International Business Machines Corporation (IBM) was once the dominant computer manufacturer intheworld and, from 1960 to 1980, the leading growth company. Indeed, in those years IBM became the verypersonification of a growth company. However, withthe advent of decentralized computing andthepersonal computer in the 1980s, IBM's growth began to slow. Under the leadership ofLouis Gerstner Jr.,thefinntransformed itselfin the early 1990s from a mainframe manufacturer to an information technology company, providing technology, system software, services, and financing products to customers.

Mr. Gerstner's book, Who SaysElephants Can 'tDance? Inside IBM's Historic Turnaround, published in 2002, gives the play-by-play. From revenues of $64.8 billion in 1991, IBM grew to a firm with $88.4 billion inrevenues in 2000.

In turning around the business, IBM tooklarge restructuring charges against its income in the early 1990s, resulting in netlosses of$2.861 billion, $4.965 billion, and$8.101 billionfor 1991-1993, respectively. SUbsequently the firm delivered the earnings growth of yesteryear. You canseeat thebottom oftheincome statements inExhibit 12.4 thatearnings persharegrew from $2.56 in 1996 to $4.58 in2000.

At a number of points, this chapter hasanalyzed the components of IBM's earnings in order to understand their sustainability. From the information extracted from IBM's financial statement footnotes below, restate the income statements from 1996to 2000 in Exhibit 12.4 to identify core operating income that arises from selling products to customers.

Thefootnotes arefrom thefirm's 1999 1O-K filing; youmayalsowishto lookat the corresponding footnotes forotheryears. Theextracts from thefirm's cashflow statement in Exhibit 12.4 will alsohelpyouinyourtask.

Doyouget a different picture of IBM's income growth during the lasthalfof the 1990s thanis suggested bygrowth in earnings pershare?

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Consolidated Statements of Earnings (dollars in millors en sencept per share amounts) For the Year Ended December 31 2000 1999 1998 1997 1996 Revenue $88,396 $87,548 $81,667 $78,508 $75,947 Cost of revenue 55,972 55,619 50,795 47,299 45,408 Gross profit 32,424 31,929 30,872 30,609 30,539 Operating expenses Seling, general, and administrative 15,639 14,729 16,662 16,634 16,854 Research, development, and engineering 5,151 5,273 5,045 4,877 5,089 Total operating expenses 20,790 20,002 21,708 21,511 21,943 Operating income 11,634 11,927 9,164 9,098 8.596 Other income, principaly interes 517 557 589 657 707 Interest expense 717 727 713 728 716 Income before income taxes 11,534 11,757 9,040 9,027 8,587 Provision for income taxes 3,441 4,045 2,712 2,934 3,158 Net income 8,093 7,712 6,328 6,093 5,429 Preferred stock dividends 20 20 _ 20 20 20 Net income applicable to common stockholders $ 8,073 $ 7,692 $ 6,308 $ 6,073 $ 5,409 Earnings per share of common Stock: Assuming dilution $ 4.44 $ 4.12 $3.29 $ 3.00 $ 2.51 Basic $ 4.58 $ 4.25 $ 3.38 5 3.09 $ 2.56 Operating and Investing Section of Cash Flow Statements Cash flow from operating activities (dollers in milions) At December 31 2000 1999 1998 1997 1996 $8,093 $7,712 $6,328 $6.093 55,429 Net income Adjustments to reconcile net income to cash provided from operating activities Depreciation 4,513 6,159 4,475 4.018 3,676 Amortization of software 482 426 517 983 1,336 Effect of restructuring charges (355) (445) (1491) Defected income taxes 29 (713) (605) 358 15 Gain on disposition of fixed and other assets (792) (4,791) (261) (273) (300) Other changes that fused) provided cash Receivables (4,720) (1,577) (2,336) 13.727) (650) Inventories (55) 301 73 432 196 Other assets (643) [1300 219 (1,088) (545) Accounts payable 2,245 (3) 362 699 319 Other liabilities 122 2.817 1,257 1,814 2,294 Net cash provided from operating activities 9274 10.111 9.273 8,865 10275 Cash flow from investing activities Payments for plant, rental machines, and other property 6,616) (5.959) (5520) 16,793) (6,599) Proceeds from disposition of plane restal machines, and other property 1,619 1,207 905 1,130 1,314 Investment in software (565) (464) (2500 (314) (296) Purchases of marketable securities and other investments (1,079) (3.949) (4211) (1,617) (1,613 Proceeds from marketable securities and other investments 1.393 2,616 3,945 1,439 1,470 Proceeds from sale of the Global Network 4,880 Net cash used in investing activities (4.248 S(1,569) 506,131 SI6,155) 5.723)