IBM REPORTS 2004 THIRD-QUARTER RESULTS
- COMPANY POSTS DILUTED EPS AS REPORTED OF $1.06
- EPS OF $1.17 BEFORE ONE-TIME $320 MILLION CHARGE TO SETTLE PENSION CLAIMS
ARMONK, N.Y., October 18, 2004 . . . IBM today announced third-quarter 2004 diluted earnings per common share of $1.06 from continuing operations as reported, compared with diluted earnings of $1.02 per share in the same period of 2003, an increase of 4 percent. In September, the company agreed to a one-time, pre-tax charge of $320 million (or 11 cents per diluted share) for the partial settlement of legal claims against IBM's pension plan. Without the one-time charge, IBM's earnings per diluted common share would have been $1.17, an increase of 15 percent.
Third-quarter income from continuing operations was $1.80 billion, an increase of 1 percent compared with $1.79 billion a year ago. Without the one-time charge, IBM's third-quarter income from continuing operations would have been $2.00 billion, an increase of 12 percent. Revenues from continuing operations for the third quarter were $23.4 billion, up 9 percent compared with the third quarter of 2003 revenues of $21.5 billion (and up 1 percent sequentially from $23.2 billion in the second quarter of this year).
Samuel J. Palmisano, IBM chairman and chief executive officer, said: "In what is normally a challenging quarter for the technology industry, IBM delivered one of our strongest third quarters in revenue and earnings growth in recent years. IBM has been gaining momentum throughout the year, and the strength of our integrated business model gives us confidence as we look toward 2005.
"We continue to see robust growth in key initiatives. Business Performance Transformation Services revenue grew more than 45 percent year-to-date. We saw more than 30 percent combined growth in the emerging markets of Brazil, China, India and Russia. And we're seeing more and more clients move toward becoming on demand businesses, which is driving demand across our portfolio."
Third-quarter revenue growth of 9 percent (5 percent, adjusting for currency) was driven by growth across all geographies, as reported. In the Americas, third-quarter revenues from continuing operations were $10.1 billion, up 8 percent (7 percent, adjusting for currency) from the 2003 period. Revenues from Europe/Middle East/Africa were $7.3 billion, an increase of 8 percent (essentially flat, adjusting for currency). Asia-Pacific revenues grew 11 percent (6 percent, adjusting for currency) to $5.3 billion. OEM revenues increased 13 percent to $726 million compared with the third quarter of 2003.
Revenues grew at a solid pace in all of IBM's five industry sectors in the third quarter with particularly strong growth from the Communications sector and Public sector, as well as good growth in sales to Small and Medium Businesses.
Revenues from Global Services, including maintenance, increased 10 percent (5 percent, adjusting for currency) to $11.4 billion in the third quarter. Global Services revenues, excluding maintenance, increased 11 percent (6 percent, adjusting for currency). IBM signed services contracts totaling nearly $10 billion and ended the quarter with an estimated services backlog, including Strategic Outsourcing, Business Consulting Services, Integrated Technology Services and Maintenance, of $110 billion.
Hardware revenues from continuing operations increased 12 percent (9 percent, adjusting for currency) to $7.5 billion in the third quarter versus the third-quarter 2003. In the current quarter, revenues from the Systems and Technology Group totaled $4.1 billion, up 9 percent due to eServer revenue increases for xSeries Intel-based servers, which had particularly strong results, and zSeries servers. The total delivery of zSeries computing power as measured in MIPS (millions of instructions per second) increased 17 percent in the quarter compared with the third quarter of 2003. Revenues for the eServer pSeries UNIX servers increased as well, while revenues for the iSeries midrange servers decreased significantly, in part, due to transition to new POWER5 architecture. Storage Systems revenues increased due to good demand for external midrange disk and tape products, and revenues from OEM Technology increased. Personal Systems Group revenues increased 17 percent to $3.3 billion, led by strong growth in mobile personal computers.
Revenues from Software were $3.6 billion, an increase of 5 percent (1 percent, adjusting for currency) compared with the third quarter of 2003. Revenues from IBM's middleware brands, which include WebSphere, DB2, Rational, Tivoli and Lotus products, were $2.9 billion, up 6 percent versus the third quarter of 2003. Operating systems revenues decreased 2 percent to $600 million compared with the third quarter of 2003.
Revenues for WebSphere software, which facilitates customers' ability to manage a wide variety of business processes using open standards to interconnect applications, data and operating systems, increased 14 percent. Revenues for Data Management increased 11 percent including revenues for DB2 database software, which increased 15 percent. Revenues from Tivoli software (infrastructure software that enables customers to centrally manage networks and storage) increased 19 percent, and revenues for Lotus software, which enables customers to communicate, collaborate and learn effectively, decreased 6 percent. Revenues from Rational (comprehensive software development tools) increased 6 percent compared with the third quarter of 2003.
Global Financing revenues declined 11 percent (14 percent, adjusting for currency) in the third quarter to $638 million. Revenues from the Enterprise Investments/Other area, which includes industry-specific IT solutions such as product life-cycle management software, increased 4 percent (2 percent, adjusting for currency) to $277 million compared with the third quarter of 2003.
The company's total gross profit margin from continuing operations was 36.9 percent in the 2004 third quarter, compared with 36.3 percent in the third quarter of 2003.
In the third quarter of 2004, total expense and other income from continuing operations of $6.1 billion, including the one-time $320 million charge to settle certain pension claims, increased 16 percent over the year-earlier period, of which 6 points is associated with the charge. The company's selling, general and administrative expense including the charge increased 16 percent to $5.0 billion. Research, development and engineering expense increased 9 percent to $1.4 billion. Intellectual property and custom development income declined to $259 million compared with $406 million a year ago. Other (income) and expense was $55 million of net income in the third quarter of 2004 versus $26 million of net expense in the same period last year.
IBM's effective tax rate from continuing operations in the third-quarter 2004, including the effect of the one-time charge relating to pension claims, was 28.9 percent. Before the charge, the rate would have been 30.0 percent, the same as the third quarter of 2003.
IBM ended the quarter with $9.7 billion of cash on hand and low debt levels for the non-financing business. The balance sheet remains strong, and the company is well positioned to take advantage of opportunities.
Share repurchases totaled approximately $1.3 billion in the third quarter. The weighted-average number of diluted common shares outstanding in the quarter was 1.70 billion compared with 1.76 billion shares in the same period of 2003. As of September 30, 2004, there were 1.66 billion basic shares outstanding.
Debt, including Global Financing, totaled $22.0 billion, compared with $23.6 billion at year-end 2003. From a management segment view, the non-global financing debt-to-capitalization ratio was 1.0 percent as of September 30, 2004, and Global Financing debt declined $1.6 billion from year-end 2003 to a total of $21.7 billion, resulting in a debt-to-equity ratio of 6.8 to 1.
Year-To-Date 2004 Results
Income from continuing operations for the nine months ended September 30, 2004, including the one-time $320 million pre-tax charge to settle certain pension claims, was $5.4 billion compared with $4.9 billion for the same period of 2003, an increase of 10 percent. Diluted earnings per common share from continuing operations was $3.14 compared with $2.78 per diluted share for the 2003 period, an increase of 13 percent. Revenues from continuing operations for the nine months ended September 30, 2004, totaled $68.8 billion, up 9 percent (4 percent, adjusting for currency) compared with $63.2 billion for the nine months of 2003.
For total operations, net income for the nine months of 2004, including a loss from discontinued operations of $3 million, was $5.4 billion, or $3.14 per diluted common share, compared with the nine months of 2003 net income of $4.9 billion, or $2.77 per diluted share, which included a loss from discontinued operations of $23 million.
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed in the company's filings with the U.S. Securities and Exchange Commission (SEC).
Presentation of Information in this Press Release
In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors:
- effect of one-time charge to settle certain pension claims on certain financial results
- adjusting for currency
The rationale for management's use of non-GAAP measures is included as part of the supplementary materials presented within the third-quarter earnings materials. These materials are available on the IBM investor relations Web site at www.ibm.com/investor and will be included in a subsequent filing of a Form 8-K with the SEC.
Conference Call and Webcast
IBM's regular quarterly earnings conference call is scheduled to begin at 4:30 p.m. EDT, today. Investors may participate by viewing the Webcast at www.ibm.com/investor/3q04.
INTERNATIONAL BUSINESS MACHINES CORPORATION
COMPARATIVE FINANCIAL RESULTS
(Unaudited; Dollars in millions except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
Percent Percent
2004 2003 Change 2004 2003 Change
------- ------- ------- ------- ------- -------
REVENUE
Global Services $11,392 $10,383 9.7% $33,818 $31,187 8.4%
Gross margin 25.0% 25.1% 24.9% 25.3%
Hardware 7,501 6,697 12.0% 21,659 19,118 13.3%
Gross margin 28.4% 25.2% 28.1% 26.2%
Software 3,621 3,461 4.6% 10,545 10,061 4.8%
Gross margin 87.3% 85.8% 86.6% 85.6%
Global Financing 638 715 -10.9% 1,951 2,092 -6.8%
Gross margin 60.1% 57.7% 60.0% 57.1%
Enterprise Investments/
Other 277 266 4.3% 859 760 13.1%
Gross margin 44.3% 53.4% 43.4% 44.1%
TOTAL REVENUE 23,429 21,522 8.9% 68,832 63,218 8.9%
GROSS PROFIT 8,646 7,812 10.7% 25,180 23,043 9.3%
Gross margin 36.9% 36.3% 36.6% 36.4%
EXPENSE AND OTHER INCOME
S,G&A 4,978 4,303 15.7% 14,094 12,978 8.6%
% of revenue 21.2% 20.0% 20.5% 20.5%
R,D&E 1,419 1,307 8.6% 4,212 3,728 13.0%
% of revenue 6.1% 6.1% 6.1% 5.9%
Intellectual property
and custom development
income (259) (406) -36.1% (871) (887) -1.7%
Other (income)
and expense (55) 26 nm (19) 114 nm
Interest expense 32 33 -3.3% 100 114 -12.8%
TOTAL EXPENSE AND
OTHER INCOME 6,115 5,263 16.2% 17,516 16,047 9.2%
% of revenue 26.1% 24.5% 25.4% 25.4%
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 2,531 2,549 -0.7% 7,664 6,996 9.5%
Pre-tax margin 10.8% 11.8% 11.1% 11.1%
Provision for
income taxes 731 764 -4.4% 2,271 2,099 8.2%
Effective tax
rate 28.9% 30.0% 29.6% 30.0%
INCOME FROM CONTINUING
OPERATIONS $1,800 $1,785 0.9% $5,393 $4,897 10.1%
Net margin 7.7% 8.3% 7.8% 7.7%
DISCONTINUED OPERATIONS
Loss from discontinued
operations 0 0 3 23
NET INCOME $1,800 $1,785 0.9% $5,390 $4,874 10.6%
====== ====== ====== ======
EARNINGS/(LOSS)PER SHARE
OF COMMON STOCK:
ASSUMING DILUTION
CONTINUING
OPERATIONS $1.06 $1.02 3.9% $3.14 $2.78 12.9%
DISCONTINUED
OPERATIONS (0.00) (0.00) (0.00) (0.01)
------ ------ ------ ------
TOTAL $1.06 $1.02 3.9% $3.14 $2.77 13.4%
====== ====== ====== ======
BASIC
CONTINUING
OPERATIONS $1.08 $1.04 3.8% $3.21 $2.84 13.0%
DISCONTINUED
OPERATIONS (0.00) (0.00) (0.00) (0.01)
------ ------ ------ ------
TOTAL $1.08 $1.04 3.8% $3.21 $2.82* 13.8%
====== ====== ====== ======
WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING (M's)
ASSUMING
DILUTION 1,700.4 1,756.4 1,714.6 1,759.5
BASIC 1,669.6 1,722.6 1,680.3 1,725.9
nm - not meaningful
* Does not total due to rounding.
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
At At
(Dollars in millions) September 30, December 31, Percent
2004 2003 Change
-------- ----------- -------
ASSETS
Cash, cash equivalents,
and marketable securities $9,671 $7,647 26.5%
Receivables - net, inventories,
prepaid expenses 32,759 37,351 -12.3%
Plant, rental machines,
and other property - net 14,608 14,689 -0.6%
Investments and other assets 43,638 44,770 -2.5%
-------- --------
TOTAL ASSETS $100,676 $104,457 -3.6%
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $8,427 $6,646 26.8%
Long-term debt 13,524 16,986 -20.4%
-------- --------
Total debt 21,951 23,632 -7.1%
Accounts payable, taxes,
and accruals 26,740 31,254 -14.4%
Other liabilities 22,283 21,707 2.7%
-------- --------
TOTAL LIABILITIES 70,974 76,593 -7.3%
STOCKHOLDERS' EQUITY 29,702 27,864 6.6%
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $100,676 $104,457 -3.6%
======== ========
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
THIRD QUARTER 2004
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) --------- Revenue -------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $11,392 $791 $12,183 $1,157 9.5%
% change 9.7% 14.5% 10.0% -4.4%
Systems and Technology
Group 4,117 265 4,382 417 9.5%
% change 8.9% 24.4% 9.7% 32.4%
Personal Systems Group 3,261 52 3,313 54 1.6%
% change 16.6% 20.9% 16.7% nm
Software 3,621 433 4,054 1,011 24.9%
% change 4.6% 17.0% 5.8% 17.8%
Global Financing 634 309 943 351 37.2%
% change -11.1% 16.2% -3.7% 20.2%
Enterprise Investments 257 2 259 (55) -21.2%
% change 0.0% 0.0% 0.0% -1.9%
TOTAL REPORTABLE SEGMENTS 23,282 1,852 25,134 2,935 11.7%
% change 8.8% 16.8% 9.4% 14.2%
Eliminations / Other 147 (1,852) (1,705) (404)
TOTAL IBM CONSOLIDATED $23,429 $0 $23,429 $2,531 10.8%
% change 8.9% 8.9% -0.7%
nm - not meaningful
THIRD QUARTER 2003
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) --------- Revenue -------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $10,383 $691 $11,074 $1,210 10.9%
Systems and Technology
Group * 3,781 213 3,994 315 7.9%
Personal Systems Group 2,796 43 2,839 (50) -1.8%
Software 3,461 370 3,831 858 22.4%
Global Financing 713 266 979 292 29.8%
Enterprise Investments 257 2 259 (54) -20.8%
TOTAL REPORTABLE SEGMENTS 21,391 1,585 22,976 2,571 11.2%
Eliminations / Other 131 (1,585) (1,454) (22)
TOTAL IBM CONSOLIDATED $21,522 $0 $21,522 $2,549 11.8%
* 2003 Technology Group and Systems Group segment results have been
reclassified to conform with current reporting structure.
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
NINE MONTHS 2004
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) --------- Revenue -------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $33,818 $2,312 $36,130 $3,237 9.0%
% change 8.4% 10.9% 8.6% -3.7%
Systems and Technology
Group 12,047 777 12,824 1,190 9.3%
% change 10.8% 31.7% 11.9% 62.1%
Personal Systems Group 9,252 115 9,367 70 0.7%
% change 17.0% -6.5% 16.6% nm
Software 10,545 1,291 11,836 2,823 23.9%
% change 4.8% 12.6% 5.6% 20.3%
Global Financing 1,951 875 2,826 1,073 38.0%
% change -6.9% 0.8% -4.6% 24.6%
Enterprise Investments 801 6 807 (153) -19.0%
% change 10.5% 50.0% 10.7% 26.4%
TOTAL REPORTABLE SEGMENTS 68,414 5,376 73,790 8,240 11.2%
% change 8.8% 11.6% 9.0% 18.3%
Eliminations / Other 418 (5,376) (4,958) (576)
TOTAL IBM CONSOLIDATED $68,832 $0 $68,832 $7,664 11.1%
% change 8.9% 8.9% 9.5%
nm - not meaningful
NINE MONTHS 2003
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) --------- Revenue -------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $31,187 $2,085 $33,272 $3,361 10.1%
Systems and Technology
Group * 10,875 590 11,465 734 6.4%
Personal Systems Group 7,909 123 8,032 (127) -1.6%
Software 10,061 1,147 11,208 2,347 20.9%
Global Financing 2,095 868 2,963 861 29.1%
Enterprise Investments 725 4 729 (208) -28.5%
TOTAL REPORTABLE SEGMENTS 62,852 4,817 67,669 6,968 10.3%
Eliminations / Other 366 (4,817) (4,451) 28
TOTAL IBM CONSOLIDATED $63,218 $0 $63,218 $6,996 11.1%
* 2003 Technology Group and Systems Group segment results have been
reclassified to conform with current reporting structure.
INTERNATIONAL BUSINESS MACHINES CORPORATION
FINANCIAL SUMMARY - SUPPLEMENTAL DATA
Three Months Ended September 30, 2004
(Unaudited; Dollars in millions except per share amounts)
As Reported Charge* Excl. Charge
3Q'04 Yr/Yr 3Q'04 3Q'04 Yr/Yr
----- ----- ------ ----- -----
Continuing Operations
Revenue $23,429 8.9% $23,429 8.9%
Gross profit 8,646 10.7% 8,646 10.7%
Gross profit margin 36.9% 36.9%
Total expense and
other income 6,115 16.2% $320 5,795 10.1%
Expense to revenue 26.1% 24.7%
Income from continuing
operations before
income taxes 2,531 (0.7)% (320) 2,851 11.8%
Pre-tax margin 10.8% 12.2%
Provision for
income taxes 731 (125) 856
Effective tax rate 28.9% 30.0%
Income from continuing
Operations $1,800 0.9% ($195) $1,995 11.8%
Net margin 7.7% 8.5%
EARNINGS PER SHARE
OF COMMON STOCK:
Assuming dilution $1.06 3.9% ($0.11) $1.17 14.7%
* One-time, pre-tax charge of $320 million for the partial settlement
of legal claims against IBM's pension plan.
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