about $1 billion of legally mandated non-U.S. pension contributions in 2009. It reaffirmed the long-term roadmap to earnings of $9 to $10 per share in 2010 and expects margin expansion to continue, with a Global Services backlog of $117 billion entering the year.
06—Continue