IBM Corporation

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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  value grew from less than $30 billion to over $200 billion during the period.
Use the following financial statement data to:
1.
Decompose IBM’s ROE (by quarter) and discuss the factors (and trends) that contribute to Big Blue’s profitability
2.
Evaluate IBM’s Revenue growth, Receivables, and Gross margins and over the period. Be sure to control for seasonality (e.g., compute the same quarter to same quarter change in these items).
3.
Evaluate IBM’s Earnings per Share (basic), and Identify the factors most responsible for the increase in IBM’s earnings
Write your answers in Standard English. Be specific in your references, provide details of your computations, and be thorough in your explanations – I cannot read your mind.
EXHIBIT 1IBMSelected Earnings Per Share DataFor the Quarters Ended:Jun-00Mar-00Dec-99Sep-99Jun-99Earnings Per Share (from continuing operations)1.06 0.83 1.12 0.90 0.91 Analyst Expected Earnings Per Share1.00 0.77 1.06 0.90 0.88 Difference0.06 0.06 0.06 – 0.03 % Surprise6.00%7.79%5.66%0.00%3.41%
All of the financial data in the tables that follow (except “per share figures”), are in millions.
EXHIBIT 2IBMEarnings per Share*Jun-00Mar-00Dec-99Sep-99Jun-99Mar-99Dec-98Sep-98Jun-98Mar-98Dec-97Earings per Share of Common Stock – Basic1.10$ 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 – Basic1,767.6 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 Share109.34$ 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 splits2 for 1 stock split 5/10/99EXHIBIT 2 (continued)Sep-97Jun-97Mar-97Dec-96Sep-96Earings per Share of Common Stock – Basic0.69$ 0.73$ 0.59$ 0.99$ 0.62$ Average Number of Common Shares Outstanding – Basic1,956.0 1,973.8 2,006.8 2,053.6 2,087.4 Average Price per Share52.13$ 42.78$ 36.45$ 36.61$ 31.65$ * All Data are Adjusted to Reflect stock splits2 for 1 stock split 5/9/97
EXHIBIT 3IBMConsolidated Statements of IncomeFor the Quarters Ended:Mar-00Dec-99Sep-99Jun-99Mar-99Dec-98Sep-98Jun-98Mar-98Dec-97Total Revenues19,348$ 24,182$ 21,144$ 21,905$ 20,317$ 25,131$ 20,095$ 18,823$ 17,618$ 23,723$ Cost of Sales12,337 15,299 13,580 13,681 13,059 15,322 12,628 11,677 11,168 14,205 Gross Margin7,011 8,883 7,564 8,224 7,258 9,809 7,467 7,146 6,450 9,518 Selling, General and Administrative Expenses3,706 4,445 3,501 2,846 3,937 5,074 4,057 3,812 3,719 5,060 Research and Development1,172 1,416 1,383 1,293 1,181 1,407 1,240 1,220 1,179 1,425 Total Operating Expenses4,878 5,861 4,884 4,139 5,118 6,481 5,297 5,032 4,898 6,485 Operating Income2,133 3,022 2,680 4,085 2,140 3,328 2,170 2,114 1,552 3,033 Other Income (Expense), net189 134 134 155 134 187 122 130 150 173 Interest Expense152 171 185 197 174 213 160 161 179 194 Income Before Taxes2,170 2,985 2,629 4,043 2,100 3,302 2,132 2,083 1,523 3,012 Income Tax Expense651 896 867 1,652 630 956 638 631 487 919 Net Income1,519$ 2,089$ 1,762$ 2,391$ 1,470$ 2,346$ 1,494$ 1,452$ 1,036$ 2,093$ EXHIBIT 3 (continued)Sep-97Jun-97Mar-97Dec-96Sep-96Total Revenues18,605$ 18,872$ 17,308$ 23,143$ 18,062$ Cost of Sales11,507 11,471 10,716 13,822 10,804 Gross Margin7,098 7,401 6,592 9,321 7,258 Selling, General and Administrative Expenses3,932 3,958 3,684 5,093 4,175 Research and Development1,162 1,221 1,069 1,332 1,115 Total Operating Expenses5,094 5,179 4,753 6,425 5,290 Operating Income2,004 2,222 1,839 2,896 1,968 Other Income (Expense), net162 137 185 181 183 Interest Expense183 179 172 190 172 Income Before Taxes1,983 2,180 1,852 2,887 1,979 Income Tax Expense624 734 657 864 694 Net Income1,359$ 1,446$ 1,195$ 2,023$ 1,285$
EXHIBIT 41999199819971996Sales87,548$ 81,667$ 78,508$ 75,947$ Cost of Goods Sold55,619 50,795 47,899 45,408 Gross Margin31,929 30,872 30,609 30,539 Research and Development Expense5,273 5,046 4,877 4,654 Other Selling, General & Administrative Expense14,729 16,662 16,634 16,854 Total Operating Expenses20,002 21,708 21,511 21,508 Total Operating Income11,927 9,164 9,098 9,031 Other Income (Expense) net557 589 657 707 Interest Expense727 713 728 716 EBT11,757 9,040 9,027 9,022 Tax on EBT4,045 2,712 2,934 3,158 Net Income7,712 6,328 6,093 5,864 For the Years Ended:Consolidated Statements of IncomeIBMEXHIBIT 51999199819971996Sales1.00 1.00 1.00 1.00 Cost of Goods Sold0.64 0.62 0.61 0.60 Gross Margin0.36 0.38 0.39 0.40 Research and Development Expense0.06 0.06 0.06 0.06 Other Selling, General & Administrative Expense0.17 0.20 0.21 0.22 Total Operating Expenses0.23 0.27 0.27 0.28 Total Operating Income0.14 0.11 0.12 0.12 Other Income (Expense) net0.01 0.01 0.01 0.01 Interest Expense0.01 0.01 0.01 0.01 EBT0.13 0.11 0.11 0.12 Tax on EBT0.05 0.03 0.04 0.04 Net Income0.09 0.08 0.08 0.08 Common Size Statements of IncomeFor 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-97Jun-97Mar-97Dec-96AssetsCash6,486$ 6,861$ 6,463$ 8,137$ Receivables, Inventory and Pre-Paids31,704 31,778 30,857 32,558 Total Current Assets38,190$ 38,639$ 37,320$ 40,695$ Property & Equipment (net)17,921 17,647 17,062 17,407 Investments and Other Assets22,182 22,533 22,145 23,030 Total Assets78,293$ 78,819$ 76,527$ 81,132$ Liabilities and Shareholders’ EquityAccounts Payable, Taxes & Accruals18,072$ 18,531$ 17,998$ 21,043$ Debt Maturing within One Year12,518 14,028 13,243 12,957 Total Current Liabilities30,590$ 32,559$ 31,241$ 34,000$ Long Term Debt13,623 11,675 10,402 9,872 Other Liabilities & Deferred Taxes14,324 14,476 14,933 15,632 Total Liabilities58,537$ 58,710$ 56,576$ 59,504$ Total Shareholders Equity19,756$ 20,109$ 19,951$ 21,628$ Total Liabilities and Shareholders’ Equity78,293$ 78,819$ 76,527$ 81,132$

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