Fitch Ratings Affirms IBM at 'AA-'; Outlook Stable.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has affirmed International Business Machines Corp. (IBM (International Business Machines Corporation, Armonk, NY, www.ibm.com) The world's largest computer company. IBM's product lines include the S/390 mainframes (zSeries), AS/400 midrange business systems (iSeries), RS/6000 workstations and servers (pSeries), Intel-based servers (xSeries) ) as follows: IBM -- Senior unsecured debt Unsecured debt Debt that does not identify specific assets that the debtholder is entitled to in case of default. 'AA-'; -- Commercial paper (CP) program 'F1+'. IBM International Finance N.V. -- Senior unsecured debt 'AA-'; -- CP program 'F1+'. Fitch also assigns an 'AA-' rating to IBM's $10 billion senior unsecured credit facility. Approximately $23.7 billion of public debt is affected by Fitch's action. The Rating Outlook is Stable. The ratings continue to be supported by IBM's financial flexibility due to consistent free cash flow, strong balance sheet despite large financing operations, industry-leading positions, solid information technology (IT) services segment which continues to increase the recurring revenue base, and significant research and development program. With trailing-12-month (TTM TTM Trailing 12 months. Often used with Earnings Per Share. ) revenues of $96.2 billion as of June 30, 2005, IBM is well-diversified by geography and by product, offering a full range of computer hardware, IT services, software, and financing. The diversity and repeatability of IBM's business units have historically provided some resilience to the volatility of the information technology (IT) end markets as more than 50% of revenues are estimated to be recurring, following the sale of the personal computer (PC) business. Also, Fitch recognizes IBM Global Financing's (IGF (Internet Governance Forum) An international organization of governments and U.N. agencies that was founded to discuss Internet issues such as security and spam. It was created at the United Nations Summit in 2005 after the U.S. ) solid long-term operating record and the flexibility the unit provides in delivering total solution packages to IBM's customers. Rating concerns center on the competitive nature of the IT industry and the pricing pressures associated with the company's hardware and services segments, recent inconsistency with respect to the volume of services contract signings, capital spending capital spending Spending for long-term assets such as factories, equipment, machinery, and buildings that permits the production of more goods and services in future years. requirements for the more capital-intensive and volatile semiconductor unit, and on-going stock buyback Stock buyback A corporation's purchase of its own outstanding stock, usually in order to raise the company's earnings per share. stock buyback See buyback. programs. Additionally, Fitch continues to monitor the Securities and Exchange Commission's (SEC) formal investigation relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc specific client transactions in 2000 and 2001 and, more recently, IBM's disclosure relating to its plan to expense stock options. Specific to IGF, Fitch is concerned by an increasing propensity to finance software and services which may lead to higher credit risk over the long term. This is partially mitigated by IGF restricting this financing to customers with strong risk profiles. IBM's financial results for the second quarter ending June 30, 2005, included a significant rebound in global services signings by nearly 45% year-over-year to $14.6 billion, representing the highest amount of services signings since the fourth quarter of 2003. Software revenue rose 10% year-over-year in the second-quarter 2005 (2Q'05) led by sales of Tivoli and WebSphere middleware products, which increased 28% and 18%, respectively. The 25% decline in hardware sales reflects only one month of financial results for the PC division following its sale to Lenovo on April 30, 2005. Excluding the PC division, hardware revenue in 2Q'05 rose 5% year-to-year. The divestiture The breakup of AT&T. By federal court order, AT&T divested itself on January 1, 1984 of its 23 operating companies, which became known as the Regional Bell Operating Companies (RBOCs). of the PC division significantly increases the percentage contribution of global services to total IBM revenue and increases the overall profit margins of the remaining hardware segment due to the negligible profits on PCs over the last few years. Global services accounted for 55% of total revenue in the 2Q'05, excluding the PC division, versus approximately 49% in 2Q'04. Overall, total IBM revenue declined nearly 4% year-over-year in the second quarter of 2005, but increased approximately 6% excluding the PC division. IBM incurred a $1.7 billion pre-tax restructuring charge restructuring charge The expense of reorganizing a company's operations. A restructuring charge is an infrequent expense that generally results from asset writedowns or facility closings. in the second quarter related to the company's restructuring actions announced in May 2005; this charge was partially offset by a pre-tax gain of $1.1 billion from the sale of the PC division. The restructuring includes 14,500 layoffs, with the majority planned for the Global Services segment, primarily in Europe. Approximately $1.7 billion out of the total $1.8 billion in charges will require cash payments, of which approximately $1.4 billion is expected to be paid over the next twelve months. IBM paid $144 million in cash payments in the second quarter in conjunction with its head count reduction efforts. For the purpose of financial evaluation, Fitch analyzes IBM's core business and financing activities separately since they are capitalized differently and have dissimilar cash flow characteristics. Although IGF contributed 12.4% of IBM's pre-tax earnings in the second quarter of 2005, it constitutes the largest component of IBM's balance sheet, with approximately 28% of total assets as of June 30, 2005. At the end of 2Q'05, IBM had $23.7 billion of total debt, nearly unchanged from $22.9 billion at year-end 2004, of which approximately 88% supported IGF's end-user and business-partner financing operations with the remaining debt supporting IBM's core operations. Although IBM's core leverage remained unchanged over the past year on a TTM basis, core interest coverage weakened slightly for the latest twelve months ending June 30, 2005 due to rising interest expense associated with higher core debt balances stemming from pension funding, stock buybacks, and debt-financed acquisitions, primarily software companies. In core operations, debt to invested capital was 9.5% and leverage 0.18 times (x). Total leverage (measured as Total Gross Debt to Total Operating EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become ) for the latest twelve months ending June 30, 2005, was at a ten-year low of 1.3x compared to 1.5x and 1.9x for fiscal years 2003 and 2002, respectively. Total interest coverage as of June 30, 2005, remains solid at 26x. IBM's liquidity remains strong with $8.7 billion in cash and marketable securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has as of June 30, 2005, significant and consistent free cash flow (averaging more than $5.5 annually over the last five years after adjusting for IGF finance receivables), and a nearly undrawn un·draw tr.v. un·drew , un·drawn , un·draw·ing, un·draws To draw to one side, as a curtain. Adj. 1. undrawn - not represented in a drawing undelineated - not represented accurately or precisely five-year $10 billion credit facility expiring in May 2009. IBM's CP balance at the end of the second quarter was $2.1 billion and approximately $900 million of debt matures in the second-half 2005 (2H'05), and $3.1 billion in 2006. Although IBM continues to pursue an aggressive stock buyback plan, Fitch believes it is manageable and is funded mainly through free cash flow. For 2004, IBM's gross stock repurchase Stock repurchase A firm's repurchase of outstanding shares of its common stock. program totaled approximately $7.3 billion; historically, the company's annual stock repurchases have been greater than $6 billion. Fitch anticipates that IBM's total stock repurchases in 2005 will surpass 2004 levels; for 1H'05 the company repurchased $5.2 billion of common stock. Fitch views IBM's capacity to offer customer financing as a net positive to the company due to the strategic advantages that it provides in attracting and retaining customers as well as the annuity-like revenue stream associated with a multi-year lease. Global Financing is a profit center for IBM that works in conjunction with the company's broad range of hardware, software and service solutions. IGF operates with independent credit approval authority and responsibility for its segment profit-and-loss. During 2003 and the first quarter of 2004, IGF resolved most of the problems in its syndicated loan Syndicated Loan A very large loan in which a group of banks work together to provide funds for one borrower. There is usually one lead bank that takes a small percentage of the loan and syndicates the rest to other banks. Notes: Also known as a "syndicated bank facility. and communications loan portfolios by charging-off or reserving for problem assets. IGF also took steps to centralize and upgrade its credit approval practices to help reduce future losses and strengthen underwriting. IGF has also employed other risk mitigation measures such as syndication of large hold levels and purchase of credit default swaps Credit Default Swap A swap designed to transfer the credit exposure of fixed income products between parties. Notes: The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. to reduce large exposures to individual corporate customers. Going forward, Fitch will continue to monitor increased risk within IGF as it finances less-tangible assets such as software and services. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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