You are on page 1of 6

IBM Corporation

In the seven years (since 1994), that Lou Gerstner has reigned over IBM, the companys 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 companys 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 IBMs ROE and discuss the factors (and trends) that contribute to Big Blues
profitability
2. Evaluate IBMs Revenue growth, Receivables, and Gross margins and over the period (be
sure to control for seasonality in your evaluation)
3. Evaluate IBMs Earnings per Share (basic), and Identify the factors most responsible for the
increase in IBMs 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:
Earnings Per Share (from continuing operations)
Analyst Expected Earnings Per Share
Difference
% Surprise

Jun-00
1.06
1.00
0.06
6.00%

Mar-00
0.83
0.77
0.06
7.79%

Dec-99
1.12
1.06
0.06
5.66%

Sep-99
0.90
0.90
0.00%

Jun-99
0.91
0.88
0.03
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
Earings per Share of Common
Stock - Basic
Average Number of Common
Shares Outstanding - Basic
Average Price per Share

Mar-00

Dec-99

Sep-99

Jun-99

1.10

0.85

1.16

0.97

1,767.6
$ 109.34

1,777.2
111.00

1,793.0
102.95

1,805.2
123.61

1,812.1
$ 116.48
2 for 1
stock split
5/10/99

Dec-96

Sep-96

* All Data are Adjusted to Reflect


stock splits

1.32

EXHIBIT 2 (continued)

Sep-97
Earings per Share of Common
Stock - Basic
Average Number of Common
Shares Outstanding - Basic
Average Price per Share
* All Data are Adjusted to Reflect
stock splits

Jun-97

Mar-97

0.69

0.73

0.59

0.99

0.62

1,956.0
52.13

1,973.8
42.78

2,006.8
36.45

2,053.6
36.61

2,087.4
31.65

2 for 1 stock
split 5/9/97

Mar-99

Dec-98

Sep-98

Jun-98

Mar-98

Dec-97

0.80

1.27

0.80

0.77

0.54

1.08

1,823.8
88.28

1,839.5
82.91

1,856.9
62.20

1,879.2
57.97

1,946.6
51.12

1,929.6
52.05

EXHIBIT 3

IBM
Consolidated Statements of Income
For the Quarters Ended:
Total Revenues
Cost of Sales
Gross Margin
Selling, General and Administrative Expenses
Research and Development
Total Operating Expenses
Operating Income
Other Income (Expense), net
Interest Expense
Income Before Taxes
Income Tax Expense
Net Income

Mar-00
19,348 $
12,337
7,011
3,706
1,172
4,878
2,133
189
152
2,170
651
1,519 $

Dec-99
24,182 $
15,299
8,883
4,445
1,416
5,861
3,022
134
171
2,985
896
2,089 $

Sep-99
21,144 $
13,580
7,564
3,501
1,383
4,884
2,680
134
185
2,629
867
1,762 $

Jun-99
21,905 $
13,681
8,224
2,846
1,293
4,139
4,085
155
197
4,043
1,652
2,391 $

Mar-99
20,317 $
13,059
7,258
3,937
1,181
5,118
2,140
134
174
2,100
630
1,470 $

EXHIBIT 3 (continued)

Total Revenues
Cost of Sales
Gross Margin
Selling, General and Administrative Expenses
Research and Development
Total Operating Expenses
Operating Income
Other Income (Expense), net
Interest Expense
Income Before Taxes
Income Tax Expense
Net Income

Sep-97
18,605 $
11,507
7,098
3,932
1,162
5,094
2,004
162
183
1,983
624
1,359 $

Jun-97
18,872 $
11,471
7,401
3,958
1,221
5,179
2,222
137
179
2,180
734
1,446 $

Mar-97
17,308 $
10,716
6,592
3,684
1,069
4,753
1,839
185
172
1,852
657
1,195 $

Dec-96
23,143 $
13,822
9,321
5,093
1,332
6,425
2,896
181
190
2,887
864
2,023 $

Sep-96
18,062
10,804
7,258
4,175
1,115
5,290
1,968
183
172
1,979
694
1,285

Dec-98
25,131 $
15,322
9,809
5,074
1,407
6,481
3,328
187
213
3,302
956
2,346 $

Sep-98
20,095 $
12,628
7,467
4,057
1,240
5,297
2,170
122
160
2,132
638
1,494 $

Jun-98
18,823 $
11,677
7,146
3,812
1,220
5,032
2,114
130
161
2,083
631
1,452 $

Mar-98
17,618 $
11,168
6,450
3,719
1,179
4,898
1,552
150
179
1,523
487
1,036 $

Dec-97
23,723
14,205
9,518
5,060
1,425
6,485
3,033
173
194
3,012
919
2,093

EXHIBIT 4

IBM
Consolidated Statements of Income
For the Years Ended:
Sales
Cost of Goods Sold
Gross Margin
Research and Development Expense
Other Selling, General & Administrative Expense
Total Operating Expenses
Total Operating Income
Other Income (Expense) net
Interest Expense
EBT
Tax on EBT
Net Income

1999
$
87,548
55,619
31,929
5,273
14,729
20,002
11,927
557
727
11,757
4,045
7,712

1998
81,667
50,795
30,872
5,046
16,662
21,708
9,164
589
713
9,040
2,712
6,328

1997
78,508
47,899
30,609
4,877
16,634
21,511
9,098
657
728
9,027
2,934
6,093

1996
75,947
45,408
30,539
4,654
16,854
21,508
9,031
707
716
9,022
3,158
5,864

EXHIBIT 5

IBM
Common Size Statements of Income
For the Years Ended:
Sales
Cost of Goods Sold
Gross Margin
Research and Development Expense
Other Selling, General & Administrative Expense
Total Operating Expenses
Total Operating Income
Other Income (Expense) net
Interest Expense
EBT
Tax on EBT
Net Income

1999
1.00
0.64
0.36
0.06
0.17
0.23
0.14
0.01
0.01
0.13
0.05
0.09

1998
1.00
0.62
0.38
0.06
0.20
0.27
0.11
0.01
0.01
0.11
0.03
0.08

1997
1.00
0.61
0.39
0.06
0.21
0.27
0.12
0.01
0.01
0.11
0.04
0.08

1996
1.00
0.60
0.40
0.06
0.22
0.28
0.12
0.01
0.01
0.12
0.04
0.08

EXHIBIT 6

IBM
Consolidated Balance
For the Quarters
Assets
Cash
Receivables, Inventory and Pre-Paids
Total Current Assets
Property & Equipment (net)
Investments and Other Assets
Total Assets
Liabilities and Shareholders' Equity
Accounts Payable, Taxes & Accruals
Debt Maturing within One Year
Total Current Liabilities
Long Term Debt
Other Liabilities & Deferred Taxes
Total Liabilities
Total Shareholders Equity
Total Liabilities and Shareholders' Equity

Mar-00

Dec-99

3606
35533
$ 39,139
16959
26666
$ 82,764

5,831
37,324
$ 43,155
17,590
26,750
$ 87,495

$
$

21767
13844
35,611 $
14295
13340
63,246 $
19518
82,764 $

25,348
14,230
39,578
14124
13282
66,984
20,511
87,495

Sep-99

Jun-99

6,026
36,851
$ 42,877
17,463
25,035
$ 85,375

7,241
36,211
$ 43,452
17,253
22,642
$ 83,347

23,682
14,096
37,778
13,807
13,722
65,307
20,068
85,375

21,248
14,713
35,961
14,330
13,898
64,189
19,158
83,347

$
$
$

$
$
$

EXHIBIT 6 (continued)

Sep-97
Assets
Cash
Receivables, Inventory and Pre-Paids
Total Current Assets
Property & Equipment (net)
Investments and Other Assets
Total Assets
Liabilities and Shareholders' Equity
Accounts Payable, Taxes & Accruals
Debt Maturing within One Year
Total Current Liabilities
Long Term Debt
Other Liabilities & Deferred Taxes
Total Liabilities
Total Shareholders Equity
Total Liabilities and Shareholders' Equity

Jun-97

Mar-97

6,486
31,704
$ 38,190
17,921
22,182
$ 78,293

6,861
31,778
$ 38,639
17,647
22,533
$ 78,819

18,072
12,518
30,590
13,623
14,324
58,537
19,756
78,293

18,531
14,028
32,559
11,675
14,476
58,710
20,109
78,819

$
$
$

$
$
$

Mar-99

$
$
$

6,463
30,857
$ 37,320
17,062
22,145
$ 76,527

Dec-96
$

8,137
32,558
$ 40,695
17,407
23,030
$ 81,132

17,998 $
13,243
31,241 $
10,402
14,933
56,576 $
19,951 $
76,527 $

21,043
12,957
34,000
9,872
15,632
59,504
21,628
81,132

$
$
$

5,356
34,445
$ 39,801
18,866
23,084
$ 81,751

119753
13708
33281
16285
13879
63445
18306
81751

Dec-98

Sep-98

Jun-98

Mar-98

Dec-97

5,768
36,592
$ 42,360
19,631
24,109
$ 86,100

5,869
32,933
$ 38,802
19,005
21,912
$ 79,719

5,471
31,541
$ 37,012
18,453
21,647
$ 77,112

5,889
31,682
37,571
18,223
22,150
$ 77,944

7,553
32,865
$ 40,418
18,347
22,734
$ 81,499

22,922
13,905
36,827
15,508
14,332
66,667
19,433
86,100

18,275
13,237
31,512
15,239
14,333
61,084
18,635
79,719

16,779
13,271
30,050
14,590
13,895
58,535
18,577
77,112

17,325
12,667
29,992
15,029
14,058
59,079
18,865
77,944

20,277
13,230
33,507
13,696
14,480
61,683
19,816
81,499

$
$
$

$
$
$

$
$
$

$
$
$

$
$
$

p96
ov
-9
Ja 6
n9
M 7
ar
-9
M 7
ay
-9
7
Ju
l-9
Se 7
p9
N 7
ov
-9
Ja 7
n9
M 8
ar
-9
M 8
ay
-9
8
Ju
l-9
Se 8
p9
N 8
ov
-9
Ja 8
n9
M 9
ar
-9
M 9
ay
-9
9
Ju
l-9
Se 9
p9
N 9
ov
-9
Ja 9
n0
M 0
ar
-0
M 0
ay
-0
0

Se

Se
pD 96
ec
-9
M 6
ar
-9
Ju 7
nSe 97
pD 97
ec
-9
M 7
ar
-9
Ju 8
nSe 98
pD 98
ec
-9
M 8
ar
-9
Ju 9
nSe 99
pD 99
ec
-9
M 9
ar
-0
Ju 0
n00

Chart 1

IBM

140

120

100

$
80

60

40

20

Common Stock Price per Share

Chart 2

IBM

$5.00

$4.50

$4.00

$3.50

$3.00
Qtly EPS

$ $2.50
Pseudo Annual EPS

$2.00

$1.50

$1.00

$0.50

$-

Earnings per Share