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IBM Corporation 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 market 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 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 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 IBM Consolidated Balance For the Quarters Sheets Jun-99 Mar-99 Dec-98 Ended: Sep-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 $ $ $ $ $ $ $ $ $ $ $ $ $ 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 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 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ N -9 6 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 p 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 Se Chart 1 IBM 140 120 100 $ 80 60 40 20 0 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 IBM Corporation 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 market 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 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 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 IBM Consolidated Balance For the Quarters Sheets Jun-99 Mar-99 Dec-98 Ended: Sep-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 $ $ $ $ $ $ $ $ $ $ $ $ $ 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 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 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ N -9 6 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 p 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 Se Chart 1 IBM 140 120 100 $ 80 60 40 20 0 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 IBM Corporation 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 market 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 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 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 IBM Consolidated Balance For the Quarters Sheets Jun-99 Mar-99 Dec-98 Ended: Sep-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 $ $ $ $ $ $ $ $ $ $ $ $ $ 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 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 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ N -9 6 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 p 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 Se Chart 1 IBM 140 120 100 $ 80 60 40 20 0 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 1. Decompose IBM's ROE (by quarter) and discuss the factors (and trends) that contribute to Big Blue's profitability Solution: Return over equity is a percentage of Net income to shareholder's equity. In this case, we have used quarterly information for computing the ROE ROE = Net Income/Shareholder's Equity In Sep-96 ROE = 1,285/21,628 = 5.94% In Dec-96 ROE = 2,023/21,628 = 9.35% In Mar-97 ROE = 1,195/19,951 = 5.99% In Jun-97 ROE = 1,446/20,109= 7.19% In Sep-97 ROE = 1,359 /19,756 = 6.88% In Dec-97 ROE = 2,093/19,816 = 10.56% In Mar-98 ROE = 1,036/18,865 = 5.49% In Jun-98 ROE = 1,452/18,577 = 7.82% In Sep-98 ROE = 1,494/18,635 = 8.02% In Dec-98 ROE = 2,346/19,433 = 12.07% In Mar-99 ROE = 1,470/18306 = 8.03% In Jun-99 ROE = 2,391 /19,158 = 12.48% In Sep-99 ROE = 1,762 /20,068 = 8.78% In Dec-99 ROE = 2,089 /20,511 = 10.18% In Mar-2000 ROE = 1,519/19518= 7.78% Factors that contribute to the Big Blue's profitability are the revenues, Cash, EPS and the gross margins. Revenue: The Company's revenue generation has been stable since March 98 till March 2000. The company stood at the highest revenue of $ 25,131 for the quarter ended December 98, while the company recorded its lowest revenue of $ 17,308 for the quarter ended March 97. The company's revenue was dropped by 25%. In December 99 it was $ 24,182 where as in march 2000 it was $ 19,348. Cash: Every year cash play an important role in company's profitability? If we see the financial year 1999 to 2000 we will find that in every quarter cash is helping out the company's short term requirements. Although they have fluctuating cash flows. EPS: company has low EPS at the begging of every year but then after it rose to a good level which indicate that company's earning has increased. Gross margin: The company stood at the highest gross-margin of $ 9,809 for the quarter ended December 98 due to higher revenues in that quarter, while the company recorded its lowest grossmargin of $ 6,450 for the quarter ended March 98 due to comparatively higher cost of goods sold for the quarter. The company's revenue was dropped by 27%. 2. Evaluate IBM's Revenue growth, Receivables, and Gross margins and over the period (be sure to control for seasonality in your evaluation) Solution: Revenue: The Company's revenue generation has been stable since March 98 till March 2000. The company stood at the highest revenue of $ 25,131 for the quarter ended December 98, while the company recorded its lowest revenue of $17,308 for the quarter ended March 97. The company revenue dropped by about 25% to $19,348 at March 2000 from $24,182 at December 99. There has been seasonal trend in the revenues patterns for IBM. The company has been witnessing higher revenue in the quarter ending December, due to festivals during that time. March has been a comparatively slow quarter for all the years. Gross margin: The company stood at the highest gross-margin of $9,809 for the quarter ended December 98 due to higher revenues in that quarter, while the company recorded its lowest grossmargin of $6,450 for the quarter ended March 98 due to comparatively higher cost of goods sold for the quarter. The company revenue dropped by about 27% to $7,011 at March 2000 from $8,333 at December 99. There has been the same seasonal trend witnessing for IBM in gross margin for the quarter ending December, due to festivals during that time. March has been a comparatively dull quarter for all the years. Receivables: The receivables for the company has grown 9.1% for the quarter ended March 2000 as compared to the quarter ended December 96. There has been a continued rising trend in the receivables of the company, even though, when revenues shows a seasonal behaviour. The highest receivables stood at $ 37,324 for the quarter ended December 99 and the lowest receivables stood at $ 30,857 for the quarter ended March 97. 3. Evaluate IBM's Earnings per Share (basic), and identify the factors most responsible for the increase in IBM's earnings? Solution: Earnings per share are the portion company's net income after preferred dividend to each outstanding share of the stock of the company. It formulated as: Company has low EPS at the begging of every year but then after it rose to a significant level which indicate that company's earning has increased. The highest EPS stood for the quarter ended June 99 at 1.32. In March 2000 it was 0.85 which rose to 1.10 in June 2000. Due to seasonal effect it happened. There are various factors which are responsible for increase in IBM's earning: The company had a comparatively higher revenues and gross margin as compared to other June ending quarters. The selling, general and administrative were the lowest for the quarter ending June 99, as compared to all the quarters. This helped the company to reduce its operating expenses and hence increase the operating income for the company. The lowest EPS stood for the quarter ended March 98 at 0.52.This happened due to contribution of factors like: The company has the second lowest revenue collections at $ 17,618 for March 98 quarters as compared to other quarters. The company has the lowest income before taxes as compared to other quarters, which ultimately resulted in the lowest EPS