01—Abstract
Summary
Summary of the 10-K filed February 25, 2014. Cited figures are marked; the original filing is the authoritative source.
IBM's 2013 Form 10-K (filed February 25, 2014) reports revenue of $99.8 billiona, down 4.6% as reported (2.5% adjusted for currency), with diluted EPS up 4.0% to $14.94 and operating (non-GAAP) diluted EPS up 6.8% to $16.28.
Net income fell 0.7% to $16.5 billionb, and the reported decline in pre-tax income of 10.9% was partly offset by a 15.6% effective tax rate, which benefited from the completed 2008-2010 IRS audit. Growth came from the strategic imperatives: business analytics revenue reached $15.7 billion (up 9%), cloud-based solutions revenue reached $4.4 billion (up 69%), and Software grew 1.9% with a 38.1% pre-tax margin. The weakness was concentrated in Systems and Technology, where revenue fell 18.7% and pre-tax income swung to a $507 million loss, driven by the late mainframe product cycle and business model pressures in Power Systems, Storage and x86.
Growth-market revenue also declined 4.9% as reported, with China and Australia weak in the second half. Cash generation and capital returns remained strong. Operating cash flow was $17.5 billionc and free cash flow was $15.0 billion (down $3.2 billion), while IBM returned $17.9 billion to shareholders through $13.9 billion of gross buybacks and $4.1 billion of dividends.
Total debt rose $6.4 billion to $39.7 billiond, with $27.5 billion supporting Global Financing, and the core debt-to-capitalization ratio rose to 39.0%. The company also signaled portfolio transformation, including the pending sale of its x86 server business to Lenovo (about $2.3 billion, with a roughly $1 billion pre-tax gain expected) and the customer care sale to SYNNEX. Its 2014 guidance calls for GAAP EPS of at least $17.00 and operating EPS of at least $18.00.
Key risks flagged in the filing include the SEC investigation into cloud revenue reporting, a securities class action filed in December 2013, FCPA-related DOJ and SEC inquiries, the SCO litigation, and ongoing Indiana and UK pension disputes. Over 60% of revenue comes from outside the U.S., and currency, particularly the weaker yen, continues to weigh on profit.
02—Key points
Key Highlights
- Revenue fell 4.6% to $99.8 billion (down 2.5% at constant currency), while gross margin rose 0.5 points to 48.6%, the tenth straight year of gross margin improvement.
- Operating (non-GAAP) diluted EPS grew 6.8% to $16.28 and GAAP diluted EPS grew 4.0% to $14.94, supported by a 52.4 million share reduction in weighted-average diluted shares.
- Strategic growth areas performed well: business analytics revenue reached $15.7 billion (up 9%), and cloud-based solutions revenue reached $4.4 billion (up 69%), with the 2015 business analytics target raised to $20 billion.
- Systems and Technology revenue fell 18.7% and pre-tax income dropped $1.7 billion to a $507 million loss, reflecting the mainframe product cycle and business model challenges in Power Systems, Storage and x86.
- Free cash flow was $15.0 billion, down $3.2 billion, while $17.9 billion was returned to shareholders through buybacks and dividends, with about $14.7 billion of buyback authorization remaining at year-end.
- Total debt increased $6.4 billion to $39.7 billion, with the core (ex-Global Financing) debt-to-capitalization ratio rising to 39.0% from 36.1%.
- Pending portfolio moves include the sale of the x86 server business to Lenovo for about $2.3 billion (roughly $1 billion pre-tax gain expected) and the customer care BPO sale to SYNNEX.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 25, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $98.37B$102.87B | −4.4% |
| Cost of Revenue | $49.68B$52.51B | −5.4% |
| Gross Profit | $48.68B$50.36B | −3.3% |
| R&D Expenses | $5.74B$5.82B | −1.3% |
| SG&A Expenses | $23.45B$23.46B | −0.1% |
| Interest Expense | $402.00M$459.00M | −12.4% |
| Net Income | $16.48B$16.60B | −0.7% |
| EPS (Basic) | $15.06$14.53 | +3.6% |
| EPS (Diluted) | $14.94$14.37 | +4.0% |
| Shares Outstanding (Basic) | 1.09B1.14B | −4.2% |
| Shares Outstanding (Diluted) | 1.10B1.16B | −4.5% |
05—Questions
Frequently Asked Questions
Why did IBM's revenue decline in 2013 even though earnings per share grew?
Revenue fell 4.6% (2.5% at constant currency), driven mainly by a 18.7% decline in Systems and Technology and a 4.9% decline in growth markets. EPS still grew because of margin expansion in Software and Global Services, a lower tax rate of 15.6% (benefiting from the IRS audit settlement), and about 4.5% fewer diluted shares from buybacks.
How much of the 2013 earnings improvement came from the tax rate and one-time items?
The effective tax rate fell 8.6 points to 15.6%, with the completed 2008-2010 U.S. audit contributing about 11.5 points. Operating EPS, which excludes acquisition-related and retirement-related charges, grew 6.8%, but reported pre-tax income fell 10.9%, so the tax benefit was a meaningful driver of net income. Management's 2014 planning assumption is a tax rate of about 23%.
What is the outlook for 2014 and what does it assume?
IBM expects GAAP EPS of at least $17.00 and operating EPS of at least $18.00, up about 10.5% on an operating basis. Assumptions include a roughly flat pre-tax income for Systems and Technology excluding the Lenovo gain, Global Services profit growth of 8-10%, a continued currency headwind (especially from the yen), and free cash flow growth of about $1 billion.
What regulatory or legal risks are disclosed in the filing?
The filing discloses an SEC investigation into how IBM reports cloud revenue, a December 2013 securities class action tied to Q3 2013 results, DOJ and SEC FCPA investigations (including Poland and other countries), the long-running SCO litigation, a February 2014 Indiana Court of Appeals ruling finding IBM in material breach, and UK pension litigation. Management states that no provisions have been recorded for these matters beyond amounts not material to the financial statements.
How leveraged is IBM, and does the debt level create concern for investors?
Consolidated total debt was $39.7 billion, of which $27.5 billion funds Global Financing at a 7.2-to-1 debt-to-equity ratio, a deliberate structure tied to the financing business's asset base. Excluding Global Financing, the core debt-to-capitalization ratio rose to 39.0%. IBM reports a $10 billion committed credit facility, AA- senior long-term debt ratings from S&P, and covenant compliance, with no ratings-trigger acceleration provisions.
06—Continue