Management discussion snapshot
| ($ and shares in millions except per share amounts) | |||
| For the year ended December 31: | 2008 | 2007 | Yr.-to-Yr. Percent/ Margin Change |
|---|---|---|---|
|
* 2.3 percent adjusted for currency. ** At December 31. NM — Not meaningful |
|||
| Revenue | $103,630 | $98,786 | 4.9%* |
| Gross profit margin | 44.1% | 42.2% | 1.8 pts. |
| Total expense and other income | $28,945 | $27,240 | 6.3% |
| Total expense and other income-to-revenue ratio | 27.9% | 27.6% | 0.4 pts. |
| Income from continuing operations before income taxes | $16,715 | $14,489 | 15.4% |
| Provision for income taxes | 4,381 | 4,071 | 7.6% |
| Income from continuing operations | $12,334 | $10,418 | 18.4% |
| Net income | $12,334 | $10,418 | 18.4% |
| Net income margin | 11.9% | 10.5% | 1.4 pts. |
| Earnings per share of common stock: | |||
| Assuming dilution: | |||
| Continuing operations | $8.93 | $7.18 | 24.4% |
| Discontinued operations | — | (0.00) | NM |
| Total | $8.93 | $7.18 | 24.4% |
| Weighted-average shares outstanding: | |||
| Assuming dilution | 1,381.8 | 1,450.6 | (4.7)% |
| Assets** | $109,524 | $120,431 | (9.1)% |
| Liabilities** | $96,058 | $91,962 | 4.5% |
| Equity** | $13,465 | $28,470 | (52.7)% |
Continuing operations
In 2008, the company performed extremely well in a difficult economic environment, delivering record levels of revenue, pre-tax profit, earnings per share and cash flow from operations. The financial performance reflected the continuing strength of the company’s global model and the results of the ongoing transformation of the business. The key elements of the company’s transformation include:
- A continuing shift to higher value businesses;
- Investing for growth in the emerging markets;
- Global integration;
- Investing in innovation; and
- Ongoing productivity resulting in higher profit margins.
Overall, the company capitalized on the opportunities in the global economies, generating approximately 65 percent of its revenue outside the United States (U.S.), in delivering full year growth of 4.9 percent (2 percent adjusted for currency). Revenue increased in all geographies, both on an as reported basis and adjusted for currency — the revenue performance, adjusted for currency, was stable throughout the year as the company focused on solutions that meet clients’ needs. Revenue from the company’s growth markets organization increased 9.8 percent (10 percent adjusted for currency). In these markets, where the growth is driven by the infrastructure build-out, the company invested aggressively to capture these opportunities. For the full year and in the fourth quarter, growth in these markets, adjusted for currency, was 8 points greater than the major markets.
Gross profit margins improved, reflecting the shift to higher value businesses, pricing for value and the continued focus on productivity and cost management. Pre-tax income from continuing operations grew 15.4 percent and net income from continuing operations increased 18.4 percent reflecting an improvement in the company’s tax rate. Diluted earnings per share improved 24.4 percent reflecting the strong growth in net income and the benefits of the common stock repurchase program. In 2008, the company repurchased approximately 90 million shares of its common stock.
The increase in 2008 revenue was primarily due to:
- Continued strong performance from Global Technology Services and Global Business Services with growth in all business lines and geographic units;
- Continued strong demand in the Software business, driven by Key Branded Middleware products, with strong contributions from strategic acquisitions; and
- Continued strength in the growth markets.
The increase in income from continuing operations before income taxes in 2008 was primarily due to the revenue growth and gross profit margin improvements in the Global Services and Software segments.
The consolidated gross profit margin increased 1.8 points versus 2007 to 44.1 percent. Gross margin performance by segment and the impact to the consolidated gross margin was as follows:
| Gross Margin | Yr.-to-Yr. Change | Consolidated Impact | |
|---|---|---|---|
| Global Technology Services | 32.6% | 2.7 pts. | 0.8 pts. |
| Global Business Services | 26.7% | 3.2 pts. | 0.5 pts. |
| Software | 85.4% | 0.2 pts. | 0.5 pts. |
| Systems & Technology | 38.1% | (1.7) pts. | (0.2) pts. |
| Global Financing | 51.3% | 4.6 pts. | 0.1 pts. |
Total expense and other income increased 6.3 percent in 2008 versus 2007. The year-to-year drivers were approximately:
- Operational expense, -1 point
- Acquisitions, +5 points
- Currency, +2 points
The effective tax rate for 2008 was 26.2 percent, compared with 28.1 percent in 2007. The decrease in the tax rate was primarily due to increased utilization of tax credits.
At December 31, 2008, the company’s balance sheet and liquidity positions remained strong. Cash on hand was $12,741 million. Total debt decreased $1,349 million year to year, and the company generated $18,812 million in operating cash flow in 2008. The company has consistently generated strong cash flow from operations and also continues to have access to additional sources of liquidity through the capital markets and its global credit facility.
Key drivers in the company’s balance sheet and total cash flows are highlighted below.
Total assets decreased $10,907 million ($5,854 million adjusted for currency) primarily due to decreases in cash and cash equivalents ($2,250 million), prepaid pension assets ($15,816 million), short-term marketable securities ($989 million) and total financing receivables ($1,233 million). These decreases were partially offset by increases in long-term deferred taxes ($5,757 million), goodwill ($3,941 million) and intangible assets ($771 million).
Total liabilities increased $4,097 million ($5,275 million adjusted for currency) driven primarily by increases in retirement and nonpension postretirement benefit obligations ($5,871 million) and total deferred income ($547 million), partially offset by decreases in total debt ($1,349 million) and accounts payable ($1,041 million).
Stockholders’ equity of $13,465 million decreased $15,004 million versus 2007. Net income of $12,334 million was offset by the effects of pension remeasurements and other retirement-related items ($14,856 million), common/treasury stock activity ($6,322 million), dividends ($2,585 million) and equity translation adjustments ($3,552 million).
The company generated $18,812 million in cash flow provided by operating activities, an increase of $2,718 million, compared to 2007, primarily driven by increased net income ($1,916 million). Net cash used in investing activities of $9,285 million was $4,611 million higher than 2007, primarily due to increased spending for acquisitions ($5,304 million). Net cash used in financing activities of $11,834 million increased $7,095 million primarily due to debt transactions ($14,556 million), partially offset by lower common stock repurchases ($8,249 million) in 2008 versus 2007.
Total Global Services signings increased 2 percent to $57,182 million ($49,738 million adjusted for currency, flat versus 2007). Short-term signings were $26,831 million, an increase of 8 percent year to year (5 percent adjusted for currency), while long-term signings were $30,351 million, a decrease of 3 percent (5 percent adjusted for currency). The estimated Global Services backlog, adjusted for currency, was $117 billion at December 31, 2008, down $2 billion versus the December 31, 2007 balance.
For additional information and details, see the “Year in Review” section.
