In November 2011, Warren Buffett announced on CNBC’s television show Squawk Box that Berkshire Hathaway had taken a $10.7 billion position in IBM—5.5 percent of the company’s shares outstanding. Explaining the purchase, Buffett said that although he had been reading the annual reports of the company for the past fifty years, he had only recently realized how important its business was for IT organizations around the world. However, after reading the 2010 annual report, Buffett began buying shares.
IBM was founded by Charles Ranlett Flint in 1911 as the Computing-Tabulating-Recording Company (CTR). CTR dealt in late-nineteenth-century technologies such as commercial scales and industrial time recorders. By 1924, under the leadership of Thomas J. Watson Sr., the company was ready to expand internationally and focus on new products. To reflect these new goals, Watson renamed the company International Business Machines Corporation (IBM). Watson would become an iconic leader, best known for instituting an almost reverent fervor in IBM employees. Professionalism and customer focus were key signatures, and the new direction of the company was built around its motto: “Think.”
Figure 20.1.
Since these founding decades, IBM had been a research and development powerhouse. The company played a major role in developing record-keeping and calculating machinery between 1930 and 1980, serving both commercial enterprises (developing, for instance, the American Airlines booking system, SABRE) as well as the government (building the record-keeping system used for Social Security, as one example). In 2013, Bloomberg noted that IBM had secured more US patents than any other company for the twentieth straight year.1 Its inventions included the automated teller machine (ATM); the floppy disk; the hard drive disk; the magnetic stripe card; the Universal Product Code (UPC); the scanning tunneling microscope; and the AI system “Watson” that famously competed in—and won—on the game show Jeopardy! in 2011. Over the course of its history, the core business of IBM had been serving the systems, calculations, and processing needs of their diverse international customers in customized ways.
Since the year 2000, IBM had augmented some of its more robust divisions, while shifting away from others. In 2002, it acquired PwC Consulting, a move that was meant to strengthen its Global Business Services (GBS) division that focused on IT systems, integration, and implementation consultancy. In 2005, IBM sold its personal computer business to Lenovo. It also made numerous acquisitions in software, enterprise, and cloud services, including Micromuse, SPSS, Ascential, FileNet, ISS, Cognos, Kenexa, and SoftLayer Technologies. IBM’s strategic focus in the last decade has been to build its software division.
To understand what an investor considering IBM would have seen in early 2011, we must turn to the company’s 2010 annual report. The report starts with a personal note from Samuel Palmisano, IBM’s chairman, president, and CEO, describing the company’s transformation into an international, high-margin products and services business, and how this transformation will put IBM in a strong position in the decade to come. On page five of his letter, Palmisano presents a clear roadmap to the future (the 2010 Road Map). The vision is clear: IBM will achieve clear success as tracked by IBM’s earnings-per-share performance over the next five years. The three drivers for achieving this will be (1) operating leverage, (2) share repurchases, and (3) growth. For Palmisano, operating leverage means shifting to increasingly higher-margin business and improving productivity in the company. As for share repurchases, Palmisano states a specific target of distributing $50 million in share buy-backs and $20 million in dividends over the next five years. Growth is much more complicated, but a few areas for targeted growth are discussed. For instance, China, India, and Brazil were identified as “growth markets,” where IBM was in the process of nearly doubling its number of branch locations. Palmisano presents a goal of increasing the share of growth market revenues from 20 percent to 30 percent by 2015. Palmisano also discusses the area of business analytics and optimization, pointing to a megatrend toward ever-increasing data for businesses and to the value that IBM can deliver in helping companies utilize these data to improve decision making. A third area of growth is cloud computing, where IBM can help clients develop their own private clouds as well as utilize IBM’s cloud-based infrastructure. Finally, Palmisano addresses what he calls “Smarter Planet,” referring to a broad bucket of new IT-driven solutions in high-growth industries like healthcare, retail, banking, and communications.
Overall, it seems from the annual report that IBM has a CEO and chairman with a very clear vision of how to increase IBM’s intrinsic value for shareholders within the next five years. As a potential investor, I would have appreciated Palmisano’s directness and his specific targets in achieving value for shareholders. I would still have been skeptical, however, about how the growth would be achieved.
As far as the actual business of IBM, the company breaks itself down into five separate business segments. I have presented them in the same order as IBM presented them in its annual report.
Table 20.1.
Overview of business segments
| Business unit |
FY 2010 revenues |
% of total |
Gross margin |
PBT margin |
| Global Tech. Services |
$38.2 billion |
38% |
34.7% |
14.1% |
| Global Business Services |
$18.2 billion |
18% |
28.3% |
13.5% |
| Software |
$22.5 billion |
23% |
86.9% |
35.8% |
| Systems and Tech. |
$18.0 billion |
18% |
38.5% |
8.4% |
| Global Financing |
$2.2 billion |
2% |
51.3% |
48.0% |
| Other |
$0.7 billion |
1% |
N/A |
N/A |
| Total |
$99.8 billion |
100% |
21.5% |
19.5% |
As table 20.1 shows, by far the most significant divisions are the Global Technology Services, Global Business Services, and the Software divisions. Together they make up 79 percent of revenues and 83 percent of pretax profits. In fact, because the Software division has such a high margin, it makes up a larger proportion of overall pretax profits than any other business segment, at 44 percent. As a potential investor, I would have focused on understanding the two Global Services divisions and the Software division.
Global Technology Services (GTS): An investor with a limited knowledge of the industry would probably have understood just the basics of this business—that it provides four major infrastructure and business process services to clients: (1) Strategic Outsourcing Services, which includes outsourcing of whole IT activity and/or the execution of business processes such as HR to a cheaper location like India; (2) Integrated Technology Services, which increases enterprise efficiency or productivity; and (3) Technology Support and (4) Maintenance Services, which offer product support services and maintenance of software platforms and systems. The annual report does not provide much greater detail than this, and an investor with no other information would likely have found it very difficult to understand the core business of IBM in GTS. Only those well versed in IBM’s structure and in the industry would understand that GTS is primarily a technology consulting business, focused on helping clients implement the capabilities mentioned previously. As such, its customer interface consists of sales personnel, who sell solutions and the implementation of solutions directly to chief technology officers, chief marketing officers, and other managers of major corporate customers. Competitors that offered similar services would have included Accenture, Deloitte, Infosys, and Cognizant.
Global Business Services (GBS): According to IBM’s annual report, Global Business Services primarily offers customers help in two areas. The first, Consulting and Systems Integration, is a broad set of services that help customers develop and implement IT solutions. This includes installing third-party software, like SAP or Oracle, and also includes some of the business analytics and optimization solutions that IBM highlights as a growth area. The second, Application Management Services, is primarily a customized software and software support business where IBM helps customers develop and maintain software solutions for specific business purposes. Again, a potential investor with limited technology knowledge would likely have understood only the basics of this business, which could be summed up as a mix of consulting and customized software solutions implementation.
Software: For IBM, Software describes numerous software platforms that the company ownes and supports. This is primarily middleware, the class of enterprise software used by companies to integrate information from different systems software from different functions. There are five distinct platforms that IBM mentions: Websphere software, Information Management software, Tivoli software, Lotus Software, and Rational software. In addition to middleware, IBM also supports customized operating systems—tailored versions of the main software that provides the interface for running a system.
Table 20.2, which IBM provides in the annual report, shows the year-on-year growth rates for subgroups of middleware. As this shows, middleware is a growth category, with WebSphere and Tivoli being the fastest growers.
Table 20.2.
Overview of IBM’s software revenue by subcategories
($ in millions)
| For the year ended Dec. 31 |
2010 |
2009* |
Yr.-to-yr. change |
Yr.-to-yr. change adjusted for currency |
| Software external revenue: |
$22,485 |
$21,396 |
5.1% |
4.8% |
| Middleware |
$18,444 |
$17,125 |
7.7% |
7.5% |
| Key branded middleware |
13,876 |
12,524 |
10.8 |
10.7 |
| WebSphere |
|
|
20.8 |
20.6 |
| Information management |
|
|
8.6 |
8.3 |
| Lotus |
|
|
(2.3) |
(2.1) |
| Tivoli |
|
|
15.0 |
15.1 |
| Rational |
|
|
4.8 |
4.8 |
| Other middleware |
4,568 |
4,602 |
(0.7) |
(1.2) |
| Operating systems |
2,282 |
2,163 |
5.5 |
4.9 |
| Other |
1,759 |
2,108 |
(16.6) |
(17.0) |
*Reclassified to conform to 2010 presentation.
Source: IBM, 2010 Annual Report, 28.
In terms of how software is sold by IBM, approximately two-thirds of revenue is annuity based, coming from recurring license fees and postcontract support. The other one-third of revenues comes from one-time or spot revenues. This includes postcontract support, product upgrades, and technical support.
As far as competition in the software area, IBM solutions competed directly and indirectly with numerous other software providers such as Oracle, Microsoft, and niche players like Software AG. Assessing the business quality of the core IBM businesses is not straightforward. In software it would have seemed clear to a potential investor that customer stickiness was high and capital intensity very low. The GTS and GBS businesses, meanwhile, are more complex. Some of the services they provided—like specialized IT implementation of data analytics—would have seemed like areas where IBM likely had a competitive advantage built over time. Other services, like business consulting or outsourced services, would have appeared to be more commoditized with numerous credible competitors.
A potential investor at the time may have concluded that IBM was a complex mix of software solutions and people services, where approximately 40 percent (matched with the software profits) were highly recurring, high-quality revenues and 40 percent (associated with consultancy and business services) were based on a range of both low- and higher-quality revenues facing different sets of competitive offerings. For this second component of revenues, which are people services, asset light, but execution heavy, the investor would likely realize the high dependence on good execution.
Before moving on to the financial analysis of IBM, let me just touch upon the last two business divisions of IBM that make up approximately 20 percent of revenues. According to IBM’s annual report, the business Systems and Technology provides customers with business solutions based on advanced computing power and storage capabilities. In layperson terms, this means mostly hardware solutions like customized servers and add-on products—in particular, IBM’s designated System z, Power Systems, and System x. The last business division, Global Financing, is responsible for helping to finance some of the customer purchases made for IBM’s products.
Turning to the financial statements, one notes that on pages 10 and 11 of the annual report IBM provides a 10-year snapshot of its business for the metrics of pretax profits, EPS, free cash flow, and margins. Pretax profits increased from roughly $11 billion to $21 billion in ten years. Referencing the business divisional pretax profits, one can see that most of this growth came from the GTS/GBS and the Software businesses (see figure 20.2).
Figure 20.2.
IBM pretax development (2000–2010). (Source: IBM, 2010 Annual Report, 10.)
The increase in pretax profits is matched by the other metrics, with EPS and free cash flow both more than doubling during that period. For all profitability measures, the annual rate over the previous ten years was greater than six percent per annum. Moreover, there is an increase in the gross margin from 37 percent to 46 percent and an increase in PBT margin from 12 percent to 20 percent. All these financials look Buffettesque; except for one down year in 2003, IBM had increased all key metrics year after year. The evidence points to an obviously successful transformation of the IBM business.
One area that seems underemphasized in the annual report is revenues. In fact, in the entire 10-year discussion, there does not seem to be any mention of revenues in the year 2000. The investor would be forced to turn to previous annual reports to find out that revenues in 2000 were $85 billion compared to revenues in 2010 of $100 billion. This comes out to an annual compounded rate of growth of approximately 1.6 percent—definitely less impressive than the development of other metrics.
Analyzing the business economics of IBM further, IBM’s capital requirements and return economics are shown in table 20.3.
Table 20.3.
Overview of total capital employed
| Category |
Amount in $ |
As a % of revenues |
| PPE |
$14.1 billion |
14% |
| Intangibles |
$3.4 billion |
3% |
| Inventories |
$2.5 billion |
3% |
| Accounts receivable |
$10.8 billion |
11% |
| Financing receivables |
$26.8 billion |
27% |
| Accounts payable |
−$7.8 billion |
−8% |
| Deferred income |
−$11.6 billion |
−12% |
| Total capital employed (TCE) |
$38.2 billion |
38% |
As this table shows, IBM’s core business is not capital intensive. There is some PPE involved, but for the most part capital requirements relate to working capital, including financing receivables.
All in all, the TCE of IBM equals 38 percent of revenues, and with an EBIT of $19.8 billion, the calculated pretax ROTCE is 52 percent. Assuming a normalized 30 percent tax rate, the comparable after-tax ROTCE is 36 percent. This is a very good return on capital and this is clearly the basis for IBM’s ability to return capital back to shareholders in the form of dividends and share repurchases. In terms of the financials, a potential investor would have found IBM to be a highly profitable, cash-generating business, whose only fault was a very modest growth in revenues. From the initial analysis, there would have been reason to believe that this was partly justified by the structural transformation of the business. Of course, one also would have preferred the top line to be growing strongly, as in the case of American Express or even BNSF.
Besides the fundamental business activity and the financials, a potential investor also would have considered the management team in place at IBM. Sam Palmisano served as the chairman, president, and CEO, so he was clearly the man in charge. Palmisano’s professional background was within IBM; he joined Big Blue in 1973 as a salesman and worked his way up to the position of COO, which he held immediately before he was appointed CEO in March of 2002. Palmisano succeeded the well-known and much-admired Lou Gerstner. Gerstner had been credited with saving IBM from bankruptcy in the 1990s, as competitors eroded its PC business. Palmisano took over the business after the collapse of the tech bubble and was known as the executive who led new initiatives to transform IBM in the post-Gerstner period. Palmisano’s key contributions up to this time included taking IBM into more diversified consulting capabilities (including the purchase of PwC’s consulting practice in 2002) as well as championing growth areas such as data analytics and cloud computing. He also made the controversial decision to sell IBM’s PC group to Lenovo in 2005. As the financials show, he was focused on profitability of the business. Based on these facts, the financial performance of IBM during his tenure, and his communication of a very specific vision and goal for IBM, a potential investor would likely have found him to be both a proven and capable executive. He delivered the goods.
Before turning to the valuation of IBM and what a potential investor faced with the prospect of investing in IBM would have concluded, I want to address two other aspects of IBM that I find relevant from the analysis. First, it was clear that IBM was an acquisition machine. During the period between 2000 and 2010, as noted in the annual report, IBM purchased 116 companies. The net cost of acquisitions during this period was $27 billion, or roughly one fifth of the cash flow generated by IBM. In pursuing these acquisitions, Palmisano focused on acquiring services capabilities or software platforms that would be plugged-into IBM’s distribution network. This was one major source of growth for IBM and seems to have generated significant value for the business. As a potential investor in IBM, I would have viewed its M&A track record positively, recognizing IBM as a platform that can quickly integrate and ramp up distribution for bolt-on acquisitions.
Second, IBM had a large pension liability. On the balance sheet, the net deficit reported in 2010 was $13 billion. The notes section of the annual report shows the full extent of these obligations. IBM had both U.S. and international defined benefits plans, and the gross amount of total estimated liabilities was $99 billion. Against this amount, IBM also had fair value of plan assets of $86 billion. This is a significant amount and also a risk potential. With most other companies that have pension deficits, there is a cash amount required of the company to correct the shortcoming over time. As one can see in the cash-flow statement, in the previous three years 2010 included, IBM paid approximately $2 billion a year in cash for the purpose of correcting this deficit. This is real money that would not be available for share buybacks or dividends or investing into the company. It also represents approximately 15 percent of the cash flow generated after tax for IBM in a year. Besides the immediate negative impact, the large gross value of the estimated liability means there is a significant risk arising from actuarial changes. Specifically, the $99 billion gross liability is only an estimated amount depending on assumptions made about the longevity of participants, the discount rate, the inflation of salaries, and so on. Hence, minor changes in assumptions could have major absolute dollar implications for how much IBM would owe in the future. For example, it seems that between 2009 and 2010, IBM changed its discount rate assumption from 5.6 percent to 5.0 percent in evaluating the gross liability of U.S. defined pension plans. This alone had the actuarial effect of increasing IBM’s liability by $1.5 billion. IBM’s assumptions, at cursory glance, seem to be on the less-conservative side; as a potential investor, this would be one long-term risk I would keep in mind. Aside from this risk, IBM seemed like a well-performing, good-quality business with strong economics.
I now turn to the valuation of the investment. As mentioned earlier, Buffett bought his stake in IBM in the first half of 2011. According to the Berkshire letter to shareholders of that year, the average price Buffett paid was $169.87 per share.2 In total this amounted to 5.5 percent of outstanding IBM shares, and it should be noted that given the very large size of IBM, Buffett more or less purchased the stock like anyone else would, as common shares and as a public investor. According to his interview on CNBC’s Squawk Box, Buffett had not even known Samuel Palmisano very well on a personal level. So this is perhaps his one investment where Buffett was most like an ordinary investor looking at a company.
The conventional valuation multiples for this purchase would have been as follows:
Table 20.4.
Calculation of enterprise value
| Share price |
$169.87 |
| Number of shares outstanding* |
1228 million |
| Market capitalization |
$208.6 billion |
| Net financial debt and pensions deficit** |
$29.8 billion |
| Enterprise value |
$238.4 billion |
*Based on shares outstanding on December 31, 2010 as reported on page 16 of the 2010 Annual Report for IBM.
**Included were cash and marketable securities of $11.7 billion, ST and LT debt of $28.6 billion, and net pension deficit of $ 12.9 billion.
Table 20.5.
| |
2010 actual |
2009 actual |
| EPS (diluted) |
$11.52 |
$10.01 |
| PER |
14.7× |
17.0× |
| EBIT |
$20.1 billion |
$18.5 billion |
| EV/EBIT |
11.9× |
12.9× |
| FCF yield on mkt. cap* |
7.8% |
7.2% |
*I have used IBM’s reported FCF of $16.3 billion, which is roughly in line with my own calculation of FCF (based on cash earnings after tax minus estimated maintenance CAPEX). Reported FCF in 2009 was $15.1 billion.
Given that IBM looked like a good-quality business with a strong track record of financial performance and proven management, the valuation looks still reasonable, although not cheap. At earnings multiples of 11.9× EV/EBIT and 14.7× PER, the share price would not have fully valued the growth in earnings if IBM were to continue on the trajectory of the previous 10 years. Note also the free cash yield of IBM. A combination of factors—including having less required maintenance CAPEX than depreciation and amortization (partly due to having less hardware than before) as well as lower than usual tax rates (partly due to overseas business and previous tax losses)—meant that IBM had an unusually high cash conversion from earnings. In fact, from my analysis, IBM had a cash earnings conversion ratio from EBIT over 80 percent for every year since 2003. The cash earnings yield of almost eight percent is quite healthy. This is especially attractive considering that management had already promised to put a significant amount of this cash flow into share buybacks and dividends. Overall, as a potential investor in IBM, I would have found this case to be quite attractive. I would have especially liked the solid financial performance, the proven management team, and the fair valuation, although I would have been concerned about not fully grasping the complexities of the business, and also about the defined benefit pension schemes.
Buffett’s View
Buffett has spoken about his investment in IBM in several interviews, including the famous interview on CNBC’s Squawk Box in November 2011 where he first announced Berkshire’s purchase. IBM was also mentioned in his annual report of that year. In the Berkshire annual report, Buffett refers to IBM as a wonderful business and one of his largest four investments along with Coca-Cola, American Express, and Wells Fargo. Specifically, Buffett comments that CEOs Lou Gerstner and Sam Palmisano have done a superb job in transforming IBM, and says that their operational and financial management accomplishments had been truly extraordinary and brilliant, respectively. Buffett goes further to detail what astute capital allocation IBM had performed over the years with respect to share buybacks. He remarks that he would not mind if the share price languished, because IBM would then be able to accumulate more shares for the same price and increase the ownership of every existing shareholder by more.
On Squawk Box, Buffett went on to say that before he started purchasing shares, he had paid particular attention to the precise targets Samuel Palmisano had given shareholders about where IBM would be financially in the future. Impressively, Palmisano achieved what he set out to do. Buffett mentioned speaking to quite a few IT organizations within Berkshire’s subsidiaries about IBM, and the takeaway from all these discussions was the strength of the role that IBM played and the “stickiness” of those relationships.
[IBM is] a company that helps IT departments do their job better…it is a big deal for a big company to change auditors, change law firms. The IT departments…very much get working hand in glove with suppliers…there is a lot of continuity to it.
—Warren Buffett, interview on Squawk Box, CNBC, November 14, 2011.
Buffett was clearly enthusiastic about IBM and said that the company had a reverence for shareholders that he found unique among large corporations. At the end of the interview, when asked why he was buying IBM even though it was a technology company and its share price was at an all-time high, Buffett replied that he considers everything, including technology companies, but he just had not found a company he thought he could understand before. When asked about how he felt about purchasing IBM at an all-time high share price, Buffett said that he absolutely did not care about the share price. He had bought control of GEICO at an all-time high share price, and BNSF as well.
Considering all this, IBM seems to be a unique case where a potential investor would have seen a picture similar to the one Buffett saw. The superb financials, management,3 cash flows, as well as the astute capital allocation in the form of dividends and share-buy backs, would all have been recognizable to a potential investor. Buffett did benefit a bit extra from the discussions he had with Berkshire subsidiaries’ IT departments, which further convinced him of his positive assessment of the IBM business, but overall, his decision was based on the criteria discussed earlier, and he was willing to pay a fair valuation to invest in IBM.
Table 20.6.
Income statement (2010)
Year ended Dec. 31
($ in millions except per share data)
| |
2010 |
2009 |
2008 |
| Revenues: |
| Services |
56.868 |
55.128 |
58.892 |
| Sales |
40.736 |
38.300 |
42.156 |
| Financing |
2.267 |
2.331 |
2.582 |
| Total revenue |
99.870 |
95.758 |
103.630 |
| Cost: |
| Services |
38.383 |
37.146 |
40.937 |
| Sales |
14.374 |
13.606 |
15.776 |
| Financing |
1.100 |
1.220 |
1.256 |
| Total cost |
53.857 |
51.973 |
57.969 |
| Gross profit |
|
|
|
| Expense and other income: |
|
|
|
| Selling, general, and administrative |
21.837 |
20.952 |
23.386 |
| Research, development, and engineering |
6.026 |
5.820 |
6.337 |
| Intellectual property and custom development income |
−1.154 |
−1.177 |
−1.153 |
| Other expense/income |
−787 |
−251 |
−298 |
| Interest expense |
368 |
402 |
673 |
| Total expense and other income |
26.291 |
25.647 |
28.945 |
| Income before income taxes |
19.723 |
18.138 |
16.715 |
| Provision for income taxes |
4.890 |
4.713 |
4.381 |
| NET INCOME |
14.833 |
13.425 |
12.334 |
| Earnings per share of common stock: |
|
|
|
| Assuming dilution |
11.52 |
10.01 |
8.89 |
| Basic |
11.69 |
10.12 |
9.02 |
| Weighted-average number of common shares outstanding |
|
|
|
| Assuming dilution |
1,287,355,388 |
1,341,352,754 |
1,387,797,198 |
| Basic |
1,268,789,202 |
1,327,157,410 |
1,369,367,069 |
Source: IBM, 2010 Annual Report, 62.
Table 20.7.
Balance sheet (2010)
Years ended Dec. 31
($ in millions)
| Assets |
2010 |
2009 |
| Current assets |
| Cash and cash equivalents |
10.661 |
12.183 |
| Marketable securities |
990 |
1.791 |
| Notes and accounts receivable—trade (net of allowances of $324 and $217) |
10.834 |
10.736 |
| Short-term financing receivables (net of allowances of $342 and $438) |
16.257 |
14.914 |
| Other accounts receivable (net of allowances of $10 and $15) |
1.134 |
1.143 |
| Inventories |
2.450 |
2.494 |
| Deferred taxes |
1.564 |
1.730 |
| Prepaid expenses and other current assets |
4.226 |
3.946 |
| Total current assets |
48.116 |
48.935 |
| Plant, rental machines, and other property |
40.289 |
39.596 |
| Less: accumulated depreciation |
26.193 |
25.431 |
| Plant, rental machines, and other property, net |
14.096 |
14.165 |
| Long-term financing receivables (net of allowances of $58 and $97) |
10.548 |
10.644 |
| Prepaid pension assets |
3.068 |
3.001 |
| Deferred taxes |
3.220 |
4.195 |
| Goodwill |
25.136 |
20.190 |
| Intangible assets, net |
3.488 |
2.513 |
| Investments and sundry assets |
5.778 |
5.379 |
| TOTAL ASSETS |
113.452 |
109.022 |
| Liabilities and equity |
| Current liabilities |
| Taxes |
4.216 |
3.826 |
| Short-term debt |
6.778 |
4.168 |
| Accounts payable |
7.804 |
7.436 |
| Compensation and benefits |
5.028 |
4.505 |
| Deferred income |
11.580 |
10.845 |
| Other accrued expenses and liabilities |
5.156 |
5.223 |
| Total current liabilities |
40.562 |
36.002 |
| Long-term debt |
21.846 |
21.932 |
| Retirement and nonpension postretirement benefit obligations |
15.978 |
15.953 |
| Deferred income |
3.666 |
3.562 |
| Other liabilities |
8.226 |
8.819 |
| Total liabilities |
90.279 |
86.267 |
| Stockholders’ equity: |
|
|
| Common stock, par value $20 per share and additional paid-in capital* |
45.418 |
41.810 |
| Retained earnings |
92.532 |
80.900 |
| Treasury stock, at cost (shares: 2010—933,806,510; 2009—821,679,245) |
−96.161 |
−81.243 |
| Accumulated other comprehensive income/loss |
−18.743 |
−18.830 |
| Total stockholders’ equity |
23.046 |
22.637 |
| Noncontrolling interests |
126 |
118 |
| Total equity |
23.172 |
22.755 |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
113.452 |
109.022 |
Source: IBM, 2010 Annual Report, 63.
*Shares authorized: 4,687,500,000; shares issued: 2010—2,161,800,054; 2009—2,127,016,668.
Table 20.8.
Cash-flow statement (2008–2010)
Year ended Dec. 31
($ in millions)
| |
2010 |
2009 |
2008 |
| Cash flow from operating activities |
|
|
|
| Net income |
14.833 |
13.425 |
12.334 |
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| Depreciation |
3.657 |
3.773 |
4.140 |
| Amortization of intangibles |
1.174 |
1.221 |
1.310 |
| Stock-based compensation |
629 |
558 |
659 |
| Deferred taxes |
1.294 |
1.773 |
1.900 |
| Net gain/loss on asset sales and other |
−801 |
−395 |
−338 |
| Change in operating assets and liabilities, net of acquisitions/divestitures: |
|
|
|
| Receivables (including financing receivables) |
−489 |
2.131 |
274 |
| Retirement related |
−1.963 |
−2.465 |
−1.773 |
| Inventories |
92 |
263 |
−102 |
| Other assets/other liabilities |
949 |
319 |
1.268 |
| Accounts payable |
174 |
170 |
−860 |
| Net cash provided by operating activities |
19.549 |
20.773 |
18.812 |
| Cash flow from investing activities |
|
|
|
| Payments for plant, rental machines, and other property |
−4.185 |
−3.447 |
−4.171 |
| Proceeds from disposition of plant, rental machines, and other property |
770 |
330 |
350 |
| Investment in software |
−569 |
−630 |
−716 |
| Purchases of marketable securities and other investments |
−6.129 |
−5.604 |
−4.590 |
| Proceeds from disposition of marketable securities and other investments |
7.877 |
3.599 |
6.100 |
| Nonoperating finance receivables, net |
−405 |
−184 |
−16 |
| Divestiture of businesses, net of cash transferred |
55 |
400 |
71 |
| Divestiture of businesses, net of cash acquired |
−5.922 |
−1.194 |
−6.313 |
| Net cash used in investing activities |
−8.507 |
−6.729 |
−9.285 |
| Cash flow from financing activities |
|
|
|
| Proceeds from new debt |
8.055 |
6.683 |
13.829 |
| Payments to settle debt |
−6.522 |
−13.495 |
−10.248 |
| Short-term repayments/borrowings less than 90 days, net |
817 |
−651 |
−6.025 |
| Common stock repurchases |
−15.375 |
−7.429 |
−10.578 |
| Common stock transactions, other |
3.774 |
3.052 |
3.774 |
| Cash dividends paid |
−3.177 |
−2.860 |
−2.585 |
| Net cash used in financing activities |
−12.429 |
−14.700 |
−11.834 |
| Effect of exchange rate changes on cash and cash equivalents |
−135 |
98 |
58 |
| Net change in cash and cash equivalents |
−1.522 |
−558 |
−2.250 |
| Cash and cash equivalents January 1 |
12.183 |
12.741 |
14.991 |
| Cash and cash equivalents December 31 |
10.661 |
12.183 |
12.741 |
| Supplemental data |
|
|
|
| Income taxes paid—net of refunds |
3.238 |
1.567 |
2.111 |
| Interest paid on debt |
951 |
1.240 |
1.460 |
| Capital lease obligations |
30 |
15 |
41 |
Source: IBM, 2010 Annual Report, 64.
