IBM Corporation
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ibm1.docIBM Corporation
In the seven years (since 1994), that Lou Gerstner has reigned over IBM, the company’s earnings per share have increased an average of 27% per year. This remarkable increase in earnings, has not gone unnoticed by the securities markets. Indeed, the company’s market value has grown from less than $30 billion to over $200 billion during this period.
Use the following financial statement data to:
1. Decompose IBM’s ROE 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 in your evaluation)
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
$
22,922
$
22,922
$
18,275
$
16,779
$
17,325
$
20,277
$
Debt Maturing within One Year
13844
14,230
14,096
14,713
13,905
13,905
13,237
13,271
12,667
13,230
Total Current Liabilities
35,611
$
39,578
$
37,778
$
35,961
$
36,827
$
36,827
$
31,512
$
30,050
$
29,992
$
33,507
$
Long Term Debt
14295
14124
13,807
14,330
15,508
15,508
15,239
14,590
15,029
13,696
Other Liabilities & Deferred Taxes
13340
13282
13,722
13,898
14,332
14,332
14,333
13,895
14,058
14,480
Total Liabilities
63,246
$
66,984
$
65,307
$
64,189
$
66,667
$
66,667
$
61,084
$
58,535
$
59,079
$
61,683
$
Total Shareholders Equity
19518
20,511
20,068
$
19,158
$
19,433
$
19,433
$
18,635
$
18,577
$
18,865
$
19,816
$
Total Liabilities and Shareholders' Equity
82,764
$
87,495
$
85,375
$
83,347
$
86,100
$
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
Sep-96
Dec-96
Mar-97
Jun-97
Sep-97
Dec-97
Mar-98
Jun-98
Sep-98
Dec-98
Mar-99
Jun-99
Sep-99
Dec-99
Mar-00
Jun-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
Sep-96
Nov-96
Jan-97
Mar-97
May-97
Jul-97
Sep-97
Nov-97
Jan-98
Mar-98
May-98
Jul-98
Sep-98
Nov-98
Jan-99
Mar-99
May-99
Jul-99
Sep-99
Nov-99
Jan-00
Mar-00
May-00
Earnings per Share
$
Qtly EPS
Pseudo Annual EPS
