UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
FOR THE YEAR ENDED DECEMBER 31, 2009
1-2360
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK
(State of Incorporation) |
13-0871985
(IRS Employer Identification Number) |
|
ARMONK, NEW YORK (Address of principal executive offices) |
|
10504 (Zip Code) |
914-499-1900
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
Voting shares outstanding
at February 10, 2010 |
Name of each exchange
on which registered |
||
---|---|---|---|---|
Capital stock, par value $.20 per share | 1,299,003,390 | New York Stock Exchange | ||
Chicago Stock Exchange | ||||
4.00% Notes due 2011 | New York Stock Exchange | |||
4.95% Notes due 2011 | New York Stock Exchange | |||
6.625% Notes due 2014 | New York Stock Exchange | |||
7.50% Debentures due 2013 | New York Stock Exchange | |||
8.375% Debentures due 2019 | New York Stock Exchange | |||
7.00% Debentures due 2025 | New York Stock Exchange | |||
6.22% Debentures due 2027 | New York Stock Exchange | |||
6.50% Debentures due 2028 | New York Stock Exchange | |||
7.00% Debentures due 2045 | New York Stock Exchange | |||
7.125% Debentures due 2096 | New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-Accelerated filer o | ||
Smaller reporting company o | (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No ý
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter was $136.8 billion.
Documents incorporated by reference:
Portions of IBM's Annual Report to Stockholders for the year ended December 31, 2009 into Parts I, II and IV of Form 10-K.
Portions of IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 27, 2010 are incorporated by reference into Part III of Form 10-K.
Item 1. Business:
International Business Machines Corporation (IBM or the company) was incorporated in the State of New York on June 16, 1911, as the Computing-Tabulating-Recording Co. (C-T-R), a consolidation of the Computing Scale Co. of America, the Tabulating Machine Co. and The International Time Recording Co. of New York. Since that time, IBM has focused on the intersection of business insight and technological invention, and its operations and aims have been international in nature. This was signaled over 80 years ago, in 1924, when C-T-R changed its name to International Business Machines Corporation. And it continues today: The company creates business value for clients and solves business problems through integrated solutions that leverage information technology and deep knowledge of business processes. IBM solutions typically create value by reducing a client's operational costs or by enabling new capabilities that generate revenue. These solutions draw from an industry leading portfolio of consulting, delivery and implementation services, enterprise software, systems and financing.
STRATEGY
Despite the volatility of the information technology (IT) industry over the past decade, IBM has consistently delivered superior performance, with a steady track record of sustained earnings per share growth. The company has shifted its business mix, exiting commoditized segments while increasing its presence in higher-value areas such as services, software and integrated solutions. As part of this shift, the company has acquired over 100 companies this past decade, complementing and scaling its portfolio of products and offerings.
IBM's clear strategy has enabled steady results in core business areas, while expanding its offerings and addressable markets. The key tenets of this strategy are:
These priorities reflect a broad shift in client spending away from "point products" and toward integrated solutions, as companies seek higher levels of business value from their IT investments. IBM has been able to deliver this enhanced client value thanks to its industry expertise, understanding of clients' businesses and the breadth and depth of the company's capabilities.
IBM's growth initiatives, like its strengthened capabilities, align with these client priorities. These initiatives include Smarter Planet and Industry Frameworks, Growth Markets, Business Analytics and Cloud Computing. Each initiative represents a significant growth opportunity with attractive profit margins for IBM.
Smarter Planet and Industry Frameworks
Smarter planet is an overarching strategy that highlights IBM's differentiated capabilities and generates broad-based demand for the company's products and services. Smarter Planet encapsulates IBM's view of enterprise IT's next major revolution: the instrumentation and integration of the world's processes and infrastructuresfrom energy grids and pipelines to supply chains and traffic systems. The massive amount of data these systems are generating can now be captured and analyzed. This infusion of intelligence enables more efficiency, productivity and responsiveness.
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Clients seeking these "smart" solutions value IBM's deep industry and process expertise, powerful back-end systems and data analytics, complex systems integration capability and unique research capacity.
IBM's Industry Frameworks create a flexible software foundation for developing, acquiring and deploying smart industry solutions. Each framework supports multiple solutions, enabling fast, efficient and tailored capabilities in support of clients' business needs. These frameworks represent a proven technique for the company to engage with its clients, driving sustained growth and high business value. They cover a wide variety of industries and domains, most of which are directly tied to Smarter Planet.
Growth Markets
The company has benefited from its investments over the past several years in growth markets. The focus now is on geographic expansion of IBM's presence; on specific industry verticals of the highest impact and opportunity; on countries' build-out of infrastructure aligned with their national agendas; and on creating markets and new business models to serve the different requirements that exist in these emerging countries.
In order to support this growth, IBM is continuing to invest significantly in these markets to expand capacity and develop talent. At the same time, IBM is expanding and benefiting from large teams of talent with global missions of delivery. The company continues to deepen its research and development (R&D) teams to design for the unique challenges and rapid growth facing these markets.
Business Analytics and Optimization
Business optimization through the application of advanced analytics is emerging as another major category of business value. It succeeds earlier generations of back-office automation, basic enterprise resource planning and traditional business intelligence. Advanced analytics allow clients to see patterns in data they could not see before, understand their exposure to risk and predict the outcomes of business decisions with greater certainty.
IBM's approach is end-to-end, providing cross-enterprise as well as industry-based analytics solutions. IBM has established the Business Analytics and Optimization practice, leveraging IBM consulting capabilities and software products, along with systems and research assets. IBM's breadth of expertise uniquely positions the company for revenue and profit growth.
Cloud Computing
"Cloud" is an emerging consumption and delivery model for many IT-related services. Clients are attracted to its improved economics, flexibility and user experience. Traditional enterprise IT will increasingly integrate with these new cloud deployments, delivered as services via the Internet (also known as public clouds) or behind a firewall (private clouds). In discussions with enterprise clients, most are initially focused on private cloud implementations, the middle ground between the traditional enterprise IT and public clouds.
IBM is helping clients determine how to leverage cloud computing to achieve business advantage. The company provides a full set of capabilities, from support in designing and implementing cloud solutions, to services for running and managing them if desired. IBM is applying its deep experience in critical areas such as security, reliability and innovation to deliver differentiated value. The company is also investing in new cloud initiatives tailored to particular industries, in conjunction with its partners and clients, to deliver cloud business services directly to the market. By providing deployment choice, optimizing solutions based on workload characteristics and delivering complete service management capabilities, IBM is positioned as the leading cloud service and infrastructure provider for enterprises.
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BUSINESS MODEL
The company's business model is built to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and IT solutions; and providing long-term value to shareholders. The business model has been developed over time through strategic investments in capabilities and technologies that have the best long-term growth and profitability prospects based on the value they deliver to clients.
The company's global capabilities include services, software, systems, fundamental research and related financing. The broad mix of businesses and capabilities are combined to provide business insight and solutions for the company's clients.
The business model is flexible, adapting to the continuously changing market and economic environment. The company continues to divest commoditizing businesses and strengthen its position through strategic investments and acquisitions in higher value segments like business analytics, smarter planet and cloud computing. In addition, the company has transformed itself into a globally integrated enterprise which has improved overall productivity and is driving investment and participation in the world's fastest growing markets. As a result, the company is a higher performing enterprise today than it was several years ago.
The business model, supported by the company's long-term financial model, has enabled the company to deliver consistently strong earnings, cash flows and returns to shareholders in changing economic environments.
BUSINESS SEGMENTS AND CAPABILITIES
The company's major operations comprise: a Global Technology Services segment; a Global Business Services segment; a Software segment; a Systems and Technology segment; and a Global Financing segment.
Global Services is a critical component of the company's strategy of providing IT infrastructure and business insight and solutions to clients. While solutions often include industry-leading IBM software and systems, other suppliers' products are also used if a client solution requires it. Approximately 60 percent of external Global Services segment revenue is annuity-based, coming primarily from outsourcing, maintenance and custom application management services arrangements. The Global Services backlog provides a solid revenue base entering each year. Within Global Services, there are two reportable segments: Global Technology Services and Global Business Services.
Global Technology Services (GTS) primarily provides IT infrastructure services and business process services, delivering business value through the company's global scale, standardization and automation.
G TS CAPABILITIES
Strategic Outsourcing Services. Comprehensive IT outsourcing services dedicated to transforming clients' existing infrastructures to ensure better quality, cost control, adaptability, security and compliance. IBM integrates long-standing experience in service management, technology and industry applications with new technologies, such as cloud computing and virtualization, to enable new capabilities for clients.
Business Transformation Outsourcing. A range of offerings from standardized processing platforms and Business Process Outsourcing through transformational offerings that deliver improved business results to clients through the strategic change and/or operation of the client's business processes, applications and infrastructure.
Integrated Technology Services. Project-based portfolio of services that enable clients to optimize their IT environments by driving efficiency, flexibility and productivity, while reducing costs. The
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standardized portfolio is built around key assets and patented software, and incorporates best practices and proven methodologies that ensure predictive quality of delivery, security and compliance.
Maintenance. A complete line of support services from product maintenance through solution support to maintain and improve the availability of clients' IT infrastructure.
The GTS outsourcing businesses are supported by integrated worldwide delivery organizations:
Integrated Technology Delivery (ITD) is responsible for worldwide service delivery supporting the Strategic Outsourcing business. It manages the world's largest privately-owned IT infrastructure with employees in over 40 countries, supporting over 450 data centers. ITD operates a globally integrated delivery model which supports regional client-facing teams by utilizing a global network of competencies and centers. Each competency provides industry-leading, standardized, integrated tools and processes. By leveraging IBM's global scale, skills and technology which is combined with the innovation from IBM research, clients gain access to leading edge, high-quality services with improved productivity, flexibility and cost.
Business Process Delivery (BPD) provides highly efficient, world-class delivery capabilities in IBM's business process delivery operations, which include Business Transformation Outsourcing, Business Process Outsourcing and Business Process Services. BPD has employees and delivery centers in over 40 countries worldwide.
Global Business Services (GBS) primarily provides professional services and application outsourcing services, delivering business value and innovation to clients through solutions which leverage industry- and business-process expertise.
G BS CAPABILITIES
Consulting and Systems Integration. Delivery of value to clients through consulting services for client-relationship management, financial management, human-capital management, business strategy and change, and supply-chain management. In 2009, the company announced the creation of a new consulting service line dedicated to the market for advanced business analytics and business optimization.
Application Management Services. Application development, management, maintenance and support services for packaged software, as well as custom and legacy applications. Value is delivered through the company's global resource capabilities, industry knowledge and the standardization and automation of application development.
Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform. IBM middleware is designed on open standards, making it easier to integrate disparate business applications, developed by different methods and implemented at different times. Operating systems are the software engines that run computers. Approximately two-thirds of external software segment revenue is annuity-based, coming from recurring license charges and ongoing subscription and support from one-time charge (OTC) arrangements. The remaining one-third relates to OTC arrangements in which clients pay one, up-front payment for a perpetual license. Typically, arrangements for the sale of OTC software include one year of subscription and support. Clients can also purchase ongoing subscription and support after the first year, which includes product upgrades and technical support.
S OFTWARE CAPABILITIES
WebSphere Software. Delivers capabilities that enable clients to integrate and manage business processes across their organizations with the flexibility and agility they need to respond to changing
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conditions quickly. With a services-oriented architecture (SOA), businesses can more easily link together their fragmented data and business processes to extract value from their existing technology.
Information Management Software. Enables clients to integrate, manage and use their information to gain business value and improve their outcomes. Solutions include advanced database management, enterprise content management, information integration, data warehousing, business analytics and intelligence, performance management and predictive analytics.
Tivoli Software. Helps clients manage their technology and business assets by providing visibility, control and automation across their organizations. With solutions for identity management, data security, storage management and the ability to provide automation and provisioning of the datacenter, Tivoli helps build the infrastructure needed to make the world's systemsfrom transportation to water, energy and telecommunicationsrun smarter.
Lotus Software. Enables businesses to connect people and processes for more effective communication and increased productivity through collaboration, messaging and social networking software. By remaining at the forefront of collaboration tools, Lotus helps organizations reap the benefits of social networking and other Web 2.0 modalities.
Rational Software. Supports software development for both IT and embedded system solutions with a suite of Application Lifecycle Management products. Jazz, Rational's technology platform, transforms the way people work together to build software, making software delivery more collaborative, productive and transparent.
Operating Systems. Software that manages the fundamental processes that make computers run.
Systems and Technology provides clients with business solutions requiring advanced computing power and storage capabilities. Approximately 55 percent of Systems and Technology's server and storage sales transactions are through the company's business partners; approximately 45 percent are direct to end-user clients. In addition, Systems and Technology provides leading semiconductor technology, products and packaging solutions to clients and for IBM's own advanced technology needs.
S YSTEMS AND TECHNOLOGY CAPABILITIES
Systems. A range of general purpose and integrated systems designed and optimized for specific business, public and scientific computing needs. These systemsSystem z, converged System p and System xare typically the core technology in data centers that provide required infrastructure for business and institutions. Also, these systems form the foundation for IBM's integrated offerings, such as IBM Smart Business Storage Cloud, IBM Smart Analytics Cloud, IBM Smart Analytics System and IBM CloudBurst. IBM servers use both IBM and non-IBM microprocessor technology and operating systems. All IBM servers run Linux, a key open-source operating system.
Storage. IBM provides data storage products and solutions that allow clients to retain and manage rapidly growing, complex volumes of digital information. These solutions address critical client requirements for information retention and archiving, data deduplication, availability and virtualization, and security and compliance. The portfolio consists of a broad range of disk and tape storage systems and software, including the next-generation, ultra-scalable disk storage system XIV.
Retail Store Solutions. Point-of-sale retail systems (network connected cash registers) as well as solutions which connect them to other store systems.
Microelectronics. Semiconductor design and manufacturing primarily for use in IBM systems and storage products and for sale to external clients.
Global Financing facilitates clients' acquisition of IBM systems, software and services. Global Financing invests in financing assets, leverages with debt and manages the associated risks with the objective of
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generating consistently strong returns on equity. The primary focus on the company's offerings and clients mitigates many of the risks normally associated with a financing company. Global Financing has the benefit of both a deep knowledge of its client base and a clear insight into the products and services that are being financed. This combination allows Global Financing to effectively manage two of the major risks (credit and residual value) that are normally associated with financing.
G LOBAL FINANCING CAPABILITIES
Client Financing. Lease and loan financing to end users and internal clients for terms generally between two and seven years. Internal financing is predominantly in support of Global Services' long-term client service contracts. Global Financing also factors a selected portion of the company's accounts receivable, primarily for cash management purposes. All internal financing arrangements are at arm's-length rates and are based upon market conditions.
Commercial Financing. Short-term inventory and accounts receivable financing to dealers and remarketers of IT products.
Remarketing. The sale and lease of used equipment to new or existing clients both externally and internally. This equipment is primarily sourced from the conclusion of lease transactions. Externally remarketed equipment revenue represents sales or leases to clients and resellers. Internally remarketed equipment revenue primarily represents used equipment that is sold or leased internally to the Systems and Technology and Global Services segments. The Systems and Technology segment may also sell the equipment that it purchases from Global Financing to external clients.
IBM WORLDWIDE ORGANIZATIONS
The following worldwide organizations play key roles in IBM's delivery of value to its clients:
Sales and Distribution
IBM has a significant global presence, operating in more than 170 countries, with an increasingly broad-based geographic distribution of revenue. The company's Sales and Distribution organization manages a strong global footprint, with dedicated country-based operating units focused on delivering client value. Within these units, client relationship professionals work with integrated teams of consultants, product specialists and delivery fulfillment teams to improve clients' business performance. These teams deliver value by understanding the clients' businesses and needs, and then bring together capabilities from across IBM and an extensive network of Business Partners to develop and implement solutions.
By combining global expertise with local experience, IBM's geographic structure enables dedicated management focus for local clients, speed in addressing new market opportunities and timely investments in emerging opportunities. The geographic units align industry-skilled resources to serve clients' agendas. IBM extends capabilities to mid-market client segments by leveraging industry skills with marketing, ibm.com and local Business Partner resources.
In 2008, the company implemented a new growth markets organization to increase its focus on the emerging markets around the world that have market growth rates greater than the global averagecountries within Southeast Asia, Eastern Europe, the Middle East and Latin America. The company's major markets include the United States (U.S.), Canada, the United Kingdom (U.K.), France,
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Germany, Italy, Japan, Denmark, Sweden, Switzerland, Austria, Belgium, Finland, Greece, Ireland, the Netherlands, Portugal, Cyprus, Norway, Israel, Spain, the Bahamas and the Caribbean region.
The majority of IBM's revenue, excluding the company's original equipment manufacturer (OEM) technology business, occurs in industries that are broadly grouped into six sectors:
Research, Development and Intellectual Property
IBM's R&D operations differentiate the company from its competitors. IBM annually invests approximately $6 billion for R&D, focusing on high-growth, high-value opportunities. As a result of innovations in these and other areas, IBM was once again awarded more U.S. patents in 2009 than any other company, the 17th consecutive year IBM has been the patent leader. IBM's 4,914 patents in 2009 were the most U.S. patents ever awarded to one company in a single year. Consistent with the shift in the company's business mix, approximately 70 percent of these patents were for software and services. The company will continue to actively seek intellectual property protection for its innovations, while increasing emphasis on other initiatives designed to leverage its intellectual property leadership and promote innovation.
In addition to producing world-class systems, software and technology products, IBM innovations are also a major differentiator in providing solutions for the company's clients through its services businesses. The company's investments in R&D also result in intellectual property (IP) income of approximately $1 billion annually. Some of IBM's technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in either/both IBM products and/or the products of the licensee. While the company's various proprietary intellectual property rights are important to its success, IBM believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. IBM owns or is licensed under a number of patents, which vary in duration, relating to its products. Licenses under patents owned by IBM have been and are being granted to others under reasonable terms and conditions.
Integrated Supply Chain
Consistent with the company's work with clients to transform their supply chains for greater efficiency and responsiveness to global market conditions, the company continues to derive business value from its own globally integrated supply chain, thereby providing a strategic advantage for the company to create value for clients. IBM leverages its supply-chain expertise for clients through its supply-chain business transformation outsourcing service to optimize and help operate clients' end-to-end supply-chain processes, from procurement to logistics.
IBM spends approximately $35 billion annually through its supply chain, procuring materials and services globally. The supply, manufacturing and logistics and customer fulfillment operations are integrated in one operating unit that has optimized inventories over time, improved response to marketplace opportunities and external risks and converted fixed costs to variable costs. Simplifying and streamlining internal processes has improved operations, sales force productivity and processes.
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COMPETITION
The company is a globally-integrated enterprise, doing business in more than 170 countries. The company participates in the highly competitive information technology (IT) industry, where its competitors vary by industry segment, and range from large multinational enterprises to smaller, more narrowly focused entities. Overall, across its business segments, the company recognizes hundreds of competitors worldwide.
The markets for each of the company's business segments is characterized by aggressive competition among all types of competitors. Across its business, the company's principal methods of competition are: technology innovation; performance; price; quality; brand; its broad range of capabilities, products and services; client relationships; the ability to deliver business value to clients; and, service and support. In order to maintain leadership in the IT industry, a corporation must continue to invest, innovate and integrate. Over the past several years, the company has been executing a strategy to transform its business, including shifting to higher value market segments and offerings and increasing its capabilities through internal investments and strategic acquisitions. Overall, the company is the leader or among the leaders in each of its business segments.
A summary of the competitive environment for each business segment is included below:
Global Services:
The services segments, GTS and GBS, operate in a highly competitive and continually evolving global market. GTS competes in strategic outsourcing, business transformation outsourcing, integrated technology services and IT support services. GBS competes in consulting, system integration and application management services. The principal competitive factors in these business segments include: technical skills and capabilities, innovative service and product offerings, the ability to add value and the time-to-value, price, client relationships, quality of sales and delivery, reliability, security and the availability of resources. The company's competitive advantages in the services business include its global reach and scale, best-of-breed process and industry skills, extensive technology expertise and infrastructure management, an ability to deliver integrated solutions that can address clients' needs in any environment and a strong set of relationships with clients and strategic business partners worldwide. The company competes with broad based competitors including Accenture, Computer Sciences Corporation, Fujitsu and Hewlett-Packard Company (HP); India-based service providers including HCL, Infosys, Tata Consulting Services and Wipro Technologies; and, many companies that primarily focus on local markets or niche service areas.
Software:
The enterprise management software market is highly competitive and the key competitive factors in this segment include: functionality, ease of use, scalability, compliance with open standards and total cost of ownership. The company's leadership in these areas provides it with competitive advantages. The company's software business includes middleware, operating systems and related software provided to all industry segments worldwide. The middleware portfolio is the broadest in the industry and it also covers both mainframe and distributed computing environments. The depth and breadth of the company's software offerings, coupled with its global sales and technical support infrastructure differentiate the company's software business from its competitors. In addition, the company's research and development capabilities and intellectual property patent portfolio contribute to this segment's leadership. The company's principal competitors in this segment include BMC Software, CA, Inc., Microsoft Corporation and Oracle Corporation. In addition, the company competes with smaller, niche competitors in specific geographic or product markets worldwide.
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Systems and Technology:
The enterprise server and storage market is highly competitive and is characterized by ongoing technology innovation, with competition focused on value, function and reliability, and new entrants leveraging technology to compete against traditional offerings. The company's principal competitors include Dell, Inc. (Dell), EMC Corporation, HP and Sun Microsystems. The company's leadership in virtualization, power management, security, multi-operating system capabilities and the ability of its systems platforms to leverage the entire system, from the company's custom semiconductors through the software stack to increase efficiency and lower cost, provide the company with competitive advantages in this segment. In addition, the company's research and development capabilities and intellectual property patent portfolio contribute significantly to this segment's leadership.
Global Financing:
The Global Financing business provides client financing, commercial financing and participates in the remarketing of used equipment. In 2009, the continued global financial credit crisis impacted both the client and commercial financing markets. The supply of credit remained tight and financial institutions continued to face increases in loan losses, higher borrowing costs and liquidity challenges. Global Financing's access to capital and its ability to manage increased exposures provide a competitive advantage for the company. The key competitive factors include price, IT product expertise, client service, contract flexibility, ease of doing business and residual values. In client and commercial financing, Global Financing competes with three types of companies in providing financial services to IT customers: other captive financing companies such as Dell and HP, non-captive companies such as General Electric Company and banks or financial institutions. In remarketing, the company competes with local and regional brokers plus original manufacturers in the fragmented worldwide used IT equipment market.
Forward-looking and Cautionary Statements
7 Certain statements contained in this Form 10-K may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). The company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In addition, the company's representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. The company assumes no obligation to update or revise any forward-looking statements. In accordance with the Reform Act, set forth under Item 1A. "Risk Factors" on pages 11 to 14 are cautionary statements that accompany those forward-looking statements. Readers should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-K, in the company's filings with the Securities and Exchange Commission or in materials incorporated therein by reference.
The following information is included in IBM's 2009 Annual Report to Stockholders and is incorporated herein by reference:
Segment information and revenue by classes of similar products or servicespages 122 to 126.
Financial information by geographic areaspage 125.
Amount spent during each of the last three years on R&D activitiespage 103.
Financial information regarding environmental activitiespages 97 and 98.
The number of persons employed by the registrantpage 56.
The management discussion overviewpages 19 and 20.
Available informationpages 132 and 133.
Also refer to Item 1A. entitled "Risk Factors" in Part I of this Form.
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Executive Officers of the Registrant (at February 23, 2010):
|
Age | Officer since | |||||
---|---|---|---|---|---|---|---|
Samuel J. Palmisano, Chairman of the Board, President and Chief Executive Officer(1) |
58 | 1997 | |||||
Rodney C. Adkins, Senior Vice President, Systems and Technology Group |
51 | 2007 | |||||
Colleen F. Arnold, Senior Vice President, Application Management Services |
52 | 2010 | |||||
Michael E. Daniels, Senior Vice President, Global Technology Services |
55 | 2005 | |||||
Jon C. Iwata, Senior Vice President, Marketing and Communications |
47 | 2002 | |||||
James J. Kavanaugh, Vice President and Controller |
43 | 2008 | |||||
John E. Kelly III, Senior Vice President, Research and Intellectual Property |
56 | 2000 | |||||
R. Franklin Kern III, Senior Vice President, Global Business Services |
56 | 2008 | |||||
Robert J. LeBlanc, Senior Vice President, Software Middleware Group |
51 | 2010 | |||||
Mark Loughridge, Senior Vice President, Chief Financial Officer |
56 | 1998 | |||||
J. Randall MacDonald, Senior Vice President, Human Resources |
61 | 2000 | |||||
Steven A. Mills, Senior Vice President, Software Group |
58 | 2000 | |||||
Michael D. Rhodin, Senior Vice President, Software Solutions Group |
49 | 2010 | |||||
Virginia M. Rometty, Senior Vice President, Global Sales and Distribution |
52 | 2005 | |||||
Linda S. Sanford, Senior Vice President, Enterprise Transformation |
57 | 2000 | |||||
Timothy S. Shaughnessy, Senior Vice President, Services Delivery |
52 | 2004 | |||||
Robert C. Weber, Senior Vice President, Legal and Regulatory Affairs, and General Counsel |
59 | 2006 |
All executive officers are elected by the Board of Directors and serve until the next election of officers in conjunction with the annual meeting of the stockholders as provided in the By-laws. Each executive officer named above, with the exception of Robert C. Weber, has been an executive of IBM or its subsidiaries during the past five years.
Mr. Weber was a partner at Jones Day, an international law firm, until joining IBM in 2006. He was with Jones Day for almost 30 years, and his career included counseling corporations, individuals and boards of directors, as well as extensive experience in corporate derivative litigation, federal and state enforcement actions and commercial litigation.
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Downturn in Economic Environment and Corporate IT Spending Budgets could impact the Company's Business: If overall demand for systems, software and services decreases, whether due to general economic conditions or a shift in corporate buying patterns, the company's revenue and profit could be impacted.
The Company may not meet its Growth and Productivity Objectives under its Internal Business Transformation and Global Integration Initiatives: On an ongoing basis, IBM seeks to drive greater productivity, flexibility and cost savings by transforming and globally integrating its own business processes and functions to remain competitive and to enable scaling of resources in both emerging and more established geographical markets. These various initiatives may not yield their intended gains in quality, productivity and enablement of rapid scaling, which may impact the company's ability to meet its growth and productivity objectives.
Failure of Innovation Initiatives could impact the Long-Term Success of the Company: IBM has been moving away from commoditized categories of the IT industry and into areas in which it can differentiate itself through innovation and by leveraging its investments in R&D. If IBM is unable to continue its cutting-edge innovation in the highly competitive IT industry, the company could fail in its ongoing efforts to maintain and increase its market share and its profit margins. In addition, IBM has one of the strongest brand names in the world, and its brand and overall reputation could be negatively impacted by many factors, including if the company does not continue to be recognized for its industry-leading technology and solutions. If the company's brand image is tarnished by negative perceptions, our ability to attract and retain customers could be impacted.
Risks from Investing in Growth Opportunities could impact the Company's Business: The company continues to invest significantly in growth opportunities, including higher-value segments of enterprise computing and dozens of emerging countries, including Brazil, Russia, India and China, to drive revenue growth and market share gains. Client adoption rates and viable economic models are uncertain in the high-value and rapidly-growing segments. In addition, as the company expands to capture emerging growth opportunities, it needs to rapidly secure the appropriate mix of trained, skilled and experienced personnel. In emerging growth countries, the developing nature presents potential political, social and economic risks from inadequate infrastructure, creditworthiness of customers and business partners, labor disruption and corruption, which could impact the company's ability to meet its growth objectives and to deliver to its clients around the world.
IBM's Intellectual Property Portfolio may not prevent Competitive Offerings, and IBM may not be able to Obtain Necessary Licenses: The company's patents and other intellectual property may not prevent competitors from independently developing products and services similar to or duplicative to the company's, nor can there be any assurance that the resources invested by the company to protect its intellectual property will be sufficient or that the company's intellectual property portfolio will adequately deter misappropriation or improper use of the company's technology. In addition, the company may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Also, there can be no assurances that IBM will be able to obtain from third parties the licenses it needs in the future.
Breaches of Data Security could impact the Company's Business: The company's products and services, as well as its internal systems and processes, involve the storage and transmission of proprietary information and sensitive or confidential data, including personal information of employees, customers and others. Breaches in security could expose the company, its customers or the individuals affected to a risk of loss or misuse of this information, resulting in litigation and potential liability for the company, as well as the loss of existing or potential customers and damage to the company's brand and reputation. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
11
The Company's Revenues for Particular Periods are Difficult to Predict: IBM's revenues are affected by such factors as the introduction of new products and services, the length of the sales cycles, the structure of products and services contracts and the seasonality of technology purchases. As a result, the company's results are difficult to predict. These factors historically have resulted in lower revenue in the first quarter than in the immediately preceding fourth quarter. In addition, the high volume of products ordered at the end of each quarter, especially at the end of the fourth quarter, may affect IBM's ability to successfully ship all orders before the end of the quarter.
Due to the Company's Global Presence, its Business and Operations could be impacted by Local Legal, Economic, Political and Health Conditions: The company is a globally integrated entity, operating in over 170 countries worldwide and deriving more than sixty percent of its revenues from sales outside the United States. Changes in the laws or policies of the countries in which the company operates, or inadequate enforcement of such laws or policies, could affect the company's business in that country and the company's overall results of operations. The company's results of operations also could be affected by economic and political changes in those countries and by macroeconomic changes, including recessions, inflation and currency fluctuations between the U.S. dollar and local currency. In addition, any widespread outbreak of an illness, pandemic or other local or global health issue, or any terrorist activities, could adversely affect customer demand and the company's operations and its ability to source and deliver products and services to its customers.
The Company could incur Substantial Costs for Environmental Matters: The company is subject to various federal, state, local and foreign laws and regulations concerning the discharge of materials into the environment or otherwise related to environmental protection, including the U.S. Superfund law. The company could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, as well as third-party claims for property damage or personal injury, if it were to violate or become liable under environmental laws and regulations. Compliance with environmental laws and regulations is not expected to have a material adverse effect on the company's financial position, results of operations and competitive position.
Tax Matters could impact the Company's Results of Operations and Financial Condition: The company is subject to income taxes in both the United States and numerous foreign jurisdictions. IBM's provision for income taxes and cash tax liability in the future could be adversely affected by numerous factors including, but not limited to, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact the company's results of operations and financial condition in future periods. In addition, IBM is subject to the continuous examination of its income tax returns by the United States Internal Revenue Service and other tax authorities. The company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on the company's provision for income taxes and cash tax liability.
The Company's Results of Operations and Financial Condition could be negatively impacted by its U.S. and non-U.S. Pension Plans: Adverse equity market conditions and volatility in the credit markets may have an unfavorable impact on the value of the company's pension trust assets and its future estimated pension liabilities. As a result, the company's financial results in any period could be negatively impacted. In addition, in a period of an extended financial market downturn, the company could be required to provide incremental pension plan funding with resulting liquidity risk which could negatively impact the company's financial flexibility. Further, the company's results of operations and financial results could be negatively impacted by premiums for mandatory pension insolvency insurance coverage outside the U.S. Premium increases can be significant due to the level of insolvencies of unrelated companies in the country at issue. Currently, Canada, Germany, Luxembourg and the United Kingdom require that these premiums be paid directly by the company and not out of plan assets,
12
which could negatively impact the company's earnings. IBM's 2009 Annual Report to Stockholders includes information about potential impacts from pension funding and the use of certain assumptions regarding pension matters.
Ineffective Internal Controls could impact the Company's Business and Operating Results: The company's internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the company experiences difficulties in their implementation, the company's business and operating results could be harmed and the company could fail to meet its financial reporting obligations.
The Company's Use of Accounting Estimates involves Judgment and could impact the Company's Financial Results: The company's most critical accounting estimates are described in the Management Discussion in IBM's 2009 Annual Report to Stockholders, under "Critical Accounting Estimates." In addition, as discussed in note O, "Contingencies and Commitments," in IBM's 2009 Annual Report to Stockholders, the company makes certain estimates including decisions related to legal proceedings and reserves. Because by definition these estimates and assumptions involve the use of judgment, actual financial results may differ.
The Company Depends on Skilled Personnel and could be impacted by the loss of Critical Skills: Much of the future success of the company depends on the continued service, availability and integrity of skilled personnel, including technical, marketing and staff resources. Experienced personnel in the information technology industry are in high demand, and competition for their talents is intense. Changing demographics and labor work force trends may result in a loss of knowledge and skills as experienced workers leave the company. In addition, as global opportunities and industry demand shifts, realignment and scaling of skilled resources may not be sufficiently rapid. Further, many of IBM's key personnel receive a total compensation package that includes equity awards. New regulations, volatility in the stock market and other factors could diminish the company's use, and the value, of the company's equity awards, putting the company at a competitive disadvantage or forcing the company to use more cash compensation.
The Company's Business could be impacted by its Relationships with Critical Suppliers: IBM's business employs a wide variety of components, supplies, services and raw materials from a substantial number of suppliers around the world. Certain of the company's businesses rely on single or a limited number of suppliers. Changes in the financial or business condition of these suppliers could subject the company to losses and affect its ability to bring products to market. Further, the failure of the company's suppliers to deliver components, supplies, services and raw materials in sufficient quantities and in a timely manner could adversely affect the company's business. In addition, any defective components, supplies or materials, or inadequate services, received from suppliers could reduce the reliability of the company's products and services and harm the company's reputation.
The Company is exposed to Currency and Customer Financing Risks that could impact its Revenue and Business: The company derives a significant percentage of its revenues and costs from its affiliates operating in local currency environments, and those results are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar. Further, inherent in the company's customer financing business are risks related to the concentration of credit, client creditworthiness, interest rate and currency fluctuations on the associated debt and liabilities, the determination of residual values and the financing of other than traditional IT assets. The company employs a number of strategies to manage these risks, including the use of derivative financial instruments; derivatives involve the risk of non-performance by the counterparty. In addition, there can be no assurance that the company's efforts to manage its currency and customer financing risks will be successful.
13
The Company's Financial Performance could be impacted by Changes in Market Liquidity Conditions and by Customer Credit Risk on Receivables: The company's financial performance is exposed to a wide variety of industry sector dynamics worldwide. The company's earnings and cash flows, as well as its access to funding, could be negatively impacted by changes in market liquidity conditions. IBM's 2009 Annual Report to Stockholders includes information about the company's liquidity position. The company's client base includes many worldwide enterprises, from small and medium businesses to the world's largest organizations and governments, with a significant portion of the company's revenue coming from global clients across many sectors. Most of the company's sales are on an open credit basis and the company performs ongoing credit evaluations of its clients' financial conditions. If the company becomes aware of information related to the credit worthiness of a major customer, or, if future actual default rates on receivables in general differ from those currently anticipated, the company may have to adjust its reserves for uncollectible receivables, which could affect the company's consolidated net income in the period the adjustments are made.
The Company's Reliance on Third Party Distribution Channels could impact its Business: The company offers its products directly and through a variety of third party distributors and resellers. Changes in the financial or business condition of these distributors and resellers could subject the company to losses and affect its ability to bring its products to market. As the company moves into new areas, distributors and resellers may be unable to keep up with changes in technology and offerings, and the company may be unable to fund and enable appropriate partners to achieve growth objectives.
Risks to the Company from Acquisitions and Alliances include Integration Challenges, Failure to Achieve Objectives, and the Assumption of Liabilities: The company has made and expects to continue to make acquisitions or enter into alliances from time to time. Acquisitions and alliances present significant challenges and risks relating to the integration of the business into the company, and there can be no assurances that the company will manage acquisitions and alliances successfully. The related risks include the company failing to achieve strategic objectives and anticipated revenue improvements and cost savings, as well as the failure to retain key personnel of the acquired business and the assumption of liabilities related to litigation or other legal proceedings involving the acquired business.
Risk Factors Related to IBM Securities: The company and its subsidiaries issue debt securities in the worldwide capital markets from time to time, with a variety of different maturities and in different currencies. The value of the company's debt securities fluctuates based on many factors, including the methods employed for calculating principal and interest, the maturity of the securities, the aggregate principal amount of securities outstanding, the redemption features for the securities, the level, direction and volatility of interest rates, changes in exchange rates, exchange controls, governmental and stock exchange regulations and other factors over which the company has little or no control. The company's ability to pay interest and repay the principal for its debt securities is dependent upon its ability to manage its business operations, as well as the other risks described under this Item 1A. entitled "Risk Factors." There can be no assurance that the company will be able to manage any of these risks successfully.
The company also issues its common stock from time to time in connection with various compensation plans, contributions to its pension plan and certain acquisitions. The market price of IBM common stock is subject to significant volatility, due to other factors described under this Item 1A. entitled "Risk Factors," as well as economic and geopolitical conditions generally, trading volumes, speculation by the press or investment community about the company's financial condition, and other factors, many of which are beyond the company's control. Since the market price of IBM's common stock fluctuates significantly, stockholders may not be able to sell the company's stock at attractive prices.
In addition, changes by any rating agency to the company's outlook or credit ratings can negatively impact the value and liquidity of both the company's debt and equity securities. The company does not make a market in either its debt or equity securities and cannot provide any assurances with respect to the liquidity or value of such securities.
14
Item 1B. Unresolved Staff Comments:
Not applicable.
At December 31, 2009, IBM's manufacturing and development facilities in the United States had aggregate floor space of 19 million square feet, of which 16 million was owned and 3 million was leased. Of these amounts, 3 million square feet was vacant and 1 million square feet was being leased to non-IBM businesses. Similar facilities in 8 other countries totaled 6 million square feet, of which 2 million was owned and 4 million was leased. Of these amounts, 1 million square feet was being leased to non-IBM businesses.
Although improved production techniques, productivity gains and infrastructure reduction actions have resulted in reduced manufacturing floor space, continuous maintenance and upgrading of facilities is essential to maintain technological leadership, improve productivity and meet customer demand.
Refer to note O, "Contingencies and Commitments," on pages 99 to 101 of IBM's 2009 Annual Report to Stockholders, which is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable.
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities:
Refer to pages 128, 132 and 133 of IBM's 2009 Annual Report to Stockholders, which are incorporated herein by reference solely as they relate to this item.
IBM common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange. There were 543,807 common stockholders of record at February 10, 2010.
The following table provides information relating to the company's repurchase of common stock for the fourth quarter of 2009.
|
Total Number
of Shares Purchased |
Average
Price Paid per Share |
Total Number
of Shares Purchased as Part of Publicly Announced Program |
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Program(1) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
October 1, 2009
|
1,725,379 | $ | 121.71 | 1,725,379 | $ | 9,031,145,176 | |||||||
November 1, 2009
|
12,952,318 | $ | 125.68 | 12,952,318 | $ | 7,403,282,907 | |||||||
December 1, 2009
|
10,027,838 | $ | 128.66 | 10,027,838 | $ | 6,113,066,348 | |||||||
Total |
24,705,535 | $ | 126.61 | 24,705,535 | |||||||||
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2009 and October 27, 2009, the Board of Directors authorized an additional $3.0 billion and $5.0 billion, respectively, in funds for use in such program. In each case, the company stated that it would repurchase shares on the open market or in private transactions depending on market conditions, and that it expects to use cash from operations for the repurchases. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.
Item 6. Selected Financial Data:
Refer to pages 127 and 128 of IBM's 2009 Annual Report to Stockholders, which are incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:
Refer to pages 18 through 61 of IBM's 2009 Annual Report to Stockholders, which are incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk:
Refer to the section titled "Market Risk" on pages 55 and 56 of IBM's 2009 Annual Report to Stockholders, which is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data:
Refer to pages 64 through 126 of IBM's 2009 Annual Report to Stockholders, which are incorporated herein by reference. Also refer to the Financial Statement Schedule on page S-1 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:
Not applicable.
Item 9A. Controls and Procedures:
The company's management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report.
Refer to "Report of Management" and "Report of Independent Registered Public Accounting Firm" on pages 62 and 63 of IBM's 2009 Annual Report to Stockholders, which are incorporated herein by reference. There has been no change in the company's internal control over financial reporting that occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to material affect, the company's internal control over financial reporting.
On February 23, 2010, IBM announced that Andrew N. Liveris has been elected to the IBM Board of Directors, effective February 23, 2010. Mr. Liveris has also become a member of IBM's Executive Compensation and Management Resources Committee. The company's compensatory and other arrangements for non-management directors are set forth in the company's most recent Proxy Statement. In connection with Mr. Liveris' election, Article III, Section 2 of IBM's By-laws was amended to increase the number of directors to fourteen, effective February 23, 2010. The full text of IBM's By-laws, as amended, is included as Exhibit 3 to this report.
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Item 10. Directors, Executive Officers and Corporate Governance:
Refer to the information under the captions "Election of Directors for a Term of One Year," "General InformationCommittees of the Board," "Audit Committee" and "Section 16(a) Beneficial Ownership Reporting Compliance" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 27, 2010, all of which information is incorporated herein by reference. Also refer to Item 1 of this Form 10-K under the caption "Executive Officers of the Registrant (at February 23, 2010)" on page 10 for additional information on the company's executive officers.
Item 11. Executive Compensation:
Refer to the information under the captions "General Information2009 Director Compensation Narrative," "2009 Director Compensation Table," "2009 Compensation Discussion and Analysis," "2009 Summary Compensation Table Narrative," "2009 Summary Compensation Table," "2009 Grants of Plan-Based Awards Table," "2009 Outstanding Equity Awards at Fiscal Year-End Narrative," "2009 Outstanding Equity Awards at Fiscal Year-End Table," "2009 Option Exercises and Stock Vested Table," "2009 Retention Plan Narrative," "2009 Retention Plan Table," "2009 Pension Benefits Narrative," "2009 Pension Benefits Table," "2009 Nonqualified Deferred Compensation Narrative," "2009 Nonqualified Deferred Compensation Table," "2009 Potential Payments Upon Termination Narrative," "2009 Potential Payments Upon Termination Table," "Compensation Committee Interlocks and Insider Participation" and "2009 Report of the Executive Compensation and Management Resources Committee of the Board of Directors" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 27, 2010, all of which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters:
Refer to the information under the caption "Ownership of SecuritiesSecurity Ownership of Certain Beneficial Owners" and "Ownership of SecuritiesCommon Stock and Stock-Based Holdings of Directors and Executive Officers" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 27, 2010, all of which information is incorporated herein by reference.
17
Equity Compensation Plan Information
|
(a) | (b) | (c) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Plan category
|
Number of securities
to be issued upon exercise of outstanding options, warrants and rights(1) |
Weighted-average
exercise price of outstanding options, warrants and rights(1) |
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|||||||||
Equity compensation plans approved by security holders |
||||||||||||
Options |
31,625,285 | $ | 108.10 | | ||||||||
RSUs |
1,277,722 | n/a | | |||||||||
PSUs |
2,848,328 | (2) | n/a | | ||||||||
Subtotal |
35,751,335 |
$ |
108.10 |
120,810,231 |
||||||||
Equity compensation plans not approved by security holders |
||||||||||||
Options |
41,585,172 | $ | 89.54 | | ||||||||
RSUs |
12,127,932 | n/a | | |||||||||
PSUs |
2,366,778 | (2) | n/a | | ||||||||
DCEAP Shares |
102,660 | n/a | | |||||||||
Subtotal |
56,182,542 |
$ |
89.54 |
19,551,357 |
||||||||
Total |
91,933,877 |
$ |
97.56 |
140,361,588 |
n/a is not applicable
RSUsRestricted Stock Units, including Retention Restricted Stock Units
PSUsPerformance Share Units
DCEAP SharesShares under the DCEAP (see plan description below)
The material features of each equity compensation plan under which equity securities are authorized for issuance that was adopted without stockholder approval are described below:
2001 LONG-TERM PERFORMANCE PLAN
The 2001 Long-Term Performance Plan (the "2001 Plan") is used to fund awards for employees other than senior executives of the company. Awards for senior executives of the company will continue
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to be funded from the stockholder-approved 1999 Long-Term Performance Plan (the "1999 Plan"). Otherwise, the provisions of the 2001 Plan are identical to the 1999 Plan, including the type of awards that may be granted under the plan (stock options, restricted stock and unit awards and long-term performance incentive awards).
The 2001 Plan is administered by the Executive Compensation and Management Resources Committee of the Board of Directors, and that Committee may delegate to officers of the company certain of its duties, powers and authority. Payment of awards may be made in the form of cash, stock or combinations thereof and may be deferred with Committee approval. Awards are not transferable or assignable except (i) by law, will or the laws of descent and distribution, (ii) as a result of the disability of the recipient, or (iii) with the approval of the Committee.
If the employment of a participant terminates, other than as a result of the death or disability of a participant, all unexercised, deferred and unpaid Awards shall be canceled immediately, unless the Award Agreement provides otherwise. In the event of the death of a participant or in the event a participant is deemed by the company to be disabled and eligible for benefits under the terms of the IBM Long-Term Disability Plan (or any successor plan or similar plan of another employer), the participant's estate, beneficiaries or representative, as the case may be, shall have the rights and duties of the participant under the applicable Award Agreement. In addition, unless the Award Agreement specifies otherwise, the Committee may cancel, rescind, suspend, withhold or otherwise limit or restrict any unexpired, unpaid, or deferred Awards at any time if the participant is not in compliance with all applicable provisions of the Award Agreement and the Plan. In addition, Awards may be cancelled if the participant engages in any conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company.
PWCC ACQUISITION LONG-TERM PERFORMANCE PLAN
The IBM PWCC Acquisition Long-Term Performance Plan (the "PWCC Plan") was adopted by the Board of Directors in connection with the Company's acquisition of PricewaterhouseCoopers Consulting ("PwCC") from PricewaterhouseCoopers LLP, as announced on October 1, 2002. The PWCC Plan has been and will continue to be used solely to fund awards for employees of PwCC who have come over to the company as a result of the acquisition. Awards for senior executives of the company will not be funded from the PWCC Plan. The terms and conditions of the PWCC Plan are substantively identical to the terms and conditions of the 2001 Plan, described above.
IBM DEFERRED COMPENSATION AND EQUITY AWARD PLAN
The IBM Deferred Compensation and Equity Award Plan (the "DCEAP") was adopted in 1993. Under the DCEAP, non-management directors receive Promised Fee Shares in connection with deferred annual retainer payments. Each Promised Fee Share is equal in value to one share of the company's common stock. Upon a director's retirement or other completion of service as a director, all amounts deferred into Promised Fee Shares are payable in either cash and/or shares of the company's stock at the director's election. (For additional information about the DCEAP, see the 2009 Director Compensation Narrative in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 27, 2010).
Item 13. Certain Relationships and Related Transactions, and Director Independence:
Refer to the information under the captions "General InformationBoard of Directors" and "General InformationCertain Transactions and Relationships" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with
19
the Annual Meeting of Stockholders to be held April 27, 2010, which information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services:
Refer to the information under the captions "Report of the Audit Committee of the Board of Directors" and "Audit and Non-Audit Fees" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 27, 2010, all of which information is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules:
Report of Independent Registered Public Accounting Firm (page 63).
Consolidated Statement of Earnings for the years ended December 31, 2009, 2008 and 2007 (page 64).
Consolidated Statement of Financial Position at December 31, 2009 and 2008 (page 65).
Consolidated Statement of Cash Flows for the years ended December 31, 2009, 2008 and 2007 (page 66).
Consolidated Statement of Changes in Equity at December 31, 2009, 2008 and 2007 (pages 67 through 69).
Notes to Consolidated Financial Statements (pages 70 through 126).
Page
|
Schedule
Number |
|
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26 |
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule. |
|||||
S-1 |
II |
Valuation and Qualifying Accounts and Reserves. |
All other schedules are omitted as the required matter is not present, the amounts are not significant or the information is shown in the Consolidated Financial Statements or the notes thereto.
Reference Number per Item 601 of Regulation S-K | Description of Exhibits |
Exhibit Number
in this Form 10-K |
|||||
---|---|---|---|---|---|---|---|
(2) | Plan of acquisition, reorganization, arrangement, liquidation or succession. | Not applicable | |||||
|
(3) |
|
Certificate of Incorporation and By-laws. |
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|
|
|
|
|
|
The Certificate of Incorporation of IBM is Exhibit 3.2 to Form 8-K filed April 27, 2007, and is hereby incorporated by reference. |
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|
|
|
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Reference Number per Item 601 of Regulation S-K | Description of Exhibits |
Exhibit Number
in this Form 10-K |
|||||
---|---|---|---|---|---|---|---|
The By-laws of IBM as amended through February 23, 2010. | 3 | ||||||
|
(4) |
|
Instruments defining the rights of security holders. |
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The instruments defining the rights of the holders of the 7.50% Debentures due 2013 are Exhibits 4(a) through 4(l) to Registration Statement No. 33-49475(1) on Form S-3, filed May 24, 1993, and are hereby incorporated by reference. |
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The instruments defining the rights of the holders of the 8.375% Debentures due 2019 are Exhibits 4(a)(b)(c) and (d), respectively, to Registration Statement No. 33-31732 on Form S-3, filed on October 24, 1989, and are hereby incorporated by reference. |
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The instruments defining the rights of the holders of the 7.00% Debentures due 2025 and the 7.00% Debentures due 2045 are Exhibits 2 and 3, respectively, to Form 8-K, filed on October 30, 1995, and are hereby incorporated by reference. |
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The instrument defining the rights of the holders of the 7.125% Debentures due 2096 is Exhibit 2 to Form 8-K/A, filed on December 6, 1996, and is hereby incorporated by reference. |
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The instrument defining the rights of the holders of the 6.22% Debentures due 2027 is Exhibit 3 to Form 8-K, filed on August 1, 1997, and is hereby incorporated by reference. |
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The instrument defining the rights of the holders of the 6.50% Debentures due 2028 is Exhibit 2 to Form 8-K, filed on January 8, 1998, and is hereby incorporated by reference. |
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The instrument defining the rights of the holders of the 4.00% Notes due 2011 is Exhibit 2 to Form 8-K, filed on November 9, 2006, and is hereby incorporated by reference. |
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The instrument defining the rights of the holders of the 4.95% Notes due 2011 is Exhibit 2 to Form 8-K, filed on March 21, 2007, and is hereby incorporated by reference. |
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The instrument defining the rights of the holders of the 6.625% Notes due 2014 is Exhibit 2 to Form 8-K, filed November 5, 2008, and is hereby incorporated by reference. |
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The instruments defining the rights of the holders of the 2.1% Notes due 2013 and Floating Rate Notes are Exhibits 2.1 and 3.1, respectively, to Form 8-K, filed on November 5, 2009, and are hereby incorporated by reference. |
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(9) |
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Voting trust agreement |
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Not applicable |
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(10) |
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Material contracts |
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21
Reference Number per Item 601 of Regulation S-K | Description of Exhibits |
Exhibit Number
in this Form 10-K |
|||||
---|---|---|---|---|---|---|---|
The IBM 2001 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-87708 on Form S-8, as such amended plan was filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.* | |||||||
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The IBM PWCC Acquisition Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-102872 on Form S-8, as such amended plan was filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.* |
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The IBM 1999 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-30424 on Form S-8, as such amended plan was filed as Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.* |
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The IBM 1997 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-31305 on Form S-8, as such amended plan was filed as Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.* |
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The IBM 1994 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 33-53777 on Form S-8, as such amended plan was filed as Exhibit 10.5 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.* |
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Forms of LTPP equity award agreements for (i) stock options, restricted stock, restricted stock units, cash-settled restricted stock units, SARS, (ii) performance share units and (iii) retention restricted stock unit awards. Such equity award agreement forms and the related terms and conditions document effective June 8, 2009 were filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2009, are hereby incorporated by reference.* |
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Board of Directors compensatory plans, as described under the caption "General Information2009 Director Compensation" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 27, 2010, are hereby incorporated by reference.* |
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The IBM Non-Employee Directors Stock Option Plan, contained in Registration Statement 33-60227 on Form S-8, is hereby incorporated by reference.* |
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22
Reference Number per Item 601 of Regulation S-K | Description of Exhibits |
Exhibit Number
in this Form 10-K |
|||||
---|---|---|---|---|---|---|---|
The IBM Board of Directors Deferred Compensation and Equity Award Plan, a compensatory plan, as amended effective October 28, 2008, was filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 2008, is hereby incorporated by reference.* | |||||||
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The IBM Supplemental Executive Retention Plan, a compensatory plan, as amended and restated through December 31, 2008, was filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 2008, is hereby incorporated by reference.* |
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The IBM Excess 401(k) Plus Plan, a compensatory plan, as amended and restated through January 1, 2010 (formerly the IBM Executive Deferred Compensation Plan contained in Registration Statement No. 333-33692 on Form S-8), which amended and restated Plan is hereby incorporated by reference into such Registration Statement.* |
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10.1 |
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The IBM 401(k) Plus Plan, a compensatory plan, as amended and restated effective as of January 1, 2008, which was filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2008 (formerly the IBM Tax Deferred Savings Plan, contained in Registration Statement No. 333-09055 on Form S-8), is hereby incorporated by reference.* |
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Amendment No. 1 to the IBM 401(k) Plus Plan, a compensatory plan, as approved September 11, 2009.* |
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10.2 |
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Amendment No. 2 to the IBM 401(k) Plus Plan, a compensatory plan, as approved November 16, 2009.* |
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10.3 |
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The IBM 2003 Employees Stock Purchase Plan, contained in Registration Statement 333-104806 on Form S-8, as amended through April 1, 2005, which was filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2005, is hereby incorporated by reference. |
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Form of Noncompetition Agreement, filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2009, is hereby incorporated by reference.* |
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The $10,000,000,000 5-Year Credit Agreement dated as of June 28, 2006, among International Business Machines Corporation, each Subsidiary Borrower, the several banks and other financial institutions from time to time parties to the Credit Agreement, JPMorgan Chase Bank, N.A., as Administrative Agent for the Lenders, and Citibank, N.A., as Syndication Agent, which was filed as Exhibit 10.1 to Form 8-K dated June 29, 2006, is hereby incorporated by reference. |
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(11) |
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Statement re computation of per share earnings |
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The statement re computation of per share earnings is note R, "Earnings Per Share of Common Stock," on page 104 of IBM's 2009 Annual Report to Stockholders, and is hereby incorporated by reference. |
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23
Reference Number per Item 601 of Regulation S-K | Description of Exhibits |
Exhibit Number
in this Form 10-K |
|||||
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(12) | Statement re computation of ratios | 12 | |||||
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(13) |
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Annual report to security holders** |
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13 |
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(18) |
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Letter re: change in accounting principles |
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Not applicable |
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(19) |
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Previously unfiled documents |
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Not applicable |
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(21) |
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Subsidiaries of the registrant |
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21 |
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(22) |
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Published report regarding matters submitted to vote of security holders |
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Not applicable |
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(23.1) |
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Consent of experts |
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23.1 |
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(24.1) |
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Powers of attorney |
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24.1 |
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(24.2) |
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Resolution of the IBM Board of Directors authorizing execution of this report by Powers of Attorney |
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24.2 |
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(28) |
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Information from reports furnished to state insurance regulatory authorities |
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Not applicable |
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(31.1) |
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Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.1 |
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(31.2) |
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Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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(32.1) |
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Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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(32.2) |
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Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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(101) |
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Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statement of Earnings for the twelve month period ended December 31, 2009, 2008 and 2007, (ii) the Consolidated Statement of Financial Position at December 31, 2009 and 2008, (iii) the Consolidated Statement of Cash Flows for the twelve months ended December, 2009, 2008 and 2007, (iv) the Consolidated Statement of Changes in Equity for the twelve month period ended December 31, 2009, 2008 and 2007, (v) Financial Statement Schedule II, tagged as a single block of text and (vi) the notes to the Consolidated Financial Statements, tagged as blocks of text |
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101 |
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24
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Registrant) |
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By: |
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/s/ SAMUEL J. PALMISANO Samuel J. Palmisano Chairman of the Board, President and Chief Executive Officer |
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Date: February 23, 2010 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
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Title
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Date
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||
---|---|---|---|---|
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/s/ SAMUEL J. PALMISANO
|
Chairman of the Board, President and Chief Executive Officer |
February 23, 2010 | ||
/s/ MARK LOUGHRIDGE
|
Senior Vice President, Chief Financial Officer |
February 23, 2010 |
||
/s/ JAMES J. KAVANAUGH
|
Vice President and Controller |
February 23, 2010 |
Cathleen Black William R. Brody Michael L. Eskew Shirley Ann Jackson W. James McNerney, Jr. Taizo Nishimuro James W. Owens Joan E. Spero Sidney Taurel |
Director Director Director Director Director Director Director Director Director |
By: |
/s/ Andrew Bonzani Andrew Bonzani Attorney-in-fact February 23, 2010 |
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To
the Stockholders and Board of Directors of
International Business Machines Corporation:
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 23, 2010 appearing in the 2009 Annual Report to Shareholders of International Business Machines Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 23, 2010
26
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31:
(Dollars in Millions)
Description
|
Balance at
Beginning of Period |
Additions* | Writeoffs | Other** |
Balance at
End of Period |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance For Doubtful Accounts |
||||||||||||||||
2009 |
||||||||||||||||
Current |
$ | 633 | $ | 115 | $ | (189 | ) | $ | 111 | $ | 669 | |||||
Noncurrent |
$ | 180 | $ | 33 | $ | (56 | ) | $ | (58 | ) | $ | 100 | ||||
2008 |
||||||||||||||||
Current |
$ | 549 | $ | 170 | $ | (92 | ) | $ | 5 | $ | 633 | |||||
Noncurrent |
$ | 59 | $ | 138 | $ | (19 | ) | $ | 2 | $ | 180 | |||||
2007 |
||||||||||||||||
Current |
$ | 543 | $ | 79 | $ | (112 | ) | $ | 40 | $ | 549 | |||||
Noncurrent |
$ | 48 | $ | 23 | $ | (18 | ) | $ | 5 | $ | 59 | |||||
Allowance For Inventory Losses |
||||||||||||||||
2009 |
$ | 643 | $ | 259 | $ | (242 | ) | $ | 18 | $ | 679 | |||||
2008 |
$ | 669 | $ | 285 | $ | (248 | ) | $ | (63 | ) | $ | 643 | ||||
2007 |
$ | 612 | $ | 315 | $ | (308 | ) | $ | 50 | $ | 669 | |||||
Revenue Based Provisions |
||||||||||||||||
2009 |
$ | 984 | $ | 3,969 | $ | (4,019 | ) | $ | (65 | ) | $ | 871 | ||||
2008 |
$ | 1,085 | $ | 6,145 | $ | (6,195 | ) | $ | (52 | ) | $ | 984 | ||||
2007 |
$ | 990 | $ | 5,812 | $ | (5,722 | ) | $ | 5 | $ | 1,085 | |||||
S-1
EXHIBIT 3
BY-LAWS
of
INTERNATIONAL BUSINESS MACHINES CORPORATION
Adopted April 29, 1958
As Amended Through
February 23, 2010
TABLE OF CONTENTS
ARTICLE I Definitions |
1 |
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ARTICLE II MEETINGS OF STOCKHOLDERS |
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SECTION 1. |
Place of Meetings |
1 |
SECTION 2. |
Annual Meetings |
1 |
SECTION 3. |
Special Meetings |
2 |
SECTION 4. |
Notice of Meetings |
2 |
SECTION 5. |
Quorum |
2 |
SECTION 6. |
Organization |
3 |
SECTION 7. |
Items of Business |
3 |
SECTION 8. |
Voting |
5 |
SECTION 9. |
List of Stockholders |
5 |
SECTION 10. |
Inspectors of Election |
5 |
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ARTICLE III BOARD OF DIRECTORS |
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SECTION 1. |
General Powers |
6 |
SECTION 2. |
Number; Qualifications; Election; Term of Office |
6 |
SECTION 3. |
Place of Meetings |
6 |
SECTION 4. |
First Meeting |
6 |
SECTION 5. |
Regular Meetings |
6 |
SECTION 6. |
Special Meetings |
7 |
SECTION 7. |
Notice of Meetings |
7 |
SECTION 8. |
Quorum and Manner of Acting |
7 |
SECTION 9. |
Organization |
7 |
SECTION 10. |
Resignations |
7 |
SECTION 11. |
Vacancies |
8 |
SECTION 12. |
Retirement of Directors |
8 |
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ARTICLE IV EXECUTIVE AND OTHER COMMITTEES |
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SECTION 1. |
Executive Committee |
8 |
SECTION 2. |
Powers of the Executive Committee |
9 |
SECTION 3. |
Meetings of the Executive Committee |
9 |
SECTION 4. |
Quorum and Manner of Acting of the Executive Committee |
9 |
SECTION 5. |
Other Committees |
9 |
SECTION 6. |
Changes in Committees; Resignations; Removals; Vacancies |
10 |
ARTICLE V OFFICERS |
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SECTION 1. |
Number and Qualifications |
10 |
SECTION 2. |
Resignations |
11 |
SECTION 3. |
Removal |
11 |
SECTION 4. |
Vacancies |
11 |
SECTION 5. |
Chairman of the Board |
11 |
SECTION 6. |
Vice Chairman of the Board |
11 |
SECTION 7. |
President |
12 |
SECTION 8. |
Designated Officers |
12 |
SECTION 9. |
Executive Vice Presidents, Senior Vice Presidents and Vice Presidents |
12 |
SECTION 10. |
Treasurer |
13 |
SECTION 11. |
Secretary |
13 |
SECTION 12. |
Controller |
14 |
SECTION 13. |
Compensation |
14 |
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ARTICLE VI CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. |
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SECTION 1. |
Execution of Contracts |
14 |
SECTION 2. |
Loans |
14 |
SECTION 3. |
Checks, Drafts, etc |
15 |
SECTION 4. |
Deposits |
15 |
SECTION 5. |
General and Special Bank Accounts |
15 |
SECTION 6. |
Indemnification |
15 |
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ARTICLE VII SHARES |
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SECTION 1. |
Stock Certificates |
16 |
SECTION 2. |
Books of Account and Record of Stockholders |
16 |
SECTION 3. |
Transfers of Stock |
16 |
SECTION 4. |
Regulations |
17 |
SECTION 5. |
Fixing of Record Date |
17 |
SECTION 6. |
Lost, Destroyed or Mutilated Certificates |
17 |
SECTION 7. |
Inspection of Records |
17 |
SECTION 8. |
Auditors |
18 |
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ARTICLE VIII OFFICES |
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SECTION 1. |
Principal Office |
18 |
SECTION 2. |
Other Offices |
18 |
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ARTICLE IX Waiver of Notice |
18 |
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ARTICLE X Fiscal Year |
19 |
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ARTICLE XI Seal |
19 |
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ARTICLE XII Amendments |
19 |
BY-LAWS
OF
INTERNATIONAL BUSINESS MACHINES CORPORATION
ARTICLE I
DEFINITIONS
In these By-laws, and for all purposes hereof, unless there be something in the subject or context inconsistent therewith:
(a) Corporation shall mean International Business Machines Corporation.
(b) Certificate of Incorporation shall mean the restated Certificate of Incorporation as filed on May 27, 1992, together with any and all amendments and subsequent restatements thereto.
(c) Board shall mean the Board of Directors of the Corporation.
(d) stockholders shall mean the stockholders of the Corporation.
(e) Chairman of the Board, Vice Chairman of the Board, Chairman of the Executive Committee, Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, President, Executive Vice President, Senior Vice President, Vice President, Treasurer, Secretary, or Controller, as the case may be, shall mean the person at any given time occupying the particular office with the Corporation.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meetings. Meetings of the stockholders of the Corporation shall be held at such place either within or outside the State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting.
SECTION 2. Annual Meetings. The annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on the last Tuesday of April of each year, if not a legal holiday, or, if such day shall be a legal holiday, then on the next succeeding day not a legal holiday. If any annual meeting shall not be held on the day designated herein, or if the directors to be elected at such annual meeting shall not have been elected thereat or at any adjournment thereof, the Board shall forthwith call a special meeting of the stockholders for the election of directors to be held as soon thereafter as convenient and give notice thereof as provided in these By-laws in respect
of the notice of an annual meeting of the stockholders. At such special meeting the stockholders may elect the directors and transact other business with the same force and effect as at an annual meeting of the stockholders duly called and held.
SECTION 3. Special Meetings. Special meetings of the stockholders, unless otherwise provided by law, may be called at any time by the Chairman of the Board or by the Board, and shall be called by the Board upon written request delivered to the Secretary of the Corporation by the holder(s) with the power to vote and dispose of at least 25% of the outstanding shares of the Corporation. Such request shall be signed by each such holder, stating the number of shares owned by each holder, and shall indicate the purpose of the requested meeting. In addition, any stockholder(s) requesting a special meeting shall promptly provide any other information reasonably requested by the Corporation.
SECTION 4. Notice of Meetings. Notice of each meeting of the stockholders, annual or special, shall be given in the name of the Chairman of the Board, a Vice Chairman of the Board or the President or a Vice President or the Secretary. Such notice shall state the purpose or purposes for which the meeting is called and the date and hour when and the place where it is to be held. A copy thereof shall be duly delivered or transmitted to all stockholders of record entitled to vote at such meeting, and all stockholders of record who, by reason of any action proposed to be taken at such meeting, would be entitled to have their stock appraised if such action were taken, not less than ten or more than sixty days before the day on which the meeting is called to be held. If mailed, such copy shall be directed to each stockholder at the address listed on the record of stockholders of the Corporation, or if the stockholder shall have filed with the Secretary a written request that notices be mailed to some other address, it shall be mailed to the address designated in such request. Nevertheless, notice of any meeting of the stockholders shall not be required to be given to any stockholder who shall waive notice thereof as hereinafter provided in Article IX of these By-laws. Except when expressly required by law, notice of any adjourned meeting of the stockholders need not be given nor shall publication of notice of any annual or special meeting thereof be required.
SECTION 5. Quorum. Except as otherwise provided by law, at all meetings of the stockholders, the presence of holders of record of a majority of the outstanding shares of stock of the Corporation having voting power, in person or represented by proxy and entitled to vote thereat, shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of those present in person or represented by proxy and entitled to vote thereat, or, in the absence of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting, may adjourn such meeting from time to time without further notice, other than by announcement at the meeting at which such adjournment shall be taken, until a quorum shall be present thereat. At any adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally called.
SECTION 6. Organization. At each meeting of the stockholders, the Chairman of the Board, or in the absence of the Chairman of the Board, the President, or in the absence of the Chairman of the Board and the President, a Vice Chairman of the Board, or if the Chairman of the Board, the President, and all Vice Chairmen of the Board shall be absent therefrom, an Executive Vice President, or if the Chairman of the Board, the President, all Vice Chairmen of the Board and all Executive Vice Presidents shall be absent therefrom, a Senior Vice President shall act as chairman. The Secretary, or, if the Secretary shall be absent from such meeting or unable to act, the person whom the Chairman of such meeting shall appoint secretary of such meeting shall act as secretary of such meeting and keep the minutes thereof.
SECTION 7. Items of Business. The items of business at all meetings of the stockholders shall be, insofar as applicable, as follows:
· |
Call to order. |
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· |
Proof of notice of meeting or of waiver thereof. |
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· |
Appointment of inspectors of election, if necessary. |
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· |
A quorum being present. |
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· |
Reports. |
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· |
Election of directors proposed by the Corporations Board of Directors, as set forth in the Corporations proxy statement. |
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· |
Other business specified in the notice of the meeting. |
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· |
Voting. |
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· |
Adjournment. |
Any items of business not referred to in the foregoing may be taken up at the meeting as the chairman of the meeting shall determine.
No other business shall be transacted at any annual meeting of stockholders, except business as may be: (i) specified in the notice of meeting (including stockholder proposals included in the Corporations proxy materials under Rule 14a-8 of Regulation 14A under the Securities Exchange Act of 1934), (ii) otherwise brought before the meeting by or at the direction of the Board of Directors, or (iii) a proper subject for the meeting which is timely submitted by a stockholder of the Corporation entitled to vote at such meeting who complies fully with the notice requirements set forth below.
For business to be properly submitted by a stockholder before any annual meeting under subparagraph (iii) above, a stockholder must give timely notice in writing of such business to the Secretary of the Corporation. To be considered timely, a stockholders notice must be received by the Secretary at the principal executive offices of the Corporation not less than 120 calendar days nor more than 150 calendar days before the date of the Corporations proxy statement released to stockholders in connection with the prior years annual meeting.
However, if no annual meeting was held in the previous year, or if the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous years proxy statement, a stockholders notice must be received by the Secretary not later than 60 days before the date the Corporation commences mailing of its proxy materials in connection with the applicable annual meeting.
A stockholders notice to the Secretary to submit business to an annual meeting of stockholders shall set forth: (i) the name and address of the stockholder, (ii) the number of shares of stock held of record and beneficially by such stockholder, (iii) the name in which all such shares of stock are registered on the stock transfer books of the Corporation, (iv) a representation that the stockholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions intended to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting, (vi) any personal or other material interest of the stockholder in the business to be submitted, and (vii) all other information relating to the proposed business which may be required to be disclosed under applicable law. In addition, a stockholder seeking to submit such business at the meeting shall promptly provide any other information reasonably requested by the Corporation.
The chairman of the meeting shall determine all matters relating to the efficient conduct of the meeting, including, but not limited to, the items of business, as well as the maintenance of order and decorum. The chairman shall, if the facts warrant, determine and declare that any putative business was not properly brought before the meeting in accordance with the procedures prescribed by this Section 7, in which case such business shall not be transacted.
Notwithstanding the foregoing provisions of this Section 7, a stockholder who seeks to have any proposal included in the Corporations proxy materials shall comply with the requirements of Rule 14a-8 under Regulation 14A of the Securities Exchange Act of 1934, as amended.
SECTION 8. Voting. Except as otherwise provided by law, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in the stockholders name on the record of stockholders of the Corporation:
(a) on the date fixed pursuant to the provisions of Section 5 of Article VII of these By-laws as the record date for the determination of the stockholders who shall be entitled to vote at such meeting, or
(b) if such record date shall not have been so fixed, then at the close of business on the day next preceding the day on which notice of such meeting shall have been given, or
(c) if such record date shall not have been so fixed and if no notice of such meeting shall have been given, then at the time of the call to order of such meeting.
Any vote on stock of the Corporation at any meeting of the stockholders may be given by the stockholder of record entitled thereto in person or by proxy appointed by such stockholder or by the stockholders attorney thereunto duly authorized and delivered or transmitted to the secretary of such meeting at or prior to the time designated in the order of business for turning in proxies. At all meetings of the stockholders at which a quorum shall be present, all matters (except where otherwise provided by law, the Certificate of Incorporation or these By-laws) shall be decided by the vote of a majority in voting interest of the stockholders present in person or represented by proxy and entitled to vote thereat. Unless required by law, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by the stockholders proxy as such, if there be such proxy.
SECTION 9. List of Stockholders. A list, certified by the Secretary, of the stockholders of the Corporation entitled to vote shall be produced at any meeting of the stockholders upon the request of any stockholder of the Corporation pursuant to the provisions of applicable law, the Certificate of Incorporation or these By-laws.
SECTION 10. Inspectors of Election. Prior to the holding of each annual or special meeting of the stockholders, two inspectors of election to serve thereat shall be appointed by the Board, or, if the Board shall not have made such appointment, by the Chairman of the Board. If there shall be a failure to appoint inspectors, or if, at any such meeting, any inspector so appointed shall be absent or shall fail to act or the office shall become vacant, the chairman of the meeting may, and at the request of a stockholder present in person and entitled to vote at such meeting shall, appoint such inspector or inspectors of election, as the case may be, to act thereat. The inspectors of election so appointed to act at any meeting of the stockholders, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of inspectors at such meeting, with strict impartiality and according to the best of their ability, and the oath so taken shall be subscribed by them. Such inspectors of election shall take charge of the
polls, and, after the voting on any question, shall make a certificate of the results of the vote taken. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the Corporation shall be managed by the Board. The Board may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these By-laws, directed or required to be exercised or done by the stockholders.
SECTION 2. Number; Qualifications; Election; Term of Office. The number of directors of the Corporation shall be fourteen, but the number thereof may be increased to not more than twenty-five, or decreased to not less than nine, by amendment of these By-laws. The directors shall be elected at the annual meeting of the stockholders. At each meeting of the stockholders for the election of directors at which a quorum is present, the vote required for election of a director shall, except in a contested election, be the affirmative vote of a majority of the votes cast in favor of or against such nominee. In a contested election, a nominee receiving a plurality of the votes cast at such election shall be elected. An election shall be considered to be contested if, as of the record date for such meeting, there are more nominees for election than positions on the Board to be filled by election at the meeting. Each director shall hold office until the annual meeting of the stockholders which shall be held next after the election of such director and until a successor shall have been duly elected and qualified, or until death, or until the director shall have resigned as hereinafter provided in Section 10 of this Article III.
SECTION 3. Place of Meetings. Meetings of the Board shall be held at such place either within or outside State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting.
SECTION 4. First Meeting. The Board shall meet for the purpose of organization, the election of officers and the transaction of other business, on the same day the annual meeting of stockholders is held. Notice of such meeting need not be given. Such meeting may be held at any other time or place which shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III.
SECTION 5. Regular Meetings. Regular meetings of the Board shall be held at times and dates fixed by the Board or at such other times and dates as the Chairman of the Board shall determine and as shall be specified in the notice of such meetings. Notice of regular meetings of the Board need not be given except as otherwise required by law or these By-laws.
SECTION 6. Special Meetings. Special meetings of the Board may be called by the Chairman of the Board.
SECTION 7. Notice of Meetings. Notice of each special meeting of the Board (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 7, in which notice shall be stated the time, place and, if required by law or these By-laws, the purposes of such meeting. Notice of each such meeting shall be mailed, postage prepaid, to each director, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, at least twenty-four hours before the time at which such meeting is to be held. Notice of any such meeting need not be given to any director who shall waive notice thereof as provided in Article IX of these By-laws. Any meeting of the Board shall be a legal meeting without notice thereof having been given, if all the directors of the Corporation then holding office shall be present thereat.
SECTION 8. Quorum and Manner of Acting. A majority of the Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting. Participation in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence in person at a meeting. Except as otherwise expressly required by law or the Certificate of Incorporation and except also as specified in Section 1, Section 5, and Section 6 of Article IV, in Section 3 of Article V and in Article XII of these By-laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such.
SECTION 9. Organization. At each meeting of the Board, the Chairman of the Board, or in the case of the Chairmans absence therefrom, the President, or in the case of the Presidents absence therefrom, a Vice Chairman, or in the case of the absence of all such persons, another director chosen by a majority of directors present, shall act as chairman of the meeting and preside thereat. The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof.
SECTION 10. Resignations.
(a) Any director of the Corporation may resign at any time by giving written notice of resignation to the Board or the Chairman of the Board or the Secretary. Subject to Section 10(b), any such resignation shall take effect at the time specified therein, or if the time when it shall become effective shall not be specified therein, then it shall take
effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
(b) In an uncontested election, any incumbent nominee for director who does not receive an affirmative vote of a majority of the votes cast in favor of or against such nominee shall promptly tender his or her resignation after such election. The independent directors of the Board, giving due consideration to the best interests of the Corporation and its stockholders, shall evaluate the relevant facts and circumstances, and shall make a decision, within 90 days after the election, on whether to accept the tendered resignation. Any director who tenders a resignation pursuant to this provision shall not participate in the Boards decision. The Board will promptly disclose publicly its decision and, if applicable, the reasons for rejecting the tendered resignation.
SECTION 11. Vacancies. Any vacancy in the Board, whether arising from death, resignation, an increase in the number of directors or any other cause, may be filled by the Board.
SECTION 12. Retirement of Directors. The Board may prescribe a retirement policy for directors on or after reaching a certain age, provided, however, that such retirement shall not cut short the annual term for which any director shall have been elected by the stockholders.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. Executive Committee. The Board, by resolution adopted by a majority of the Board, may designate not less than four of the directors then in office to constitute an Executive Committee, each member of which unless otherwise determined by resolution adopted by a majority of the whole Board, shall continue to be a member of such Committee until the annual meeting of the stockholders which shall be held next after designation as a member of such Committee or until the earlier termination as a director. The Chief Executive Officer shall always be designated as a member of the Executive Committee. The Board may by resolution appoint one member as the Chairman of the Executive Committee who shall preside at all meetings of such Committee. In the absence of said Chairman, the Chief Executive Officer shall preside at all such meetings. In the absence of both the Chairman of the Executive Committee and the Chief Executive Officer, the Chairman of the Board shall preside at all such meetings. In the absence of the Chairman of the Executive Committee and the Chief Executive Officer and the Chairman of the Board, the President shall preside at all such meetings. In the absence of all such persons, a majority of the members of the Executive Committee present shall choose a chairman to preside at such meetings. The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof.
SECTION 2. Powers of the Executive Committee. To the extent permitted by law, the Executive Committee may exercise all the powers of the Board in the management of specified matters where such authority is delegated to it by the Board, and also, to the extent permitted by law, the Executive Committee shall have, and may exercise, all the powers of the Board in the management of the business and affairs of the Corporation (including the power to authorize the seal of the Corporation to be affixed to all papers which may require it; but excluding the power to appoint a member of the Executive Committee) in such manner as the Executive Committee shall deem to be in the best interests of the Corporation and not inconsistent with any prior specific action of the Board. An act of the Executive Committee taken within the scope of its authority shall be an act of the Board. The Executive Committee shall render in the form of minutes a report of its several acts at each regular meeting of the Board and at any other time when so directed by the Board.
SECTION 3. Meetings of the Executive Committee. Regular meetings of the Executive Committee shall be held at such times, on such dates and at such places as shall be fixed by resolution adopted by a majority of the Executive Committee, of which regular meetings notice need not be given, or as shall be fixed by the Chairman of the Executive Committee or in the absence of the Chairman of the Executive Committee the Chief Executive Officer and specified in the notice of such meeting. Special meetings of the Executive Committee may be called by the Chairman of the Executive Committee or by the Chief Executive Officer. Notice of each such special meeting of the Executive Committee (and of each regular meeting for which notice shall be required), stating the time and place thereof shall be mailed, postage prepaid, to each member of the Executive Committee, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, at least twenty-four hours before the time at which such meeting is to be held; but notice need not be given to a member of the Executive Committee who shall waive notice thereof as provided in Article IX of these By-laws, and any meeting of the Executive Committee shall be a legal meeting without any notice thereof having been given, if all the members of such Committee shall be present thereat.
SECTION 4. Quorum and Manner of Acting of the Executive Committee. Four members of the Executive Committee shall constitute a quorum for the transaction of business, and the act of a majority of the members of the Executive Committee present at a meeting at which a quorum shall be present shall be the act of the Executive Committee. Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of the Executive Committee. The members of the Executive Committee shall act only as a committee and individual members shall have no power as such.
SECTION 5. Other Committees. The Board may, by resolution adopted by a majority of the Board, designate members of the Board to constitute other committees, which shall have, and may exercise, such powers as the Board may by resolution delegate to them, and shall in each case consist of such number of directors as the
Board may determine; provided, however, that each such committee shall have at least three directors as members thereof. Such a committee may either be constituted for a specified term or may be constituted as a standing committee which does not require annual or periodic reconstitution. A majority of all the members of any such committee may determine its action and its quorum requirements and may fix the time and place of its meetings, unless the Board shall otherwise provide. Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of such other committees.
In addition to the foregoing, the Board may, by resolution adopted by a majority of the Board, create a committee of indeterminate membership and duration and not subject to the limitations as to the membership, quorum and manner of meeting and acting prescribed in these By-laws, which committee, in the event of a major disaster or catastrophe or national emergency which renders the Board incapable of action by reason of the death, physical incapacity or inability to meet of some or all of its members, shall have, and may exercise all the powers of the Board in the management of the business and affairs of the Corporation (including, without limitation, the power to authorize the seal of the Corporation to be affixed to all papers which may require it and the power to fill vacancies in the Board). An act of such committee taken within the scope of its authority shall be an act of the Board.
SECTION 6. Changes in Committees; Resignations; Removals; Vacancies. The Board shall have power, by resolution adopted by a majority of the Board, at any time to change or remove the members of, to fill vacancies in, and to discharge any committee created pursuant to these By-laws, either with or without cause. Any member of any such committee may resign at any time by giving written notice to the Board or the Chairman of the Board or the Secretary. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any vacancy in any committee, whether arising from death, resignation, an increase in the number of committee members or any other cause, shall be filled by the Board in the manner prescribed in these By-laws for the original appointment of the members of such committee.
ARTICLE V
OFFICERS
SECTION 1. Number and Qualifications. The officers of the Corporation shall include the Chairman of the Board, and may include one or more Vice Chairmen of the Board, the President, one or more Vice Presidents (one or more of whom may be designated as Executive Vice Presidents or as Senior Vice Presidents or by other designations), the Treasurer, the Secretary and the Controller. Officers shall be elected from time to time by the Board, each to hold office until a successor shall have been duly elected and shall have qualified, or until death, or until resignation as hereinafter
provided in Section 2 of this Article V, or until removed as hereinafter provided in Section 3 of this Article V.
SECTION 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of resignation to the Board, the Chairman of the Board, the Chief Executive Officer or the Secretary. Any such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall become effective upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
SECTION 3. Removal. Any officer of the Corporation may be removed, either with or without cause, at any time, by a resolution adopted by a majority of the Board at any meeting of the Board.
SECTION 4. Vacancies. A vacancy in any office, whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of office which shall be vacant, in the manner prescribed in these By-laws for the regular election or appointment to such office.
SECTION 5. Chairman of the Board. The Chairman of the Board shall, if present, preside at each meeting of the stockholders and of the Board and shall perform such other duties as may from time to time be assigned by the Board. The Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By- laws to some other officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it. The Chairman of the Board, when there is no President or in the absence or incapacity of the President, shall perform all the duties and functions and exercise all the powers of the President.
SECTION 6. Vice Chairman of the Board. Each Vice Chairman of the Board shall assist the Chairman of the Board and have such other duties as may be assigned by the Board or the Chairman of the Board. The Vice Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it.
SECTION 7. President. The President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board. The President may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some other officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered, and affix the seal of the Corporation to any instrument which shall require it; and, in general, perform all duties incident to the office of President. The President shall in the absence or incapacity of the Chairman of the Board, perform all the duties and functions and exercise all the powers of the Chairman of the Board.
SECTION 8. Designated Officers. (a) Chief Executive Officer. Either the Chairman of the Board, or the President, as the Board of Directors may designate, shall be the Chief Executive Officer of the Corporation. The officer so designated shall have, in addition to the powers and duties applicable to the office set forth in Section 5 or 7 of this Article V, general and active supervision over the business and affairs of the Corporation and over its several officers, agents, and employees, subject, however, to the control of the Board. The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect, be an ex officio member of all committees of the Board (except the Audit Committee, the Directors and Corporate Governance Committee, and committees specifically empowered to fix or approve the Chief Executive Officers compensation or to grant or administer bonus, option or other similar plans in which the Chief Executive Officer is eligible to participate), and, in general, shall perform all duties incident to the position of Chief Executive Officer and such other duties as may from time to time be assigned by the Board. (b) Other Designated Officers. The Board of Directors may designate officers to serve as Chief Financial Officer, Chief Accounting Officer and other such designated positions and to fulfill the responsibilities of such designated positions in addition to their duties as officers as set forth in this Article V.
SECTION 9. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. Each Executive and Senior Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President. Each Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or a Senior Vice President. Any Vice President may sign certificates representing shares of stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws.
SECTION 10. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, and may invest the same in any securities, may open, maintain and close accounts for effecting any and all purchase, sale, investment and lending transactions in securities of any and all kinds for and on behalf of the Corporation or any employee pension or benefit plan fund or other fund established by the Corporation, as may be permitted by law;
(b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation;
(c) deposit all moneys and other valuables to the credit of the Corporation in such depositaries as may be designated by the Board or the Executive Committee;
(d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the investment of its funds, taking proper vouchers therefor;
(f) render to the Board, whenever the Board may require, an account of all transactions as Treasurer; and
(g) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President.
SECTION 11. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the Executive Committee and other committees of the Board and the stockholders;
(b) see that all notices are duly given in accordance with the provisions of these By-laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and
(e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President.
SECTION 12. Controller. The Controller shall:
(a) have control of all the books of account of the Corporation;
(b) keep a true and accurate record of all property owned by it, of its debts and of its revenues and expenses;
(c) keep all accounting records of the Corporation (other than the accounts of receipts and disbursements and those relating to the deposits of money and other valuables of the Corporation, which shall be kept by the Treasurer);
(d) render to the Board, whenever the Board may require, an account of the financial condition of the Corporation; and
(e) in general, perform all the duties incident to the office of Controller and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President.
SECTION 13. Compensation. The compensation of the officers of the Corporation shall be fixed from time to time by the Board; provided, however, that the Board may delegate to a committee the power to fix or approve the compensation of any officers. An officer of the Corporation shall not be prevented from receiving compensation by reason of being also a director of the Corporation; but any such officer who shall also be a director shall not have any vote in the determination of the amount of compensation paid to such officer.
ARTICLE VI
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 1. Execution of Contracts. Except as otherwise required by law or these By-laws, any contract or other instrument may be executed and delivered in the name and on behalf of the Corporation by any officer (including any assistant officer) of the Corporation. The Board or the Executive Committee may authorize any agent or employee to execute and deliver any contract or other instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances as the Board or such Committee, as the case may be, may by resolution determine.
SECTION 2. Loans. Unless the Board shall otherwise determine, the Chairman of the Board or a Vice Chairman of the Board or the President or any Vice President, acting together with the Treasurer or the Secretary, may effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, but in making such loans or advances no officer or officers shall
mortgage, pledge, hypothecate or transfer any securities or other property of the Corporation, except when authorized by resolution adopted by the Board.
SECTION 3. Checks, Drafts, etc. All checks, drafts, bills of exchange or other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed in the name and on behalf of the Corporation by such persons and in such manner as shall from time to time be authorized by the Board or the Executive Committee or authorized by the Treasurer acting together with either the General Manager of an operating unit or a nonfinancial Vice President of the Corporation, which authorization may be general or confined to specific instances.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board or the Executive Committee may from time to time designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer, employee or agent of the Corporation.
SECTION 5. General and Special Bank Accounts. The Board or the Executive Committee may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board or the Executive Committee may designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee. The Board or the Executive Committee may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these By-laws, as it may deem expedient.
SECTION 6. Indemnification. The Corporation shall, to the fullest extent permitted by applicable law as in effect at any time, indemnify any person made, or threatened to be made, a party to an action or proceeding whether civil or criminal (including an action or proceeding by or in the right of the Corporation or any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, for which any director or officer of the Corporation served in any capacity at the request of the Corporation), by reason of the fact that such person or such persons testator or intestate was a director or officer of the Corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein. Such indemnification shall be a contract right and shall include the right to be paid advances of any expenses incurred by such person in connection with such action, suit or proceeding, consistent with the provisions of applicable law in effect at any time.
Indemnification shall be deemed to be permitted within the meaning of the first sentence hereof if it is not expressly prohibited by applicable law as in effect at the time.
ARTICLE VII
SHARES
SECTION 1. Stock Certificates. The shares of the Corporation shall be represented by certificates, or shall be uncertificated shares. Each owner of stock of the Corporation shall be entitled to have a certificate, in such form as shall be approved by the Board, certifying the number of shares of stock of the Corporation owned. To the extent that shares are represented by certificates, such certificates of stock shall be signed in the name of the Corporation by the Chairman of the Board or a Vice Chairman of the Board or the President or a Vice President and by the Secretary and sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed); provided, however, that where any such certificate is signed by a registrar, other than the Corporation or its employee, the signatures of the Chairman of the Board, a Vice Chairman of the Board, the President, the Secretary, and transfer agent or a transfer clerk acting on behalf of the Corporation upon such certificates may be facsimiles, engraved or printed. In case any officer, transfer agent or transfer clerk acting on behalf of the Corporation ceases to be such officer, transfer agent, or transfer clerk before such certificates shall be issued, they may nevertheless be issued by the Corporation with the same effect as if they were still such officer, transfer agent or transfer clerk at the date of their issue.
SECTION 2. Books of Account and Record of Stockholders. There shall be kept at the office of the Corporation correct books of account of all its business and transactions, minutes of the proceedings of stockholders, Board, and Executive Committee, and a book to be known as the record of stockholders, containing the names and addresses of all persons who are stockholders, the number of shares of stock held, and the date when the stockholder became the owner of record thereof.
SECTION 3. Transfers of Stock. Transfers of shares of stock of the Corporation shall be made on the record of stockholders of the Corporation only upon authorization by the registered holder thereof, or by an attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates for such shares properly endorsed, provided such shares are represented by a certificate, or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. The person in whose names shares of stock shall stand on the record of stockholders of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfers of shares shall be made for collateral security and not absolutely and written notice thereof shall be given to the Secretary or to such transfer agent or transfer clerk, such fact shall be stated in the entry of the transfer.
SECTION 4. Regulations. The Board may make such additional rules and regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of certificated or uncertificated shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates of stock to bear the signature or signatures of any of them.
SECTION 5. Fixing of Record Date. The Board shall fix a time not exceeding sixty nor less than ten days prior to the date then fixed for the holding of any meeting of the stockholders or prior to the last day on which the consent or dissent of the stockholders may be effectively expressed for any purpose without a meeting, as the time as of which the stockholders entitled to notice of and to vote at such meeting or whose consent or dissent is required or may be expressed for any purpose, as the case may be, shall be determined, and all persons who were holders of record of voting stock at such time, and no others, shall be entitled to notice of and to vote at such meeting or to express their consent or dissent, as the case may be. The Board may fix a time not exceeding sixty days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of capital stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests.
SECTION 6. Lost, Destroyed or Mutilated Certificates. The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated, and the Corporation may, in its discretion, require such owner or the owners legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or the issuance of such new certificate. Anything to the contrary notwithstanding, the Corporation, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of New York.
SECTION 7. Inspection of Records. The record of stockholders and minutes of the proceedings of stockholders shall be available for inspection, within the limits and subject to the conditions and restrictions prescribed by applicable law.
SECTION 8. Auditors. The Board shall employ an independent public or certified public accountant or firm of such accountants who shall act as auditors in making examinations of the consolidated financial statements of the Corporation and its subsidiaries in accordance with generally accepted auditing standards. The auditors shall certify that the annual financial statements are prepared in accordance with generally accepted accounting principles, and shall report on such financial statements to the stockholders and directors of the Corporation. The Boards selection of auditors shall be presented for ratification by the stockholders at the annual meeting. Directors and officers, when acting in good faith, may rely upon financial statements of the Corporation represented to them to be correct by the officer of the Corporation having charge of its books of account, or stated in a written report by the auditors fairly to reflect the financial condition of the Corporation.
ARTICLE VIII
OFFICES
SECTION 1. Principal Office. The principal office of the Corporation shall be at such place in the Town of North Castle, County of Westchester and State of New York as the Board shall from time to time determine.
SECTION 2. Other Offices. The Corporation may also have an office or offices other than said principal office at such place or places as the Board shall from time to time determine or the business of the Corporation may require.
ARTICLE IX
WAIVER OF NOTICE
Whenever under the provisions of any law of the State of New York, the Certificate of Incorporation or these By-laws or any resolution of the Board or any committee thereof, the Corporation or the Board or any committee thereof is authorized to take any action after notice to the stockholders, directors or members of any such committee, or after the lapse of a prescribed period of time, such action may be taken without notice and without the lapse of any period of time, if, at any time before or after such action shall be completed, such notice or lapse of time shall be waived by the person or persons entitled to said notice or entitled to participate in the action to be taken, or, in the case of a stockholder, by an attorney thereunto authorized. Attendance at a meeting requiring notice by any person or, in the case of a stockholder, by the stockholders attorney, agent or proxy, shall constitute a waiver of such notice on the part of the person so attending, or by such stockholder, as the case may be.
ARTICLE X
FISCAL YEAR
The fiscal year of the Corporation shall end on the thirty-first day of December in each year.
ARTICLE XI
SEAL
The Seal of the Corporation shall consist of two concentric circles with the IBM logotype appearing in bold face type within the inner circle and the words International Business Machines Corporation appearing within the outer circle.
ARTICLE XII
AMENDMENTS
These By-laws may be amended or repealed or new By-laws may be adopted by the stockholders at any annual or special meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting. These By-laws, subject to the laws of the State of New York, may also be amended or repealed or new By-laws may be adopted by the affirmative vote of a majority of the Board given at any meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting.
EXHIBIT 10.1
Note: This exhibit amends and restates the IBM Excess 401(k) Plus Plan to clarify the administrative structures of the Plan.
IBM EXCESS 401(k) PLUS PLAN
Amended and Restated Effective January 1, 2010
(except as otherwise provided herein)
TABLE OF CONTENTS
ARTICLE I. INTRODUCTION |
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1.01. |
Name of Plan and Effective Date |
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1.02. |
Purpose |
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1.03. |
Legal Status |
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1.04. |
Section 409A |
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ARTICLE II. DEFINITIONS |
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ARTICLE III. ELIGIBILITY |
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3.01. |
Eligibility for Elective Deferrals |
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3.02. |
Eligibility for Matching and Match Maximizer Contributions |
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3.03. |
Eligibility for Automatic Contributions and Transition Credits |
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3.04. |
Eligibility for Section 415 Excess Credits |
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3.05. |
Eligibility for Discretionary Awards |
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ARTICLE IV. ELECTIVE DEFERRALS AND MATCHING CONTRIBUTIONS |
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4.01. |
Elective Deferrals |
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4.02. |
Matching Contributions |
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ARTICLE V. NON-ELECTIVE CREDITS |
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5.01. |
Automatic Contributions |
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5.02. |
Transition Credits |
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5.03. |
Section 415 Excess Credits |
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5.04. |
Discretionary Awards |
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ARTICLE VI. VESTING, DEEMED INVESTMENT OF ACCOUNTS |
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6.01. |
Individual Accounts |
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6.02. |
Vesting of Accounts |
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6.03. |
Deemed Investment of Accounts |
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ARTICLE VII. FORFEITURE AND RIGHT OF RECOVERY OF COMPANY CONTRIBUTIONS |
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7.01. |
In General |
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7.02. |
Detrimental Activity |
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7.03. |
Applicable Company Contributions |
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7.04. |
Timing |
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7.05. |
Delegation of Authority |
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7.06. |
Chief Human Resources Officer |
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7.07. |
Non-Exclusive Remedies |
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7.08. |
Severability |
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ARTICLE VIII. PAYMENT OF GRANDFATHERED AMOUNTS |
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8.01. |
Grandfathered Treatment of Grandfathered Amounts |
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8.02. |
Payment of Grandfathered Amounts Upon Death |
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8.03. |
Options for Payment of Grandfathered Amounts Upon Termination of Employment |
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8.04. |
Payment of Grandfathered Amounts Upon Termination of Employment |
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ARTICLE IX. PAYMENT OF NON-GRANDFATHERED AMOUNTS |
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9.01. |
Payment of Non-Grandfathered Amounts Upon Death |
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9.02. |
Form of Payment for Non-Grandfathered Amounts Paid Upon a 409A Separation from Service |
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9.03. |
Electing and Changing Payment Options for Non-Grandfathered Amounts |
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9.04. |
Payment of Non-Grandfathered Upon a 409A Separation from Service |
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9.05. |
Special Rules for Payment of Non-Grandfathered Amounts Upon a 409A Separation from Service in First Quarter of 2008 |
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9.06. |
Valuation of Non-Grandfathered Accounts |
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9.07. |
Effect of Rehire on Non-Grandfathered Payments |
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ARTICLE X. ADMINISTRATION |
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10.01. |
Amendment or Termination |
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10.02. |
Responsibilities |
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ARTICLE XI. GENERAL PROVISIONS |
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11.01. |
Funding |
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11.02. |
No Contract of Employment |
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11.03. |
Facility of Payment |
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11.04. |
Withholding Taxes |
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11.05. |
Nonalienation |
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11.06. |
Administration |
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11.07. |
Construction |
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ARTICLE XII. CLAIMS PROCEDURE |
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The following words and phrases as used herein have the following meanings unless a different meaning is required by the context:
401(k) Plan means the IBM 401(k) Plus Plan as in effect from time to time, including, with respect to periods before the Effective Date, the IBM Savings Plan and any other predecessor to the IBM 401(k) Plus Plan, as applicable.
409A Key Employee has the meaning described in the IBM Section 409A Umbrella Document, which is Appendix B.
409A Separation from Service has the meaning described in the IBM Section 409A Umbrella Document attached to this Plan as Appendix B.
Account means a record-keeping account maintained for a Participant under the Plan. A Participants Accounts under the Plan include, where applicable, a Pre-2005 Elective Deferral Account, a Pre-2005 Company Account, a Post-2004 Elective Deferral Account, and a Post-2004 Company Account.
Actively Employed means actively employed by the Company, including on a leave of absence other than a bridge leave, a pre-retirement planning leave, or a leave during which the individual is receiving LTD Benefits.
Automatic Contribution has the meaning provided in Section 5.01.
Base Pay means an Employees base pay (determined under the 401(k) Plan) from the Company for employment while on a U.S. payroll, determined before reduction for deferrals under the Plan or the 401(k) Plan or for amounts not included in income on account of salary reductions under Code section 125 or 132(f). However, Base Pay does not include any pay during a Deferral Period that is paid after an Employees 409A Separation from Service (except amounts paid in the pay period in which the Employees 409A Separation from Service occurs and Rehire Pay).
Beneficiary means a person who is designated by a Participant or by the terms of the Plan to receive a benefit under the Plan by reason of the Participants death. Each Participants Beneficiary under the Plan shall be the person or persons designated as the Participants Beneficiary under the Plan, in the form and manner prescribed by the Plan Administrator. If no such beneficiary designation is in effect under the Plan at the time of the Participants death, or if no designated beneficiary under the Plan survives the Participant, the Participants Beneficiary shall be the person or persons determined to be the Participants beneficiary under the 401(k) Plan (including the default beneficiary rules under the 401(k) Plan, if no beneficiary is designated under that plan).
Board means the Board of Directors of IBM.
Code means the Internal Revenue Code of 1986, as amended from time to time. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.
Combined Base Pay Election has the meaning provided in Section 4.01(a)(1).
Company means International Business Machines Corporation (IBM), a New York corporation having its principal place of business at Armonk, New York, and its Domestic Subsidiaries that are participating employers in the 401(k) Plan.
Company Contributions means amounts credited to a Participants Post-2004 Company Account, including Matching Contributions, Match Maximizer Contributions, Automatic Contributions, Transition Credits, Discretionary Awards, Section 415 Excess Credits, and any similar credits under the EDCP.
Deferral Election means an Eligible Employees election to defer Base Pay or Performance Pay under Section 4.01.
Deferral Period means a period that begins on or after the Effective Date that (a) starts on January 1 and ends on the next following December 31 for Base Pay and (b) starts on April 1 and ends on the next following March 31 for Performance Pay.
Discretionary Award means a credit to a Participants Account as described in Section 5.04.
Domestic Subsidiary means a Domestic Subsidiary as defined in the 401(k) Plan.
EDCP means the IBM Executive Deferred Compensation Plan in effect before the Effective Date.
Effective Date means the initial effective date of the Plan, which is January 1, 2008.
Elective Deferrals means deferrals of Base Pay or Performance Pay credited to the Participants Post-2004 Elective Deferral Account pursuant to a Participants election under Section 4.01(a) or any similar provision of the EDCP.
Eligible Employee means, with respect to a Plan Year, an Employee who is eligible to make Elective Deferrals or to receive Company Contributions during the Plan Year pursuant to ARTICLE III.
Employee means an employee of the Company who is eligible to participate in the 401(k) Plan and is not a Supplemental Employee. Notwithstanding the foregoing, an individual who, on or after January 1, 2009, was an Employee and becomes a Supplemental Employee or begins receiving LTD Benefits before or during a Deferral Period with respect to which the individual has a valid, irrevocable Deferral Election and
without first incurring a 409A Separation from Service shall continue to be considered to be an Employee solely for purposes of the individuals eligibility during such Deferral Period to make Elective Deferrals (but not for purposes of the individuals eligibility for any Company Contribution). For example, an individual who is receiving LTD Benefits is not eligible to participate in the 401(k) Plan (as in effect on the Effective Date) and is therefore not an Employee, except that if the individual has not incurred a 409A Separation from Service, the Employees Elective Deferrals shall continue pursuant to any irrevocable Deferral Election.
ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time.
Excess 401(k) Eligible Pay means, for each payroll period that ends after an Eligible Employee reaches his or her Program Eligibility Date, the excess, if any, of (A) the Eligible Employees eligible compensation under the 401(k) Plan for such payroll period determined without regard to the Pay Limit, over (B) the Eligible Employees eligible compensation under the 401(k) Plan during such payroll period determined taking into account the Pay Limit. Solely for purposes of each payroll period in Plan Year 2008:
(a) Excess 401(k) Eligible Pay of an Eligible Employee who is an executive includes Performance Pay that is paid during the payroll period and is not eligible compensation under the 401(k) Plan minus Elective Deferrals made with respect to such Performance Pay; and
(b) solely for purposes of calculating Match Maximizer Contributions, Excess 401(k) Eligible Pay does not include Growth Driven Profit-Sharing amounts and employee sales or services incentives that are paid in the first quarter of 2008 (however, these amounts are Excess 401(k) Eligible Pay for purposes of calculating Automatic Contributions and Transition Credits).
Grandfathered Amounts has the meaning provided in Section 1.04(a).
IBM means International Business Machines Corporation, any predecessor, or any successor by merger, purchase, or otherwise.
LTD Benefits means benefits under the Companys long-term disability plan.
Matching Contribution has the meaning provided in Section 4.02(a).
Match Maximizer Contribution has the meaning provided in Section 4.02(b).
Non-Grandfathered Amounts has the meaning provided in Section 1.04(b).
Participant means an individual who has a positive balance in an Account under the Plan.
Pay Limit means, for a Plan Year, the limit on compensation that may be taken into account during such Plan Year under a tax-qualified plan as determined under Code Section 401(a)(17).
Performance Pay means an Employees performance pay (determined under the 401(k) Plan) from the Company for employment while on a U.S. payroll, determined before reduction for deferrals under the Plan or the 401(k) Plan or for amounts not included in income on account of salary reductions under Code section 125 or 132(f). However, Performance Pay does not include any pay during a Deferral Period that is paid after an Employees 409A Separation from Service (except amounts paid in the pay period in which the Employees 409A Separation from Service occurs and Rehire Pay). Notwithstanding this definition, Performance Pay that is paid in the first quarter of 2008 is subject to the following special rules:
(a) such Performance Pay does not include Growth Driven Profit-Sharing and employee sales or services incentives;
(b) such Performance Pay includes incentive pay (such as Annual Incentive Plan payments or sales or services incentives) that is paid to an executive; and
(c) an Employees deferral election with respect to such Performance Pay is subject to the advance election and deferral percentage limit terms of the EDCP.
Plan means this IBM Excess 401(k) Plus Plan.
Plan Administrator means the VP HR with functional responsibilities for IBMs benefit programs, or such other person or committee appointed pursuant to ARTICLE X, which shall be responsible for reporting, recordkeeping, and related administrative requirements. If appointed as a committee, any one of the members of the committee may act individually on behalf of the committee to fulfill the committees duties.
Plan Year means the calendar year.
Pre-2005 Accounts means a Participants Pre-2005 Company Account and Pre-2005 Elective Deferral Account.
Pre-2005 Company Account means, for any Participant, the aggregate of the company contributions (including any discretionary awards) credited to the Participant under the EDCP before January 1, 2005, to the extent such contributions were vested as of December 31, 2004, and earnings, gains, or losses credited on those contributions, but reduced for any prior distribution under the EDCP or the Plan.
Pre-2005 Elective Deferral Account means, for any Participant, the aggregate of the elective deferrals credited to the Participant under the EDCP before January 1, 2005, and earnings, gains, or losses credited on those elective deferrals, but reduced for any prior distribution under the EDCP or the Plan.
Post-2004 Accounts means a Participants Post-2004 Company Account and Post-2004 Elective Deferral Account.
Post-2004 Company Account means, for any Participant, the aggregate of (a) the Company Contributions credited to the Participant under the EDCP or the Plan on or after January 1, 2005, plus (b) any such contributions credited under the EDCP before January 1, 2005, to the extent such contributions were not vested as of December 31, 2004, and earnings, gains, or losses credited on amounts described in (a) and (b), but reduced for any prior distribution under the EDCP or the Plan.
Post-2004 Elective Deferral Account means, for any Participant, the aggregate of the Elective Deferrals credited to the Participant under the EDCP or the Plan on or after January 1, 2005, and earnings, gains, or losses credited on those Elective Deferrals, but reduced for any prior distribution under the EDCP or the Plan.
Program Eligibility Date means an Eligible Employees Program Eligibility Date under the 401(k) Plan.
Rehire Pay means Base Pay or Performance Pay, as applicable, that is payable on or after the date an Employee returns to active employment with the Company following a 409A Separation from Service or, if later, after the end of the Deferral Period in which the Employees 409A Separation from Service occurred. For example, if an Employee incurs a 409A Separation from Service in April 2009 (whether on account of a leave in excess of six months or because of a termination of employment with IBM) and returns to active employment with IBM in November 2009, the Employees Rehire Pay would include (a) Base Pay payable on or after January 1, 2010 (i.e., the beginning of the Base Pay Deferral Period after the 409A Separation from Service), and (b) Performance Pay payable on or after April 1, 2010 (i.e., the beginning of the Performance Pay Deferral Period after the 409A Separation from Service). By contrast, if instead the Employee returned to active employment on February 1, 2010, the Employees Rehire Pay would include (a) Base Pay payable on or after on February 1, 2010, and (b) Performance Pay payable on or after April 1, 2010.
Retirement-Eligible Participant means a Participant who:
(a) when his or her 409A Separation from Service occurs, (1) is at least age 55 with at least 15 years of service, (2) is at least age 62 with at least 5 years of service, (3) is at least age 65 with at least 1 year of service, or (4) begins to receive LTD Benefits;
(b) as of June 30, 1999, had at least 25 years of service and, when his or her 409A Separation from Service occurs, has at least 30 years of service; or
(c) as of June 30, 1999, was at least age 40 with at least 10 years of service and, when his or her 409A Separation from Service occurs, has at least 30 years of service.
For purposes of this definition, year of service means a year of Eligibility Service as defined in the IBM Personal Pension Plan. In addition, for purposes of Section 8.04 (payment of grandfathered amounts upon termination of employment), this definition of Retirement-Eligible Participant is applied by replacing 409A Separation from Service with termination of employment. Furthermore, the conditions in (a), (b), and/or (c) above are modified to the extent necessary to be consistent with the retirement-eligibility criteria in the EDCP.
Section 415 Excess Credit means a credit to a Participants Account as described in Section 5.03.
Subsidiary means a Subsidiary as defined in the 401(k) Plan.
Supplemental Employee means an employee who is designated by the Company as a long-term supplemental employee or a supplemental employee in accordance with the Companys established personnel practices.
Transition Credit means a credit to a Participants Account as described in Section 5.02.
If the individual is eligible to make Elective Deferrals during the Plan Year only with respect to Performance Pay during the Performance Pay Deferral Period that ends in the Plan Year, the individual is eligible for Automatic Contributions and Transition Credits, if at all, only during payroll periods ending during such Performance Pay Deferral Period and only with respect to the portion of the Performance Pay actually deferred under this Plan (except as provided in subsection (b), below). For example, if an individual is eligible to make Elective Deferrals for Deferral Periods that begin in 2008 but is not eligible to make Elective Deferrals for Deferral Periods that begin in 2009, the individual is not eligible for Automatic Contributions and Transition Credits in 2009 except with respect to any Elective Deferrals of Performance Pay for the Performance Pay Deferral Period ending March 31, 2009 (and except as provided in subsection (b), below).
For example, if an individual receives a hardship withdrawal on June 1, 2009, the individuals Deferral Election with respect to Performance Pay is cancelled for the remainder of the Deferral Period ending March 31, 2010. Furthermore, if the individual instead receives a hardship withdrawal on March 1, 2009, the individuals Deferral Election is cancelled with respect to the remainder of the Deferral Period ending on March 31, 2009, and for the Deferral Period beginning on April 1, 2009, and ending on March 31, 2010.
provided that the sum of (1) and (2) shall not exceed the Elective Deferrals credited to the Eligible Employee for such payroll period.
The lesser of: (1) The company matching contribution percentage applicable to the Eligible Employee under the 401(k) Plan or (2) the percentage derived from the ratio of:
(i) the aggregate Elective Deferrals previously credited to the Eligible Employees Post-2004 Elective Deferral Account for the portion of the Plan Year after the Eligible Employees Program Eligibility Date, to
(ii) the sum, aggregated for the portion of the Plan Year that is after the Eligible Employees Program Eligibility Date and determined as of the date the applicable payroll period ends , of (A) the Eligible Employees Elective Deferrals, (B) the Eligible Employees Excess 401(k) Eligible Pay, and (C) if the Eligible Employee did not elect a Combined Base Pay Election for the Plan Year, the compensation eligible for a matching contribution under the 401(k) Plan.
Multiplied by: The Eligible Employees Excess 401(k) Eligible Pay plus the Eligible Employees Elective Deferrals, each aggregated only for the portion of the Plan Year that is after the Eligible Employees Program Eligibility Date and until the applicable payroll period ends.
Minus: The Matching Contributions and Match Maximizer Contributions previously credited to the Eligible Employee through the date the applicable payroll period ends.
Solely for purposes of this subsection (a), termination of employment includes the date on which a Participant begins to receive LTD Benefits.
However, the Plan Administrator may make payment on any other day to the extent that such payment is treated as being paid on the date specified above under Treasury Regulation section 1.409A-3(d), which permits payment to be made within thirty days before the specified date and later within the same calendar year, or, if later, within 2-1/2 months following the specified date, provided that the Participant is not permitted to designate the taxable year of payment.
Accordingly, an individual who first became an executive after October 31, 2007 and who is not eligible to make Elective Deferrals in 2008, is not eligible to make a payment election under this paragraph (1), even if he or she deferred pay under the EDCP in 2007.
For purposes of this Section 9.04, a valid payment election is a payment election made at least six months before the Participants 409A Separation from Service in a manner prescribed by the Plan Administrator. If a Participant did not make a valid payment election for his or her Post-2004 Accounts, the Participants valid payment election shall be his or her valid payment election for his or her Pre-2005 Accounts, if any.
All such determinations and interpretations shall be in accordance with the terms and intent of the Plan, and the Plan Administrator shall report such actions to IBMs chief human resources officer on a regular basis .
If a Participant or Beneficiary believes he or she is entitled to have received benefits but has not received them, the Participant or Beneficiary must accept any payment made under the Plan and make prompt and reasonable, good faith efforts to collect the remaining portion of the payment, as determined under Treas. Reg. § 1.409A-3(g). For this purpose (and as determined under such regulation), efforts to collect the payment will be presumed not to be prompt, reasonable, good faith efforts, unless the Participant or Beneficiary provides notice to the Plan Administrator within 90 days of the latest date upon which the payment could have been timely made in accordance with the terms of the Plan and the regulations under Code Section 409A, and unless, if not paid, the Participant or Beneficiary takes further enforcement measures within 180 days after such latest date. In addition, a Participant or Beneficiary must exhaust any other claims procedures established by the Plan Administrator before initiating litigation.
Appendix A
IBM EXECUTIVE DEFERRED COMPENSATION PLAN
Amended and Restated Effective January 1, 2000
Incorporating Amendments Effective Through January 1, 2008
INTRODUCTION
A. Name of Plan and Purpose. The IBM Executive Deferred Compensation Plan has been authorized by the Board of Directors of International Business Machines to be applicable effective on and after January 1, 1995. The purpose of this Plan is to attract and retain executives by providing a means for making compensation deferrals and matching company contributions for those employees eligible to participate in the Savings Plan (as defined in Article 1) with respect to whom compensation deferrals and company contributions under the Savings Plan are or would be limited by application of the limitations imposed on qualified plans by Sections 401(a)(17), 401(a)(30), and 415 of the Internal Revenue Code of 1986, as amended (the Code).
B. Legal Status. This Plan is intended to constitute an unfunded deferred compensation plan for a select group of management or highly compensated employees under Sections 201(2), 301(a)(2), 401(a)(1), and 4021(b)(6) of the Employee Retirement Income Security Act of 1974, as amended. All benefits payable under the Plan shall be paid out of the general assets of the Company.
C. Restatement . The Plan is amended and restated herein effective as of January 1, 2000, incorporating amendments effective through January 1, 2008. The Plan is superseded, effective January 1, 2008, by the IBM Excess 401(k) Plus Plan (the Excess Plan), except as provided in Paragraph D, below, with respect to Grandfathered Amounts and Deferred Shares and as otherwise provided in the text of the Plan.
D. Section 409A .
Notwithstanding anything to the contrary in this Paragraph D, in no event shall the Company, its officers, directors, employees, parents, subsidiaries, or affiliates be liable for any additional tax, interest, or penalty incurred by a Participant or Beneficiary as a result of the Plans failure to satisfy the requirements of Section 409A of the Code, or as a result of the Plans failure to satisfy any other applicable requirements for the deferral of tax.
IBM EXECUTIVE DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
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Page(s) |
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ARTICLE 1. DEFINITIONS |
1 |
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ARTICLE 2. PARTICIPATION |
4 |
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2.01 |
ELIGIBILITY |
4 |
2.02 |
PARTICIPATION |
4 |
2.03 |
APPLICATION OF THIS ARTICLE AFTER 2007 |
5 |
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ARTICLE 3. CONTRIBUTIONS |
6 |
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3.01 |
AMOUNT OF DEFERRAL CONTRIBUTIONS |
6 |
3.02 |
MATCHING CONTRIBUTIONS |
7 |
3.03 |
ADDITIONAL COMPANY CONTRIBUTIONS |
7 |
3.04 |
INVESTMENT OF ACCOUNTS |
7 |
3.05 |
VESTING OF ACCOUNTS |
8 |
3.06 |
INDIVIDUAL ACCOUNTS |
8 |
3.07 |
DEFERRAL OF RSUS OR PERFORMANCE SHARE UNITS |
8 |
3.08 |
APPLICATION OF THIS ARTICLE AFTER 2007 |
8 |
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ARTICLE 4. INVESTMENT OF DEFERRALS AND DEFERRAL ACCOUNTS |
10 |
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4.01 |
DEEMED SAVINGS PLAN INVESTMENTS; PARTICIPANT CONTROL |
10 |
4.02 |
CHANGE OF INVESTMENT SELECTION ON FUTURE DEFERRALS |
10 |
4.03 |
CHANGE OF INVESTMENT SELECTION ON EXISTING DEFERRAL ACCOUNTS |
10 |
4.04 |
APPLICATION OF THIS ARTICLE AFTER 2007 |
11 |
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ARTICLE 5. PAYMENT OF ACCOUNTS |
12 |
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5.01 |
COMMENCEMENT OF DEFERRAL PAYMENTS |
12 |
5.02 |
METHOD OF PAYMENT |
12 |
5.03 |
DESIGNATION OF BENEFICIARY |
13 |
5.04 |
DISTRIBUTIONS TO SPECIFIED EMPLOYEES |
13 |
5.05 |
APPLICATION OF THIS ARTICLE AFTER 2007 |
14 |
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ARTICLE 6. GENERAL PROVISIONS |
15 |
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6.01 |
FUNDING |
15 |
6.02 |
NO CONTRACT OF EMPLOYMENT |
15 |
6.03 |
FACILITY OF PAYMENT |
16 |
6.04 |
WITHHOLDING TAXES |
16 |
6.05 |
NONALIENATION |
16 |
6.06 |
ADMINISTRATION |
16 |
6.07 |
CONSTRUCTION |
17 |
6.08 |
APPLICATION OF THIS ARTICLE AFTER 2007 |
17 |
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ARTICLE 7. MANAGEMENT AND ADMINISTRATION |
18 |
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7.01 |
AMENDMENT OR TERMINATION |
18 |
7.02 |
RESPONSIBILITIES |
18 |
7.03 |
APPLICATION OF THIS ARTICLE AFTER 2007 |
20 |
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ARTICLE 8. CLAIMS PROCEDURE |
21 |
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ARTICLE 9. PAYMENT OF NON-GRANDFATHERED DEFERRED SHARES ON OR AFTER JANUARY 1, 2008 |
22 |
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9.01 |
PURPOSE |
22 |
9.02 |
DEFINITIONS |
22 |
9.03 |
PAYMENT UPON DEATH |
22 |
9.04 |
FORM OF PAYMENT FOR AMOUNTS PAID UPON A 409A SEPARATION FROM SERVICE |
23 |
9.05 |
ELECTING AND CHANGING PAYMENT OPTIONS |
23 |
9.06 |
PAYMENT OF NG DEFERRED SHARES UPON A 409A SEPARATION FROM SERVICE |
25 |
9.07 |
SPECIAL RULES FOR PAYMENT OF NG DEFERRED SHARES UPON A 409A SEPARATION FROM SERVICE IN FIRST QUARTER OF 2008 |
25 |
The following words and phrases as used herein have the following meanings unless a different meaning is required by the context:
Eligibility is limited, except as provided below, to U.S. executive level Eligible Employees of IBM and selected Domestic Subsidiaries whose rate of annual Compensation (defined as salary and annual incentive rate) is $150,000 or more for calendar year 1995 (adjusted periodically thereafter based on industry trends and government guidelines), or who are members of the Companys Senior Management Group regardless of rate of annual Compensation. For this purpose, the defining of selected Domestic Subsidiaries, the executive level and Senior Management Group, as well as the ability to change the rate of annual Compensation threshold are delegated to the chief human resources officer of the Company in his or her sole discretion and are subject to change. Notwithstanding the above, non-U.S. executives designated by the chief human resources officer are eligible to elect to defer PSUs and RSUs under this Plan. The Committee shall notify employees of their eligibility for participation in the Plan as soon as practicable after the chief human resources officer has made its determination that such employees qualify as Eligible Employees for a calendar year.
This Article 2 shall cease to apply after December 31, 2007. An individual who was not a Participant on December 31, 2007, shall not become a Participant after that date. Each individual who was a Participant on December 31, 2007, ceased to be a Participant on that date except to the extent that, on that date, Grandfathered Amounts and/or Deferred Shares were credited to the individuals Account.
For each payroll period that an Eligible Employee has Compensation beginning on or after the effective date of an Eligible Employees Deferral Election Agreement, his or her Deferral Account shall be credited with an amount of Deferrals. The amount of Deferrals shall be equal to the designated percentage of Compensation elected by the Participant in his or her Deferral Election Agreement. Under the Deferral Election Agreement, the Eligible Employee may elect to forego receipt of amounts equivalent to 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, 13%, 14% or 15% (or, effective January 1, 2002, up to 80% in 1% increments) of the Employees Compensation (other than his or her annual incentive payment) for each pay period during which the election is in effect, and in the event an Eligible Employee is a DCP Participant for the calendar year, he or she may defer up to 100% of his or her annual incentive payment for the calendar year (provided that, effective January 1, 2007, if the individual is not an Eligible Employee at the beginning of such calendar year, the maximum percentage of his or her annual incentive payment for the calendar year that may be deferred shall be limited, as applicable, in accordance with the following rules: if the individual became an Eligible Employee and submitted a Deferral Election Agreement during the period of January 1-February 15 of the calendar year, the maximum percentage is 79%; if the individual became an Eligible Employee and submitted a Deferral Election Agreement during the period of February 16-May 15 of the calendar year, the maximum percentage is 62%; if the individual became an Eligible Employee and submitted a Deferral Election Agreement during the period from May 16-August 15 of the calendar year, the maximum percentage is 46%; and if the individual became an Eligible Employee after August 16 of the calendar year, then no annual incentive may be deferred for the calendar year). In addition, any Company officer who is subject to 162(m) of the Internal Revenue Code may defer up to 100% of his or her salary. For calendar years 2006 and 2007, any portion of an Eligible Employees annual incentive payment that is a deal team or other transactional payment under the Engagement Team Bonus Plan, the Global Dealmaker Plan, or the Managing Directors Incentive Plan is not eligible for deferral.
Deferrals under this Article 3.01 shall commence for payroll periods for a calendar year at such time as the Participant may no longer actively participate in the Savings Plan for the calendar year (or would have been unable to actively participate in the Savings Plan if the Participant was an active participant in the Savings Plan for the calendar year) by reason of Code Section 401(a)(17) or Code Section 401(a)(30) and has Compensation. No Deferrals may be made hereunder prior to such time, except for the deferral of a DCP Participants annual incentive payment. On and after January 1, 2007, if a Participant takes a hardship withdrawal under the Savings Plan, Deferrals under this Article 3.01 will be cancelled for the remainder of the calendar year in which the hardship was taken.
Effective before January 1, 2005, the amount of Company Matching Contributions credited to a Participant for each payroll period shall be equal to 50% of the Participants Deferrals for the payroll period; provided however, that no Company Matching Contributions will be made for a Participants Deferrals in excess of 6% of the Participants Compensation for that payroll period. Company Matching Contributions will be made in units of IBM Stock with no right to transfer such units, except as otherwise provided in this Plan.
Effective January 1, 2005, the amount of Company Matching Contributions credited to a Participant who is not a 401(k) Pension Program Participant (as defined in the Savings Plan) for each payroll period shall be equal to 50% of such Participants Deferrals for the payroll period and, effective January 1, 2005, the amount of Company Matching Contributions credited to a Participant who is a 401(k) Pension Program Participant shall be equal to 100% of such Participants Deferrals for the payroll period; provided, however, that in neither case shall Company Matching Contributions be made for a Participants Deferrals in excess of 6% of the Participants Compensation for that payroll period. Company Matching Contributions will be made in units of IBM Stock with no right to transfer such units, except as otherwise provided in this Plan. No Company Matching Contributions shall be made to a Participant who is a 401(k) Pension Program Participant unless such Participant has, on or before the last day of the payroll period to which such Company Matching Contributions relate, attained his Program Eligibility Date (as defined in the Savings Plan).
On behalf of any Participant, or any Eligible Employee who is not otherwise a Participant for a particular calendar year, IBM may make any award under this Plan, including an additional amount of Company Matching Contributions or other Company Contributions, in accordance with the terms of the agreement evidencing such award, and the terms of this Plan to the extent not inconsistent with the terms of the agreement.
A Participants Deferral Account shall be treated as if the Participant had invested it in certain Savings Plan investment funds in accordance with ARTICLE 4. Except as provided in Article 3.07 (regarding Deferred Shares), a Participants Company Account shall be treated as if it had been invested in the IBM Stock Fund under the Savings Plan; provided however, that in the event a Participant retires from the Company and does not elect to have the entire amount of his or her Accounts then paid to him or her, any amounts credited to the Participants Company Account after retirement will be treated as if they were transferred to the Participants Deferral Account for purposes of this Article 3.04 and Article 4.
A Participant always shall be fully vested in his or her Accounts, except as specified in an agreement between IBM and a Participant with respect to an award of additional Company Contributions.
The Committee shall maintain, or cause to be maintained, records showing the individual balances of each Participants Accounts. Periodically, each Participant shall be furnished with a statement setting forth the value of his or her Accounts.
A Participant may also elect, on a form provided by the Company, to defer as Deferred Shares the amount of any RSUs or PSUs that are determined by the Company to be eligible for deferral under this Plan, at the time such RSU or PSU would otherwise be paid to the Participant. For Deferrals prior to January 1, 2006, such election must be made at the time specified by the Plan Administrator and prior to the end of the vesting period of the PSUs and the RSUs. On and after January 1, 2006, an election to defer RSUs must be made no later than 30 days after the date of the grant of such RSUs, and an election to defer PSUs must be made no later than six months prior to the end of the performance period to which the PSUs relate. Notwithstanding the above, for all Non-U.S. executives who are eligible to defer RSUs or PSUs under this Plan, an election to defer any RSUs or PSU, must be made prior to the end of the applicable vesting or performance period. The amount of Deferred Shares shall be determined under the terms of the applicable award and the Participants deferral election and shall be credited to the Participants Company Account as units of IBM stock, with no right to transfer such units. No Company Matching Contributions shall be credited for any amounts deferred under this Article of the Plan.
After December 31, 2007:
Otherwise, this ARTICLE 3 shall cease to apply after December 31, 2007, and no deferral elections shall be made under the Plan after that date.
A Participant shall designate the proportions in which his or her Deferrals shall be treated as if they had been allocated among any or all of the investment funds under the Savings Plan, other than the mutual fund window. If the Participant does not provide investment instructions, his or her Deferrals shall be treated as if they had been allocated to the default investment fund under the Savings Plan.
The Committee, in its discretion (which discretion may be delegated to the Treasurer or other executive officer of IBM), from time to time may determine that any Savings Plan investment fund may be terminated as an investment measure under this Plan.
A Participant may elect to invest his or her Deferrals entirely in any one of the funds or may elect any combination in 5% multiples.
Notwithstanding anything else in ARTICLE 4, if any portion of a Participants Deferrals are covered under the IBM Buy-First Executive Equity Program, such Deferrals are subject to the investment limitations specified under that program.
A Participant may elect to change his or her investment selection for future Deferrals once per month (and, effective January 1, 2002, twice per month). The Participant must make this election in the manner prescribed by the Committee.
The Committee may impose such additional rules and limitations upon transfers between investment funds as the Committee may consider necessary or appropriate.
Article 4.03 shall continue to apply to Grandfathered Amounts on and after January 1, 2008. Articles 4.01 and 4.02 shall cease to apply after December 31, 2007.
A Participant shall receive payment of his or her Accounts upon the Participants (1) termination of employment from the Company for any reason other than retirement from the Company or (2) retirement from the Company with a balance of less than $25,000 in his or her Accounts, as soon as administratively feasible following termination of employment. Any other Participant who retires from the Company shall be entitled to receive payment of his or her Accounts as of the January 31 following the calendar year during which the Participant had a termination of employment from the Company.
Payment of Accounts shall be made in a single lump sum payment. Payments shall be in cash, except that Deferred Shares shall be paid in shares of IBM stock. Notwithstanding the foregoing, a Participant with a balance of at least $25,000 in his or her Accounts who retires from the Company may elect to receive (1) a lump sum payment upon his or her termination of employment from the Company, (2) a lump sum payment as of the January 31 following the calendar year during which the Participant has a termination of employment from the Company, or (3) up to ten ratable annual installment payments of the balance in his or her Accounts commencing as of the January 31 following the calendar year during which the Participant had a termination of employment from the Company. For this election to be effective, at least one full calendar year must pass between the calendar year the Participant makes the election and the calendar year the Participant has a termination of employment from the Company; provided, however, that:
The Participant must make this election in the manner prescribed by the Committee and may make a separate election with respect to any Deferred Shares allocated to his or her Company Account. For purposes of this Plan, retires means (I) attainment of at least age 55 with at least 15 years of service or age 62 with at least 5 years of service or at least age 65 with at least 1 year of service at termination of employment with the Company, (II) attainment of at least 25 years of service as of June 30, 1999, and completion of at least 30 years of service as of termination of employment with the Company, (III) attainment, as of June 30, 1999, of at least age 40 with at least 10 years of service and completion of at least 30 years of service as of termination of employment with the Company, or (IV) eligibility for benefits under the IBM Long-
Term Disability Plan (and for purposes of this Plan, termination of employment shall be deemed to have occurred coincident with eligibility for benefits under the IBM Long-Term Disability Plan).
Upon application of a Participant, the Committee may authorize earlier payment to the Participant after termination of employment with the Company of an amount reasonably needed to satisfy the emergency need caused by an unforeseeable emergency that causes severe financial hardship to the Participant. If a Participant dies before payment of the entire balance of his or her Accounts, an amount equal to the unpaid portion thereof as of the date of his or her death shall be payable in one lump sum to his or her Beneficiary.
Dividend equivalents allocated with respect to a Participants Deferred Shares will be paid to the Participant in cash on the date dividends are paid to IBM shareholders, or as soon as practical thereafter (but, with respect to Non-Grandfathered Amounts, no later than the latest date permissible under Section 409A of the Code).
Effective January 1, 2005, payment of Accounts (including in the event of a Participants death as described in the preceding sentence) shall be made based on the value of the Account as of the date such payment is processed.
Before January 1, 2008, each Participants Beneficiary under this Plan shall automatically be the person or persons designated as the Participants beneficiary under the Savings Plan even if such designation is found to be invalid under the provisions of ERISA or the Code. If no such Beneficiary designation is in effect at the time of the Participants death, or if no designated Beneficiary survives the Participant, the Participants Beneficiary shall be deemed to be the Participants beneficiary according to the provisions of the Savings Plan.
On or after January 1, 2008, each Participants Beneficiary under the Plan shall be the person or persons designated as the Participants Beneficiary under the Plan, in the form and manner prescribed by the Plan Administrator. If no such beneficiary designation is in effect under the Plan at the time of the Participants death, or if no designated beneficiary under the Plan survives the Participant, the Participants Beneficiary shall be the person or persons determined to be the Participants beneficiary under the Savings Plan (including the default beneficiary rules under the latter plan, if no beneficiary is designated under that plan).
Such Beneficiary shall be entitled to receive the lump sum amount, if any, payable under the Plan upon the Participants death pursuant to this Article 5.03; provided however, that the Beneficiary is alive at the time of the Participants death.
Notwithstanding any provision in this ARTICLE 5 to the contrary, any payment of Non-Grandfathered Amounts under the Plan that becomes payable to a Participant
who is a specified employee (within the meaning of Section 409A(a)(2)(B)(i) of the Code) within the first six months following his or her separation from service on or after January 1, 2005, shall instead be paid in the seventh month following such separation from service. If Non-Grandfathered Amounts are paid in installments the first of which would otherwise be paid before January 1, 2008, and in the first six months following the Participants separation from service, the first installment shall instead be paid in the seventh month following a separation from service, and the next annual installment, and each annual installment thereafter shall be paid on the anniversary of the date that the first installment was paid.
This ARTICLE 5 shall apply on and after January 1, 2008 only with respect to Grandfathered Amounts.
Nothing herein contained shall be deemed to give any employee the right to be retained in the service of the Company or an Affiliate or to interfere with the right of the Company or an Affiliate to discharge any employee at any time without regard to the effect that such discharge may have upon the employee under the Plan. Nothing appearing in or done pursuant to the Plan shall be held or construed to create a contract of employment with the Company, to obligate the Company to continue the services of any Employee, or to affect or modify any Employees terms of employment in any way or to give any person any legal or equitable right or interest in the Plan or any part thereof or distribution therefrom or against the Company except as expressly provided herein.
In the event the Plan Administrator determines that any Participant or Beneficiary receiving or entitled to receive benefits under the Plan is incompetent to care for his or her affairs and in the absence of the appointment of a legal guardian of the property of the incompetent, benefit payments due under the Plan (unless prior claim thereto has been made by a duly qualified guardian, committee, or other legal representative) may be made to the spouse, parent, brother or sister, or other person, including a hospital or other institution, deemed by the Plan Administrator to have incurred or to be liable for expenses on behalf of such incompetent. In the absence of the appointment of a legal guardian of the property of a minor, any minors share of benefits payable under the Plan may be paid to such adult or adults as in the opinion of the Plan Administrator have assumed the custody and principal support of such minor.
The Plan Administrator, however, in its sole discretion, may require that a legal guardian for the property of any such incompetent or minor be appointed before authorizing the payment of benefits in such situation. Benefit payments made under the Plan in accordance with determinations of the Plan Administrator pursuant to this ARTICLE 6 shall be a complete discharge of any obligation arising under the Plan with respect to such benefit payments.
The Plan Administrator shall have the right to withhold all applicable taxes or other payments from benefits hereunder and to report information to government agencies when required to do so by law.
No benefits payable under the Plan shall be subject to alienation, sale, transfer, assignment, pledge, attachment, garnishment, lien, levy, or like encumbrance. No benefit under the Plan shall in any manner be liable for or subject to the debts or liabilities of any person entitled to benefits under the Plan. However, compliance with any domestic relations order relating to a Participants Account that the Plan Administrator determines must be complied with under applicable law shall not be considered a violation of this provision.
All decisions, determinations, or interpretations the Board, the Committee, the Plan Administrator, the Company or any member, officer or employee thereof are authorized to make under the Plan (including the delegation of any authority hereunder to another party) shall be made in that partys sole discretion and shall be final, binding, and conclusive on all interested persons.
The Plan is intended to constitute an unfunded deferred compensation arrangement for a select group of management or highly compensated employees, and all rights hereunder shall be governed by and construed in accordance with the laws of the State of New York to the extent not governed by the Employee Retirement Income Security Act of 1974, as amended.
Effective January 1, 2008, the provisions of this Article 6 shall be superseded by the provisions of Article X of the Excess Plan for any portion of a Participants Accounts that is not attributable to Deferred Shares.
This Plan may be amended from time to time for any purpose permitted by law or terminated at any time by written resolution of the Board or the Committee, but only if the Committees action is not materially inconsistent with a prior action of the Board.
The authority to amend or terminate the Plan shall include the authority to amend the procedure for amending or terminating the Plan and the authority to amend or terminate any related instrument or agreement.
Each person or group of persons shall be responsible for discharging only the duties assigned to it by the terms of the Plan.
All such determinations and interpretations shall be in accordance with the terms and intent of the Plan, and the Plan Administrator shall report such actions to the Committee on a regular basis. Additionally, the chief human resources officer shall appoint and designate such other IBM employees as may be needed to provide adequate staff services to the Committee and the Plan Administrator.
Effective January 1, 2008, the provisions of this Article 7 shall be superseded by the provisions of Article IX of the Excess Plan for any portion of a Participants Accounts that is not attributable to Deferred Shares.
Before January 1, 2008, IBMs Executive Compensation Department is responsible for advising Participants and Beneficiaries of their benefits under the Plan. In the event a Participant or Beneficiary believes he or she is entitled to benefits and has not received them, the Participant or Beneficiary must submit a claim to the Director of Executive Compensation, IBM Corporation, New Orchard Road, Armonk, New York 10504. A written decision setting forth its conclusions will be furnished by the Plan Administrator to the Participant or Beneficiary within 60 days after the request for review is received. Failure of the Plan Administrator to follow this procedure shall not, in and of itself, give rise to a cause of action for benefits hereunder. On and after January 1, 2008, claims shall be processed as described in the summary description for the Excess Plan.
Effective January 1, 2008, if a Participant or Beneficiary believes he or she is entitled to have received benefits with respect to his or her Non-Grandfathered Amounts that are attributable to Deferred Shares but has not received them, the Participant or Beneficiary must accept any payment made under the Plan and make prompt and reasonable, good faith efforts to collect the remaining portion of the payment, as determined under Treas. Reg. § 1.409A-3(g). For this purpose (and as determined under such regulation), efforts to collect the payment will be presumed not to be prompt, reasonable, good faith efforts, unless the Participant or Beneficiary provides notice to the Plan Administrator within 90 days of the latest date upon which the payment could have been timely made in accordance with the terms of the Plan and the regulations under Code Section 409A, and unless, if not paid, the Participant or Beneficiary takes further enforcement measures within 180 days after such latest date. In addition, a Participant or Beneficiary must exhaust any other claims procedures established by the Plan Administrator before initiating litigation.
This ARTICLE 9 describes the provisions of the Plan that apply on and after January 1, 2008 to Non-Grandfathered Amounts that are attributable to Deferred Shares (NG Deferred Shares).
The following words and phrases used in this ARTICLE 9 have the following meanings unless a different meaning is required by the context:
For purposes of this definition, year of service means a year of Eligibility Service as defined in the IBM Personal Pension Plan.
If a Participant dies before his or her NG Deferred Shares are distributed in full, his or her NG Deferred Shares shall be paid in full in shares of IBM stock to the Participants Beneficiary on the date that is 30 days after the date of the Participants death (or, if that date is not a business day, the first business day thereafter). However, the Plan Administrator may make payment on any other day to the extent
that such payment is treated as being paid on the date specified in the previous sentence under Treasury Regulation section 1.409A-3(d), which permits payment to be made within thirty days before the specified date and later within the same calendar year, or, if later, within 2-1/2 months following the specified date, provided that the Participant is not permitted to designate the taxable year of payment.
A Participant may elect, at the time and in the manner described in Article 9.05, below, to have his or her NG Deferred Shares paid under one of the following options, subject to the limits in Article 9.06, below (regarding delays for 409A Key Employees) and Article 9.07, below (special rules for separations during the first quarter of 2008):
However, the Plan Administrator may make payment on any other day to the extent that such payment is treated as being paid on the date specified above under Treasury Regulation section 1.409A-3(d), which permits payment to be made within thirty days before the specified date and later within the same calendar year, or, if later, within 2-1/2 months following the specified date, provided that the Participant is not permitted to designate the taxable year of payment. A Participants NG Deferred Shares shall be paid in shares of IBM stock.
(i) is eligible to make elective deferrals under the Excess Plan in 2008;
(ii) on October 31, 2007, had a balance in his or her Accounts; or
(iii) on October 31, 2007, had a valid election on file for Deferrals in 2007.
Accordingly, an individual who first became an executive after October 31, 2007, and who is not eligible to make elective deferrals under the Excess Plan in 2008, is not eligible to make a payment election under this paragraph (a), even if he or she deferred pay under the Plan in 2007.
(A) only once during 2008; and
(B) only once on or after January 1, 2009.
A Participants NG Deferred Shares shall be paid to the Participant upon his or her 409A Separation from Service on or after January 1, 2008 in the form and at the time provided in Articles 9.04 and 9.05, above (except as provided in Article 9.07, below (special rules for first quarter of 2008)), subject to the following:
If a Participants 409A Separation from Service occurs on or after January 1, 2008, and before April 1, 2008, the Participants NG Deferred Shares shall be paid to the Participant in the form and at the time described below, except that such payments shall be subject to Article 9.06(a) (delay for 409A Key Employees) and Article 9.06(b) (death of Participant after 409A Separation from Service):
For purposes of this Article 9.07, a valid payment election is a payment election made at least six months before the Participants 409A Separation from Service in a manner prescribed by the Plan Administrator. If a Participant did not make a valid payment election for his or her NG Deferred Shares, the Participants valid payment election shall be his or her valid payment election for his or her Deferred Shares that are Grandfathered Amounts, if any.
For purposes of determining the amount of any lump sum, the Participants NG Deferred Shares will be determined as of the date the payment is processed. For purposes of determining the amount of any annual installment, the Participants remaining NG Deferred Shares will be determined as of the date the payment is processed and divided by the remaining number of installments. Any resulting partial share is retained in the Participants Account.
If a Participant becomes eligible for a payment of NG Deferred Shares on account of a 409A Separation from Service and is rehired as an employee of the Company before his or her NG Deferred Shares have been distributed in full, payments shall be made as if the Participant had not been rehired.
Dividend equivalents allocated with respect to a Participants NG Deferred Shares will be paid to the Participant (or to the Beneficiary of a deceased Participant) in cash
as soon as practicable after, but no later than 30 days following, the date dividends are paid to IBM shareholders.
APPENDIX B
IBM SECTION 409A UMBRELLA DOCUMENT
For purposes of plans of International Business Machines or any member of its controlled group as determined under §414(b) or (c) of the Internal Revenue Code (collectively, IBM) that are subject to § 409A of the Internal Revenue Code (§ 409A), any benefit subject to § 409A that is paid on account of a separation from service shall be paid on account of a 409A Separation from Service, as defined below. In addition, for purposes of applying the six-month delay described in § 409A(a)(2)(B)(i), a specified employee is a 409A Key Employee, as defined below.
1. The term 409A Key Employee means, for each 12-consecutive-month period beginning on any April 1 that occurs after January 1, 2008 (an effective period), an individual who is a specified employee of IBM (within the meaning of Treas. Reg. § 1.409A-1(i)) within the 12-consecutive-month period ending on the December 31 immediately preceding the start of such effective period. For purposes of the preceding sentence, specified employees include:
(a) each employee of IBM on IBMs U.S. payroll, not to exceed 50, who is designated by IBM as an officer and whose pay (as defined under Treas. Reg. § 1.415(c)-2(d)(4)) exceeds the dollar limitation under § 416(i)(1)(A)(i) of the Internal Revenue Code (§ 416 Pay Limit); plus
(b) the highest paid Band A executives (as defined by IBMs rules and regulations) on IBMs U.S. payroll whose pay exceeds the § 416 Pay Limit (where pay is defined under Treas. Reg. § 1.415(c)-2(d)(4)), such that, when combined with the employees in subsection (a) (designated officers), there are no more than 50 specified employees on IBMs U.S. payroll; plus
(c) if the total number of individuals designated as specified employees under subsections (a) and (b) is less than 50, the highest paid other employees on IBMs U.S. payroll (where pay is defined under Treas. Reg. § 1.415(c)-2(d)(4)), such that, when combined with the employees in subsections (a) (designated officers) and (b) (Band A executives), there are no more than 50 specified employees on IBMs U.S. payroll; plus
(d) each employee of IBM who: (1) is entitled to a benefit that is subject to § 409A, (2) is not on a U.S. payroll, and (3) is considered to be an officer for purposes of identifying specified employees under Treas. Reg. § 1.409A-1(i).
2. The term 409A Separation from Service means, effective January 1, 2009, a separation from service within the meaning of Treas. Reg. § 1.409A-1(h), which shall include, but not be limited to, the following events:
(a) A termination of employment, as that term is applied for purposes of the IBM 401(k) Plus Plan (except to the extent that an earlier event associated with such termination of employment is described in subsections (b) through (d), below);
(b) The start of a bridge leave or a pre-retirement planning leave;
(c) A permanent reduction in services to no more than 20% of the average level of services performed over the immediately preceding 36-month period (or the full period of services if less);
(d) The six-month anniversary of a leave of absence, when no services are performed (including paid and unpaid leave and including disability leave or any combination thereof) other than a military leave.
From January 1, 2008 through December 31, 2008, a 409A Separation from Service means a good faith interpretation of separation from service, within the meaning of § 409A(a)(2)(A)(i), and includes the following rules:
i. A Participant who is on a bridge leave or a pre-retirement planning leave as of December 31, 2007, shall have a 409A Separation from Service as of December 31, 2007;
ii. If a Participant
(1) during 2008 has an event described in paragraph (c) or has a six-month anniversary described in paragraph (d),
(2) does not otherwise incur a separation from service prior to December 31, 2008, and
(3) has not returned to active employment (or, in the case of an event described in (c), to full schedule employment) on or before December 31, 2008,
the Participant shall have a 409A Separation from Service as of December 31, 2008.
EXHIBIT 10.2
Note : This exhibit reflects an amendment to the IBM 401(k) Plus Plan to incorporate required changes under Section 415 of the Internal Revenue Code.
IBM 401(k) Plus Plan
(As Amended and Restated January 1, 2008)
AMENDMENT No. 1
Instrument of Amendment
Recitals:
International Business Machines Corporation (IBM) has established and maintains the IBM 401(k) Plus Plan (the Plan), a qualified retirement plan that meets the requirements of Section 401(a) of the Internal Revenue Code (the Code) and that includes a cash or deferred arrangement within the meaning of Section 401(k) of the Code:
In accordance with Section 13.01 of the Plan, the Plan Administrator is authorized to adopt amendments to the Plan that are required to comply with changes in the law and that are necessary to maintain the tax-qualified status of the Plan.
In order to comply with the final regulations under Code Section 415, the Plan shall be amended, in the manner set forth in this instrument, to be effective as specified herein
Amendment :
1. Section 1.15 of the Plan is amended to add the following immediately after the last sentence of such Section:
Notwithstanding the foregoing, effective with respect to Plan Years beginning on or after January 1, 2008, Compensation for purposes of determining Deferred Cash Contributions shall not include amounts that are excluded from compensation under Section 1.415(c)-2 of the Regulations.
2. Section 1.51 of the Plan is amended to add the following immediately after the last sentence of such Section:
Effective as of January 1, 2008, Statutory Compensation shall be determined in accordance with Section 1.415(c)-2 of the Regulations. Statutory Compensation shall include amounts that are paid by the later of 2½ months after an Employees severance from employment with the Employer or an Affiliate or the end of the Plan Year that includes the date of the Employees severance from employment and that are required to be recognized under Section 1.415(c)-2(e) of the Regulations and, to the extent applicable, Sections 1.415(c)-2(g)(4),(5),(6),(7) and (8) of the Regulations, and amounts that are permitted to be recognized under the provisions of Section 1.415(c)-2(e)(2),(3) and (4) of the Regulations.
3. Section 4.10(c) shall be designated as 4.10(c)(i) and a new Sec. 4.10(c)(ii) shall be added to provide the following:
(ii) Effective as of January 1, 2008, the term remuneration for purposes of this Section 4.10 shall mean Statutory Compensation.
4. Section 4.10(f) shall be amended in its entirety to read as follows:
(f) Effective January 1, 2008, the limitations imposed by Section 415 of the Code shall be applied to the annual additions in accordance with the provisions of the final regulations promulgated on April 5, 2007, as Treasury Decision 9319 (26 C.F.R. Parts 1 and 11), which regulations are hereby incorporated by reference in accordance with Section 1.415(a)-1(d)(3). The dollar limitation on annual additions shall be adjusted in accordance with Section 415(d) of the Code and Section 1.415(d)-1 of the Regulations, which is hereby incorporated by reference, pursuant to Section 1.415(a)-1(d)(3)(v). If the annual addition to a Participants Account exceeds the limitation imposed in accordance with this Section, the provisions of subsection (d) shall apply.
EXHIBIT 10.3
Note : This exhibit reflects an amendment to the IBM 401(k) Plus Plan to revise the definition of Committee under the Plan.
Amendment No. 2
(As Amended and Restated as of January 1, 2008)
Instrument of Amendment
Recitals:
International Business Machines Corporation (IBM) has established and maintains the IBM 401(k) Plus Plan (the Plan), a qualified retirement plan that meets the requirements of Section 401(a) of the Internal Revenue Code (the Code) and that includes a cash or deferred arrangement within the meaning of Section 401(k) of the Code.
In accordance with Section 13.01 of the Plan, IBM has reserved the right to amend the Plan at any time and from time to time.
IBM amended and restated the Plan, effective as of January 1, 2008.
IBM has determined to amend the Plan, as heretofore restated, in the manner set forth in this Instrument of Amendment, to be effective as specified herein.
1. Section 1.14 is amended effective November 16, 2009, to read as follows:
1.14 Committee means the Retirement Plans Committee of IBM, which shall consist of the individuals with the following positions (or successor positions) at IBM: Senior Vice President and Chief Financial Officer; Senior Vice President, Human Resources; senior Finance executive reporting to the Senior Vice President and Chief Financial Officer and responsible for funded benefit plans; and Senior Vice President & General Counsel. Effective beginning November 16, 2009, the Retirement Plans Committee shall consist of the individuals with the following positions (or successor positions) at IBM: Senior Vice President and Chief Financial Officer; Senior Vice President, Human Resources; and Senior Vice President & General Counsel.
12. Section 11.03 is amended, effective August 1, 2007, to read as follows:
11.03 Responsibilities of Committee
(a) The Committee shall be responsible for:
(i) the appointment, retention, and removal of:
(A) the Trustee that holds the assets of the Fund, and
(B) the Trustee or Investment Managers that direct or manage the investment, acquisition, and disposition of the assets of the Fund or of any Investment Fund;
(ii) the establishment and amendment of investment policies and guidelines for the Plan, provided, however, that the Committee, in its sole discretion, may delegate all or part of such responsibility to the Trustee or Investment Managers, or to employees of IBM, or to Participants;
(iii) the review of the performance of the Plan Administrator, the Trustee, the Investment Managers, and any others appointed by it at such times as the Committee determines; and
(iv) the establishment of such rules as it may deem appropriate for the conduct of its business with respect to the Plan.
(b) The Committee may, by duly adopted resolution, delegate to the Plan Administrator, or any officer or employee of IBM, the authority to carry out any decision, resolution, directive, or delegation of the Committee. The Committee may, by duly adopted resolution, delegate to the IBM senior Finance executive reporting to the Senior Vice President and Chief Financial Officer and responsible for funded benefit plans, the authority granted to the Committee under subsection (a)(i)(B) or Section 5.01(c).
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING
OPERATIONS TO FIXED CHARGES
(Unaudited)
|
Years Ended December 31: | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions)
|
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
Income from continuing operations before income taxes(1) |
$ | 18,159 | $ | 16,742 | $ | 14,492 | $ | 13,322 | $ | 12,236 | ||||||
Add: |
||||||||||||||||
Fixed charges, excluding capitalized interest |
1,667 | 2,021 | 1,942 | 1,452 | 1,188 | |||||||||||
Income as adjusted before income taxes |
$ | 19,826 | $ | 18,763 | $ | 16,434 | $ | 14,774 | $ | 13,424 | ||||||
Fixed charges: |
||||||||||||||||
Interest expense |
$ | 1,108 | $ | 1,461 | $ | 1,422 | $ | 970 | $ | 745 | ||||||
Capitalized interest |
13 | 15 | 9 | 11 | 16 | |||||||||||
Portion of rental expense representative of interest |
559 | 560 | 520 | 482 | 443 | |||||||||||
Total fixed charges |
$ | 1,680 | $ | 2,036 | $ | 1,951 | $ | 1,463 | $ | 1,204 | ||||||
Ratio of income from continuing operations to fixed charges |
11.8 | 9.2 | 8.4 | 10.1 | 11.1 |
Exhibit 13
Report of Financials
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Management Discussion |
|
|
Overview |
18 |
|
Forward-Looking and Cautionary Statements |
18 |
|
Management Discussion Snapshot |
19 |
|
Description of Business |
20 |
|
Year in Review |
25 |
|
Prior Year in Review |
40 |
|
Discontinued Operations |
47 |
|
Other Information |
47 |
|
Looking Forward |
47 |
|
Liquidity and Capital Resources |
49 |
|
Critical Accounting Estimates |
52 |
|
Currency Rate Fluctuations |
54 |
|
Market Risk |
55 |
|
Financing Risks |
56 |
|
Employees and Related Workforce |
56 |
|
Global Financing |
57 |
|
|
|
|
REPORT OF MANAGEMENT |
62 |
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
63 |
|
|
|
|
Consolidated Financial Statements |
|
|
Earnings |
64 |
|
Financial Position |
65 |
|
Cash Flows |
66 |
|
Changes in Equity |
67 |
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
A |
Significant Accounting Policies |
70 |
B |
Accounting Changes |
79 |
C |
Acquisitions/Divestitures |
82 |
D |
Fair Value |
86 |
E |
Financial Instruments (Excluding Derivatives) |
87 |
F |
Inventories |
88 |
G |
Financing Receivables |
88 |
H |
Plant, Rental Machines and Other Property |
89 |
I |
Investments and Sundry Assets |
89 |
J |
Intangible Assets Including Goodwill |
89 |
K |
Borrowings |
90 |
L |
Derivatives and Hedging Transactions |
92 |
M |
Other Liabilities |
97 |
N |
Equity Activity |
98 |
O |
Contingencies and Commitments |
99 |
P |
Taxes |
101 |
Q |
Research, Development and Engineering |
103 |
R |
Earnings Per Share of Common Stock |
104 |
S |
Rental Expense and Lease Commitments |
104 |
T |
Stock-Based Compensation |
105 |
U |
Retirement-Related Benefits |
109 |
V |
Segment Information |
122 |
W |
Subsequent Events |
126 |
|
|
|
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA |
127 |
|
|
|
|
SELECTED QUARTERLY DATA |
128 |
|
|
|
|
PERFORMANCE GRAPHS |
129 |
|
|
|
|
BOARD OF DIRECTORS AND SENIOR LEADERSHIP |
131 |
|
|
|
|
STOCKHOLDER INFORMATION |
132 |
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Overview
The financial section of the International Business Machines Corporation (IBM or the company) 2009 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. This Overview is designed to provide the reader with some perspective regarding the information contained in the financial section.
Organization of Information
· The Management Discussion is designed to provide readers with an overview of the business and a narrative on the companys financial results and certain factors that may affect its future prospects from the perspective of the companys management. The Management Discussion Snapshot on pages 19 and 20 presents an overview of the key performance drivers in 2009.
· Beginning with the Year in Review on page 25, the Management Discussion contains the results of operations for each reportable segment of the business and a discussion of the companys financial position and cash flows. Other key sections within the Management Discussion include: Looking Forward on pages 47 to 49 and Liquidity and Capital Resources on pages 49 to 52. It is useful to read the Management Discussion in conjunction with note V, Segment Information, on pages 122 to 126.
· Global Financing is a reportable segment that is measured as if it were a standalone entity. A separate Global Financing section is included beginning on page 57. The information presented in this section is consistent with this separate company view.
· The Consolidated Financial Statements are presented on pages 64 through 69. These statements provide an overview of the companys income and cash flow performance and its financial position.
· The notes follow the Consolidated Financial statements. Among other items, the notes contain the companys accounting policies (pages 70 to 79), acquisitions and divestitures (pages 82 to 86), detailed information on specific items within the financial statements, certain contingencies and commitments (pages 99 to 101), and retirement-related benefits information (pages 109 through 121).
· The references to adjusted for currency or at constant currency in the Management Discussion are made so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year periods currency conversion rate. This approach is used for all countries where the functional currency is the local country currency. See Currency Rate Fluctuations on page 54 for additional information.
· Within the financial tables in this Annual Report, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages reported are calculated from the underlying whole-dollar numbers.
Discontinued Operations
On December 31, 2002, the company sold its hard disk drive (HDD) business to Hitachi, Ltd. (Hitachi). The HDD business was accounted for as a discontinued operation under generally accepted accounting principles in the United States (GAAP) and therefore, the HDD results of operations and cash flows have been removed from the companys results of continuing operations and cash flows for the year 2007. There was no activity in 2008 or 2009. See page 47 for additional information.
Forward-Looking and Cautionary Statements
Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These Statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this Annual Report and in the companys filings with the Securities and Exchange Commission (SEC), including the companys 2009 Form 10-K filed on February 23, 2010.
Management Discussion Snapshot
($ and shares in millions except per share amounts)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
|
|
|
|
|
|
Percent/ |
|
||
|
|
|
|
|
|
Margin |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
||
Revenue |
|
$ |
95,758 |
|
$ |
103,630 |
|
(7.6 |
)%* |
Gross profit margin |
|
45.7 |
% |
44.1 |
% |
1.7 |
pts. |
||
Total expense and other income |
|
$ |
25,647 |
|
$ |
28,945 |
|
(11.4 |
)% |
Total expense and other income-to-revenue ratio |
|
26.8 |
% |
27.9 |
% |
(1.1 |
) pts. |
||
Income before income taxes |
|
$ |
18,138 |
|
$ |
16,715 |
|
8.5 |
% |
Provision for income taxes |
|
4,713 |
|
4,381 |
|
7.6 |
% |
||
Net income |
|
$ |
13,425 |
|
$ |
12,334 |
|
8.8 |
% |
Net income margin |
|
14.0 |
% |
11.9 |
% |
2.1 |
pts. |
||
Earnings per share of common stock: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
$ |
10.01 |
|
$ |
8.89 |
+ |
12.6 |
% |
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
1,341.4 |
|
1,387.8 |
+ |
(3.3 |
)% |
||
Assets** |
|
$ |
109,022 |
|
$ |
109,524 |
|
(0.5 |
)% |
Liabilities** |
|
$ |
86,267 |
|
$ |
95,939 |
++ |
(10.1 |
)% |
Equity** |
|
$ |
22,755 |
|
$ |
13,584 |
++ |
67.5 |
% |
* (5.3) percent adjusted for currency.
** At December 31.
+ Reflects the adoption of the Financial Accounting Standards Board (FASB) guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, Accounting Changes, on pages 79 to 82 for additional information.
++ Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
In 2009, in a difficult global economic environment, the company continued to deliver value to its clients and strong financial results to its investors-with profit growth driven by continued margin expansion, expense productivity, market share gains in software and systems and a continuing strong cash position. The company again achieved record levels of pre-tax profit, earnings per share and cash flow from operations-despite a decline in revenue. The financial performance reflected the strength of the companys global model and the results of the strategic transformation of the business.
The companys transformation, which started at the beginning of the decade, is driven by a combination of shifting the business mix, improving operating leverage through productivity and investing to capture growth opportunities.
The company has exited commoditizing businesses and remixed its portfolio to higher value areas through organic investments and acquisitions. This shift to higher value areas drives a more profitable mix and enables the company to better meet clients needs. In addition, the focus on global integration has improved productivity and efficiency. The companys ongoing initiatives have reduced the fixed cost base and improved the operational balance point-generating more profit for each dollar of revenue. The strong profit and cash base has enabled the company to make significant investments for growth and return capital to shareholders. Key areas of investment include smarter planet solutions, business analytics, growth market opportunities and new computing models such as cloud computing. The strategic transformation of the company has enabled the company to deliver strong financial performance since the last recession in 2002, including the difficult environment in 2008 and 2009, and has positioned the business for the future.
For the year, the company delivered $10.01 in diluted earnings per share, an increase of 12.6 percent year to year. This was the seventh consecutive year of double-digit earnings per share growth. In 2007, the company developed a road map for growth with an earnings per share objective for 2010 of $10 to $11 per share. With its performance in 2009, the company achieved this objective one year early.
Total revenue decreased 7.6 percent (5 percent adjusted for currency) compared to 2008. Revenue from the growth markets declined 3.5 percent, but increased 1 percent at constant currency. Performance was led by the BRIC countries of Brazil, Russia, India and China which increased 4 percent, adjusted for currency. Segment performance was driven by Software which decreased 3.1 percent year to year (1 percent adjusted for currency) and Global Technology Services which declined 4.9 percent (2 percent adjusted for currency). Within Software performance was led by key branded middleware which increased revenue 1.1 percent (3 percent adjusted for currency) compared to the prior year.
Gross profit margins improved reflecting the shift to higher value businesses and the continued focus on productivity and cost management. The consolidated gross profit margin increased 1.7 points versus 2008 to 45.7 percent. This was the sixth consecutive year of improvement in the gross profit margin. Gross profit margin performance by segment and the impact to the consolidated gross margin was as follows:
|
|
Gross |
|
Yr.-to-Yr. |
|
Consolidated |
|
|
|
Margin |
|
Change |
|
Impact |
|
Global Technology Services |
|
35.0 |
% |
2.4 |
pts. |
0.8 |
pts. |
Global Business Services |
|
28.2 |
% |
1.5 |
pts. |
0.4 |
pts. |
Software |
|
86.0 |
% |
0.6 |
pts. |
0.6 |
pts. |
Systems & Technology |
|
37.8 |
% |
(0.2 |
) pts. |
0.1 |
pts. |
Global Financing |
|
47.5 |
% |
(3.8 |
) pts. |
(0.1 |
) pts. |
Total expense and other income decreased 11.4 percent in 2009 versus 2008. The year-to-year drivers were approximately:
· Operational expense, (9) points
· Currency, (4) points
· Acquisitions, 1 point
Pre-tax income grew 8.5 percent and the pre-tax margin was 18.9 percent, the highest level in more than a decade. Net income increased 8.8 percent reflecting a slight improvement in the tax rate. The effective tax rate for 2009 was 26.0 percent, compared with 26.2 percent in 2008.
Diluted earnings per share improved 12.6 percent reflecting the strong growth in net income and the benefits of the common stock repurchase program. In 2009, the company repurchased approximately 69 million shares of its common stock. Diluted earnings per share of $10.01 increased $1.12 from the prior year driven by the following factors:
· |
Revenue decrease at actual rates: |
|
$ |
(0.68 |
) |
· |
Gross margin increase of 1.7 points: |
|
$ |
0.85 |
|
· |
Expense productivity: |
|
$ |
0.58 |
|
· |
Tax rate decrease of 0.2 points: |
|
$ |
0.03 |
|
· |
Common stock repurchases: |
|
$ |
0.34 |
|
At December 31, 2009, the Companys balance sheet and liquidity positions remained strong. Cash on hand was $12,183 million. Total debt decreased $7,826 million year to year, and the company generated $20,773 million in operating cash flow in 2009. The company has consistently generated strong cash flow from operations and also continues to have access to additional sources of liquidity through the capital markets and its global credit facility.
Key drivers in the companys balance sheet and total cash flows are highlighted below.
Total assets decreased $502 million (decreased $3,885 million adjusted for currency) from December 31, 2008, driven by:
· Decreases in cash and cash equivalents ($558 million) and total receivables ($1,301 million); and
· Lower deferred taxes ($2,888 million) and intangible assets ($365 million), partially offset by;
· Increased goodwill ($1,964 million) and prepaid pension assets ($1,401 million); and
· Higher level of marketable securities ($1,625 million).
The company had $13,973 million in cash and marketable securities at December 31, 2009.
Total liabilities decreased $9,672 million (decreased $11,213 million adjusted for currency) from December 31, 2008 driven by:
· Lower total debt ($7,826 million);
· Decrease in retirement-related benefit obligations ($3,500 million), partially offset by;
· Higher tax liabilities ($1,083 million); and
· Increased deferred income ($997 million).
Total equity of $22,755 million increased $9,170 million from the prior year-end balance as a result of:
· Higher retained earnings ($10,546 million);
· Increase in foreign currency translation adjustments ($1,732 million);
· Increase in retirement-related items ($1,727 million) and common stock ($2,682 million), partially offset by;
· Increased treasury stock ($7,072 million); and
· Increased net unrealized losses on cash flow derivatives ($556 million).
The company generated $20,773 million in cash flow provided by operating activities, an increase of $1,961 million, compared to 2008, primarily driven by a decrease in receivables ($1,857 million). Net cash used in investing activities of $6,729 million was $2,556 million lower than 2008, primarily due to the prior year Cognos acquisition and the core logistics operations divestiture in 2009, partially offset by the year-to-year impacts related to marketable securities and other investments.
Net cash used in financing activities of $14,700 million was $2,866 million higher, primarily due to debt repayments ($5,019 million), partially offset by lower common stock repurchases ($3,150 million) in 2009 versus 2008.
Total Global Services signings were $57,094 million, flat (up 2 percent adjusted for currency) versus 2008. The estimated Global Services backlog was $137 billion at December 31, 2009, up $7 billion ($1 billion adjusted for currency) versus the prior year-end balance.
In January 2010, the company disclosed that it is expecting earnings of at least $11.00 per diluted share for the full year 2010.
For additional information and details, see the Year in Review section on pages 25 through 39.
Description of Business
Please refer to IBMs Annual Report on Form 10-K filed with the SEC on February 23, 2010 for a more detailed version of this Description of Business, especially Item 1A. entitled Risk Factors.
The company creates business value for clients and solves business problems through integrated solutions that leverage information technology and deep knowledge of business processes. IBM solutions typically create value by reducing a clients operational costs or by enabling new capabilities that generate revenue. These solutions draw from an industry leading portfolio of consulting, delivery and implementation services, enterprise software, systems and financing.
Strategy
Despite the volatility of the information technology (IT) industry over the past decade, IBM has consistently delivered superior performance, with a steady track record of sustained earnings per share growth. The company has shifted its business mix, exiting commoditized segments while increasing its presence in higher-value areas such as services, software and integrated solutions. As part of this shift, the company has acquired over 100 companies this past decade, complementing and scaling its portfolio of products and offerings.
IBMs clear strategy has enabled steady results in core business areas, while expanding its offerings and addressable markets. The key tenets of this strategy are:
· Deliver value to enterprise clients through integrated business and IT innovation
· Build/expand strong positions in growth initiatives
· Shift the business mix to higher-value software and services
· Become the premier globally integrated enterprise
These priorities reflect a broad shift in client spending away from point products and toward integrated solutions, as companies seek higher levels of business value from their IT investments. IBM has been able to deliver this enhanced client value thanks to its industry expertise, understanding of clients businesses and the breadth and depth of the companys capabilities.
IBMs growth initiatives, like its strengthened capabilities, align with these client priorities. These initiatives include Smarter Planet and Industry Frameworks, Growth Markets, Business Analytics and Cloud Computing. Each initiative represents a significant growth opportunity with attractive profit margins for IBM.
Smarter Planet and Industry Frameworks
Smarter Planet is an overarching strategy that highlights IBMs differentiated capabilities and generates broad-based demand for the companys products and services. Smarter Planet encapsulates IBMs view of enterprise ITs next major revolution: the instrumentation and integration of the worlds processes and infrastructures-from energy grids and pipelines to supply chains and traffic systems. The massive amount of data these systems are generating can now be captured and analyzed. This infusion of intelligence enables more efficiency, productivity and responsiveness.
Clients seeking these smart solutions value IBMs deep industry and process expertise, powerful back-end systems and data analytics, complex systems integration capability and unique research capacity.
IBMs Industry Frameworks create a flexible software foundation for developing, acquiring and deploying smart industry solutions. Each framework supports multiple solutions, enabling fast, efficient and tailored capabilities in support of clients business needs. These frameworks represent a proven technique for the company to engage with its clients, driving sustained growth and high business value. They cover a wide variety of industries and domains, most of which are directly tied to Smarter Planet.
Growth Markets
The company has benefited from its investments over the past several years in growth markets. The focus now is on geographic expansion of IBMs presence; on specific industry verticals of the highest impact and opportunity; on countries build-out of infrastructure aligned with their national agendas; and on creating markets and new business models to serve the different requirements that exist in these emerging countries.
In order to support this growth, IBM is continuing to invest significantly in these markets to expand capacity and develop talent. At the same time, IBM is expanding and benefiting from large teams of talent with global missions of delivery. The company continues to deepen its research and development (R&D) teams to design for the unique challenges and rapid growth facing these markets.
Business Analytics and Optimization
Business optimization through the application of advanced analytics is emerging as another major category of business value. It succeeds earlier generations of back-office automation, basic enterprise resource planning and traditional business intelligence. Advanced analytics allow clients to see patterns in data they could not see before, understand their exposure to risk and predict the outcomes of business decisions with greater certainty.
IBMs approach is end-to-end, providing cross-enterprise as well as industry-based analytics solutions. IBM has established the Business Analytics and Optimization practice, leveraging IBM consulting capabilities and software products, along with systems and research assets. IBMs breadth of expertise uniquely positions the company for revenue and profit growth.
Cloud Computing
Cloud is an emerging consumption and delivery model for many IT-related services. Clients are attracted to its improved economics, flexibility and user experience. Traditional enterprise IT will increasingly integrate with these new cloud deployments, delivered as services via the Internet (also known as public clouds) or behind a firewall (private clouds). In discussions with enterprise clients, most are initially focused on private cloud implementations, the middle ground between the traditional enterprise IT and public clouds.
IBM is helping clients determine how to leverage cloud computing to achieve business advantage. The company provides a full set of capabilities, from support in designing and implementing cloud solutions, to services for running and managing them if desired. IBM is applying its deep experience in critical areas such as security, reliability and innovation to deliver differentiated value. The company is also investing in new cloud initiatives tailored to particular industries, in conjunction with its partners and clients, to deliver cloud business services directly to the market. By providing deployment choice, optimizing solutions based on workload characteristics and delivering complete service management capabilities, IBM is positioned as the leading cloud service and infrastructure provider for enterprises.
Business Model
The companys business model is built to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and IT solutions; and providing long-term value to shareholders. The business model has been developed over time through strategic investments in capabilities and technologies that have the best long-term growth and profitability prospects based on the value they deliver to clients.
The companys global capabilities include services, software, systems, fundamental research and related financing. The broad mix of businesses and capabilities are combined to provide business insight and solutions for the companys clients.
The business model is flexible, adapting to the continuously changing market and economic environment. the company continues to divest commoditizing businesses and strengthen its position through strategic investments and acquisitions in higher value segments like business analytics, smarter planet and cloud computing. In addition, the company has transformed itself into a globally integrated enterprise which has improved overall productivity and is driving investment and participation in the worlds fastest growing markets. As a result, the company is a higher performing enterprise today than it was several years ago.
The business model, supported by the companys long-term financial model, has enabled the company to deliver consistently strong earnings, cash flows and returns to shareholders in changing economic environments.
Business Segments and Capabilities
The companys major operations comprise: a Global Technology Services segment; a Global Business Services segment; a Software segment; a Systems and Technology segment; and a Global Financing segment.
Global Services is a critical component of the companys strategy of providing IT infrastructure and business insight and solutions to clients. While solutions often include industry-leading IBM software and systems, other suppliers products are also used if a client solution requires it. approximately 60 percent of external Global Services segment revenue is annuity-based, coming primarily from outsourcing, maintenance and custom application management services arrangements. The Global Services backlog provides a solid revenue base entering each year. Within Global Services, there are two reportable segments: Global Technology Services and Global Business Services.
Global Technology Services (GTS) primarily provides IT infrastructure services and business process services, delivering business value through the companys global scale, standardization and automation.
GTS CAPABILITIES
Strategic Outsourcing Services . Comprehensive IT outsourcing services dedicated to transforming clients existing infrastructures to ensure better quality, cost control, adaptability, security and compliance. IBM integrates long-standing experience in service management, technology and industry applications with new technologies, such as cloud computing and virtualization, to enable new capabilities for clients.
Business Transformation Outsourcing. A range of offerings from standardized processing platforms and Business Process Outsourcing through transformational offerings that deliver improved business results to clients through the strategic change and/or operation of the clients business processes, applications and infrastructure.
Integrated Technology Services. Project-based portfolio of services that enable clients to optimize their IT environments by driving efficiency, flexibility and productivity, while reducing costs. The standardized portfolio is built around key assets and patented software, and incorporates best practices and proven methodologies that ensure predictive quality of delivery, security and compliance.
Maintenance. A complete line of support services from product maintenance through solution support to maintain and improve the availability of clients IT infrastructure.
The GTS outsourcing businesses are supported by integrated worldwide delivery organizations:
Integrated Technology Delivery (ITD) is responsible for worldwide service delivery supporting the Strategic Outsourcing business. It manages the worlds largest privately-owned IT infrastructure with employees in over 40 countries, supporting over 450 data centers. I td operates a globally integrated delivery model which supports regional client-facing teams by utilizing a global network of competencies and centers. e ach competency provides industry-leading, standardized, integrated tools and processes. By leveraging IBMs global scale, skills and technology which is combined with the innovation from IBM research, clients gain access to leading edge, high-quality services with improved productivity, flexibility and cost.
Business Process Delivery (BPD) provides highly efficient, world-class delivery capabilities in IBMs business process delivery operations, which include Business t ransformation Outsourcing, Business p rocess Outsourcing and Business p rocess s ervices. Bpd has employees and delivery centers in over 40 countries worldwide.
Global Business Services (GBS) primarily provides professional services and application outsourcing services, delivering business value and innovation to clients through solutions which leverage industry- and business-process expertise.
GBS CAPABILITIES
Consulting and Systems Integration . Delivery of value to clients through consulting services for client-relationship management, financial management, human-capital management, business strategy and change, and supply-chain management. In 2009, the company announced the creation of a new consulting service line dedicated to the market for advanced business analytics and business optimization.
Application Management Services. Application development, management, maintenance and support services for packaged software, as well as custom and legacy applications. Value is delivered through the companys global resource capabilities, industry knowledge and the standardization and automation of application development.
Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform. IBM middleware is designed on open standards, making it easier to integrate disparate business applications, developed by different methods and implemented at different times. o perating s ystems are the software engines that run computers. Approximately two-thirds of external software segment revenue is annuity-based, coming from recurring license charges and ongoing subscription and support from one-time charge (OTC) arrangements. The remaining one-third relates to OTC arrangements in which clients pay one, up-front payment for a perpetual license. Typically, arrangements for the sale of OTC software include one year of subscription and support. c lients can also purchase ongoing subscription and support after the first year, which includes product upgrades and technical support.
SOFTWARE CAPABILITIES
WebSphere Software . d elivers capabilities that enable clients to integrate and manage business processes across their organizations with the flexibility and agility they need to respond to changing conditions quickly. With a services-oriented architecture (SOA), businesses can more easily link together their fragmented data and business processes to extract value from their existing technology.
Information Management Software. e nables clients to integrate, manage and use their information to gain business value and improve their outcomes. Solutions include advanced database management, enterprise content management, information integration, data warehousing, business analytics and intelligence, performance management and predictive analytics.
Tivoli Software. Helps clients manage their technology and business assets by providing visibility, control and automation across their organizations. With solutions for identity management, data security, storage management and the ability to provide automation and provisioning of the datacenter, Tivoli helps build the infrastructure needed to make the worlds systemsfrom transportation to water, energy and telecommunicationsrun smarter.
Lotus Software . Enables businesses to connect people and processes for more effective communication and increased productivity through collaboration, messaging and social networking software. By remaining at the forefront of collaboration tools, Lotus helps organizations reap the benefits of social networking and other Web 2.0 modalities.
Rational Software . s upports software development for both I t and embedded system solutions with a suite of a pplication l ifecycle Management products. Jazz, Rationals technology platform, transforms the way people work together to build software, making software delivery more collaborative, productive and transparent.
Operating Systems. s oftware that manages the fundamental processes that make computers run.
Systems and Technology provides clients with business solutions requiring advanced computing power and storage capabilities. a pproximately 55 percent of s ystems and Technologys server and storage sales transactions are through the companys business partners; approximately 45 percent are direct to end-user clients. In addition, s ystems and t echnology provides leading semiconductor technology, products and packaging solutions to clients and for IBMs own advanced technology needs.
SYSTEMS AND TECHNOLOGY CAPABILITIES
Systems. A range of general purpose and integrated systems designed and optimized for specific business, public and scientific computing needs. These systems s ystem z, converged s ystem p and s ystem xare typically the core technology in data centers that provide required infrastructure for business and institutions. a lso, these systems form the foundation for IBMs integrated offerings, such as IBM Smart Business Storage Cloud, IBM Smart Analytics Cloud, IBM Smart Analytics System and IBM CloudBurst. IBM servers use both IBM and non-IBM microprocessor technology and operating systems. All IBM servers run Linux, a key open-source operating system.
Storage . IBM provides data storage products and solutions that allow clients to retain and manage rapidly growing, complex volumes of digital information. These solutions address critical client requirements for information retention and archiving, data deduplication, availability and virtualization, and security and compliance. The portfolio consists of a broad range of disk and tape storage systems and software, including the next-generation, ultra-scalable disk storage system XIV.
Retail Store Solutions. p oint-of-sale retail systems (network connected cash registers) as well as solutions which connect them to other store systems.
Microelectronics. Semiconductor design and manufacturing primarily for use in IBM systems and storage products and for sale to external clients.
Global Financing facilitates clients acquisition of IBM systems, software and services. Global Financing invests in financing assets, leverages with debt and manages the associated risks with the objective of generating consistently strong returns on equity. The primary focus on the companys offerings and clients mitigates many of the risks normally associated with a financing company. Global Financing has the benefit of both a deep knowledge of its client base and a clear insight into the products and services that are being financed. This combination allows Global Financing to effectively manage two of the major risks (credit and residual value) that are normally associated with financing.
GLOBAL FINANCING CAPABILITIES
Client Financing. Lease and loan financing to end users and internal clients for terms generally between two and seven years. Internal financing is predominantly in support of Global Services long-term client service contracts. Global Financing also factors a selected portion of the companys accounts receivable, primarily for cash management purposes. All internal financing arrangements are at arms-length rates and are based upon market conditions.
Commercial Financing . Short-term inventory and accounts receivable financing to dealers and remarketers of IT products.
Remarketing. The sale and lease of used equipment to new or existing clients both externally and internally. t his equipment is primarily sourced from the conclusion of lease transactions. Externally remarketed equipment revenue represents sales or leases to clients and resellers. Internally remarketed equipment revenue primarily represents used equipment that is sold or leased internally to the s ystems and Technology and Global s ervices segments. t he s ystems and t echnology segment may also sell the equipment that it purchases from Global Financing to external clients.
IBM Worldwide Organizations
The following worldwide organizations play key roles in IBMs delivery of value to its clients:
· Sales and Distribution
· Research, Development and Intellectual Property
· Integrated Supply Chain
Sales and Distribution
IBM has a significant global presence, operating in more than 170 countries, with an increasingly broad-based geographic distribution of revenue. The companys s ales and d istribution organization manages a strong global footprint, with dedicated country-based operating units focused on delivering client value. Within these units, client relationship professionals work with integrated teams of consultants, product specialists and delivery fulfillment teams to improve clients business performance. These teams deliver value by understanding the clients businesses and needs, and then bring together capabilities from across IBM and an extensive network of Business p artners to develop and implement solutions.
By combining global expertise with local experience, IBMs geographic structure enables dedicated management focus for local clients, speed in addressing new market opportunities and timely investments in emerging opportunities. The geographic units align industry-skilled resources to serve clients agendas. IBM extends capabilities to mid-market client segments by leveraging industry skills with marketing, ibm.com and local Business p artner resources.
In 2008, the company implemented a new growth markets organization to increase its focus on the emerging markets around the world that have market growth rates greater than the global averagecountries within Southeast Asia, Eastern Europe, the Middle East and Latin America. The companys major markets include the United States (U.S.), Canada, the United Kingdom ( u .K.), France, Germany, Italy, Japan, Denmark, Sweden, Switzerland, Austria, Belgium, Finland, Greece, Ireland, the Netherlands, Portugal, Cyprus, Norway, Israel, Spain, the Bahamas and the Caribbean region.
The majority of IBMs revenue, excluding the companys original equipment manufacturer (OEM) technology business, occurs in industries that are broadly grouped into six sectors:
· Financial Services: Banking, Financial Markets, Insurance
· Public: Education, Government, Healthcare, Life s ciences
· Industrial: a erospace and d efense, a utomotive, c hemical and p etroleum, e lectronics
· Distribution: c onsumer p roducts, r etail, t ravel and t ransportation
· Communications: t elecommunications, Media and e ntertainment, e nergy and u tilities
· General Business: Mainly companies with fewer than 1,000 employees
Research, Development and Intellectual Property
IBMs R&D operations differentiate the company from its competitors. IBM annually invests approximately $6 billion for R&D, focusing on high-growth, high-value opportunities. As a result of innovations in these and other areas, IBM was once again awarded more U.S. patents in 2009 than any other company, the 17th consecutive year IBM has been the patent leader. IBMs 4,914 patents in 2009 were the most u.s . patents ever awarded to one company in a single year. Consistent with the shift in the companys business mix, approximately 70 percent of these patents were software and services. t he company will continue to actively seek intellectual property protection for its innovations, while increasing emphasis on other initiatives designed to leverage its intellectual property leadership and promote innovation.
In addition to producing world-class systems, software and technology products, IBM innovations are also a major differentiator in providing solutions for the companys clients through its services businesses. The companys investments in R&D also result in intellectual property (IP) income of approximately $1 billion annually. s ome of IBMs technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in either/both IBM products and/or the products of the licensee. While the companys various proprietary intellectual property rights are important to its success, IBM believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. IBM owns or is licensed under a number of patents, which vary in duration, relating to its products. Licenses under patents owned by IBM have been and are being granted to others under reasonable terms and conditions.
Integrated Supply Chain
Consistent with the companys work with clients to transform their supply chains for greater efficiency and responsiveness to global market conditions, the company continues to derive business value from its own globally integrated supply chain, thereby providing a strategic advantage for the company to create value for clients. IBM leverages its supply-chain expertise for clients through its supply-chain business transformation outsourcing service to optimize and help operate clients end-to-end supply-chain processes, from procurement to logistics.
IBM spends approximately $35 billion annually through its supply chain, procuring materials and services globally. The supply, manufacturing and logistics and customer fulfillment operations are integrated in one operating unit that has optimized inventories over time, improved response to marketplace opportunities and external risks and converted fixed costs to variable costs. Simplifying and streamlining internal processes has improved operations, sales force productivity and processes.
Year in Review
Segment Details
The following is an analysis of the 2009 versus 2008 reportable segment results. The analysis of 2008 versus 2007 reportable segment results is on pages 40 to 45.
The following table presents each reportable segments external revenue and gross margin results.
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
Yr.-to-Yr. |
|
||
|
|
|
|
|
|
Percent/ |
|
Change |
|
||
|
|
|
|
|
|
Margin |
|
Adjusted |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
for Currency |
|
||
Revenue: |
|
|
|
|
|
|
|
|
|
||
Global Technology Services |
|
$ |
37,347 |
|
$ |
39,264 |
|
(4.9 |
)% |
(2.0 |
)% |
Gross margin |
|
35.0 |
% |
32.6 |
% |
2.4 |
pts. |
|
|
||
Global Business Services |
|
17,653 |
|
19,628 |
|
(10.1 |
)% |
(8.1 |
)% |
||
Gross margin |
|
28.2 |
% |
26.7 |
% |
1.5 |
pts. |
|
|
||
Software |
|
21,396 |
|
22,089 |
|
(3.1 |
)% |
(0.8 |
)% |
||
Gross margin |
|
86.0 |
% |
85.4 |
% |
0.6 |
pts. |
|
|
||
Systems and Technology |
|
16,190 |
|
19,287 |
|
(16.1 |
)% |
(14.9 |
)% |
||
Gross margin |
|
37.8 |
% |
38.1 |
% |
(0.2 |
) pts. |
|
|
||
Global Financing |
|
2,302 |
|
2,559 |
|
(10.0 |
)% |
(7.3 |
)% |
||
Gross margin |
|
47.5 |
% |
51.3 |
% |
(3.8 |
) pts. |
|
|
||
Other |
|
869 |
|
803 |
|
8.3 |
% |
11.7 |
% |
||
Gross margin |
|
11.6 |
% |
13.4 |
% |
(1.8 |
) pts. |
|
|
||
Total Revenue |
|
$ |
95,758 |
|
$ |
103,630 |
|
(7.6 |
)% |
(5.3 |
)% |
|
|
|
|
|
|
|
|
|
|
||
Gross profit |
|
$ |
43,785 |
|
$ |
45,661 |
|
(4.1 |
)% |
|
|
Gross margin |
|
45.7 |
% |
44.1 |
% |
1.7 |
pts. |
|
|
t he following table presents each reportable segments external revenue as a percentage of total segment external revenue and each reportable segments pre-tax income as a percentage of total segment pre-tax income.
|
|
Revenue |
|
Pre-tax Income* |
|
||||
For the year ended December 31: |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Global Technology Services |
|
39.4 |
% |
38.2 |
% |
28.6 |
% |
26.3 |
% |
Global Business Services |
|
18.6 |
|
19.1 |
|
13.2 |
|
15.3 |
|
Total Global Services |
|
58.0 |
|
57.3 |
|
41.9 |
|
41.6 |
|
Software |
|
22.5 |
|
21.5 |
|
41.9 |
|
40.4 |
|
Systems and Technology |
|
17.1 |
|
18.8 |
|
7.3 |
|
8.8 |
|
Global Financing |
|
2.4 |
|
2.5 |
|
8.9 |
|
9.2 |
|
Total |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
* Segment pre-tax income includes transactions between segments that are intended to reflect an arms-length transfer price and excludes certain unallocated corporate items; see note V, s egment Information for additional information.
In 2009, Global Services and Software increased as a percentage of total segment revenue and total segment pre-tax income, with Global s ervices and s oftware each contributing 42 percent of segment pre-tax income. t hese changes reflect the companys continuing transformation and the remix of its business both aimed at market segments that present the best long-term opportunities.
g lobal s ervices
The Global s ervices segments, Gts and GBs, had combined revenue of $55,000 million, a decrease of 6.6 percent (4 percent adjusted for currency) in 2009 when compared to 2008. s ervices revenue performance was supported by its annuity revenue base, but also reflected the challenges in the more economically sensitive consulting business.
t otal Global Services signings of $57,094 million decreased 0.2 percent (increased 2 percent adjusted for currency). o utsourcing signings of $33,014 million increased 8.8 percent (11 percent adjusted for currency). o utsourcing signings growth was broad based across all the major geographies and in each business area: s trategic o utsourcing, Business t ransformation o utsourcing and a pplication o utsourcing. c onsulting and s ystems Integration and Integrated t echnology s ervices signings were $24,081 million, a decrease of 10.2 percent (8 percent adjusted for currency). t he estimated Global Services backlog at actual currency rates was $137 billion at d ecember 31, 2009, an increase of $7 billion ($1 billion adjusted for currency) from d ecember 31, 2008 and an increase of $2 billion ($3 billion adjusted for currency) from s eptember 30, 2009.
t he Global Services segments delivered a combined pre-tax profit of $8,092 million in 2009, a growth of 11.0 percent versus 2008, and expanded pre-tax margin 2.3 points to 14.1 percent. t he improved margin was a result of the structural changes made to services delivery over the past several years. t he services global delivery capabilities have proven to be dynamic and flexible enough to deal with very tough market conditions. o verall, the Global Services business delivered strong margin and signings performance in a difficult economic climate.
($ in millions)
|
|
|
|
|
|
|
|
y r.-to- y r. |
|
||
|
|
|
|
|
|
y r.-to- y r. |
|
c hange a djusted |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
c hange |
|
for c urrency |
|
||
g lobal s ervices external revenue: |
|
$ |
55,000 |
|
$ |
58,891 |
|
(6.6 |
)% |
(4.0 |
)% |
Global t echnology Services |
|
$ |
37,347 |
|
$ |
39,264 |
|
(4.9 |
)% |
(2.0 |
)% |
Strategic Outsourcing |
|
19,340 |
|
20,183 |
|
(4.2 |
) |
(1.5 |
) |
||
Integrated Technology Services |
|
8,771 |
|
9,283 |
|
(5.5 |
) |
(2.9 |
) |
||
Business Transformation Outsourcing |
|
2,280 |
|
2,550 |
|
(10.6 |
) |
(6.1 |
) |
||
Maintenance |
|
6,956 |
|
7,250 |
|
(4.1 |
) |
(1.1 |
) |
||
Global Business s ervices |
|
$ |
17,653 |
|
$ |
19,628 |
|
(10.1 |
)% |
(8.1 |
)% |
Global t echnology s ervices revenue of $37,347 million decreased 4.9 percent (2 percent adjusted for currency) in 2009 versus 2008. t otal Gts signings of $34,703 million in 2009 were flat (increased 3 percent adjusted for currency) versus 2008. o utsourcing signings of $25,507 million increased 4.3 percent (8 percent adjusted for currency) with growth of 7 percent in the major markets and 14 percent in the growth markets, adjusted for currency. Integrated t echnology s ervices signings of $9,196 million decreased 10.3 percent (8 percent adjusted for currency).
s trategic o utsourcing (SO) revenue decreased 4.2 percent (1 percent adjusted for currency). s O revenue performance, adjusted for currency, was consistent throughout the year, although impacted by reduced volumes in the existing client base. s O signings increased 1.8 percent (6 percent adjusted for currency) when compared to 2008. r evenue trends in outsourcing should improve in 2010 as a result of the 2009 signings performance.
Integrated Technology Services (ITS) revenue decreased 5.5 percent (3 percent adjusted for currency) in 2009 versus 2008. r evenue performance largely reflects recent signings performance which continued to be impacted by declines in oeM offerings, as the ITS portfolio shifts to higher value, higher margin offerings.
Business Transformation Outsourcing ( Bto ) revenue decreased 10.6 percent (6 percent adjusted for currency) year to year and reflects declines in client business volumes in a slower economic environment and an increased focus on deal selectivity. Bto signings increased 21.9 percent (26 percent adjusted for currency) in 2009 compared to 2008.
Global Business Services revenue decreased 10.1 percent (8 percent adjusted for currency) in 2009 driven primarily by a double-digit decline in Consulting and Systems Integration revenue. t otal signings in GBs decreased 0.4 percent (increased 1 percent adjusted for currency). a pplication Outsourcing signings increased 27.1 percent (25 percent adjusted for currency), illustrating the strong value proposition Application Outsourcing can provide to clients with compelling cost savings. c onsulting and Systems Integration signings decreased 10.2 percent (8 percent adjusted for currency).
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
||
g lobal s ervices: |
|
|
|
|
|
|
|
||
Global Technology Services: |
|
|
|
|
|
|
|
||
e xternal gross profit |
|
$ |
13,081 |
|
$ |
12,802 |
|
2.2 |
% |
e xternal gross profit margin |
|
35.0 |
% |
32.6 |
% |
2.4 |
pts. |
||
p re-tax income |
|
$ |
5,537 |
|
$ |
4,607 |
|
20.2 |
% |
p re-tax margin |
|
14.3 |
% |
11.3 |
% |
3.0 |
pts. |
||
Global Business Services: |
|
|
|
|
|
|
|
||
e xternal gross profit |
|
$ |
4,979 |
|
$ |
5,238 |
|
(4.9 |
)% |
e xternal gross profit margin |
|
28.2 |
% |
26.7 |
% |
1.5 |
pts. |
||
p re-tax income |
|
$ |
2,555 |
|
$ |
2,681 |
|
(4.7 |
)% |
p re-tax margin |
|
13.8 |
% |
13.0 |
% |
0.8 |
pts. |
Gts gross profit margin improved 2.4 points to 35.0 percent in 2009 and expanded in all lines of business when compared to 2008. s trategic Outsourcing gross margin improved for the fifth consecutive year, while also improving overall service delivery quality. t his has been accomplished through a disciplined and innovative approach to delivery focused on both labor and non-labor productivity actions. Gts has been executing a strategy to deliver services out of key global delivery centers using consistent global delivery methods and processes. t he delivery centers are also improving labor utilization with analytics and by applying supply chain tools and techniques to the labor base. Integrated Technology Services gross margin improved as the result of mixing the portfolio of offerings to more profitable labor-based services. Business Transformation Outsourcing gross margin expanded as a result of improved deal selectivity and delivery performance. s egment pre-tax profit increased 20.2 percent to $5,537 million with a pre-tax margin of 14.3 percent, an increase of 3.0 points versus 2008.
GBs gross profit margin improved 1.5 points to 28.2 percent in 2009 with an improving margin trend throughout the year. s egment pre-tax profit was down 4.7 percent to $2,555 million, however, margin improved 0.8 points year over year. t hroughout the year, the dynamic GBS delivery model enabled solid profit performance in a tough economic climate. t he pre-tax margin expansion also included improving trends throughout the year and was driven primarily by improved delivery center utilization, reduced subcontractor spending and improved cost and expense management.
globAl seRVIces sIgnIngs
t he table on page 28 presents Global Services signings as reported. s ignings at actual currency rates provide investors with a better view of how these signings will convert to services revenue and also provides better comparability to other companies in the industry who report signings using actual rates.
($ in millions)
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
|
|
|
|
|
|
Yr.-to-Yr. |
|
Change Adjusted |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
for Currency |
|
||
g lobal t echnology s ervices s ignings: |
|
|
|
|
|
|
|
|
|
||
o utsourcing |
|
$ |
25,507 |
|
$ |
24,446 |
|
4.3 |
% |
8.1 |
% |
ITS |
|
9,196 |
|
10,247 |
|
(10.3 |
) |
(8.2 |
) |
||
t otal |
|
$ |
34,703 |
|
$ |
34,693 |
|
0.0 |
% |
3.3 |
% |
g lobal b usiness s ervices s ignings: |
|
|
|
|
|
|
|
|
|
||
Application Outsourcing |
|
$ |
7,506 |
|
$ |
5,905 |
|
27.1 |
% |
25.1 |
% |
Consulting & Systems Integration |
|
14,885 |
|
16,584 |
|
(10.2 |
) |
(7.9 |
) |
||
t otal |
|
$ |
22,391 |
|
$ |
22,488 |
|
(0.4 |
)% |
0.8 |
% |
Global s ervices signings are managements initial estimate of the revenue value of a clients commitment under a Global Services contract. s ignings are used by management to assess period performance of Global Services management. t here are no third-party standards or requirements governing the calculation of signings. t he calculation used by management involves estimates and judgments to gauge the extent of a clients commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.
s ignings include SO, BTO, ITS and GBS contracts. c ontract extensions and increases in scope are treated as signings only to the extent of the incremental new revenue value. Maintenance is not included in signings as maintenance contracts tend to be more steady state, where revenues equal renewals.
Backlog includes SO, BTO, ITS, GBS and Maintenance. Backlog is intended to be a statement of overall work under contract and therefore does include Maintenance. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations and adjustments for revenue not materialized.
c ontract portfolios purchased in an acquisition are treated as positive backlog adjustments provided those contracts meet the companys requirements for initial signings. a new signing will be recognized if a new services agreement is signed incidental or coincidental to an acquisition or divestiture.
Software
($ in millions)
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
|
|
|
|
|
|
|
|
Change |
|
||
|
|
|
|
|
|
Yr.-to-Yr. |
|
Adjusted |
|
||
For the year ended December 31: |
|
2009 |
|
2008* |
|
Change |
|
for Currency |
|
||
Software external revenue: |
|
$ |
21,396 |
|
$ |
22,089 |
|
(3.1 |
)% |
(0.8 |
)% |
Middleware |
|
$ |
17,125 |
|
$ |
17,305 |
|
(1.0 |
)% |
1.4 |
% |
Key Branded Middleware |
|
12,524 |
|
12,392 |
|
1.1 |
|
3.4 |
|
||
WebSphere Family |
|
|
|
|
|
10.5 |
|
12.7 |
|
||
Information Management |
|
|
|
|
|
(0.5 |
) |
1.9 |
|
||
l otus |
|
|
|
|
|
(10.0 |
) |
(7.9 |
) |
||
t ivoli |
|
|
|
|
|
2.9 |
|
5.1 |
|
||
r ational |
|
|
|
|
|
0.2 |
|
2.7 |
|
||
o ther middleware |
|
4,602 |
|
4,912 |
|
(6.3 |
) |
(3.5 |
) |
||
o perating systems |
|
2,163 |
|
2,337 |
|
(7.4 |
) |
(4.9 |
) |
||
p roduct Lifecycle Management |
|
739 |
|
960 |
|
(23.0 |
) |
(21.7 |
) |
||
o ther |
|
1,369 |
|
1,488 |
|
(8.0 |
) |
(5.8 |
) |
* r eclassified to conform with 2009 presentation.
s oftware revenue of $21,396 million decreased 3.1 percent (1 percent adjusted for currency) in 2009 compared to 2008. a djusted for currency, growth in the Key Branded Middleware products was offset by decreased revenue in other components of the software portfolio. o verall, the software business has continued to perform well in an uncertain environment. t he companys recent acquisitions increased revenue and the company is continuing to invest in capabilities that accelerate the development of new market opportunities like business analytics and smarter planet.
Key Branded Middleware revenue increased 1.1 percent (3 percent adjusted for currency) and represented 59 percent of total Software revenue, an increase of 2 points from 2008. t he company continued to solidify its lead in the middleware market, gaining share for nine consecutive quarters. o rganic investments and acquisitions in middleware capabilities continue to result in it becoming a larger portion of the software portfolio and improving the overall software revenue growth rate. Growth in 2009, adjusted for currency, was led by WebSphere and t ivoli.
WebSphere Family revenue increased 10.5 percent (13 percent adjusted for currency) in 2009 with strong performance throughout the year. a pplication Servers, which provide customers with a secure and resilient infrastructure for mission-critical business applications, grew 5 percent adjusted for currency. Business Integration software had double-digit revenue growth in 2009, including strong contribution from IloG , a company acquired in the fourth quarter of 2008.
Information Management revenue decreased 0.5 percent (increased 2 percent adjusted for currency) in 2009 versus the prior year, with revenue growth, adjusted for currency, in both Information Management solutions and infrastructure offerings. c ognos and InfoSphere software, two key components of the business analytics area, both had double-digit revenue growth adjusted for currency. t he acquisition of spss , which was completed in early o ctober, 2009, further expands the companys business analytics capabilities.
l otus revenue decreased 10.0 percent (8 percent adjusted for currency) in 2009. d emand for Lotus software was impacted by customer consolidations and downsizing throughout 2009.
t ivoli revenue increased 2.9 percent (5 percent adjusted for currency) in 2009 when compared to 2008, driven by growth in storage software. t ivoli storage revenue grew consistently throughout the year as customers managed their rapidly growing storage data.
r ational revenue increased 0.2 percent in 2009 as reported and increased 3 percent adjusted for currency versus 2008. r ationals integrated software tools improve the speed, quality and efficiency for customers with software development projects. t elelogic contributed strong revenue growth in 2009 and extended the brands reach into the systems development market opportunity.
r evenue from Other middleware products decreased 6.3 percent (3 percent adjusted for currency) in 2009 versus the prior year. t his software product set includes more mature products which provide a more stable flow of revenue.
o perating systems product revenue decreased 7.4 percent (5 percent adjusted for currency) in 2009 compared to 2008, reflecting declining sales in all system brands.
p roduct Lifecycle Management revenue decreased 23.0 percent (22 percent adjusted for currency). t he company and Dassault Systemes ( ds ) signed an agreement in o ctober 2009 under which ds intends to acquire the companys sales and client support operations encompassing ds s Product Lifecycle Management software application portfolio, as well as customer contracts and related assets. t he company expects to record a gain when this transaction is completed, which is anticipated in the first quarter of 2010.
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
||
s oftware: |
|
|
|
|
|
|
|
||
e xternal gross profit |
|
$ |
18,405 |
|
$ |
18,859 |
|
(2.4 |
)% |
e xternal gross profit margin |
|
86.0 |
% |
85.4 |
% |
0.6 |
pts. |
||
p re-tax income |
|
$ |
8,095 |
|
$ |
7,075 |
|
14.4 |
% |
p re-tax margin |
|
33.6 |
% |
28.5 |
% |
5.2 |
pts. |
s oftware gross profit of $18,405 million in 2009 decreased 2.4 percent versus 2008, driven primarily by declining revenue. Gross profit margin expanded 0.6 points to 86.0 percent in 2009. t he Software segment delivered $8,095 million of pre-tax profit in 2009, an increase of 14.4 percent versus 2008. t he segment pre-tax profit margin expanded 5.2 points to 33.6 percent. t he breadth of the software portfolio, the strong recurring revenue stream and the actions taken to improve efficiency and productivity combined to deliver strong profit results.
s ystems and t echnology
($ in millions)
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
|
|
|
|
|
|
Yr.-to-Yr. |
|
c hange a djusted |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
for Currency |
|
||
s ystems and t echnology external revenue: |
|
$ |
16,190 |
|
$ |
19,287 |
|
(16.1 |
)% |
(14.9 |
)% |
s ystem z |
|
|
|
|
|
(28.7 |
)% |
(27.5 |
)% |
||
c onverged System p |
|
|
|
|
|
(10.7 |
) |
(9.2 |
) |
||
s ystem x |
|
|
|
|
|
(4.6 |
) |
(3.3 |
) |
||
s ystem Storage |
|
|
|
|
|
(12.0 |
) |
(11.0 |
) |
||
r etail Store Solutions |
|
|
|
|
|
(25.6 |
) |
(23.6 |
) |
||
t otal Systems |
|
|
|
|
|
(15.9 |
) |
(14.6 |
) |
||
Microelectronics oeM |
|
|
|
|
|
(15.1 |
) |
(15.2 |
) |
||
Systems and Technology revenue decreased 16.1 percent (15 percent adjusted for currency) in 2009 versus 2008 reflecting the challenges that transactional-based businesses are facing in the current environment. While revenue performance declined in 2009, the rate of decline improved sequentially in the third and fourth quarters. The company gained share in System p, System x, blades, and in System Storage external disk and tape storage during 2009.
s ystem z revenue decreased 28.7 percent (28 percent adjusted for currency) in 2009 versus 2008. MIps (millions of instructions per second) shipments decreased 13 percent in 2009 versus the prior year. MIps increased 4 percent in 2009 on a two year compounded growth rate and this performance is consistent with what the company would expect at this point in the product cycle. In the third quarter, the company introduced System z offerings called System z Solution Editions, which expanded the platforms value proposition to both new and existing clients. In 2010 the company will be releasing the next generation System z mainframe product.
c onverged System p revenue decreased 10.7 percent (9 percent adjusted for currency) in 2009 versus 2008. l ow-end server revenue declined 43 percent, midrange server revenue decreased 2 percent and high-end server revenue decreased 10 percent versus 2008. a lthough revenue declined, the company continued to gain market share in the midrange and high end of the product line by helping clients increase efficiency in their data centers by leveraging consolidation and virtualization results. t his has led to seven consecutive quarters of share gains. In addition, in 2009, the company increased sales generated by unIX competitive displacements to over $600 million. In February 2010, the company introduced several new models of the next generation poWer systems, which will deliver 2 to 3 times the performance, within the same energy envelope.
s ystem x revenue decreased 4.6 percent (3 percent adjusted for currency) in 2009 versus 2008. r evenue performance in the second half of the year was strong with third quarter revenue increasing 0.6 percent (2 percent adjusted for currency) and fourth quarter revenue increasing 36.8 percent (30 percent adjusted for currency) compared to the prior year periods. s ystem x server revenue declined 4 percent, primarily driven by decreased low-end server revenue (10 percent) in 2009 versus 2008. Blades revenue increased 11 percent in 2009 versus 2008. s ystem x server has gained share in four consecutive quarters. t he companys improved sales model and enhanced product offerings were the key contributors to this performance.
s ystem Storage revenue decreased 12.0 percent (11 percent adjusted for currency) in 2009 versus 2008. t otal disk revenue decreased 9 percent versus 2008. t hese decreases were driven by declines in midrange disk revenue of 18 percent and decreased Enterprise Disk revenue of 6 percent. In the fourth quarter, the company introduced the ds 8700 product, the latest addition to the ds8000 line of high-end disk systems. t he companys storage acquisitions, XIV and Diligent, had strong performance. XIV has added over 400 new customers since the acquisition. t ape revenue declined 20 percent in 2009 versus 2008.
r etail Stores Solutions revenue decreased 25.6 percent (24 percent adjusted for currency) in 2009 versus 2008, reflecting continued weakness in the retail sector.
Microelectronics oeM revenue decreased 15.1 percent (15 percent adjusted for currency), in 2009 versus 2008. a lthough 2009 revenue declined, second half revenue improved significantly over first half performance with performance essentially flat compared to the prior year. t he companys 45 nanometer technology is in production and on track to drive the launch of the poWer 7 systems in 2010.
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
||
s ystems and Technology: |
|
|
|
|
|
|
|
||
e xternal gross profit |
|
$ |
6,127 |
|
$ |
7,341 |
|
(16.5 |
)% |
e xternal gross profit margin |
|
37.8 |
% |
38.1 |
% |
(0.2 |
)pts. |
||
p re-tax income |
|
$ |
1,419 |
|
$ |
1,550 |
|
(8.5 |
)% |
p re-tax margin |
|
8.3 |
% |
7.7 |
% |
0.6 |
pts. |
t he decrease in external gross profit for 2009 versus 2008 was primarily driven by lower revenue.
o verall, gross margin decreased 0.2 points versus the prior year. Margin improvements in s ystem x, converged System p and System z were offset by impacts due to product mix and a margin decline in Microelectronics.
s ystems and Technologys pre-tax income decreased 8.5 percent in 2009 when compared to 2008 driven by lower revenue. p re-tax margin increased 0.6 points in 2009 versus the prior year, reflecting the focus on cost and expense management and improving productivity.
GLOBAL FINANCING
See page 57 for an analysis of Global Financings segment results.
Geographic Revenue
In addition to the revenue presentation by reportable segment, the company also measures revenue performance on a geographic basis. t he following geographic, regional and country-specific revenue performance excludes oeM revenue, which is discussed separately below.
($ in millions)
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
|
|
|
|
|
|
Yr.-to-Yr. |
|
Change Adjusted |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
for Currency |
|
||
t otal revenue: |
|
$ |
95,758 |
|
$ |
103,630 |
|
(7.6 |
)% |
(5.3 |
)% |
Geographies: |
|
$ |
93,477 |
|
$ |
100,939 |
|
(7.4 |
)% |
(5.1 |
)% |
a mericas |
|
40,184 |
|
42,807 |
|
(6.1 |
) |
(5.1 |
) |
||
e urope/Middle e ast/ a frica |
|
32,583 |
|
37,020 |
|
(12.0 |
) |
(5.7 |
) |
||
a sia Pacific |
|
20,710 |
|
21,111 |
|
(1.9 |
) |
(3.7 |
) |
||
|
|
|
|
|
|
|
|
|
|
||
Major markets |
|
|
|
|
|
(8.2 |
)% |
(6.4 |
)% |
||
Growth markets |
|
|
|
|
|
(3.5 |
)% |
1.2 |
% |
||
BrIc countries |
|
|
|
|
|
0.7 |
% |
4.3 |
% |
Geographic revenue decreased 7.4 percent (5 percent adjusted for currency) to $93,477 million in 2009 when compared to 2008, with relatively consistent performance, adjusted for currency, across the geographies. r evenue from the growth markets decreased 3.5 percent (increased 1 percent adjusted for currency) and revenue from the major markets decreased 8.2 percent (6 percent adjusted for currency). While the economic environment slowed globally in 2009, revenue growth, adjusted for currency, in the growth markets remained approximately 8 points higher than the major markets. t he company has been investing to capture the opportunity in the emerging markets as these countries build out their public and private infrastructures. t he growth markets contributed 19 percent of the geographic revenue in 2009, 1 point higher versus 2008. Within the BrIc countries, revenue increased 0.7 percent (4 percent adjusted for currency) led by growth in China, India and Brazil, adjusted for currency.
a mericas revenue decreased 6.1 percent (5 percent adjusted for currency) in 2009. Within the major market countries, the u.s. declined 6.5 percent and c anada decreased 7.1 percent (1 percent adjusted for currency). r evenue in the l atin a merica growth markets decreased 3.4 percent (increased 1 percent adjusted for currency) led by growth in Brazil (increased 3 percent adjusted for currency).
e urope/Middle e ast/ a frica ( eMea ) revenue decreased 12.0 percent (6 percent adjusted for currency) in 2009 when compared to 2008. r evenue decreased in the major market countries with year-to-year declines in the u.K . of 13.6 percent (increased 1 percent adjusted for currency), Germany 10.3 percent (6 percent adjusted for currency), France 11.6 percent (7 percent adjusted for currency), Italy 11.3 percent (7 percent adjusted for currency) and s pain 12.6 percent (8 percent adjusted for currency).
a sia Pacific revenue decreased 1.9 percent (4 percent adjusted for currency) year over year. r evenue in the a sia Pacific growth markets decreased 2.4 percent (increased 3 percent adjusted for currency), led by growth in China and India. c hina revenue increased 10 percent, adjusted for currency, as the company leveraged its broad portfolio to provide comprehensive solutions to clients. India revenue increased 6 percent, adjusted for currency. Japan revenue decreased 1.4 percent (10 percent adjusted for currency).
t he company continues to see growing opportunity globallymuch of which is outside the traditional IT opportunityto help its clients drive efficiency in their physical infrastructures.
oeM revenue of $2,281 million in 2009 declined 15.2 percent (15 percent adjusted for currency) compared to 2008 driven by reduced demand year over year in the technology oeM business. Year-to-year revenue performance improved in this business across the second half of 2009.
t otal Expense and Other Income
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
||
t otal expense and other income |
|
$ |
25,647 |
|
$ |
28,945 |
|
(11.4 |
)% |
e xpense to Revenue |
|
26.8 |
% |
27.9 |
% |
(1.1 |
)pts. |
||
t he key drivers year to year in total expense and other income were approximately:
· o perational expense, (9) points
· c urrency, (4) points
· a cquisitions, 1 point
In 2009, the company continued to execute its operational plan to increase process efficiency and productivity; leveraging the companys scale and global presence. t he companys efforts have been focused on all areas of the businessfrom sales efficiency, supply chain management and service delivery to the global support functions. t he companys cost and expense base (approximately $80 billion) provides ample opportunity for savings and the company yielded approximately $3.7 billion in cost and expense savings in 2009. t he companys initiatives have contributed to an improved operational balance point and the improvements in margins and profit. a s a result, the company is able to continue to invest in capabilities that will differentiate the company in the future and accelerate the development of new market opportunities.
For additional information regarding total expense and other income, see the following analyses by category.
sellIng, geneRAl AnD ADMInIstRAtIVe
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008* |
|
Change |
|
||
s elling, general and administrativebase |
|
$ |
18,056 |
|
$ |
19,967 |
|
(9.6 |
)% |
a dvertising and promotional expense |
|
1,252 |
|
1,259 |
|
(0.6 |
) |
||
Workforce reductions |
|
474 |
|
737 |
|
(35.7 |
) |
||
a mortization expenseacquired intangibles |
|
285 |
|
306 |
|
(6.9 |
) |
||
r etirement-related expense |
|
322 |
|
326 |
|
(1.2 |
) |
||
s tock-based compensation |
|
417 |
|
484 |
|
(13.9 |
) |
||
Bad debt expense |
|
147 |
|
306 |
|
(52.0 |
) |
||
t otal |
|
$ |
20,952 |
|
$ |
23,386 |
|
(10.4 |
)% |
* r eclassified to conform with 2009 presentation.
t otal Selling, general and administrative ( sG&a ) expense decreased 10.4 percent (8 percent adjusted for currency) in 2009 versus 2008. o verall, the decrease was driven by reductions in operational expense (down 9 points) as the company continues to focus on disciplined expense management, while investing for future growth. c urrency impacts also drove a year-to-year decline (down 3 points), partially offset by acquisition-related spending (up 1 point). Workforce reductions expense decreased $264 million, primarily due to actions taken in the fourth quarter of 2008, reflecting workforce actions in Japan ($120 million) and other ongoing skills rebalancing that is a regular element of the companys business model. Bad debt expense decreased $159 million primarily driven by reductions in specific reserve requirements and lower accounts receivable balances in 2009 versus 2008. t he companys accounts receivable provision coverage is 2.0 percent, flat from a year ago.
OTHER (INCOME) AND EXPENSE
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008* |
|
Change |
|
||
Foreign currency transaction (gains)/losses |
|
$ |
(1 |
) |
$ |
328 |
|
NM |
|
Gains on derivative instruments |
|
(12 |
) |
(26 |
) |
(53.4 |
)% |
||
Interest income |
|
(94 |
) |
(343 |
) |
(72.6 |
) |
||
Net losses/(gains) from securities and investment assets |
|
112 |
|
(52 |
) |
NM |
|
||
Net realized gains from certain real estate activities |
|
(5 |
) |
(26 |
) |
(82.6 |
) |
||
Other |
|
(352 |
) |
(179 |
) |
96.8 |
|
||
Total |
|
$ |
(351 |
) |
$ |
(298 |
) |
17.7 |
% |
* Reclassified to conform with 2009 presentation.
n MNot meaningful
Other (income) and expense was income of $351 million in 2009, an increase in income of $53 million year to year. The increase was driven by several key factors: the $298 million gain, reflected in Other, from the core logistics operations divestiture; increased foreign currency transaction gains of $329 million; offset by less interest income of $249 million due to lower rates; less gains from securities transactions of $162 million due to Lenovo equity sales in 2008; and a 2009 loss provision related to a joint venture investment of $119 million, also reflected in Other.
ReseARcH, DeVelopMent AnD engIneeRIng
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
||
r esearch, development and engineering |
|
|
|
|
|
|
|
||
t otal |
|
$ |
5,820 |
|
$ |
6,337 |
|
(8.2 |
)% |
t he company continues to invest in research and development, focusing its investments on high-value, high-growth opportunities. t otal Research, development and engineering ( rd&e ) expense decreased 8.2 percent in 2009 versus 2008; adjusted for currency, expense decreased 6 percent in 2009. t he decrease in spending, adjusted for currency, was driven by continued process efficiencies and reductions in discretionary spending, partially offset by the impact of acquisitions. rd&e investments represented 6.1 percent of total revenue in 2009, flat compared to 2008.
IntellectuAl pRopeRty AnD custoM DeVelopMent IncoMe
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
||
s ales and other transfers of intellectual property |
|
$ |
228 |
|
$ |
138 |
|
65.5 |
% |
l icensing/royalty-based fees |
|
370 |
|
514 |
|
(28.0 |
) |
||
c ustom development income |
|
579 |
|
501 |
|
15.5 |
|
||
t otal |
|
$ |
1,177 |
|
$ |
1,153 |
|
2.1 |
% |
t he timing and amount of sales and other transfers of Ip may vary significantly from period to period depending upon timing of divestitures, industry consolidation, economic conditions and the timing of new patents and know-how development. t here were no significant individual Ip transactions in 2009 or 2008.
InteRest expense
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
Change |
|
||
Interest expense |
|
|
|
|
|
|
|
||
t otal |
|
$ |
402 |
|
$ |
673 |
|
(40.3 |
)% |
t he decrease in interest expense was primarily due to lower debt balances in 2009 versus 2008. t otal debt at d ecember 31, 2009 was $26.1 billion; a decline of $7.8 billion of primarily non-Global Financing debt. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings if the related external borrowings are to support the Global Financing external business. o verall interest expense for 2009 was $1,109 million, a decrease of $353 million versus 2008.
s tock-Based c ompensation
t otal pre-tax stock-based compensation cost of $558 million decreased $101 million compared to 2008. t he decrease was principally the result of a reduction in the level of stock option grants ($159 million), offset by an increase related to restricted and performance-based share units ($58 million). t he year-to-year change was reflected in the following categories: reductions in cost ($22 million), rd&e expense ($12 million), and sG&a expense ($67 million).
s ee note T, Stock-Based Compensation, on pages 105 to 109 for additional information on stock-based incentive awards.
Retirement-Related Benefits
t he following table presents the total pre-tax cost for all retirement-related plans. t hese amounts are included in the Consolidated Statement of Earnings within the category (e.g., cost, sG&a, rd&e ) relating to the job function of the plan participants.
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2009 |
|
2008* |
|
Change |
|
||
d efined benefit and contribution pension plans cost |
|
$ |
1,065 |
|
$ |
1,076 |
|
(1.1 |
)% |
n onpension postretirement plans costs |
|
350 |
|
363 |
|
(3.6 |
) |
||
t otal |
|
$ |
1,415 |
|
$ |
1,439 |
|
(1.7 |
)% |
* r eclassified to conform with 2009 presentation.
o verall retirement-related benefit costs decreased $24 million versus 2008. t otal plan costs decreased $142 million year-to-year, driven by lower defined contribution plans cost of $160 million compared to 2008. t his decrease was offset by higher costs for mandatory pension insolvency insurance coverage. d uring the year ended d ecember 31, 2009, the company paid $140 million for mandatory pension insolvency insurance coverage in certain non- u.s. countries, an increase year to year of $117 million driven primarily by premiums paid in Germany. While not related to the IBM Plans, all companies with plans in Germany and several other countries are subject to these charges.
r etirement-related plan costs decreased approximately $16 million in cost, $4 million in SG&A expense and $3 million in rd&e expense.
s ee note U, Retirement-Related Benefits, on pages 109 through 121 for additional information on these plans and the factors driving the year-to-year change in total cost.
Acquired Intangible Asset Amortization
t he company has been investing in targeted acquisitions to increase its capabilities in higher value businesses. t he following table presents the total acquired intangible asset amortization included in the Consolidated Statement of Earnings. s ee note J, Intangible Assets Including Goodwill, on pages 89 and 90 for additional information.
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
Yr.-to-Yr.
|
|
||
c ost: |
|
|
|
|
|
|
|
||
s oftware (Sales) |
|
$ |
160 |
|
$ |
173 |
|
(7.5 |
)% |
Global Technology Services (Services) |
|
33 |
|
32 |
|
2.2 |
|
||
s ystems and Technology (Sales) |
|
11 |
|
8 |
|
27.0 |
|
||
s elling, general and administrative expense |
|
285 |
|
306 |
|
(6.9 |
) |
||
t otal |
|
$ |
489 |
|
$ |
520 |
|
(6.0 |
)% |
Income Taxes
t he effective tax rate for 2009 was 26.0 percent, compared with 26.2 percent in 2008. The 0.2 point decrease was primarily driven by a more favorable geographic mix of pre-tax income, the absence of the 2008 tax cost impacts associated with the intercompany transfer of certain intellectual property and the agreements reached regarding the completion of the u.s. federal income tax examination for the years 2004 and 2005, including the associated income tax reserve redeterminations. t hese benefits were offset by a decrease in 2009 in the utilization of foreign tax credits.
e arnings Per Share
Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. d ilutive potential common shares include outstanding stock options, share awards and convertible notes.
For the year ended December 31: |
|
2009 |
|
2008 |
|
Yr.-to-Yr.
|
|
||
e arnings per share of common stock: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
$ |
10.01 |
|
$ |
8.89 |
* |
12.6 |
% |
Basic |
|
$ |
10.12 |
|
$ |
9.02 |
* |
12.2 |
% |
Weighted-average shares outstanding (in millions): |
|
|
|
|
|
|
|
||
Assuming dilution |
|
1,341.4 |
|
1,387.8 |
* |
(3.3 |
)% |
||
Basic |
|
1,327.2 |
|
1,369.4 |
* |
(3.1 |
)% |
* r eflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. s ee note B, Accounting Changes, on pages 79 to 82 for additional information.
Actual shares outstanding at d ecember 31, 2009 and d ecember 31, 2008 were 1,305.3 million and 1,339.1 million, respectively. t he average number of common shares outstanding assuming dilution was 46.4 million shares lower in 2009 versus 2008. t he decrease was primarily the result of the common stock repurchase program. s ee note N, Equity Activity, on pages 98 and 99 for additional information regarding common stock activities. a lso see note R, Earnings Per Share of Common Stock, on page 104.
Financial Position
Dynamics
At December 31, 2009, the companys balance sheet and liquidity position remain strong. Cash on hand at year end was $12,183 million. Total debt of $26,099 million decreased $7,826 million from prior year-end levels, primarily as a result of the repayment of debt issued in support of the 2007 accelerated share repurchase program. The commercial paper balance at December 31, 2009 was $235 million, down $233 million from December 31, 2008. In 2009, the company generated $20,773 million in cash from operations, an increase of $1,961 million compared to 2008. The company has consistently generated strong cash flow from operations and continues to have access to additional sources of liquidity through the capital markets and its $10 billion global credit facility.
Consistent with accounting standards, the company remeasures the funded status of its retirement and postretirement plans at December 31. The funded status is measured as the difference between the fair value of the plan assets and the benefit obligation and is recognized in the Consolidated Statement of Financial Position. At December 31, 2009, primarily as a result of improved returns on plan assets, the overall net underfunded position decreased $4,667 million from December 31, 2008, to a net underfunded position of $13,818 million. This change is primarily reflected in prepaid pension assets and retirement and nonpension postretirement benefit obligations which increased $1,401 million and decreased $3,500 million, respectively, from year-end 2008 levels. Due to the improvement in the equity markets in 2009, the return on the U.S. Personal Pension Plan assets was 11 percent, compared to a negative 15 percent in 2008. The companys asset return in the non-U.S. plans was approximately 14 percent compared to a negative 21 percent in 2008. At December 31, 2009, the companys qualified defined benefit plans worldwide were 99 percent funded with the U.S. qualified Personal Pension Plan 101 percent funded.
In addition, total equity increased $9,170 million, net of tax, primarily as a result of an improvement in retained earnings of $10,546 million driven by current year net income, partially offset by net stock transactions which declined $4,390 million primarily due to common stock repurchases.
The assets and debt associated with the Global Financing business are a significant part of the companys financial position. The financial position amounts appearing on page 65 are the consolidated amounts including Global Financing. The amounts appearing in the separate Global Financing section on pages 57 through 61 are supplementary data presented to facilitate an understanding of the Global Financing business.
Working Capital
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
c urrent assets |
|
$ |
48,935 |
|
$ |
49,004 |
|
c urrent liabilities |
|
36,002 |
|
42,435 |
|
||
Working capital |
|
$ |
12,933 |
|
$ |
6,568 |
|
c urrent ratio |
|
1.36 |
|
1.15 |
|
Working capital increased $6,365 million compared to the prior year primarily as a result of a net decrease in current liabilities. The key drivers are described below:
Current assets decreased $68 million due to:
· a n increase of $1,066 million in cash and cash equivalents and marketable securities (see Cash Flow analysis below and on page 36); partially offset by;
· a decrease of $1,541 million in short-term receivables, offset by a currency benefit of $779 million, driven by short-term financing receivables due to lower volumes;
· a decrease of $353 million in prepaid expenses and other current assets primarily resulting from:
· a decrease of $500 million in derivative assets as a result of changes in foreign currency rates primarily driven by instruments in cash flow hedging relationships; partially offset by;
· an increase of approximately $236 million in services pre-paid and deferred transition costs; and
· a currency benefit of $135 million.
Current liabilities decreased $6,433 million as a result of:
· a decrease in short-term debt of $7,068 million primarily driven by:
· $12,123 million in payments; partially offset by;
· reclasses of $2,282 million from long-term to short-term debt to reflect maturity dates; and
· $3,502 million in new debt issuances.
· a decrease of $1,357 million in other accrued expenses and liabilities primarily due to:
· a decrease of $508 million in derivative liabilities as a result of changes in foreign currency rates primarily for certain economic hedges;
· a decrease of $349 million in workforce reduction accruals; and
· a decrease of $218 million in deferred tax liabilities; partially offset by;
· a n increase of $1,083 million in taxes payable as a result of a reclass from noncurrent liabilities related to uncertain tax benefits and higher pre-tax income;
· a n increase of $606 million in deferred income mainly driven by a currency impact of approximately $329 million; and
· a n increase of $423 million in accounts payable including a currency impact of $131 million.
c ash Flow
t he companys cash flow from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 66, is summarized in the following table. These amounts include the cash flows associated with the Global Financing business.
($ in millions)
For the year ended December 31: |
|
|
|
2009 |
|
2008 |
|
||
Net cash provided by/ (used in): |
|
|
|
|
|
||||
Operating activities |
|
|
|
$ |
20,773 |
|
$ |
18,812 |
|
Investing activities |
|
|
|
(6,729 |
) |
(9,285 |
) |
||
Financing activities |
|
|
|
(14,700 |
) |
(11,834 |
) |
||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
98 |
|
58 |
|
||
Net change in cash and cash equivalents |
|
|
|
$ |
(558 |
) |
$ |
(2,250 |
) |
Net cash from operating activities for 2009 increased $1,961 million as compared to 2008 driven by the following key factors:
· An increase in cash provided by accounts receivable of $1,857 million, driven by Global Financing receivables due to lower volumes in 2009;
· Lower payments resulted in a benefit in accounts payable of $1,030 million year to year;
· Tax refunds of approximately $710 million; partially offset by:
· Higher retirement-related funding of $875 million;
· Derivative instruments in cash flow hedging relationships representing a use of cash of $247 million in the current year in comparison to a source of cash of $176 million in 2008; and
· Higher payments for workforce rebalancing actions of $377 million.
Net cash used in investing activities decreased $2,556 million on a year-to-year basis driven by:
· A decrease of $5,119 million in cash used for acquisitions primarily driven by the acquisition of Cognos in 2008;
· A decrease in cash used in net capital spending of $704 million driven by a decline in rental additions and lower investment requirements in the Strategic Outsourcing and Microelectronics businesses; and
· An increase in cash from divestitures of $329 million as a result of the Geodis transaction in 2009; partially offset by:
· The net impact of purchases and sales of marketable securities and other investments that resulted in a use of cash of $2,005 million in the current year in comparison to a source of cash in 2008 of $1,510 million.
Net cash used in financing activities increased $2,866 million compared to 2008 as a result of:
· An increase of $5,019 million in net cash payments used to retire debt;
· A decrease of $721 million in cash generated by other common stock transactions primarily due to lower stock option exercises; partially offset by:
· Lower common stock repurchases of $3,150 million.
Within total debt, on a net basis, the company utilized $7,463 million in net cash to retire debt versus $2,444 million in net cash used in 2008. The net cash used to retire debt in 2009 was comprised of: $13,495 million in cash payments to settle debt and net payments of $651 million in short-term borrowings, partially offset by $6,683 million of new debt issuances. See note K, Borrowings, on pages 90 to 92 for a listing of the companys debt securities.
Noncurrent Assets and Liabilities
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Noncurrent assets |
|
$ |
60,087 |
|
$ |
60,520 |
|
Long-term debt |
|
$ |
21,932 |
|
$ |
22,689 |
|
Noncurrent liabilities (excluding debt) |
|
$ |
28,334 |
|
$ |
30,815 |
* |
* Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
The decrease in noncurrent assets of $433 million compared to the prior year-end balance was primarily driven by:
· A decrease of $3,075 million in deferred taxes primarily driven by pension related activity;
· A decrease of $904 million in long-term financing receivables, offset by a currency benefit of $365 million, driven by maturities exceeding originations; and
· A decrease of $365 million in intangible assets driven by amortization; partially offset by:
· An increase of $1,964 million in goodwill primarily driven by a currency impact of $1,035 million and the acquisition of SPSS; and
· An increase of $1,401 million in pension assets mainly driven by plan contributions and pension remeasurements.
Long-term debt decreased $758 million primarily due to reclasses to short-term debt as certain instruments approached maturity ($2,282 million); offset by new net debt issuances ($1,885 million).
Other noncurrent liabilities, excluding debt, decreased $2,481 million primarily driven by:
· A decrease of $3,500 million in retirement and nonpension postretirement benefit obligations primarily driven by pension remeasurements and plan contributions; partially offset by:
· An increase in deferred income of $392 million including a currency impact of $117 million;
· An increase in executive compensation plan accruals of $300 million primarily due to improvement in market returns; and
· An increase of $200 million in deferred tax liabilities.
Debt
The companys funding requirements are continually monitored and strategies are executed to manage the overall asset and liability profile.
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Total company debt |
|
$ |
26,099 |
|
$ |
33,926 |
|
Total Global Financing segment debt: |
|
$ |
22,383 |
|
$ |
24,360 |
|
Debt to support external clients |
|
19,091 |
|
20,892 |
|
||
Debt to support internal clients |
|
3,292 |
|
3,468 |
|
The Global Financing business provides funding predominantly for the companys external client assets as well as for certain assets under contract by other IBM units. These assets, primarily for Global Services, generate long-term, stable revenue streams similar to the Global Financing asset portfolio. Based on their nature, these Global Services assets are leveraged consistent with the balance of the Global Financing asset base. The debt analysis above is further detailed in the Global Financing section on page 60.
Total debt decreased $7,826 million in 2009 versus 2008, primarily as a result of the repayment of debt issued in support of the 2007 accelerated share repurchase program.
Given the significant leverage, the company presents a debt-to-capitalization ratio which excludes Global Financing debt and equity as management believes this is more representative of the companys core business operations. This ratio can vary from period to period as the company manages its global cash and debt positions.
Core debt-to-capitalization ratio (excluding Global Financing debt and equity) was 16.0 percent at December 31, 2009 compared to 48.7 percent at December 31, 2008. The reduction was primarily driven by the decrease in non-Global Financing debt of $5,849 million and growth in non-Global Financing equity of $9,493 million from December 31, 2008 balances.
Consolidated debt-to-capitalization ratio at December 31, 2009 was 53.4 percent versus 71.4 percent at December 31, 2008.
Equity
($ in millions)
At December 31: |
|
2009 |
|
2008* |
|
||
Equity |
|
|
|
|
|
||
Total |
|
$ |
22,755 |
|
$ |
13,584 |
|
* Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
Total equity increased $9,170 million in 2009 as a result of several key factors:
· An increase of $10,546 million in retained earnings primarily driven by net income of $13,425 million, partially offset by dividends ($2,860 million); and
· An increase of $3,015 million as a result of lower accumulated other comprehensive income/(loss), primarily from a positive impact from foreign currency translation adjustments of $1,732 million, in addition to pension remeasurements and other retirement-related activities of $1,727 million; partially offset by deferred losses from hedging programs in the current year of $481 million in comparison to deferred gains of $74 million in 2008; partially offset by:
· A decrease related to net stock transactions of $4,390 million, driven by less common stock repurchases in 2009 versus 2008.
Consolidated Fourth-Quarter Results
($ and shares in millions except per share amounts)
For the fourth quarter: |
|
2009 |
|
2008 |
|
Yr.-to-Yr.
|
|
||
Revenue |
|
$ |
27,230 |
|
$ |
27,006 |
|
0.8 |
%* |
Gross profit margin |
|
48.3 |
% |
47.9 |
% |
0.4 |
pts. |
||
Total expense and other income |
|
$ |
6,765 |
|
$ |
7,127 |
|
(5.1 |
)% |
Total expense and other income-to-revenue ratio |
|
24.8 |
% |
26.4 |
% |
(1.5 |
)pts. |
||
Income before income taxes |
|
$ |
6,381 |
|
$ |
5,808 |
|
9.9 |
% |
Provision for income taxes |
|
1,568 |
|
1,382 |
|
13.5 |
% |
||
Net income |
|
$ |
4,813 |
|
$ |
4,427 |
|
8.7 |
% |
Net income margin |
|
17.7 |
% |
16.4 |
% |
1.3 |
pts. |
||
Earnings per share of common stock: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
$ |
3.59 |
|
$ |
3.27 |
+ |
9.8 |
% |
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
1,340.7 |
|
1,353.7 |
+ |
(1.0 |
)% |
* (5.5) percent adjusted for currency.
+ Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, Accounting Changes, on pages 79 to 82 for additional information.
The fourth quarter capped off a great year for the company in an uncertain economic environment with financial performance driven by continued margin expansion, profit growth and cash generation. Total revenue increased 0.8 percent as reported and decreased 5.5 percent, adjusted for currency, versus the fourth quarter of 2008. Systems and Technology year-to-year revenue growth improved sequentially in the quarter with share gains in System p, System x and Storage. Software had share gains in WebSphere, Tivoli and Key Branded Middleware. Global Services revenue adjusted for currency, was consistent with third-quarter performance while signings and backlog both increased year to year. Gross profit margin expanded 40 basis points primarily due to improved margins in services and systems as the companys productivity initiatives continued to yield improvements in gross margin. The company has improved gross margin in 21 of the last 22 quarters. Total expense and other income decreased 5.1 percent driven by operational expense management. Pre-tax income increased 9.9 percent and pre-tax margin improved 1.9 points versus the fourth-quarter 2008. Pre-tax profit increased and margins expanded in every segment. Net income increased 8.7 percent and diluted earnings per share of $3.59 increased 9.8 percent year to year.
The Global Services segments combined had $14,630 million of revenue in the fourth quarter, an increase of 2.1 percent (decrease of 5 percent adjusted for currency) and delivered pre-tax profit of $2,322 million, an increase of 6.7 percent year to year. Total signings for Global Services in the fourth quarter were $18,763 million, an increase of 9.0 percent (2 percent adjusted for currency) versus 2008. Signings in the quarter included 22 deals larger than $100 million. Outsourcing signings of $11,385 million increased 15.0 percent (8 percent adjusted for currency). Consulting and Systems Integration and Integrated Technology Services signings increased 1.0 percent (decreased 6 percent adjusted for currency) to $7,378 million.
GTS revenue of $10,051 million increased 4.4 percent (decreased 3 percent adjusted for currency) versus the fourth quarter of 2008. GTS signings of $11,350 million increased 2.8 percent (decreased 4 percent adjusted for currency) with outsourcing signings increasing 4.7 percent (decreased 1 percent adjusted for currency), partially offset by a 2.9 percent decrease (10 percent adjusted for currency) in Integrated Technology Services signings. SO revenue increased 5.6 percent (decreased 2 percent adjusted for currency). SO signings decreased 9.9 percent (16 percent adjusted for currency). ITS revenue increased 0.2 percent (decreased 7 percent adjusted for currency). Revenue performance largely reflects signings performance which continued to be impacted by declines in OEM as the portfolio shifts to higher value offerings. ITS signings continued to be impacted by client deferrals and capital constraints. BTO revenue increased 7.0 percent (1 percent adjusted for currency) and signings increased 132.9 percent (124 percent adjusted for currency).
GTS gross profit margin improved 0.9 points to 35.8 percent with margin expansion in all lines of business. The GTS segment fourth-quarter pre-tax profit was up 8.3 percent and the pre-tax margin improved 60 basis points to 15.0 percent from fourth-quarter 2008.
GBS revenue of $4,579 million decreased 2.8 percent (9 percent adjusted for currency) compared to the fourth-quarter 2008. GBS signings of $7,413 million, increased 20.3 percent (13 percent adjusted for currency), driven by a 65.4 percent increase (55 percent adjusted for currency) in Application Outsourcing signings. Consulting and Systems Integration signings increased 3.4 percent (decreased 3 percent adjusted for currency) in the quarter, a significant improvement compared to third-quarter 2009. In the fourth quarter, small deal performance improved as the quarter progressed, general business and distribution sectors grew and the growth markets were up 34 percent, adjusted for currency.
GBS gross profit increased 2.9 percent in the quarter with the gross margin improving 1.7 points to 30.3 percent. The GBS segment pre-tax profit increased 3.5 percent in the fourth quarter and the pre-tax margin expanded 1.1 points to 16.0 percent, a record margin performance for the segment. Pre-tax margin was driven by strong utilization in the delivery centers, good subcontractor resource management and spending management.
Software revenue of $6,577 million increased 2.4 percent (decreased 4 percent adjusted for currency). Revenue performance highlighted continued strength in demand in the growth markets, strong contributions from recent acquisitions and an increase in the volume of small deal activity in North America. Key Branded Middleware increased 6.1 percent (flat adjusted for currency) and represented 63 percent of total software revenue, an increase of 2 points year to year. WebSphere Family revenue increased 12.9 percent (6 percent adjusted for currency) in the quarter. Business Process Management, Commerce and DataPower products all had double-digit revenue growth. ILOG performed well again this quarter and contributed to the overall WebSphere growth. Information Management increased 7.1 percent (1 percent adjusted for currency). Business Analytics continues to be a key growth area and Cognos posted strong double-digit revenue growth in the quarter. InfoSphere Warehouse, which helps customers turn information into a strategic asset, also grew double digits in the quarter. Tivoli software revenue increased 7.2 percent (1 percent adjusted for currency). Enterprise Asset Management, which is part of the Smarter Planet strategy, grew over 40 percent in the growth markets, adjusted for currency. Tivoli storage continued its strong growth as customers manage their rapidly growing storage data. Data Protection and Storage Management had double-digit revenue growth, with broad-based geography and sector growth. Rational revenue decreased 4.5 percent (10 percent adjusted for currency) and Lotus revenue decreased 5.3 percent (11 percent adjusted for currency).
Software gross profit increased 2.4 percent with a flat margin year to year. The Software segment delivered pre-tax profit of $3,058 million, an increase of 9.6 percent. The pre-tax margin of 41.5 percent increased 2.4 points compared to fourth-quarter 2008.
Systems and Technology revenue of $5,190 million decreased 4.3 percent (9 percent adjusted for currency). The rate of year-to-year decline improved sequentially for the second consecutive quarter. System z revenue decreased 26.8 percent (31 percent adjusted for currency). System z MIPS shipments decreased 19 percent year to year. Volume performance was consistent with expectations for this point in the product cycle. Converged System p revenue declined 13.8 percent (18 percent adjusted for currency). Although revenue has declined, the brand has continued to gain market share, up 4 points in the quarter. In the fourth quarter, sales generated by UNIX competitive displacements was approximately $200 million. System x revenue increased 36.8 percent (30 percent adjusted for currency), with share gains in server (3 points) and blades (6 points). The improved sales model and enhanced product offerings were the key contributors to the fourth quarter performance. Systems Storage revenue increased 1.4 percent (decreased 4 percent adjusted for currency). Total disk revenue increased 6.1 percent (1 percent adjusted for currency) driven by strong growth in midrange and XIV. Tape revenue declined 9.8 percent (15 percent adjusted for currency) versus the fourth quarter of 2008. Microelectronics OEM revenue increased 1.9 percent in the fourth quarter. The companys 300 millimeter fabrication facility is nearing full utilization and the 45 nanometer process output was sold out again this quarter.
Systems and Technology gross margin of 42.5 percent, increased 2.6 points versus the fourth quarter of 2008 with margin improvement in all brands. This was the highest gross profit margin since the fourth quarter of 2007 and was driven by improvements in System x server and converged System p. The Systems and Technology segment pre-tax profit increased 15.3 percent to $832 million. Pre-tax margin increased 2.6 points to 15.4 percent compared to the fourth quarter of 2008.
Global Financing external revenue of $621 million decreased 5.9 percent (12 percent adjusted for currency), driven by decreased financing revenue. The Global Financing segment delivered 2.0 points of external gross margin improvement and 5.5 points of total pre-tax margin expansion in the fourth quarter of 2009.
Geographic revenue increased 0.7 percent (decreased 6 percent adjusted for currency) with declines in all geographies, adjusted for currency. Revenue in the major markets decreased 2.2 percent (7 percent adjusted for currency) and was 1 point weaker than third quarter performance, adjusted for currency. The U.K. had solid growth and revenue performance improved sequentially in Canada and Japan (adjusted for currency). Revenue in the growth markets increased 14.3 percent (2 percent adjusted for currency), 9 points higher than the major markets, adjusted for currency. The growth markets contributed 20 percent of the geographic revenue in the fourth quarter. The BRIC countries were up 18.4 percent (7 percent adjusted for currency) driven by India, Brazil and China. Americas revenue was $11,106 million, a decrease of 3.0 percent (6 percent adjusted for currency). Adjusted for currency, revenue increased 2 percent in Latin America, while the U.S. declined 8 percent and Canada declined 1 percent. EMEA revenue increased 2.4 percent (decreased 7 percent adjusted for currency) to $9,694 million. In the major market countries, when adjusted for currency, revenue in Germany declined 8 percent, France declined 12 percent, Italy declined 11 percent and Spain declined 11 percent while the U.K. was up 4 percent. Asia Pacific revenue increased 5.7 percent (decreased 3 percent adjusted for currency) to $5,782 million, with the growth markets up 14.3 percent (3 percent adjusted for currency) and Japan down 2.8 percent (9 percent adjusted for currency).
Total expense and other income decreased 5.1 percent compared to the fourth quarter of 2008 and the expense-to-revenue-ratio improved 1.5 points. The decrease was driven by lower operational expenses (approximately 15 points), partially offset by 9 points due to the impact of currency and 1 point due to the impact of acquisitions. The company continues to execute its operational plan to increase efficiency and drive productivity by leveraging its scale and global presence. Initiatives such as globalization of support functions and services delivery and workforce balancing have yielded significant expense and cost savings. Within selling, general and administrative expense, workforce reduction charges decreased approximately $340 million in the fourth quarter.
The companys effective tax rate in the fourth-quarter 2009 was 24.6 percent compared with 23.8 percent in the fourth quarter of 2008. The higher rate was primarily driven by higher utilization of tax credits in the prior year.
Share repurchases totaled $3,128 million in the fourth quarter. The weighted-average number of diluted common shares outstanding in the fourth quarter of 2009 was 1,340.7 million compared with 1,353.7 million in the fourth quarter of 2008.
The company ended the quarter with $12,183 million of cash and cash equivalents and generated $6,448 million in cash flow provided by operating activities driven primarily by net income. Net cash from investing activities was a use of cash of $2,495 million in fourth quarter of 2009 and Net cash from financing activities was a use of cash of $1,206 million.
Prior Year in Review
The Prior Year in Review section provides a summary of the companys financial performance in 2008 as compared to 2007. For a detailed discussion of 2008 performance, see the 2008 Annual Report.
($ and shares in millions except per share amounts)
For the year ended December 31: |
|
2008 |
|
2007 |
|
Yr.-to-Yr.
|
|
||
Revenue |
|
$ |
103,630 |
|
$ |
98,786 |
|
4.9 |
%* |
Gross profit margin |
|
44.1 |
% |
42.2 |
% |
1.8 |
pts. |
||
Total expense and other income |
|
$ |
28,945 |
|
$ |
27,240 |
|
6.3 |
% |
Total expense and other income-to-revenue ratio |
|
27.9 |
% |
27.6 |
% |
0.4 |
pts. |
||
Income from continuing operations before income taxes |
|
$ |
16,715 |
|
$ |
14,489 |
|
15.4 |
% |
Provision for income taxes |
|
4,381 |
|
4,071 |
|
7.6 |
% |
||
Income from continuing operations |
|
$ |
12,334 |
|
$ |
10,418 |
|
18.4 |
% |
Net income |
|
$ |
12,334 |
|
$ |
10,418 |
|
18.4 |
% |
Net income margin |
|
11.9 |
% |
10.5 |
% |
1.4 |
pts. |
||
Earnings per share of common stock: |
|
|
|
|
|
|
|
||
Assuming dilution: |
|
|
|
|
|
|
|
||
Continuing operations |
|
$ |
8.89 |
+ |
$ |
7.15 |
+ |
24.3 |
% |
Discontinued operations |
|
|
|
(0.00 |
) |
NM |
|
||
Total |
|
$ |
8.89 |
+ |
$ |
7.15+ |
|
24.3 |
% |
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
||
Assuming dilution |
|
1,387.8 |
+ |
1,456.9 |
+ |
(4.7 |
)% |
||
Assets** |
|
$ |
109,524 |
|
$ |
120,431 |
|
(9.1 |
)% |
Liabilities** |
|
$ |
95,939 |
++ |
$ |
91,816 |
++ |
4.5 |
% |
Equity** |
|
$ |
13,584 |
++ |
$ |
28,615 |
++ |
(52.5 |
)% |
* 2.3 percent adjusted for currency.
** At December 31.
+ Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, Accounting Changes, on pages 79 to 82 for additional information.
++ Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information
NMNot meaningful
Continuing Operations
In 2008, the company performed extremely well in a difficult economic environment, delivering record levels of revenue, pre-tax profit, earnings per share and cash flow from operations. The financial performance reflected the continuing strength of the companys global model and the results of the ongoing transformation of the business. The key elements of the companys transformation include:
· A continuing shift to higher value businesses;
· Investing for growth in the emerging markets;
· Global integration;
· Investing in innovation; and
· Ongoing productivity resulting in higher profit margins.
Overall, the company capitalized on the opportunities in the global economies, generating approximately 65 percent of its revenue outside the U.S., in delivering full-year growth of 4.9 percent (2 percent adjusted for currency). Revenue increased in all geographies, both on an as reported basis and adjusted for currency the revenue performance, adjusted for currency, was stable throughout the year as the company focused on solutions that meet clients needs. Revenue from the growth markets organization increased 9.8 percent (10 percent adjusted for currency). In these markets, where the growth was driven by the infrastructure build-out, the company invested aggressively to capture these opportunities. For the full year, growth in these markets, adjusted for currency, was 8 points greater than the major markets.
Gross profit margins improved, reflecting the shift to higher value businesses, pricing for value and the continued focus on productivity and cost management. Pre-tax income from continuing operations grew 15.4 percent and net income from continuing operations increased 18.4 percent reflecting an improvement in the tax rate. Diluted earnings per share improved 24.3 percent reflecting the strong growth in net income and the benefits of the common stock repurchase program. In 2008, the company repurchased approximately 90 million shares of its common stock.
The increase in 2008 revenue was primarily due to:
· Continued strong performance from Global Technology Services and Global Business Services with growth in all business lines and geographic units;
· Continued strong demand in the Software business, driven by Key Branded Middleware products, with strong contributions from strategic acquisitions; and
· Continued strength in the growth markets.
The increase in income from continuing operations before income taxes in 2008 was primarily due to the revenue growth and gross profit margin improvements in the Global Services and Software segments.
The following is an analysis of the 2008 versus 2007 reportable segment results for Global Services, Systems and Technology and Software. The Global Financing segment analysis is included in the Global Financing section on pages 57 through 61.
Global Services
($ in millions)
For the year ended December 31: |
|
2008 |
|
2007 |
|
Yr.-to-Yr.
|
|
Yr.-to-Yr.
|
|
||
Global Services external revenue: |
|
$ |
58,891 |
|
$ |
54,144 |
|
8.8 |
% |
5.6 |
% |
Global Technology Services: |
|
$ |
39,264 |
|
$ |
36,103 |
|
8.8 |
% |
5.8 |
% |
Strategic Outsourcing |
|
20,183 |
|
18,701 |
|
7.9 |
|
4.7 |
|
||
Integrated Technology Services |
|
9,283 |
|
8,438 |
|
10.0 |
|
7.5 |
|
||
Business Transformation Outsourcing |
|
2,550 |
|
2,294 |
|
11.2 |
|
11.9 |
|
||
Maintenance |
|
7,250 |
|
6,670 |
|
8.7 |
|
5.1 |
|
||
Global Business Services |
|
$ |
19,628 |
|
$ |
18,041 |
|
8.8 |
% |
5.2 |
% |
Global Technology Services revenue increased 8.8 percent (6 percent adjusted for currency) in 2008 versus 2007 with strong performance across all lines of business. Total signings in GTS of $34,693 million increased 1 percent (flat adjusted for currency) led by Integrated Technology Services (ITS) signings growth of 5 percent (4 percent adjusted for currency). Outsourcing signings decreased 1 percent (2 percent adjusted for currency).
Strategic Outsourcing (SO) revenue was up 7.9 percent (5 percent adjusted for currency) with growth in all geographies, driven by prior years signings and continued growth in the base accounts. SO signings in 2008 increased 3 percent (1 percent adjusted for currency) when compared to 2007. Signings were very strong in the fourth quarter (up 20 percent), as clients focused on the value of the SO offerings in the current environment. The initiatives around standardization, global integration and improved efficiency are driving improvements in quality and customer satisfaction which are reflected in the signings performance and in improved profitability.
ITS revenue increased 10.0 percent (7 percent adjusted for currency) in 2008 versus 2007 led by growth in key infrastructure offerings such as Green Data Center and Converged Communications. ITS infrastructure offerings deliver high-value, standardized, asset-based services that leverage the companys services, systems and software capabilities, providing clients end-to-end solutions and processes that transform their businesses.
Business Transformation Outsourcing (BTO) revenue increased 11.2 percent (12 percent adjusted for currency) with growth in all geographies, led by Asia Pacific. The Daksh business, which is focused on business process outsourcing, delivered strong growth. BTO signings decreased 18 percent (14 percent adjusted for currency) in 2008 compared to 2007.
Maintenance revenue increased 8.7 percent (5 percent adjusted for currency) with growth in availability services on both IBM and non-IBM IT equipment.
Global Business Services (GBS) revenue increased 8.8 percent (5 percent adjusted for currency) in 2008, with balanced growth across all three geographies. Revenue performance was led by growth in Application Management Services (12.5 percent) and Core Consulting (6.1 percent). Total signings of $22,488 million increased 2 percent (decreased 1 percent adjusted for currency), led by a 10 percent (6 percent adjusted for currency) growth in Consulting and Systems Integration signings. Growth was driven by offerings that enable clients to reduce cost and conserve capital. In the second half of the year, signings for transformational and compliance offerings also increased. Application Outsourcing signings decreased 14 percent (16 percent adjusted for currency) year over year.
($ in millions)
For the year ended December 31: |
|
2008 |
|
2007 |
|
Yr.-to-Yr.
|
|
||
Global services: |
|
|
|
|
|
|
|
||
Global Technology Services: |
|
|
|
|
|
|
|
||
External gross profit |
|
$ |
12,802 |
|
$ |
10,800 |
|
18.5 |
% |
External gross profit margin |
|
32.6 |
% |
29.9 |
% |
2.7 |
pts. |
||
Pre-tax income |
|
$ |
4,607 |
|
$ |
3,557 |
|
29.5 |
% |
Pre-tax margin |
|
11.3 |
% |
9.4 |
% |
1.9 |
pts. |
||
Global Business Services: |
|
|
|
|
|
|
|
||
External gross profit |
|
$ |
5,238 |
|
$ |
4,240 |
|
23.5 |
% |
External gross profit margin |
|
26.7 |
% |
23.5 |
% |
3.2 |
pts. |
||
Pre-tax income |
|
$ |
2,681 |
|
$ |
2,064 |
|
29.9 |
% |
Pre-tax margin |
|
13.0 |
% |
10.7 |
% |
2.2 |
pts. |
GTS gross profit increased 18.5 percent compared to 2007, with gross profit margin improving 2.7 points. All lines of business delivered gross margin expansion year over year driven by a combination of a mix to higher value offerings and an improved cost structure. Segment pre-tax profit increased 29.5 percent to $4,607 million with a pre-tax margin of 11.3 percent, an increase of 1.9 points versus 2007. At year-end 2008, GTS had delivered six consecutive quarters of double-digit pre-tax profit growth. The margin improvement was driven primarily by a delivery structure that maximizes utilization and flexibility, a mix to higher value offerings, lower retirement-related costs and improved productivity.
GBS gross profit increased 23.5 percent to $5,238 million in 2008 when compared to 2007, and the gross profit margin improved 3.2 points. Segment pre-tax profit increased 29.9 percent to $2,681 million with a pre-tax margin of 13.0 percent, an improvement of 2.2 points year over year. This was the third straight year of profit growth greater than 20 percent in GBS and demonstrates the results of a strong operating discipline and the benefits of a globally integrated operating model. The margin expansion was driven by improved utilization, cost and expense management, stable pricing and lower retirement-related costs.
At December 31, 2008, the estimated Global Services backlog at actual currency rates was $130 billion ($117 billion adjusted for currency), a decrease of $6 billion ($2 billion adjusted for currency) from prior year-end levels.
Software
($ in millions)
For the year ended December 31: |
|
2008 |
|
2007 |
|
Yr.-to-Yr.
|
|
Yr.-to-Yr.
|
|
||
Software external revenue: |
|
$ |
22,089 |
|
$ |
19,982 |
|
10.5 |
% |
8.1 |
% |
Middleware |
|
$ |
17,305 |
|
$ |
15,505 |
|
11.6 |
% |
9.5 |
% |
Key Branded Middleware |
|
12,383 |
|
10,827 |
|
14.4 |
|
12.5 |
|
||
WebSphere Family |
|
|
|
|
|
6.2 |
|
4.5 |
|
||
Information Management |
|
|
|
|
|
24.5 |
|
22.0 |
|
||
Lotus |
|
|
|
|
|
10.4 |
|
7.8 |
|
||
Tivoli |
|
|
|
|
|
2.9 |
|
2.1 |
|
||
Rational |
|
|
|
|
|
13.2 |
|
11.6 |
|
||
Other middleware |
|
4,922 |
|
4,678 |
|
5.2 |
|
2.6 |
|
||
Operating systems |
|
2,337 |
|
2,319 |
|
0.8 |
|
(1.9 |
) |
||
Product Lifecycle Management |
|
960 |
|
1,051 |
|
(8.6 |
) |
(14.4 |
) |
||
Other |
|
1,488 |
|
1,107 |
|
34.4 |
|
31.3 |
|
Software revenue of $22,089 million increased 10.5 percent (8 percent adjusted for currency) in 2008 led by growth in the Key Branded Middleware products and strong contributions from the annuity base and acquisitions. Clients continue to embed the companys software in the fabric of their IT infrastructures.
Key Branded Middleware revenue increased 14.4 percent (12 percent adjusted for currency) and represented 56 percent of total Software segment revenue, an increase of 2 points from 2007. When adjusted for currency, growth in 2008 was led by Information Management, Rational and Lotus. Strategic acquisitions, including Cognos and Telelogic, have extended the segments middleware capabilities.
WebSphere Family revenue increased 6.2 percent (5 percent adjusted for currency) in 2008 and was led by growth in WebSphere Application Servers and WebSphere Business Integration software. In December 2008, the company completed the acquisition of ILOG, whose products help customers improve business decisions with optimization, visualization and business rules software. The WebSphere products provide the foundation for Web-enabled applications and are a key product set in deploying a clients SOA. Information Management revenue increased 24.5 percent (22 percent adjusted for currency) in 2008 versus the prior year, reflecting contribution from Cognos and strong demand for the distributed relational database products. Cognos performance management solution helps customers improve decision-making across the enterprise to optimize business performance.
Lotus revenue increased 10.4 percent (8 percent adjusted for currency) in 2008 led by growth in Lotus Notes products as customers continue to invest to improve their workforce efficiency. Lotus software is well established as a tool for providing improved workplace collaboration and productivity.
Tivoli revenue increased 2.9 percent (2 percent adjusted for currency) in 2008 when compared to 2007. Revenue performance was led by growth in Tivoli Security and Storage Management products. Tivoli software provides the advanced capabilities required to run large mission-critical environments. This includes security and storage software which helps customers improve utilization and reduce costs.
Rational revenue increased 13.2 percent (12 percent adjusted for currency) in 2008 driven primarily by Telelogic contributions. Telelogics suite of system programming tools complements Rationals IT tool set, providing a common framework for software and systems delivery across a clients enterprise.
Revenue from Other middleware products increased 5.2 percent (3 percent adjusted for currency) in 2008 versus the prior year. This software product set includes more mature products which provide a more stable flow of revenue.
Other software segment revenue increased 34.4 percent (31 percent adjusted for currency) versus 2007 reflecting continued growth in software-related services.
($ in millions)
For the year ended December 31: |
|
2008 |
|
2007 |
|
Yr.-to-Yr.
|
|
||
Software: |
|
|
|
|
|
|
|
||
External gross profit |
|
$ |
18,859 |
|
$ |
17,015 |
|
10.8 |
% |
External gross profit margin |
|
85.4 |
% |
85.2 |
% |
0.2 |
pts. |
||
Pre-tax income |
|
$ |
7,075 |
|
$ |
6,002 |
|
17.9 |
% |
Pre-tax margin |
|
28.5 |
% |
26.8 |
% |
1.7 |
pts. |
Software segment gross profit increased 10.8 percent to $18,859 million in 2008, driven primarily by the strong revenue growth. The large annuity base of this business continues to provide a predictable and growing profit stream. Gross profit margin was 85.4 percent in 2008, an increase of 0.2 points versus 2007. The company has been investing significantly in the software business with good results. The Software segment contributed $7,075 million of pre-tax profit in 2008, an increase of 17.9 percent versus 2007 while successfully integrating Cognos and Telelogic. Software contributed approximately 40 percent of the companys segment pre-tax profit in 2008. The segment pre-tax profit margin increased 1.7 points to 28.5 percent. The pre-tax income and margin improvements have been driven primarily by revenue growth and increasing operational efficiencies.
Systems and Technology
($ in millions)
For the year ended December 31: |
|
2008 |
|
2007 |
|
Yr.-to-Yr.
|
|
Yr.-to-Yr.
|
|
||
Systems and Technology external revenue: |
|
$ |
19,287 |
|
$ |
21,317 |
|
(9.5 |
)% |
(10.8 |
)% |
System z |
|
|
|
|
|
12.5 |
% |
10.6 |
% |
||
Legacy System i |
|
|
|
|
|
(66.1 |
) |
(67.5 |
) |
||
Converged System p |
|
|
|
|
|
11.2 |
|
10.7 |
|
||
System x |
|
|
|
|
|
(16.9 |
) |
(18.9 |
) |
||
System Storage |
|
|
|
|
|
(3.4 |
) |
(4.7 |
) |
||
Retail Store Solutions |
|
|
|
|
|
(15.0 |
) |
(15.8 |
) |
||
Total Systems |
|
|
|
|
|
(4.9 |
) |
(6.3 |
) |
||
Microelectronics OEM |
|
|
|
|
|
(25.1 |
) |
(25.4 |
) |
||
Printing Systems |
|
|
|
|
|
NM |
|
NM |
|
||
NMNot meaningful
Systems and Technology revenue decreased 9.5 percent (down 11 percent adjusted for currency) in 2008 versus 2007. In June 2007, the company divested its printing business. Systems and Technology revenue, excluding the divested printing business, decreased 7.8 percent (9 percent adjusted for currency) in 2008 versus 2007. Total Systems revenue decreased 4.9 percent (6 percent adjusted for currency) in 2008 versus 2007.
In the current economic environment, clients are focused on reducing the cost of running their IT infrastructure. Virtualization, which provides the capability to run multiple workloads on a single server, is a key enabler of efficiency. System z is the leading platform for virtualization as it is able to support thousands of images and operate fully utilized. The companys POWER architecture supports hundreds of partitions, often driving utilization rates of over 60 percent. Both of these platforms leverage the entire system, from the companys custom semiconductors through the software stack, to achieve these high levels of efficiency and lower cost of ownership. The distributed computing model, which utilizes many small servers, cannot offer the same level of efficiency and value.
System z revenue increased 12.5 percent (11 percent adjusted for currency) in 2008 versus 2007. System z revenue growth was particularly strong in the Americas (up 19 percent), as well as in the Financial Services and Industrial Sectors globally. Clients in emerging markets also leveraged this platforms stability and efficiency during 2008. MIPS (millions of instructions per second) shipments increased 25 percent in 2008 versus 2007, posting double-digit growth in each quarter, reflecting strength in both traditional and specialty workloads. Specialty MIPS increased 68 percent in 2008, as clients exploit the capabilities of System z to bring new Linux and Java applications to this highly efficient and cost effective platform.
Converged System p revenue increased 11.2 percent (11 percent adjusted for currency) in 2008 versus 2007, reflecting solid demand for the energy efficiencies and multi-operating system capabilities of POWER6 technology. Clients concluded that POWER6 technology is the right solution for a multitude of workloads. The revenue growth was primarily driven by mid-range servers which increased 32 percent and high-end servers which increased 3 percent in 2008 versus 2007.
Legacy System i revenue decreased 66.1 percent (67 percent adjusted for currency) in 2008 versus 2007, as the company continues to transition the System i customer base to the converged POWER platform within System p.
System x revenue decreased 16.9 percent (19 percent adjusted for currency) in 2008 versus 2007. System x server revenue declined 15 percent and blades revenue decreased 3 percent, in 2008 versus 2007, respectively. The decline in server revenue reflects a significant slowdown in the x86 market, especially in the second half of 2008, as clients are virtualizing and consolidating workloads onto more efficient platforms such as POWER and mainframe.
System Storage revenue decreased 3.4 percent (5 percent adjusted for currency) in 2008 versus 2007. Total disk revenue was essentially flat in 2008 versus 2007. Enterprise Disk revenue increased 2 percent primarily due to increased demand for the DS8000 product, while mid-range disk revenue declined 15 percent. Tape revenue declined 10 percent in 2008 primarily due to reduced demand and clients deciding to purchase additional media to expand the utilization of their existing devices.
Microelectronics OEM revenue decreased 25.1 percent (25 percent adjusted for currency) in 2008 versus 2007. The primary mission of this business is to provide leadership technology for the systems business, as demonstrated during 2008 in the new System z10 mainframe and POWER6 systems.
Retail Stores Solutions revenue decreased 15.0 percent (16 percent adjusted for currency) in 2008 versus 2007, reflecting weakness in the retail sector and a compare to a strong 2007, when a new programmable point-of-sale solution was being delivered to large clients.
($ in millions)
For the year ended December 31: |
|
2008 |
|
2007 |
|
Yr.-to-Yr.
|
|
||
Systems and Technology: |
|
|
|
|
|
|
|
||
External gross profit |
|
$ |
7,341 |
|
$ |
8,468 |
|
(13.3 |
)% |
External gross profit margin |
|
38.1 |
% |
39.7 |
% |
(1.7 |
)pts. |
||
Pre-tax income |
|
$ |
1,550 |
|
$ |
2,153 |
|
(28.0 |
)% |
Pre-tax margin |
|
7.7 |
% |
9.6 |
% |
(2.0 |
)pts. |
Gross margin decreased by 1.7 points versus the prior year. This decrease was primarily driven by margin declines in System z, System x and Microelectronics OEM which impacted the overall margin by 1.6 points, 1.3 points and 1.2 points, respectively. Partially offsetting these margin declines was a revenue mix benefit of 2.7 points due to the increased revenue in System z and converged System p.
Systems and Technology segment pre-tax margin declined 2.0 points to 7.7 percent in 2008 reflecting the lower revenue and gross profit margin in 2008 versus 2007.
Global Financing
See page 57 for an analysis of Global Financings segment results.
Geographic Revenue
($ in millions)
For the year ended December 31: |
|
2008 |
|
2007 |
|
Yr.-to-Yr.
|
|
Yr.-to-Yr.
|
|
||
Total revenue: |
|
$ |
103,630 |
|
$ |
98,786 |
|
4.9 |
% |
2.3 |
% |
Geographies: |
|
$ |
100,939 |
|
$ |
95,320 |
|
5.9 |
% |
3.3 |
% |
Americas |
|
42,807 |
|
41,122 |
|
4.1 |
|
3.9 |
|
||
Europe/Middle East/Africa |
|
37,020 |
|
34,699 |
|
6.7 |
|
3.2 |
|
||
Asia Pacific |
|
21,111 |
|
19,501 |
|
8.3 |
|
2.1 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Major markets |
|
|
|
|
|
5.1 |
% |
1.9 |
% |
||
Growth markets |
|
|
|
|
|
9.8 |
% |
9.9 |
% |
||
BRIC countries |
|
|
|
|
|
17.6 |
% |
14.5 |
% |
Geographic revenue increased 5.9 percent (3 percent adjusted for currency) to $100,939 million in 2008 when compared to 2007. Revenue increased in all geographies in 2008, and adjusted for currency, revenue growth was strongest in the Americas followed by Europe and Asia Pacific. Revenue from the growth markets organization increased 9.8 percent (10 percent adjusted for currency) while growth in the more established major markets was 5.1 percent (2 percent adjusted for currency).
Americas revenue increased 4.1 percent (4 percent adjusted for currency) in 2008. Revenue increased in all regions with the U.S. up 2.9 percent, Canada 5.6 percent (6 percent adjusted for currency) and Latin America 13.9 percent (11 percent adjusted for currency).
Europe/Middle East/Africa (EMEA) revenue increased 6.7 percent (3 percent adjusted for currency) in 2008 when compared to 2007. The majority of major market countries performed well led by Spain which grew 12.0 percent (5 percent adjusted for currency), Germany increased 10.8 percent (4 percent adjusted for currency) and France increased 9.0 percent (2 percent adjusted for currency). Italy increased 5.8 percent (decreased 1 percent adjusted for currency) while the U.K. decreased 4.9 percent (increased 4 percent adjusted for currency).
Asia Pacific revenue increased 8.3 percent (2 percent adjusted for currency) year over year. Revenue increased in the India, South Korea, ASEAN, Australia/New Zealand and China regions with combined growth of 8.1 percent (9 percent adjusted for currency). Japan revenue, which represented 49 percent of the Asia Pacific revenue base, increased 8.5 percent as reported, but decreased 5 percent adjusted for currency in 2008 when compared to 2007.
Across the geographies, aggregate revenue from the countries comprising the growth markets organization increased 9.8 percent (10 percent adjusted for currency) in 2008 and represented approximately 18 percent of the companys total geographic revenue. The company has continued to invest to capture new infrastructure spending in the growth markets. Adjusted for currency, growth in these markets was 8 points higher than in the major markets. The BRIC countries, a subset of the growth
markets, together grew 17.6 percent (15 percent adjusted for currency), with growth in India of 25.8 percent (33 percent adjusted for currency), Brazil 18.3 percent (13 percent adjusted for currency), China 14.7 percent (8 percent adjusted for currency) and Russia 11.0 percent (11 percent adjusted for currency).
OEM revenue decreased 22.4 percent (23 percent adjusted for currency) in 2008 when compared to 2007, driven by reduced demand in the Microelectronics OEM business.
Total Expense and Other Income
($ in millions)
|
|
|
|
|
|
Yr.-to-Yr. |
|
||
For the year ended December 31: |
|
2008 |
|
2007 |
|
Change |
|
||
Total expense and other income |
|
$ |
28,945 |
|
$ |
27,240 |
|
6.3 |
% |
Expense to Revenue |
|
27.9 |
% |
27.6 |
% |
0.4 |
pts. |
||
The key drivers year to year in total expense and other income were approximately:
· Operational expense, (1) point
· Acquisitions, 5 points
· Currency, 2 points
In 2008, the company continued to focus on productivity improvements in its more established markets and increased its investments in the growth markets. Within selling, general and administrative expense (SG&A), total sales and marketing expense increased 4 percent year to year (2 percent adjusted for currency). Sales and marketing expense in the growth markets increased 13 percent (13 percent adjusted for currency), as compared to major markets where sales and marketing expense increased 3 percent (1 percent adjusted for currency) year to year. On a consolidated basis, general and administrative expenses, which are indirect expenses incurred in the business, increased 2 percent (flat at constant currency) year to year.
Total SG&A expense increased 6.0 percent (4 percent adjusted for currency) in 2008 versus 2007. The increase in SG&A was primarily due to acquisition-related spending, predominantly for Cognos and Telelogic, which accounted for 5 points of the increase, while the effects of currency accounted for 2 points. Workforce reductionsongoing expense increased $387 million primarily due to charges recorded in the fourth quarter reflecting workforce actions in Japan ($120 million) and other ongoing skills rebalancing that is a regular element of the companys business model. In addition, bad debt expense increased $206 million primarily driven by additional specific accounts receivable reserves reflecting the current economic environment in many industries. The companys accounts receivable provision coverage at December 31, 2008 was 2.0 percent, an increase of 50 basis points from year-end 2007. These increases were partially offset by lower retirement-related expense of $287 million.
Other (income) and expense was income of $298 million and $626 million in 2008 and 2007, respectively. The decrease in income was primarily driven by higher foreign currency transaction losses ($285 million) and lower interest income reflecting lower cash balances and the current interest rate environment ($222 million). These decreases were partially offset by a gain on derivative instruments which primarily hedge foreign currency risks ($221 million). Included within the foreign currency hedging activity, the company hedges its major cross-border cash flows to mitigate the effect of currency volatility in its global cash planning, which also reduces volatility in the year-over-year results. The impact of these hedging programs is primarily reflected in other (income) and expense, as well as cost of goods sold. The impact of losses from these cash flow hedges reflected in other (income) and expense was $186 million, a decrease of $24 million year to year.
The increase in RD&E expense of $184 million was primarily driven by acquisitions and investments to maintain technology leadership across the companys offerings. Software spending increased $262 million, partially offset by lower spending in Systems and Technology ($54 million) and other unit spending ($74 million).
IP income of $1,153 million increased 20.4 percent in 2008, however, there were no significant individual IP transactions in 2008 or 2007. The improvement year to year was primarily driven by the Systems and Technology business.
The increase in interest expense of $63 million to $673 million was primarily due to the increase in debt in 2007 associated with the financing of the accelerated share repurchase agreements, partially offset by lower interest rates in 2008. See note N, Equity Activity, on page 98 for additional information regarding the accelerated share repurchase. Overall interest expense, including amounts reflected in cost of financing, for 2008 was $1,462 million, an increase of $40 million versus 2007.
Income Taxes
The effective tax rate for 2008 was 26.2 percent, compared with 28.1 percent in 2007. The 1.9 point decrease was primarily driven by the 2008 net increase in the utilization of foreign and state tax credits (2.9 points), the benefit associated with the second quarter 2008 agreement reached with the U.S. Internal Revenue Service (IRS) regarding claims for certain tax incentives (1.7 points) and the benefit related to certain issues associated with newly published U.S. tax regulations (1.2 points). These benefits were partially offset by several items including the net impact related to the completion of the U.S. federal income tax examination for the years 2004 and 2005 including the associated income tax reserve redeterminations (0.5 points), the second quarter 2008 tax cost associated with the intercompany transfer of certain intellectual property (2.8 points) and lower capital loss utilization in 2008 (0.7 points). The remaining items were individually insignificant.
Financial Position
Total assets decreased $10,907 million ($5,854 million adjusted for currency) primarily due to decreases in cash and cash equivalents ($2,250 million), prepaid pension assets ($15,816 million), short-term marketable securities ($989 million) and total financing receivables ($1,233 million). These decreases were partially offset by increases in long-term deferred taxes ($5,757 million), goodwill ($3,941 million) and intangible assets ($771 million).
Total liabilities increased $4,123 million ($5,301 million adjusted for currency) driven primarily by increases in retirement and nonpension postretirement benefit obligations ($5,871 million) and total deferred income ($547 million), partially offset by decreases in total debt ($1,349 million) and accounts payable ($1,041 million).
Total equity of $13,584 million decreased $15,030 million versus 2007. Net income of $12,334 million was offset by the effects of pension remeasurements and other retirement-related items ($14,856 million), common/treasury stock activity ($6,323 million), dividends ($2,585 million) and equity translation adjustments ($3,552 million).
The company generated $18,812 million in cash flow provided by operating activities, an increase of $2,718 million, compared to 2007, primarily driven by increased net income ($1,916 million). Net cash used in investing activities of $9,285 million was $4,611 million higher than 2007, primarily due to increased spending for acquisitions ($5,304 million). Net cash used in financing activities of $11,834 million increased $7,095 million primarily due to debt transactions ($14,556 million), partially offset by lower common stock repurchases ($8,249 million) in 2008 versus 2007.
Discontinued Operations
On December 31, 2002, the company sold its HDD business to Hitachi for approximately $2 billion. The final cash payment of $399 million was received on December 30, 2005.
In 2007, the company reported a net loss of less than $1 million, net of tax. There was no activity in 2008.
Other Information
Looking Forward
Looking forward, the company enters 2010 in excellent operational and financial position. Since the last recession in 2002, the company has consistently generated strong profit and cash growth. In that timeframe (2003-2009), the company has added $12 billion to its pre-tax income base; pre-tax income margin has expanded more than 2.5 times; earnings per diluted share is up 4 times, and cumulatively, the company has generated approximately $115 billion in cash flow from operating activities. This financial performance is the result of the transformation of the business that started at the beginning of the decade. Its driven by a combination of shifting the companys business mix, improving leverage through productivity and investing to capture growth opportunities.
The company has remixed its business to move into higher value areasexiting commoditizing businesses, while acquiring 108 companies since 2000 for a total of approximately $22 billion in net cash. These portfolio actions have contributed to a significant change in the companys business profile. In 2000, Global Services segment pre-tax income was $4.5 billion; in 2009, it was over $8 billion. The Software growth is even more dynamic. In 2000, Software segment pre-tax income was $2.8 billion; in 2009, it also was over $8 billion. In 2009, over 90 percent of segment pre-tax income came from Software, Global Services and Global Financing, with Software and Global Services each contributing 42 percent of segment pre-tax income. The portfolio generates high profitability and the company will continue to remix to higher value through organic investments and acquisitions.
The company has had an ongoing focus on driving operating leverage through productivity. The company has leveraged its scale and global presence to improve processes and productivity in a number of areas, including support functions and service delivery. In 2009, the company yielded $3.7 billion of cost and expense savings from the structural actions it has taken, driving gross margin improvement and reductions in operational expense. These actions have reduced the fixed cost base and improved the operational balance point. Going forward, this will provide an advantage as the spending environment improveswith solid operating leverage off of the companys leaner cost base.
A nother key element of the companys transformation is the significant investments it has made for growthinvestments enabled by the strong margins, profitability and cash base. The company continues to invest to capture the opportunity in the emerging markets. In 2009, the revenue growth in the growth markets remained 8 points greater than the major markets. The company is also investing in capabilities that differentiate IBM and accelerate the development of new market opportunitiesareas like business analytics, cloud computing and smarter planet. The company remains committed to technology leadership, and in 2009, the company invested approximately $6 billion in research and development. The companys organic investments have been complemented with acquisitions, with a key focus on business analytics which provide a solid platform for the Smarter Planet initiatives. Since 2005, the company has invested approximately $8.5 billion in net cash for 14 strategic acquisitions to build its business analytics capabilities.
The last decade has seen a significant transformation of IBM. The company will continue to shift to higher value areas, improve the efficiency of the business and invest where management sees the best long-term opportunities. This transformation and the focus going forward positions the company for growth moving into 2010.
In May 2007, the company met with investors and analysts and discussed a road map to deliver earnings per share in 2010 in the range of $10 to $11 per share, or 14 to 16 percent compound growth rate from 2006. The companys 2010 road map is comprised of two key components. First, the 2010 road map includes generating earnings per share in the range of $9 to $10 per share, or 10 to 14 percent growth from 2006 through a combination of operational elements including revenue growth, margin improvement, growth initiatives, acquisitions and effective capital deployment to fund growth and provide returns to shareholders through dividends and common stock repurchases.
In addition to these operational elements, the companys road map to the $10 to $11 per share range includes the projected benefit of retirement-related costs based on December 31, 2006 assumptions. Actual retirement-related costs will depend on several factors including financial market performance, the interest rate environment and actuarial assumptions. In March 2008 and May 2009, the company met with investors and analysts and discussed the progress the company is making on its 2010 road map.
The companys performance in 2009 highlighted the benefits of its global reach and the strength of its business model. The financial results reflected solid progress on major elements of the long-term goals. Despite a challenging economy, with diluted earnings per share of $10.01 in 2009, the company achieved its road map objective one year early.
In January 2010, the company disclosed that it is expecting earnings of at least $11.00 per diluted share for the full year 2010, with consistent earnings per share growth throughout the year. Also in January 2010, the company disclosed that for the first quarter of 2010, the company expects a 4-5 point improvement in its year-to-year revenue growth rate compared to the fourth quarter of 2009, at both actual currency rates and at constant currency. This would represent a mid-single-digit revenue growth at actual rates compared to the 0.8 percent growth in the fourth quarter of 2009. The company is confident in its ability to continue to leverage its business model to expand margins, grow profit, generate cash, return value to shareholders and return to revenue growth in 2010.
The continued investments in Software have led to this segments emergence as a strong source of revenue and the largest contributor to the companys pre-tax profit. The Software business is differentiated in the industry by both the strength of its individual products and the breadth of the software offerings. Clients continue to rely on the extensive middleware portfolio to help them transform their business, streamline costs and seek new business opportunities. The key to continued Software growth stems from the ability to maintain and grow this industry-leading software business. Investments will be aligned to advance the companys growth strategy through new client acquisition, with specific focus on key industries and local businesses. The company will also continue to focus on expanding its software capabilities through a combination of internal development and strategic acquisitions. In January 2010, the company disclosed that it expects Software to deliver a double-digit revenue growth rate, at actual rates, in the first quarter of 2010.
Within the Global Services business, profit margins improved and the company continues to yield significant results from the targeted actions and investments it has made in the last few years. The business has been transformed into one that is more flexible and more focused on higher-value segments of the market. The two services segments are well-positioned heading into 2010 driven by: an 11 percent growth (at constant currency) in outsourcing signings in 2009; a backlog of $137 billion at December 31, 2009; improving trends in Global Business Services; and, a global delivery structure that has enabled the company to perform well in a tough environment. In addition, the portfolio is strong with a complement of offerings and capabilities that deliver both high value and productivity to clients. Going forward the Global Services business will look to build upon its momentum by continuing to deliver value and by focusing on further enhancements to its offerings/integrated solutions portfolio and continuing to improve both the skills and structure of the business.
In the Systems and Technology business, the company will continue to focus its investments on differentiating technologies with leadership and high-growth potential including POWER, high-performance computing, virtualization, nanotechnology and energy efficiency. In this market, the value has shifted to the high end to address clients needs to consolidate and virtualize their environments. The company will focus on providing clients with a clear path to a fully dynamic infrastructure that not only reduces
cost, but is both intelligent and secure. The systems product line will be significantly refreshed in 2010 with the release of the next generation System z mainframe in the second half and the next generation POWER systems in System p beginning in the first quarter of 2010.
In 2010, Global Financing will continue to focus on expanding its core business by accelerating growth in the participation rates for IBM products and services transactions. In addition, the business will drive increased operational efficiency and sales productivity through the deployment of its single operating model initiative. This global initiative is focused on simplifying processes, standardizing operations and optimizing business performance.
The company expects 2010 pre-tax retirement-related plan cost to be approximately $1.5 billion, an increase of approximately $100 million compared to 2009. This estimate reflects current pension plan assumptions and the impacts of recent non-U.S. pension plan redesign efforts. See note U, Retirement-Related Benefits, on pages 109 through 121 for additional information.
The company expects in the normal course of business that its effective tax rate in 2010 will be approximately 26.0-26.5 percent. The rate will change year to year based on non-recurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, the timing and amount of foreign dividend repatriation, state and local taxes and the effects of various global income tax strategies.
Effective January 1, 2010, the company will implement several new accounting standards that have been issued by the Financial Accounting Standards Board. These standards include: amended guidance for revenue recognition for arrangements with multiple deliverables; guidance that revises the scope of existing software revenue recognition accounting; amendments to the accounting rules for variable interest entities and transfers of financial assets; and, additional disclosure requirements for fair value measurements. The company has evaluated the new guidance and does not expect a material impact on the Consolidated Financial Statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
Liquidity and Capital Resources
The company has consistently generated strong cash flow from operations, improving results year to year and providing a source of funds ranging between $14.9 billion and $20.8 billion per year over the past five years. The company provides for additional liquidity through several sources: maintaining an adequate cash balance, access to global funding sources, a committed global credit facility and other committed and uncommitted lines of credit worldwide. At December 31, 2009, the company had total unused lines of credit of $17,314 million. The following table provides a summary of the major sources of liquidity for the years ended December 31, 2005 through 2009.
Cash Flow and Liquidity Trends
($ in billions)
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|||||
Net cash from operating activities |
|
$ |
20.8 |
|
$ |
18.8 |
|
$ |
16.1 |
|
$ |
15.0 |
|
$ |
14.9 |
|
Cash and short-term marketable securities |
|
$ |
14.0 |
|
$ |
12.9 |
|
$ |
16.1 |
|
$ |
10.7 |
|
$ |
13.7 |
|
Committed global credit facilities |
|
$ |
10.0 |
|
$ |
10.0 |
|
$ |
10.0 |
|
$ |
10.0 |
|
$ |
10.0 |
|
Trade receivables securitization facility |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
0.5 |
|
The major rating agencies ratings on the companys debt securities at December 31, 2009 appear in the table below and remain unchanged from December 31, 2008. The companys debt securities do not contain any acceleration clauses which could change the scheduled maturities of the obligation. In addition, the company does not have ratings trigger provisions in its debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. The companys contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if the companys credit rating were to fall below investment grade. At December 31, 2009, the fair value of those instruments that were in a liability position was $1,555 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of the companys outstanding instruments and market conditions. The company has no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on its financial position or liquidity.
|
|
|
|
Moodys |
|
|
|
|
|
Standard |
|
Investors |
|
Fitch |
|
|
|
& Poors |
|
Service |
|
Ratings |
|
Senior long-term debt |
|
A+ |
|
A1 |
|
A+ |
|
Commercial paper |
|
A-1 |
|
Prime-1 |
|
F1 |
|
The company prepares its Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 66 and highlights causes and events underlying sources and uses of cash in that format on pages 35 and 36. For purposes of running its business, the company manages, monitors and analyzes cash flows in a different format.
Management uses a free cash flow measure to evaluate the companys operating results, plan share repurchase levels, evaluate strategic investments and assess the companys ability and need to incur and service debt. Free cash flow is not a defined term under U.S. GAAP and it should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The company defines free cash flow as net cash from operating activities less the change in Global Financing receivables and net
capital expenditures. As discussed on page 24, a key objective of the Global Financing business is to generate strong returns on equity. Increasing receivables is the basis for growth in a financing business. Accordingly, management considers Global Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. After considering Global Financing receivables as an investment, the remaining net operational cash flow less net capital expenditures is viewed by the company as free cash flow.
From the perspective of how management views cash flow, in 2009, free cash flow was $15.1 billion, an increase of $0.8 billion compared to 2008. This cash performance was driven primarily by the growth in net income of $1.1 billion, lower capital spending of $0.8 billion and higher cash from sales cycle working capital ($1.2 billion), partially offset by higher retirement-related funding ($0.9 billion) and workforce rebalancing payments ($0.6 billion).
Over the past five years, the company generated over $61 billion in free cash flow. During that period, the company invested $13.8 billion in strategic acquisitions and returned over $63 billion to shareholders through dividends and share repurchases. The amount of prospective returns to shareholders in the form of dividends and share repurchases will vary based upon several factors including each years operating results, capital expenditure requirements, research and development investments and acquisitions, as well as the factors discussed below.
The companys Board of Directors meets quarterly to consider the dividend payment. The company expects to fund dividend payments through cash from operations. In the second quarter of 2009, the Board of Directors increased the companys quarterly common stock dividend from $0.50 to $0.55 per share.
The table below represents the way in which management reviews cash flow as described above.
($ in billions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|||||
Net cash from operating activities per GAAP (Continuing Operations) |
|
$ |
20.8 |
|
$ |
18.8 |
|
$ |
16.1 |
|
$ |
15.0 |
|
$ |
14.9 |
|
Less: Global Financing receivables |
|
|
(1.9 |
) |
|
(0.0 |
) |
|
(1.3 |
) |
|
(0.3 |
) |
|
1.8 |
|
Net cash from operating activities (Continuing Operations), e xcluding Global Financing receivables |
|
|
18.9 |
|
|
18.8 |
|
|
17.4 |
|
|
15.3 |
|
|
13.1 |
|
Capital expenditures, net |
|
|
(3.7 |
) |
|
(4.5 |
) |
|
(5.0 |
) |
|
(4.7 |
) |
|
(3.5 |
) |
Free cash flow (excluding Global Financing receivables) |
|
|
15.1 |
|
|
14.3 |
|
|
12.4 |
|
|
10.5 |
|
|
9.6 |
|
Acquisitions |
|
|
(1.2 |
) |
|
(6.3 |
) |
|
(1.0 |
) |
|
(3.8 |
) |
|
(1.5 |
) |
Divestitures |
|
|
0.4 |
|
|
0.1 |
|
|
0.3 |
|
|
|
|
|
0.9 |
|
Share repurchase |
|
|
(7.4 |
) |
|
(10.6 |
) |
|
(18.8 |
) |
|
(8.1 |
) |
|
(7.7 |
) |
Dividends |
|
|
(2.9 |
) |
|
(2.6 |
) |
|
(2.1 |
) |
|
(1.7 |
) |
|
(1.2 |
) |
Non-Global Financing debt |
|
|
(4.7 |
) |
|
(3.2 |
) |
|
10.9 |
|
|
(1.1 |
) |
|
1.2 |
|
Other (includes Global Financing receivables and Global Financing debt) |
|
|
1.7 |
|
|
5.0 |
|
|
3.8 |
|
|
1.1 |
|
|
1.9 |
|
Change in cash, cash equivalents and short-term marketable securities |
|
$ |
1.1 |
|
$ |
(3.2 |
) |
$ |
5.5 |
|
$ |
(3.0 |
) |
$ |
3.1 |
|
Events that could temporarily change the historical cash flow dynamics discussed above include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation or future pension funding requirements during periods of severe downturn in the capital markets. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note O, Contingencies and Commitments on pages 99 and 100. With respect to pension funding, in 2009, the company contributed $1,252 million to its non-U.S. defined benefit plans, versus $917 million in 2008. As highlighted in the Contractual Obligations table on page 51, the company expects to make legally mandated pension plan contributions to certain non-U.S. plans of approximately $3.6 billion in the next five years.
The 2010 contributions are currently expected to be approximately $0.8 billion. Financial market performance in 2010 could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. The company is not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations.
The Pension Protection act of 2006 was enacted into law in 2006, and, among other things, increases the funding requirements for certain U.S. defined benefit plans beginning after December 31, 2007. No mandatory contribution is required for the U.S. defined benefit plan in 2010 as of December 31, 2009.
Contractual Obligations
($ in millions)
|
|
Total |
|
|
|
|
|
|
|
|
|
|||||
|
|
Contractual |
|
Payments due in |
|
|||||||||||
|
|
Payment Stream |
|
2010 |
|
2011-12 |
|
2013-14 |
|
After 2014 |
|
|||||
Long-term debt obligations |
|
$ |
23,842 |
|
$ |
2,186 |
|
$ |
6,992 |
|
$ |
5,250 |
|
$ |
9,414 |
|
Interest on long-term debt obligations |
|
12,381 |
|
1,166 |
|
2,073 |
|
1,507 |
|
7,635 |
|
|||||
Capital (finance) lease obligations |
|
165 |
|
64 |
|
57 |
|
44 |
|
|
|
|||||
Operating lease obligations |
|
5,938 |
|
1,504 |
|
2,263 |
|
1,395 |
|
776 |
|
|||||
Purchase obligations |
|
2,314 |
|
771 |
|
851 |
|
423 |
|
269 |
|
|||||
Other long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Minimum pension funding (mandated)* |
|
3,936 |
|
803 |
|
1,535 |
|
1,261 |
|
337 |
|
|||||
Executive compensation |
|
1,207 |
|
71 |
|
152 |
|
166 |
|
817 |
|
|||||
Long-term termination benefits |
|
1,789 |
|
223 |
|
245 |
|
213 |
|
1,109 |
|
|||||
Tax reserves** |
|
4,371 |
|
1,083 |
|
|
|
|
|
|
|
|||||
Other |
|
879 |
|
66 |
|
93 |
|
67 |
|
653 |
|
|||||
Total |
|
$ |
56,822 |
|
$ |
7,937 |
|
$ |
14,261 |
|
$ |
10,326 |
|
$ |
21,011 |
|
* Represents future pension contributions that are mandated by local regulations or statute, all associated with non-U.S. pension plans. See note U, Retirement-Related Benefits, on pages 109 through 121 for additional information on the non-U.S. plans, investment strategies and expected contributions and for information regarding the companys unfunded pension plans of $16,819 million at December 31, 2009.
** These amounts represent the liability for unrecognized tax benefits. The company estimates that approximately $1,083 million of the liability is expected to be settled within the next 12 months. The settlement period for the noncurrent portion of the income tax liability cannot be reasonably estimated as the timing of the payments will depend on the progress of tax examinations with the various tax authorities; however, it is not expected to be due within the next 12 months.
Total contractual obligations are reported in the table above excluding the effects of time value and therefore, may not equal the amounts reported in the Consolidated Statement of Financial Position. Total contractual obligations decreased $10.4 billion from the amount reported in the 2008 Annual Report primarily due to the paydown of debt and the removal of the associated interest expense obligations. Long-term debt obligations decreased $6.4 billion and interest expense related to long-term debt obligations decreased $4.1 billion.
Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that meet any of the following criteria: (1) they are noncancelable, (2) the company would incur a penalty if the agreement was canceled, or (3) the company must make specified minimum payments even if it does not take delivery of the contracted products or services (take-or-pay). If the obligation to purchase goods or services is noncancelable, the entire value of the contract is included in the table above. If the obligation is cancelable, but the company would incur a penalty if canceled, the dollar amount of the penalty is included as a purchase obligation. Contracted minimum amounts specified in take-or-pay contracts are also included in the table as they represent the portion of each contract that is a firm commitment.
In the ordinary course of business, the company enters into contracts that specify that the company will purchase all or a portion of its requirements of a specific product, commodity or service from a supplier or vendor. These contracts are generally entered into in order to secure pricing or other negotiated terms. They do not specify fixed or minimum quantities to be purchased and, therefore, the company does not consider them to be purchase obligations.
Interest on floating rate debt obligations is calculated using the effective interest rate at December 31, 2009, plus the interest rate spread associated with that debt, if any.
Off-Balance Sheet Arrangements
From time to time, the company may enter into off-balance sheet arrangements as defined by the SEC Financial Reporting Release 67 (FRR-67), Disclosure in Managements Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.
At December 31, 2009, the company has no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. See the table above for the companys contractual obligations and note O, Contingencies and Commitments, on pages 99 to 101, for detailed information about the companys guarantees, financial commitments and indemnification arrangements. The company does not have retained interests in assets transferred to unconsolidated entities or other material off-balance sheet interests or instruments.
C ritical Accounting Estimates
The application of GAAP requires the company to make estimates and assumptions about future events that directly affect its reported financial condition and operating performance. The accounting estimates and assumptions discussed in this section are those that the company considers to be the most critical to its financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to the companys financial condition or operating performance. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of the companys Board of Directors. The companys significant accounting policies are described in note A, Significant Accounting Policies, on pages 70 to 79.
A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides material information to investors. The amounts used to assess sensitivity (e.g., 1 percent, 10 percent, etc.) are included to allow users of the Annual Report to understand a general direction cause and effect of changes in the estimates and do not represent managements predictions of variability. For all of these estimates, it should be noted that future events rarely develop exactly as forecasted, and estimates require regular review and adjustment.
Pension Assumptions
The measurement of the companys benefit obligation to its employees and net periodic pension cost/(income) requires the use of certain assumptions, including, among others, estimates of discount rates and expected return on plan assets.
Changes in the discount rate assumptions will impact the (gain)/loss amortization and interest cost components of the net periodic pension cost/(income) calculation (see page 115 for information regarding the discount rate assumptions) and the projected benefit obligation (PBO). As presented on page 115, the company decreased the discount rate assumption for the IBM Personal Pension Plan (PPP), a U.S.-based defined benefit plan, by 15 basis points to 5.60 percent on December 31, 2009. This change will increase pre-tax cost and expense recognized in 2010 by an estimated $40 million. If the discount rate assumption for the PPP increased by 15 basis points on December 31, 2009, pre-tax cost and expense recognized in 2010 would have decreased by an estimated $41 million. Changes in the discount rate assumptions will impact the PBO which, in turn, may impact the companys funding decisions if the PBO exceeds plan assets. Each 25 basis point increase or decrease in the discount rate will cause a corresponding decrease or increase, respectively, in the PPPs PBO of an estimated $1.2 billion based upon December 31, 2009 data. The PPPs PBO (after the decrease in discount rate presented on page 115) and plan assets as of December 31, 2009 is presented on page 113.
The expected long-term return on plan assets is used in calculating the net periodic pension cost/(income). See page 115 for information regarding the expected long-term return on plan assets assumption. The differences between the actual return on plan assets and expected long-term return on plan assets are recognized over five years in the expected return on plan assets line in net periodic pension cost/(income) and also as a component of actuarial gains/losses, which are recognized over the service lives or life expectancy of the plan participants, depending on the plan, provided such amounts exceed thresholds which are based upon the obligation or the value of plan assets.
To the extent the outlook for long-term returns changes such that management changes its expected long-term return on plan assets assumption, each 50 basis point increase or decrease in the expected long-term return on PPP plan assets assumption will have an estimated increase or decrease, respectively, of $252 million on the following years pre-tax net periodic pension cost/(income) (based upon the PPPs plan assets at December 31, 2009 and assuming no contributions are made in 2010).
The company may voluntarily make contributions or be required, by law, to make contributions to its pension plans. Actual results that differ from the estimates may result in more or less future company funding into the pension plans than is planned by management.
Impacts of these types of changes on the companys defined benefit pension plans in other countries worldwide will vary depending upon the status of each respective plan.
Revenue Recognition
Application of the various accounting principles in GAAP related to the measurement and recognition of revenue requires the company to make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting. Other significant judgments include determining whether IBM or a reseller is acting as the principal in a transaction and whether separate contracts are considered part of one arrangement.
Revenue recognition is also impacted by the companys ability to estimate sales incentives, expected returns and allowances for uncollectible receivables. The company considers various factors, including a review of specific transactions, the credit-worthiness of the customers, historical experience and market and economic conditions when calculating these provisions and allowances. Estimates are evaluated each quarter to assess the adequacy of the estimates. If these estimates were changed by 10 percent in 2009, net income would be impacted by $74 million (excluding Global Financing receivables reserves discussed on page 59).
Costs to Complete Service Contracts
The company enters into numerous service contracts through its GTS and GBS businesses. During the contractual period, revenue, cost and profits may be impacted by estimates of the ultimate profitability of each contract, especially contracts for which the company uses the percentage-of-completion (POC) method of accounting. If at any time these estimates indicate the POC contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost. The company performs ongoing profitability analyses of its services contracts in order to determine whether the latest estimates require updating. Key factors reviewed by the company to estimate the future costs to complete each contract are future labor costs, future product costs and productivity efficiencies. Contract loss provisions recorded as a component of other accrued expenses and liabilities are approximately $37 million and $24 million at December 31, 2009 and December 31, 2008, respectively.
Income Taxes
The company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes.
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, the company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the companys belief that its tax return positions are supportable, the company believes that certain positions may not be fully sustained upon review by tax authorities. The company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that new information becomes available which causes the company to change its judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such determination is made.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. In the event that the company changes its determination as to the amount of deferred tax assets that can be realized, the company will adjust its valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.
To the extent that the provision for income taxes increases/decreases by 1 percent of income from continuing operations before income taxes, consolidated income from continuing operations would have decreased/improved by $181 million in 2009.
Valuation of Assets
The application of business combination and impairment accounting requires the use of significant estimates and assumptions. The acquisition method of accounting for business combinations requires the company to estimate the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. Impairment testing for assets, other than goodwill, requires the allocation of cash flows to those assets or group of assets and if required, an estimate of fair value for the assets or group of assets. The companys estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of managements assumptions, which would not reflect unanticipated events and circumstances that may occur.
Valuation of Goodwill
The company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The guidance on goodwill impairment requires the company to perform a two-step impairment test. In the first step, the company compares the fair value of each reporting unit to its carrying value. The company determines the fair value of its reporting units based on the income approach. Under the income approach, the company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned
to that unit, goodwill is not impaired. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the second step of the impairment test is performed in order to determine the implied fair value of the reporting units goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, then the company records an impairment loss equal to the difference.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates and future economic and market conditions. The companys estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of managements assumptions, which would not reflect unanticipated events and circumstances that may occur.
The annual goodwill impairment analysis, which the company performed during the fourth quarter of 2009, did not result in an impairment charge. Utilizing the balances as of September 30, 2009, the excess of fair value over carrying value for each of the companys reporting units ranged from approximately $0.4 billion to approximately $74.7 billion. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, the company applied a hypothetical 10 percent decrease to the fair values of each reporting unit. This hypothetical 10 percent decrease would result in excess fair value over carrying value ranging from approximately $0.4 billion to approximately $66.3 billion for each of the companys reporting units.
Loss contingencies
The company is currently involved in various claims and legal proceedings. Quarterly, the company reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the company accrues a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the company reassesses the potential liability related to its pending claims and litigation and may revise its estimates. These revisions in the estimates of the potential liabilities could have a material impact on the companys results of operations and financial position.
Financing Receivables Reserves
The Global Financing business reviews its financing receivables portfolio at least quarterly in order to assess collectibility. A description of the methods used by management to estimate the amount of uncollectible receivables is included on pages 78 and 79. Factors that could result in actual receivable losses that are materially different from the estimated reserve include sharp changes in the economy, or a significant change in the economic health of a particular client or industry segment that represents a concentration in Global Financings receivables portfolio.
To the extent that actual collectibility differs from managements estimates currently provided for by 10 percent, Global Financings segment pre-tax income and the companys consolidated income from continuing operations before income taxes would be higher or lower by an estimated $54 million (using 2009 data), depending upon whether the actual collectibility was better or worse, respectively, than the estimates.
Residual Value
Residual value represents the estimated fair value of equipment under lease as of the end of the lease. Residual value estimates impact the determination of whether a lease is classified as operating or capital. Global Financing estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment and obtaining forward-looking product information such as marketing plans and technological innovations. Residual value estimates are periodically reviewed and other than temporary declines in estimated future residual values are recognized upon identification. Anticipated increases in future residual values are not recognized until the equipment is remarketed. Factors that could cause actual results to materially differ from the estimates include significant changes in the used-equipment market brought on by unforeseen changes in technology innovations and any resulting changes in the useful lives of used equipment.
To the extent that actual residual value recovery is lower than managements estimates by 10 percent, Global Financings segment pre-tax income and the companys consolidated income from continuing operations before income taxes would be lower by an estimated $120 million (using 2009 data). If the actual residual value recovery is higher than managements estimates, the increase in income will be realized at the end of lease when the equipment is remarketed.
Currency Rate Fluctuations
Changes in the relative values of non-U.S. currencies to the U.S. dollar affect the companys results. At December 31, 2009, currency changes resulted in assets and liabilities denominated in local currencies being translated into more U.S. dollars than at year-end 2008. The company uses financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions. Further discussion of currency and hedging appears in note L, Derivatives and Hedging Transactions, on pages 92 through 96.
In 2009, the companys revenue decreased 7.6 percent as reported and 5.3 percent adjusted for currency. In the first nine months of 2009, revenue decreased 10.6 percent as reported and 5.3 percent adjusted for currency. This currency impact reversed in the fourth quarter, as revenue increased 0.8 percent as reported and declined 5.5 percent adjusted for currency, driven from the companys operations in currencies other than the U.S. dollar. The company maintains currency hedging programs for cash planning purposes which mitigate, but do not eliminate, the volatility of currency impacts on the companys financial results. In addition to the translation of earnings, the impact of currency changes also may affect the companys pricing and sourcing actions. For example, the company may procure components and supplies in multiple functional currencies and sell products and services in other currencies. The company believes that some of these currency-based changes in cost impact the price charged to clients. However, the company estimates that the effect of currency, before taking pricing or sourcing actions into account, and net of hedging activity, had no more than a $0.09 impact on earnings per share growth in 2009.
For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, the company manages currency risk in these entities by linking prices and contracts to U.S. dollars.
The company is continuing to monitor the current economic conditions in Venezuela. In Venezuela, there is an official currency rate that is fixed by the government, and a parallel market of currency exchange that enables companies to obtain foreign currency, including dollars. The parallel rate is variable and may differ significantly from the official rate. Accounting guidance requires that the translation of a non-U.S. entitys financial statements into the companys consolidated financial statements be at the rate applicable to dividend remittances. Through the first 11 months of 2009, the company used the official rate for translation of its Venezuela financial statements as this was the rate applicable to prior dividend remittances. Due to the significant reduction of currency approvals by the Venezuela government, in December the company determined that the rate for translation should be changed to the parallel rate at December 31, 2009. This resulted in an immaterial charge to the income statement and a decrease of IBM stockholders equity of $93 million. Future results are not expected to be materially impacted as a result of translation at the parallel rate.
In addition, due to the fact that the blended CPI/NCPI three-year cumulative inflation rate in Venezuela has reached 100 percent, the country will be considered highly inflationary, consistent with accounting standards, effective January 1, 2010. The companys operations in Venezuela are not significant (less than 1 percent of total 2008 and 2009 revenue), therefore, the company does not expect a material impact from the shift to highly inflationary. On January 8, 2010, a devaluation of the Venezuelan currency was announced. There will be a two-tiered official rate, for essentials and non-essentials. This is not expected to have a material impact to future operating results.
Market Risk
In the normal course of business, the financial position of the company is routinely subject to a variety of risks. In addition to the market risk associated with interest rate and currency movements on outstanding debt and non-U.S. dollar denominated assets and liabilities, other examples of risk include collectibility of accounts receivable and recoverability of residual values on leased assets.
The company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, the company does not anticipate any material losses from these risks.
The companys debt, in support of the Global Financing business and the geographic breadth of the companys operations, contains an element of market risk from changes in interest and currency rates. The company manages this risk, in part, through the use of a variety of financial instruments including derivatives, as explained in note L, Derivatives and Hedging Transactions, on pages 92 through 96.
To meet disclosure requirements, the company performs a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of the companys debt and other financial instruments.
The financial instruments that are included in the sensitivity analysis comprise all of the companys cash and cash equivalents, marketable securities, short-term and long-term loans, commercial financing and installment payment receivables, investments, long-term and short-term debt and all derivative financial instruments. The companys portfolio of derivative financial instruments generally includes interest rate swaps, foreign currency swaps and forward contracts.
To perform the sensitivity analysis, the company assesses the risk of loss in fair values from the effect of hypothetical changes in interest rates and foreign currency exchange rates on market-sensitive instruments. The market values for interest and foreign currency exchange risk are computed based on the present value of future cash flows as affected by the changes in rates that are attributable to the market risk being measured.
The discount rates used for the present value computations were selected based on market interest and foreign currency exchange rates in effect at December 31, 2009 and 2008. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.
Information provided by the sensitivity analysis does not necessarily represent the actual changes in fair value that the company would incur under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor are held constant. In addition, the results of the model are constrained by the fact that certain items are specifically excluded from the analysis, while the financial instruments relating to the financing or hedging of those items are included by definition. Excluded items include short-term and long-term receivables from sales-type and direct financing leases, forecasted foreign currency cash flows and the companys net investment in foreign operations. As a consequence, reported changes in the values of some of the financial instruments impacting the results of the sensitivity analysis are not matched with the offsetting changes in the values of the items that those instruments are designed to finance or hedge.
The results of the sensitivity analysis at December 31, 2009, and December 31, 2008, are as follows:
Interest Rate Risk
At December 31, 2009, a 10 percent decrease in the levels of interest rates with all other variables held constant would result in a decrease in the fair market value of the companys financial instruments of $274 million as compared with a decrease of $353 million at December 31, 2008. A 10 percent increase in the levels of interest rates with all other variables held constant would result in an increase in the fair value of the companys financial instruments of $251 million as compared to an increase of $327 million at December 31, 2008. Changes in the relative sensitivity of the fair value of the companys financial instrument portfolio for these theoretical changes in the level of interest rates are primarily driven by changes in the companys debt maturities, interest rate profile and amount.
Foreign Currency Exchange Rate Risk
At December 31, 2009, a 10 percent weaker U.S. dollar against foreign currencies, with all other variables held constant, would result in a decrease in the fair value of the companys financial instruments of $609 million as compared with a decrease of $1,007 million at December 31, 2008. Conversely, a 10 percent stronger U.S. dollar against foreign currencies, with all other variables held constant, would result in an increase in the fair value of the companys financial instruments of $609 million compared with an increase of $1,007 million at December 31, 2008.
Financing Risks
See the Description of Business on page 24 for a discussion of the financing risks associated with the Global Financing business and managements actions to mitigate such risks.
Employees and Related Workforce
|
|
|
|
|
|
|
|
Yr.-to-Yr. Change |
|
||
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
2009-08 |
|
2008-07 |
|
IBM/wholly owned subsidiaries |
|
399,409 |
|
398,455 |
|
386,558 |
|
0.2 |
% |
3.1 |
% |
Less-than-wholly owned subsidiaries |
|
11,421 |
|
11,642 |
|
11,769 |
|
(1.9 |
) |
(1.1 |
) |
Complementary |
|
26,946 |
|
27,983 |
|
28,642 |
|
(3.7 |
) |
(2.3 |
) |
As a globally integrated enterprise, the company operates in over 170 countries and is continuing to shift its business to the higher value segments of enterprise computing. The company continually assesses its resource needs with the objective of balancing its workforce globally to improve the companys global reach and competitiveness. In 2009, total employees at IBM and its wholly owned subsidiaries increased slightly compared to the prior year.
The complementary workforce is an approximation of equivalent full-time employees hired under temporary, part-time and limited-term employment arrangements to meet specific business needs in a flexible and cost-effective manner.
Global Financing
Global Financing is a reportable segment that is measured as if it were a standalone entity. Accordingly, the information presented in this section is consistent with this separate company view.
In 2009, as the global economy emerged from a challenging credit environment, the Global Financing business delivered strong financial results. The Global Financing business remained focused on its core competenciesproviding IT financing to the companys clients and business partners. For the year, Global Financing improved gross margin by 4.2 points and pre-tax income margin by 6.1 points, while total revenue declined 8.4 percent. Total pre-tax income of $1,730 million increased 7.0 percent compared to 2008.
In addition to the overall health of the economy and its impact on corporate IT budgets, key drivers of Global Financings results are interest rates and originations. Interest rates directly impact Global Financings business by increasing or decreasing both financing revenue and the associated borrowing costs. Originations, which determine the asset base of Global Financings annuity-like business, are impacted by IBMs non-Global Financing sales volumes and Global Financings participation rates. Participation rates are the propensity of IBMs clients to finance their purchases through Global Financing in lieu of paying IBM up-front cash or financing through a third party.
Results of Operations
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
External revenue |
|
$ |
2,302 |
|
$ |
2,559 |
|
$ |
2,502 |
|
Internal revenue |
|
1,774 |
|
1,892 |
|
1,482 |
|
|||
Total revenue |
|
4,076 |
|
4,451 |
|
3,984 |
|
|||
Cost |
|
1,555 |
|
1,887 |
|
1,819 |
|
|||
Gross profit |
|
$ |
2,520 |
|
$ |
2,564 |
|
$ |
2,165 |
|
Gross profit margin |
|
61.8 |
% |
57.6 |
% |
54.4 |
% |
|||
Pre-tax income |
|
$ |
1,730 |
|
$ |
1,617 |
|
$ |
1,386 |
|
After-tax income* |
|
$ |
1,138 |
|
$ |
1,049 |
|
$ |
877 |
|
Return on equity* |
|
34.4 |
% |
29.4 |
% |
26.1 |
% |
* S ee page 61 for the details of the after-tax income and return on equity calculation.
The decrease in 2009 revenue, as compared to 2008, was primarily due to:
· A decline in external revenue of 10.0 percent (7 percent adjusted for currency), due to decreases in financing revenue (down 11.6 percent to $1,715 million) and in used equipment sales (down 5.2 percent to $588 million); and
· A decline in internal revenue of 6.3 percent driven by a decrease in financing revenue (down 22.0 percent to $580 million), partially offset by an increase in used equipment sales (up 3.9 percent to $1,194 million).
The decrease in external and internal financing revenue was due to lower average asset balances and lower asset yields.
Global Financing gross profit decreased 1.7 percent compared to 2008 due to the lower revenue. Gross margin increased 4.2 points due to higher margins on financing and used equipment sales.
The increase in 2008 revenue, as compared to 2007, was primarily due to:
· A n increase in external revenue of 2.3 percent (flat adjusted for currency), due to growth in financing revenue (up 7.9 percent to $1,939 million), partially offset by a decrease in used equipment sales (down 12.0 percent to $620 million); and
· Growth in internal revenue of 27.7 percent primarily driven by an increase in used equipment sales (up 47.2 percent to $1,148 million) and an increase in financing revenue (up 6.0 percent to $744 million).
The increase in external and internal financing revenue was due to higher average asset balances and higher asset yields.
Global Financing gross profit increased 18.4 percent in 2008 versus 2007, with gross margin increasing 3.3 points. This was due to higher margins on financing and used equipment sales.
Global Financing pre-tax income increased 7.0 percent in 2009 versus 2008, following an increase of 16.7 percent in 2008 versus 2007. The increase in 2009 was primarily driven by decreases in financing receivables provisions of $86 million and other selling, general and administrative expenses of $67 million, partially offset by the decrease in gross profit of $44 million. The increase in 2008 was driven by the increase in gross profit of $399 million, partially offset by an increase in financing receivables provisions of $159 million. The decrease in financing receivables provisions in 2009 was primarily due to lower specific reserve requirements. Overall allowance for doubtful accounts coverage rate is 2.1 percent, an increase of 0.1 points versus 2008.
The increase in return on equity from 2008 to 2009 was driven by higher after-tax income and a lower average equity balance, while the increase from 2007 to 2008 was primarily due to higher after-tax income.
Financial Condition
Balance Sheet
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Cash and cash equivalents |
|
$ |
1,285 |
|
$ |
1,269 |
|
Net investment in sales-type and direct financing leases |
|
9,482 |
|
10,203 |
|
||
Equipment under operating leases: |
|
|
|
|
|
||
External clients(a) |
|
1,863 |
|
2,139 |
|
||
Internal clients(b)(c) |
|
994 |
|
1,709 |
|
||
Client loans |
|
10,413 |
|
10,615 |
|
||
Total client financing assets |
|
22,752 |
|
24,667 |
|
||
Commercial financing receivables |
|
5,662 |
|
5,875 |
|
||
Intercompany financing receivables(b)(c) |
|
3,660 |
|
2,957 |
|
||
Other receivables |
|
370 |
|
396 |
|
||
Other assets |
|
877 |
|
956 |
|
||
Total assets |
|
$ |
34,605 |
|
$ |
36,119 |
|
Intercompany payables(b) |
|
$ |
5,879 |
|
$ |
5,391 |
|
Debt(d) |
|
22,383 |
|
24,360 |
|
||
Other liabilities |
|
3,174 |
|
2,875 |
|
||
Total liabilities |
|
31,435 |
|
32,626 |
|
||
Total equity |
|
3,170 |
|
3,493 |
|
||
Total liabilities and equity |
|
$ |
34,605 |
|
$ |
36,119 |
|
(a) Includes intercompany mark-up, priced on an arms-length basis, on products purchased from the companys product divisions, which is eliminated in IBMs consolidated results.
(b) E ntire amount eliminated for purposes of IBMs consolidated results and therefore does not appear on page 65.
(c) T hese assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt.
(d) Global Financing debt is comprised of intercompany loans and external debt. A portion of Global Financing debt is in support of the companys internal business, or related to intercompany mark-up embedded in the Global Financing assets. See table on page 60.
Sources and Uses of Funds
The primary use of funds in Global Financing is to originate client and commercial financing assets. Client financing assets for end users consist primarily of IBM systems, software and services, but also include non-IBM equipment, software and services to meet IBM clients total solutions requirements. Client financing assets are primarily sales-type, direct financing and operating leases for systems products, as well as loans for systems, software and services with terms generally from two to seven years. Global Financings client loans are primarily for software and services and are unsecured. These loans are subjected to additional credit analysis to evaluate the associated risk and, when deemed necessary, actions are taken to mitigate risks in the loan agreements which include covenants to protect against credit deterioration during the life of the obligation. Client financing also includes internal activity as described on page 24.
Commercial financing receivables arise primarily from inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory financing and accounts receivable financing generally range from 30 to 90 days. These short-term receivables are primarily unsecured and are also subjected to additional credit analysis in order to evaluate the associated risk.
At December 31, 2009, approximately 98 percent of Global Financings external financing assets are in the segments core competency of technology equipment and solutions financing, and approximately 59 percent of the external portfolio is with investment grade clients with no direct exposure to consumers or mortgage assets.
Originations
The following are total external and internal financing originations.
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
Client financing: |
|
|
|
|
|
|
|
|||
External |
|
$ |
11,760 |
|
$ |
14,790 |
|
$ |
14,171 |
|
Internal |
|
755 |
|
1,039 |
|
1,040 |
|
|||
Commercial financing |
|
27,126 |
|
32,078 |
|
30,541 |
|
|||
Total |
|
$ |
39,641 |
|
$ |
47,907 |
|
$ |
45,752 |
|
Cash collections exceeded new financing originations for both client and commercial financing in 2009 which resulted in a net decline in financing assets from December 31, 2008. The decrease in originations in 2009 from 2008 was primarily due to lower demand for IT equipment associated with the economic environment. The increase in originations in 2008 versus 2007 was due to improving external volumes in both client and commercial financing.
Cash generated by Global Financing in 2009 was primarily deployed to pay the intercompany payables and dividends to IBM.
G lobal Financing Receivables and Allowances
The following table presents external financing receivables excluding residual values and the allowance for doubtful accounts.
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Gross financing receivables |
|
$ |
25,508 |
|
$ |
26,599 |
|
Specific allowance for doubtful accounts |
|
416 |
|
386 |
|
||
Unallocated allowance for doubtful accounts |
|
120 |
|
144 |
|
||
Total allowance for doubtful accounts |
|
536 |
|
530 |
|
||
Net financing receivables |
|
$ |
24,972 |
|
$ |
26,069 |
|
Allowance for doubtful accounts coverage |
|
2.1 |
% |
2.0 |
% |
Roll Forward of Financing Receivables Allowance for Doubtful Accounts
($ in millions)
Jan. 1, 2009 |
|
Allowance
|
|
Additions/
|
|
Other** |
|
Dec. 31,
|
|
|||||
$ |
530 |
|
$ |
(153 |
) |
$ |
143 |
|
$ |
16 |
|
$ |
536 |
|
* R epresents reserved receivables, net of recoveries, that were disposed of during the period.
** P rimarily represents translation adjustments.
The percentage of global financing receivables reserved increased from 2.0 percent at December 31, 2008 to 2.1 percent at December 31, 2009 primarily due to the decline in the gross financing receivables balance from December 31, 2008. Specific reserves increased 7.8 percent from $386 million at December 31, 2008 to $416 million at December 31, 2009. Unallocated reserves decreased 16.6 percent from $144 million at December 31, 2008, to $120 million at December 31, 2009. Global Financings bad debt expense was an increase of $143 million for 2009, compared to an increase of $229 million for 2008. The year-to-year decrease was primarily attributed to the decline of required specific reserve additions.
Residual Value
Residual value is a risk unique to the financing business and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. Global Financing has insight into product plans and cycles for the IBM products under lease. Based upon this product information, Global Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio. See note A, Significant Accounting Policies, on page 79 for the companys accounting policy for residual values.
Global Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients. Sales of equipment, which are primarily sourced from equipment returned at the end of a lease, represented 43.7 percent of Global Financings revenue in 2009 and 39.7 percent in 2008. The percentage increase was driven primarily by the decrease in financing revenue. The gross margin on these sales was 51.3 percent and 50.0 percent in 2009 and 2008, respectively. The increase is primarily driven by a shift in mix toward higher margin internal used equipment sales.
The table on page 60 presents the recorded amount of unguaranteed residual value for sales-type, direct financing and operating leases at December 31, 2008 and 2009. In addition, the table presents the residual value as a percentage of the related original amount financed and a run out of when the unguaranteed residual value assigned to equipment on leases at December 31, 2009 is expected to be returned to the company. In addition to the unguaranteed residual value, on a limited basis, Global Financing will obtain guarantees of the future value of the equipment to be returned at end of lease. These third-party guarantees are included in minimum lease payments as provided for by accounting standards in the determination of lease classifications for the covered equipment and provide protection against risk of loss arising from declines in equipment values for these assets. The residual value guarantee increases the minimum lease payments that are utilized in determining the classification of a lease as a sales-type lease or operating lease. The aggregate asset values associated with the guarantees were $569 million and $1,083 million for the financing transactions originated during the years ended December 31, 2009 and 2008, respectively. In 2009, the residual value guarantee program resulted in the company recognizing approximately $400 million of revenue that would otherwise have been recognized in future periods as operating lease revenue. If the company had chosen to not participate in a residual value program in 2009 and prior years, the 2009 impact would be substantially mitigated by the effect of prior year asset values being recognized as operating lease revenue in the current year. The associated aggregate guaranteed future values at the scheduled end of lease were $30 million and $56 million for the financing transactions originated during 2009 and 2008, respectively. The cost of guarantees was $4 million for the year ended December 31, 2009 and $7 million for the year ended December 31, 2008.
Unguaranteed Residual Value
($ in millions)
|
|
Total |
|
Estimated Run Out of 2009 Balance |
|
||||||||||||||
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 and Beyond |
|
||||||
Sales-type and direct financing leases |
|
$ |
916 |
|
$ |
849 |
|
$ |
203 |
|
$ |
271 |
|
$ |
271 |
|
$ |
104 |
|
Operating leases |
|
378 |
|
351 |
|
166 |
|
112 |
|
62 |
|
11 |
|
||||||
Total unguaranteed residual value |
|
$ |
1,294 |
|
$ |
1,200 |
|
$ |
369 |
|
$ |
383 |
|
$ |
333 |
|
$ |
115 |
|
Related original amount financed |
|
$ |
21,000 |
|
$ |
20,687 |
|
|
|
|
|
|
|
|
|
||||
Percentage |
|
6.2 |
% |
5.8 |
% |
|
|
|
|
|
|
|
|
Debt
At December 31: |
|
2009 |
|
2008 |
|
Debt-to-equity ratio |
|
7.1x |
|
7.0x |
|
The company funds Global Financing through borrowings using a debt-to-equity ratio target of approximately 7 to 1. The debt used to fund Global Financing assets is composed of intercompany loans and external debt. The terms of the intercompany loans are set by the company to substantially match the term and currency underlying the financing receivable and are based on arms-length pricing. Both assets and debt are presented in the Global Financing Balance sheet on page 58.
The Global Financing business provides funding predominantly for the companys external clients but also provides intercompany financing for the company. Since the company measures Global Financing as if it were a standalone entity, interest expense relating to debt supporting Global Financings external client and internal business is included in the Global Financing Results of Operations on page 57 and in note V, Segment Information, on pages 122 to 126.
In the companys Consolidated Statement of Earnings on page 64, however, the external debt-related interest expense supporting Global Financings internal financing to the company is reclassified from cost of financing to interest expense.
The following table provides additional information on total company debt. In this table, intercompany activity includes internal loans and leases at arms-length pricing in support of Global Services long-term contracts and other internal activity. The company believes these assets should be appropriately leveraged in line with the overall Global Financing business model.
($ in millions)
|
|
December 31, 2009 |
|
December 31, 2008 |
|
||||||||
Global Financing Segment: |
|
|
|
$ |
22,383 |
|
|
|
$ |
24,360 |
|
||
Debt to support external clients |
|
$ |
19,091 |
|
|
|
$ |
20,892 |
|
|
|
||
Debt to support internal clients |
|
3,292 |
|
|
|
3,468 |
|
|
|
||||
Non-Global Financing Segments: |
|
|
|
3,717 |
|
|
|
9,566 |
|
||||
Debt supporting operations |
|
7,008 |
|
|
|
13,034 |
|
|
|
||||
Intercompany activity |
|
(3,292 |
) |
|
|
(3,468 |
) |
|
|
||||
Total company debt |
|
|
|
$ |
26,099 |
|
|
|
$ |
33,926 |
|
||
Liquidity and Capital Resources
Global Financing is a segment of the company and therefore, is supported by the companys overall liquidity position and access to capital markets. Cash generated by Global Financing was primarily deployed to pay intercompany payables and dividends to the company in order to maintain an appropriate debt-to-equity ratio.
Return on Equity
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Numerator: |
|
|
|
|
|
||
Global Financing after-tax income(a)* |
|
$ |
1,138 |
|
$ |
1,049 |
|
Denominator: |
|
|
|
|
|
||
Average Global Financing equity(b)** |
|
$ |
3,312 |
|
$ |
3,572 |
|
Global Financing return on equity(a)/(b) |
|
34.4 |
% |
29.4 |
% |
* C alculated based upon an estimated tax rate principally based on Global Financings geographic mix of earnings as IBMs provision for income taxes is determined on a consolidated basis.
** A verage of the ending equity for Global Financing for the last five quarters.
Looking Forward
Global Financings financial position provides flexibility and funding capacity which enables the company to be well positioned in the current environment. Global Financings assets and new financing volumes are primarily IBM products and services financed to the companys clients and business partners, and substantially all financing assets are IT related assets which provide a stable base of business for future growth. Global Financings offerings are competitive and available to clients as a result of the companys borrowing cost and access to the capital markets. Overall, Global Financings originations will be dependent upon the demand for IT products and services as well as client participation rates.
IBM continues to access both the short-term commercial paper market and the medium- and long-term debt markets. A protracted period where IBM could not access the capital markets would likely lead to a slowdown in originations.
Interest rates and the overall economy (including currency fluctuations) will have an effect on both revenue and gross profit. The companys interest rate risk management policy, however, combined with the Global Financing pricing strategy should mitigate gross margin erosion due to changes in interest rates.
The economy could impact the credit quality of the Global Financing receivables portfolio and therefore the level of provision for bad debts. Global Financing will continue to apply rigorous credit policies in both the origination of new business and the evaluation of the existing portfolio.
As discussed on page 59, Global Financing has historically been able to manage residual value risk both through insight into the companys product cycles, as well as through its remarketing business.
Global Financing has policies in place to manage each of the key risks involved in financing. These policies, combined with product and client knowledge, should allow for the prudent management of the business going forward, even during periods of uncertainty with respect to the economy.
Report of Management
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Management Responsibility for Financial Information
Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with IBM management. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.
IBM maintains an effective internal control structure. It consists, in part, of organizational arrangements with clearly defined lines of responsibility and delegation of authority, and comprehensive systems and control procedures. An important element of the control environment is an ongoing internal audit program. Our system also contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
To assure the effective administration of internal controls, we carefully select and train our employees, develop and disseminate written policies and procedures, provide appropriate communication channels and foster an environment conducive to the effective functioning of controls. We believe that it is essential for the company to conduct its business affairs in accordance with the highest ethical standards, as set forth in the IBM Business Conduct Guidelines. These guidelines, translated into numerous languages, are distributed to employees throughout the world, and re-emphasized through internal programs to assure that they are understood and followed.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, is retained to audit IBMs Consolidated Financial Statements and the effectiveness of the internal control over financial reporting. Its accompanying report is based on audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).
The Audit Committee of the Board of Directors is composed solely of independent, non-management directors, and is responsible for recommending to the Board the independent registered public accounting firm to be retained for the coming year, subject to stockholder ratification. The Audit Committee meets periodically and privately with the independent registered public accounting firm, with the companys internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and financial reporting matters.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of the company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the companys internal control over financial reporting was effective as of December 31, 2009.
|
|
Samuel J. Palmisano |
|
Chairman of the Board, |
|
President and Chief Executive Officer |
|
February 23, 2010 |
|
|
|
|
|
Mark Loughridge |
|
Senior Vice President, |
|
Chief Financial Officer |
|
February 23, 2010 |
|
Report of Independent Registered Public Accounting Firm
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
To the Stockholders and Board of Directors of International Business Machines Corporation:
In our opinion, the accompanying Consolidated Financial Statements appearing on pages 64 through 126 present fairly, in all material respects, the financial position of International Business Machines Corporation and its subsidiaries at December 31, 2009 and 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting appearing on page 62. Our responsibility is to express opinions on these financial statements and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
|
PricewaterhouseCoopers LLP |
|
New York, New York |
|
February 23, 2010 |
|
Consolidated Statement of Earnings
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions except per share amounts)
For the year ended December 31: |
|
Notes |
|
2009 |
|
2008 |
|
2007 |
|
|||
Revenue: |
|
|
|
|
|
|
|
|
|
|||
Services |
|
|
|
$ |
55,128 |
|
$ |
58,892 |
|
$ |
54,057 |
|
Sales |
|
|
|
38,300 |
|
42,156 |
|
42,202 |
|
|||
Financing |
|
|
|
2,331 |
|
2,582 |
|
2,526 |
|
|||
Total revenue |
|
|
|
95,758 |
|
103,630 |
|
98,786 |
|
|||
Cost: |
|
|
|
|
|
|
|
|
|
|||
Services |
|
|
|
37,146 |
|
40,937 |
|
39,160 |
|
|||
Sales |
|
|
|
13,606 |
|
15,776 |
|
16,552 |
|
|||
Financing |
|
|
|
1,220 |
|
1,256 |
|
1,345 |
|
|||
Total cost |
|
|
|
51,973 |
|
57,969 |
|
57,057 |
|
|||
Gross profit |
|
|
|
43,785 |
|
45,661 |
|
41,729 |
|
|||
Expense and other income: |
|
|
|
|
|
|
|
|
|
|||
Selling, general and administrative |
|
|
|
20,952 |
|
23,386 |
|
22,060 |
|
|||
Research, development and engineering |
|
Q |
|
5,820 |
|
6,337 |
|
6,153 |
|
|||
Intellectual property and custom development income |
|
|
|
(1,177 |
) |
(1,153 |
) |
(958 |
) |
|||
Other (income) and expense |
|
|
|
(351 |
) |
(298 |
) |
(626 |
) |
|||
Interest expense |
|
K&L |
|
402 |
|
673 |
|
611 |
|
|||
Total expense and other income |
|
|
|
25,647 |
|
28,945 |
|
27,240 |
|
|||
Income from continuing operations before income taxes |
|
|
|
18,138 |
|
16,715 |
|
14,489 |
|
|||
Provision for income taxes |
|
P |
|
4,713 |
|
4,381 |
|
4,071 |
|
|||
Income from continuing operations |
|
|
|
13,425 |
|
12,334 |
|
10,418 |
|
|||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|||
Income/(loss) from discontinued operations, net of tax |
|
|
|
|
|
|
|
(00 |
) |
|||
Net income |
|
|
|
$ |
13,425 |
|
$ |
12,334 |
|
$ |
10,418 |
|
Earnings/(loss) per share of common stock: |
|
|
|
|
|
|
|
|
|
|||
Assuming dilution: |
|
|
|
|
|
|
|
|
|
|||
Continuing operations |
|
R |
|
$ |
10.01 |
|
$ |
8.89 |
* |
$ |
7.15 |
* |
Discontinued operations |
|
R |
|
|
|
|
|
(0.00 |
) |
|||
Total |
|
R |
|
$ |
10.01 |
|
$ |
8.89 |
* |
$ |
7.15 |
* |
Basic: |
|
|
|
|
|
|
|
|
|
|||
Continuing operations |
|
R |
|
$ |
10.12 |
|
$ |
9.02 |
* |
$ |
7.27 |
* |
Discontinued operations |
|
R |
|
|
|
|
|
(0.00 |
) |
|||
Total |
|
R |
|
$ |
10.12 |
|
$ |
9.02 |
* |
$ |
7.27 |
* |
Weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|||
Assuming dilution |
|
|
|
1,341,352,754 |
|
1,387,797,198 |
* |
1,456,880,751 |
* |
|||
Basic |
|
|
|
1,327,157,410 |
|
1,369,367,069 |
* |
1,433,935,221 |
* |
* Reflects the adoption of the Financial Accounting Standards Board (FASB) guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, Accounting Changes, on pages 79 to 82 for additional information.
The accompanying notes on pages 70 through 126 are an integral part of the financial statements.
Consolidated Statement of Financial Position
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions except per share amounts)
At December 31: |
|
Notes |
|
2009 |
|
2008 |
|
||
Assets |
|
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
|
$ |
12,183 |
|
$ |
12,741 |
|
Marketable securities |
|
E |
|
1,791 |
|
166 |
|
||
Notes and accounts receivable trade (net of allowances of $217 in 2009 and $226 in 2008) |
|
|
|
10,736 |
|
10,906 |
|
||
Short-term financing receivables (net of allowances of $438 in 2009 and $351 in 2008) |
|
G |
|
14,914 |
|
15,477 |
|
||
Other accounts receivable (net of allowances of $15 in 2009 and $55 in 2008) |
|
|
|
1,143 |
|
1,172 |
|
||
Inventories |
|
F |
|
2,494 |
|
2,701 |
|
||
Deferred taxes |
|
P |
|
1,730 |
|
1,542 |
|
||
Prepaid expenses and other current assets |
|
|
|
3,946 |
|
4,299 |
|
||
Total current assets |
|
|
|
48,935 |
|
49,004 |
|
||
Plant, rental machines and other property |
|
H |
|
39,596 |
|
38,445 |
|
||
Less: Accumulated depreciation |
|
H |
|
25,431 |
|
24,140 |
|
||
Plant, rental machines and other property net |
|
H |
|
14,165 |
|
14,305 |
|
||
Long-term financing receivables (net of allowances of $97 in 2009 and $179 in 2008) |
|
G |
|
10,644 |
|
11,183 |
|
||
Prepaid pension assets |
|
U |
|
3,001 |
|
1,601 |
|
||
Deferred taxes |
|
P |
|
4,195 |
|
7,270 |
|
||
Goodwill |
|
J |
|
20,190 |
|
18,226 |
|
||
Intangible assets net |
|
J |
|
2,513 |
|
2,878 |
|
||
Investments and sundry assets |
|
I |
|
5,379 |
|
5,058 |
|
||
Total assets |
|
|
|
$ |
109,022 |
|
$ |
109,524 |
|
|
|
|
|
|
|
|
|
||
Liabilities and equity |
|
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
|
||
Taxes |
|
P |
|
$ |
3,826 |
|
$ |
2,743 |
|
Short-term debt |
|
K&L |
|
4,168 |
|
11,236 |
|
||
Accounts payable |
|
|
|
7,436 |
|
7,014 |
|
||
Compensation and benefits |
|
|
|
4,505 |
|
4,623 |
|
||
Deferred income |
|
|
|
10,845 |
|
10,239 |
|
||
Other accrued expenses and liabilities |
|
|
|
5,223 |
|
6,580 |
|
||
Total current liabilities |
|
|
|
36,002 |
|
42,435 |
|
||
Long-term debt |
|
K&L |
|
21,932 |
|
22,689 |
|
||
Retirement and nonpension postretirement benefit obligations |
|
U |
|
15,953 |
|
19,452 |
|
||
Deferred income |
|
|
|
3,562 |
|
3,171 |
|
||
Other liabilities |
|
M |
|
8,819 |
|
8,192 |
* |
||
Total liabilities |
|
|
|
86,267 |
|
95,939 |
* |
||
Contingencies and Commitments |
|
O |
|
|
|
|
|
||
Equity: |
|
N |
|
|
|
|
|
||
IBM Stockholders equity: |
|
|
|
|
|
|
|
||
Common stock, par value $.20 per share and additional paid-in capital |
|
|
|
41,810 |
|
39,129 |
|
||
Shares authorized: 4,687,500,000 |
|
|
|
|
|
|
|
||
Shares issued (2009 2,127,016,668; 2008 2,096,981,860) |
|
|
|
|
|
|
|
||
Retained earnings |
|
|
|
80,900 |
|
70,353 |
|
||
Treasury stock, at cost (shares: 2009 821,679,245; 2008 757,885,937) |
|
|
|
(81,243 |
) |
(74,171 |
) |
||
Accumulated other comprehensive income/(loss) |
|
|
|
(18,830 |
) |
(21,845 |
) |
||
Total IBM stockholders equity |
|
|
|
22,637 |
|
13,465 |
* |
||
Noncontrolling interests* |
|
|
|
118 |
|
119 |
* |
||
Total equity |
|
|
|
22,755 |
|
13,584 |
* |
||
Total liabilities and equity |
|
|
|
$ |
109,022 |
|
$ |
109,524 |
|
* Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
The accompanying notes on pages 70 through 126 are an integral part of the financial statements.
Consolidated Statement of Cash Flows
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
Cash flow from operating activities from continuing operations: |
|
|
|
|
|
|
|
|||
Net income |
|
$ |
13,425 |
|
$ |
12,334 |
|
$ |
10,418 |
|
(Income)/loss from discontinued operations |
|
|
|
|
|
00 |
|
|||
Adjustments to reconcile income from continuing operations to cash provided by operating activities: |
|
|
|
|
|
|
|
|||
Depreciation |
|
3,773 |
|
4,140 |
|
4,038 |
|
|||
Amortization of intangibles |
|
1,221 |
|
1,310 |
|
1,163 |
|
|||
Stock-based compensation |
|
558 |
|
659 |
|
713 |
|
|||
Deferred taxes |
|
1,773 |
|
1,900 |
|
740 |
|
|||
Net gain on asset sales and other |
|
(395 |
) |
(338 |
) |
(89 |
) |
|||
Change in operating assets and liabilities, net of acquisitions/divestitures: |
|
|
|
|
|
|
|
|||
Receivables (including financing receivables) |
|
2,131 |
|
274 |
|
(1,408 |
) |
|||
Retirement related |
|
(2,465 |
) |
(1,773 |
) |
(228 |
) |
|||
Inventories |
|
263 |
|
(102 |
) |
182 |
|
|||
Other assets/other liabilities |
|
319 |
|
1,268 |
|
706 |
|
|||
Accounts payable |
|
170 |
|
(860 |
) |
(142 |
) |
|||
Net cash provided by operating activities from continuing operations |
|
20,773 |
|
18,812 |
|
16,094 |
|
|||
Cash flow from investing activities from continuing operations: |
|
|
|
|
|
|
|
|||
Payments for plant, rental machines and other property |
|
(3,447 |
) |
(4,171 |
) |
(4,630 |
) |
|||
Proceeds from disposition of plant, rental machines and other property |
|
330 |
|
350 |
|
537 |
|
|||
Investment in software |
|
(630 |
) |
(716 |
) |
(875 |
) |
|||
Purchases of marketable securities and other investments |
|
(5,604 |
) |
(4,590 |
) |
(24,117 |
) |
|||
Proceeds from disposition of marketable securities and other investments |
|
3,599 |
|
6,100 |
|
24,984 |
|
|||
Non-operating finance receivablesnet |
|
(184 |
) |
(16 |
) |
125 |
|
|||
Divestiture of businesses, net of cash transferred |
|
400 |
|
71 |
|
310 |
|
|||
Acquisition of businesses, net of cash acquired |
|
(1,194 |
) |
(6,313 |
) |
(1,009 |
) |
|||
Net cash used in investing activities from continuing operations |
|
(6,729 |
) |
(9,285 |
) |
(4,675 |
) |
|||
Cash flow from financing activities from continuing operations: |
|
|
|
|
|
|
|
|||
Proceeds from new debt |
|
6,683 |
|
13,829 |
|
21,744 |
|
|||
Payments to settle debt |
|
(13,495 |
) |
(10,248 |
) |
(11,306 |
) |
|||
Short-term (repayments)/borrowings less than 90 daysnet |
|
(651 |
) |
(6,025 |
) |
1,674 |
|
|||
Common stock repurchases |
|
(7,429 |
) |
(10,578 |
) |
(18,828 |
) |
|||
Common stock transactionsother |
|
3,052 |
|
3,774 |
|
4,123 |
|
|||
Cash dividends paid |
|
(2,860 |
) |
(2,585 |
) |
(2,147 |
) |
|||
Net cash used in financing activities from continuing operations |
|
(14,700 |
) |
(11,834 |
) |
(4,740 |
) |
|||
Effect of exchange rate changes on cash and cash equivalents |
|
98 |
|
58 |
|
294 |
|
|||
Net cash used in discontinued operations from: operating activities |
|
|
|
|
|
(5 |
) |
|||
Net change in cash and cash equivalents |
|
(558 |
) |
(2,250 |
) |
6,969 |
|
|||
Cash and cash equivalents at January 1 |
|
12,741 |
|
14,991 |
|
8,022 |
|
|||
Cash and cash equivalents at December 31 |
|
$ |
12,183 |
|
$ |
12,741 |
|
$ |
14,991 |
|
Supplemental data: |
|
|
|
|
|
|
|
|||
Income taxes paidnet of refunds received |
|
$ |
1,567 |
|
$ |
2,111 |
|
$ |
2,608 |
|
Interest paid on debt |
|
$ |
1,240 |
|
$ |
1,460 |
|
$ |
1,485 |
|
Capital lease obligations |
|
$ |
15 |
|
$ |
41 |
|
$ |
57 |
|
The accompanying notes on pages 70 through 126 are an integral part of the financial statements.
Consolidated Statement of Changes in Equity
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions)
|
|
Common |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|||||||
|
|
Stock and |
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|||||||
|
|
Additional |
|
|
|
|
|
Comprehensive |
|
Total IBM |
|
Non- |
|
|
|
|||||||
|
|
Paid-in |
|
Retained |
|
Treasury |
|
Income/ |
|
Stockholders |
|
controlling |
|
Total |
|
|||||||
|
|
Capital |
|
Earnings |
|
Stock |
|
(Loss) |
|
Equity* |
|
Interests* |
|
Equity* |
|
|||||||
2007** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Equity, January 1, 2007 |
|
$ |
31,271 |
|
$ |
52,432 |
|
$ |
(46,296 |
) |
$ |
(8,901 |
) |
$ |
28,506 |
|
$ |
129 |
|
$ |
28,635 |
|
Cumulative effect of change in accounting Principle + |
|
|
|
117 |
|
|
|
|
|
117 |
|
|
|
117 |
|
|||||||
Net income plus other comprehensive Income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net income |
|
|
|
10,418 |
|
|
|
|
|
$ |
10,418 |
|
|
|
$ |
10,418 |
|
|||||
Other comprehensive income/(loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net unrealized gains/(losses) on cash flow hedge
derivatives (net of tax benefit
|
|
|
|
|
|
|
|
(123 |
) |
(123 |
) |
|
|
(123 |
) |
|||||||
Foreign currency translation adjustments (net of tax benefit of $553++) |
|
|
|
|
|
|
|
726 |
|
726 |
|
|
|
726 |
|
|||||||
Retirement-related benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Prior service costs/(credits) (net of tax expense of $31) |
|
|
|
|
|
|
|
44 |
|
44 |
|
|
|
44 |
|
|||||||
Net gains/(losses) (net of tax expense of $1,913) |
|
|
|
|
|
|
|
3,611 |
|
3,611 |
|
|
|
3,611 |
|
|||||||
Amortization of prior service costs/(credits) (net of tax benefit of $50) |
|
|
|
|
|
|
|
(85 |
) |
(85 |
) |
|
|
(85 |
) |
|||||||
Amortization of net gains/(losses) (net of tax expense of $654) |
|
|
|
|
|
|
|
1,110 |
|
1,110 |
|
|
|
1,110 |
|
|||||||
Amortization of transition assets (net of tax benefit of $1) |
|
|
|
|
|
|
|
(2 |
) |
(2 |
) |
|
|
(2 |
) |
|||||||
Net unrealized gains/(losses) on marketable securities (net of tax expense of $132) |
|
|
|
|
|
|
|
206 |
|
206 |
|
|
|
206 |
|
|||||||
Total other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
5,487 |
|
|
|
5,487 |
|
|||||||
Subtotal: net income plus other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
$ |
15,905 |
|
|
|
$ |
15,905 |
|
|||||
Cash dividends declaredcommon stock |
|
|
|
(2,147 |
) |
|
|
|
|
(2,147 |
) |
|
|
(2,147 |
) |
|||||||
Common stock issued under employee plans (49,137,038 shares) |
|
4,332 |
|
|
|
|
|
|
|
4,332 |
|
|
|
4,332 |
|
|||||||
Purchases (1,282,131 shares) and sales (9,282,055 shares) of treasury stock under employee plansnet |
|
|
|
(179 |
) |
729 |
|
|
|
550 |
|
|
|
550 |
|
|||||||
Other treasury shares purchased, not retired (178,385,436 shares) |
|
(405 |
) |
|
|
(18,378 |
) |
|
|
(18,783 |
) |
|
|
(18,783 |
) |
|||||||
Changes in other equity |
|
(10 |
) |
|
|
|
|
|
|
(10 |
) |
|
|
(10 |
) |
|||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
16 |
|
16 |
|
|||||||
Equity, December 31, 2007 |
|
$ |
35,188 |
|
$ |
60,640 |
|
$ |
(63,945 |
) |
$ |
(3,414 |
) |
$ |
28,470 |
|
$ |
145 |
|
$ |
28,615 |
|
* R eflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
** R eclassified to conform with 2009 presentation.
+ Reflects the adoption of the FASB guidance for uncertain tax positions. See note B, Accounting Changes, on pages 79 to 82 for additional information.
++ Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
The accompanying notes on pages 70 through 126 are an integral part of the financial statements.
Consolidated Statement of Changes in Equity
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions)
|
|
Common |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|||||||
|
|
Stock and |
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|||||||
|
|
Additional |
|
|
|
|
|
Comprehensive |
|
Total IBM |
|
Non- |
|
|
|
|||||||
|
|
Paid-in |
|
Retained |
|
Treasury |
|
Income/ |
|
Stockholders |
|
controlling |
|
Total |
|
|||||||
|
|
Capital |
|
Earnings |
|
Stock |
|
(Loss) |
|
Equity* |
|
Interests* |
|
Equity* |
|
|||||||
2008** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Equity, January 1, 2008 |
|
$ |
35,188 |
|
$ |
60,640 |
|
$ |
(63,945 |
) |
$ |
(3,414 |
) |
$ |
28,470 |
|
$ |
145 |
|
$ |
28,615 |
|
Net income plus other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net income |
|
|
|
12,334 |
|
|
|
|
|
$ |
12,334 |
|
|
|
$ |
12,334 |
|
|||||
Other comprehensive income/(loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net unrealized gains/(losses) on cash flow hedge derivatives (net of tax expense of $79) |
|
|
|
|
|
|
|
301 |
|
301 |
|
|
|
301 |
|
|||||||
Foreign currency translation adjustments (net of tax benefit of $153+) |
|
|
|
|
|
|
|
(3,552 |
) |
(3,552 |
) |
|
|
(3,552 |
) |
|||||||
Retirement-related benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Prior service (credits)/costs (net of tax benefit of $86) |
|
|
|
|
|
|
|
(136 |
) |
(136 |
) |
|
|
(136 |
) |
|||||||
Net (losses)/gains (net of tax benefit of $8,436) |
|
|
|
|
|
|
|
(15,245 |
) |
(15,245 |
) |
|
|
(15,245 |
) |
|||||||
Curtailments and settlements (net of tax expense of $9) |
|
|
|
|
|
|
|
16 |
|
16 |
|
|
|
16 |
|
|||||||
Amortization of prior service (credits)/costs (net of tax benefit of $73) |
|
|
|
|
|
|
|
(132 |
) |
(132 |
) |
|
|
(132 |
) |
|||||||
Amortization of net gains/(losses) (net of tax expense of $358) |
|
|
|
|
|
|
|
640 |
|
640 |
|
|
|
640 |
|
|||||||
Net unrealized gains/(losses) on marketable
securities
(net of tax benefit
|
|
|
|
|
|
|
|
(324 |
) |
(324 |
) |
|
|
(324 |
) |
|||||||
Total other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
(18,431 |
) |
|
|
(18,431 |
) |
|||||||
Subtotal: Net income plus other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
$ |
(6,097 |
) |
|
|
$ |
(6,097 |
) |
|||||
Cash dividends declaredcommon stock |
|
|
|
(2,585 |
) |
|
|
|
|
(2,585 |
) |
|
|
(2,585 |
) |
|||||||
Common stock issued under employee plans (39,374,439 shares) |
|
3,919 |
|
|
|
|
|
|
|
3,919 |
|
|
|
3,919 |
|
|||||||
Purchases (1,505,107 shares) and sales (5,882,800 shares) of treasury stock under employee plansnet |
|
|
|
(36 |
) |
391 |
|
|
|
355 |
|
|
|
355 |
|
|||||||
Other treasury shares purchased, not retired (89,890,347 shares) |
|
54 |
|
|
|
(10,618 |
) |
|
|
(10,563 |
) |
|
|
(10,563 |
) |
|||||||
Changes in other equity |
|
(33 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
(33 |
) |
|||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
(26 |
) |
(26 |
) |
|||||||
Equity, December 31, 2008 |
|
$ |
39,129 |
|
$ |
70,353 |
|
$ |
(74,171 |
) |
$ |
(21,845 |
) |
$ |
13,465 |
|
$ |
119 |
|
$ |
13,584 |
|
* R eflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
** R eclassified to conform with 2009 presentation.
+ Foreign currency translation adjustments are presented gross except for associated hedges which are presented net of tax.
The accompanying notes on pages 70 through 126 are an integral part of the financial statements.
Consolidated Statement of Changes in Equity
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions)
|
|
Common |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|||||||
|
|
Stock and |
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|||||||
|
|
Additional |
|
|
|
|
|
Comprehensive |
|
Total IBM |
|
Non- |
|
|
|
|||||||
|
|
Paid-in |
|
Retained |
|
Treasury |
|
Income/ |
|
Stockholders |
|
controlling |
|
Total |
|
|||||||
|
|
Capital |
|
Earnings |
|
Stock |
|
(Loss) |
|
Equity* |
|
Interests* |
|
Equity* |
|
|||||||
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Equity, January 1, 2009 |
|
$ |
39,129 |
|
$ |
70,353 |
|
$ |
(74,171 |
) |
$ |
(21,845 |
) |
$ |
13,465 |
|
$ |
119 |
|
$ |
13,584 |
|
Net income plus other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net income |
|
|
|
13,425 |
|
|
|
|
|
$ |
13,425 |
|
|
|
$ |
13,425 |
|
|||||
Other comprehensive income/(loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net unrealized gains/(losses) on cash flow hedge derivatives (net of tax benefit of $256) |
|
|
|
|
|
|
|
(556 |
) |
(556 |
) |
|
|
(556 |
) |
|||||||
Foreign currency translation adjustments (net of tax benefit of $57**) |
|
|
|
|
|
|
|
1,732 |
|
1,732 |
|
|
|
1,732 |
|
|||||||
Retirement-related benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Prior service costs/(credits) (net of tax expense of $146) |
|
|
|
|
|
|
|
229 |
|
229 |
|
|
|
229 |
|
|||||||
Net (losses)/gains (net of tax expense of $439) |
|
|
|
|
|
|
|
994 |
|
994 |
|
|
|
994 |
|
|||||||
Curtailments and settlements (net of tax benefit of $33) |
|
|
|
|
|
|
|
(93 |
) |
(93 |
) |
|
|
(93 |
) |
|||||||
Amortization of prior service (credits)/costs (net of tax benefit of $55) |
|
|
|
|
|
|
|
(107 |
) |
(107 |
) |
|
|
(107 |
) |
|||||||
Amortization of net gains/(losses) (net of tax expense of $402) |
|
|
|
|
|
|
|
704 |
|
704 |
|
|
|
704 |
|
|||||||
Net unrealized gains/(losses) on marketable securities (net of tax expense of $71) |
|
|
|
|
|
|
|
111 |
|
111 |
|
|
|
111 |
|
|||||||
Total other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
3,015 |
|
|
|
3,015 |
|
|||||||
Subtotal: net income plus other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
$ |
16,440 |
|
|
|
$ |
16,440 |
|
|||||
Cash dividends declaredcommon stock |
|
|
|
(2,860 |
) |
|
|
|
|
(2,860 |
) |
|
|
(2,860 |
) |
|||||||
Common stock issued under employee plans (30,034,808 shares) |
|
3,011 |
|
|
|
|
|
|
|
3,011 |
|
|
|
3,011 |
|
|||||||
Purchases (1,550,846 shares) and sales (6,408,265 shares) of treasury stock under employee plansnet |
|
|
|
(19 |
) |
462 |
|
|
|
443 |
|
|
|
443 |
|
|||||||
Other treasury shares purchased, not retired (68,650,727 shares) |
|
|
|
|
|
(7,534 |
) |
|
|
(7,534 |
) |
|
|
(7,534 |
) |
|||||||
Changes in other equity |
|
(330 |
) |
|
|
|
|
|
|
(330 |
) |
|
|
(330 |
) |
|||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
(1 |
) |
|||||||
Equity, December 31, 2009 |
|
$ |
41,810 |
|
$ |
80,900 |
|
$ |
(81,243 |
) |
$ |
(18,830 |
) |
$ |
22,637 |
|
$ |
118 |
|
$ |
22,755 |
|
* Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
** Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
The accompanying notes on pages 70 through 126 are an integral part of the financial statements.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Note A.
Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements and footnotes thereto of the International Business Machines Corporation (IBM and/or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
On December 31, 2002, the company sold its hard disk drive (HDD) business to Hitachi, Ltd. (Hitachi). The HDD business was accounted for as a discontinued operation and therefore, the HDD results of operations and cash flows have been removed from the companys results of continuing operations and cash flows for 2007. There was no activity in 2008 or 2009.
The company evaluated subsequent events through February 23, 2010, which is the date the financial statements were issued.
Within the financial tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of IBM and its controlled subsidiaries, which are generally majority owned. The accounts of variable interest entities (VIEs) are included in the Consolidated Financial Statements, if required. Investments in business entities in which the company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method and the companys proportionate share of income or loss is recorded in other (income) and expense. The accounting policy for other investments in equity securities is described on page 78 within Marketable Securities. Equity investments in non-publicly traded entities are primarily accounted for using the cost method. All intercompany transactions and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on managements best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. See pages 52 to 54 for a discussion of the companys critical accounting estimates.
Revenue
The company recognizes revenue when it is realized or realizable and earned. The company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client, risk of loss has transferred to the client, and either client acceptance has been obtained, client acceptance provisions have lapsed, or the company has objective evidence that the criteria specified in the client acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.
The company recognizes revenue on sales to solution providers, resellers and distributors (herein referred to as resellers) when the reseller has economic substance apart from the company, credit risk, title and risk of loss to the inventory, the fee to the company is not contingent upon resale or payment by the end user, the company has no further obligations related to bringing about resale or delivery and all other revenue recognition criteria have been met.
The company reduces revenue for estimated client returns, stock rotation, price protection, rebates and other similar allowances. (See Schedule II, Valuation and Qualifying Accounts and Reserves included in the companys Annual Report on Form 10-K). Revenue is recognized only if these estimates can be reasonably and reliably determined. The company bases its estimates on historical results taking into consideration the type of client, the type of transaction and the specifics of each arrangement. Payments made under cooperative marketing programs are recognized as an expense only if the company receives from the client an identifiable benefit sufficiently separable from the product sale whose fair value can be reasonably and reliably estimated. If the company does not receive an identifiable benefit sufficiently separable from the product sale whose fair value can be reasonably estimated, such payments are recorded as a reduction of revenue.
Revenue from sales of third-party vendor products or services is recorded net of costs when the company is acting as an agent between the client and vendor and gross when the company is a principal to the transaction. Several factors are considered to determine whether the company is an agent or principal, most notably whether the company is the primary obligor to the client, or has inventory risk. Consideration is also given to whether the company adds meaningful value to the vendors product or service, was involved in the selection of the vendors product or service, has latitude in establishing the sales price or has credit risk.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. In addition to the aforementioned general policies, the following are the specific revenue recognition policies for multiple-element arrangements and for each major category of revenue.
Multiple-Element Arrangements
The company enters into multiple-element revenue arrangements, which may include any combination of services, software, hardware and/or financing. To the extent that a deliverable in a multiple-element arrangement is subject to specific guidance, such as, leased hardware which is subject to specific leasing guidance or software which is subject to specific software revenue recognition guidance (see Software on page 72) on whether and/or how to separate multiple deliverable arrangements into separate units of accounting (separability) and how to allocate the arrangement consideration among those separate units of accounting (allocation), that deliverable is accounted for in accordance with such specific guidance. For all other deliverables in multiple-element arrangements, the guidance below is applied to determine separability and allocation. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met:
· T he delivered item(s) has value to the client on a stand-alone basis;
· T here is objective and reliable evidence of the fair value of the undelivered item(s); and
· I f the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the company.
If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized on a straight-line basis or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each units relative fair value. There may be cases, however, in which there is objective and reliable evidence of fair value of the undelivered item(s) but no such evidence for the delivered item(s). In those cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate fair value of the undelivered item(s). The revenue policies described below are then applied to each unit of accounting, as applicable.
Services
The companys primary services offerings include information technology (IT) datacenter and business process outsourcing, application management services, consulting and systems integration, technology infrastructure and system maintenance, Web hosting and the design and development of complex IT systems to a clients specifications (design and build). These services are provided on a time-and-material basis, as a fixed-price contract or as a fixed-price per measure of output contract and the contract terms range from less than one year to over 10 years.
Revenue from IT datacenter and business process outsourcing contracts is recognized in the period the services are provided using either an objective measure of output or a straight-line basis over the term of the contract. Under the output method, the amount of revenue recognized is based on the services delivered in the period.
Revenue from application management services, technology infrastructure and system maintenance and Web hosting contracts is recognized on a straight-line basis over the terms of the contracts. Revenue from time-and-material contracts is recognized as labor hours are delivered and direct expenses are incurred. Revenue related to extended warranty and product maintenance contracts is recognized on a straight-line basis over the delivery period.
Revenue from fixed-price design and build contracts is recognized under the percentage-of-completion (POC) method. Under the POC method, revenue is recognized based on the labor costs incurred to date as a percentage of the total estimated labor costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in income in the period in which the circumstances that gave rise to the revision become known by management.
The company performs ongoing profitability analyses of its services contracts accounted for under the POC method in order to determine whether the latest estimates of revenue, costs and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. For non-POC method service contracts, losses are recorded as incurred.
In some services contracts, the company bills the client prior to recognizing revenue from performing the services. Deferred income of $7,066 million and $6,403 million at December 31, 2009 and 2008, respectively, is included in the Consolidated Statement of Financial Position. The year-to-year increase was driven by growth in the Global Services business and the impacts of currency. In other services contracts, the company performs the services prior to billing the client. Unbilled accounts receivable of $2,020 million and $2,090 million at December 31, 2009 and 2008, respectively, are included in notes and accounts receivable-trade in the Consolidated Statement of Financial Position.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Billings usually occur in the month after the company performs the services or in accordance with specific contractual provisions. Unbilled receivables are expected to be billed within four months.
Hardware
Revenue from hardware sales and sales-type leases is recognized when risk of loss has transferred to the client and there are no unfulfilled company obligations that affect the clients final acceptance of the arrangement. Any cost of standard warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental or lease.
Software
Revenue from perpetual (one-time charge) license software is recognized at the inception of the license term if all revenue recognition criteria have been met. Revenue from term (recurring license charge) license software is recognized on a subscription basis over the period that the client is entitled to use the license. Revenue from subscription and support, which includes unspecified upgrades on a when-and-if-available basis and technical support, is recognized on a straight-line basis over the period such items are delivered. In multiple-element revenue arrangements that include software that is more than incidental to the products or services as a whole (software multiple-element arrangements), software and software-related elements are accounted for in accordance with guidance on software revenue recognition. Software-related elements include software products and services, as well as any non-software deliverable for which a software deliverable is essential to its functionality.
A software multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met:
· The functionality of the delivered element(s) is not dependent on the undelivered element(s);
· There is vendor-specific objective evidence (VSOE) of fair value of the undelivered element(s). VSOE of fair value is based on the price charged when the deliverable is sold separately by the company on a regular basis and not as part of the multiple-element arrangement; and
· Delivery of the delivered element(s) represents the culmination of the earnings process for that element(s).
If any one of these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized on a straight-line basis or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is VSOE of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each units relative VSOE of fair value. There may be cases, however, in which there is VSOE of fair value of the undelivered item(s) but no such evidence for the delivered item(s). In these cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate VSOE of fair value of the undelivered elements.
Financing
Financing income attributable to sales-type leases, direct financing leases and loans is recognized on the accrual basis using the effective interest method. Operating lease income is recognized on a straight-line basis over the term of the lease.
Services Costs
Recurring operating costs for services contracts, including costs related to bid and proposal activities, are recognized as incurred. For fixed-price design and build contracts, the costs of external hardware and software accounted for under the POC method are deferred and recognized based on the labor costs incurred to date, as a percentage of the total estimated labor costs to fulfill the contract. Certain eligible, nonrecurring costs incurred in the initial phases of outsourcing contracts are deferred and subsequently amortized. These costs consist of transition and setup costs related to the installation of systems and processes and are amortized on a straight-line basis over the expected period of benefit, not to exceed the term of the contract. Additionally, fixed assets associated with outsourcing contracts are capitalized and depreciated on a straight-line basis over the expected useful life of the asset. If an asset is contract specific, then the depreciation period is the shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements are deferred and amortized on a straight-line basis as a reduction of revenue over the expected period of benefit not to exceed the term of the contract. The company performs periodic reviews to assess the recoverability of deferred contract transition and setup costs. This review is done by comparing the estimated minimum remaining undiscounted cash flows of a contract to the unamortized contract costs. If such minimum undiscounted cash flows are not sufficient to recover the unamortized costs, a loss is recognized.
Deferred services transition and setup costs were $2,432 million and $2,023 million at December 31, 2009 and December 31, 2008, respectively. The primary driver of the increase was the continued growth of the Global Services business. Amortization expense of deferred services transition and setup costs is estimated at December 31, 2009 to be $689 million in 2010, $562 million in 2011, $464 million in 2012, $430 million in 2013 and $287 million thereafter.
Deferred amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements were $72 million and $119 million at December 31, 2009 and December 31, 2008, respectively. Amortization of deferred amounts paid to
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
clients in excess of the fair value of acquired assets is recorded as an offset of revenue and is estimated at December 31, 2009 to be $39 million in 2010, $23 million in 2011, $7 million in 2012, $2 million in 2013 and $1 million thereafter.
In situations in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the company for the recovery of unbilled accounts receivable, unamortized deferred costs incurred to purchase specific assets utilized in the delivery of services and to pay any additional costs incurred by the company to transition the services.
Software Costs
Costs that are related to the conceptual formulation and design of licensed programs are expensed as incurred to research, development and engineering expense; costs that are incurred to produce the finished product after technological feasibility has been established are capitalized as an intangible asset. Capitalized amounts are amortized using the straight-line method, which is applied over periods ranging up to three years. The company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged to software cost as incurred.
The company capitalizes certain costs that are incurred to purchase or to create and implement internal-use computer software, which includes software coding, installation, testing and certain data conversions. These capitalized costs are amortized on a straight-line basis over two years and are recorded in selling, general and administrative expense. See note J, Intangible Assets Including Goodwill, on pages 89 to 90.
Product Warranties
The company offers warranties for its hardware products that range up to three years, with the majority being either one or three years. Estimated costs for warranty terms standard to the deliverable are recognized when revenue is recorded for the related deliverable. The company estimates its warranty costs standard to the deliverable based on historical warranty claim experience and applies this estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized in the current period are charged to cost of revenue. The warranty accrual is reviewed quarterly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended warranty contracts, are recognized as incurred.
Revenue from extended warranty contracts, for which the company is obligated to perform, is recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period.
Changes in the companys deferred income for extended warranty contracts and warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities on the Consolidated Statement of Financial Position, are presented in the following tables:
Standard Warranty Liability
($ in millions)
|
|
2009 |
|
2008 |
|
||
Balance at January 1 |
|
$ |
358 |
|
$ |
412 |
|
Current period accruals |
|
374 |
|
390 |
|
||
Accrual adjustments to reflect actual experience |
|
(11 |
) |
16 |
|
||
Charges incurred |
|
(406 |
) |
(460 |
) |
||
Balance at December 31 |
|
$ |
316 |
|
$ |
358 |
|
Extended Warranty Liability
($ in millions)
|
|
2009 |
|
2008 |
|
||
Aggregate deferred revenue at January 1 |
|
$ |
589 |
|
$ |
409 |
|
Revenue deferred for new extended warranty contracts |
|
283 |
|
335 |
|
||
Amortization of deferred revenue |
|
(226 |
) |
(134 |
) |
||
Other* |
|
18 |
|
(21 |
) |
||
Balance at December 31 |
|
$ |
665 |
|
$ |
589 |
|
Current portion |
|
$ |
310 |
|
$ |
234 |
|
Noncurrent portion |
|
355 |
|
355 |
|
||
Balance at December 31 |
|
$ |
665 |
|
$ |
589 |
|
* Other consists primarily of foreign currency translation adjustments.
Shipping and Handling
Costs related to shipping and handling are recognized as incurred and included in cost in the Consolidated Statement of Earnings.
Expense and Other Income
Selling, General and Administrative
Selling, general and administrative (SG&A) expense is charged to income as incurred. Expenses of promoting and selling products and services are classified as selling expense and include such items as compensation, advertising, sales commissions and travel. General and administrative expense includes such items as compensation, office supplies, non-income taxes, insurance and office rental. In addition, general and administrative expense includes other operating items such as a provision for doubtful accounts, workforce accruals for contractually obligated payments to employees terminated in the ongoing course of business, acquisition costs related to business combinations, amortization of certain intangible assets and environmental remediation costs.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Advertising and Promotional Expense
The company expenses advertising and promotional costs when incurred. Cooperative advertising reimbursements from vendors are recorded net of advertising and promotional expense in the period the related advertising and promotional expense is incurred. Advertising and promotional expense, which includes media, agency and promotional expense, was $1,252 million, $1,259 million and $1,242 million in 2009, 2008 and 2007, respectively, and is recorded in SG&A expense in the Consolidated Statement of Earnings.
Research, Development and Engineering
Research, development and engineering (RD&E) costs are expensed as incurred. Software costs that are incurred to produce the finished product after technological feasibility has been established are capitalized as an intangible asset. See Software Costs on page 73.
Intellectual Property and Custom Development Income
The company licenses and sells the rights to certain of its intellectual property (IP) including internally developed patents, trade secrets and technological know-how. Certain transfers of IP to third parties are licensing/royalty-based and other transfers are transaction-based sales and other transfers. Licensing/royalty-based fees involve transfers in which the company earns the income over time, or the amount of income is not fixed or determinable until the licensee sells future related products (i.e., variable royalty, based upon licensees revenue). Sales and other transfers typically include transfers of IP whereby the company has fulfilled its obligations and the fee received is fixed or determinable at the transfer date. The company also enters into cross-licensing arrangements of patents, and income from these arrangements is recorded only to the extent cash is received. Furthermore, the company earns income from certain custom development projects for strategic technology partners and specific clients. The company records the income from these projects when the fee is realized or realizable and earned, is not refundable and is not dependent upon the success of the project.
Other (Income) and Expense
Other (income) and expense includes interest income (other than from Global Financing external business transactions), gains and losses on certain derivative instruments, gains and losses from securities and other investments, gains and losses from certain real estate transactions, foreign currency transaction gains and losses, gains and losses from the sale of businesses and amounts related to accretion of asset retirement obligations.
Business Combinations and Intangible Assets Including Goodwill
The company accounts for business combinations using the acquisition method and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree are recorded at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the company and the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. Identifiable intangible assets with finite lives are amortized over their useful lives. Amortization of completed technology is recorded in cost and amortization of all other intangible assets is recorded in selling, general and administrative expense. See note C, Acquisitions/Divestitures, on pages 82 to 86 and note J, Intangible Assets Including Goodwill, on pages 89 to 90, for additional information. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Impairment
Long-lived assets, other than goodwill, are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Goodwill is tested annually, in the fourth quarter, for impairment, or sooner when circumstances indicate an impairment may exist, using a fair-value approach at the reporting unit level. A reporting unit is the operating segment, or a business, which is one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by management at the segment level. Components are aggregated as a single reporting unit if they have similar economic characteristics.
Depreciation and Amortization
Plant, rental machines and other property are carried at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of certain depreciable assets are as follows: buildings, 30 to 50 years; building equipment, 10 to 20 years; land improvements, 20 years; plant, laboratory and office equipment, 2 to 20 years; and computer equipment, 1.5 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely exceeding 25 years.
Capitalized software costs incurred or acquired after technological feasibility has been established are amortized over periods ranging up to 3 years. Capitalized costs for internal-use software are amortized on a straight-line basis over periods up to 2 years. (See Software Costs on page 73 for additional information). Other intangible assets are amortized over periods between 2 and 7 years.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Environmental
The cost of internal environmental protection programs that are preventative in nature are expensed as incurred. When a cleanup program becomes likely, and it is probable that the company will incur cleanup costs and those costs can be reasonably estimated, the company accrues remediation costs for known environmental liabilities. The companys maximum exposure for all environmental liabilities cannot be estimated and no amounts are recorded for environmental liabilities that are not probable or estimable.
Asset Retirement Obligations
Asset retirement obligations (ARO) are legal obligations associated with the retirement of long-lived assets. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the company records period-to-period changes in the ARO liability resulting from the passage of time in interest expense and revisions to either the timing or the amount of the original expected cash flows to the related assets.
Defined Benefit Pension and Nonpension Postretirement Benefit Plans
The funded status of the companys defined benefit pension plans and nonpension postretirement benefit plans (retirement-related benefit plans) is recognized in the Consolidated Statement of Financial Position. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (PBO), which represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. For the nonpension postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation (APBO), which represents the actuarial present value of postretirement benefits attributed to employee services already rendered. The fair value of plan assets represents the current market value of cumulative company and participant contributions made to an irrevocable trust fund, held for the sole benefit of participants, which are invested by the trust fund. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are aggregated and recorded as a prepaid pension asset equal to this excess. Underfunded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and recorded as a retirement and nonpension postretirement benefit obligation equal to this excess.
The current portion of the retirement and nonpension postretirement benefit obligations represents the actuarial present value of benefits payable in the next 12 months exceeding the fair value of plan assets, measured on a plan-by-plan basis. This obligation is recorded in compensation and benefits in the Consolidated Statement of Financial Position.
Net periodic pension and nonpension postretirement benefit cost/(income) is recorded in the Consolidated Statement of Earnings and includes service cost, interest cost, expected return on plan assets, amortization of prior service costs/(credits) and (gains)/losses previously recognized as a component of other comprehensive income/(loss) and amortization of the net transition asset remaining in accumulated other comprehensive income/(loss). Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money cost associated with the passage of time. Certain events, such as changes in employee base, plan amendments and changes in actuarial assumptions, result in a change in the benefit obligation and the corresponding change in other comprehensive income/(loss). The result of these events is amortized as a component of net periodic cost/(income) over the service lives or life expectancy of the participants, depending on the plan, provided such amounts exceed thresholds which are based upon the benefit obligation or the value of plan assets. Net periodic cost/(income) is recorded in cost, SG&A and RD&E in the Consolidated Statement of Earnings based on the employees respective function.
(Gains)/losses and prior service costs/(credits) not recognized as a component of net periodic cost/(income) in the Consolidated Statement of Earnings as they arise are recognized as a component of other comprehensive i ncome/(loss) in the Consolidated Statement of Changes in Equity, net of tax. Those (gains)/losses and prior service costs/(credits) are subsequently recognized as a component of net periodic cost/(income) pursuant to the recognition and amortization provisions of applicable accounting guidance. (Gains)/losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Prior service costs/(credits) represent the cost of benefit improvements attributable to prior service granted in plan amendments.
The measurement of benefit obligations and net periodic cost/(income) is based on estimates and assumptions approved by the companys management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates.
Defined Contribution Plans
The company records expense for defined contribution plans for the companys contribution when the employee renders service to the company, essentially coinciding with the cash contributions to the plans. The expense is recorded in cost, SG&A and RD&E in the Consolidated Statement of Earnings based on the employees respective function.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Stock-Based Compensation
Stock-based compensation represents the cost related to stock-based awards granted to employees. The company measures stock-based compensation cost at grant date, based on the estimated fair value of the award and recognizes the cost on a straight-line basis (net of estimated forfeitures) over the employee requisite service period. The company estimates the fair value of stock options using a Black-Scholes valuation model. The cost is recorded in cost, SG&A, and RD&E in the Consolidated Statement of Earnings based on the employees respective function.
The company records deferred tax assets for awards that result in deductions on the companys income tax returns, based on the amount of compensation cost recognized and the statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in the Consolidated Statement of Earnings (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards).
See note T, Stock-Based Compensation on pages 105 to 109 for additional information.
Income Taxes
Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. Valuation allowances are recognized to reduce deferred tax assets to the amount that will more likely than not be realized. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. When the company changes its determination as to the amount of deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made.
The company recognizes tax liabilities when, despite the companys belief that its tax return positions are supportable, the company believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. The current portion of tax liabilities is included in taxes and the noncurrent portion of tax liabilities is included in other liabilities in the Consolidated Statement of Financial Position. To the extent that new information becomes available which causes the company to change its judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense.
Translation of Non-U.S. Currency Amounts
Assets and liabilities of non-U.S. subsidiaries that have a local functional currency are translated to United States (U.S.) dollars at year-end exchange rates. Translation adjustments are recorded in accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity. Income and expense items are translated at weighted-average rates of exchange prevailing during the year.
Inventories, plant, rental machines and other propertynet and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars are translated at the approximate exchange rates prevailing when the company acquired the assets or liabilities. All other assets and liabilities denominated in a currency other than U.S. dollars are translated at year-end exchange rates with the transaction gain or loss recognized in other (income) and expense. Cost of sales and depreciation are translated at historical exchange rates. All other income and expense items are translated at the weighted-average rates of exchange prevailing during the year. These translation gains and losses are included in net income for the period in which exchange rates change.
Derivatives
All derivatives are recognized in the Consolidated Statement of Financial Position at fair value and are reported in prepaid expenses and other current assets, investments and sundry assets, other accrued expenses and liabilities or other liabilities. Classification of each derivative as current or noncurrent is based upon whether the maturity of the instrument is less than or greater than 12 months. To qualify for hedge accounting, the company requires that the instruments be effective in reducing the risk exposure that they are designated to hedge. For instruments that hedge cash flows, hedge effectiveness criteria also require that it be probable that the underlying transaction will occur. Instruments that meet established accounting criteria are formally designated as hedges. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in fair value or cash flows of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. The method of assessing hedge effectiveness and measuring hedge ineffectiveness is formally documented at hedge inception. The company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the designated hedge period.
Where the company applies hedge accounting, the company designates each derivative as a hedge of: (1) the fair value of a recognized financial asset or liability or of an unrecognized firm commitment (fair value hedge); (2) the variability of anticipated cash flows of a forecasted transaction or the cash flows to be received or paid related to a recognized financial asset or liability (cash flow hedge); or (3) a hedge of a long-term investment
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
(net investment hedge) in a foreign operation. In addition, the company may enter into derivative contracts that economically hedge certain of its risks, even though hedge accounting does not apply or the company elects not to apply hedge accounting. In these cases, there exists a natural hedging relationship in which changes in the fair value of the derivative, which are recognized currently in net income, act as an economic offset to changes in the fair value of the underlying hedged item(s).
Changes in the fair value of a derivative that is designated as a fair value hedge, along with offsetting changes in the fair value of the underlying hedged exposure, are recorded in earnings each period. For hedges of interest rate risk, the fair value adjustments are recorded as adjustments to interest expense and cost of financing in the Consolidated Statement of Earnings. For hedges of currency risk associated with recorded financial assets or liabilities, derivative fair value adjustments are recognized in other (income) and expense in the Consolidated Statement of Earnings. Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded, net of applicable taxes, in accumulated other comprehensive income/ (loss), a component of equity. When net income is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the derivative that is deferred in equity is released to net income and reported in interest expense, cost, SG&A expense or other (income) and expense in the Consolidated Statement of Earnings based on the nature of the underlying cash flow hedged. Effectiveness for net investment hedging derivatives is measured on a spot-to-spot basis. The effective portion of changes in the fair value of net investment hedging derivatives and other non-derivative financial instruments designated as net investment hedges are recorded as foreign currency translation adjustments, net of applicable taxes, in accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity. Changes in the fair value of the portion of a net investment hedging derivative excluded from the effectiveness assessment are recorded in interest expense.
When the underlying hedged item ceases to exist, all changes in the fair value of the derivative are included in net income each period until the instrument matures. When the derivative transaction ceases to exist, a hedged asset or liability is no longer adjusted for changes in its fair value except as required under other relevant accounting standards. Derivatives that are not designated as hedges, as well as changes in the fair value of derivatives that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period (collectively, ineffectiveness), are recorded in net income each period and are reported in other (income) and expense.
The company reports cash flows arising from derivative financial instruments designated as fair value or cash flow hedges consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Accordingly, the cash flows associated with derivatives designated as fair value or cash flow hedges are classified in cash flows from operating activities in the Consolidated Statement of Cash Flows. Cash flows from derivatives designated as net investment hedges and derivatives that do not qualify as hedges are reported in investing activities. For currency swaps designated as hedges of foreign currency denominated debt (included in the companys debt risk management program as addressed in note L, Derivatives and Hedging Transactions, on pages 92 through 96), cash flows directly associated with the settlement of the principal element of these swaps are reported in payments to settle debt in the cash flow from financing activities section of the Consolidated Statement of Cash Flows.
Financial Instruments
In determining the fair value of its financial instruments, the company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. Refer to note E, Financial Instruments (Excluding Derivatives), on pages 87 and 88 for further information. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Fair Value Measurement
Exit prices are used to measure assets and liabilities that fall within the scope of the fair value measurements guidance. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:
· Level 1Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
· Level 2Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
· Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
This guidance requires the use of observable market data if such data is available without undue cost and effort.
When available, the company uses unadjusted quoted market prices to measure the fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.
The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument. In the event of another-than -temporary impairment of a nonpublic equity method investment, the company uses the net asset
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
value of its investment in the investee adjusted using discounted cash flows for the companys estimate of the price that it would receive to sell the investment to a market participant that would consider all factors that would impact the investments fair value.
In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the base valuations calculated using the methodologies described below for several parameters that market participants would consider in determining fair value.
· Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.
· Credit risk adjustments are applied to reflect the companys own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the companys own credit risk as observed in the credit default swap market.
Certain assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the end of the period to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include public cost method investments that are deemed to be other-than-temporarily impaired.
Cash Equivalents
All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.
Marketable Securities
Debt securities included in current assets represent securities that are expected to be realized in cash within one year of the balance sheet date. Long-term debt securities that are not expected to be realized in cash within one year and alliance equity securities are included in investments and sundry assets. Debt and marketable equity securities are considered available for sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, recorded in other comprehensive income/(loss), a component of equity. The realized gains and losses for available for sale securities are included in other (income) and expense in the Consolidated Statement of Earnings. Realized gains and losses are calculated based on the specific identification method.
In determining whether an other-than-temporary decline in market value has occurred, the company considers the duration that, and extent to which, the fair value of the investment is below its cost, the financial condition and near-term prospects of the issuer or underlying collateral of a security; and the companys intent and ability to retain the security in order to allow for an anticipated recovery in fair value. Other-than-temporary declines in fair value from amortized cost for available for sale equity and debt securities that the company intends to sell or would more-likely-than-not be required to sell before the expected recovery of the amortized cost basis are charged to other (income) and expense in the period in which the loss occurs. For debt securities that the company has no intent to sell and believes that it more-likely-than-not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in other (income) and expense, while the remaining loss is recognized in other comprehensive income/(loss). The credit loss component recognized in other (income) and expense is identified as the amount of the principal cash flows not expected to be received over the remaining term of the debt security as projected using the companys cash flow projections.
Inventories
Raw materials, work in process and finished goods are stated at the lower of average cost or market. Cash flows related to the sale of inventories are reflected in net cash from operating activities from continuing operations in the Consolidated Statement of Cash Flows.
Allowance for Uncollectible Receivables
Trade
An allowance for uncollectible trade receivables is estimated based on a combination of write-off history, aging analysis and any specific, known troubled accounts.
Financing
Financing receivables include sales-type leases, direct financing leases and loans. The methodologies that the company uses to calculate both its specific and its unallocated reserves, which are applied consistently to its different portfolios are as follows:
SPECIFIC The company reviews all financing receivables considered at risk on a quarterly basis. The review primarily consists of an analysis based upon current information available about the client, such as financial statements, news reports, published credit ratings, current market-implied credit analysis, as well as the current economic environment, collateral net of repossession cost and prior collection history. For loans that are collateral dependent, impairment is measured using the fair value of the collateral when foreclosure is probable. Using this information, the company determines the expected cash flow for the receivable and calculates a recommended estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve.
UNALLOCATED The company records an unallocated reserve that is calculated by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, asset characteristics and loss history.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Certain receivables for which the company recorded specific reserves may also be placed on non-accrual status. Non-accrual assets are those receivables (impaired loans or non-performing leases) with specific reserves and other accounts for which it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan agreement. Income recognition is discontinued on these receivables. Cash collections are first applied as a reduction to principal outstanding. Any cash received in excess of principal payments outstanding is recognized as interest income. Receivables may be removed from non-accrual status, if appropriate, based upon changes in client circumstances.
Estimated Residual Values of Lease Assets
The recorded residual values of the companys lease assets are estimated at the inception of the lease to be the expected fair value of the assets at the end of the lease term. The company periodically reassesses the realizable value of its lease residual values. Any anticipated increases in specific future residual values are not recognized before realization through remarketing efforts. Anticipated decreases in specific future residual values that are considered to be other-than-temporary are recognized immediately upon identification and are recorded as an adjustment to the residual-value estimate. For sales-type and direct financing leases, this reduction lowers the recorded net investment and is recognized as a loss charged to financing income in the period in which the estimate is changed, as well as an adjustment to unearned income to reduce future-period financing income.
Common Stock
Common stock refers to the $.20 par value per share capital stock as designated in the companys Certificate of Incorporation. Treasury stock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recorded using a weighted-average basis.
Earnings Per Share of Common Stock
Basic earnings per share of common stock is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share of common stock is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, stock awards and convertible notes. See note R, Earnings Per Share of Common Stock, on page 104 for additional information.
Note B.
Accounting Changes
New Standards to be Implemented
In January 2010, the Financial Accounting Standards Board (FASB) issued additional disclosure requirements for fair value measurements. According to the guidance, the fair value hierarchy disclosures are to be further disaggregated by class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. In addition, significant transfers between Levels 1 and 2 of the fair value hierarchy will be required to be disclosed. These additional requirements are effective January 1, 2010 for quarterly and annual reporting. These amendments will not have an impact on the consolidated financial results as this guidance relates only to additional disclosures. In addition, the guidance requires more detailed disclosures of the changes in Level 3 instruments. These changes will be effective January 1, 2011 and are not expected to have a material impact on the Consolidated Financial Statements.
In October 2009, the FASB issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance eliminates the residual method of revenue recognition and allows the use of managements best estimate of selling price for individual elements of an arrangement when vendor-specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE) is unavailable. In accordance with the guidance, the company has elected to early adopt its provisions as of January 1, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The company does not expect a material impact on the Consolidated Financial Statements.
In October 2009, the FASB issued guidance which amends the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the products essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. This guidance must be adopted in the same period that the company adopts the amended accounting for arrangements with multiple deliverables described in the preceding paragraph. Therefore, the company will also early adopt this guidance as of January 1, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The company does not expect a material impact on the Consolidated Financial Statements.
In June 2009, the FASB issued amendments to the accounting rules for variable interest entities (VIEs) and for transfers of financial assets. The new guidance for VIEs eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary. In addition, qualifying special purpose entities (QSPEs)
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
are no longer exempt from consolidation under the amended guidance. The amendments also limit the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented, and/or when the transferor has continuing involvement with the transferred financial asset. The company will adopt these amendments for interim and annual reporting periods beginning on January 1, 2010. The company does not expect the adoption of these amendments to have a material impact on the Consolidated Financial Statements.
Standards Implemented
In September 2009, the FASB issued amended guidance concerning fair value measurements of investments in certain entities that calculate net asset value per share (or its equivalent). If fair value is not readily determinable, the amended guidance permits, as a practical expedient, a reporting entity to measure the fair value of an investment using the net asset value per share (or its equivalent) provided by the investee without further adjustment. In accordance with the guidance, the company adopted these amendments for the year ended December 31, 2009. There was no material impact on the Consolidated Financial Statements.
On July 1, 2009, the FASB issued the FASB Accounting Standards Codification (the Codification). The Codification became the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. The Codification eliminates the previous U.S. GAAP hierarchy and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. The Codification was effective for interim and annual periods ending after September 15, 2009. The company adopted the Codification for the quarter ending September 30, 2009. There was no impact to the consolidated financial results.
In May 2009, the FASB issued guidelines on subsequent event accounting which sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. These guidelines were effective for interim and annual periods ending after June 15, 2009, and the company adopted them in the quarter ended June 30, 2009. There was no impact on the consolidated financial results.
In April 2009, the FASB issued additional requirements regarding interim disclosures about the fair value of financial instruments which were previously only disclosed on an annual basis. Entities are now required to disclose the fair value of financial instruments which are not recorded at fair value in the financial statements in both interim and annual financial statements. The new requirements were effective for interim and annual periods ending after June 15, 2009 on a prospective basis. The company adopted these requirements in the quarter ended June 30, 2009. There was no impact on the consolidated financial results as this relates only to additional disclosures in the quarterly financial statements. See note E, Financial Instruments (Excluding Derivatives), on pages 87 and 88.
On January 1, 2009, the company adopted the revised FASB guidance regarding business combinations which was required to be applied to business combinations on a prospective basis. The revised guidance requires that the acquisition method of accounting be applied to a broader set of business combinations, amends the definition of a business combination, provides a definition of a business, requires an acquirer to recognize an acquired business at its fair value at the acquisition date and requires the assets and liabilities assumed in a business combination to be measured and recognized at their fair values as of the acquisition date (with limited exceptions). There was no impact upon adoption and the effects of this guidance will depend on the nature and significance of business combinations occurring after the effective date. See note C, Acquisitions/Divestitures, on pages 82 to 86 for further information regarding 2009 business combinations.
In April 2009, the FASB issued an amendment to the revised business combination guidance regarding the accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. The requirements of this amended guidance carry forward without significant revision the guidance on contingencies which existed prior to January 1, 2009. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with the Accounting Standards Codification (ASC) Topic 450 on contingencies. There was no impact upon adoption. See note C, Acquisitions/Divestitures, on pages 82 to 86 for further information regarding 2009 business combinations.
In April 2008, the FASB issued new requirements regarding the determination of the useful lives of intangible assets. In developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. The new requirements apply to intangible assets acquired after January 1, 2009. The adoption of these new rules did not have a material impact on the Consolidated Financial Statements.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
In December 2007, the FASB issued new guidance on non-controlling interests in consolidated financial statements. This guidance requires that the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. Pursuant to the transition provisions, the company adopted this new guidance on January 1, 2009 via retrospective application of the presentation and disclosure requirements. Noncontrolling interests of $119 million at January 1, 2009, $145 million at January 1, 2008 and $129 million at January 1, 2007 were reclassified from the Liabilities section to the Equity section in the Consolidated Statement of Financial Position.
Noncontrolling interest amounts in income of $5 million, $14 million and $17 million, net of tax, for the years ended December 31, 2009, December 31, 2008 and December 31, 2007, respectively, are not presented separately in the Consolidated Statement of Earnings due to immateriality, but are reflected within the other (income) and expense line item. Additionally, changes to noncontrolling interests in the Consolidated Statement of Changes in Equity were $(1) million, $(26) million and $16 million for the years ended December 31, 2009, December 31, 2008 and December 31, 2007, respectively. A separate roll forward is not presented due to immateriality.
In March 2008, the FASB issued new disclosure requirements regarding derivative instruments and hedging activities. Entities must now provide enhanced disclosures on an interim and annual basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for, and how derivatives and related hedged items affect the entitys financial position, financial results and cash flow. Pursuant to the transition provisions, the company adopted these new requirements on January 1, 2009. The required disclosures are presented in note L, Derivatives and Hedging Transactions, on pages 92 through 96 on a prospective basis. These new requirements did not impact the consolidated financial results as they relate only to additional disclosures.
In June 2008, the FASB issued guidance in determining whether instruments granted in share-based payment transactions are participating securities. The guidance became effective on January 1, 2009 via retrospective application. According to the new guidance, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share (EPS) pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Restricted Stock Units (RSUs) granted to employees prior to December 31, 2007 are considered participating securities as they receive non-forfeitable dividend equivalents at the same rate as common stock. RSUs granted after December 31, 2007 do not receive dividend equivalents and are not considered participating securities. The company retrospectively adopted this guidance on January 1, 2009. The impact of adoption decreased previously reported diluted EPS by $0.04 for the year ended December 31, 2008 and by $0.03 for the year ended December 31, 2007. Previously reported basic EPS decreased by $0.05 for the year ended December 31, 2008 and by $0.05 for the year ended December 31, 2007.
In November 2008, the FASB issued guidance on accounting for defensive intangible assets. A defensive intangible asset is an asset acquired in a business combination or in an asset acquisition that an entity does not intend to actively use. According to the guidance, defensive intangible assets are considered to be a separate unit of account and valued based on their highest and best use from the perspective of an external market participant. The company adopted this guidance on January 1, 2009, and there was no impact upon adoption.
In December 2008, the FASB issued guidance regarding employers disclosures about postretirement benefit plan assets. This guidance requires more detailed disclosures about the fair value measurements of employers plan assets including: (a) investment policies and strategies; (b) major categories of plan assets; (c) information about valuation techniques and inputs to those techniques, including the fair value hierarchy classifications (as defined in the Codification) of the major categories of plan assets; (d) the effects of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets; and (e) significant concentrations of risk within plan assets. The disclosures are required annually and have been included in the December 31, 2009 consolidated financial statements. See note U Retirement-Related Benefits on pages 109 through 121 for further information. There was no impact on the consolidated financial results as the guidance relates only to additional disclosures.
In September 2006, the FASB issued guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. This guidance became effective January 1, 2008 and was applied prospectively to fair value measurements and disclosures of (a) financial assets and financial liabilities and (b) nonfinancial assets and nonfinancial liabilities which are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The application of this guidance did not have a material effect on the Consolidated Financial Statements. See note D, Fair Value, on pages 86 and 87 for additional information.
In February 2008, the FASB issued two amendments to the fair value guidance described above. The first amendment removed leasing from the scope of the fair value guidance. The second amendment delayed the effective date regarding fair value measurements and disclosures of nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
basis (at least annually), to January 1, 2009. The application of these amendments did not have a material impact on the Consolidated Financial Statements.
In February 2007, the FASB issued guidance that permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. The company adopted this guidance as of January 1, 2008 but has not applied the fair value option to any eligible assets or liabilities. Thus, the adoption of this guidance did not affect the Consolidated Financial Statements.
In the first quarter of 2007, the company adopted the guidance on accounting for separately recognized servicing assets and servicing liabilities. Separately recognized servicing assets and servicing liabilities must be initially measured at fair value, if practicable. Subsequent to initial recognition, the company may use either the amortization method or the fair value measurement method to account for servicing assets and servicing liabilities within the scope of this Statement. The adoption of this guidance did not have a material effect on the Consolidated Financial Statements.
On January 1, 2007, the company adopted the guidance on the accounting and reporting of uncertainties in income tax law. The guidance prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. See note P Taxes, on pages 101 to 103 for further information. The cumulative effect of adopting this guidance was a decrease in tax reserves and an increase of $117 million to the January 1, 2007 retained earnings balance.
Note C.
Acquisitions/Divestitures
Acquisitions
2009
In 2009, the company completed six acquisitions at an aggregate cost of $1,471 million. The SPSS, Inc. acquisition is shown separately given its significant purchase price.
SPSS, INC. (SPSS) On October 2, 2009, the company acquired 100 percent of the outstanding common shares of SPSS for cash consideration of $1,177 million. SPSS is a leading global provider of predictive analytics software and solutions and this acquisition will strengthen the companys business analytics and optimization capabilities. SPSS was integrated into the Software segment upon acquisition, and goodwill, as reflected in the table below, has been entirely assigned to the Software segment. Substantially all of the goodwill is not deductible for tax purposes. The overall weighted average useful life of the intangible assets acquired, excluding goodwill, is 7.0 years.
OTHER ACQUISITIONS The Software segment also completed acquisitions of four privately held companies: in the second quarter, Outblaze Limited, a messaging software provider, and Exeros, Inc., a data discovery firm; in the third quarter, security provider Ounce Labs, Inc.; and in the fourth quarter, Guardium, Inc., a database security company. Global Technology Services completed one acquisition in the fourth quarter: RedPill Solutions PTE Limited, a privately held company focused on business analytics.
Purchase price consideration for the Other Acquisitions, as reflected in the table below, was paid all in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.
2009 ACQUISITIONS
($ in millions)
|
|
Amortization |
|
|
|
Other |
|
||
|
|
Life (in Years) |
|
SPSS |
|
Acquisitions |
|
||
Current assets |
|
|
|
$ |
397 |
|
$ |
13 |
|
Fixed assets/noncurrent |
|
|
|
20 |
|
1 |
|
||
Intangible assets: |
|
|
|
|
|
|
|
||
Goodwill |
|
N/A |
|
748 |
|
255 |
|
||
Completed technology |
|
4 to 7 |
|
105 |
|
39 |
|
||
Client relationships |
|
5 to 7 |
|
30 |
|
20 |
|
||
In-process R&D |
|
N/A |
|
|
|
|
|
||
Other identifiable assets |
|
1 to 7 |
|
36 |
|
1 |
|
||
Total assets acquired |
|
|
|
1,336 |
|
330 |
|
||
Current liabilities |
|
|
|
(157 |
) |
(34 |
) |
||
Noncurrent liabilities |
|
|
|
(2 |
) |
(0 |
) |
||
Total liabilities assumed |
|
|
|
(160 |
) |
(35 |
) |
||
Total purchase price |
|
|
|
$ |
1,177 |
|
$ |
295 |
|
N/ANot applicable
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The acquisitions were accounted for as business combinations, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. For the Other Acquisitions, the overall weighted-average life of the identified amortizable intangible assets acquired is 6.5 years. With the exception of goodwill, these identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $255 million has been assigned to the Software ($246 million) and Global Technology Services ($10 million) segments. Substantially all of the goodwill is not deductible for tax purposes.
On October 5, 2009, the company announced that it had signed an agreement with Bank of America Corporation to acquire the core operating assets of Wilshire Credit Corporation, including the Wilshire mortgage servicing platform. This acquisition continues the companys strategic focus on the mortgage services industry and strengthens its commitment to deliver mortgage business process outsourcing solutions. The agreement is subject to customary closing conditions and is not expected to close until the first quarter of 2010.
2008
In 2008, the company completed 15 acquisitions at an aggregate cost of $6,796 million. The Cognos, Inc. and Telelogic AB acquisitions are shown separately given their significant purchase prices.
COGNOS, INC. (COGNOS) On January 31, 2008, the company acquired 100 percent of the outstanding common shares of Cognos for consideration of $5,021 million consisting of $4,998 million of cash and $24 million of equity instruments. Through this acquisition, IBM and Cognos will become a leading provider of technology and services for business intelligence and performance management, delivering the industrys most complete, open standards-based platform with the broadest range of expertise to help companies expand the value of their information, optimize their business processes and maximize performance across their enterprises. The company acquired Cognos to accelerate its Information on Demand strategy, a cross-company initiative that combines the companys strength in information integration, content and data management and business consulting services to unlock the business value of information. Cognos was integrated into the Software segment upon acquisition, and goodwill, as reflected in the table on page 84, has been entirely assigned to the Software segment. Approximately 25-30 percent of the goodwill was deductible for tax purposes. The overall weighted-average useful life of the intangible assets acquired, excluding goodwill, is 6.5 years.
TELELOGIC, AB (TELELOGIC) On April 3, 2008, IBM acquired 100 percent of the outstanding common shares of Telelogic for cash consideration of $885 million. Telelogic is a leading global provider of solutions that enable organizations to align the development of products, complex systems and software with business objectives and customer needs. This results in improved quality and predictability, while reducing time-to-market and overall costs. Clients will benefit from the combined technologies and services of both companies, providing them a wider range of software and system development capabilities used to build complex systems. Telelogic was integrated into the Software segment upon acquisition, and goodwill, as reflected in the table on page 84 has been entirely assigned to the Software segment. Substantially all of the goodwill is not deductible for tax purposes. The overall weighted-average useful life of the intangible assets acquired, excluding goodwill, is 7.0 years.
OTHER ACQUISITIONS The company acquired 13 additional companies at an aggregate cost of $889 million that are presented in the table on page 84 as Other Acquisitions.
The Software segment completed eight other acquisitions, seven of which were privately held companies: in the first quarter; AptSoft Corporation, Solid Information Technology, Net Integration Technologies Inc., and Encentuate, Inc; in the second quarter; Infodyne, Beijing Super Info and FilesX. In the fourth quarter, ILOG S. A. (ILOG), a publicly held company, was acquired for $295 million. ILOG adds significant capability across the companys entire software platform and bolsters its existing rules management offerings.
Global Technology Services completed one acquisition in the first quarter: Arsenal Digital Solutions, a privately held company. Arsenal provides global clients with security rich information protection services designed to handle increasing data retention requirements.
Global Business Services completed one acquisition in the first quarter: u9consult, a privately held company. u9consult complements the companys existing capabilities in value chain consulting.
Systems and Technology completed three acquisitions: in the second quarter; Diligent Technologies Corporation and Platform Solutions, Inc (PSI), both privately held companies. Diligent will be an important component of IBMs New Enterprise Data Center model, which helps clients improve IT efficiency and facilitates the rapid deployment of new IT services for future business growth. PSIs technologies and skills, along with its intellectual capital, will be integrated into the companys mainframe product engineering cycles and future product plans. In the second quarter, $24 million of the purchase price of PSI was attributed to the settlement of a preexisting lawsuit
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
between IBM and PSI and recorded in SG&A expense. See note O, Contingencies and Commitments, on pages 99 to 101 for additional information regarding this litigation. Also, the company recorded a $24 million in-process research and development (IPR&D) charge related to this acquisition in the second quarter. The acquisition of Transitive Corporation (Transitive) was completed in the fourth quarter. Transitives cross-platform technology will allow clients to consolidate their Linux-based applications onto the IBM systems that make the most sense for their business needs.
Purchase price consideration for the Other Acquisitions was paid all in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.
2008 ACQUISITIONS
($ in millions)
|
|
Amortization |
|
|
|
|
|
Other |
|
|||
|
|
Life (in Years) |
|
Cognos |
|
Telelogic |
|
Acquisitions |
|
|||
Current assets |
|
|
|
$ |
504 |
|
$ |
242 |
|
$ |
185 |
|
Fixed assets/noncurrent |
|
|
|
126 |
|
7 |
|
75 |
|
|||
Intangible assets: |
|
|
|
|
|
|
|
|
|
|||
Goodwill |
|
N/A |
|
4,207 |
|
690 |
|
676 |
|
|||
Completed technology |
|
3 to 7 |
|
534 |
|
108 |
|
94 |
|
|||
Client relationships |
|
3 to 7 |
|
512 |
|
127 |
|
39 |
|
|||
In-process R&D |
|
N/A |
|
|
|
|
|
24 |
|
|||
Other |
|
3 to 7 |
|
78 |
|
15 |
|
19 |
|
|||
Total assets acquired |
|
|
|
5,960 |
|
1,189 |
|
1,112 |
|
|||
Current liabilities |
|
|
|
(798 |
) |
(141 |
) |
(233 |
) |
|||
Noncurrent liabilities |
|
|
|
(141 |
) |
(163 |
) |
(14 |
) |
|||
Total liabilities assumed |
|
|
|
(939 |
) |
(304 |
) |
(247 |
) |
|||
Settlement of prexisting litigation |
|
|
|
|
|
|
|
24 |
|
|||
Total purchase price |
|
|
|
$ |
5,021 |
|
$ |
885 |
|
$ |
889 |
|
N/ANot applicable
The table above reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2008.
The acquisitions were accounted for as purchase transactions, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. For the Other Acquisitions, the overall weighted-average life of the identified amortizable intangible assets acquired is 4.3 years. With the exception of goodwill, these identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $676 million has been assigned to the Software ($328 million), Global Technology Services ($68 million) and Systems and Technology ($280 million) segments. Substantially, all of the goodwill related to Other Acquisitions is not deductible for tax purposes.
2007
In 2007, the company completed 12 acquisitions at an aggregate cost of $1,144 million.
The Software segment completed six acquisitions: in the first quarter, Consul Risk Management International BV and Vallent Corporation, both privately held companies. Four acquisitions were completed in the third quarter: Watchfire Corporation, WebDialogs Inc. and Princeton Softech Inc., all privately held companies, and DataMirror Corporation, a publicly held company. Each acquisition further complemented and enhanced the software product portfolio.
Global Technology Services completed four acquisitions: in the first quarter, Softek Storage Solutions Corporation (Softek) and DM Information Systems, Ltd. (DMIS), both privately held companies. Two acquisitions were completed in the fourth quarter: Novus Consulting Group, Inc. and Serbian Business Systems, both privately held companies. Softek augments the companys unified data mobility offerings and worldwide delivery expertise for managing data in storage array, host and virtualized IT environments. DMIS will enhance and complement the Technology Service offerings. Novus CG, a storage solution company, will provide improved access to business information,
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
enable stronger regulatory and corporate compliance and improve overall information technology performance. Serbian Business Systems establishes the companys maintenance and technical support services business in Serbia.
Global Business Services completed one acquisition in the fourth quarter: IT Gruppen AS, which will add to the companys presence in the retail and media sectors.
Systems and Technology completed one acquisition in the fourth quarter: XIV, Ltd., a privately held company focused on storage systems technology.
Purchase price consideration was paid in cash. These acquisitions are reported in the Consolidated Statement of Cash Rows net of acquired cash and cash equivalents.
The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2007.
The acquisitions were accounted for as purchase transactions, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. Substantially all of the goodwill is not deductible for tax purposes. The overall weighted-average life of the identified amortizable intangible assets acquired is 5.4 years. With the exception of goodwill, these identified intangible assets will be amortized over their useful lives. Goodwill of $999 million was assigned to the Software ($639 million), Global Business Services ($14 million), Global Technology Services ($76 million) and Systems and Technology ($269 million) segments.
2007 ACQUISITIONS
($ in millions)
|
|
Amortization |
|
|
|
|
|
|
Life (in Years) |
|
Acquisitions |
|
|
Current assets |
|
|
|
$ |
184 |
|
Fixed assets/noncurrent |
|
|
|
31 |
|
|
Intangible assets: |
|
|
|
|
|
|
Goodwill |
|
N/A |
|
999 |
|
|
Completed technology |
|
3 to 7 |
|
93 |
|
|
Client relationships |
|
3 to 7 |
|
91 |
|
|
Other |
|
2 to 5 |
|
17 |
|
|
Total assets acquired |
|
|
|
1,415 |
|
|
Current liabilities |
|
|
|
(136 |
) |
|
Noncurrent liabilities |
|
|
|
(135 |
) |
|
Total liabilities assumed |
|
|
|
(271 |
) |
|
Total purchase price |
|
|
|
$ |
1,144 |
|
N/ANot applicable
Divestitures
2009
On October 26, 2009, the company announced that it had signed an agreement with Dassault Systemes (DS) under which DS would acquire the companys activities associated with sales and support of DSs product lifecycle management (PLM) software solutions, including customer contracts and related assets. This transaction is subject to customary closing conditions and is expected to close in the first quarter of 2010. The company expects to record a gain when this transaction is completed.
On October 1, 2009, the company completed the divestiture of its UniData and Universe software products and related tools to Rocket Software, a privately held global software development firm. The company recognized a gain on the transaction in the fourth quarter.
On March 16, 2009, the company completed the sale of certain processes, resources, assets and third-party contracts related to its core logistics operations to Geodis. The company received proceeds of $365 million and recognized a net gain of $298 million on the transaction in the first quarter of 2009. The gain was net of the fair value of certain contractual terms, certain transaction costs and related real estate charges. As part of this transaction, the company outsourced its logistics operations to Geodis which enables the company to leverage industry-leading skills and scale and improve the productivity of the companys supply chain.
2007
In January 2007, the company announced an agreement with Ricoh Company Limited (Ricoh), a publicly traded company, to form a joint venture company based on the Printing System Division (a division of the Systems and Technology segment).
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The company initially created a wholly owned subsidiary, InfoPrint Solutions Company, LLC (InfoPrint), by contributing specific assets and liabilities from its printer business. The Printing Systems Division generated approximately $1 billion of revenue in 2006. The InfoPrint portfolio includes solutions for production printing for enterprises and commercial printers as well as solutions for office workgroup environments and industrial segments. On June 1, 2007 (closing date), the company divested 51 percent of its interest in InfoPrint to Ricoh. The company will divest its remaining 49 percent ownership to Ricoh quarterly over the next three years from the closing date. At December 31, 2009, the companys ownership in InfoPrint was 8.0 percent.
The total consideration the company agreed to on January 24, 2007 (the date the definitive agreement was signed) was $725 million which was paid in cash to the company on the closing date. The cash received was consideration for the initial 51 percent acquisition of InfoPrint by Ricoh as well as a prepayment for the remaining 49 percent to be acquired and certain royalties and services to be provided by the company to InfoPrint. Final consideration for this transaction will be determined at the end of the three-year period based upon the participation in the profits and losses recorded by the equity partners. The company concluded that InfoPrint met the requirements of a variable interest entity, the company is not the primary beneficiary of the entity and that deconsolidation of the applicable net assets was appropriate. The companys investment in InfoPrint is accounted for under the equity method of accounting.
The company will provide maintenance services for one year, certain hardware products for three years and other information technology and business process services to InfoPrint for up to five years. The company assessed the fair value of these arrangements, and, as a result, deferred $274 million of the proceeds. This amount will be recorded as revenue, primarily in the companys services segments, as services are provided to InfoPrint.
The royalty agreements are related to the use of certain of the companys trademarks for up to 10 years. The company assessed the fair value of these royalty agreements, and, as a result, deferred $116 million of the proceeds. This amount will be recognized as intellectual property and custom development income as it is earned in subsequent periods.
Net assets contributed, transaction-related expenses and provisions were $90 million, resulting in an expected total pre-tax gain of $245 million, of which $81 million was recorded in other (income) and expense in the Consolidated Statement of Earnings in the second quarter of 2007
The deferred pre-tax gain of $164 million at the closing date was primarily related to: (1) the transfer of the companys remaining 49 percent interest in InfoPrint to Ricoh, and, (2) the transfer of certain maintenance services employees to InfoPrint. The company will recognize this amount over a three-year period as the remaining ownership interest is divested and the employees are transferred. The pre-tax gain will be recorded in other (income) and expense in the Consolidated Statement of Earnings.
Note D.
Fair Value
Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the companys financial assets and financial liabilities that are measured at fair value on a recurring basis at December 31, 2009 and 2008.
($ in millions)
At December 31, 2009: |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Netting(1) |
|
Total |
|
|||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
2,780 |
|
$ |
6,497 |
|
$ |
|
|
$ |
|
|
$ |
9,277 |
|
Marketable securities |
|
|
|
1,791 |
|
|
|
|
|
1,791 |
|
|||||
Derivative assets(2) |
|
|
|
838 |
|
|
|
(573 |
) |
265 |
|
|||||
Investments and sundry assets |
|
369 |
|
14 |
|
|
|
|
|
383 |
|
|||||
Total assets |
|
$ |
3,149 |
|
$ |
9,140 |
|
$ |
|
|
$ |
(573 |
) |
$ |
11,716 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Derivative liabilities(3) |
|
$ |
|
|
$ |
1,555 |
|
$ |
|
|
$ |
(573 |
) |
$ |
982 |
|
Total liabilities |
|
$ |
|
|
$ |
1,555 |
|
$ |
|
|
$ |
(573 |
) |
$ |
982 |
|
(1) Represents netting of derivative exposures covered by a qualifying master netting agreement.
(2) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2009 are $273 million and $565 million, respectively.
(3) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2009 are $906 million and $649 million, respectively.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions)
At December 31, 2008: |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Netting(1) |
|
Total |
|
|||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
1,950 |
|
$ |
8,059 |
|
$ |
|
|
$ |
|
|
$ |
10,009 |
|
Marketable securities |
|
|
|
166 |
|
|
|
|
|
166 |
|
|||||
Derivative assets(2) |
|
56 |
|
1,834 |
|
|
|
(875 |
) |
1,015 |
|
|||||
Investments and sundry assets |
|
165 |
|
6 |
|
|
|
|
|
171 |
|
|||||
Total assets |
|
$ |
2,171 |
|
$ |
10,065 |
|
$ |
|
|
$ |
(875 |
) |
$ |
11,361 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Derivative liabilities(3) |
|
$ |
|
|
$ |
2,116 |
|
$ |
|
|
$ |
(875 |
) |
$ |
1,241 |
|
Total liabilities |
|
$ |
|
|
$ |
2,116 |
|
$ |
|
|
$ |
(875 |
) |
$ |
1,241 |
|
(1) Represents netting of derivative exposures covered by a qualifying master netting agreement.
(2) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2008 are $773 million and $1,117 million, respectively.
(3) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2008 are $1,414 million and $702 million, respectively.
Items Measured at Fair Value on a Nonrecurring Basis
In the fourth quarter of 2008, the company recorded an other-than-temporary impairment of $81 million for an equity method investment. The resulting investment which was classified as Level 3 in the fair value hierarchy was valued using a discounted cash flow model. The valuation inputs included an estimate of future cash flows, expectations about possible variations in the amount and timing of cash flows and a discount rate based on the risk-adjusted cost of capital. Potential results were assigned probabilities that resulted in a weighted average or most-likely discounted cash flow fair value as of December 31, 2008. The fair value of the investment after impairment was $7 million at December 31, 2008. During 2009, the balance of this investment was further reduced by an additional impairment of $5 million and other adjustments primarily related to dividends. The balance of this investment was zero at December 31, 2009.
Note E.
Financial Instruments (Excluding Derivatives)
Fair Value of Financial Instruments
Cash and cash equivalents, debt and marketable equity securities and derivative financial instruments are recognized and measured at fair value in the companys financial statements. Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt are financial liabilities with carrying values that approximate fair value. In the absence of quoted prices in active markets, considerable judgment is required in developing estimates of fair value. Estimates are not necessarily indicative of the amounts the company could realize in a current market transaction. The following methods and assumptions are used to estimate fair values:
Loans and Long-term Receivables
Estimates of fair value are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities.
Long-term Debt
Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturies is used to estimate fair value. The carrying amount of long-term debt is $21,932 million and $22,689 million and the estimated fair value is $23,748 million and $23,351 million at December 31, 2009 and 2008, respectively.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Debt and Marketable Equity Securities
The following table summarizes the companys debt and marketable equity securities all of which are considered available-for-sale and recorded at fair value in the Consolidated Statement of Financial Position.
($ in millions)
|
|
Fair Value |
|
||||
At December 31: |
|
2009 |
|
2008 |
|
||
Cash and cash equivalents:* |
|
|
|
|
|
||
Time deposits and certificates of deposit |
|
$ |
4,324 |
|
$ |
4,805 |
|
Commercial paper |
|
2,099 |
|
3,194 |
|
||
Money market funds |
|
2,780 |
|
1,950 |
|
||
Other securities |
|
74 |
|
60 |
|
||
Total |
|
$ |
9,277 |
|
$ |
10,009 |
|
Debt securitiescurrent:** |
|
|
|
|
|
||
Commercial paper |
|
$ |
1,491 |
|
$ |
166 |
|
Securities of U.S. Federal government and its agencies |
|
300 |
|
|
|
||
Total |
|
$ |
1,791 |
|
$ |
166 |
|
Debt securitiesnoncurrent:*** |
|
|
|
|
|
||
Other securities |
|
$ |
9 |
|
$ |
6 |
|
Total |
|
$ |
9 |
|
$ |
6 |
|
Non-equity method alliance investments*** |
|
$ |
374 |
|
$ |
165 |
|
* Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
** Reported as marketable securities within the Consolidated Statement of Financial Position.
*** Included within investments and sundry assets in the Consolidated Statement of Financial Position. See note I, Investments and Sundry Assets, on page 89.
Gross unrealized gains (before taxes) on debt securities were less than $1 million and $1 million at December 31, 2009 and 2008, respectively. Gross unrealized gains (before taxes) on marketable equity securities were $201 million and $31 million at December 31, 2009 and 2008, respectively. Gross unrealized losses (before taxes) on debt securities were less than $1 million at December 31, 2009 and 2008. Gross unrealized losses (before taxes) on marketable equity securities were $10 million and $27 million at December 31, 2009 and 2008, respectively. Based on an evaluation of available evidence as of December 31, 2009, the company believes that unrealized losses on marketable equity securities are temporary and do not represent a need for an other-than-temporary impairment. See note N, Equity Activity, on pages 98 and 99 for net change in unrealized gains and losses on debt and marketable equity securities.
Proceeds from sales of debt securities and marketable equity securities were approximately $24 million and $787 million during 2009 and 2008, respectively. The gross realized gains and losses (before taxes) on these sales totaled $3 million and $40 million, respectively in 2009. The gross realized gains and losses (before taxes) on these sales totaled $182 million and $13 million, respectively, in 2008.
The contractual maturities of substantially all available-for-sale debt securities are due in less than one year at December 31, 2009.
Note F.
Inventories
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Finished goods |
|
$ |
533 |
|
$ |
524 |
|
Work in process and raw materials |
|
1,960 |
|
2,176 |
|
||
Total |
|
$ |
2,494 |
|
$ |
2,701 |
|
Note G.
Financing Receivables
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Current: |
|
|
|
|
|
||
Net investment in sales-type and direct financing leases |
|
$ |
4,105 |
|
$ |
4,226 |
|
Commercial financing receivables |
|
5,604 |
|
5,781 |
|
||
Client loan receivables |
|
4,475 |
|
4,861 |
|
||
Installment payment receivables |
|
730 |
|
608 |
|
||
Total |
|
$ |
14,914 |
|
$ |
15,477 |
|
Noncurrent: |
|
|
|
|
|
||
Net investment in sales-type and direct financing leases |
|
$ |
5,331 |
|
$ |
5,938 |
|
Commercial financing receivables |
|
58 |
|
94 |
|
||
Client loan receivables |
|
4,759 |
|
4,718 |
|
||
Installment payment receivables |
|
496 |
|
433 |
|
||
Total |
|
$ |
10,644 |
|
$ |
11,183 |
|
Net investment in sales-type and direct financing leases is for leases that relate principally to the companys systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $849 million and $916 million at December 31, 2009 and 2008, respectively, and is reflected net of unearned income of $905 million and $1,049 million and of allowance for doubtful accounts receivable of $159 million and $217 million at those dates, respectively. Scheduled maturities of minimum lease payments outstanding at December 31, 2009, expressed as a percentage of the total, are approximately: 2010, 49 percent; 2011, 27 percent; 2012, 15 percent; 2013, 6 percent; and 2014 and beyond, 2 percent.
Commercial financing receivables relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.
Client loan receivables are loans that are provided by Global Financing primarily to clients to finance the purchase of software and services. Separate contractual relationships on these
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
financing arrangements are for terms ranging generally from two to seven years. Each financing contract is priced independently at competitive market rates. The company has a history of enforcing the terms of these separate financing agreements.
The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $271 million and $373 million at December 31, 2009 and 2008, respectively. These borrowings are included in note K, Borrowings, on pages 90 to 92.
The company did not have any financing receivables held for sale as of December 31, 2009 and 2008.
Note H.
Plant, Rental Machines and Other Property
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Land and land improvements |
|
$ |
737 |
|
$ |
729 |
|
Buildings and building improvements |
|
9,314 |
|
8,819 |
|
||
Plant, laboratory and office equipment |
|
25,888 |
|
24,950 |
|
||
|
|
35,940 |
|
34,499 |
|
||
Less: Accumulated depreciation |
|
23,485 |
|
22,178 |
|
||
Plant and other propertynet |
|
12,455 |
|
12,321 |
|
||
Rental machines |
|
3,656 |
|
3,946 |
|
||
Less: Accumulated depreciation |
|
1,946 |
|
1,962 |
|
||
Rental machinesnet |
|
1,710 |
|
1,984 |
|
||
Totalnet |
|
$ |
14,165 |
|
$ |
14,305 |
|
Note I.
Investments and Sundry Assets
($ in millions)
At December 31: |
|
2009 |
|
2008* |
|
||
Deferred transition and setup costs and other deferred arrangements** |
|
$ |
1,772 |
|
$ |
1,548 |
|
Derivativesnoncurrent+ |
|
565 |
|
1,117 |
|
||
Alliance investments: |
|
|
|
|
|
||
Equity method |
|
115 |
|
167 |
|
||
Non-equity method |
|
477 |
|
285 |
|
||
Prepaid software |
|
312 |
|
370 |
|
||
Long-term deposits |
|
310 |
|
277 |
|
||
Other receivables |
|
617 |
|
238 |
|
||
Employee benefit-related |
|
427 |
|
372 |
|
||
Other assets |
|
783 |
|
685 |
|
||
Total |
|
$ |
5,379 |
|
$ |
5,058 |
|
* Reclassified to conform with 2009 presentation.
** Deferred transition and setup costs and other deferred arrangements are related to Global Services client arrangements. Also see note A, Significant Accounting Policies, on pages 70 to 79 for additional information.
+ See note L, Derivatives and Hedging Transactions, on pages 92 through 96 for the fair value of all derivatives reported in the Consolidated Statement of Financial Position.
Note J.
Intangible Assets Including Goodwill
Intangible Assets
The following table details the companys intangible asset balances by major asset class.
($ in millions)
|
|
At December 31, 2009 |
|
|||||||
|
|
Gross |
|
|
|
Net |
|
|||
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
|||
Intangible Asset Class |
|
Amount |
|
Amortization |
|
Amount |
|
|||
Capitalized software |
|
$ |
1,765 |
|
$ |
(846 |
) |
$ |
919 |
|
Client-related |
|
1,367 |
|
(677 |
) |
690 |
|
|||
Completed technology |
|
1,222 |
|
(452 |
) |
770 |
|
|||
Patents/trademarks |
|
174 |
|
(59 |
) |
115 |
|
|||
Other* |
|
94 |
|
(75 |
) |
19 |
|
|||
Total |
|
$ |
4,622 |
|
$ |
(2,109 |
) |
$ |
2,513 |
|
* Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems, and impacts from currency translator
($ in millions)
|
|
At December 31, 2008 |
|
|||||||
|
|
Gross |
|
|
|
Net |
|
|||
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
|||
Intangible asset class |
|
Amount |
|
Amortization |
|
Amount |
|
|||
Capitalized software |
|
$ |
1,861 |
|
$ |
(839 |
) |
$ |
1,022 |
|
Client-related |
|
1,532 |
|
(663 |
) |
869 |
|
|||
Completed technology |
|
1,167 |
|
(327 |
) |
840 |
|
|||
Patents/trademarks |
|
188 |
|
(76 |
) |
112 |
|
|||
Other* |
|
154 |
|
(121 |
) |
35 |
|
|||
Total |
|
$ |
4,901 |
|
$ |
(2,023 |
) |
$ |
2,878 |
|
* Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems, and impacts from currency translation
The net carrying amount of intangible assets decreased $365 million for the year ended December 31, 2009, primarily due to amortization of acquired intangibles. No impairment of intangible assets was recorded in any of the periods presented.
Total amortization was $1,221 million and $1,310 million for the years ended December 31, 2009 and 2008, respectively. The aggregate intangible amortization expense for acquired intangibles (excluding capitalized software) was $489 million and $520 million for the years ended December 31, 2009 and 2008,
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
respectively. In addition, in 2009 the company retired $1,147 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization for this amount.
The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at December 31, 2009:
($ in millions)
|
|
Capitalized
|
|
Acquired
|
|
Total |
|
|||
2010 |
|
$ |
570 |
|
$ |
422 |
|
$ |
992 |
|
2011 |
|
277 |
|
373 |
|
650 |
|
|||
2012 |
|
72 |
|
306 |
|
377 |
|
|||
2013 |
|
|
|
277 |
|
277 |
|
|||
2014 |
|
|
|
149 |
|
149 |
|
|||
Goodwill
The changes in the goodwill balances by reportable segment, for the years ended December 31, 2009 and 2008, are as follows:
($ in millions)
Segment |
|
Balance
|
|
Goodwill
|
|
Purchase
|
|
Divestitures |
|
Foreign
|
|
Balance
|
|
||||||
Global Business Services |
|
$ |
3,870 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
172 |
|
$ |
4,042 |
|
Global Technology Services |
|
2,616 |
|
10 |
|
1 |
|
|
|
150 |
|
2,777 |
|
||||||
Software |
|
10,966 |
|
994 |
|
(50 |
) |
(13 |
) |
708 |
|
12,605 |
|
||||||
Systems and Technology |
|
772 |
|
|
|
(7 |
) |
|
|
1 |
|
766 |
|
||||||
Total |
|
$ |
18,226 |
|
$ |
1,004 |
|
$ |
(56 |
) |
$ |
(13 |
) |
$ |
1,031 |
|
$ |
20,190 |
|
Segment |
|
Balance
|
|
Goodwill
|
|
Purchase
|
|
Divestitures |
|
Foreign
|
|
Balance
|
|
||||||
Global Business Services |
|
$ |
4,041 |
|
$ |
|
|
$ |
(4 |
) |
$ |
(16 |
) |
$ |
(151 |
) |
$ |
3,870 |
|
Global Technology Services |
|
2,914 |
|
68 |
|
(5 |
) |
|
|
(361 |
) |
2,616 |
|
||||||
Software |
|
6,846 |
|
5,225 |
|
(85 |
) |
|
|
(1,018 |
) |
10,966 |
|
||||||
Systems and Technology |
|
484 |
|
280 |
|
9 |
|
|
|
(1 |
) |
772 |
|
||||||
Total |
|
$ |
14,285 |
|
$ |
5,573 |
|
$ |
(85 |
) |
$ |
(16 |
) |
$ |
(1,531 |
) |
$ |
18,226 |
|
Purchase price adjustments recorded in 2009 were related to acquisitions that were completed on or prior to December 31, 2008 and were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. There were no goodwill impairment losses recorded in 2009 or 2008, and the company has no accumulated impairment losses.
Note K.
Borrowings
Short-Term Debt
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Commercial paper |
|
$ |
235 |
|
$ |
468 |
|
Short-term loans |
|
1,711 |
|
1,827 |
|
||
Long-term debt current maturities |
|
2,222 |
|
8,942 |
|
||
Total |
|
$ |
4,168 |
|
$ |
11,236 |
|
The weighted-average interest rates for commercial paper at December 31, 2009 and 2008, were 0.1 percent and 3.1 percent, respectively. The weighted-average interest rates for short-term loans were 1.8 percent and 4.5 percent at December 31, 2009 and 2008, respectively.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Long-Term Debt
Pre-Swap Borrowing
($ in millions)
At December 31: |
|
Maturities |
|
2009 |
|
2008 |
|
||
U.S. Dollar Notes and Debentures (average interest rate at December 31, 2009): |
|
|
|
|
|
|
|
||
3.33% |
|
2010-2012 |
|
$ |
5,456 |
* |
$ |
10,496 |
|
4.99% |
|
2013-2014 |
|
3,332 |
|
5,053 |
|
||
6.63% |
|
2015-2019 |
|
5,396 |
|
5,511 |
|
||
7.00% |
|
2025 |
|
600 |
|
600 |
|
||
6.22% |
|
2027 |
|
469 |
|
469 |
|
||
6.50% |
|
2028 |
|
313 |
|
313 |
|
||
5.875% |
|
2032 |
|
600 |
|
600 |
|
||
8.00% |
|
2038 |
|
187 |
|
1,000 |
|
||
5.60% |
|
2039 |
|
1,518 |
|
|
|
||
7.00% |
|
2045 |
|
27 |
|
150 |
|
||
7.125% |
|
2096 |
|
350 |
|
850 |
|
||
|
|
|
|
18,247 |
|
25,041 |
|
||
Other currencies (average interest rate at December 31, 2009, in parentheses): |
|
|
|
|
|
|
|
||
Euros (4.4%) |
|
2010-2014 |
|
3,427 |
|
3,330 |
|
||
Japanese yen (1.5%) |
|
2010-2014 |
|
1,565 |
|
1,457 |
|
||
Swiss francs (3.4%) |
|
2011-2015 |
|
484 |
|
470 |
|
||
Other (5.5%) |
|
2010-2013 |
|
285 |
|
203 |
|
||
|
|
|
|
24,008 |
|
30,502 |
|
||
Less: Net unamortized discount |
|
|
|
527 |
|
81 |
|
||
Add: Fair value adjustment** |
|
|
|
673 |
|
1,210 |
|
||
|
|
|
|
24,154 |
|
31,631 |
|
||
Less: Current maturities |
|
|
|
2,222 |
|
8,942 |
|
||
Total |
|
|
|
$ |
21,932 |
|
$ |
22,689 |
|
* $1.6 billion in debt securities issued by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of the company, is included in 20102012. Debt securities issued by IBM International Group Capital LLC are fully and unconditionally guaranteed by the company.
** The portion of the fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debts carrying value plus a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.
Post-Swap Borrowing (Long-term Debt, Including Current Portion)
($ in millions)
|
|
2009 |
|
2008 |
|
||||||
At December 31: |
|
Amount |
|
Average Rate |
|
Amount |
|
Average Rate |
|
||
Fixed-rate debt* |
|
$ |
11,939 |
|
6.13 |
% |
$ |
16,608 |
|
6.16 |
% |
Floating-rate debt** |
|
12,215 |
|
1.22 |
% |
15,023 |
|
3.35 |
% |
||
Total |
|
$ |
24,154 |
|
|
|
$ |
31,631 |
|
|
|
* Includes $0 in 2009 and $1,700 million in 2008 of notional interest rate swaps that effectively convert floating-rate long-term debt into fixed-rate debt. (See note L, Derivatives and Hedging Transactions, on pages 92 through 96).
** Includes $9,054 million in 2009 and $7,435 million in 2008 of notional interest rate swaps that effectively convert the fixed-rate long-term debt into floating-rate debt. (See note L, Derivatives and Hedging Transactions, on pages 92 through 96).
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Pre-swap annual contractual maturities of long-term debt outstanding at December 31, 2009, are as follows:
($ in millions)
2010 |
|
$ |
2,251 |
|
2011 |
|
3,953 |
|
|
2012 |
|
3,096 |
|
|
2013 |
|
3,778 |
|
|
2014 |
|
1,516 |
|
|
2015 and beyond |
|
9,414 |
|
|
Total |
|
$ |
24,008 |
|
Debt Exchange
During the fourth quarter of 2009, the company completed an exchange of approximately $500 million principal amount of its 7.125 percent debentures due 2096, $123 million principal amount of its 7 percent debentures due 2045 and $813 million principal amount of its 8 percent notes due 2038, for approximately $1.5 billion of 5.60 percent senior notes due 2039 and cash of approximately $376 million. The exchange was conducted to retire high coupon long-dated debt in a favorable interest rate environment.
The debt exchange was accounted for as a non-revolving debt modification in accordance with U.S. GAAP and therefore it did not result in any gain or loss recorded in the Consolidated Statement of Earnings. Cash payments made will be amortized over the life of the new debt. Upfront fees with third parties in relation to the exchange were expensed as incurred.
Interest on Debt
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
Cost of financing |
|
$ |
706 |
|
$ |
788 |
|
$ |
811 |
|
Interest expense |
|
404 |
|
687 |
|
753 |
|
|||
Net investment derivative activity |
|
(1 |
) |
(13 |
) |
(142 |
) |
|||
Interest capitalized |
|
13 |
|
15 |
|
9 |
|
|||
Total interest paid and accrued |
|
$ |
1,122 |
|
$ |
1,477 |
|
$ |
1,431 |
|
Refer to the related discussion on page 124 in note V, Segment Information, for total interest expense of the Global Financing segment. See note L, Derivatives and Hedging Transactions, on pages 92 through 96 for a discussion of the use of currency and interest rate swaps in the companys debt risk management program.
Lines of Credit
The company maintains a five-year, $10 billion Credit Agreement (the Credit Agreement), which expires on June 28, 2012. The total expense recorded by the company related to this facility was $6.3 million in 2009, $6.2 million in 2008 and $6.2 million in 2007. The amended Credit Agreement permits the company and its Subsidiary Borrowers to borrow up to $10 billion on a revolving basis. Borrowings of the Subsidiary Borrowers will be unconditionally backed by the company. The company may also, upon the agreement of either existing lenders, or of the additional banks not currently party to the Credit Agreement, increase the commitments under the Credit Agreement up to an additional $2.0 billion. Subject to certain terms of the Credit Agreement, the company and Subsidiary Borrowers may borrow, prepay and reborrow amounts under the Credit Agreement at any time during the Credit Agreement. Interest rates on borrowings under the Credit Agreement will be based on prevailing market interest rates, as further described in the Credit Agreement. The Credit Agreement contains customary representations and warranties, covenants, events of default, and indemnification provisions. The company believes that circumstances that might give rise to breach of these covenants or an event of default, as specified in the Credit Agreement are remote. The companys other lines of credit, most of which are uncommitted, totaled approximately $9,790 million and $11,031 million at December 31, 2009 and 2008, respectively. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
||
Unused lines: |
|
|
|
|
|
||
From the committed global credit facility |
|
$ |
9,910 |
|
$ |
9,888 |
|
From other committed and uncommitted lines |
|
7,405 |
|
8,376 |
|
||
Total unused lines of credit |
|
$ |
17,314 |
|
$ |
18,264 |
|
Note L.
Derivatives and Hedging Transactions
The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the companys lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors. The companys established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default. The company is also a party to collateral security arrangements with certain counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at December 31, 2009 was $779 million for which the company has posted collateral of $37 million. Full overnight collateralization of these agreements would be required in the event that the companys credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in net asset positions as of December 31, 2009 was $838 million. This amount represents the maximum exposure to loss at the reporting date as a result of the counterparties failing to perform as contracted. This exposure is reduced by $573 million of liabilities included in master netting arrangements with those counterparties. The company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. At December 31, 2009, the company recorded $37 million in cash collateral related to all applicable derivative instruments in prepaid expenses and other current assets in the Consolidated Statement of Financial Position.
The company may employ derivative instruments to hedge the volatility in equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors the cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating the derivative instrument to manage this liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in fair value of the de-designated instruments from the date of de-designation until maturity. The company expended $533 million related to maturities of derivative instruments that existed in qualifying net investment hedge relationships in the 12 months ending December 31, 2009. At December 31, 2009, the company had assets of $84 million, representing the fair value of derivative instruments in qualifying net investment hedge relationships. The weighted-average remaining maturity of these instruments at December 31, 2009 was 1.6 years. In addition, at December 31, 2009, the company had liabilities of $318 million representing the fair value of derivative instruments that were previously designated in qualifying net investment hedging relationships but were de-designated prior to December 31, 2009; of this amount $94 million is expected to mature over the next 12 months. The notional amount of these instruments at December 31, 2009 was $2.3 billion including original and offsetting transactions.
In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps and cross-currency swaps, depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.
A brief description of the major hedging programs, categorized by underlying risk, follows.
Interest Rate Risk
Fixed and Variable Rate Borrowings
The company issues debt in the global capital markets, principally to fund its financing lease and loan portfolio. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At December 31, 2009, the total notional amount of the companys interest rate swaps was $9.1 billion.
Forecasted Debt Issuance
The company is exposed to interest rate volatility on forecasted debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at December 31, 2009.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries (Net Investment)
A significant portion of the companys foreign currency denominated debt portfolio is designated as a hedge of net investment to reduce the volatility in equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At December 31, 2009, the total notional amount of derivative instruments designated as net investment hedges was $1.0 billion.
Anticipated Royalties and Cost Transactions
The companys operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the companys non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company is hedging its exposure to the variability in future cash flows is approximately four years. At December 31, 2009, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $18.7 billion with a weighted-average remaining maturity of 1.3 years.
Foreign currency Denominated Borrowings
The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. The maximum length of time over which the company is hedging its exposure to the variability in future cash flows is approximately five years. At December 31, 2009, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $0.3 billion.
Subsidiary Cash and Foreign Currency Asset/Liability Management
The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the companys nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than two years. The changes in the fair values of these contracts and of the underlying exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. At December 31, 2009, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $13.1 billion.
Equity Risk Management
The company is exposed to market price changes primarily related to certain obligations to employees. These exposures are primarily related to market price movements in certain broad equity market indices and in the companys own common stock. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the companys common stock. They are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At December 31, 2009, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $0.8 billion.
Other Risks
The company holds warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The amount of shares to be purchased under these agreements was immaterial at December 31, 2009. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings.
The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company utilizes credit default swaps to economically hedge its credit exposures. These derivatives have terms of one year or less. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at December 31, 2009.
The following tables provide a quantitative summary of the derivative and non-derivative instrument related risk management activity as of and for the 12 months ended December 31, 2009:
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Fair Values of Derivative Instruments on the Consolidated Statement of Financial Position
($ in millions)
|
|
Fair value of derivative assets |
|
Fair value of derivative liabilities |
|
||||||||||||||
At December 31, 2009: |
|
Designated
|
|
Not
designated
|
|
Total |
|
Designated
|
|
Not
designated
|
|
Total |
|
||||||
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Prepaid expenses and other current assets |
|
$ |
43 |
|
$ |
|
|
$ |
43 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Investments and sundry assets |
|
383 |
|
|
|
383 |
|
|
|
|
|
|
|
||||||
Other liabilities |
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Prepaid expenses and other current assets |
|
74 |
|
151 |
|
225 |
|
|
|
|
|
|
|
||||||
Investments and sundry assets |
|
156 |
|
26 |
|
182 |
|
|
|
|
|
|
|
||||||
Other accrued expenses and liabilities |
|
|
|
|
|
|
|
602 |
|
304 |
|
906 |
|
||||||
Other liabilities |
|
|
|
|
|
|
|
423 |
|
224 |
|
647 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Equity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Prepaid expenses and other current assets |
|
|
|
5 |
|
5 |
|
|
|
|
|
|
|
||||||
Other accrued expenses and liabilities |
|
|
|
|
|
|
|
|
|
0 |
|
0 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fair value of derivative assets and liabilities |
|
$ |
656 |
|
$ |
182 |
|
$ |
838 |
|
$ |
1,027 |
|
$ |
528 |
|
$ |
1,555 |
|
Total debt designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Short-term debt |
|
NA |
|
NA |
|
NA |
|
$ |
1,440 |
|
|
|
$ |
1,440 |
|
||||
Long-term debt |
|
NA |
|
NA |
|
NA |
|
2,618 |
|
|
|
2,618 |
|
||||||
Total |
|
|
|
|
|
$ |
838 |
|
|
|
|
|
$ |
5,613 |
|
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The Effect of Derivative Instruments on the Consolidated Statement of Earnings
($ in millions)
For the year ended December 31, 2009:
|
|
Gain (loss) recognized in earnings |
|
||||||
Derivative instruments in |
|
Consolidated Statement of |
|
Recognized on |
|
Attributable to risk |
|
||
fair value hedges |
|
Earnings line item |
|
derivatives(2) |
|
being hedged(3) |
|
||
Interest rate contracts |
|
Cost of financing |
|
$ |
(172 |
) |
$ |
344 |
|
|
|
Interest expense |
|
(97 |
) |
193 |
|
||
Total |
|
|
|
$ |
(269 |
) |
$ |
537 |
|
|
|
Gain (loss) recognized in earnings and other comprehensive income |
|
|||||||||
|
|
|
|
|
|
Effective portion |
|
Ineffectiveness and |
|
|||
Derivative instruments in |
|
Effective portion |
|
Consolidated Statement |
|
reclassified from |
|
amounts excluded from |
|
|||
cash flow hedges |
|
recognized in AOCI |
|
of Earnings line item |
|
AOCI to earnings |
|
effectiveness testing(4) |
|
|||
Interest rate contracts |
|
$ |
(0 |
) |
Interest income |
|
$ |
(13 |
) |
$ |
|
|
Foreign exchange contracts |
|
(718 |
) |
Other (income) and expense |
|
143 |
|
(3 |
) |
|||
|
|
|
|
Cost of sales |
|
(49 |
) |
|
|
|||
|
|
|
|
SG&A expense |
|
14 |
|
|
|
|||
Total |
|
$ |
(718 |
) |
|
|
$ |
94 |
|
$ |
(3 |
) |
|
|
Gain (loss) recognized in earnings and other comprehensive income |
|
|||||||||
|
|
|
|
|
|
Effective portion |
|
Ineffectiveness and |
|
|||
Derivative instruments in |
|
Effective portion |
|
Consolidated Statement |
|
reclassified from |
|
amounts excluded from |
|
|||
net investment hedges |
|
recognized in AOCI |
|
of Earnings line item |
|
AOCI to earnings |
|
effectiveness testing(5) |
|
|||
Foreign exchange contracts |
|
$ |
234 |
|
Interest income |
|
$ |
|
|
$ |
1 |
|
|
|
|
|
Other (income) and expense |
|
$ |
|
|
$ |
|
|
|
Derivative instruments not
|
|
Consolidated Statement
|
|
Gain (loss) recognized
|
|
|
|
|
Foreign exchange contracts |
|
Other (income) and expense |
|
$ |
(128 |
) |
|
|
Equity contracts |
|
SG&A expense |
|
177 |
|
|
|
|
Total |
|
|
|
$ |
50 |
|
|
|
Note: AOCI represents Accumulated other comprehensive income/(loss) in Consolidated Statement of Changes in Equity.
(1) S ee pages 76 and 77 for additional information on the purpose for entering into derivatives not designated as hedging instruments.
(2) Includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
(3) Includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.
(4) A mount of gain (loss) recognized in income represents ineffectiveness on hedge relationships.
(5) A mount of gain (loss) recognized in income represents amounts excluded from effectiveness assessment.
At December 31, 2009, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $718 million (before taxes), in accumulated other comprehensive income/(loss); $427 million of losses are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions. At December 31, 2009, net losses of approximately $18 million (before taxes), were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the companys borrowings; $10 million of losses are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.
For the 12 months ending December 31, 2009, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
Refer to note A, Significant Accounting Policies, on pages 76 and 77 for additional information.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Note M.
Other Liabilities
($ in millions)
At December 31: |
|
2009 |
|
2008* |
|
||
Income tax reserves |
|
$ |
3,627 |
|
$ |
3,557 |
|
Executive compensation accruals |
|
1,160 |
|
860 |
|
||
Disability benefits |
|
795 |
|
743 |
|
||
Derivative liabilities |
|
649 |
|
702 |
|
||
Restructuring actions |
|
441 |
|
476 |
|
||
Workforce reductions |
|
409 |
|
415 |
|
||
Deferred taxes |
|
470 |
|
270 |
|
||
Environmental accruals |
|
245 |
|
246 |
|
||
Noncurrent warranty accruals |
|
126 |
|
189 |
|
||
Asset retirement obligations |
|
116 |
|
119 |
|
||
Other* |
|
781 |
|
615 |
|
||
Total |
|
$ |
8,819 |
|
$ |
8,192 |
|
* Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
In response to changing business needs, the company periodically takes workforce reduction actions to improve productivity, cost competitiveness and to rebalance skills. The noncurrent contractually obligated future payments associated with these activities are reflected in the workforce reductions caption in the previous table.
In addition, the company executed certain special actions as follows: (1) the second quarter of 2005 associated with Global S ervices segments, primarily in Europe, (2) the fourth quarter of 2002 associated with the acquisition of the PricewaterhouseCoopers consulting business, (3) the second quarter of 2002 associated with the Microelectronics Division and the rebalancing of both the companys workforce and leased space resources, (4) the 2002 actions associated with the HDD business for reductions in workforce, manufacturing capacity and space, (5) the actions taken in 1999, and (6) the actions that were executed prior to 1994.
The table below provides a roll forward of the current and noncurrent liabilities associated with these special actions. The current liabilities presented in the table are included in other accrued expenses and liabilities in the Consolidated Statement of Financial Position.
($ in millions)
|
|
Liability |
|
|
|
|
|
Liability |
|
||||
|
|
as of |
|
|
|
Other |
|
as of |
|
||||
|
|
Dec. 31, 2008 |
|
Payments |
|
Adjustments* |
|
Dec. 31, 2009 |
|
||||
Current: |
|
|
|
|
|
|
|
|
|
||||
Workforce |
|
$ |
95 |
|
$ |
(95 |
) |
$ |
71 |
|
$ |
71 |
|
Space |
|
23 |
|
(21 |
) |
13 |
|
16 |
|
||||
Other |
|
7 |
|
|
|
(7 |
) |
|
|
||||
Total current |
|
$ |
125 |
|
$ |
(116 |
) |
$ |
77 |
|
$ |
87 |
|
Noncurrent: |
|
|
|
|
|
|
|
|
|
||||
Workforce |
|
$ |
453 |
|
$ |
|
|
$ |
(26 |
) |
$ |
427 |
|
Space |
|
23 |
|
|
|
(10 |
) |
14 |
|
||||
Total Noncurrent |
|
$ |
476 |
|
$ |
|
|
$ |
(36 |
) |
$ |
441 |
|
* T he other adjustments column in the table above principally includes the reclassification of noncurrent to current, foreign currency translation adjustments and interest accretion.
The workforce accruals primarily relate to terminated employees who are no longer working for the company who were granted annual payments to supplement their incomes in certain countries. Depending on the individual countrys legal requirements, these required payments will continue until the former employee begins receiving pension benefits or passes away. The space accruals are for ongoing obligations to pay rent for vacant space that could not be sublet or space that was sublet at rates lower than the committed lease arrangement. The length of these obligations varies by lease with the longest extending through 2016.
The company employs extensive internal environmental protection programs that primarily are preventive in nature. The company also participates in environmental assessments and cleanups at a number of locations, including operating facilities, previously owned facilities and Superfund sites. The companys maximum exposure for all environmental liabilities cannot be estimated and no amounts have been recorded for non-ARO environmental liabilities that are not probable or estimable. The total amounts accrued for non-ARO environmental liabilities, including amounts classified as current in the Consolidated Statement of Financial Position, that do not reflect actual or anticipated insurance recoveries, were $258 million and $267 million at December 31, 2009 and 2008, respectively. Estimated environmental costs are not expected to materially affect the consolidated financial position or consolidated results of the companys operations in future periods. However, estimates of future costs are subject to change due to protracted cleanup periods and changing environmental remediation regulations.
As of December 31, 2009, the company was unable to estimate the range of settlement dates and the related probabilities
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
for certain asbestos remediation AROs. These conditional AROs are primarily related to the encapsulated structural fireproofing that is not subject to abatement unless the buildings are demolished and non-encapsulated asbestos that the company would remediate only if it performed major renovations of certain existing buildings. Because these conditional obligations have indeterminate settlement dates, the company could not develop a reasonable estimate of their fair values. The company will continue to assess its ability to estimate fair values at each future reporting date. The related liability will be recognized once sufficient additional information becomes available. The total amounts accrued for ARO liabilities, including amounts classified as current in the Consolidated Statement of Financial Position were $126 million and $127 million at December 31, 2009 and 2008, respectively.
Note N.
Equity Activity
The authorized capital stock of IBM consists of 4,687,500,000 shares of common stock with a $.20 per share par value, of which 1,305,337,423 shares were outstanding at December 31, 2009 and 150,000,000 shares of preferred stock with a $.01 per share par value, none of which were outstanding at December 31, 2009.
Stock Repurchases
The Board of Directors authorizes the company to repurchase IBM common stock. The company repurchased 68,650,727 common shares at a cost of $7,534 million, 89,890,347 common shares at a cost of $10,563 million and 178,385,436 common shares at a cost of $18,783 million in 2009, 2008 and 2007, respectively. These amounts reflect transactions executed through December 31 of each year. Actual cash disbursements for repurchased shares may differ due to varying settlement dates for these transactions.
Included in the 2007 repurchases highlighted above, in May 2007, IBM International Group (IIG), a wholly owned foreign subsidiary of the company, repurchased 118.8 million shares of common stock for $12.5 billion under accelerated share repurchase (ASR) agreements with three banks.
Pursuant to the ASR agreements, executed on May 25, 2007, IIG paid an initial purchase price of $105.18 per share for the repurchase. The initial purchase price was subject to adjustment based on the volume weighted-average price of IBM common stock over a settlement period of three months for each of the banks. The adjustment also reflected certain other amounts including the banks carrying costs, compensation for ordinary dividends declared by the company during the settlement period and interest benefits for receiving the $12.5 billion payment in advance of the anticipated purchases by each bank of shares in the open market during the respective settlement periods. The adjustment amount could be settled in cash, registered shares or unregistered shares at IIGs option. Under the ASR agreements, IIG had a separate settlement with each of the three banks. The first settlement occurred on September 6, 2007, resulting in a settlement payment to the bank of $151.8 million. The second settlement occurred on December 5, 2007, resulting in a settlement payment to the bank of $253.1 million. The third settlement occurred on March 4, 2008, resulting in a settlement payment to the company of $54.2 million. The adjusted average price paid per share during the ASR was $108.13, resulting in a total purchase price of $12,581 million. The $351 million difference was settled in cash. The settlement amounts were paid in cash at the election of IIG in accordance with the provisions of the ASR agreements and were recorded as adjustments to equity in the Consolidated Statement of Financial Position on the settlement dates.
The company issued 6,408,265 treasury shares in 2009, 5,882,800 treasury shares in 2008 and 9,282,055 treasury shares in 2007, as a result of exercises of stock options by employees of certain recently acquired businesses and by non-U.S. employees. At December 31, 2009, $6,113 million of Board common stock repurchase authorization was still available. The company plans to purchase shares on the open market or in private transactions from time to time, depending on market conditions. In connection with the issuance of stock as part of the companys stock-based compensation plans, 1,550,846 common shares at a cost of $161 million, 1,505,107 common shares at a cost of $166 million and 1,282,131 common shares at a cost of $134 million in 2009, 2008 and 2007, respectively, were remitted by employees to the company in order to satisfy minimum statutory tax withholding requirements. These amounts are included in the treasury stock balance in the Consolidated Statement of Financial Position and the Consolidated statement of Changes in Equity.
Accumulated Other Comprehensive Income/(Loss) (net of tax)
($ in millions)
|
|
Net Unrealized |
|
|
|
Net Change |
|
Net Unrealized |
|
Accumulated |
|
|||||
|
|
Gains/(Losses) |
|
Foreign Currency |
|
Retirement- |
|
Gains/(Losses) |
|
Other |
|
|||||
|
|
on Cash Flow |
|
Translation |
|
related |
|
on Marketable |
|
Comprehensive |
|
|||||
|
|
Hedge Derivatives |
|
Adjustments* |
|
Benefit Plans |
|
Securities |
|
Income/(Loss) |
|
|||||
December 31, 2007 |
|
$ |
(227 |
) |
$ |
3,655 |
|
$ |
(7,168 |
) |
$ |
325 |
|
$ |
(3,414 |
) |
Change for period |
|
301 |
|
(3,552 |
) |
(14,856 |
) |
(324 |
) |
(18,431 |
) |
|||||
December 31, 2008 |
|
74 |
|
103 |
|
(22,025 |
) |
2 |
|
(21,845 |
) |
|||||
Change for period |
|
(556 |
) |
1,732 |
|
1,727 |
|
111 |
|
3,015 |
|
|||||
December 31, 2009 |
|
$ |
(481 |
) |
$ |
1,836 |
|
$ |
(20,297 |
) |
$ |
113 |
|
$ |
(18,830 |
) |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Net Change in Unrealized Gains/(Losses) on Marketable Securities (net of tax)
($ in millions)
For the period ended December 31: |
|
2009 |
|
2008 |
|
||
Net unrealized gains/(losses) arising during the period |
|
$ |
72 |
|
$ |
(224 |
) |
Less: Net (losses)/gains included in net income for the period* |
|
(39 |
) |
100 |
|
||
Net change in unrealized gains/(losses) on marketable securities |
|
$ |
111 |
|
$ |
(324 |
) |
* Includes writedowns of $16.2 million and $3.0 million in 2009 and 2008, respectively.
Note O.
Contingencies and Commitments
Contingencies
The company is involved in a variety of claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property (IP), product liability, employment, benefits, securities, foreign operations and environmental matters. These actions may be commenced by a number of different parties, including competitors, partners, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business.
The following is a summary of the more significant legal matters involving the company.
The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&Ts UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the companys distribution of AIX and Dynix and contribution of code to Linux. The company has asserted counterclaims, including breach of contract, violation of the Lanham Act, unfair competition, intentional torts, unfair and deceptive trade practices, breach of the General Public License that governs open source distributions, promissory estoppel and copyright infringement. In October 2005, the company withdrew its patent counterclaims in an effort to simplify and focus the issues in the case and to expedite their resolution. Motions for summary judgment were heard in March 2007, and the court has not yet issued its decision. On August 10, 2007, the court in another suit, the SCO Group, Inc. v. Novell, Inc., issued a decision and order determining, among other things, that Novell is the owner of UNIX and UnixWare copyrights, and obligating SCO to recognize Novells waiver of SCOs claims against IBM and Sequent for breach of UNIX license agreements. At the request of the court in SCO v. IBM, on August 31, 2007, each of the parties filed a status report with the court concerning the effect of the August 10th Novell ruling on the SCO v. IBM case, including the pending motions. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. In the SCO v. Novell case, on November 25, 2008, SCO filed its notice of appeal to the U.S. Court of Appeals for the Tenth Circuit, which included an appeal of the August 10, 2007 ruling; on August 24, 2009, the U.S. Court of Appeals reversed the August 10, 2007 ruling and remanded the SCO v. Novell case for trial. On August 25, 2009, the U.S. Bankruptcy Court for the District of Delaware approved the appointment of a Chapter 11 Trustee of SCO.
On November 29, 2006, the company filed a lawsuit against Platform Solutions, Inc. (PSI) in the United States District Court for the Southern District of New York, alleging that PSI violated certain intellectual property rights of IBM. PSI asserted counterclaims against IBM. On January 11, 2008, the court permitted T3 Technologies, a reseller of PSI computer systems, to intervene as a counterclaim-plaintiff. T3 claimed that IBM violated certain antitrust laws by refusing to license its patents and trade secrets to PSI and by tying the sales of its mainframe computers to its mainframe operating systems. On June 30, 2008, IBM acquired PSI. As a result of this transaction, IBM and PSI dismissed all claims against each other, and PSI withdrew a complaint it had filed with the European Commission in October 2007 with regard to IBM. On September 30, 2009, the court granted IBMs motion for summary judgment and dismissed T3s claims against IBM. This decision is subject to appeal by T3. In January 2009, T3 filed a complaint with the European Commission alleging that IBM violated European Commission competition law based on the facts alleged in the above-referenced U.S. litigation. IBM has been notified that the U.S. Department of Justice (DOJ) is investigating possible antitrust violations by IBM. The DOJ has requested certain information, including the production of materials from the litigation between T3 and IBM.
The company is a defendant in an action filed on December 14, 2009 in the United States District Court for the Western District of Texas by Neon Enterprise Software, LLC. Neon alleges that the company has interfered with Neons efforts to license its zPrime software. They seek damages and injunctive relief. In late January 2010, IBM filed its answer to Neons complaint and asserted counterclaims against Neon.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
In January 2004, The Seoul District Prosecutors Office in South Korea announced it had brought criminal bid-rigging charges against several companies, including IBM Korea and LG IBM (a joint venture between IBM Korea and LG electronics, which has since been dissolved, effective January, 2005) and had also charged employees of some of those entities with, among other things, bribery of certain officials of government-controlled entities in Korea and bid rigging. IBM Korea and LG IBM cooperated fully with authorities in these matters. a number of individuals, including former IBM Korea and LG IBM employees, were subsequently found guilty and sentenced. IBM Korea and LG IBM were also required to pay fines. Debarment orders were imposed at different times, covering a period of no more than a year from the date of issuance, which barred IBM Korea from doing business directly with certain government-controlled entities in Korea. All debarment orders have since expired and when they were in force did not prohibit IBM Korea from selling products and services to business partners who sold to government-controlled entities in Korea. In addition, the U.S. Department of Justice and the SEC have both contacted the company in connection with this matter. In March 2008, the company received a request from the SEC for additional information.
The company was a defendant in a civil lawsuit brought in Tokyo District Court by Tokyo Leasing Co., Ltd., which sought to recover losses that it allegedly suffered after IXI Co., Ltd. initiated civil rehabilitation (bankruptcy) proceedings in Japan and apparently failed to pay Tokyo Leasing amounts for which Tokyo Leasing sought to hold IBM and others liable. The claims in this suit included tort and breach of contract. The action against IBM was resolved in December 2009 and is no longer pending.
The company is a defendant in numerous actions filed after January 1, 2008 in the Supreme Court for the State of New York, county of Broome, on behalf of hundreds of plaintiffs. The complaints allege numerous and different causes of action, including for negligence and recklessness, private nuisance and trespass. Plaintiffs in these cases seek medical monitoring and claim damages in unspecified amounts for a variety of personal injuries and property damages allegedly arising out of the presence of groundwater contamination and vapor intrusion of groundwater contaminants into certain structures in which plaintiffs reside or resided, or conducted business, allegedly resulting from the release of chemicals into the environment by the company at its former manufacturing and development facility in Endicott. These complaints also seek punitive damages in an unspecified amount.
The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as Superfund, or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.
The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian authorities regarding non-income tax assessments and non-income tax litigation matters. These matters include claims for taxes on the importation of computer software. In november 2008, the company won a significant case in the Superior Chamber of the federal administrative tax court in Brazil, and in late July 2009, the company received written confirmation regarding this decision. The total potential amount related to the remaining matters for all applicable years is approximately $600 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.
The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and proceedings are reviewed at least quarterly and provisions are taken or adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Any recorded liabilities, including any changes to such liabilities for the year ended December 31, 2009, were not material to the Consolidated Financial Statements. Based on its experience, the company believes that the damage amounts claimed in the matters previously referred to are not a meaningful indicator of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of the matters previously discussed. While the company will continue to defend itself vigorously, it is possible that the companys business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.
Whether any losses, damages or remedies finally determined in any such claim, suit, investigation or proceeding could reasonably have a material effect on the companys business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have on the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter which may give rise to additional factors.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Commitments
The companys extended lines of credit to third-party entities include unused amounts of $3,576 million and $3,857 million at December 31, 2009 and 2008, respectively. A portion of these amounts was available to the companys business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $2,788 million and $3,342 million at December 31, 2009 and 2008, respectively. The change over the prior year was due to decreased signings of long-term IT infrastructure arrangements in which financing is committed by the company to fund a clients future purchases from the company.
The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantors performance is remote. The following is a description of arrangements in which the company is the guarantor.
The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain IP rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the company to challenge the other partys claims. While typically indemnification provisions do not include a contractual maximum on the companys payment, the companys obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the companys obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the companys business, financial condition or results of operations.
In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $85 million and $50 million at December 31, 2009 and 2008, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.
Note P.
Taxes
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
Income from continuing operations before income taxes: |
|
|
|
|
|
|
|
|||
U.S. operations |
|
$ |
9,524 |
|
$ |
8,424 |
|
$ |
7,667 |
|
Non-U.S. operations |
|
8,614 |
|
8,291 |
|
6,822 |
|
|||
Total income from continuing operations before income taxes |
|
$ |
18,138 |
|
$ |
16,715 |
|
$ |
14,489 |
|
The continuing operations provision for income taxes by geographic operations is as follows:
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
U.S. operations |
|
$ |
2,427 |
|
$ |
2,348 |
|
$ |
2,280 |
|
Non-U.S. operations |
|
2,286 |
|
2,033 |
|
1,791 |
|
|||
Total continuing operations provision for income taxes |
|
$ |
4,713 |
|
$ |
4,381 |
|
$ |
4,071 |
|
The components of the continuing operations provision for income taxes by taxing jurisdiction are as follows:
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
U.S. federal: |
|
|
|
|
|
|
|
|||
Current |
|
$ |
473 |
|
$ |
338 |
|
$ |
1,085 |
|
Deferred |
|
1,341 |
|
1,263 |
|
683 |
|
|||
|
|
1,814 |
|
1,601 |
|
1,768 |
|
|||
U.S. state and local: |
|
|
|
|
|
|
|
|||
Current |
|
120 |
|
216 |
|
141 |
|
|||
Deferred |
|
185 |
|
205 |
|
(19 |
) |
|||
|
|
305 |
|
421 |
|
122 |
|
|||
Non-U.S.: |
|
|
|
|
|
|
|
|||
Current |
|
2,347 |
|
1,927 |
|
2,105 |
|
|||
Deferred |
|
247 |
|
432 |
|
76 |
|
|||
|
|
2,594 |
|
2,359 |
|
2,181 |
|
|||
Total continuing operations provision for income taxes |
|
4,713 |
|
4,381 |
|
4,071 |
|
|||
Provision for social security, real estate, personal property and other taxes |
|
3,986 |
|
4,076 |
|
3,832 |
|
|||
Total taxes included in income from continuing operations |
|
$ |
8,699 |
|
$ |
8,457 |
|
$ |
7,903 |
|
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
A reconciliation of the statutory U.S. federal tax rate to the companys continuing operations effective tax rate is as follows:
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
Statutory rate |
|
35 |
% |
35 |
% |
35 |
% |
Foreign tax differential |
|
(9 |
) |
(8 |
) |
(6 |
) |
State and local |
|
1 |
|
1 |
|
1 |
|
Other |
|
(1 |
) |
(2 |
) |
(2 |
) |
Effective rate |
|
26 |
% |
26 |
% |
28 |
% |
The effect of tax law changes on deferred tax assets and liabilities did not have a material impact on the companys effective tax rate.
The significant components of deferred tax assets and liabilities that are recorded in the Consolidated Statement of Financial Position were as follows:
Deferred Tax Assets
($ in millions)
At December 31: |
|
2009 |
|
2008* |
|
||
Retirement benefits |
|
$ |
3,921 |
|
$ |
5,215 |
|
Share-based and other compensation |
|
1,853 |
|
2,579 |
|
||
Domestic tax loss/credit carryforwards |
|
859 |
|
862 |
|
||
Deferred income |
|
847 |
|
739 |
|
||
Foreign tax loss/credit carryforwards |
|
680 |
|
642 |
|
||
Bad debt, inventory and warranty reserves |
|
605 |
|
561 |
|
||
Capitalized research and development |
|
539 |
|
795 |
|
||
Depreciation |
|
485 |
|
388 |
|
||
Other |
|
1,999 |
|
1,863 |
|
||
Gross deferred tax assets |
|
11,788 |
|
13,644 |
|
||
Less: valuation allowance |
|
812 |
|
720 |
|
||
Net deferred tax assets |
|
$ |
10,976 |
|
$ |
12,924 |
|
* Reclassified to conform with 2009 presentation.
Deferred Tax Liabilities
($ in millions)
At December 31: |
|
2009 |
|
2008* |
|
||
Leases |
|
$ |
2,129 |
|
$ |
1,913 |
|
Depreciation |
|
1,138 |
|
941 |
|
||
Goodwill and intangible assets |
|
639 |
|
552 |
|
||
Software development costs |
|
409 |
|
449 |
|
||
Retirement benefits |
|
389 |
|
104 |
|
||
Other |
|
874 |
|
697 |
|
||
Gross deferred tax liabilities |
|
$ |
5,578 |
|
$ |
4,656 |
|
* Reclassified to conform with 2009 presentation.
For income tax return purposes, the company has foreign and domestic loss carryforwards, the tax effect of which is $860 million as well as domestic and foreign credit carryforwards of $679 million. Substantially all of these carryforwards are available for at least two years or are available for ten years or more.
The company has certain foreign tax loss carryforwards that have not been reflected in the gross deferred tax asset balance due to the level of uncertainty associated with the sustainability of the losses which are under examination by the local taxing authority. The tax benefit of these losses approximated $930 million at December 31, 2009. In addition, during the second quarter of 2009, foreign tax losses were utilized against a prior year tax liability resulting in a cash benefit of approximately $360 million. However, the company has recorded an unrecognized tax benefit for the entire amount received given the degree of uncertainty in sustaining the associated tax benefit. The company expects that the local taxing authority will complete its field examination in early 2010.
The valuation allowance at December 31, 2009, principally applies to certain foreign, state and local loss carryforwards that, in the opinion of management, are more likely than not to expire unutilized. However, to the extent that tax benefits related to these carryforwards are realized in the future, the reduction in the valuation allowance will reduce income tax expense. The year-to-year change in the allowance balance was an increase of $92 million.
The amount of unrecognized tax benefits at December 31, 2009 increased by $892 million in 2009 to $4,790 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
($ in millions)
|
|
2009 |
|
2008 |
|
2007 |
|
|||
Balance at January 1 |
|
$ |
3,898 |
|
$ |
3,094 |
|
$ |
2,414 |
|
Additions based on tax positions related to the current year |
|
554 |
|
1,481 |
|
745 |
|
|||
Additions for tax positions of prior years |
|
634 |
|
747 |
|
195 |
|
|||
Reductions for tax positions of prior years (including impacts due to a lapse in statute) |
|
(277 |
) |
(1,209 |
) |
(144 |
) |
|||
Settlements |
|
(19 |
) |
(215 |
) |
(116 |
) |
|||
Balance at December 31 |
|
$ |
4,790 |
|
$ |
3,898 |
|
$ |
3,094 |
|
The additions to the unrecognized tax benefits related to the current and prior years are primarily attributable to non-U.S. issues, certain tax incentives and credits, acquisition-related matters and other non-U.S. and state matters.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The settlements and reductions to the unrecognized tax benefits for tax positions of prior years are primarily attributable to the conclusion of the companys various U.S., state and non-U.S. income tax examinations and various non-U.S. matters including impacts due to lapses in statutes of limitation.
The liability at December 31, 2009 of $4,790 million can be reduced by $577 million of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes and timing adjustments. The net amount of $4,213 million, if recognized, would favorably affect the companys effective tax rate. The net amounts at December 31, 2008 and December 31, 2007 were $3,366 million and $2,598 million, respectively.
Interest and penalties related to income tax liabilities are included in income tax expense. During the year ended December 31, 2009, the company recognized $193 million in interest and penalties; in 2008, the company recognized $96 million in interest and penalties and in 2007, the company recognized $85 million in interest and penalties. The company has $479 million for the payment of interest and penalties accrued at December 31, 2009 and had $286 million accrued at December 31, 2008.
Within the next 12 months, the company believes it is reasonably possible that the total amount of unrecognized tax benefits associated with certain positions may be significantly reduced. The potential decrease in the amount of unrecognized tax benefits is primarily associated with the possible resolution of the companys U.S. income tax audit for 2006 and 2007, as well as various non-U.S. audits. Specific positions that may be resolved, and that may significantly reduce the related amount of unrecognized tax benefits, include transfer pricing matters, tax incentives and credits as well as various other foreign tax matters including foreign tax loss utilization. The company estimates that the unrecognized tax benefits at December 31, 2009 could be reduced by approximately $1,100 million.
With limited exception, the company is no longer subject to U.S. federal, state and local or non-U.S. income tax audits by taxing authorities for years through 2003. The years subsequent to 2003 contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result for these years.
During the fourth quarter of 2008, the U.S. Internal Revenue Service (IRS) concluded its examination of the companys income tax returns for 2004 and 2005 and issued a final Revenue Agents Report (RAR). The company has agreed with all of the adjustments contained in the RAR, with the exception of a proposed adjustment, with a pre-tax amount in excess of $2 billion, relating to valuation matters associated with the intercompany transfer of certain intellectual property in 2005 and computational issues related to certain tax credits. The company disagrees with the IRS position on these specific matters and in March 2009 filed a protest with the IRS Appeals Office.
The audit of the companys 2006 and 2007 U.S. income tax returns commenced in the first quarter of 2009. The company anticipates that this audit will be completed by the end of 2010.
The company has not provided deferred taxes on $26.0 billion of undistributed earnings of non-U.S. subsidiaries at December 31, 2009, as it is the companys policy to indefinitely reinvest these earnings in non-U.S. operations. However, the company periodically repatriates a portion of these earnings to the extent that it does not incur an additional U.S. tax liability. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.
For additional information on the companys effective tax rate refer to the Looking Forward section of the Management Discussion on pages 47 to 49.
Note Q.
Research, Development and Engineering
RD&E expense was $5,820 million in 2009, $6,337 million in 2008 and $6,153 million in 2007.
The company incurred expense of $5,523 million in 2009, $6,015 million in 2008 and $5,754 million in 2007 for scientific research and the application of scientific advances to the development of new and improved products and their uses, as well as services and their application. Within these amounts, software-related expense was $2,991 million, $3,359 million and $3,037 million in 2009, 2008 and 2007, respectively. In addition, included in the expense was a charge of $24 million in 2008 for acquired IPR&D.
Expense for product-related engineering was $297 million, $322 million and $399 million in 2009, 2008 and 2007, respectively.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
N ote R.
Earnings Per Share of Common Stock
The following table presents the computation of basic and diluted earnings per share of common stock.
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
Weighted-average number of shares on which earnings per share calculations are based: |
|
|
|
|
|
|
|
Basic: |
|
1,327,157,410 |
|
1,369,367,069 |
* |
1,433,935,221 |
* |
Add incremental shares under stock-based compensation plans |
|
12,258,864 |
|
16,617,801 |
* |
18,145,715 |
* |
Add incremental shares associated with Accelerated Share Repurchase agreements |
|
|
|
|
|
1,891,095 |
|
Add incremental shares associated with convertible notes |
|
|
|
|
|
1,362,191 |
|
Add incremental shares associated with contingently issuable shares |
|
1,936,480 |
|
1,812,328 |
|
1,546,529 |
|
Assuming dilution |
|
1,341,352,754 |
|
1,387,797,198 |
* |
1,456,880,751 |
* |
($ in millions except per share amounts) |
|
|
|
|
|
|
|
|||
Basic: |
|
|
|
|
|
|
|
|||
Income from continuing operations |
|
$ |
13,425 |
|
$ |
12,334 |
|
$ |
10,418 |
|
Income/(loss) from discontinued operations |
|
|
|
|
|
(00 |
) |
|||
Net income from total operations on which basic earnings per share is calculated |
|
$ |
13,425 |
|
$ |
12,334 |
|
$ |
10,418 |
|
Assuming dilution: |
|
|
|
|
|
|
|
|||
Income from continuing operations |
|
$ |
13,425 |
|
$ |
12,334 |
|
$ |
10,418 |
|
Less net income applicable to contingently issuable shares |
|
|
|
1 |
|
|
|
|||
Income/(loss) from discontinued operations |
|
|
|
|
|
(00 |
) |
|||
Net income from total operations on which diluted earnings per share is calculated |
|
$ |
13,425 |
|
$ |
12,333 |
|
$ |
10,418 |
|
Earnings/(loss) per share of common stock: |
|
|
|
|
|
|
|
|||
Assuming dilution: |
|
|
|
|
|
|
|
|||
Continuing operations |
|
$ |
10.01 |
|
$ |
8.89 |
* |
$ |
7.15 |
* |
Discontinued operations |
|
|
|
|
|
(0.00 |
) |
|||
Total assuming dilution |
|
$ |
10.01 |
|
$ |
8.89 |
* |
$ |
7.15 |
* |
Basic: |
|
|
|
|
|
|
|
|||
Continuing operations |
|
$ |
10.12 |
|
$ |
9.02 |
* |
$ |
7.27 |
* |
Discontinued operations |
|
|
|
|
|
(0.00 |
) |
|||
Total basic |
|
$ |
10.12 |
|
$ |
9.02 |
* |
$ |
7.27 |
* |
* Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, Accounting Changes, on pages 79 to 82 for additional information.
Stock options to purchase 612,272 common shares in 2009, 42,981,463 common shares in 2008 and 62,782,516 common shares in 2007 were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the common shares for the applicable full year, and therefore, the effect would have been antidilutive.
Note S.
Rental Expense and Lease Commitments
Rental expense from continuing operations, including amounts charged to inventories and fixed assets, and excluding amounts previously reserved, was $1,677 million in 2009, $1,681 million in 2008 and $1,559 million in 2007. Rental expense in agreements
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
with rent holidays and scheduled rent increases is recorded on a straight-line basis over the lease term. Contingent rentals are included in the determination of rental expense as accruable. The table below depicts gross minimum rental commitments from continuing operations under noncancelable leases, amounts related to vacant space associated with infrastructure reductions and restructuring actions taken through 1994, and in 1999, 2002 and 2005 (previously reserved), sublease income commitments and capital lease commitments. These amounts reflect activities primarily related to office space, as well as manufacturing facilities.
($ in millions)
|
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Beyond 2014 |
|
||||||
Operating lease commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gross minimum rental commitments (including vacant space below) |
|
$ |
1,504 |
|
$ |
1,281 |
|
$ |
982 |
|
$ |
769 |
|
$ |
626 |
|
$ |
776 |
|
Vacant space |
|
$ |
69 |
|
$ |
37 |
|
$ |
18 |
|
$ |
9 |
|
$ |
8 |
|
$ |
9 |
|
Sublease income commitments |
|
$ |
52 |
|
$ |
27 |
|
$ |
15 |
|
$ |
8 |
|
$ |
4 |
|
$ |
2 |
|
Capital lease commitments |
|
$ |
64 |
|
$ |
25 |
|
$ |
32 |
|
$ |
31 |
|
$ |
13 |
|
|
|
Note T.
Stock-Based Compensation
Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. See note A, Significant Accounting Policies, on page 76 for additional information.
The following table presents total stock-based compensation cost included in the Consolidated Statement of Earnings.
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
Cost |
|
$ |
94 |
|
$ |
116 |
|
$ |
166 |
|
Selling, general and administrative |
|
417 |
|
484 |
|
480 |
|
|||
Research, development and engineering |
|
47 |
|
58 |
|
68 |
|
|||
Other (income) and expense* |
|
|
|
|
|
(1 |
) |
|||
Pre-tax stock-based compensation cost |
|
558 |
|
659 |
|
713 |
|
|||
Income tax benefits |
|
(221 |
) |
(224 |
) |
(248 |
) |
|||
Total stock-based compensation cost |
|
$ |
337 |
|
$ |
435 |
|
$ |
464 |
|
* Reflects the one-time effects of the divestiture of the Printing Systems business in the second quarter of 2007.
Total unrecognized compensation cost related to non-vested awards at December 31, 2009 and 2008 was $1,082 million and $1,076 million, respectively, and is expected to be recognized over a weighted-average period of approximately 2.5 years.
There was no significant capitalized stock-based compensation cost at December 31, 2009, 2008 and 2007.
Incentive Awards
Stock-based incentive awards are provided to employees under the terms of the companys long-term performance plans (the Plans). The Plans are administered by the Executive Compensation and Management Resources Committee of the Board of Directors (the Committee). Awards available under the Plans principally include stock options, restricted stock units, performance share units or any combination thereof. The nonmanagement members of the IBM Board of Directors also received stock options under a director stock option plan through December 31, 2006. The director stock option plan was terminated effective January 1, 2007.
The amount of shares originally authorized to be issued under the companys existing Plans was 274.1 million at December 31, 2009 and 2008. In addition, certain incentive awards granted under previous Plans, if and when those awards were canceled, could be reissued under the companys existing Plans. As such, 66.4 million and 47.6 million additional awards were considered authorized to be issued under the companys existing Plans as of December 31, 2009 and 2008, respectively. There were 1.9 million and 23.8 million option awards outstanding (which were included in the total options outstanding at December 31, 2009 and 2008, respectively) under previous Plans that, if and when canceled, would increase the number of authorized shares. There were 140.4 million and 130.1 million unused shares available to be granted under the Plans as of December 31, 2009 and 2008, respectively.
Under the companys long-standing practices and policies, all awards are approved prior to or on the date of grant. The exercise price of at-the-money stock options is the average of the high and low market price on the date of grant. The options
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
approval process specifies the individual receiving the grant, the number of options or the value of the award, the exercise price or formula for determining the exercise price and the date of grant. All awards for senior management are approved by the Committee. All awards for employees other than senior management are approved by senior management pursuant to a series of delegations that were approved by the Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee. Awards that are given as part of annual total compensation for senior management and other employees are made on specific cycle dates scheduled in advance. With respect to awards given in connection with promotions or new hires, the companys policy requires approval of such awards prior to the grant date, which is typically the date of the promotion or the date of hire. The exercise price of these options is the average of the high and low market price on the date of grant.
Stock Options
Stock Options are awards which allow the employee to purchase shares of the companys stock at a fixed price. Stock options are granted at an exercise price equal to the company stock price on the date of grant. These awards, which generally vest 25 percent per year, are fully vested four years from the date of grant and have a contractual term of ten years. The company also had a stock-based program under the Plans for its senior executives, designed to drive improved performance and increase the ownership executives have in the company. These executives had the opportunity to receive at-the-money stock options by agreeing to defer a certain percentage of their annual incentive compensation into IBM equity, where it is held for three years or until retirement. In 2005, this program was expanded to cover all executives of the company. Options under this program become fully vested three years from the date of grant and have a contractual term of ten years. The plan element permitting executives to defer annual incentive compensation into IBM equity and receive at-the-money stock options was terminated at December 31, 2006.
The company estimates the fair value of stock options using the Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the companys stock, the risk-free rate and the companys dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the company.
The fair value of each stock option grant was estimated at the date of grant using a Black-Scholes option pricing model. The following table presents the weighted-average assumptions used in the valuation and the resulting weighted-average fair value per option granted.
For the year ended December 31: |
|
2009 * |
|
2008 * |
|
2007 |
|
|
Option term (years)** |
|
|
|
|
|
5 |
|
|
Volatility + |
|
|
|
|
|
23.1 |
% |
|
Risk-free interest rate (zero coupon U.S. treasury note) |
|
|
|
|
|
4.5 |
% |
|
Dividend yield |
|
|
|
|
|
1.4 |
% |
|
Weighted-average fair value per option granted |
|
|
|
|
|
$ |
26 |
|
* During the years ended December 31, 2009 and 2008, the company did not grant stock options.
** The option term is the number of years that the company estimates, based upon history, that options will be outstanding prior to exercise or forfeiture.
+ The companys estimates of expected volatility are principally based on daily price changes of the companys stock over the expected option term, as well as the additional requirements included in accounting guidance on share-based payments.
The following table summarizes option activity under the Plans during the years ended December 31, 2009, 2008 and 2007.
|
|
2009 |
|
2008 |
|
2007 |
|
|||||||||
|
|
Wtd. Avg. |
|
No. of Shares |
|
Wtd. Avg. |
|
No. of Shares |
|
Wtd. Avg. |
|
No. of Shares |
|
|||
|
|
Exercise Price |
|
Under Option |
|
Exercise Price |
|
Under Option |
|
Exercise Price |
|
Under Option |
|
|||
Balance at January 1 |
|
$ |
102 |
|
119,307,170 |
|
$ |
100 |
|
157,661,257 |
|
$ |
95 |
|
207,663,223 |
|
Options granted |
|
|
|
|
|
|
|
|
|
103 |
|
1,087,381 |
|
|||
Options exercised |
|
120 |
|
(28,100,192 |
) |
91 |
|
(36,282,000 |
) |
77 |
|
(46,961,380 |
) |
|||
Options canceled/expired |
|
127 |
|
(17,996,521 |
) |
109 |
|
(2,072,087 |
) |
106 |
|
(4,127,967 |
) |
|||
Balance at December 31 |
|
$ |
98 |
|
73,210,457 |
|
$ |
102 |
|
119,307,170 |
|
$ |
100 |
|
157,661,257 |
|
Exercisable at December 31 |
|
$ |
98 |
|
72,217,126 |
|
$ |
102 |
|
114,445,381 |
|
$ |
100 |
|
144,092,169 |
|
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The shares under option at December 31, 2009 were in the following exercise price ranges:
|
|
Options Outstanding |
|
||||||||
|
|
|
|
|
|
|
|
Wtd. Avg. |
|
||
|
|
Wtg. Avg. |
|
Number |
|
Aggregate |
|
Remaining |
|
||
|
|
Exercise |
|
of Shares |
|
Intrinsic |
|
Contractual |
|
||
Exercise Price Range |
|
Price |
|
Under Option |
|
Value |
|
Life (in years) |
|
||
$61-$85 |
|
$ |
77 |
|
17,468,272 |
|
$ |
940,917,103 |
|
3.2 |
|
$86-$105 |
|
98 |
|
32,894,001 |
|
1,067,822,966 |
|
3.4 |
|
||
$106 and over |
|
112 |
|
22,848,184 |
|
432,260,579 |
|
1.5 |
|
||
|
|
$ |
98 |
|
73,210,457 |
|
$ |
2,441,000,648 |
|
2.8 |
|
|
|
Options Exercisable |
|
||||||||
|
|
|
|
|
|
|
|
Wtd. Avg. |
|
||
|
|
Wtd. Avg. |
|
Number |
|
Aggregate |
|
Remaining |
|
||
|
|
Exercise |
|
of Shares |
|
Intrinsic |
|
Contractual |
|
||
Exercise Price Range |
|
Price |
|
Under Option |
|
Value |
|
Life (in years) |
|
||
$61-$85 |
|
$ |
77 |
|
17,439,702 |
|
$ |
939,529,901 |
|
3.2 |
|
$86-$105 |
|
98 |
|
31,929,240 |
|
1,039,848,239 |
|
3.3 |
|
||
$106 and over |
|
112 |
|
22,848,184 |
|
432,260,579 |
|
1.5 |
|
||
|
|
$ |
98 |
|
72,217,126 |
|
$ |
2,411,638,719 |
|
2.7 |
|
In connection with various acquisition transactions, there were an additional 1.1 million options outstanding at December 31, 2009, as a result of the companys assumption of options granted by the acquired entities. The weighted-average exercise price of these options was $76 per share.
Exercises of Employee Stock Options
The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $639 million, $1,073 million and $1,414 million, respectively. The total cash received from employees as a result of employee stock option exercises for the years ended December 31, 2009, 2008 and 2007 was approximately $2,744 million, $3,320 million and $3,619 million, respectively. In connection with these exercises, the tax benefits realized by the company for the years ended December 31, 2009, 2008 and 2007 were $243 million, $356 million and $481 million, respectively.
The company settles employee stock option exercises primarily with newly issued common shares and, occasionally, with treasury shares. Total treasury shares held at December 31, 2009 and 2008 were approximately 822 million and 758 million shares, respectively.
Stock Awards
In lieu of stock options, currently the company grants its employees stock awards. These awards are made in the form of Restricted Stock Units (RSUs), including Retention Restricted Stock Units (RRSUs), or Performance Share Units (PSUs). RSUs are stock awards granted to employees that entitle the holder to shares of common stock as the award vests, typically over a one- to five-year period. The fair value of the awards is determined and fixed on the grant date based on the companys stock price. For RSUs awarded after December 31, 2007, dividend equivalents will not be paid. The fair value of such RSUs is determined and fixed on the grant date based on the companys stock price adjusted for the exclusion of dividend equivalents.
The tables on page 108 summarize RSU and PSU activity under the Plans during the years ended December 31, 2009, 2008 and 2007.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
RSUs
|
|
2009 |
|
2008 |
|
2007 |
|
|||||||||
|
|
Wtd. Avg. |
|
Number |
|
Wtd. Avg. |
|
Number |
|
Wtd. Avg. |
|
Number |
|
|||
|
|
Grant Price |
|
of Units |
|
Grant Price |
|
of Units |
|
Grant Price |
|
of Units |
|
|||
Balance at January 1 |
|
$ |
100 |
|
12,397,515 |
|
$ |
94 |
|
11,887,746 |
|
$ |
84 |
|
10,217,258 |
|
RSUs granted |
|
105 |
|
4,432,449 |
|
107 |
|
4,587,011 |
|
104 |
|
4,929,141 |
|
|||
RSUs released |
|
99 |
|
(2,748,613 |
) |
88 |
|
(3,526,580 |
) |
77 |
|
(2,747,110 |
) |
|||
RSUs canceled/forfeited |
|
101 |
|
(675,697 |
) |
98 |
|
(550,662 |
) |
88 |
|
(511,543 |
) |
|||
Balance at December 31 |
|
$ |
102 |
|
13,405,654 |
|
$ |
100 |
|
12,397,515 |
|
$ |
94 |
|
11,887,746 |
|
PSUs
|
|
2009 |
|
2008 |
|
2007 |
|
|||||||||
|
|
Wtd. Avg. |
|
Number |
|
Wtd. Avg. |
|
Number |
|
Wtd. Avg. |
|
Number |
|
|||
|
|
Grant Price |
|
of Units |
|
Grant Price |
|
of Units |
|
Grant Price |
|
of Units |
|
|||
Balance at January 1 |
|
$ |
102 |
|
3,078,694 |
|
$ |
93 |
|
2,783,823 |
|
$ |
89 |
|
2,417,378 |
|
PSUs granted at target |
|
101 |
|
1,568,129 |
|
119 |
|
1,058,381 |
|
103 |
|
1,156,708 |
|
|||
Additional shares earned above target* |
|
83 |
|
396,794 |
|
91 |
|
275,190 |
|
95 |
|
216,826 |
|
|||
PSUs released |
|
83 |
|
(1,440,099 |
) |
91 |
|
(860,705 |
) |
96 |
|
(926,386 |
) |
|||
PSUs canceled/forfeited |
|
111 |
|
(126,781 |
) |
102 |
|
(177,995 |
) |
90 |
|
(80,703 |
) |
|||
Balance at December 31** |
|
$ |
107 |
|
3,476,737 |
|
$ |
102 |
|
3,078,694 |
|
$ |
93 |
|
2,783,823 |
|
* Represents additional shares issued to employees after vesting of PSUs because final performance metrics exceeded specified targets.
** Represents the number of shares expected to be issued based on achievement of grant date performance targets. The actual number of shares issued depends on the companys performance against specified targets over the vesting period.
The remaining weighted-average contractual term of RSUs at December 31, 2009, 2008 and 2007 is the same as the period over which the remaining cost of the awards will be recognized, which is approximately three years. The fair value of RSUs granted during the years ended December 31, 2009, 2008 and 2007 was $467 million, $490 million and $513 million, respectively. The total fair value of RSUs vested and released during the years ended December 31, 2009, 2008 and 2007 was $272 million, $311 million and $213 million, respectively. As of December 31, 2009, 2008 and 2007, there was $892 million, $863 million and $740 million, respectively, of unrecognized compensation cost related to non-vested RSUs. The company received no cash from employees as a result of employee vesting and release of RSUs for the years ended December 31, 2009, 2008 and 2007.
PSUs are stock awards where the number of shares ultimately received by the employee depends on the companys performance against specified targets and typically vest over a three-year period. The fair value of each PSU is determined on the grant date, based on the companys stock price, and assumes that performance targets will be achieved. Over the performance period, the number of shares of stock that will be issued is adjusted upward or downward based upon the probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized as expense will be based on a comparison of the final performance metrics to the specified targets. The fair value of PSUs granted during the years ended December 31, 2009, 2008 and 2007 was $159 million, $126 million and $116 million, respectively. Total fair value of PSUs vested and released during the years ended December 31, 2009, 2008 and 2007 was $120 million, $78 million and $88 million, respectively.
In connection with vesting and release of RSUs and PSUs, the tax benefits realized by the company for the years ended December 31, 2009, 2008 and 2007 were $156 million, $165 million and $133 million, respectively.
IBM Employees Stock Purchase Plan
The company maintains a non-compensatory Employees Stock Purchase Plan (ESPP). The ESPP enables eligible participants to purchase full or fractional shares of IBM common stock at a five-percent discount off the average market price on the day of purchase through payroll deductions of up to 10 percent of eligible compensation. Eligible compensation includes any compensation received by the employee during the year. The ESPP provides for offering periods during which shares may be purchased and continues as long as shares remain available under the ESPP, unless terminated earlier at the discretion of the Board of Directors. Individual ESPP participants are restricted from purchasing more than $25,000 of common stock in one calendar year or 1,000 shares in an offering period.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Employees purchased 3.2 million, 3.5 million and 4.0 million shares under the ESPP during the years ended December 31, 2009, 2008 and 2007, respectively. Cash dividends declared and paid by the company on its common stock also include cash dividends on the company stock purchased through the ESPP. Dividends are paid on full and fractional shares and can be reinvested in the ESPP. The company stock purchased through the ESPP is considered outstanding and is included in the weighted-average outstanding shares for purposes of computing basic and diluted earnings per share.
Approximately 9.6 million, 12.8 million and 16.3 million shares were available for purchase under the ESPP at December 31, 2009, 2008 and 2007, respectively.
Note U.
Retirement-Related Benefits
Description of Plans
IBM sponsors defined benefit pension plans and defined contribution plans that cover substantially all regular employees, a supplemental retention plan that covers certain U.S. executives and nonpension postretirement benefit plans primarily consisting of retiree medical and dental benefits for eligible retirees and dependents.
U.S. Plans
DEFINED BENEFIT PENSION PLANS
IBM Personal Pension Plan
IBM provides U.S. regular, full-time and part-time employees hired prior to January 1, 2005 with noncontributory defined benefit pension benefits via the IBM Personal Pension Plan. Prior to 2008, the IBM Personal Pension Plan consisted of a tax qualified (qualified) plan and a non-tax qualified (nonqualified) plan. Effective January 1, 2008, the nonqualified plan was renamed the Excess Personal Pension Plan (Excess PPP) and the qualified plan is now referred to as the Qualified PPP. The combined plan is now referred to as the PPP. The Qualified PPP is funded by company contributions to an irrevocable trust fund, which is held for the sole benefit of participants and beneficiaries. The Excess PPP, which is unfunded, provides benefits in excess of IRS limitations for qualified plans.
Benefits provided to the PPP participants are calculated using benefit formulas that vary based on the participant. Pension benefits are calculated using one of two methods based upon specified criteria used to determine each participants eligibility. The first method uses a five-year, final pay formula that determines benefits based on salary, years of service, mortality and other participant-specific factors. The second method is a cash balance formula that calculates benefits using a percentage of employees annual salary, as well as an interest crediting rate.
Benefit accruals under the IBM Personal Pension Plan ceased December 31, 2007 for all participants.
U.S. Supplemental Executive Retention Plan
The company also sponsors a nonqualified U.S. Supplemental Executive Retention Plan (Retention Plan). The Retention Plan, which is unfunded, provides benefits to eligible U.S. executives based on average earnings, years of service and age at termination of employment. Effective July 1, 1999, the company replaced the then effective Retention Plan with the current Retention Plan. Some participants in the previous Retention Plan will still be eligible for benefits under that prior plan if those benefits are greater than the benefits provided under the current plan.
Benefit accruals under the Retention Plan ceased December 31, 2007 for all participants.
DEFINED CONTRIBUTION PLANS
IBM 401(k) Plus Plan
U.S. regular, full-time and part-time employees are eligible to participate in the IBM 401(k) Plus Plan, which is a qualified defined contribution plan under section 401(k) of the Internal Revenue Code. Effective January 1, 2008, under the IBM 401(k) Plus Plan, eligible employees receive a dollar-for-dollar match of their contributions up to 6 percent of eligible compensation for those hired prior to January 1, 2005, and up to 5 percent of eligible compensation for those hired on or after January 1, 2005. In addition, eligible employees receive automatic contributions from the company equal to 1, 2 or 4 percent of eligible compensation based on their eligibility to participate in the PPP as of December 31, 2007. Employees receive automatic contributions and matching contributions after the completion of one year of service. Further, through June 30, 2009, IBM contributed transition credits to eligible participants 401(k) Plus Plan accounts. The amount of the transition credits was based on a participants age and service as of June 30, 1999.
Prior to January 1, 2008, the company match equaled 50 percent of the first 6 percent of eligible compensation that participants contributed to the plan for those hired before January 1, 2005, and 100 percent of the first 6 percent contributed for those hired after December 31, 2004.
The companys matching contributions vest immediately and participants are always fully vested in their own contributions. All contributions, including the company match, are made in cash and invested in accordance with participants investment elections. There are no minimum amounts that must be invested in company stock, and there are no restrictions on transferring amounts out of company stock to another investment choice, other than excessive trading rules applicable to such investments.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
IBM Excess 401(k) Plus Plan
Effective January 1, 2008, the company replaced the IBM Executive Deferred Compensation Plan, an unfunded, nonqualified, defined contribution plan, with the IBM Excess 401(k) Plus Plan (Excess 401(k)), an unfunded, nonqualified defined contribution plan. All employees whose eligible compensation is expected to exceed the IRS compensation limit for qualified plans are eligible to participate in the Excess 401(k). The purpose of the Excess 401(k) is to provide benefits that would be provided under the qualified IBM 401(k) Plus Plan if the compensation limits did not apply.
Amounts deferred into the Excess 401(k) are recordkeeping (notional) accounts and are not held in trust for the participants. Participants in the Excess 401(k) may invest their notional accounts in the primary investment options available to all employees through the 401(k) Plus Plan. p articipants in the e xcess 401(k) are also eligible to receive company match and automatic contributions on eligible compensation deferred into the e xcess 401(k) and on compensation earned in excess of the Internal r evenue c ode pay limit once they have completed one year of service. Through June 30, 2009, eligible participants also received transition credits. Amounts deferred into the e xcess 401(k), including company contributions are recorded as liabilities.
NONPENSION POSTRETIREMENT BENEFIT PLAN
U.S. Nonpension Postretirement Plan
The company sponsors a defined benefit nonpension postretirement benefit plan that provides medical and dental benefits to eligible U.S. retirees and eligible dependents, as well as life insurance for eligible U.S. retirees. Effective July 1, 1999, the company established a Future h ealth a ccount (FHA) for employees who were more than five years from retirement eligibility. Employees who were within five years of retirement eligibility are covered under the companys prior retiree health benefits arrangements. Under either the FHA or the prior retiree health benefit arrangements, there is a maximum cost to the company for retiree health benefits.
Since January 1, 2004, new hires, as of that date or later, are not eligible for company subsidized postretirement benefits.
Non-U.S. Plans
Most subsidiaries and branches outside the United States sponsor defined benefit and/or defined contribution plans that cover substantially all regular employees. The company deposits funds under various fiduciary-type arrangements, purchases annuities under group contracts or provides reserves for these plans. Benefits under the defined benefit plans are typically based either on years of service and the employees compensation (generally during a fixed number of years immediately before retirement) or on annual credits. The range of assumptions that are used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries.
In addition, certain of the companys non-U.S. subsidiaries sponsor defined benefit nonpension postretirement benefit plans that provide medical and dental benefits to eligible non-U.S. retirees and eligible dependents, as well as life insurance for certain eligible non-U.S. retirees. However, most of the non-U.S. retirees are covered by local government sponsored and administered programs.
Plan Financial Information
Summary of Financial Information
The following table presents a summary of the total retirement-related benefits net periodic (income)/cost recorded in the c onsolidated s tatement of e arnings.
($ in millions)
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
Total |
|
|||||||||||||||||||||
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008* |
|
2007* |
|
2009 |
|
2008* |
|
2007* |
|
|||||||||
Defined benefit pension plans |
|
$ |
(919 |
) |
$ |
(948 |
) |
$ |
473 |
|
$ |
521 |
|
$ |
402 |
|
$ |
835 |
|
$ |
(398 |
) |
$ |
(546 |
) |
$ |
1,308 |
|
Retention plan |
|
13 |
|
13 |
|
23 |
|
|
|
|
|
|
|
13 |
|
13 |
|
23 |
|
|||||||||
Total defined benefit pension plans (income)/cost |
|
$ |
(906 |
) |
$ |
(936 |
) |
$ |
496 |
|
$ |
521 |
|
$ |
402 |
|
$ |
835 |
|
$ |
(384 |
) |
$ |
(534 |
) |
$ |
1,331 |
|
IBM 401(k) p lus p lan and n on-U.S. plans |
|
$ |
946 |
|
$ |
1,034 |
|
$ |
390 |
|
$ |
478 |
|
$ |
540 |
|
$ |
478 |
|
$ |
1,424 |
|
$ |
1,574 |
|
$ |
868 |
|
Excess 401(k) |
|
26 |
|
36 |
|
12 |
|
|
|
|
|
|
|
26 |
|
36 |
|
12 |
|
|||||||||
Total defined contribution plans cost |
|
$ |
972 |
|
$ |
1,069 |
|
$ |
402 |
|
$ |
478 |
|
$ |
540 |
|
$ |
478 |
|
$ |
1,450 |
|
$ |
1,609 |
|
$ |
880 |
|
Nonpension postretirement benefit plans cost |
|
$ |
292 |
|
$ |
310 |
|
$ |
342 |
|
$ |
58 |
|
$ |
53 |
|
$ |
57 |
|
$ |
350 |
|
$ |
363 |
|
$ |
399 |
|
Total retirement-related benefits net periodic cost |
|
$ |
358 |
|
$ |
443 |
|
$ |
1,240 |
|
$ |
1,057 |
|
$ |
996 |
|
$ |
1,370 |
|
$ |
1,415 |
|
$ |
1,439 |
|
$ |
2,610 |
|
* Reclassified to conform with 2009 presentation.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The following table presents a summary of the total projected benefit obligation (PBO) for defined benefit plans, accumulated postretirement benefit obligation (APBO) for nonpension postretirement benefit plans (benefit obligations), fair value of plan assets and the associated funded status recorded in the c onsolidated s tatement of Financial p osition.
($ in millions)
|
|
Benefit Obligations |
|
Fair Value of Plan Assets |
|
Funded Status* |
|
||||||||||||
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|||||||
U.S. Plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Overfunded plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Qualified PPP |
|
$ |
46,910 |
|
$ |
|
|
$ |
47,269 |
|
$ |
|
|
$ |
359 |
|
$ |
|
|
Underfunded plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Qualified PPP |
|
$ |
|
|
$ |
47,297 |
|
$ |
|
|
$ |
45,918 |
|
$ |
|
|
$ |
(1,379 |
) |
Excess PPP |
|
1,195 |
|
1,224 |
|
|
|
|
|
(1,195 |
) |
(1,224 |
) |
||||||
Retention Plan |
|
249 |
|
235 |
|
|
|
|
|
(249 |
) |
(235 |
) |
||||||
Nonpension postretirement benefit plan |
|
5,100 |
|
5,224 |
|
33 |
|
113 |
|
(5,067 |
) |
(5,111 |
) |
||||||
Total underfunded U.S. plans |
|
$ |
6,545 |
|
$ |
53,980 |
|
$ |
33 |
|
$ |
46,031 |
|
$ |
(6,512 |
) |
$ |
(7,949 |
) |
Non-U.S. Plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Overfunded Plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Qualified defined benefit pension plans |
|
$ |
14,032 |
|
$ |
12,586 |
|
$ |
16,673 |
|
$ |
14,183 |
|
$ |
2,641 |
|
$ |
1,598 |
|
Nonpension postretirement benefit plans |
|
7 |
|
12 |
|
8 |
|
14 |
|
1 |
|
3 |
|
||||||
Total overfunded non-U.S. plans |
|
$ |
14,039 |
|
$ |
12,598 |
|
$ |
16,681 |
|
$ |
14,197 |
|
$ |
2,642 |
|
$ |
1,601 |
|
Underfunded plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Qualified defined benefit pension plans |
|
$ |
21,521 |
|
$ |
21,179 |
|
$ |
17,633 |
|
$ |
14,980 |
|
$ |
(3,888 |
) |
$ |
(6,199 |
) |
Nonqualified defined benefit pension plans |
|
5,755 |
|
5,406 |
|
|
|
|
|
(5,755 |
) |
(5,406 |
) |
||||||
Nonpension postretirement benefit plans |
|
760 |
|
596 |
|
96 |
|
65 |
|
(664 |
) |
(532 |
) |
||||||
Total underfunded non-U.S. plans |
|
$ |
28,036 |
|
$ |
27,182 |
|
$ |
17,729 |
|
$ |
15,045 |
|
$ |
(10,307 |
) |
$ |
(12,137 |
) |
Total overfunded plans |
|
$ |
60,949 |
|
$ |
12,598 |
|
$ |
63,950 |
|
$ |
14,197 |
|
$ |
3,001 |
|
$ |
1,601 |
|
Total underfunded plans |
|
$ |
34,581 |
|
$ |
81,162 |
|
$ |
17,762 |
|
$ |
61,076 |
|
$ |
(16,819 |
) |
$ |
(20,086 |
) |
* Funded status is recognized in the c onsolidated s tatement of Financial p osition as follows: a sset amounts as prepaid pension assets; (liability) amounts as compensation and benefits (current liability) and retirement and nonpension postretirement benefit obligations (noncurrent liability).
At December 31, 2009, the companys qualified defined benefit pension plans worldwide were 99 percent funded compared to the benefit obligations, with the U.S. qualified PPP 101 percent funded. Overall, including nonqualifed plans, the companys defined benefit pension plans were 91 percent funded, an improvement of 6 points from the year-end 2008 position.
Defined Benefit Pension and Nonpension Postretirement Benefit Plan Financial Information
The tables on pages 112 to 114 represent financial information for the companys retirement-related benefit plans. Defined benefit pension plans in the U.S. Plans consist of the Qualified PPP, the e xcess PPP and the r etention p lan. Defined benefit pension plans in the Non-U.S. Plans consist of all plans sponsored by the companys subsidiaries. The nonpension postretirement benefit plan in the U.S. plan represents the U.S. n onpension p ostretirement Benefit p lan. n onpension postretirement benefit plans in the n on-U.S. Plans consist of all plans sponsored by the companys subsidiaries.
The tables on page 112 present the components of net periodic (income)/cost of the companys retirement-related benefit plans recognized in Consolidated Statement of e arnings.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions)
|
|
Defined Benefit Pension Plans |
|
||||||||||||||||
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
||||||||||||||
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008* |
|
2007* |
|
||||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
773 |
|
$ |
585 |
|
$ |
660 |
|
$ |
688 |
|
Interest cost |
|
2,682 |
|
2,756 |
|
2,660 |
|
1,898 |
|
2,042 |
|
1,825 |
|
||||||
Expected return on plan assets |
|
(4,009 |
) |
(3,978 |
) |
(3,703 |
) |
(2,534 |
) |
(2,725 |
) |
(2,528 |
) |
||||||
Amortization of transition assets |
|
|
|
|
|
|
|
(0 |
) |
(0 |
) |
(3 |
) |
||||||
Amortization of prior service costs/(credits) |
|
10 |
|
(7 |
) |
57 |
|
(126 |
) |
(129 |
) |
(125 |
) |
||||||
Recognized actuarial losses |
|
411 |
|
291 |
|
703 |
|
624 |
|
612 |
|
934 |
|
||||||
Curtailments and settlements |
|
|
|
2 |
|
5 |
|
(126 |
) |
(139 |
) |
2 |
|
||||||
Multi-employer plan/other costs |
|
|
|
|
|
|
|
200 |
|
82 |
|
40 |
|
||||||
Total net periodic (income)/cost |
|
$ |
(906 |
) |
$ |
(936 |
) |
$ |
496 |
|
$ |
521 |
|
$ |
402 |
|
$ |
835 |
|
* Reclassified to conform with 2009 presentation.
($ in millions)
|
|
Nonpension Postretirement Benefit Plans |
|
||||||||||||||||
|
|
U.S. Plan |
|
Non-U.S. Plans |
|
||||||||||||||
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
|
||||||
Service cost |
|
$ |
41 |
|
$ |
55 |
|
$ |
69 |
|
$ |
10 |
|
$ |
10 |
|
$ |
12 |
|
Interest cost |
|
289 |
|
312 |
|
311 |
|
51 |
|
53 |
|
46 |
|
||||||
Expected return on plan assets |
|
|
|
(8 |
) |
|
|
(8 |
) |
(10 |
) |
(11 |
) |
||||||
Amortization of transition assets |
|
|
|
|
|
|
|
0 |
|
0 |
|
1 |
|
||||||
Amortization of prior service costs/(credits) |
|
(39 |
) |
(62 |
) |
(62 |
) |
(6 |
) |
(7 |
) |
(8 |
) |
||||||
Recognized actuarial losses |
|
|
|
9 |
|
24 |
|
11 |
|
14 |
|
17 |
|
||||||
Curtailments and settlements |
|
|
|
3 |
|
|
|
|
|
(6 |
) |
|
|
||||||
Total net periodic cost |
|
$ |
292 |
|
$ |
310 |
|
$ |
342 |
|
$ |
58 |
|
$ |
53 |
|
$ |
57 |
|
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The following table presents the changes in benefit obligations and plan assets of the companys retirement-related benefit plans.
($ in millions)
|
|
Defined Benefit Pension Plans |
|
Nonpension Postretirement Benefit Plans |
|
||||||||||||||||||||
|
|
U.S. Plans |
|
Non-U.S. Plans* |
|
U.S. Plan |
|
Non-U.S. Plans |
|
||||||||||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||||||
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Benefit obligation at January 1 |
|
$ |
48,756 |
|
$ |
47,673 |
|
$ |
39,171 |
|
$ |
42,291 |
|
$ |
5,224 |
|
$ |
5,472 |
|
$ |
608 |
|
$ |
769 |
|
Service cost |
|
|
|
|
|
585 |
|
660 |
|
41 |
|
55 |
|
10 |
|
10 |
|
||||||||
Interest cost |
|
2,682 |
|
2,756 |
|
1,898 |
|
2,042 |
|
289 |
|
312 |
|
51 |
|
53 |
|
||||||||
Plan participants contributions |
|
|
|
|
|
58 |
|
63 |
|
228 |
|
216 |
|
|
|
|
|
||||||||
Acquisitions/divestitures, net |
|
|
|
|
|
(58 |
) |
(6 |
) |
|
|
|
|
(2 |
) |
(1 |
) |
||||||||
Actuarial losses/(gains) |
|
155 |
|
1,183 |
|
506 |
|
(64 |
) |
(65 |
) |
(191 |
) |
14 |
|
(12 |
) |
||||||||
Benefits paid from trust |
|
(3,144 |
) |
(2,999 |
) |
(1,855 |
) |
(1,814 |
) |
(646 |
) |
(656 |
) |
(6 |
) |
(31 |
) |
||||||||
Direct benefit payments |
|
(94 |
) |
(81 |
) |
(464 |
) |
(486 |
) |
(25 |
) |
(24 |
) |
(23 |
) |
(21 |
) |
||||||||
Foreign exchange impact |
|
|
|
|
|
1,920 |
|
(3,357 |
) |
|
|
|
|
111 |
|
(146 |
) |
||||||||
Medicare subsidy |
|
|
|
|
|
|
|
|
|
52 |
|
37 |
|
|
|
|
|
||||||||
Plan amendments/curtailments/settlements |
|
|
|
224 |
|
(454 |
) |
(157 |
) |
|
|
3 |
|
4 |
|
(13 |
) |
||||||||
Benefit obligation at December 31 |
|
$ |
48,354 |
|
$ |
48,756 |
|
$ |
41,308 |
|
$ |
39,171 |
|
$ |
5,100 |
|
$ |
5,224 |
|
$ |
767 |
|
$ |
608 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fair value of plan assets at January 1 |
|
$ |
45,918 |
|
$ |
57,191 |
|
$ |
29,164 |
|
$ |
41,696 |
|
$ |
113 |
|
$ |
504 |
|
$ |
79 |
|
$ |
121 |
|
Actual return on plan assets |
|
4,496 |
|
(8,274 |
) |
4,030 |
|
(7,678 |
) |
(1 |
) |
4 |
|
8 |
|
10 |
|
||||||||
Employer contributions |
|
|
|
|
|
1,195 |
|
858 |
|
338 |
|
45 |
|
1 |
|
10 |
|
||||||||
Acquisitions/divestitures, net |
|
|
|
|
|
(29 |
) |
16 |
|
|
|
|
|
|
|
|
|
||||||||
Plan participants contributions |
|
|
|
|
|
58 |
|
63 |
|
228 |
|
216 |
|
|
|
|
|
||||||||
Benefits paid from trust |
|
(3,144 |
) |
(2,999 |
) |
(1,855 |
) |
(1,814 |
) |
(646 |
) |
(656 |
) |
(6 |
) |
(31 |
) |
||||||||
Foreign exchange impact |
|
|
|
|
|
1,710 |
|
(3,978 |
) |
|
|
|
|
23 |
|
(30 |
) |
||||||||
Plan amendments/curtailments/settlements |
|
|
|
|
|
33 |
|
2 |
|
|
|
|
|
(1 |
) |
|
|
||||||||
Fair value of plan assets at December 31 |
|
$ |
47,269 |
|
$ |
45,918 |
|
$ |
34,305 |
|
$ |
29,164 |
|
$ |
33 |
|
$ |
113 |
|
$ |
104 |
|
$ |
79 |
|
Funded status at December 31 |
|
$ |
(1,085 |
) |
$ |
(2,838 |
) |
$ |
(7,003 |
) |
$ |
(10,007 |
) |
$ |
(5,067 |
) |
$ |
(5,111 |
) |
$ |
(663 |
) |
$ |
(529 |
) |
Accumulated benefit obligation** |
|
$ |
48,354 |
|
$ |
48,756 |
|
$ |
40,339 |
|
$ |
37,759 |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
* Excludes a defined benefit pension plan in Brazil due to restrictions on the use of plan assets imposed by governmental regulations.
** Represents the benefit obligation assuming no future participant compensation increases.
N/Anot applicable
The following table presents the net funded status recognized in the c onsolidated s tatement of Financial p osition.
($ in millions)
|
|
Defined Benefit Pension Plans |
|
Nonpension Postretirement Benefit Plans |
|
||||||||||||||||||||
|
|
U.S. Plans |
|
Non-U.S. Plans* |
|
U.S. plan |
|
Non-U.S. Plans |
|
||||||||||||||||
At December 31: |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||||||
Prepaid pension assets |
|
$ |
359 |
|
$ |
|
|
$ |
2,641 |
|
$ |
1,598 |
|
$ |
|
|
$ |
|
|
$ |
1 |
|
$ |
3 |
|
Current liabilitiesCompensation and benefits |
|
(91 |
) |
(86 |
) |
(326 |
) |
(283 |
) |
(425 |
) |
(255 |
) |
(24 |
) |
(9 |
) |
||||||||
Noncurrent liabilities r etirement and nonpension postretirement benefit obligations |
|
(1,353 |
) |
(2,752 |
) |
(9,318 |
) |
(11,322 |
) |
(4,642 |
) |
(4,856 |
) |
(640 |
) |
(523 |
) |
||||||||
Funded statusnet |
|
$ |
(1,085 |
) |
$ |
(2,838 |
) |
$ |
(7,003 |
) |
$ |
(10,007 |
) |
$ |
(5,067 |
) |
$ |
(5,111 |
) |
$ |
(663 |
) |
$ |
(529 |
) |
The table on page 114 presents the pre-tax net loss and prior service costs/(credits) and transition (assets)/liabilities recognized in other comprehensive income/(loss) and the changes in pre-tax net loss, prior service costs/(credits) and transition (assets)/liabilities recognized in accumulated other comprehensive income/(loss) for the retirement-related benefit plans.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions)
|
|
Defined Benefit Pension Plans |
|
Nonpension Postretirement Benefit Plans |
|
||||||||||||||||||||
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
U.S. Plan |
|
Non-U.S. Plans |
|
||||||||||||||||
For the year ended December 31: |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||||||
Net loss at January 1 |
|
$ |
15,623 |
|
$ |
2,479 |
|
$ |
18,898 |
|
$ |
9,228 |
|
$ |
454 |
|
$ |
657 |
|
$ |
155 |
|
$ |
186 |
|
Current period loss/(gain) |
|
(332 |
) |
13,435 |
|
(1,107 |
) |
10,339 |
|
(57 |
) |
(194 |
) |
24 |
|
(11 |
) |
||||||||
Curtailments and settlements |
|
|
|
|
|
6 |
|
(56 |
) |
|
|
|
|
|
|
(7 |
) |
||||||||
Amortization of net loss included in net periodic (income)/cost |
|
(411 |
) |
(291 |
) |
(624 |
) |
(612 |
) |
|
|
(9 |
) |
(11 |
) |
(14 |
) |
||||||||
Net loss at December 31 |
|
$ |
14,880 |
|
$ |
15,623 |
|
$ |
17,172 |
|
$ |
18,898 |
|
$ |
397 |
|
$ |
454 |
|
$ |
167 |
|
$ |
155 |
|
Prior service costs/(credits) at January 1 |
|
$ |
168 |
|
$ |
(60 |
) |
$ |
(980 |
) |
$ |
(1,147 |
) |
$ |
(53 |
) |
$ |
(115 |
) |
$ |
(21 |
) |
$ |
(28 |
) |
Current period prior service costs/(credits) |
|
|
|
222 |
|
(370 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
||||||||
Curtailments and settlements |
|
|
|
|
|
120 |
|
38 |
|
|
|
|
|
|
|
|
|
||||||||
Amortization of prior service (costs)/credits included in net periodic (income)/cost |
|
(10 |
) |
7 |
|
126 |
|
129 |
|
39 |
|
62 |
|
6 |
|
7 |
|
||||||||
Prior service costs/(credits) at December 31 |
|
$ |
159 |
|
$ |
168 |
|
$ |
(1,104 |
) |
$ |
(980 |
) |
$ |
(14 |
) |
$ |
(53 |
) |
$ |
(19 |
) |
$ |
(21 |
) |
Transition (assets)/liabilities at January 1 |
|
$ |
|
|
$ |
|
|
$ |
(1 |
) |
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
1 |
|
$ |
1 |
|
Amortization of transition assets/(liabilities) included in net periodic (income)/cost |
|
|
|
|
|
0 |
|
0 |
|
|
|
|
|
0 |
|
0 |
|
||||||||
Transition (assets)/liabilities at December 31 |
|
$ |
|
|
$ |
|
|
$ |
(1 |
) |
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
1 |
|
$ |
1 |
|
Total loss recognized in Accumulated other comprehensive income/(loss)* |
|
$ |
15,038 |
|
$ |
15,791 |
|
$ |
16,067 |
|
$ |
17,917 |
|
$ |
382 |
|
$ |
401 |
|
$ |
148 |
|
$ |
135 |
|
* See note N, Equity Activity, on page 98 for the total change in the accumulated other comprehensive income/(loss) and the Consolidated Statement of Changes in Equity for components of net periodic (income)/cost, including the related tax effects, recognized in other comprehensive income/(loss) for the retirement-related benefit plans.
The following table presents the pre-tax estimated net loss, estimated prior service costs/(credits) and estimated transition (assets)/liabilities of the retirement-related benefit plans that will be amortized from accumulated other comprehensive income/(loss) into net periodic (income)/cost and recorded in the Consolidated Statement of Earnings in 2010.
($ in millions)
|
|
Defined |
|
Nonpension Post- |
|
||||||||
|
|
Benefit Pension Plans |
|
retirement Benefit Plans |
|
||||||||
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
U.S. Plan |
|
Non-U.S. Plans |
|
||||
Net loss |
|
$ |
476 |
|
$ |
722 |
|
$ |
|
|
$ |
9 |
|
Prior service costs/(credits) |
|
10 |
|
(165 |
) |
(14 |
) |
(5 |
) |
||||
Transition (assets)/liabilities |
|
|
|
0 |
|
|
|
|
|
||||
During the year ended December 31, 2009, the company paid $140 million for mandatory pension insolvency insurance coverage premiums in certain non-U.S. countries (Germany, Canada, Luxembourg and the U.K.), an increase of $117 million from the year ended December 31, 2008, driven primarily by premiums paid in Germany. These premiums relate to the rising level of plan insolvencies experienced by other companies.
During the year ended December 31, 2009, the company approved changes to the United Kingdom Pension Plan which included the elimination of accrued benefits under this plan effective April 2011. As a result of this action, the company recorded a curtailment gain of $124 million included in 2009 net periodic (income)/cost and reduced the PBO by $85 million. The company also amended its cash balance and defined contribution plans in Japan to reduce overall benefits for active participants for future years of service. This amendment resulted in a decrease in the PBO of $359 million and had no impact on 2009 net periodic (income)/cost.
During the year ended December 31, 2008, the IBM Board of Directors approved a pension adjustment for certain U.S. retirees and beneficiaries in the PPP. This adjustment provided a pension increase to approximately 42,000 IBM retirees who retired before January 1, 1997. This adjustment resulted in an increase in the PBO of $222 million and had no impact on 2008 net periodic (income)/cost.
During the year ended December 31, 2008, the company terminated one of its defined benefit pension plans in Japan that resulted in a settlement gain of $140 million recorded as part of 2008 net periodic (income)/cost and resulted in a decrease in the PBO of $157 million.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
No significant amendments of retirement-related benefit plans occurred during the year ended December 31, 2007 that had a material effect on the Consolidated Statement of Earnings.
Assumptions Used to Determine Plan Financial Information
Underlying both the measurement of benefit obligations and net periodic (income)/cost are actuarial valuations. These valuations use participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. The company evaluates these assumptions, at a minimum, annually, and makes changes as necessary.
The table below presents the assumptions used to measure the net periodic (income)/cost and the year-end benefit obligations for retirement-related benefit plans.
|
|
Defined Benefit Pension Plans |
|
||||||||||
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
||||||||
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
|
Weighted-average assumptions used to measure net periodic (income)/cost for the year ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
5.75 |
% |
6.00 |
% |
5.75 |
% |
4.89 |
% |
5.06 |
% |
4.40 |
% |
Expected long-term returns on plan assets |
|
8.00 |
% |
8.00 |
% |
8.00 |
% |
6.73 |
% |
6.86 |
% |
6.95 |
% |
Rate of compensation increase* |
|
N/A |
|
N/A |
|
4.00 |
% |
3.09 |
% |
3.23 |
% |
3.05 |
% |
Weighted-average assumptions used to measure benefit obligations at December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
5.60 |
% |
5.75 |
% |
6.00 |
% |
4.84 |
% |
4.89 |
% |
5.06 |
% |
Rate of compensation increase* |
|
N/A |
|
N/A |
|
N/A |
|
2.92 |
% |
3.09 |
% |
3.23 |
% |
* Rate of compensation increase is not applicable to the U.S. defined benefit pension plans as benefit accruals ceased December 31, 2007 for all participants.
N/ANot applicable
|
|
Nonpension Postretirement Benefit Plans |
|
||||||||||
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
||||||||
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
|
Weighted-average assumptions used to measure net periodic cost for the year ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
5.75 |
% |
6.00 |
% |
5.75 |
% |
7.36 |
% |
7.13 |
% |
6.93 |
% |
Expected long-term returns on plan assets |
|
N/A |
|
3.02 |
% |
N/A |
|
9.19 |
% |
9.04 |
% |
9.95 |
% |
Weighted-average assumptions used to measure benefit obligations at December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
5.40 |
% |
5.75 |
% |
6.00 |
% |
7.92 |
% |
7.36 |
% |
7.13 |
% |
N/ANot applicable
DISCOUNT RATE
The discount rate assumptions used for retirement-related benefit plans accounting reflect the yields available on high-quality, fixed income debt instruments at the measurement date. For the U.S. discount rate assumptions, a portfolio of high-quality corporate bonds is used to construct a yield curve. The cash flows from the companys expected benefit obligation payments are then matched to the yield curve to derive the discount rates. In the non-U.S., where markets for high-quality long-term bonds are not generally as well developed, a portfolio of long-term government bonds is used as a base, to which a credit spread is added to simulate corporate bond yields at these maturities in the jurisdiction of each plan, as the benchmark for developing the respective discount rates.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
For the U.S. defined benefit pension plans, the changes in discount rate assumptions impacted the net periodic (income)/cost and the PBO. The changes in discount rate assumptions resulted in a decrease in 2009 net periodic income of $70 million, an increase in 2008 net periodic income of $67 million and a decrease in 2007 net periodic cost of $92 million. The changes in discount rate assumptions resulted in an increase in the PBO of $703 million and $1,190 million at December 31, 2009 and 2008, respectively.
For the nonpension postretirement benefit plans, the changes in discount rate assumptions had no material impact on net periodic cost for the years ended December 31, 2009, 2008 and 2007 and on the APBO at December 31, 2009 and 2008.
EXPECTED LONG-TERM RETURNS ON PLAN ASSETS
Expected returns on plan assets, a component of net periodic (income)/cost, represent the expected long-term returns on plan assets based on the calculated market-related value of plan assets. Expected long-term returns on plan assets take into account long-term expectations for future returns and investment policies and strategies as described on page 117. These rates of return are developed by the company, calculated using an arithmetic average and are tested for reasonableness against historical returns. The use of expected long-term returns on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns, and therefore result in a pattern of income and cost recognition that more closely matches the pattern of the services provided by the employees. Differences between actual and expected returns are recognized as a component of net loss or gain in accumulated other comprehensive income/(loss), which is amortized as a component of net periodic (income)/cost over the service lives or life expectancy of the plan participants, depending on the plan, provided such amounts exceed certain thresholds provided by accounting standards. The market-related value of plan assets recognizes changes in the fair value of plan assets systematically over a five-year period in the expected return on plan assets line in net periodic (income)/cost.
For the U.S. defined benefit pension plan, Qualified PPP, the expected long-term rate of return on plan assets of 8.00 percent remained constant for the years ended December 31, 2009, 2008 and 2007 and, consequently, had no incremental impact on net periodic (income)/cost.
For the nonpension postretirement benefit plans, the company maintains a nominal, highly liquid trust fund balance to ensure payments are made timely. As a result, for the years ended December 31, 2009, 2008 and 2007, the expected long-term return on plan assets and the actual return on those assets were not material.
RATE OF COMPENSATION INCREASES AND MORTALITY RATE
The rate of compensation increases is determined by the company, based upon its long-term plans for such increases. The rate of compensation increase is not applicable to the U.S. defined benefit pension plans as benefit accruals ceased December 31, 2007 for all participants. Mortality rate assumptions are based on life expectancy and death rates for different types of participants. Mortality rates are periodically updated based on actual experience.
INTEREST CREDITING RATE
Benefits for certain participants in the PPP are calculated using a cash balance formula. An assumption underlying this formula is an interest crediting rate, which impacts both net periodic (income)/cost and the PBO. This assumption provides a basis for projecting the expected interest rate that participants will earn on the benefits that they are expected to receive in the following year and is based on the average from August to October of the one-year U.S. Treasury Constant Maturity yield plus one percent.
For the PPP, the change in the interest crediting rate to 2.8 percent for the year ended December 31, 2009 from 5.2 percent for the year ended December 31, 2008 resulted in an increase in 2009 net periodic income of $151 million. The change in the interest crediting rate to 5.2 percent for the year ended December 31, 2008 from 6.0 percent for the year ended December 31, 2007 resulted in an increase in 2008 net periodic income of $65 million. The change in the interest crediting rate to 6.0 percent for the year ended December 31, 2007 from 5.0 percent for the year ended December 31, 2006 resulted in an increase in 2007 net periodic cost of $125 million.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
HEALTHCARE COST TREND RATE
For nonpension postretirement benefit plan accounting, the company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. However, the healthcare cost trend rate has an insignificant effect on plan costs and obligations as a result of the terms of the plan which limit the companys obligation to the participants. The company assumes that the healthcare cost trend rate for 2010 will be 7 percent. In addition, the company assumes that the same trend rate will decrease to 5 percent over the next three years. A one percentage point increase or decrease in the assumed healthcare cost trend rate would not have a material effect on 2009, 2008 and 2007 net periodic cost or the benefit obligations as of December 31, 2009 and 2008.
Plan Assets
Retirement-related benefit plan assets are recognized and measured at fair value as described in note A, Significant Accounting Policies, on page 77. Because of the inherent uncertainty of valuations, these fair value measurements may not necessarily reflect the amounts the company could realize in current market transactions.
INVESTMENT POLICIES AND STRATEGIES
The investment objectives of the Qualified PPP portfolio are designed to generate returns that will enable the plan to meet its future obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates and life expectancy of the plans participants. The obligations are estimated using actuarial assumptions, based on the current economic environment and other pertinent factors described on page 115. The Qualified PPP portfolios investment strategy balances the requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and changes in interest rates that could cause the plan to become underfunded, thereby increasing its dependence on contributions from the company. To mitigate any potential concentration risk, careful consideration is given to balancing the portfolio among industry sectors, companies and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. As a result, the Qualified PPP portfolios target allocation is 44 percent equity securities, 46 percent fixed income securities, 5 percent real estate and 5 percent other investments, which is consistent with the allocation decisions made by the companys management and is similar to the prior year target allocation. The table on page 118 details the actual allocation of equity, fixed income, real estate and all other types of investments for the Qualified PPP portfolio.
The assets are managed by professional investment firms and investment professionals who are employees of the company. They are bound by investment mandates determined by the companys management and are measured against specific benchmarks. Among these managers, consideration is given, but not limited to, balancing security concentration, issuer concentration, investment style and reliance on particular active and passive investment strategies.
Market liquidity risks are tightly controlled, with only a modest percentage of the Qualified PPP portfolio invested in private market assets consisting of private equities and private real estate investments, which are less liquid than publicly traded securities. As of December 31, 2009, the Qualified PPP portfolio had $3,618 million in commitments for future investments in private markets to be made over a number of years. These commitments are expected to be funded from plan assets.
Derivatives are used on a limited basis as an effective means to achieve investment objectives and/or as a component of the plans risk management strategy. The primary reasons for the use of derivatives are fixed income management, including duration, interest rate management and credit exposure, cash equitization and as a means to gain exposure to the currency and commodities markets.
Outside the U.S., the investment objectives are similar to those described above, subject to local regulations. The weighted average target allocation for the non-U.S. plans is 47 percent equity securities, 46 percent fixed income securities, 2 percent real estate and 5 percent other investments, which is consistent with the allocation decisions made by the companys management and is similar to the prior year weighted average target allocation. The table on page 118 details the actual allocations of equity, fixed income, real estate and all other types of investments for non-U.S. plans. In some countries, a higher percentage allocation to fixed income securities is required. In others, the responsibility for managing the investments typically lies with a board that may include up to 50 percent of members elected by employees and retirees. This can result in slight differences compared with the strategies previously described. Generally, these non-U.S. plans do not invest in illiquid assets and their use of derivatives is usually limited to currency hedging, adjusting portfolio durations and reducing specific market risks. There was no significant change in the investment strategies of these plans during either 2009 or 2008.
The companys nonpension postretirement benefit plans are underfunded or unfunded. For some plans, the company maintains a nominal, highly liquid trust fund balance to ensure timely benefit payments.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
DEFINED BENEFIT PENSION PLAN ASSETS
The following table presents the companys defined benefit pension plans major asset categories and their associated fair value at December 31, 2009. The U.S. Plan consists of the Qualified PPP and the Non-U.S. Plans consist of all plans sponsored by the companys subsidiaries.
($ in millions)
|
|
U.S. Plan |
|
Non-U.S. Plans |
|
||||||||||||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||||||
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Equity securities(a) |
|
$ |
15,205 |
|
$ |
56 |
|
$ |
|
|
$ |
15,261 |
|
$ |
7,012 |
|
$ |
|
|
$ |
|
|
$ |
7,012 |
|
Equity commingled/mutual funds(b)(c) |
|
303 |
|
1,085 |
|
26 |
|
1,413 |
|
386 |
|
8,923 |
|
|
|
9,309 |
|
||||||||
Fixed income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Government and related(d) |
|
|
|
10,880 |
|
|
|
10,880 |
|
|
|
6,231 |
|
|
|
6,231 |
|
||||||||
Corporate bonds |
|
|
|
7,264 |
|
|
|
7,264 |
|
|
|
1,467 |
|
|
|
1,467 |
|
||||||||
Mortgage and asset-backed securities |
|
|
|
1,403 |
|
37 |
|
1,440 |
|
|
|
21 |
|
|
|
21 |
|
||||||||
Fixed income commingled/ mutual funds(b)(e) |
|
369 |
|
1,064 |
|
192 |
|
1,625 |
|
45 |
|
6,835 |
|
|
|
6,880 |
|
||||||||
Insurance contracts |
|
|
|
1 |
|
|
|
1 |
|
|
|
1,143 |
|
|
|
1,143 |
|
||||||||
Cash and short-term investments(f) |
|
243 |
|
2,460 |
|
|
|
2,703 |
|
98 |
|
236 |
|
|
|
333 |
|
||||||||
Hedge funds |
|
|
|
214 |
|
587 |
|
800 |
|
|
|
|
|
|
|
|
|
||||||||
Private equity(g) |
|
|
|
|
|
3,877 |
|
3,877 |
|
|
|
|
|
93 |
|
93 |
|
||||||||
Private real estate(g) |
|
|
|
|
|
2,247 |
|
2,247 |
|
|
|
|
|
492 |
|
492 |
|
||||||||
Derivatives(h) |
|
18 |
|
(221 |
) |
|
|
(203 |
) |
62 |
|
(7 |
) |
|
|
55 |
|
||||||||
Other commingled/mutual funds(b)(i) |
|
|
|
(0 |
) |
|
|
|
|
|
|
1,190 |
|
|
|
1,190 |
|
||||||||
Subtotal |
|
16,138 |
|
24,205 |
|
6,964 |
|
47,308 |
|
7,602 |
|
26,038 |
|
585 |
|
34,226 |
|
||||||||
Other(j) |
|
|
|
|
|
|
|
(39 |
) |
|
|
|
|
|
|
80 |
|
||||||||
Fair value of plan assets |
|
$ |
16,138 |
|
$ |
24,205 |
|
$ |
6,964 |
|
$ |
47,269 |
|
$ |
7,602 |
|
$ |
26,038 |
|
$ |
585 |
|
$ |
34,305 |
|
(a) Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $122 million, representing 0.3 percent of the U.S. Plan assets. Non-U.S. Plans include IBM common stock of $45 million, representing 0.1 percent of the non-U.S. Plans assets.
(b) C ommingled funds represent pooled institutional investments.
(c) Invests in predominantly equity securities.
(d) Includes debt issued by national, state and local governments and agencies.
(e) Invests in predominantly fixed income securities.
(f) Includes cash and cash equivalents and short-term marketable securities.
(g) Includes limited partnerships and venture capital partnerships.
(h) P rimarily includes interest rate derivatives and, to a lesser extent, forwards, exchange traded and other over-the-counter derivatives.
(i) Invests in both equity and fixed income securities.
(j) R epresents net unsettled transactions, relating primarily to purchases and sales of plan assets.
The U.S. nonpension postretirement benefit plan assets of $33 million were invested in fixed income commingled/mutual funds, categorized as Level 1 in the fair value hierarchy. The non-U.S. nonpension postretirement benefit plan assets of $104 million, primarily in Brazil, and, to a lesser extent, in Mexico and South Africa, were invested primarily in government and related fixed income securities, categorized as Level 2 in the fair value hierarchy.
The companys asset allocations at December 31, 2008 were as follows:
|
|
U.S. Plan |
|
Non-U.S. Plans |
|
Asset Category: |
|
|
|
|
|
Equity securities(a)(b) |
|
37.1 |
% |
46.0 |
% |
Debt securities |
|
54.0 |
|
48.5 |
|
Real estate(a) |
|
5.9 |
|
1.6 |
|
Other |
|
3.0 |
|
4.0 |
|
Total |
|
100.0 |
% |
100.0 |
% |
(a) T he Qualified PPP portfolio (U.S. Plan) included private market assets comprising approximately 12.9 percent of total assets.
(b) E quity securities included IBM common stock of $83 million, representing 0.2 percent of the Qualified PPP portfolio plan assets.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The following table presents the reconciliation of the beginning and ending balances of Level 3 assets for the year ended December 31, 2009 for the U.S. Plan:
($ in millions)
|
|
Equity
|
|
Mortgage
|
|
Fixed
|
|
Hedge
|
|
Private
|
|
Private
|
|
Total |
|
|||||||
Balance at January 1 |
|
$ |
|
|
$ |
47 |
|
$ |
180 |
|
$ |
513 |
|
$ |
3,169 |
|
$ |
2,698 |
|
$ |
6,607 |
|
Return on assets held at end of year |
|
1 |
|
11 |
|
11 |
|
80 |
|
575 |
|
(634 |
) |
44 |
|
|||||||
Return on assets sold during the year |
|
|
|
1 |
|
|
|
2 |
|
14 |
|
(98 |
) |
(81 |
) |
|||||||
Purchases, sales and settlements, net |
|
25 |
|
(7 |
) |
|
|
(8 |
) |
118 |
|
281 |
|
408 |
|
|||||||
Transfers, net |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
(14 |
) |
|||||||
Balance at December 31 |
|
$ |
26 |
|
$ |
37 |
|
$ |
192 |
|
$ |
587 |
|
$ |
3,877 |
|
$ |
2,247 |
|
$ |
6,964 |
|
The following table presents the reconciliation of the beginning and ending balances of Level 3 assets for the year ended December 31, 2009 for the non-U.S. Plans:
($ in millions)
|
|
Private
|
|
Private
|
|
Total |
|
|||
Balance at January 1 |
|
$ |
64 |
|
$ |
429 |
|
$ |
494 |
|
Return on assets held at end of year |
|
(10 |
) |
(10 |
) |
(19 |
) |
|||
Return on assets sold during the year |
|
|
|
|
|
1 |
|
|||
Purchases, sales and settlements, net |
|
32 |
|
27 |
|
59 |
|
|||
Transfers, net |
|
|
|
|
|
|
|
|||
Foreign exchange impact |
|
6 |
|
46 |
|
51 |
|
|||
Balance at December 31 |
|
$ |
93 |
|
$ |
492 |
|
$ |
585 |
|
VALUATION TECHNIQUES
The following is a description of the valuation techniques used to measure plan assets at fair value. There were no changes in valuation techniques during 2009 and 2008.
Equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. IBM common stock is valued at the closing price reported on the New York Stock Exchange. Equity commingled/mutual funds are typically valued using the net asset value (NAV) provided by the administrator of the fund and reviewed by the company. The NAV is based on the value of the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. These assets are classified as Level 1, Level 2 or Level 3 depending on availability of quoted market prices.
The fair value of fixed income securities is typically estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are generally classified as Level 2. If available, they are valued using the closing price reported on the major market on which the individual securities are traded.
Cash includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short-term investments represent securities with original maturities of one year or less. These assets are classified as Level 1 or Level 2.
Private equity and private real estate partnership valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. These assets are initially valued at cost and are reviewed periodically utilizing available and relevant market data to determine if the carrying value of these assets should be adjusted. These investments are classified as Level 3. The valuation methodology is applied consistently from period to period.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Exchange traded derivatives are valued at the closing price reported on the exchange on which the individual securities are traded, while forward contracts are valued using a mid-close price. Over-the-counter derivatives are typically valued using pricing models. The models require a variety of inputs, including, for example, yield curves, credit curves, measures of volatility and foreign exchange rates. These assets are classified as Level 1 or Level 2 depending on availability of quoted market prices.
EXPECTED CONTRIBUTIONS
DEFINED BENEFIT PENSION PLANS
It is the companys general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and local tax laws. From time to time, the company contributes additional amounts as it deems appropriate.
The company contributed $1,252 million and $917 million in cash to non-U.S. plans, including non-U.S. multi-employer plans, during the years ended December 31, 2009 and 2008, respectively.
In 2010, the company is not legally required to make any contributions to the U.S. defined benefit pension plans. However, depending on market conditions, or other factors, the company may elect to make discretionary contributions to the Qualified PPP during the year.
The Pension Protection Act of 2006 (the Act), enacted into law in 2006, is a comprehensive reform package that, among other provisions, increases pension funding requirements for certain U.S. defined benefit plans, provides guidelines for measuring pension plan assets and pension obligations for funding purposes and raises tax deduction limits for contributions to retirement-related benefit plans. The additional funding requirements by the Act apply to plan years beginning after December 31, 2007. The Act was updated by the Worker, Retiree and Employer Recovery Act of 2008, which revised the funding requirements in the Act by clarifying that the company may smooth the change in value of pension plan assets over 24 months. At December 31, 2009, no mandatory contribution is required for 2010.
In 2010, the company estimates contributions to its non-U.S. plans to be approximately $800 million, which will be mainly contributed to defined benefit pension plans in Japan, the Netherlands, Switzerland and the United Kingdom. This amount represents the legally mandated minimum contributions. Financial market performance in 2010 could increase the legally mandated minimum contribution in certain countries which require monthly or daily remeasurement of the funded status. The company could also elect to contribute more than the legally mandated amount based on market conditions or other factors.
NONPENSION POSTRETIREMENT BENEFIT PLANS
T he company contributed $293 million and $10 million to the nonpension postretirement benefit plans during the years ended December 31, 2009 and 2008. These contribution amounts exclude the Medicare-related subsidy discussed below.
Expected Benefit Payments
DEFINED BENEFIT PENSION PLAN EXPECTED PAYMENTS
The following table presents the total expected benefit payments to defined benefit pension plan participants. These payments have been estimated based on the same assumptions used to measure the plans PBO at December 31, 2009 and include benefits attributable to estimated future compensation increases, where applicable.
($ in millions)
|
|
Qualified
|
|
Nonqualified
|
|
Qualified
|
|
Nonqualified
|
|
Total
Expected
|
|
|||||
2010 |
|
$ |
3,375 |
|
$ |
91 |
|
$ |
2,079 |
|
$ |
314 |
|
$ |
5,860 |
|
2011 |
|
3,262 |
|
91 |
|
1,951 |
|
315 |
|
5,620 |
|
|||||
2012 |
|
3,276 |
|
92 |
|
1,971 |
|
324 |
|
5,664 |
|
|||||
2013 |
|
3,291 |
|
95 |
|
1,989 |
|
333 |
|
5,709 |
|
|||||
2014 |
|
3,316 |
|
97 |
|
2,022 |
|
337 |
|
5,772 |
|
|||||
2015-2019 |
|
16,692 |
|
518 |
|
10,536 |
|
1,843 |
|
29,590 |
|
|||||
The 2010 expected benefit payments to defined benefit pension plan participants not covered by the respective plan assets (underfunded plans) represent a component of compensation and benefits, within current liabilities, in the Consolidated Statement of Financial Position.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
NONPENSION POSTRETIREMENT BENEFIT PLAN
EXPECTED PAYMENTS
The following table reflects the total expected benefit payments to nonpension postretirement benefit plan participants, as well as the expected receipt of the companys share of the Medicare subsidy described below. These payments have been estimated based on the same assumptions used to measure the plans APBO at December 31, 2009.
($ in millions)
|
|
U.S. Plan
|
|
Less: IBM Share
|
|
Net Expected
|
|
Qualified
|
|
Nonqualified
|
|
Total
Expected
|
|
||||||
2010 |
|
$ |
499 |
|
$ |
(27 |
) |
$ |
472 |
|
$ |
11 |
|
$ |
24 |
|
$ |
507 |
|
2011 |
|
492 |
|
(28 |
) |
464 |
|
15 |
|
25 |
|
503 |
|
||||||
2012 |
|
458 |
|
(28 |
) |
430 |
|
16 |
|
26 |
|
472 |
|
||||||
2013 |
|
440 |
|
(28 |
) |
412 |
|
18 |
|
27 |
|
457 |
|
||||||
2014 |
|
431 |
|
|
|
431 |
|
20 |
|
28 |
|
479 |
|
||||||
2015-2019 |
|
$ |
2,113 |
|
|
|
$ |
2,113 |
|
135 |
|
154 |
|
2,402 |
|
||||
The 2010 expected benefit payments to nonpension postretirement benefit plan participants not covered by the respective plan assets represent a component of compensation and benefits, within current liabilities, in the Consolidated Statement of Financial Position.
Medicare Prescription Drug Act
In connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003, the company is expected to continue to receive a federal subsidy of approximately $229 million to subsidize the prescription drug coverage provided by the U.S. nonpension postretirement benefit plan, which is expected to extend until 2013. Approximately $111 million of the subsidy will be used by the company to reduce its obligation and cost related to the U.S. nonpension postretirement benefit plan. The company will contribute the remaining subsidy of $118 million to the plan in order to reduce contributions required by the participants. The company received a total subsidy of $45 million for prescription drug-related coverage during each of the years ended December 31, 2009 and 2008, which was utilized to reduce the company contributions to the U.S. nonpension postretirement benefit plan.
The company has included the impact of its portion of the subsidy in the determination of net periodic cost and APBO for the U.S. nonpension postretirement benefit plan at and for the years ended December 31, 2009, 2008 and 2007. The impact of the subsidy resulted in a reduction in APBO of $100 million and $127 million at December 31, 2009 and 2008, respectively. The impact of the subsidy resulted in a reduction in 2009, 2008 and 2007 net periodic cost of $28 million, $40 million and $36 million, respectively.
Other Plan Information
The following table presents information for defined benefit pension plans with accumulated benefit obligations (ABO) in excess of plan assets. For a more detailed presentation of the funded status of the companys defined benefit pension plans, see the table on page 113.
($ in millions)
|
|
2009 |
|
2008 |
|
||||||||
At December 31: |
|
Benefit
|
|
Plan Assets |
|
Benefit
|
|
Plan Assets |
|
||||
Plans with PBO in excess of plan assets |
|
$ |
28,720 |
|
$ |
17,633 |
|
$ |
75,341 |
|
$ |
60,898 |
|
Plans with ABO in excess of plan assets |
|
27,996 |
|
17,561 |
|
73,939 |
|
60,630 |
|
||||
Plans with assets in excess of PBO |
|
60,942 |
|
63,942 |
|
12,586 |
|
14,183 |
|
||||
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Note V.
Segment Information
The company creates business value for clients and solves business problems through integrated solutions that leverage information technology and deep knowledge of business processes. IBM solutions typically create value by reducing a clients operational costs or by enabling new capabilities that generate revenue. These solutions draw from an industry-leading portfolio of consulting, delivery and implementation services, enterprise software, systems and financing.
The companys major operations comprise: a Global Technology Services segment; a Global Business Services segment; a Software segment; a Systems and Technology segment; and a Global Financing segment. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief executive officer in determining how to allocate the companys resources and evaluate performance. The segments are determined based on several factors, including client base, homogeneity of products, technology, delivery channels and similar economic characteristics.
Information about each segments business and the products and services that generate each segments revenue is located in the Description of Business section of the Management Discussion on pages 20 to 25, and Segment Details, on pages 25 to 31.
Segment revenue and pre-tax income include transactions between the segments that are intended to reflect an arms-length transfer price. Systems and software that is used by the Global Technology Services segment in outsourcing engagements is primarily sourced internally from the Systems and Technology and Software segments. For the internal use of IT services, Global Technology Services and Global Business Services recover cost, as well as a reasonable fee, reflecting the arms-length value of providing the services. The Global Services segments enter into arms-length leases and loans at prices equivalent to market rates with the Global Financing segment to facilitate the acquisition of equipment used in services engagements. All internal transaction prices are reviewed annually, and reset if appropriate.
The company utilizes globally integrated support organizations to realize economies of scale and efficient use of resources. As a result, a considerable amount of expense is shared by all of the segments. This shared expense includes sales coverage, marketing and support functions such as Accounting, Treasury, Procurement, Legal, Human Resources and Billing and Collections. Where practical, shared expenses are allocated based on measurable drivers of expense, e.g., headcount. When a clear and measurable driver cannot be identified, shared expenses are allocated on a financial basis that is consistent with the companys management system; e.g., advertising expense is allocated based on the gross profits of the segments. The unallocated corporate amounts arising from certain divestitures, indirect infrastructure reductions, miscellaneous tax items and the unallocated corporate expense pool are recorded in net income but are not allocated to the segments.
The following tables reflect the results of continuing operations of the segments consistent with the companys management and measurement system. These results are not necessarily a depiction that is in conformity with GAAP. Performance measurement is based on pre-tax income. These results are used, in part, by senior management, both in evaluating the performance of, and in allocating resources to, each of the segments.
Notes to Consolidated Financial Statements |
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES |
Management System Segment View
($ in millions)
|
|
Global Services Segments |
|
|
|
|
|
|
|
|
|
||||||||
|
|
Global
|
|
Global
|
|
|
|
Systems and |
|
Global |
|
Total |
|
||||||
For the year ended December 31: |
|
Services |
|
Services |
|
Software |
|
Technology |
|
Financing |
|
Segments |
|
||||||
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
External revenue |
|
$ |
37,347 |
|
$ |
17,653 |
|
$ |
21,396 |
|
$ |
16,190 |
|
$ |
2,302 |
|
$ |
94,889 |
|
Internal revenue |
|
1,386 |
|
887 |
|
2,677 |
|
911 |
|
1,774 |
|
7,635 |
|
||||||
Total revenue |
|
$ |
38,734 |
|
$ |
18,540 |
|
$ |
24,073 |
|
$ |
17,102 |
|
$ |
4,076 |
|
$ |
102,524 |
|
Pre-tax income |
|
$ |
5,537 |
|
$ |
2,555 |
|
$ |
8,095 |
|
$ |
1,419 |
|
$ |
1,730 |
|
$ |
19,335 |
|
Revenue year-to-year change |
|
(5.1 |
)% |
(10.3 |
)% |
(3.1 |
)% |
(15.2 |
)% |
(8.4 |
)% |
(7.6 |
)% |
||||||
Pre-tax income year-to-year change |
|
20.2 |
% |
(4.7 |
)% |
14.4 |
% |
(8.5 |
)% |
7.0 |
% |
10.3 |
% |
||||||
Pre-tax income margin |
|
14.3 |
% |
13.8 |
% |
33.6 |
% |
8.3 |
% |
42.4 |
% |
18.9 |
% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
External revenue |
|
$ |
39,264 |
|
$ |
19,628 |
|
$ |
22,089 |
|
$ |
19,287 |
|
$ |
2,559 |
|
$ |
102,827 |
|
Internal revenue |
|
1,546 |
|
1,044 |
|
2,761 |
|
882 |
|
1,892 |
|
8,125 |
|
||||||
Total revenue |
|
$ |
40,810 |
|
$ |
20,671 |
|
$ |
24,850 |
|
$ |
20,169 |
|
$ |
4,451 |
|
$ |
110,951 |
|
Pre-tax income |
|
$ |
4,607 |
|
$ |
2,681 |
|
$ |
7,075 |
|
$ |
1,550 |
|
$ |
1,617 |
|
$ |
17,531 |
|
Revenue year-to-year change |
|
8.1 |
% |
7.5 |
% |
10.9 |
% |
(9.6 |
)% |
11.7 |
% |
5.0 |
% |
||||||
Pre-tax income year-to-year change |
|
29.5 |
% |
29.9 |
% |
17.9 |
% |
(28.0 |
)% |
16.7 |
% |
15.6 |
% |
||||||
Pre-tax income margin |
|
11.3 |
% |
13.0 |
% |
28.5 |
% |
7.7 |
% |
36.3 |
% |
15.8 |
% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
External revenue |
|
$ |
36,103 |
|
$ |
18,041 |
|
$ |
19,982 |
|
$ |
21,317 |
|
$ |
2,502 |
|
$ |
97,944 |
|
Internal revenue |
|
1,636 |
|
1,193 |
|
2,416 |
|
998 |
|
1,482 |
|
7,726 |
|
||||||
Total revenue |
|
$ |
37,739 |
|
$ |
19,234 |
|
$ |
22,398 |
|
$ |
22,315 |
|
$ |
3,984 |
|
$ |
105,670 |
|
Pre-tax income |
|
$ |
3,557 |
|
$ |
2,064 |
|
$ |
6,002 |
|
$ |
2,153 |
|
$ |
1,386 |
|
$ |
15,163 |
|
Revenue year-to-year change |
|
10.7 |
% |
10.9 |
% |
9.7 |
% |
(3.6 |
)% |
2.4 |
% |
6.9 |
% |
||||||
Pre-tax income year-to-year change |
|
8.2 |
% |
21.0 |
% |
9.3 |
% |
23.8 |
% |
(4.7 |
)% |
10.8 |
% |
||||||
Pre-tax income margin |
|
9.4 |
% |
10.7 |
% |
26.8 |
% |
9.6 |
% |
34.8 |
% |
14.3 |
% |
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Reconciliations of IBM as Reported
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
Revenue: |
|
|
|
|
|
|
|
|||
Total reportable segments |
|
$ |
102,524 |
|
$ |
110,951 |
|
$ |
105,670 |
|
Other revenue and adjustments |
|
869 |
|
803 |
|
842 |
|
|||
Elimination of internal revenue |
|
(7,635 |
) |
(8,125 |
) |
(7,726 |
) |
|||
Total IBM consolidated revenue |
|
$ |
95,758 |
|
$ |
103,630 |
|
$ |
98,786 |
|
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
Pre-Tax Income: |
|
|
|
|
|
|
|
|||
Total reportable segments |
|
$ |
19,335 |
|
$ |
17,531 |
|
$ |
15,163 |
|
Elimination of internal transactions |
|
(744 |
) |
(433 |
) |
(194 |
) |
|||
Unallocated corporate amounts* |
|
(453 |
) |
(382 |
) |
(480 |
) |
|||
Total IBM consolidated pre-tax income from continuing operations |
|
$ |
18,138 |
|
$ |
16,715 |
|
$ |
14,489 |
|
* Includes a provision related to a joint venture investment (2009 only); gains related to the divestiture of the printing business (2007-2009), interest expense associated with debt related to the 2007 accelerated share repurchase (2007-2009); and gains related to the sale of Lenovo stock (2008 and 2007).
Immaterial items
Investment in Equity Alliances and Equity Alliances Gains/(Losses)
The investments in equity alliances and the resulting gains and (losses) from these investments that are attributable to the segments did not have a material effect on the financial position or the financial results of the segments.
Segment Assets and Other Items
Global Technology Services assets are primarily accounts receivable, plant, property and equipment including those associated with the segments outsourcing business, goodwill, acquired intangible assets, deferred services arrangement transition costs and maintenance parts inventory. Global Business Services assets are primarily goodwill and accounts receivable. Software segment assets are mainly goodwill, acquired intangible assets and accounts receivable. Systems and Technology assets are primarily plant, property and equipment, manufacturing inventory and accounts receivable. The assets of the Global Financing segment are primarily financing receivables and fixed assets under operating leases.
To ensure the efficient use of the companys space and equipment, it usually is necessary for several segments to share plant, property and equipment assets. Where assets are shared, landlord ownership of the assets is assigned to one segment and is not allocated to each user segment. This is consistent with the companys management system and is reflected accordingly in the table below. In those cases, there will not be a precise correlation between segment pre-tax income and segment assets.
Similarly, the depreciation amounts reported by each segment are based on the assigned landlord ownership and may not be consistent with the amounts that are included in the segments pre-tax income. The amounts that are included in pre-tax income reflect occupancy charges from the landlord segment and are not specifically identified by the management reporting system. Capital expenditures that are reported by each segment also are consistent with the landlord ownership basis of asset assignment.
The Global Financing segment amounts for interest income and interest expense reflect the interest income and interest expense associated with the Global Financing business, including the intercompany financing activities discussed on page 24, as well as the income from investment in cash and marketable securities. The explanation of the difference between cost of financing and interest expense for segment presentation versus presentation in the Consolidated Statement of Earnings is included on page 60 of the Management Discussion.
Notes to Consolidated Financial Statements |
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES |
Management System Segment View
($ in millions)
|
|
Global Services Segments |
|
|
|
|
|
|
|
|
|
||||||||
|
|
Global
|
|
Global
|
|
|
|
Systems and |
|
Global |
|
Total |
|
||||||
For the year ended December 31: |
|
Services |
|
Services |
|
Software |
|
Technology |
|
Financing |
|
Segments |
|
||||||
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Assets |
|
$ |
16,422 |
|
$ |
6,885 |
|
$ |
16,894 |
|
$ |
6,907 |
|
$ |
34,605 |
|
$ |
81,714 |
|
Depreciation/amortization of intangibles |
|
1,680 |
|
87 |
|
906 |
|
814 |
|
1,694 |
|
5,181 |
|
||||||
Capital expenditures/investments in intangibles |
|
1,512 |
|
45 |
|
471 |
|
658 |
|
1,460 |
|
4,145 |
|
||||||
Interest income |
|
|
|
|
|
|
|
|
|
2,265 |
|
2,265 |
|
||||||
Interest expense |
|
|
|
|
|
|
|
|
|
674 |
|
674 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Assets |
|
$ |
15,456 |
|
$ |
6,874 |
|
$ |
15,336 |
|
$ |
7,313 |
|
$ |
36,119 |
|
$ |
81,098 |
|
Depreciation/amortization of intangibles |
|
1,797 |
|
99 |
|
905 |
|
851 |
|
2,065 |
|
5,718 |
|
||||||
Capital expenditures/investments in intangibles |
|
1,607 |
|
54 |
|
504 |
|
754 |
|
2,143 |
|
5,062 |
|
||||||
Interest income |
|
|
|
|
|
|
|
|
|
2,604 |
|
2,604 |
|
||||||
Interest expense |
|
|
|
|
|
|
|
|
|
988 |
|
988 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Assets |
|
$ |
16,157 |
|
$ |
7,226 |
|
$ |
10,042 |
|
$ |
7,338 |
|
$ |
37,586 |
|
$ |
78,348 |
|
Depreciation/amortization of intangibles |
|
1,714 |
|
122 |
|
684 |
|
894 |
|
2,034 |
|
5,448 |
|
||||||
Capital expenditures/investments in intangibles |
|
1,803 |
|
61 |
|
559 |
|
840 |
|
2,432 |
|
5,694 |
|
||||||
Interest income |
|
|
|
|
|
|
|
|
|
2,421 |
|
2,421 |
|
||||||
Interest expense |
|
|
|
|
|
|
|
|
|
966 |
|
966 |
|
Reconciliations of IBM as Reported
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
Assets: |
|
|
|
|
|
|
|
|||
Total reportable segments |
|
$ |
81,714 |
|
$ |
81,098 |
|
$ |
78,348 |
|
Elimination of internal transactions |
|
(5,481 |
) |
(5,594 |
) |
(5,964 |
) |
|||
Unallocated amounts: |
|
|
|
|
|
|
|
|||
Cash and marketable securities |
|
12,688 |
|
11,631 |
|
16,007 |
|
|||
Notes and accounts receivable |
|
3,928 |
|
3,632 |
|
3,639 |
|
|||
Deferred tax assets |
|
5,545 |
|
8,341 |
|
2,664 |
|
|||
Plant, other property and equipment |
|
2,971 |
|
3,172 |
|
3,098 |
|
|||
Pension assets |
|
2,994 |
|
1,594 |
|
17,397 |
|
|||
Other |
|
4,665 |
|
5,647 |
|
5,242 |
|
|||
Total IBM consolidated |
|
$ |
109,022 |
|
$ |
109,524 |
|
$ |
120,431 |
|
Major Clients
No single client represents 10 percent or more of the companys total revenue.
Geographic Information
The following provides information for those countries that are 10 percent or more of the specific category.
Revenue*
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
United States |
|
$ |
34,150 |
|
$ |
36,686 |
|
$ |
36,511 |
|
Japan |
|
10,222 |
|
10,403 |
|
9,632 |
|
|||
Other countries |
|
51,386 |
|
56,541 |
|
52,643 |
|
|||
Total |
|
$ |
95,758 |
|
$ |
103,630 |
|
$ |
98,786 |
|
*Revenues are attributed to countries based on location of client.
Net Plant, Property and Equipment
($ in millions)
At December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
United States |
|
$ |
6,313 |
|
$ |
6,469 |
|
$ |
6,592 |
|
Japan |
|
1,050 |
|
1,055 |
|
890 |
|
|||
Other countries |
|
5,092 |
|
4,797 |
|
5,365 |
|
|||
Total |
|
$ |
12,455 |
|
$ |
12,321 |
|
$ |
12,847 |
|
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Revenue by Classes of Similar Products or Services
The table presents external revenue for similar classes of products or services within the companys reportable segments. Within Global Technology Services and Global Business Services, client solutions often include IBM software and systems and other suppliers products if the client solution requires it. Within Software, product license charges and ongoing subscription and support are reported as Software and consulting, education, training and other product-related services are reported as Services. Within Systems and Technology, Microelectronics original equipment manufacturer (OEM) revenue is primarily from the sale of semiconductors. Microelectronics Services revenue includes circuit and component design services and technology and manufacturing consulting services. See Description of the Business beginning on page 20 for additional information. The data is presented on a continuing operations basis.
($ in millions)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
|||
Global Technology Services: |
|
|
|
|
|
|
|
|||
Services |
|
$ |
28,762 |
|
$ |
29,928 |
|
$ |
27,482 |
|
Maintenance |
|
6,956 |
|
7,250 |
|
6,670 |
|
|||
Systems |
|
1,279 |
|
1,648 |
|
1,496 |
|
|||
Software |
|
351 |
|
438 |
|
454 |
|
|||
Global Business Services: |
|
|
|
|
|
|
|
|||
Services |
|
$ |
17,213 |
|
$ |
19,176 |
|
$ |
17,579 |
|
Software |
|
231 |
|
237 |
|
289 |
|
|||
Systems |
|
208 |
|
215 |
|
173 |
|
|||
Software: |
|
|
|
|
|
|
|
|||
Software |
|
$ |
20,094 |
|
$ |
20,695 |
|
$ |
18,992 |
|
Services |
|
1,302 |
|
1,394 |
|
990 |
|
|||
Systems and Technology: |
|
|
|
|
|
|
|
|||
Servers |
|
$ |
10,627 |
|
$ |
12,717 |
|
$ |
13,348 |
|
Storage |
|
3,177 |
|
3,612 |
|
3,738 |
|
|||
Microelectronics OEM |
|
1,550 |
|
1,862 |
|
2,589 |
|
|||
Retail Store Solutions |
|
551 |
|
741 |
|
872 |
|
|||
Microelectronics Services |
|
285 |
|
355 |
|
383 |
|
|||
Printing Systems |
|
|
|
|
|
386 |
|
|||
Global Financing: |
|
|
|
|
|
|
|
|||
Financing |
|
$ |
1,715 |
|
$ |
1,946 |
|
$ |
1,803 |
|
Remarketing |
|
588 |
|
613 |
|
699 |
|
Note W.
Subsequent Events
On January 20, 2010, the company announced that it signed a definitive agreement to acquire National Interest Security Company, LLC (NISC). NISC, a privately held company, will strengthen the companys ability to deliver advanced analytics and IT solutions to the public sector. The transaction is subject to customary closing conditions, including regulatory reviews, and is expected to be completed in the first quarter of 2010.
On January 26, 2010, the company announced that the Board of Directors approved a quarterly dividend of $0.55 per common share. The dividend is payable March 10, 2010 to shareholders of record on February 10, 2010.
On January 26, 2010, the company announced that it completed the acquisition of Lombardi, a privately held software company based in Austin, Texas. Lombardi is a leading provider of business process management software and services. Lombardi will become a part of the companys application integration software portfolio. At the date of issuance of the financial statements, the initial purchase accounting was not complete.
On February 3, 2010, the company announced that it signed a definitive agreement to acquire Initiate Systems. Initiate Systems, a privately held company based in Chicago, Illinois is a leading provider of data integrity software for information sharing among healthcare and government organizations. The transaction is subject to customary closing conditions, including regulatory reviews, and is expected to be completed in the first quarter of 2010.
On February 16, 2010, the company announced that it had completed the acquisition of Intelliden Inc., a privately held software company based in Menlo Park, California. Intelliden will extend the companys network management offerings. At the date of issuance of the financial statements, the initial purchase accounting was not complete.
Five-year Comparison of Selected Financial Data
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions except per share amounts)
For the year ended December 31: |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|||||
Revenue |
|
$ |
95,758 |
|
$ |
103,630 |
|
$ |
98,786 |
|
$ |
91,424 |
|
$ |
91,134 |
|
Income from continuing operations |
|
$ |
13,425 |
|
$ |
12,334 |
|
$ |
10,418 |
|
$ |
9,416 |
|
$ |
7,994 |
|
Income/(loss) from discontinued operations |
|
|
|
|
|
(00 |
) |
76 |
|
(24 |
) |
|||||
Income before cumulative effect of change in accounting principle |
|
13,425 |
|
12,334 |
|
10,418 |
|
9,492 |
|
7,970 |
|
|||||
Cumulative effect of change in accounting principle** |
|
|
|
|
|
|
|
|
|
(36 |
) |
|||||
Net income |
|
$ |
13,425 |
|
$ |
12,334 |
|
$ |
10,418 |
|
$ |
9,492 |
|
$ |
7,934 |
|
Earnings/(loss) per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Continuing operations |
|
$ |
10.01 |
|
$ |
8.89 |
* |
$ |
7.15 |
* |
$ |
6.05 |
* |
$ |
4.90 |
* |
Discontinued operations |
|
|
|
|
|
(0.00 |
) |
0.05 |
|
(0.01 |
) |
|||||
Before cumulative effect of change in accounting principle |
|
10.01 |
|
8.89 |
* |
7.15 |
* |
6.10 |
* |
4.89 |
* |
|||||
Cumulative effect of change in accounting principle** |
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|||||
Total |
|
$ |
10.01 |
|
$ |
8.89 |
* |
$ |
7.15 |
* |
$ |
6.10 |
* |
$ |
4.86 |
* |
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Continuing operations |
|
$ |
10.12 |
|
$ |
9.02 |
* |
$ |
7.27 |
* |
$ |
6.13 |
* |
$ |
4.97 |
* |
Discontinued operations |
|
|
|
|
|
(0.00 |
) |
0.05 |
|
(0.02 |
) |
|||||
Before cumulative effect of change in accounting principle |
|
10.12 |
|
9.02 |
* |
7.27 |
* |
6.18 |
* |
4.96 |
* |
|||||
Cumulative effect of change in accounting principle** |
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|||||
Total |
|
$ |
10.12 |
|
$ |
9.02 |
* |
$ |
7.27 |
* |
$ |
6.18 |
* |
$ |
4.94 |
* |
Cash dividends paid on common stock |
|
$ |
2,860 |
|
$ |
2,585 |
|
$ |
2,147 |
|
$ |
1,683 |
|
$ |
1,250 |
|
Per share of common stock |
|
2.15 |
|
1.90 |
|
1.50 |
|
1.10 |
|
0.78 |
|
|||||
Investment in plant, rental machines and other property |
|
$ |
3,447 |
|
$ |
4,171 |
|
$ |
4,630 |
|
$ |
4,362 |
|
$ |
3,842 |
|
Return on IBM stockholders equity |
|
80.4 |
% |
48.7 |
%+ |
42.6 |
%+ |
29.3 |
%+ |
25.8 |
%+ |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
At December 31: |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|||||
Total assets |
|
$ |
109,022 |
|
$ |
109,524 |
|
$ |
120,431 |
|
$ |
103,234 |
|
$ |
105,748 |
|
Net investment in plant, rental machines and other property |
|
14,165 |
|
14,305 |
|
15,081 |
|
14,440 |
|
13,756 |
|
|||||
Working capital |
|
12,933 |
|
6,568 |
|
8,867 |
|
4,569 |
|
10,509 |
|
|||||
Total debt |
|
26,099 |
|
33,926 |
|
35,274 |
|
22,682 |
|
22,641 |
|
|||||
Total equity |
|
22,755 |
|
13,584 |
+ |
28,615 |
+ |
28,635 |
+ |
33,209 |
+ |
* Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, Accounting Changes, on pages 79 to 82 for additional information.
** Reflects the adoption of the FASB guidance in accounting for conditional asset retirement obligations.
+ Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, Accounting Changes, on pages 79 to 82 for additional information.
Selected Quarterly Data
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
($ in millions except per share amounts and stock prices)
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Full |
|
|||||
2009: |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
|
|||||
Revenue |
|
$ |
21,711 |
|
$ |
23,250 |
|
$ |
23,566 |
|
$ |
27,230 |
|
$ |
95,758 |
|
Gross profit |
|
$ |
9,431 |
|
$ |
10,581 |
|
$ |
10,627 |
|
$ |
13,145 |
|
$ |
43,785 |
|
Net income |
|
$ |
2,295 |
|
$ |
3,103 |
|
$ |
3,214 |
|
$ |
4,813 |
|
$ |
13,425 |
|
Earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|||||
A ssuming dilution |
|
$ |
1.70 |
|
$ |
2.32 |
|
$ |
2.40 |
|
$ |
3.59 |
|
$ |
10.01 |
* |
Basic |
|
$ |
1.71 |
|
$ |
2.34 |
|
$ |
2.44 |
|
$ |
3.65 |
|
$ |
10.12 |
* |
Dividends per share of common stock |
|
$ |
0.50 |
|
$ |
0.55 |
|
$ |
0.55 |
|
$ |
0.55 |
|
$ |
2.15 |
|
Stock prices:** |
|
|
|
|
|
|
|
|
|
|
|
|||||
High |
|
$ |
99.86 |
|
$ |
110.62 |
|
$ |
122.88 |
|
$ |
132.85 |
|
|
|
|
Low |
|
81.76 |
|
95.70 |
|
99.50 |
|
117.31 |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Full |
|
|||||
2008: |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
|
|||||
Revenue |
|
$ |
24,502 |
|
$ |
26,820 |
|
$ |
25,302 |
|
$ |
27,006 |
|
$ |
103,630 |
|
Gross profit |
|
$ |
10,166 |
|
$ |
11,599 |
|
$ |
10,959 |
|
$ |
12,936 |
|
$ |
45,661 |
|
Net income |
|
$ |
2,319 |
|
$ |
2,765 |
|
$ |
2,824 |
|
$ |
4,427 |
|
$ |
12,334 |
|
Earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Assuming dilution |
|
$ |
1.64 |
+ |
$ |
1.97 |
+ |
$ |
2.04 |
+ |
$ |
3.27 |
+ |
$ |
8.89 |
+ |
Basic |
|
$ |
1.67 |
+ |
$ |
2.01 |
+ |
$ |
2.08 |
+ |
$ |
3.29 |
+ |
$ |
9.02 |
+ |
Dividends per share of common stock |
|
$ |
0.40 |
|
$ |
0.50 |
|
$ |
0.50 |
|
$ |
0.50 |
|
$ |
1.90 |
|
Stock prices:** |
|
|
|
|
|
|
|
|
|
|
|
|||||
High |
|
$ |
119.78 |
|
$ |
129.99 |
|
$ |
130.92 |
|
$ |
116.80 |
|
|
|
|
Low |
|
97.04 |
|
113.86 |
|
109.95 |
|
69.50 |
|
|
|
* Earnings Per Share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during that quarter while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters EPS does not equal the full-year EPS.
** The stock prices reflect the high and low prices for IBMs common stock on the New York Stock Exchange composite tape for the last two years.
+ Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, Accounting Changes, on pages 79 to 82 for additional information.
Performance Graphs
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Comparison of One-, Five- and Ten-year Cumulative Total Return for IBM, S&P 500 Stock Index and S&P Information Technology Index
The following graphs compare the one-, five- and ten-year cumulative total returns for IBM common stock with the comparable cumulative return of certain Standard & Poors (S&P) indices. Due to the fact that IBM is a company included in the S&P 500 Stock Index, the SECs rules require the use of that index for the required five-year graph. Under those rules, the second index used for comparison may be a published industry or line-of-business index. The S&P Information Technology Index is such an index. IBM is also included in this index.
Each graph assumes $100 invested on December 31 (of the initial year shown in the graph) in IBM common stock and $100 invested on the same date in each of the S&P indices. The comparisons assume that all dividends are reinvested.
One-year
Five-year
One-year
|
|
2008 |
|
2009 |
|
||||||||||||||
· IBM Common Stock |
|
$ |
100.00 |
|
$ |
158.61 |
|
||||||||||||
· S&P 500 Index |
|
100.00 |
|
126.46 |
|
||||||||||||||
· S&P Information Technology Index |
|
100.00 |
|
161.72 |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Five-year |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
||||||
· IBM Common Stock |
|
$ |
100.00 |
|
$ |
84.17 |
|
$ |
100.81 |
|
$ |
113.75 |
|
$ |
90.13 |
|
$ |
142.96 |
|
· S&P 500 Index |
|
100.00 |
|
104.91 |
|
121.48 |
|
128.16 |
|
80.74 |
|
102.11 |
|
||||||
· S&P Information Technology Index |
|
100.00 |
|
100.99 |
|
109.49 |
|
127.35 |
|
72.41 |
|
117.11 |
|
||||||
Performance Graphs
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Ten-year
Ten-year
|
|
1999 |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
|||||||||||
· IBM Common Stock |
|
$ |
100.00 |
|
$ |
79.16 |
|
$ |
113.20 |
|
$ |
73.04 |
|
$ |
88.02 |
|
$ |
94.34 |
|
$ |
79.41 |
|
$ |
95.11 |
|
$ |
107.32 |
|
$ |
85.03 |
|
$ |
134.87 |
|
· S&P 500 Index |
|
100.00 |
|
90.89 |
|
80.09 |
|
62.39 |
|
80.29 |
|
89.02 |
|
93.40 |
|
108.15 |
|
114.09 |
|
71.88 |
|
90.90 |
|
|||||||||||
· S&P Information Technology Index |
|
100.00 |
|
59.10 |
|
43.81 |
|
27.42 |
|
40.37 |
|
41.40 |
|
41.81 |
|
45.33 |
|
52.72 |
|
29.98 |
|
48.48 |
|
|||||||||||
Board of Directors and Senior Leadership
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Board of Directors
Alain J.P. Belda Chairman Alcoa Inc. and Managing Director Warburg Pincus LLC
Cathleen Black President Hearst Magazines
William R. Brody President Salk Institute for Biological Studies
Kenneth I. Chenault Chairman and Chief Executive Officer American Express Company
Michael L. Eskew Retired Chairman and Chief Executive Officer United Parcel Service, Inc. |
|
Shirley Ann Jackson President Rensselaer Polytechnic Institute
Andrew N. Liveris Chairman, President and Chief Executive Officer The Dow Chemical Company
W. James McNerney, Jr. Chairman, President and Chief Executive Officer The Boeing Company
Taizo Nishimuro Chairman Tokyo Stock Exchange Group, Inc. |
|
James W. Owens Chairman and Chief Executive Officer Caterpillar Inc.
Samuel J. Palmisano Chairman, President and Chief Executive Officer IBM
Joan E. Spero Visiting Fellow Foundation Center
Sidney Taurel Chairman Emeritus Eli Lilly and Company
Lorenzo H. Zambrano Chairman and Chief Executive Officer CEMEX, S.A.B. de C.V. |
|
|
|
|
|
Senior Leadership |
|
|
|
|
|
|
|
|
|
Rodney C. Adkins Senior Vice President Systems and Technology Group |
|
John E. Kelly III Senior Vice President Research and Intellectual Property |
|
Michael D. Rhodin Senior Vice President Software Solutions Group |
Colleen F. Arnold Senior Vice President Application Management Services |
|
R. Franklin Kern III Senior Vice President Global Business Services |
|
Virginia M. Rometty Senior Vice President Global Sales and Distribution |
Andrew Bonzani Vice President, Assistant General Counsel and Secretary |
|
Robert J. LeBlanc Senior Vice President Software Middleware Group |
|
Linda S. Sanford Senior Vice President Enterprise Transformation |
Michael E. Daniels Senior Vice President Global Technology Services |
|
Mark Loughridge Senior Vice President and Chief Financial Officer |
|
Martin J. Schroeter Treasurer
Timothy S. Shaughnessy |
Jesse J. Greene, Jr. Vice President Financial Management and Chief Financial Risk Officer |
|
J. Randall MacDonald Senior Vice President Human Resources
Steven A. Mills |
|
Senior Vice President Services Delivery
Robert C. Weber Senior Vice President |
Jon C. Iwata Senior Vice President Marketing and Communications |
|
Senior Vice President Software Group
Samuel J. Palmisano |
|
Legal and Regulatory Affairs, and General Counsel |
James J. Kavanaugh Vice President and Controller |
|
Chairman, President and
|
|
|
Stockholder Information
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
IBM STOCKHOLDER SERVICES
Stockholders with questions about their accounts should contact:
Computershare Trust Company, N.A., P.O. Box 43072, Providence, Rhode Island 02940-3072 (888) IBM-6700
Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.
Stockholders can also reach Computershare Trust Company, N.A. via e-mail at: ibm@computershare.com
Hearing-impaired stockholders with access to a telecommunications device (TDD) can communicate directly with Computershare Trust Company, N.A., by calling (800) 490-1493. Stockholders residing outside the United States, Canada and Puerto Rico should call (781) 575-2694.
IBM ON THE INTERNET
Topics featured in this Annual Report can be found via the IBM home page on the Internet (http://www.ibm.com). Financial results, news on IBM products, services and other activities can also be found via that address.
Stockholders of record can receive online account information and answers to frequently asked questions regarding stockholder accounts via the Internet (http://www.ibm.com/investor).
Stockholders of record can also consent to receive future IBM Annual Reports and Proxy Statements online through the Internet at this site.
IBM files reports with the Securities and Exchange Commission (SEC), including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any other filings required by the SEC.
IBMs website (http://www.ibm.com) contains a significant amount of information about IBM, including the companys annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC (http:// www.ibm.com/investor). These materials are available free of charge on or through our website.
The public may read and copy any materials the company files with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
IBM INVESTOR SERVICES PROGRAM
The Investor Services Program brochure outlines a number of services provided for IBM stockholders and potential IBM investors, including the reinvestment of dividends, direct purchase and the deposit of IBM stock certificates for safekeeping. Call (888) IBM-6700 for a copy of the brochure. Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.
Investors with other requests may write to: IBM Stockholder Relations, New Orchard Road, Armonk, New York 10504
IBM STOCK
IBM common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange, and outside the United States.
ANNUAL MEETING
The IBM Annual Meeting of Stockholders will be held on Tuesday, April 27, 2010, at 10 a.m. at the Midwest Airlines Center, 400 West Wisconsin Avenue, Milwaukee, Wisconsin.
STOCKHOLDER COMMUNICATIONS
Stockholders in the United States and Canada can get quarterly financial results, listen to a summary of the Annual Meeting remarks and hear voting results from the meeting by calling (800) IBM-7800. Callers can also request printed copies of the information via mail or fax. Stockholders residing outside the United States, Canada and Puerto Rico should call (402) 573-9861.
LITERATURE FOR IBM STOCKHOLDERS
The following literature on IBM is available without charge from:
Computershare Trust Company, N.A., P.O. Box 43072, Providence, Rhode Island 02940-3072 (888) IBM-6700
Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.
The Form 10-K Annual Report and Form 10-Q Quarterly Reports to the SEC provide additional information on IBMs business. The 10-K report is released by the end of February; 10-Q reports are released by early May, August and November.
An audio recording of the 2009 Annual Report will be available for sight-impaired stockholders in June.
The IBM Corporate Responsibility Report details the companys distinct strategy, results and key performance metrics in the areas of employees, communities, environment, supply chain, public policy and governance. The report highlights IBMs values-based leadership of IBMers, leadership that drives not just our corporate social responsibility efforts, but also our hiring decisions, our partnering strategy and our client engagements. The report is available in printed form, online and downloadable at ibm.com/responsibility.
GENERAL INFORMATION
For answers to general questions about IBM from within the continental United States, call (800) IBM-4YOU. From outside the United States, Canada and Puerto Rico, call (914)-499-1900.
CORPORATE OFFICES
International Business Machines Corporation, New Orchard Road, Armonk, New York 10504 (914) 499-1900
The IBM Annual Report is printed on recycled paper and is recyclable.
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Printed in the U.S.A. COL03002-USEN-00
INTERNATIONAL BUSINESS MACHINES CORPORATION SUBSIDIARIES
Subsidiariesas of December 31, 2009
Company Name
|
State or country of
incorporation or organization |
Voting percent owned directly or indirectly by registrant | ||||
---|---|---|---|---|---|---|
IBM Argentina Sociedad Anonima |
Argentina | 100.00 | ||||
IBM Australia Limited |
Australia | 100.00 | ||||
IBM Oesterreich Internationale Bueromaschinen Gesellschaft m.b.H. |
Austria | 100.00 | ||||
IBM Bahamas Limited |
Bahamas | 100.00 | ||||
IBM Foreign Sales Corporation |
Barbados | 100.00 | ||||
International Business Machines of Belgium sprl/buba |
Belgium | 100.00 | ||||
WTC Insurance Corporation, Ltd. |
Bermuda | 100.00 | ||||
IBM de Bolivia, S.A. |
Bolivia | 100.00 | ||||
IBM BrasilIndustria, Maquinas e Servicos Limitada |
Brazil | 100.00 | ||||
IBM Bulgaria Ltd. |
Bulgaria | 100.00 | ||||
IBM Canada LimitedIBM Canada Limitee |
Canada | 100.00 | ||||
IBM de Chile S.A.C. |
Chile | 100.00 | ||||
IBM (China) Investment Company Limited |
China (P.R.C.) | 100.00 | ||||
IBM de Colombia & C.I.A. S.C.A. |
Colombia | 100.00 | ||||
IBM Business Transformation Center, S.r.l. |
Costa Rica | 100.00 | ||||
IBM Croatia Ltd./IBM Hrvatska d.o.o. |
Croatia | 100.00 | ||||
IBM Ceska Republika spol. s.r.o. |
Czech Republic | 100.00 | ||||
IBM Danmark A/S |
Denmark | 100.00 | ||||
IBM del Ecuador, C.A. |
Ecuador | 100.00 | ||||
IBM Egypt Business Support Services |
Egypt | 100.00 | ||||
IBM Eesti Osauhing (IBM Estonia Ou) |
Estonia | 100.00 | ||||
Oy International Business Machines AB |
Finland | 100.00 | ||||
Compagnie IBM France, S.A.S. |
France | 100.00 | ||||
IBM Deutschland GmbH |
Germany | 100.00 | ||||
International Business Machines Ghana Limited |
Ghana | 100.00 | ||||
IBM Hellas Information Handling Systems S.A. |
Greece | 100.00 | ||||
IBM China/Hong Kong Limited |
Hong Kong | 100.00 | ||||
IBM Magyarorszagi Kft. |
Hungary | 100.00 | ||||
IBM India Private Limited |
India | 100.00 | ||||
PT IBM Indonesia |
Indonesia | 100.00 | ||||
IBM Ireland Limited |
Ireland | 100.00 | ||||
IBM Ireland Product Distribution Limited |
Ireland | 100.00 | ||||
IBM Israel Limited |
Israel | 100.00 | ||||
IBM Italia S.p.A. |
Italy | 100.00 | ||||
IBM Japan, Ltd. |
Japan | 100.00 | ||||
IBM East Africa Limited |
Kenya | 100.00 | ||||
IBM Korea, Inc. |
Korea (South) | 100.00 | ||||
Sabiedriba ar irobezotu atbildibu IBM Latvija |
Latvia | 100.00 | ||||
IBM Lietuva |
Lithuania | 100.00 | ||||
IBM Services Financial Sector Luxembourg Sarl |
Luxembourg | 100.00 | ||||
IBM Malaysia Sdn. Bhd. |
Malaysia | 100.00 | ||||
IBM Malta Limited |
Malta | 100.00 | ||||
International Business Machines (Mauritius) |
Mauritius | 99.60 | ||||
IBM de Mexico, S. de R.L. |
Mexico | 99.99 | (A) | |||
IBM Maroc |
Morocco | 100.00 | ||||
IBM International Group B.V. |
Netherlands | 100.00 |
Company Name
|
State or country of
incorporation or organization |
Voting percent owned directly or indirectly by registrant | ||||
---|---|---|---|---|---|---|
IBM International Holdings B.V. |
Netherlands | 100.00 | ||||
IBM Nederland B.V. |
Netherlands | 100.00 | ||||
IBM New Zealand Limited |
New Zealand | 100.00 | ||||
International Business Machines West Africa Limited |
Nigeria | 100.00 | ||||
International Business Machines AS |
Norway | 100.00 | ||||
IBM del Peru, S.A. |
Peru | 100.00 | ||||
IBM Philippines, Incorporated |
Philippines | 100.00 | ||||
IBM Polska Sp.z.o.o. |
Poland | 100.00 | ||||
Companhia IBM Portuguesa, S.A. |
Portugal | 100.00 | ||||
IBM Romania Srl |
Romania | 100.00 | ||||
IBM East Europe/Asia Ltd. |
Russia | 100.00 | ||||
IBMInternational Business Machines d.o.o., Belgrade |
Serbia | 100.00 | ||||
IBM Singapore Pte. Ltd. |
Singapore | 100.00 | ||||
IBM Slovensko spol s.r.o. |
Slovak Republic | 100.00 | ||||
IBM Slovenija d.o.o. |
Slovenia | 100.00 | ||||
IBM South Africa (Pty) Ltd. |
South Africa | 100.00 | ||||
International Business Machines, S.A. |
Spain | 100.00 | ||||
International Busines Machines Svenska A.B. |
Sweden | 100.00 | ||||
IBM Schweiz AGIBM Suisse SAIBM Suizzera SAIBM Switzerland Ltd. |
Switzerland | 100.00 | ||||
IBM Taiwan Corporation |
Taiwan | 100.00 | ||||
IBM Thailand Company Limited |
Thailand | 99.99 | (A) | |||
IBM Tunisie |
Tunisia | 100.00 | ||||
IBM (International Business Machines) Turk Limited Sirketi |
Turkey | 100.00 | ||||
IBM Ukraine |
Ukraine | 100.00 | ||||
IBM Middle East FZLLC |
United Arab Emirates | 100.00 | ||||
IBM United Kingdom Limited |
United Kingdom | 100.00 | ||||
IBM del Uruguay, S.A. |
Uruguay | 100.00 | ||||
IBM Capital Inc. |
USA (Delaware) | 100.00 | ||||
IBM Credit LLC |
USA (Delaware) | 100.00 | ||||
IBM International Group Capital LLC |
USA (Delaware) | 100.00 | ||||
IBM International Foundation |
USA (Delaware) | 100.00 | ||||
IBM World Trade Corporation |
USA (Delaware) | 100.00 | ||||
IBM de Venezuela, S.A. |
Venezuela | 100.00 | ||||
IBM Vietnam Company |
Vietnam | 100.00 |
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-77235, 33-29022, 33-33458, 33-34406, 33-53777, 33-60225, 33-60227, 33-60237, 33-60815, 333-01411, 33-52931, 33-33590, 333-76914, 333-87708, 333-09055, 333-23315, 333-31305, 333-41813, 333-44981, 333-48435, 333-81157, 333-87751, 333-87859, 333-87925, 333-30424, 333-33692, 333-36510, 333-102872, 333-102870, 333-103471, 333-104806, 333-114190, 333-131934, 333-138326, 333-138327, 333-148964 and 333-151673) and the Registration Statements on Form S-3 (Nos. 33-49475(1), 33-31732, 333-03763, 333-27669, 333-32690, 333-101034, 333-145104 and 333-145104-01) of International Business Machines Corporation of our report dated February 23, 2010, relating to the financial statements and effectiveness of internal control over financial reporting, which appears in the 2009 Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 23, 2010, relating to the Financial Statement Schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
New York, New York
February 23, 2010
EXHIBIT 24.1
POWER OF ATTORNEY OF SAMUEL J. PALMISANO
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Chairman of the Board, President and Chief Executive Officer of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, and Robert C. Weber as true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him and in his name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ Samuel J. Palmisano |
|
Samuel J. Palmisano |
|
Chairman of the Board, President |
|
and Chief Executive Officer |
POWER OF ATTORNEY OF MARK LOUGHRIDGE
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Senior Vice President and Chief Financial Officer of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him and in his name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ Mark Loughridge |
|
Mark Loughridge |
|
Senior Vice President and |
|
Chief Financial Officer |
POWER OF ATTORNEY OF JAMES J. KAVANAUGH
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Vice President and Controller of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him and in his name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ James J. Kavanaugh |
|
James J. Kavanaugh |
|
Vice President and Controller |
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents for the undersigned director, and each of them with full power to act without the others, for such director and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ Cathleen Black |
|
Director |
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents for the undersigned director, and each of them with full power to act without the others, for such director and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ William R. Brody |
|
Director |
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents for the undersigned director, and each of them with full power to act without the others, for such director and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ Michael L. Eskew |
|
Director |
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents for the undersigned director, and each of them with full power to act without the others, for such director and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ Shirley Ann Jackson |
|
Director |
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents for the undersigned director, and each of them with full power to act without the others, for such director and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ W. James McNerney, Jr. |
|
Director |
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents for the undersigned director, and each of them with full power to act without the others, for such director and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ Taizo Nishimuro |
|
Director |
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents for the undersigned director, and each of them with full power to act without the others, for such director and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ James W. Owens |
|
Director |
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents for the undersigned director, and each of them with full power to act without the others, for such director and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ Joan E. Spero |
|
Director |
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2009 on Form 10-K, hereby constitutes and appoints Andrew Bonzani, Jesse J. Greene, Jr., James J. Kavanaugh, Mark Loughridge, Samuel J. Palmisano and Robert C. Weber as true and lawful attorneys-in-fact and agents for the undersigned director, and each of them with full power to act without the others, for such director and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 23rd day of February 2010.
|
/s/ Sidney Taurel |
|
Director |
EXHIBIT 24.2
RESOLUTION REGARDING FILING OF THE FORM 10-K ANNUAL REPORT
RESOLVED, that the Form 10-K Annual Report for the year 2009 be, and hereby is, approved and that the Officers of the Company be, and they hereby are, authorized and empowered to execute by powers of attorney the Form 10-K and to make such additions, supplements and changes thereto as in their opinion may be necessary or desirable and to cause such material to be filed with the Securities and Exchange Commission and other appropriate regulatory agencies.
CERTIFICATION PURSUANT TO RULE 13A-14(a)/15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS
ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Samuel J. Palmisano, certify that:
Date: February 23, 2010
/s/ SAMUEL J. PALMISANO
Samuel J. Palmisano Chairman, President and Chief Executive Officer |
CERTIFICATION PURSUANT TO RULE 13A-14(a)/15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Mark Loughridge, certify that:
Date: February 23, 2010
/s/ MARK LOUGHRIDGE
Mark Loughridge Senior Vice President, Chief Financial Officer |
INTERNATIONAL BUSINESS MACHINES CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of International Business Machines Corporation (the "Company") on Form 10-K for the period ending December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Samuel J. Palmisano, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
/s/ SAMUEL J. PALMISANO Samuel J. Palmisano Chairman, President and Chief Executive Officer February 23, 2010 |
|
|
A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.
INTERNATIONAL BUSINESS MACHINES CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of International Business Machines Corporation (the "Company") on Form 10-K for the period ending December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark Loughridge, Senior Vice President, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
/s/ MARK LOUGHRIDGE Mark Loughridge Senior Vice President, Chief Financial Officer February 23, 2010 |
|
|
A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.