Accouting Financial Reporting and Analysis
Ken.S
IBM_Case.pdf
IBM Corporation
In the seven years (since 1994), that Lou Gerstner reigned over IBM, the company’s earnings per
share increased an average of 27% per year. This remarkable increase in earnings did not go
unnoticed by the securities markets. Indeed, the company’s market value grew from less than $30
billion to over $200 billion during the period.
Use the following financial statement data to:
1. Decompose IBM’s ROE (by quarter) and discuss the factors (and trends) that contribute to Big Blue’s profitability
2. Evaluate IBM’s Revenue growth, Receivables, and Gross margins and over the period. Be sure to control for seasonality (e.g., compute the same quarter to same quarter change in these
items).
3. Evaluate IBM’s Earnings per Share (basic), and Identify the factors most responsible for the increase in IBM’s earnings
Write your answers in Standard English. Be specific in your references, provide details of your
computations, and be thorough in your explanations – I cannot read your mind.
EXHIBIT 1
IBM
Selected Earnings Per Share Data
For the Quarters Ended: Jun-00 Mar-00 Dec-99 Sep-99 Jun-99
Earnings Per Share (from continuing operations) 1.06 0.83 1.12 0.90 0.91
Analyst Expected Earnings Per Share 1.00 0.77 1.06 0.90 0.88
Difference 0.06 0.06 0.06 - 0.03
% Surprise 6.00% 7.79% 5.66% 0.00% 3.41%
All of the financial data in the tables that follow (except “per share figures”), are in millions.
EXHIBIT 2
IBM
Earnings per Share* Jun-00 Mar-00 Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97
Earings per Share of Common
Stock - Basic 1.10$ 0.85$ 1.16$ 0.97$ 1.32$ 0.80$ 1.27$ 0.80$ 0.77$ 0.54$ 1.08$
Average Number of Common
Shares Outstanding - Basic 1,767.6 1,777.2 1,793.0 1,805.2 1,812.1 1,823.8 1,839.5 1,856.9 1,879.2 1,946.6 1,929.6
Average Price per Share 109.34$ 111.00$ 102.95$ 123.61$ 116.48$ 88.28$ 82.91$ 62.20$ 57.97$ 51.12$ 52.05$
* All Data are Adjusted to Reflect
stock splits
2 for 1
stock split
5/10/99
EXHIBIT 2 (continued)
Sep-97 Jun-97 Mar-97 Dec-96 Sep-96
Earings per Share of Common
Stock - Basic 0.69$ 0.73$ 0.59$ 0.99$ 0.62$
Average Number of Common
Shares Outstanding - Basic 1,956.0 1,973.8 2,006.8 2,053.6 2,087.4
Average Price per Share 52.13$ 42.78$ 36.45$ 36.61$ 31.65$
* All Data are Adjusted to Reflect
stock splits
2 for 1 stock
split 5/9/97
EXHIBIT 3
IBM
Consolidated Statements of Income
For the Quarters Ended: Mar-00 Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97
Total Revenues 19,348$ 24,182$ 21,144$ 21,905$ 20,317$ 25,131$ 20,095$ 18,823$ 17,618$ 23,723$
Cost of Sales 12,337 15,299 13,580 13,681 13,059 15,322 12,628 11,677 11,168 14,205
Gross Margin 7,011 8,883 7,564 8,224 7,258 9,809 7,467 7,146 6,450 9,518
Selling, General and Administrative Expenses 3,706 4,445 3,501 2,846 3,937 5,074 4,057 3,812 3,719 5,060
Research and Development 1,172 1,416 1,383 1,293 1,181 1,407 1,240 1,220 1,179 1,425
Total Operating Expenses 4,878 5,861 4,884 4,139 5,118 6,481 5,297 5,032 4,898 6,485
Operating Income 2,133 3,022 2,680 4,085 2,140 3,328 2,170 2,114 1,552 3,033
Other Income (Expense), net 189 134 134 155 134 187 122 130 150 173
Interest Expense 152 171 185 197 174 213 160 161 179 194
Income Before Taxes 2,170 2,985 2,629 4,043 2,100 3,302 2,132 2,083 1,523 3,012
Income Tax Expense 651 896 867 1,652 630 956 638 631 487 919
Net Income 1,519$ 2,089$ 1,762$ 2,391$ 1,470$ 2,346$ 1,494$ 1,452$ 1,036$ 2,093$
EXHIBIT 3 (continued)
Sep-97 Jun-97 Mar-97 Dec-96 Sep-96
Total Revenues 18,605$ 18,872$ 17,308$ 23,143$ 18,062$
Cost of Sales 11,507 11,471 10,716 13,822 10,804
Gross Margin 7,098 7,401 6,592 9,321 7,258
Selling, General and Administrative Expenses 3,932 3,958 3,684 5,093 4,175
Research and Development 1,162 1,221 1,069 1,332 1,115
Total Operating Expenses 5,094 5,179 4,753 6,425 5,290
Operating Income 2,004 2,222 1,839 2,896 1,968
Other Income (Expense), net 162 137 185 181 183
Interest Expense 183 179 172 190 172
Income Before Taxes 1,983 2,180 1,852 2,887 1,979
Income Tax Expense 624 734 657 864 694
Net Income 1,359$ 1,446$ 1,195$ 2,023$ 1,285$
EXHIBIT 4
1999 1998 1997 1996
Sales 87,548$ 81,667$ 78,508$ 75,947$
Cost of Goods Sold 55,619 50,795 47,899 45,408
Gross Margin 31,929 30,872 30,609 30,539
Research and Development Expense 5,273 5,046 4,877 4,654
Other Selling, General & Administrative Expense 14,729 16,662 16,634 16,854
Total Operating Expenses 20,002 21,708 21,511 21,508
Total Operating Income 11,927 9,164 9,098 9,031
Other Income (Expense) net 557 589 657 707
Interest Expense 727 713 728 716
EBT 11,757 9,040 9,027 9,022
Tax on EBT 4,045 2,712 2,934 3,158
Net Income 7,712 6,328 6,093 5,864
For the Years Ended:
Consolidated Statements of Income
IBM
EXHIBIT 5
1999 1998 1997 1996
Sales 1.00 1.00 1.00 1.00
Cost of Goods Sold 0.64 0.62 0.61 0.60
Gross Margin 0.36 0.38 0.39 0.40
Research and Development Expense 0.06 0.06 0.06 0.06
Other Selling, General & Administrative Expense 0.17 0.20 0.21 0.22
Total Operating Expenses 0.23 0.27 0.27 0.28
Total Operating Income 0.14 0.11 0.12 0.12
Other Income (Expense) net 0.01 0.01 0.01 0.01
Interest Expense 0.01 0.01 0.01 0.01
EBT 0.13 0.11 0.11 0.12
Tax on EBT 0.05 0.03 0.04 0.04
Net Income 0.09 0.08 0.08 0.08
Common Size Statements of Income
For the Years Ended:
IBM
EXHIBIT 6
IBM Consolidated Balance Sheets For the Quarters
Ended: Mar-00 Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Assets Cash 3606 5,831
6,026 $ 7,241 $ 5,356 $ 5,768 $ 5,869 $ 5,471 $ 5,889 $ 7,553 $ Receivables, Inventory and Pre-Paids 35533 37,324
36,851 36,211 34,445 36,592 32,933 31,541 31,682 32,865 Total Current Assets 39,139 $
43,155 $ 42,877 $ 43,452 $ 39,801 $ 42,360 $ 38,802 $ 37,012 $ 37,571 40,418 $ Property & Equipment (net) 16959 17,590
17,463 17,253 18,866 19,631 19,005 18,453 18,223 18,347 Investments and Other Assets 26666 26,750
25,035 22,642 23,084 24,109 21,912 21,647 22,150 22,734 Total Assets 82,764 $
87,495 $ 85,375 $ 83,347 $ 81,751 $ 86,100 $ 79,719 $ 77,112 $ 77,944 $ 81,499 $ Liabilities and Shareholders' Equity Accounts Payable, Taxes & Accruals 21767 25,348
23,682 $ 21,248 $ 19753 $ 1 22,922 $ 18,275 $ 16,779 $ 17,325 $ 20,277 $ Debt Maturing within One Year 13844 14,230
14,096 14,713 13708 13,905 13,237 13,271 12,667 13,230 Total Current Liabilities 35,611 $
39,578 $ 37,778 $ 35,961 $ 33281 $ 36,827 $ 31,512 $ 30,050 $ 29,992 $ 33,507 $ Long Term Debt 14295 14124 13,807
14,330 16285 15,508 15,239 14,590 15,029 13,696 Other Liabilities & Deferred Taxes 13340 13282 13,722
13,898 13879 14,332 14,333 13,895 14,058 14,480 Total Liabilities 63,246 $
66,984 $ 65,307 $ 64,189 $ 63445 $ 66,667 $ 61,084 $ 58,535 $ 59,079 $ 61,683 $ Total Shareholders Equity 19518 20,511
20,068 $ 19,158 $ 18306 $ 19,433 $ 18,635 $ 18,577 $ 18,865 $ 19,816 $ Total Liabilities and Shareholders' Equity 82,764 $
87,495 $ 85,375 $ 83,347 $ 81751 $ 86,100 $ 79,719 $ 77,112 $ 77,944 $ 81,499 $
EXHIBIT 6 (continued)
Sep-97 Jun-97 Mar-97 Dec-96
Assets
Cash 6,486$ 6,861$ 6,463$ 8,137$
Receivables, Inventory and Pre-Paids 31,704 31,778 30,857 32,558
Total Current Assets 38,190$ 38,639$ 37,320$ 40,695$
Property & Equipment (net) 17,921 17,647 17,062 17,407
Investments and Other Assets 22,182 22,533 22,145 23,030
Total Assets 78,293$ 78,819$ 76,527$ 81,132$
Liabilities and Shareholders' Equity
Accounts Payable, Taxes & Accruals 18,072$ 18,531$ 17,998$ 21,043$
Debt Maturing within One Year 12,518 14,028 13,243 12,957
Total Current Liabilities 30,590$ 32,559$ 31,241$ 34,000$
Long Term Debt 13,623 11,675 10,402 9,872
Other Liabilities & Deferred Taxes 14,324 14,476 14,933 15,632
Total Liabilities 58,537$ 58,710$ 56,576$ 59,504$
Total Shareholders Equity 19,756$ 20,109$ 19,951$ 21,628$
Total Liabilities and Shareholders' Equity 78,293$ 78,819$ 76,527$ 81,132$
Chart 1
IBM
0
20
40
60
80
100
120
140
S ep
-9 6
D ec
-9 6
M ar
-9 7
Ju n-
97
S ep
-9 7
D ec
-9 7
M ar
-9 8
Ju n-
98
S ep
-9 8
D ec
-9 8
M ar
-9 9
Ju n-
99
S ep
-9 9
D ec
-9 9
M ar
-0 0
Ju n-
00
Common Stock Price per Share
$
Chart 2
IBM
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
S ep
-9 6
N ov
-9 6
Ja n-
97
M ar
-9 7
M ay
-9 7
Ju l-9
7
S ep
-9 7
N ov
-9 7
Ja n-
98
M ar
-9 8
M ay
-9 8
Ju l-9
8
S ep
-9 8
N ov
-9 8
Ja n-
99
M ar
-9 9
M ay
-9 9
Ju l-9
9
S ep
-9 9
N ov
-9 9
Ja n-
00
M ar
-0 0
M ay
-0 0
Earnings per Share
$
Qtly EPS
Pseudo Annual EPS
