01—Abstract
Summary
Summary of the 10-K filed February 28, 2012. Cited figures are marked; the original filing is the authoritative source.
International Business Machines (IBM) closed 2011 with record revenue of $106.9 billiona (up 7.1%, or 3.4% adjusted for currency), net income of $15.9 billion (up 6.9%), and diluted EPS of $13.06 (up 13.4%).
Operating (non-GAAP) diluted EPS was $13.44b, up 15.2%, and management reiterated its 2015 Road Map objective of at least $20 of operating EPS. Growth was led by Software (revenue up 10.9%, with key branded middleware up 15.6%), Systems and Technology (up 5.6%, driven by Power Systems), and the growth markets (up 16.0%, or 11% at constant currency, now 22% of geographic revenue). Gross margin improved 0.8 points to 46.9%, the eighth consecutive year of improvement, supported by a richer mix toward Software.
Cash generation remained strong: operating cash flow was $19.8 billionc and free cash flow was $16.6 billion, with $18.5 billion returned to shareholders through $15.0 billion of buybacks and $3.5 billion of dividends. The Global Services backlog was $141 billion, roughly flat at constant currency. Balance sheet leverage rose, however: total debt increased $2.7 billion to $31.3 billion, the core (ex-Global Financing) debt-to-capitalization ratio rose to 32.0% from 22.6%, and total equity fell $2.9 billion to $20.2 billion because of share repurchases and a $2.4 billion pension-related charge to equity.
The underfunded retirement plan position increased to $16.4 billiond, and management guided 2012 GAAP EPS to at least $14.16 and operating EPS to at least $14.85. Risks flagged in the filing include European credit exposure (about $2.6 billion of receivables in Portugal, Italy, Ireland, Greece and Spain, with a higher allowance taken in Q4 2011), a tough System z mainframe comparison in the first half of 2012, pension funding and discount-rate sensitivity, a rising tax liability (unrecognized tax benefits of $5.6 billion), and ongoing litigation including the Indiana contract dispute and the Endicott groundwater cases.
02—Key points
Key Highlights
- Record 2011 results: revenue of $106.9B (+7.1%; +3.4% at constant currency), net income of $15.9B (+6.9%), and GAAP diluted EPS of $13.06 (+13.4%).
- Operating (non-GAAP) diluted EPS of $13.44 (+15.2%), with management reaffirming the path to at least $20 of operating EPS by 2015 and guiding 2012 operating EPS to at least $14.85.
- Software was the growth engine: revenue of $24.9B (+10.9%), with key branded middleware up 15.6%, WebSphere up 40.5%, and Software accounting for roughly 43.5% of segment pre-tax income.
- Growth markets revenue rose 16.0% (11% at constant currency) and reached 22% of geographic revenue, with BRIC revenue up 18.6%.
- Gross margin rose 0.8 points to 46.9%, the eighth straight year of expansion, driven by Software mix and margin gains in Systems and Technology and Global Services.
- Strong cash returns: operating cash flow of $19.8B, free cash flow of $16.6B, and $18.5B returned to shareholders ($15.0B buybacks, $3.5B dividends); the quarterly dividend was raised to $0.75 in Q2 2011.
- Balance sheet and pension pressure: total debt rose to $31.3B, core debt-to-capitalization reached 32.0%, equity fell to $20.2B, and the net underfunded retirement position widened to $16.4B.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $106.92B$99.87B | +7.1% |
| Cost of Revenue | $56.78B$53.86B | +5.4% |
| Gross Profit | $50.14B$46.01B | +9.0% |
| R&D Expenses | $6.26B$6.03B | +3.8% |
| SG&A Expenses | $23.59B$21.84B | +8.0% |
| Interest Expense | $411.00M$368.00M | +11.7% |
| Net Income | $15.86B$14.83B | +6.9% |
| EPS (Basic) | $13.25$11.69 | +13.3% |
| EPS (Diluted) | $13.06$11.52 | +13.4% |
| Shares Outstanding (Basic) | 1.20B1.27B | −5.7% |
| Shares Outstanding (Diluted) | 1.21B1.29B | −5.7% |
05—Questions
Frequently Asked Questions
How did IBM's revenue and earnings perform in 2011?
Revenue reached $106.9 billion, up 7.1% as reported and 3.4% at constant currency. Net income rose 6.9% to $15.9 billion, and GAAP diluted EPS was $13.06, up 13.4%, helped by a 5.8% reduction in weighted-average diluted shares from buybacks. Operating (non-GAAP) EPS was $13.44, up 15.2%.
Which segments drove growth, and which lagged?
Software led with 10.9% revenue growth (8% at constant currency), and Systems and Technology grew 5.6%, driven by Power Systems (+12.0%), while System z was nearly flat (+0.3%). Global Technology Services grew 7.0% and Global Business Services 5.8%, though GBS was held back by Japan and the Public Sector. Global Financing revenue declined 6.1%.
Is IBM's balance sheet becoming more leveraged?
Yes. Total debt rose $2.7 billion to $31.3 billion, and the core debt-to-capitalization ratio (excluding Global Financing) increased to 32.0% from 22.6%, as share repurchases and a $2.4 billion pension-related reduction in equity lowered book equity. Global Financing is intentionally leveraged at about 7.2 to 1 debt-to-equity, and the company still reports strong liquidity and a $10 billion undrawn committed credit facility.
What are the main risks flagged for investors?
Key risks include European credit exposure (about $2.6 billion of receivables in Portugal, Italy, Ireland, Greece and Spain, with a higher credit allowance in Q4 2011), pension funding needs and discount-rate sensitivity (the net underfunded position was $16.4 billion), a tough System z comparison in the first half of 2012, rising tax liabilities (unrecognized tax benefits of $5.6 billion), currency volatility (more than 60% of revenue comes from outside the U.S.), and litigation including the Indiana state contract dispute.
What is management's 2012 outlook?
IBM expects 2012 GAAP EPS of at least $14.16 and operating EPS of at least $14.85, roughly 8% and 10% growth. It expects about 3% revenue growth from the Global Services backlog, double-digit pre-tax income growth in Software, a return to mid-single-digit revenue growth in Systems and Technology in the second half, and pre-tax retirement-related plan costs of about $2.3 billion, up roughly $500 million.
06—Continue