01—Abstract
Summary
Summary of the 10-K filed February 26, 2013. Cited figures are marked; the original filing is the authoritative source.
IBM's 10-K for fiscal 2012 (filed February 26, 2013) reports revenue of $104.5 billiona, down 2.3% as reported but flat at constant currency, with the decline driven by divestitures (notably Retail Store Solutions), currency, and weakness in the major markets, especially Europe.
Profitability improved meaningfully: gross margin rose 1.2 points to 48.1%, pre-tax margin expanded to 21.0%, and GAAP diluted EPS grew 10.0% to $14.37b. Management's non-GAAP operating EPS of $15.25 rose 13.5%, marking the 10th consecutive year of double-digit EPS growth. Growth came from higher-value areas (Software, cloud, business analytics, Smarter Planet) and growth markets, which now make up 24% of geographic revenue.
Cash generation and shareholder returns were strong. Operating cash flow was $19.6 billionc and free cash flow (as management defines it) was $18.2 billion. IBM returned $15.8 billion to shareholders through $12.0 billion of buybacks and $3.8 billion of dividends, and spent about $3.7 billion on 11 acquisitions.
Total debt rose to $33.3 billiond, with most of it supporting the leveraged Global Financing unit. The consolidated debt-to-capitalization ratio rose to 63.7%, partly because of a $5.2 billion pension remeasurement hit to equity, and the underfunded retirement obligation grew to about $20.2 billion.
For investors, the key watch items are the pension burden (2013 retirement-related cost expected to rise about $700 million to roughly $3.1 billion), Global Services revenue pressure from low-margin contract restructuring, the Systems and Technology decline outside the new System z mainframe, and 2013 guidance of at least $16.70 operating EPS (about 10% growth). Management also flagged ongoing legal matters, including the UK pension litigation and the Indiana contract dispute.
02—Key points
Key Highlights
- Revenue of $104.5B fell 2.3% as reported but was flat at constant currency; growth markets rose 4.2% (7% at constant currency) and now represent 24% of geographic revenue.
- GAAP diluted EPS rose 10.0% to $14.37; operating (non-GAAP) diluted EPS rose 13.5% to $15.25, the 10th straight year of double-digit EPS growth.
- Gross profit margin expanded 1.2 points to 48.1%, the ninth consecutive year of improvement, driven by Software and both Global Services segments.
- Free cash flow of $18.2B (operating cash flow of $19.6B less net capex and Global Financing receivables growth) funded $15.8B in shareholder returns ($12.0B buybacks, $3.8B dividends).
- Cloud revenue grew 80% and business analytics grew 13%, while Systems and Technology revenue fell 6.9% (5.1% excluding divested Retail Store Solutions).
- The underfunded retirement obligation rose to about $20.2B and the consolidated debt-to-capitalization ratio rose to 63.7%, with 2013 pre-tax retirement cost expected to increase by about $700M.
- 2013 guidance calls for GAAP EPS of at least $15.53 and operating EPS of at least $16.70 (about 10% growth).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 26, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $102.87B$106.92B | −3.8% |
| Cost of Revenue | $52.51B$56.78B | −7.5% |
| Gross Profit | $50.36B$50.14B | +0.4% |
| R&D Expenses | $5.82B$6.26B | −7.1% |
| SG&A Expenses | $23.46B$23.59B | −0.6% |
| Interest Expense | $459.00M$411.00M | +11.7% |
| Net Income | $16.60B$15.86B | +4.7% |
| EPS (Basic) | $14.53$13.25 | +9.7% |
| EPS (Diluted) | $14.37$13.06 | +10.0% |
| Shares Outstanding (Basic) | 1.14B1.20B | −4.5% |
| Shares Outstanding (Diluted) | 1.16B1.21B | −4.8% |
05—Questions
Frequently Asked Questions
Why did IBM's reported revenue decline in 2012 even though the business grew?
Reported revenue fell 2.3% to $104.5B, but constant-currency revenue was flat. Currency translation and the divestiture of the Retail Store Solutions business accounted for much of the gap. Revenue from growth markets rose, but major markets such as Europe, Germany, and France declined, and Systems and Technology revenue dropped 6.9%.
How strong is IBM's cash generation and how is it being returned to shareholders?
IBM generated $19.6B in operating cash flow and $18.2B in management-defined free cash flow in 2012. It returned $15.8B to shareholders, including $12.0B in gross share repurchases (about 61 million shares) and $3.8B in dividends. The quarterly dividend was raised to $0.85 per share in mid-2012.
What are the main balance sheet risks for investors?
Total debt rose to $33.3B, of which $24.5B supports the leveraged Global Financing unit (about 7:1 debt-to-equity). The underfunded retirement obligation grew to about $20.2B after lower discount rates, and the consolidated debt-to-capitalization ratio rose to 63.7%. Pension cash requirements are expected to remain around $1B per year for qualified plans through 2015.
What does IBM expect for 2013?
IBM guided to GAAP EPS of at least $15.53 and operating (non-GAAP) EPS of at least $16.70, representing growth of about 8% and 10%, respectively. The company expects Software revenue growth in the mid single digits at constant currency, Global Services profit growth, and a return to constant-currency revenue growth in Global Business Services. It also expects a tax rate of about 25% and higher retirement-related costs.
What legal or operational risks did the filing highlight?
Key disclosed matters include the UK pension litigation, which led to a $162 million retirement-related charge in Q3 2012; the State of Indiana contract dispute, which IBM won at trial with a $52 million award that the State is appealing; and the SCO litigation. Operationally, the filing flags reliance on a few suppliers, cybersecurity exposure, currency volatility (over 60% of revenue comes from outside the U.S.), and the risk that low-margin services contract restructuring slows revenue growth.
06—Continue