01—Abstract
Summary
Summary of the 10-K filed February 23, 2010. Cited figures are marked; the original filing is the authoritative source.
IBM's 2009 Form 10-K shows a company that grew earnings while revenue fell.
Revenue declined 7.6% to $95.8 billiona (5.3% adjusted for currency), yet pre-tax income rose 8.5% to $18.1 billion, net income rose 8.8% to $13.4 billion, and diluted EPS rose 12.6% to $10.01. Gross margin expanded 1.7 points to 45.7%, and total expense and other income fell 11.4%, driven by about $3.7 billion in cost and expense savings. Management attributes the results to a mix shift toward software and services, global integration and productivity.
The company also reached its 2010 EPS road map target of $10 to $11b one year early. Balance sheet and cash generation were strong. Operating cash flow was a record $20.8 billion, and free cash flow, as management defines it, was $15.1 billion.
Total debt fell $7.8 billion to $26.1 billionc, and the core (non-Global Financing) debt-to-capitalization ratio dropped to 16.0% from 48.7%. Shareholder equity rose to $22.8 billion. IBM repurchased roughly 69 million shares in 2009 and raised its quarterly dividend to $0.55 in mid-2009.
Management guided to at least $11.00d in 2010 diluted EPS. Risks remain. Revenue fell in the major markets, with Systems and Technology down 16.1% and Global Business Services down 10.1%.
Pension underfunding was $13.8 billion net, mandated non-U.S. pension contributions are rising, and the company faces an open IRS dispute over a 2004-2005 intellectual property transfer, with a proposed adjustment above $2 billion. Global Financing carries about $22.4 billion of debt at a roughly 7:1 debt-to-equity target, and more than 60% of revenue comes from outside the U.S.
02—Key points
Key Highlights
- Revenue fell 7.6% to $95.8 billion (down 5.3% adjusted for currency), but pre-tax income rose 8.5% to $18.1 billion and gross margin improved 1.7 points to 45.7%.
- Diluted EPS rose 12.6% to $10.01, the seventh consecutive year of double-digit EPS growth, and reached the 2010 target of $10-$11 a year early.
- Operating cash flow hit a record $20.8 billion, and free cash flow was $15.1 billion, up $0.8 billion year over year.
- Total debt fell $7.8 billion to $26.1 billion, and the core debt-to-capitalization ratio declined to 16.0% from 48.7%.
- IBM repurchased about 69 million shares in 2009 and had $6.1 billion of repurchase authorization remaining at year-end.
- Global Services backlog reached $137 billion, and Global Services signings were flat at $57.1 billion (up 2% adjusted for currency).
- Management guided to at least $11.00 in 2010 diluted EPS. Software and Global Services together produced 84% of segment pre-tax income.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 23, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $95.76B$103.63B | −7.6% |
| Cost of Revenue | $51.97B$57.97B | −10.3% |
| Gross Profit | $43.78B$45.66B | −4.1% |
| R&D Expenses | $5.82B$6.34B | −8.2% |
| SG&A Expenses | $20.95B$23.39B | −10.4% |
| Interest Expense | $402.00M$673.00M | −40.3% |
| Net Income | $13.43B$12.33B | +8.8% |
| EPS (Basic) | $10.12$9.02 | +12.2% |
| EPS (Diluted) | $10.01$8.89 | +12.6% |
| Shares Outstanding (Basic) | 1.33B1.37B | −3.1% |
| Shares Outstanding (Diluted) | 1.34B1.39B | −3.3% |
05—Questions
Frequently Asked Questions
Why did EPS grow when revenue declined?
Pre-tax margin rose to 18.9%, its highest level in more than a decade. Gross margin rose 1.7 points on the shift toward higher-value software and services, expense productivity cut total expense and other income by 11.4%, and share repurchases reduced the diluted share count by 3.3%. Together these added more to earnings than the revenue decline took away.
How exposed is IBM to pension and tax risks?
Net pension underfunding was $13.8 billion at year-end, down $4.7 billion, and 2010 retirement-related plan cost is expected to be about $1.5 billion. Mandated non-U.S. pension contributions are estimated at $3.6 billion over five years. On tax, IBM disagrees with the IRS on a proposed adjustment above $2 billion tied to a 2005 intellectual property transfer and has filed a protest. Its unrecognized tax benefit liability was $4.8 billion.
What does the Global Financing segment contribute, and what leverage does it carry?
Global Financing pre-tax income was $1.73 billion, up 7%, with a 34.4% return on equity and a gross margin of 61.8%. It carries $22.4 billion of debt against roughly $3.2 billion of equity, a target debt-to-equity ratio of about 7 to 1. Global Financing revenue fell 8.4% as lower asset balances reduced financing income.
Which parts of the business are weakening?
Systems and Technology revenue fell 16.1%, with System z down 28.7% and retail store solutions down 25.6%. Global Business Services revenue fell 10.1%, driven by a double-digit decline in consulting and systems integration. Lotus revenue fell 10%, and product lifecycle management fell 23% ahead of its planned sale to Dassault Systemes. Software and Global Technology Services continued to grow profit even as revenue slipped.
What is the outlook for 2010?
IBM guided to at least $11.00 in 2010 diluted EPS and expects first-quarter revenue growth of mid-single digits at actual rates, a 4-5 point improvement over Q4 2009. Management expects Software to grow at a double-digit rate in Q1 2010, expects its tax rate to be 26.0-26.5%, and expects a new System z mainframe and POWER systems to launch in 2010. The company is also acquiring several businesses, including SPSS, Lombardi and Initiate Systems.
06—Continue