01—Abstract
Summary
Summary of the 10-K filed February 22, 2011. Cited figures are marked; the original filing is the authoritative source.
International Business Machines Corporation's 2010 Form 10-K, filed February 22, 2011, shows a strong year.
Revenue rose 4.3% to $99.9 billiona (3.3% adjusted for currency), gross profit margin improved 0.3 points to 46.1%, and pre-tax income grew 8.7% to $19.7 billion. Net income reached a record $14.8 billion, up 10.5%, and diluted EPS was $11.52, up 15.1%, marking the eighth consecutive year of double-digit EPS growth. Growth was led by Software (up 5.1%, with 44% of segment pre-tax profit) and Systems and Technology (up 11.0%), while Global Services grew 2.6% and remained annuity-heavy, with a $142 billion backlog.
Growth markets revenue rose 16% and now account for 21% of geographic revenue. Capital allocation was shareholder-focused. IBM repurchased about 118 million shares, returned roughly $19 billionb to shareholders in 2010 through buybacks and dividends, and raised the quarterly dividend to $0.65.
Operating cash flow was $19.5 billionc and free cash flow was $16.3 billion. Total debt rose $2.5 billion to $28.6 billion, mostly to fund acquisitions, which totaled $5.9 billion in cash across 17 companies including Netezza and Sterling Commerce. Moody's upgraded IBM's senior debt to Aa3 in November 2010.
Looking ahead, management set a 2015 road map targeting at least $20d of operating (non-GAAP) EPS, starting from a 2010 base of $11.67. For 2011 it guided to GAAP EPS of at least $12.56 and operating EPS of at least $13.00.
The company is also introducing an operating versus non-operating earnings split that excludes acquisition charges and non-service pension costs. Investors should note the reliance on buybacks and acquisitions for EPS growth, the large pension underfunding of about $16.8 billion, the $5.3 billion of unrecognized tax benefits under IRS dispute, and ongoing litigation, including antitrust exposure and the Endicott environmental cases.
02—Key points
Key Highlights
- Record 2010 results: revenue $99.9B (+4.3%), net income $14.8B (+10.5%), diluted EPS $11.52 (+15.1%), the eighth straight year of double-digit EPS growth.
- Software is the profit engine: $22.5B revenue (+5.1%) and $9.1B pre-tax income, 44% of total segment pre-tax profit, with a 35.8% pre-tax margin.
- Systems and Technology rebounded strongly: revenue +11.0%, with System z up 16.4% and System x up 27.5% on the new z196 and POWER7 launches.
- Global Services is largely annuity-based, with approximately 60% of external revenue recurring and a $142B backlog, up $5B year over year.
- Capital returns were large: about $15.4B in buybacks (118M shares) and $3.2B in dividends; the Board added $10B to the repurchase authorization in October 2010.
- Free cash flow of $16.3B (+8%), but total debt rose $2.5B to $28.6B, and the core debt-to-capitalization ratio excluding Global Financing rose to 22.6% from 16.0%.
- 2015 road map targets at least $20 of operating EPS, from a 2010 base of $11.67; 2011 guidance is GAAP EPS of at least $12.56 and operating EPS of at least $13.00.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 22, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $99.87B$95.76B | +4.3% |
| Cost of Revenue | $53.86B$51.97B | +3.6% |
| Gross Profit | $46.01B$43.78B | +5.1% |
| R&D Expenses | $6.03B$5.82B | +3.5% |
| SG&A Expenses | $21.84B$20.95B | +4.2% |
| Interest Expense | $368.00M$402.00M | −8.5% |
| Net Income | $14.83B$13.43B | +10.5% |
| EPS (Basic) | $11.69$10.12 | +15.5% |
| EPS (Diluted) | $11.52$10.01 | +15.1% |
| Shares Outstanding (Basic) | 1.27B1.33B | −4.4% |
| Shares Outstanding (Diluted) | 1.29B1.34B | −4.0% |
05—Questions
Frequently Asked Questions
How did IBM perform financially in 2010?
IBM reported revenue of $99.87 billion, up 4.3% (3.3% at constant currency). Gross margin rose to 46.1%, pre-tax income grew 8.7% to $19.7 billion, net income rose 10.5% to $14.8 billion, and diluted EPS reached $11.52, up 15.1%. Growth markets were a key driver, with revenue up 16%.
Which segments drove IBM's growth and profitability?
Systems and Technology grew revenue 11.0%, led by mainframe and x86 server demand. Software grew 5.1% and delivered $9.1B of pre-tax income, about 44% of segment profit. Global Technology Services grew 2.3% and Global Business Services grew 3.2%, with business analytics revenue up more than 35%. Global Financing revenue was roughly flat, but its pre-tax income rose 13.3%.
How is IBM returning capital to shareholders, and is it sustainable?
In 2010 IBM repurchased about $15.4B of stock and paid $3.2B in dividends, roughly $19B in total. The quarterly dividend was raised to $0.65 from $0.55. Operating cash flow of $19.5B and free cash flow of $16.3B covered these returns, but the gap was partly funded by $2.5B of added debt. The 2010-2015 road map envisions about $50B in buybacks and $20B in dividends, so sustainability depends on continued cash generation and access to debt markets.
What are the main risks flagged in the filing?
Risks include a downturn in corporate IT spending, execution on internal productivity and global integration initiatives, and uncertain adoption of new growth areas such as cloud and analytics. Other exposures include currency and customer-financing credit risk, pension funding needs (net underfunding of about $13.7B, or $16.8B for underfunded plans), potential adverse outcomes on the IRS and other tax examinations (with $5.3B of unrecognized tax benefits), intellectual property and antitrust litigation, including the T3/PSI matter and European Commission and DOJ inquiries, and the Endicott groundwater claims.
What is IBM's outlook and what is the new 'operating earnings' measure?
For 2011 IBM guided to GAAP EPS of at least $12.56 and operating EPS of at least $13.00, about 9% and 11% growth respectively. Operating earnings is a non-GAAP measure that excludes acquisition-related charges and non-operating retirement-related costs, such as pension interest cost and expected return on assets. Management says this gives a clearer view of operating performance. The 2010 operating EPS was $11.67 versus GAAP EPS of $11.52. Investors should weigh the non-GAAP adjustments and the company's reliance on buybacks and acquisitions in forecasting EPS.
06—Continue