10-QPeriod: Q2 FY2002

INTERNATIONAL BUSINESS MACHINES CORP Quarterly Report for Q2 Ended Jun 30, 2002

Filed August 13, 2002For Securities:IBM

Summary

IBM reported a significant year-over-year decline in revenue and net income for the second quarter of 2002. Total revenue decreased by 5.7%, impacted by a substantial drop in hardware sales and a modest decline in Global Services, though Software revenue showed growth. The company recorded a net income of $56 million for the quarter, a sharp decrease from $2.045 billion in the prior year, largely due to significant restructuring charges and losses from discontinued operations. These charges, primarily related to the Microelectronics division and workforce reductions, impacted the company's profitability. Despite the revenue and profit challenges, IBM is undertaking strategic initiatives, including the announced sale of its Hard Disk Drive (HDD) business and the pending acquisition of PwC Consulting, which is expected to bolster its business consulting and technology services offerings. The company is also focusing on productivity improvements and adapting to a challenging economic environment. While current results show a downturn, these strategic moves aim to strengthen IBM's long-term market position and future growth prospects.

Key Highlights

  • 1Total revenue for the second quarter of 2002 was $19.651 billion, a decrease of 5.7% compared to $20.834 billion in the prior year period.
  • 2Net income applicable to common shareholders significantly declined to $56 million from $2.040 billion in the same period last year.
  • 3Hardware revenue saw a substantial decrease of 15.7% year-over-year, while Software revenue increased by 7.6%.
  • 4The company incurred significant restructuring charges totaling $1.727 billion related to actions in the Microelectronics Division and workforce reductions, impacting profitability.
  • 5IBM announced an agreement to sell its Hard Disk Drive (HDD) business to Hitachi for approximately $2 billion, accounted for as a discontinued operation.
  • 6The company is acquiring PwC's global business consulting and technology services unit, PwC Consulting, for approximately $3.5 billion, expected to close in the second half of the year.
  • 7Earnings per share (diluted) for the quarter were $0.03, down from $1.15 in the prior year, with continuing operations EPS at $0.25 versus $1.17.

Frequently Asked Questions

The significant drop in net income was primarily driven by substantial restructuring charges related to actions in the Microelectronics Division and workforce reductions, which amounted to $1.727 billion pre-tax. Additionally, losses from discontinued operations, notably the Hard Disk Drive business, also contributed to the decline.

The HDD business is accounted for as a discontinued operation. Its results have been removed from continuing operations for all periods presented. The company has recognized a loss on disposal estimated at $28 million, net of tax, and the assets and liabilities of this business are presented separately on the balance sheet.

The acquisition of PwC Consulting is a strategic move to enhance IBM's business consulting and technology services capabilities, enabling it to offer integrated technology and business process insights. The transaction is expected to cost approximately $3.5 billion and reduce earnings by an estimated $500 million, net of tax, in the fourth quarter of 2002, but is anticipated to be accretive to earnings in the fourth quarter of 2003.

Global Services revenue declined slightly, impacted by lower signings, though Strategic Outsourcing remained strong. Hardware revenue saw a significant decline, particularly in Enterprise Systems and Personal/Printing Systems, with only xSeries servers showing growth. Software revenue grew, driven by middleware products like WebSphere and DB2, while operating systems software declined. Global Financing revenue decreased, and Enterprise Investments/Other also declined.