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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.



PART I

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:

    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 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 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.

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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 systems—from transportation to water, energy and telecommunications—run 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 systems—System z, converged System p and System x—are 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

    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 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 average—countries 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:

    Financial Services: Banking, Financial Markets, Insurance

    Public: Education, Government, Healthcare, Life Sciences

    Industrial: Aerospace and Defense, Automotive, Chemical and Petroleum, Electronics

    Distribution: Consumer Products, Retail, Travel and Transportation

    Communications: Telecommunications, Media and Entertainment, Energy and Utilities

    General Business: Mainly companies with fewer than 1,000 employees

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 services—pages 122 to 126.

        Financial information by geographic areas—page 125.

        Amount spent during each of the last three years on R&D activities—page 103.

        Financial information regarding environmental activities—pages 97 and 98.

        The number of persons employed by the registrant—page 56.

        The management discussion overview—pages 19 and 20.

        Available information—pages 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  

(1)
Member of the Board of Directors.

        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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Item 1A. Risk Factors:

         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.


Item 2. Properties:

        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.


Item 3. Legal Proceedings:

        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.


PART II


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—
October 31, 2009

    1,725,379   $ 121.71     1,725,379   $ 9,031,145,176  

November 1, 2009—
November 30, 2009

    12,952,318   $ 125.68     12,952,318   $ 7,403,282,907  

December 1, 2009—
December 31, 2009

    10,027,838   $ 128.66     10,027,838   $ 6,113,066,348  
                     

Total

    24,705,535   $ 126.61     24,705,535        
                     

(1)
On February 26, 2008, the Board of Directors authorized $15.0 billion in funds for use in the company's common stock repurchase program. This authorization was fully utilized by November 2009. On April 28,

15


    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.


Item 9B. Other Information:

        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.

16



PART III

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 Information—Committees 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 Information—2009 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 Securities—Security Ownership of Certain Beneficial Owners" and "Ownership of Securities—Common 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

RSUs—Restricted Stock Units, including Retention Restricted Stock Units

PSUs—Performance Share Units

DCEAP Shares—Shares under the DCEAP (see plan description below)

(1)
In connection with 35 acquisition transactions, 1,122,425 additional options were outstanding at December 31, 2009 as a result of the company's assumption of options granted by the acquired entities. The weighted-average exercise price of these options was $76.39. The company has not made, and will not make, any future grants or awards of equity securities under the plans of these acquired companies.

(2)
The numbers included for PSUs in column (a) above reflect the maximum number payout. Assuming target number payout, the number of securities to be issued upon the exercise of PSUs for equity compensation plans approved by security holders is 1,898,885 and for equity compensation plans not approved by security holders is 1,577,852. For additional information about PSUs, including payout calculations, refer to the information under "2009 Summary Compensation Table 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.

        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

18



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 Information—Board of Directors" and "General Information—Certain 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.


PART IV

Item 15. Exhibits, Financial Statement Schedules:

    (a)
    The following documents are filed as part of this report:

    1.
    Financial statements from IBM's 2009 Annual Report to Stockholders, which are incorporated herein by reference:

        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).

      2.
      Financial statement schedule required to be filed by Item 8 of this Form:

Page
  Schedule
Number
   
 

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.

      3.
      Exhibits:

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. 

 

 

 

 

 

 

 

The Certificate of Incorporation of IBM is Exhibit 3.2 to Form 8-K filed April 27, 2007, and is hereby incorporated by reference. 

 

 

 

 

20


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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

(9)

 

Voting trust agreement

 

 

Not applicable

 

 

(10)

 

Material contracts

 

 

 

 

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.*        

 

 

 

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.*

 

 

 

 

 

 

 

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.*

 

 

 

 

 

 

 

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.*

 

 

 

 

 

 

 

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.*

 

 

 

 

 

 

 

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.*

 

 

 

 

 

 

 

Board of Directors compensatory plans, as described under the caption "General Information—2009 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.*

 

 

 

 

 

 

 

The IBM Non-Employee Directors Stock Option Plan, contained in Registration Statement 33-60227 on Form S-8, is hereby incorporated by reference.*

 

 

 

 

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.*        

 

 

 

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.*

 

 

 

 

 

 

 

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.*

 

 

10.1

 

 

 

 

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.*

 

 

 

 

 

 

 

Amendment No. 1 to the IBM 401(k) Plus Plan, a compensatory plan, as approved September 11, 2009.*

 

 

10.2

 

 

 

 

Amendment No. 2 to the IBM 401(k) Plus Plan, a compensatory plan, as approved November 16, 2009.*

 

 

10.3

 

 

 

 

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. 

 

 

 

 

 

 

 

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.*

 

 

 

 

 

 

 

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. 

 

 

 

 

 

(11)

 

Statement re computation of per share earnings

 

 

 

 

 

 

 

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. 

 

 

 

 

23


Reference Number per Item 601 of Regulation S-K   Description of Exhibits   Exhibit Number
in this
Form 10-K
 
  (12)   Statement re computation of ratios     12  

 

(13)

 

Annual report to security holders**

 

 

13

 

 

(18)

 

Letter re: change in accounting principles

 

 

Not applicable

 

 

(19)

 

Previously unfiled documents

 

 

Not applicable

 

 

(21)

 

Subsidiaries of the registrant

 

 

21

 

 

(22)

 

Published report regarding matters submitted to vote of security holders

 

 

Not applicable

 

 

(23.1)

 

Consent of experts

 

 

23.1

 

 

(24.1)

 

Powers of attorney

 

 

24.1

 

 

(24.2)

 

Resolution of the IBM Board of Directors authorizing execution of this report by Powers of Attorney

 

 

24.2

 

 

(28)

 

Information from reports furnished to state insurance regulatory authorities

 

 

Not applicable

 

 

(31.1)

 

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

 

 

31.1

 

 

(31.2)

 

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

 

 

31.2

 

 

(32.1)

 

Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.1

 

 

(32.2)

 

Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2

 

 

(101)

 

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

 

 

101

 

*
Management contract or compensatory plan or arrangement.

**
The Performance Graphs, set forth on pages 129 and 130 of IBM's 2009 Annual Report to Stockholders, are deemed to be furnished but not filed.

24



SIGNATURES

        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)

 

 

By:

 

/s/ SAMUEL J. PALMISANO

Samuel J. Palmisano
Chairman of the Board,
President and Chief Executive Officer

 

 

 

 

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
 
Title
 
Date

 

 

 

 

 

/s/ SAMUEL J. PALMISANO


Samuel J. Palmisano
 

Chairman of the Board, President and Chief Executive Officer

  February 23, 2010

/s/ MARK LOUGHRIDGE


Mark Loughridge
 

Senior Vice President, Chief Financial Officer

 

February 23, 2010

/s/ JAMES J. KAVANAUGH


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



SCHEDULE II

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  
                       

*
Additions for Allowance for Doubtful Accounts and Allowance for Inventory Losses are charged to expense and cost accounts, respectively, while Revenue Based Provisions are charged to revenue accounts.

**
Primarily comprises currency translation adjustments.

S-1




QuickLinks

PART I
PART II
PART III
PART IV
SIGNATURES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31: (Dollars in Millions)

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

 

 

ARTICLE II — MEETINGS OF STOCKHOLDERS

 

 

 

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

 

 

 

ARTICLE III — BOARD OF DIRECTORS

 

 

 

 

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

 

 

 

ARTICLE IV — EXECUTIVE AND OTHER COMMITTEES

 

 

 

 

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

 

i



 

ARTICLE V — OFFICERS

 

 

 

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

 

 

 

ARTICLE VI — CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.

 

 

 

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

 

 

 

ARTICLE VII — SHARES

 

 

 

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

 

 

 

ARTICLE VIII — OFFICES

 

 

 

SECTION  1.

Principal Office

18

SECTION  2.

Other Offices

18

 

 

 

ARTICLE IX — Waiver of Notice

18

 

 

ARTICLE X — Fiscal Year

19

 

 

ARTICLE XI — Seal

19

 

 

ARTICLE XII — Amendments

19

 

ii



 

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

 

1



 

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.

 

2



 

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.

 

 

·

Proof of notice of meeting or of waiver thereof.

 

 

·

Appointment of inspectors of election, if necessary.

 

 

·

A quorum being present.

 

 

·

Reports.

 

 

·

Election of directors proposed by the Corporation’s Board of Directors, as set forth in the Corporation’s proxy statement.

 

 

·

Other business specified in the notice of the meeting.

 

 

·

Voting.

 

 

·

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 Corporation’s 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.

 

3



 

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 stockholder’s 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 Corporation’s proxy statement released to stockholders in connection with the prior year’s 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 year’s proxy statement, a stockholder’s 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 stockholder’s 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 Corporation’s proxy materials shall comply with the requirements of Rule 14a-8 under Regulation 14A of the Securities Exchange Act of 1934, as amended.

 

4



 

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 stockholder’s 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 stockholder’s 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 stockholder’s 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

 

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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.

 

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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 Chairman’s absence therefrom, the President, or in the case of the President’s 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

 

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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 Board’s 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.

 

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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

 

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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

 

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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.

 

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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 Officer’s 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.

 

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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.

 

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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

 

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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 person’s 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.

 

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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.

 

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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 owner’s 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.

 

17



 

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 Board’s 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 stockholder’s 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.

 

18



 

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.

 

19


 



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

1

 

 

 

 

 

1.01.

Name of Plan and Effective Date

1

 

 

 

 

 

1.02.

Purpose

1

 

 

 

 

 

1.03.

Legal Status

1

 

 

 

 

 

1.04.

Section 409A

1

 

 

 

 

ARTICLE II. DEFINITIONS

3

 

 

 

 

ARTICLE III. ELIGIBILITY

9

 

 

 

 

 

3.01.

Eligibility for Elective Deferrals

9

 

 

 

 

 

3.02.

Eligibility for Matching and Match Maximizer Contributions

9

 

 

 

 

 

3.03.

Eligibility for Automatic Contributions and Transition Credits

9

 

 

 

 

 

3.04.

Eligibility for Section 415 Excess Credits

10

 

 

 

 

 

3.05.

Eligibility for Discretionary Awards

10

 

 

 

 

ARTICLE IV. ELECTIVE DEFERRALS AND MATCHING CONTRIBUTIONS

11

 

 

 

 

 

4.01.

Elective Deferrals

11

 

 

 

 

 

4.02.

Matching Contributions

12

 

 

 

 

ARTICLE V. NON-ELECTIVE CREDITS

14

 

 

 

 

 

5.01.

Automatic Contributions

14

 

 

 

 

 

5.02.

Transition Credits

14

 

 

 

 

 

5.03.

Section 415 Excess Credits

14

 

 

 

 

 

5.04.

Discretionary Awards

14

 

 

 

 

ARTICLE VI. VESTING, DEEMED INVESTMENT OF ACCOUNTS

15

 

 

 

 

 

6.01.

Individual Accounts

15

 

 

 

 

 

6.02.

Vesting of Accounts

15

 

 

 

 

 

6.03.

Deemed Investment of Accounts

15

 



 

ARTICLE VII. FORFEITURE AND RIGHT OF RECOVERY OF COMPANY CONTRIBUTIONS

18

 

 

 

 

 

7.01.

In General

18

 

 

 

 

 

7.02.

Detrimental Activity

18

 

 

 

 

 

7.03.

Applicable Company Contributions

19

 

 

 

 

 

7.04.

Timing

19

 

 

 

 

 

7.05.

Delegation of Authority

19

 

 

 

 

 

7.06.

Chief Human Resources Officer

19

 

 

 

 

 

7.07.

Non-Exclusive Remedies

20

 

 

 

 

 

7.08.

Severability

20

 

 

 

 

ARTICLE VIII. PAYMENT OF GRANDFATHERED AMOUNTS

20

 

 

 

 

 

8.01.

Grandfathered Treatment of Grandfathered Amounts

20

 

 

 

 

 

8.02.

Payment of Grandfathered Amounts Upon Death

20

 

 

 

 

 

8.03.

Options for Payment of Grandfathered Amounts Upon Termination of Employment

20

 

 

 

 

 

8.04.

Payment of Grandfathered Amounts Upon Termination of Employment

21

 

 

 

 

ARTICLE IX. PAYMENT OF NON-GRANDFATHERED AMOUNTS

22

 

 

 

 

 

9.01.

Payment of Non-Grandfathered Amounts Upon Death

22

 

 

 

 

 

9.02.

Form of Payment for Non-Grandfathered Amounts Paid Upon a 409A Separation from Service

22

 

 

 

 

 

9.03.

Electing and Changing Payment Options for Non-Grandfathered Amounts

23

 

 

 

 

 

9.04.

Payment of Non-Grandfathered Upon a 409A Separation from Service

25

 

 

 

 

 

9.05.

Special Rules for Payment of Non-Grandfathered Amounts Upon a 409A Separation from Service in First Quarter of 2008

26

 

 

 

 

 

9.06.

Valuation of Non-Grandfathered Accounts

26

 

2



 

 

9.07.

Effect of Rehire on Non-Grandfathered Payments

27

 

 

 

 

ARTICLE X. ADMINISTRATION

28

 

 

 

 

 

10.01.

Amendment or Termination

28

 

 

 

 

 

10.02.

Responsibilities

28

 

 

 

 

ARTICLE XI. GENERAL PROVISIONS

30

 

 

 

 

 

11.01.

Funding

30

 

 

 

 

 

11.02.

No Contract of Employment

30

 

 

 

 

 

11.03.

Facility of Payment

30

 

 

 

 

 

11.04.

Withholding Taxes

31

 

 

 

 

 

11.05.

Nonalienation

31

 

 

 

 

 

11.06.

Administration

31

 

 

 

 

 

11.07.

Construction

31

 

 

 

 

ARTICLE XII. CLAIMS PROCEDURE

32

 

3



 

ARTICLE I. INTRODUCTION

 

1.01.       Name of Plan and Effective Date.   The IBM Executive Deferred Compensation Plan (the “EDCP”) was renamed and restated as the “IBM Excess 401(k) Plus Plan” (the “Plan”), effective as of January 1, 2008 (the “Effective Date”), except as provided in Section 1.04, below, with respect to amounts earned before the Effective Date.  This amended and restated plan document is effective as of January 1, 2010, except as otherwise provided herein. In addition, the EDCP plan document in effect prior to the Effective Date (the “EDCP document”) continues to govern the portion of the Plan consisting of “deferred shares” (as defined in the EDCP document).  The EDCP document is Appendix A.

 

1.02.       Purpose.   The purpose of the Plan is to attract and retain employees by providing a means for employees to defer their pay and obtain matching and other company contributions outside of the IBM 401(k) Plus Plan, which is subject to certain limits under the Internal Revenue Code of 1986, as amended (the “Code”).  All Plan benefits are paid out of the general assets of the Company (as defined in ARTICLE II).

 

1.03.       Legal Status.   The Plan consists of two separate plans:

 

(a) An unfunded deferred compensation plan for a select group of management or highly compensated employees (within the meaning of Sections 201(2), 301(a)(3), 401(a)(1), 4021(b)(6) of Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), except to the extent that the Plan provides benefits as described in subsection (b), below; and

 

(b) An “excess benefit plan” (within the meaning of Section 3(36) of ERISA), to the extent the Plan provides benefits that Section 415 of the Code prevents the IBM 401(k) Plus Plan from providing.

 

1.04.       Section 409A.

 

(a)  Grandfathered Amounts under Section 409A.   Benefits earned and vested under the EDCP before January 1, 2005, as adjusted for earnings, gains, or losses on those benefits (“Grandfathered Amounts”) are treated as grandfathered for purposes of Section 409A of the Code.  Grandfathered Amounts are subject to the terms of the EDCP in effect on October 3, 2004, except as provided herein or in Appendix A.  For recordkeeping purposes, the Company will account separately for Grandfathered Amounts.

 

(b)  Non-Grandfathered Amounts.   With respect to benefits under the Plan (including benefits earned before the Effective Date) other than Grandfathered Amounts (“Non-Grandfathered Amounts”), the Plan is intended, and shall be construed, to comply with the requirements of Section 409A of the Code.  Non-Grandfathered Amounts earned before the Effective Date were subject, before

 



 

Exhibit A

 

the Effective Date, to the terms of the EDCP, as amended, including, for example, the requirement that any payment to a 409A Key Employee (as defined in ARTICLE II) that would otherwise be paid in the first six months after a separation from service was instead paid in the seventh month.  Notwithstanding anything to the contrary in this Section 1.04, 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 Plan’s failure to satisfy the requirements of Section 409A of the Code, or as a result of the Plan’s failure to satisfy any other applicable requirements for the deferral of tax.

 

2



 

ARTICLE II. DEFINITIONS

 

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 Participant’s 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 Employee’s 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 Employee’s 409A Separation from Service (except amounts paid in the pay period in which the Employee’s 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 Participant’s death.  Each Participant’s Beneficiary under the Plan shall be the person or persons designated as the Participant’s 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 Participant’s death, or if no designated beneficiary under the Plan survives the Participant, the Participant’s Beneficiary shall be the person or persons determined to be the Participant’s 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.

 

3



 

“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 Participant’s 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 Employee’s 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 Participant’s 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 Participant’s Post-2004 Elective Deferral Account pursuant to a Participant’s 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

 

4



 

without first incurring a 409A Separation from Service shall continue to be considered to be an Employee solely for purposes of the individual’s eligibility during such Deferral Period to make Elective Deferrals (but not for purposes of the individual’s 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 Employee’s 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 Employee’s eligible compensation under the 401(k) Plan for such payroll period determined without regard to the Pay Limit, over (B) the Eligible Employee’s 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 Company’s 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.

 

5



 

“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 Employee’s 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 Employee’s 409A Separation from Service (except amounts paid in the pay period in which the Employee’s 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 Employee’s 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 IBM’s 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 committee’s duties.

 

“Plan Year” means the calendar year.

 

“Pre-2005 Accounts” means a Participant’s 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.

 

6


 

“Post-2004 Accounts” means a Participant’s 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 Employee’s “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 Employee’s 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 Employee’s 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 Employee’s 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

 

7



 

(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 Participant’s 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 Company’s established personnel practices.

 

“Transition Credit” means a credit to a Participant’s Account as described in Section 5.02.

 

8



 

ARTICLE III. ELIGIBILITY

 

3.01.        Eligibility for Elective Deferrals.   An Employee shall be eligible to make Elective Deferrals for a Deferral Period if:

 

(a) he or she qualifies as an Employee (i.e., an employee of the Company who is eligible to participate in the 401(k) Plan and is not a Supplemental Employee) and is Actively Employed on both August 31 and December 31 immediately preceding the first day of the Deferral Period;

 

(b) the Plan Administrator, in its sole discretion, estimates as of the September 1 immediately preceding the first day of the Deferral Period (or such other date prescribed by the Plan Administrator) that the Employee’s pay for the calendar year immediately preceding the first day of the Deferral Period will exceed the Pay Limit as then in effect; and

 

(c) the Plan Administrator notifies the Employee between September 1 and December 31 immediately preceding the Deferral Period that he or she will be eligible to make Elective Deferrals under the Plan during the Deferral Period.

 

3.02.        Eligibility for Matching and Match Maximizer Contributions.   An Employee shall be eligible for Matching and Match Maximizer Contributions for a payroll period that ends after the Employee has reached his or her Program Eligibility Date, provided that the Employee is eligible for, and makes, Elective Deferrals during the Plan Year in which the payroll period ends .  However, an Employee shall not be eligible for Matching and Match Maximizer Contributions during any payroll period:

 

(a)  beginning after the Employee has a 409A Separation from Service and ending before the Employee returns to active employment as an Employee;

 

(b)  beginning after the Employee receives a hardship withdrawal under the 401(k) Plan and within the same Plan Year as such hardship withdrawal occurs; or

 

(c)  beginning after the Employee becomes a Supplemental Employee or begins to receive LTD Benefits (whether or not he or she makes Elective Deferrals) and ending before he again becomes an Employee.

 

3.03.        Eligibility for Automatic Contributions and Transition Credits.

 

(a)  General Rule.  Except as provided in subsection (b) (regarding Employees hired before September 1, 2007) and subsection (c) (regarding the period following a 409A Separation from Service), an Employee shall be eligible for Automatic Contributions and Transition Credits during a payroll period if:

 

(1) with respect to eligibility for Automatic Contributions, the Employee is eligible during that payroll period for “automatic contributions”

 

9



 

under the 401(k) Plan, and, with respect to eligibility for Transition Credits, the Employee is eligible during that payroll period for “transition credits” under the 401(k) Plan; and

 

(2) the Employee is eligible to make Elective Deferrals during the payroll period (regardless of whether the Employee has elected to make Elective Deferrals for the payroll period).

 

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).

 

(b)  Employees Hired Before September 1, 2007 .   Notwithstanding subsection (a), above, an Employee who is continuously employed by the Company since August 31, 2007, shall be eligible for Automatic Contributions and Transition Credits during a payroll period if the Employee is eligible during that payroll period, respectively, for “automatic contributions” and “transition credits” under the 401(k) Plan as described in subsection (a)(1), above, even if the Employee is not eligible to make Elective Deferrals during the payroll period .

 

(c)  Eligibility after 409A Separation from Service .  An Employee shall not be eligible for Automatic Contributions or Transition Credits during any payroll period that begins after the Employee has a 409A Separation from Service and ends before the Employee returns to active employment as an Employee.

 

3.04.        Eligibility for Section 415 Excess Credits.   An Employee shall be eligible for Section 415 Excess Credits during a payroll period if the Employee’s allocations during the payroll period under the 401(k) Plan are limited by Section 415 of the Code.  However, an Employee shall not be eligible for Section 415 Excess Credits during any payroll period that begins after the Employee has a 409A Separation from Service and ends before the Employee returns to active employment as an Employee.

 

3.05.        Eligibility for Discretionary Awards.   An Employee shall be eligible for Discretionary Awards during a Plan Year as determined by the Company, in its discretion.

 

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ARTICLE IV. ELECTIVE DEFERRALS AND MATCHING CONTRIBUTIONS

 

4.01.        Elective Deferrals.   Beginning with the payroll period that includes the Effective Date , Elective Deferrals made pursuant to an Eligible Employee’s Deferral Election, as described below, shall be credited to the Employee’s Post-2004 Elective Deferral Account on the date on which the amount would otherwise be paid to the Eligible Employee absent a Deferral Election.

 

(a)  Amount of Elective Deferrals .

 

(1)  Amount of Base Pay Deferrals .  An Employee who, pursuant to Section 3.01, is eligible to make Elective Deferrals under the Plan for a Deferral Period with respect to Base Pay may elect to defer Base Pay in the amounts specified below, subject to any restriction imposed by the Plan Administrator to ensure sufficient pay remains for other deductions and withholding, which limitations shall be imposed prior to the date on which the election becomes irrevocable.

 

i.     Standard Base Pay Election .  From 1% to 80%, in 1% increments, of the Eligible Employee’s Base Pay, if any, for each payroll period that ends during the Deferral Period; or
 
ii.    Combined Base Pay Election .  From 1% to 80%, in 1% increments, of the Eligible Employee’s Base Pay, if any, for each payroll period that ends during the Deferral Period, reduced (but not below zero) by the product of (A) the company matching contribution percentage applicable to the Eligible Employee under the 401(k) Plan and (B) 1/24 of the Pay Limit in effect for the Deferral Period.
 

(2)  Amount of Performance Pay Deferrals .  An Employee who, pursuant to Section 3.01, may elect to make Elective Deferrals under the Plan for a Deferral Period with respect to Performance Pay may elect to make Deferrals from 1% to 80%, in 1% increments, of his or her Performance Pay, if any, paid during the Deferral Period.

 

(b)  Timing of Deferral Elections.   An Eligible Employee’s Deferral Elections under subsection (a), above, shall be made as follows:

 

(1)  Election Period.   The election must be made while the individual is an Employee and Actively Employed, in the form and manner prescribed by the Plan Administrator, and during the time period prescribed by the Plan Administrator, which shall begin no earlier than the September 1 and end no later than the December 31 of the Plan Year

 

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immediately preceding the first day of the Deferral Period to which the election applies.

 

(2)  Irrevocability .  The election must become irrevocable on the December 31st immediately preceding the Plan Year during which the applicable Deferral Period begins.  Once a Deferral Election becomes irrevocable, a n Eligible Employee’s Deferral Election shall apply for the entire Deferral Period to which it relates and shall cease to apply after such Deferral Period except to the extent that the individual makes a new Deferral Election in accordance with this Section for subsequent Deferral Periods , subject to the cancellation rules in subsection (c), below.

 

(c)  Cancellation of Deferral Election upon a 401(k) Plan Hardship Distribution . Notwithstanding the irrevocability of elections in subsection (b)(2), above, an individual’s Deferral Election shall not apply with respect to:

 

(1) any payroll period that ends after the Employee receives a hardship withdrawal under the 401(k) Plan and within the same Plan Year as the hardship withdrawal occurs; or

 

(2) any payroll period for which Performance Pay would, absent a Deferral Election, be paid to the individual during a Deferral Period that begins during the Plan Year in which the hardship withdrawal occurs.

 

For example, if an individual receives a hardship withdrawal on June 1, 2009, the individual’s 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 individual’s 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.

 

4.02.        Matching Contributions.  Beginning with the payroll period that includes the Effective Date , Matching Contributions and Match Maximizer Contributions shall be credited to the Post-2004 Company Account for each Eligible Employee who satisfies the eligibility requirements described in Section 3.02 for such payroll period in an amount equal to the sum of the Matching Contribution and Match Maximizer Contribution described below.

 

(a)  Matching Contribution .  An Eligible Employee’s Matching Contribution is the sum of the following:

 

(1) the lesser of (A) the company matching contribution percentage applicable to the Eligible Employee under the 401(k) Plan or (B) the Elective Deferral percentage elected by the Eligible Employee (without regard to any Combined Base Pay Election) for such payroll period,

 

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multiplied by the Eligible Employee’s Elective Deferrals for such payroll period; and

 

(2) the lesser of (A) the company matching contribution percentage applicable to the Eligible Employee under the 401(k) Plan or (B) the Elective Deferral percentage elected by the Eligible Employee (without regard to any Combined Base Pay Election) for such payroll period, multiplied by the Eligible Employee’s Excess 401(k) Eligible Pay for such payroll period;

 

provided that the sum of (1) and (2) shall not exceed the Elective Deferrals credited to the Eligible Employee for such payroll period.

 

(b)  Match Maximizer Contribution .  An Eligible Employee’s Match Maximizer Contribution for a payroll period is determined as described below.  The formula differs (as noted in paragraph (ii), below) depending on whether or not the Eligible Employee elected the Combined Base Pay Election for the Plan Year. The Match Maximizer Contribution shall equal:

 

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 Employee’s Post-2004 Elective Deferral Account for the portion of the Plan Year after the Eligible Employee’s Program Eligibility Date, to

 

(ii)            the sum, aggregated for the portion of the Plan Year that is after the Eligible Employee’s Program Eligibility Date and determined as of the date the applicable payroll period ends , of (A) the Eligible Employee’s Elective Deferrals, (B) the Eligible Employee’s 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 Employee’s Excess 401(k) Eligible Pay plus the Eligible Employee’s Elective Deferrals, each aggregated only for the portion of the Plan Year that is after the Eligible Employee’s 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.

 

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ARTICLE V. NON-ELECTIVE CREDITS

 

5.01.        Automatic Contributions.   Beginning with the payroll period that includes the Effective Date, an Automatic Contribution shall be credited to the Post-2004 Company Account of an Employee who is eligible for Automatic Contributions under Section 3.03 in an amount equal to the sum of:

 

(a) the Employee’s “automatic contribution percentage” under the 401(k) Plan multiplied by the Employee’s Elective Deferrals, if any, for the applicable payroll period; plus

 

(b) the Employee’s “automatic contribution percentage” under the 401(k) Plan multiplied by the Employee’s Excess 401(k) Eligible Pay, if any, for the applicable payroll period.

 

5.02.        Transition Credits.   Beginning with the payroll period that includes the Effective Date, a Transition Credit shall be credited to the Post-2004 Company Account of an Employee who is eligible for Transition Credits under Section 3.03 in an amount equal to the sum of:

 

(a) the Employee’s “transition credit percentage” under the 401(k) Plan multiplied by, if any, the Employee’s Elective Deferrals for the applicable payroll period; plus

 

(b) the Employee’s “transition credit percentage” under the 401(k) Plan multiplied by the Employee’s Excess 401(k) Eligible Pay, if any, for the applicable payroll period.

 

5.03.        Section 415 Excess Credits.   Beginning with the payroll period that includes the Effective Date, a Section 415 Excess Credit shall be credited to the Post-2004 Company Account of an Employee who is eligible for Section 415 Excess Credits under Section 3.04 in an amount equal to the excess of (A) the amount that would have been allocated to the Employee’s account under the 401(k) Plan (including any forfeiture that would have been allocated to such account in lieu of such a contribution) for such payroll period if the limits imposed by Section 415 of the Code did not apply to such allocation over (B) the amount actually allocated to such Employee’s account under the 401(k) Plan (including any forfeiture allocated in lieu of such a contribution) for such payroll period.

 

5.04.        Discretionary Awards.   From time to time on and after the Effective Date, the Company, in its discretion, may credit an Eligible Employee’s Post-2004 Company Account with an amount determined under an agreement evidencing the Discretionary Award, and such award shall be subject to the terms specified in such agreement in addition to the terms of this Plan.

 

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ARTICLE VI. VESTING, DEEMED INVESTMENT OF ACCOUNTS

 

6.01.        Individual Accounts.  For record-keeping purposes only, the Plan Administrator shall maintain, or cause to be maintained, records showing the individual balances of each Account maintained for a Participant from time to time under the Plan.  Periodically, each Participant shall be furnished with a statement setting forth the value of his or her Accounts under the Plan.

 

6.02.        Vesting of Accounts.   A Participant shall be fully vested in all Accounts maintained for the Participant under the Plan; provided, however, that Discretionary Awards credited to a Participant’s Post-2004 Company Account and earnings, gains, or losses on those contributions, shall become vested only as set forth in the agreement evidencing the award and, to the extent not vested, shall not be paid.

 

6.03.        Deemed Investment of Accounts.   A Participant’s Accounts under the Plan shall be adjusted for deemed earnings, gains, or losses.  Earnings, gains, or losses for any period before the Effective Date shall be determined in accordance with the applicable provisions of the EDCP.  Earnings, gains, or losses for any period on or after the Effective Date shall be determined in accordance with the following:

 

(a)  Deemed Investment Options Available .

 

(1)  General Rule .  A Participant’s Account shall be treated as if the Participant had invested such accounts in certain 401(k) Plan investment funds in accordance with subsection (b), below, except with respect to certain amounts credited before the Effective Date and attributable to Matching Contributions or the Buy-First Program as described in paragraphs (2) and (3), below.

 

(2)  Matching Contributions Credited Before the Effective Date .  The portion of a Participant’s Pre-2005 Company Account (if any) and the Participant’s Post-2004 Company Account attributable to Matching Contributions credited to the Participant before the Effective Date (and related earnings but not dividend equivalents) shall be treated as if invested at all times in the IBM Stock Fund under the 401(k) Plan.  Notwithstanding the foregoing, if a Participant has a termination of employment for purposes of the 401(k) Plan and his or her entire Plan benefit is not immediately payable in a lump sum, amounts described in this paragraph (2) shall no longer be subject to the restrictions of this paragraph (2) and may be invested as described in paragraph (1), above.

 

(3)  Amounts Attributable to Buy-First Executive Equity Program . Any portion of a Participant’s Post-2004 Elective Deferral Account that is attributable to a Participant’s deferrals under the EDCP through the IBM Buy-First Executive Equity Program before the Effective Date (and related

 

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earnings but not dividend equivalents) shall, for the three-year period following the date such deferrals were credited, be treated as if invested in the IBM Stock Fund under the 401(k) Plan; provided, however, that if a Participant has a termination of employment for purposes of the 401(k) Plan before the end of such three-year period and his or her entire Plan benefit is not immediately payable in a lump sum, amounts described in this paragraph (3) shall no longer be subject to the restrictions of this paragraph (3) and may be invested as described in paragraph (1), above.

 

(b)  Elections for Deemed Investment Options.

 

(1)  Initial Election For Future Credits .  A Participant shall designate, in such form and at such time in advance as may be prescribed by the Plan Administrator, the proportions (in multiples of 1%) in which Elective Deferrals and Company Contributions credited to his or her Plan Accounts on or after the Effective Date shall be treated as if they had been allocated among any or all of the investment funds that are available under the 401(k) Plan (other than the mutual fund window) at the time such amounts are credited.  If the Participant makes no such designation, the Participant shall be deemed to have designated the default investment fund under the 401(k) Plan.

 

(2)  Change in Election for Future Credits .  A Participant may elect, in such form and at such time in advance as may be prescribed by the Plan Administrator, to change his or her investment elections for future Elective Deferrals and Company Contributions credited to his or her Plan Accounts.  Any restrictions on investment election changes that apply under the 401(k) Plan shall also apply under the Plan.

 

(3)  Transfers Among Deemed Investment Options .  A Participant may elect, in such form and at such time in advance as may be prescribed by the Plan Administrator, to transfer balances in his or her Plan Accounts (other than amounts described in subsections (a)(1), (a)(2), or (a)(3) that are required to be treated as invested in IBM stock or the IBM Stock Fund) among the available investment funds, provided that:

 

i.     Transfers must be made in multiples of 1%, provided that the minimum amount transferred shall be $250 if that is greater than 1% (provided, however, that the Plan Administrator may specify a different percentage and/or a different dollar amount to be applied in this paragraph);
 
ii.    Any restrictions on transfers into or out of investment funds that apply under the 401(k) Plan shall also apply under the Plan; and

 

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iii.   Plan Administrator may impose such additional rules and limits upon transfers between investment funds as the Plan Administrator may deem necessary or appropriate.
 

(c)  Administrative Fee .  Each calendar quarter, an administrative fee shall be deducted pro rata from each Participant’s Accounts.  The amount of the fee shall be determined by the Plan Administrator and, as of the Effective Date is $8 each quarter.

 

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ARTICLE VII. FORFEITURE AND RIGHT OF RECOVERY OF COMPANY CONTRIBUTIONS

 

7.01.       In General.   If IBM’s chief human resources officer makes a determination that a Participant has engaged in “Detrimental Activity” (as defined below), subject to the terms of this ARTICLE VII:  (i) the Participant’s right (if any) to the payment of the portion of the Participant’s Account attributable to “Applicable Company Contributions” (as defined below) shall terminate, unless otherwise determined by such chief human resources officer; and (ii) if such portion of the Participant’s Account had been paid before such determination is made, the Participant shall be required to repay such amount to IBM, unless otherwise determined by such chief human resources officer.  Any determination by IBM’s chief human resources officer under this ARTICLE VII may be made in such officer’s sole discretion and shall be binding on the Participant.

 

7.02.       Detrimental Activity.   For purposes of this ARTICLE VII,  “Detrimental Activity” shall include the performance of any of the following activities during the Participant’s employment with the Company (as defined below) or during the 12-month period immediately following such employment:

 

(a)  the rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company;

 

(b) the disclosure to anyone outside the Company, or the use in other than the Company’s business, without prior written authorization from the Company, of any confidential information or material, as defined in the Company’s Agreement Regarding Confidential Information and Intellectual Property, relating to the business of the Company, acquired by the Participant either during or after employment with the Company;

 

(c) the failure or refusal to disclose promptly and to assign to the Company, pursuant to the Company’s Agreement Regarding Confidential Information and Intellectual Property, all right, title and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by the Company, relating in any manner to the actual or anticipated business, research or development work of the Company or the failure or refusal to do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in other countries;

 

(d) activity that results in termination of the Participant’s employment for cause;

 

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(e) a violation of any rules, policies, procedures or guidelines of the Company, including but not limited to the Company’s Business Conduct Guidelines;

 

(f) any attempt directly or indirectly to induce any employee of the Company to be employed or perform services elsewhere or any attempt directly or indirectly to solicit the trade or business of any current or prospective customer, supplier or partner of the Company;

 

(g) the Participant being convicted of, or entering a guilty plea with respect to, a crime, whether or not connected with the Company; or

 

(h) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company.

 

7.03.       Applicable Company Contributions.   For purposes of this ARTICLE VII, “Applicable Company Contributions” means Company Contributions (adjusted for deemed earnings, gains, or losses) credited to the Participant’s Account during the period (i) beginning 12 months before the date of the first occurrence of the Detrimental Activity, and (ii) ending on the date of the Participant’s termination of employment with the Company.  For the avoidance of doubt, “Applicable Company Contributions” include any Company Contributions credited under the Plan in connection with the last paycheck of the Participant for compensation earned through the date of termination of employment.  Notwithstanding the foregoing, “Applicable Company Contributions” do not include Company Contributions credited before April 1, 2010.

 

7.04.       Timing.  This ARTICLE VII applies only if IBM’s chief human resources officer makes a determination that the Participant engaged in Detrimental Activity under Section 7.01 no later than the second anniversary of the date such officer discovers the Detrimental Activity.

 

7.05.       Delegation of Authority.

 

IBM’s chief human resources officer may, by a duly adopted resolution, delegate to an officer or employee of IBM all or a portion of his or her authority under this ARTICLE VII.

 

7.06.       Chief Human Resources Officer. For purposes of this ARTICLE VII:

 

(a) if IBM’s chief human resources officer delegates his or her responsibilities under this ARTICLE VII to another person or to a committee, references to IBM’s chief human resources officer in this ARTICLE VII shall, instead, refer to such other person or committee, except as provided in (b), below; and

 

(b) in the case of a Participant who is IBM’s chief human resources officer, references to IBM’s chief human resources officer in this ARTICLE VII shall, instead, refer to the Board or its delegate.

 

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7.07.       Non-Exclusive Remedies.   The remedies available under this ARTICLE VII are in addition to, and not in lieu of, any other remedies available to IBM or its affiliates.

 

7.08.       Severability.   If an arbitrator or court of competent jurisdiction determines that any term, provision, or portion of this ARTICLE VII is void, illegal, or unenforceable, the other terms, provisions, and portions of this ARTICLE VII (as well as the remainder of the Plan) shall remain in full force and effect, and the terms, provisions, and portions that are determined to be void, illegal, or unenforceable shall either be limited so that they shall remain in effect to the extent permissible by law, or such arbitrator or court shall substitute, to the extent enforceable, provisions similar thereto or other provisions, so as to provide to IBM and its affiliates, to the fullest extent permitted by applicable law, the benefits intended by this ARTICLE VII.

 

ARTICLE VIII. PAYMENT OF GRANDFATHERED AMOUNTS

 

8.01.       Grandfathered Treatment of Grandfathered Amounts.   Pre-2005 Accounts are paid in accordance with the EDCP in effect on October 3, 2004, except as the EDCP is amended, where each such amendment does not constitute a “material modification,” as determined under Section 409A of the Code.  This ARTICLE VII describes the key provisions of the EDCP (as amended), as it applies to Grandfathered Amounts on and after the Effective Date.

 

8.02.       Payment of Grandfathered Amounts Upon Death.    If a Participant dies before his or her Pre-2005 Accounts have been distributed in full, the value of his or her Pre-2005 Accounts shall be paid in a lump sum to the Participant’s Beneficiary as soon as practicable after the Participant’s death.

 

8.03.       Options for Payment of Grandfathered Amounts Upon Termination of Employment.

 

(a)  Forms of Payment.   A Participant may elect, at the time and in the manner described in subsection (b), below, to have the value of his or her Pre-2005 Accounts paid under one of the following options, subject to the limits in Section 8.04, below (regarding retirement-eligibility and $25,000 cash-out limit):

 

(1) A lump sum payment as soon as practicable following the Participant’s termination from employment;

 

(2) A lump sum payment as of the last business day in January of the calendar year immediately following the calendar year in which the Participant’s termination from employment occurs; or

 

(3) From two to 10 annual installments (as elected by the Participant), each paid as of the last business day in January beginning

 

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with the January immediately following the calendar year in which the Participant’s termination from employment occurs, until the elected number of installments have been paid.

 

Solely for purposes of this subsection (a), termination of employment includes the date on which a Participant begins to receive LTD Benefits.

 

(b)  Election of Payment Option.   A Participant shall elect a payment option for his or her Pre-2005 Accounts in the form and manner prescribed by the Plan Administrator.  A payment election made before January 1, 2008, applies to a termination of employment that occurs at least six months after, and in a calendar year after, the payment election is made.  A payment election made on or after January 1, 2008, applies to a termination of employment that occurs at least twelve months after the payment election is made.

 

8.04.       Payment of Grandfathered Amounts Upon Termination of Employment. The Participant’s Pre-2005 Accounts shall be paid to the Participant in the form and at the time described below:

 

(a)  Non-Retirement-Eligible or Benefit Is Less than $25,000 .  If the Participant is not a Retirement-Eligible Participant or if the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) is less than $25,000 when the Participant terminates employment, the Participant’s Pre-2005 Accounts shall be paid in an immediate lump sum;

 

(b)  Retirement-Eligible Without Valid Payment Election .  If the Participant is a Retirement-Eligible Participant but has not made a valid payment election, the Participant’s Pre-2005 Accounts shall be paid in a lump sum as of the last business day in January immediately following the calendar year of the Participant’s termination of employment, provided that the aggregate value of all of the Participant’s Accounts (including, for this purpose, “deferred shares” as defined in the EDCP) under the Plan is at least $25,000 when the Participant terminates employment.

 

(c)  Retirement-Eligible With Valid Payment Election .  If the Participant is a Retirement-Eligible Participant and has made a valid payment election, the Participant’s Pre-2005 Accounts shall be paid in accordance with the payment option elected, provided that the aggregate value of all of the Participant’s Accounts under the Plan is at least $25,000 (including, for this purpose, “deferred shares” as defined in the EDCP) when the Participant terminates employment.

 

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ARTICLE IX. PAYMENT OF NON-GRANDFATHERED AMOUNTS

 

9.01.       Payment of Non-Grandfathered Amounts Upon Death.   If a Participant dies before his or her Post-2004 Accounts have been distributed in full, the value of his or her Post-2004 Accounts shall be paid in a lump sum to the Participant’s Beneficiary on the date that is 30 days after the date of the Participant’s 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.  For purposes of determining the amount payable to the Beneficiary, the Participant’s Post-2004 Accounts will be valued as of the date the payment is processed.

 

9.02.       Form of Payment for Non-Grandfathered Amounts Paid Upon a 409A Separation from Service.   A Participant may elect, at the time and in the manner described in Section 9.03, below, to have the value of his or her Post-2004 Accounts paid under one of the following options, subject to the limits in Section 9.04, below (regarding delays for 409A Key Employees) and Section 9.05, below (special rules for separations during the first quarter of 2008):

 

(a) A lump sum payment as of the first business day that is at least 30 days after the Participant’s 409A Separation from Service;

 

(b) A lump sum payment as of the last business day in January of the calendar year immediately following the calendar year in which the Participant’s 409A Separation from Service occurs; or

 

(c) From two to 10 annual installments (as elected by the Participant), each paid as of the last business day in January beginning with the January immediately following the calendar year in which the Participant’s 409A Separation from Service occurs, until the elected number of installments have been paid, subject to Section 9.04(c) (involuntary cash-outs).  This installment option is treated as the entitlement to a single payment for purposes of Treasury Regulation section 1.409A-2(b)(2)(iii).

 

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.

 

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9.03.       Electing and Changing Payment Options for Non-Grandfathered Amounts.

 

(a)  Election of Payment Option.   A Participant shall elect a payment option for his or her Post-2004 Accounts in the form and manner prescribed by the Plan Administrator and during whichever of the following election periods applies to the Participant (except as provided in Section 9.05, below, with respect to a separation during the first quarter of 2008):

 

(1)  Special Election Period in 2007 .  During the special election period designated by the Plan Administrator and ending no later than December 31, 2007, an Employee may elect the payment option that will apply to his or her Post-2004 Accounts under the Plan in the event his 409A Separation from Service occurs on or after April 1, 2008, if the Employee:

 

i.              is eligible to make Elective Deferrals in 2008;
 
ii.           on October 31, 2007, had a balance in his or her EDCP Accounts; or
 
iii.        on October 31, 2007, had a valid EDCP 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 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.

 

(2)  Election in Plan Year Before Initial Eligibility .  An individual who is first eligible to make Elective Deferrals in a Plan Year beginning after the Effective Date, and who before such Plan Year has not earned any other benefit under the Plan (including the EDCP) may, during the annual enrollment period prescribed by the Plan Administrator that immediately precedes such Plan Year, elect the payment option that will apply to his or her Post-2004 Accounts under the Plan, whether or not the individual also elects to make Elective Deferrals during such enrollment period.

 

(3)  Initial Election for Pre-September 1, 2007 Hire .  If, during a Plan Year, an Eligible Employee earns for the first time Automatic Contributions and/or Transition Credits (but not Section 415 Excess Credits), and the benefit the Eligible Employee earns under the Plan for the Plan Year is equal only to the excess of amounts that would otherwise be allocated to the Participant’s account in the 401(k) Plan in the absence of one or more limits applicable to tax-qualified plans over the amount actually credited to the Participant’s account in the 401(k) Plan, the Participant may elect, in accordance with Treas. Reg. § 1.409A-2(a)(7)(iii), the payment option that

 

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will apply to his or her Post-2004 Accounts under the Plan during the period determined by the Plan Administrator that ends no later than January 31st of the calendar year immediately following the calendar year in which the Automatic and/or Transition Credit is credited, but only if the Participant:

 

i.              was hired by the Company before September 1, 2007 and has been employed continuously since his or her hire date;
 
ii.           was not, during the Plan Year of such credit or any previous Plan Year beginning on or after the Effective Date, eligible to make an Elective Deferral;
 
iii.        was not previously eligible to elect a payment option under this subsection (a);
 
iv.       has not, in any calendar year prior to the calendar year of the contribution, accrued a benefit or deferred compensation under a plan as determined under Treas. Reg. § 1.409A-2(a)(7)(iii).
 

(b)  Irrevocability and Default Payment Option .  If a Participant does not make an election under paragraphs (a)(1), (a)(2), or (a)(3), above (including a Participant who is not eligible to make an election under any of those paragraphs), the Participant’s initial payment election shall be the payment option described in subsection 9.02(a) (immediate lump sum), above.  A Participant’s initial payment election (including the default option described in the previous sentence) becomes irrevocable, and can be changed only in accordance with subsection (c), below, after (i) the deadline specified in paragraphs (a)(1) or (a)(3), for Participants eligible to make elections under those paragraphs, and (ii) December 31 of the Plan Year preceding the Plan Year in which the Participant first earns a credit under the Plan, for all other Participants.

 

(c)  Changing Payment Options .  A Participant may elect, in the form and manner prescribed by the Plan Administrator, to change the Participant’s initial payment option determined under this Section 9.03, provided that:

 

(1) The Participant must make such election at least 12 months before the date of his 409A Separation from Service;

 

(2) If the election is made on or after January 1, 2009, the payment date for any lump sum or the start date for any series of installments provided for under the new payment option shall be the fifth anniversary of the payment date or start date that would have applied absent a change in payment option; and

 

(3) The Participant may change his or her payment option:

 

24



 

i.              only once during 2008; and
 
ii.           only once on or after January 1, 2009.
 

9.04.       Payment of Non-Grandfathered Amounts Upon a 409A Separation from Service.   The value of a Participant’s Post-2004 Accounts shall be paid to the Participant upon his or her 409A Separation from Service on or after the Effective Date in the form and at the time provided in Sections 9.02 and 9.03, above (except as provided in Section 9.05, below (special rules for first quarter of 2008)), subject to the following:

 

(a)  Delay for 409A Key Employees .  If the Participant is a 409A Key Employee on the date of his or her 409A Separation from Service, the payment date for any lump sum or the start date for any series of installments provided for under the applicable payment option shall be the later of (I) the first business day that is six months after the date of the Participant’s 409A Separation from Service, or (II) the otherwise applicable payment date or start date, subject to subsection (b) (death).  If the start date of a series of installments occurs other than as of  the last business day in January due to application of this paragraph, installments after the first installment shall be paid as of the last business day in January of each subsequent year, as scheduled without regard to the delay described in this subsection (a).

 

(b)  Death of Participant After 409A Separation from Service .  If the death of a Participant (including a 409A Key Employee described in subsection (a), above) occurs before the payment date for any lump sum or installment provided for under the applicable payment option, payment shall be made to the Participant’s Beneficiary as provided in Section 9.01.

 

(c)  Involuntary Cash-Out .  If (i) the applicable payment option is the installment option described in subsection 9.02(c), above, and (ii) the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) determined as of the date of his or her 409A Separation from Service is less than 50% of the Pay Limit in effect for the calendar year in which the Participant’s 409A Separation from Service occurs, the value of the Participant’s Post-2004 Accounts shall be distributed in a lump sum on the start date that would otherwise have applied for the elected installments, taking into account any applicable delay for a 409A Key Employee described in subsection (a), above.

 

25



 

9.05.       Special Rules for Payment of Non-Grandfathered Amounts Upon a 409A Separation from Service in First Quarter of 2008.   If a Participant’s 409A Separation from Service occurs on or after January 1, 2008, and before April 1, 2008, the Participant’s Post-2004 Accounts shall be paid to the Participant in the form and at the time described below, except that such payments shall be subject to Section 9.04(a) (delay for 409A Key Employees) and Section 9.04(b) (death of Participant after 409A Separation from Service):

 

(a)  Non-Retirement-Eligible or Benefit Is Less than $25,000 .  If the Participant is not a Retirement-Eligible Participant or if the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) is less than $25,000 as of the date of his or her 409A Separation from Service, the Participant’s Post-2004 Accounts shall be paid in an immediate lump sum as described in Section 9.02(a), above;

 

(b)  Retirement-Eligible Without Valid Payment Election .  If the Participant is a Retirement-Eligible Participant but has not made a valid payment election, the Participant’s Post-2004 Accounts shall be paid in a lump sum as of the last business day in January immediately following the calendar year of the Participant’s 409A Separation from Service as described in Section 9.02(b), above, provided that the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) is at least $25,000 as of the date of his or her 409A Separation from Service.

 

(c)  Retirement-Eligible With Valid Payment Election .  If the Participant is a Retirement-Eligible Participant and has made a valid payment election, the Participant’s Post-2004 Accounts shall be paid in accordance with the payment option elected, as described in Section 9.02, above, provided that the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) is at least $25,000 as of the date of his or her 409A Separation from Service.

 

For purposes of this Section 9.04, a valid payment election is a payment election made at least six months before the Participant’s 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 Participant’s valid payment election shall be his or her valid payment election for his or her Pre-2005 Accounts, if any.

 

9.06.       Valuation of Non-Grandfathered Accounts.   For purposes of determining the amount of any payment of the Participant’s Post-2004 Accounts, the Participant’s Post-2004 Accounts will be valued as of the date the payment is processed, except that if payment is required under the terms of the Plan to be made as of the last business day in January of a Plan Year (for example, pursuant to Section 9.02(b)), the Participant’s Post-2004 Accounts with respect to such payment shall be valued as of such last business day in January.  For purposes of determining the amount of any annual installment payment of the Participant’s Post-2004 Accounts, the

 

26



 

value of the Participant’s Post-2004 Accounts on the valuation date shall be divided by the remaining number of installments.  No adjustment shall be made to the amount of any lump sum or installment after the valuation date.

 

9.07.       Effect of Rehire on Non-Grandfathered Payments.   If a Participant becomes eligible for a payment of benefits on account of a 409A Separation from Service and is rehired as an Employee before his or her Post-2004 Accounts have been distributed in full, payments shall be made as if the Participant had not been rehired.  If the Participant again becomes eligible to make Elective Deferrals or receive Company Contributions following his or her rehire, the Plan Administrator shall arrange separate accounting for Elective Deferrals and Company Contributions (and related earnings, gains, or losses) credited to the Participant’s Post-2004 Accounts following the Participant’s rehire, and the Participant’s opportunity to make an initial distribution election under subsection 9.03(a)(2) (election in Plan Year before initial eligibility) shall be determined without regard to the benefits earned under the Plan prior to the Participant’s rehire.

 

27



 

ARTICLE X. ADMINISTRATION

 

10.01.     Amendment or Termination.   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 by IBM’s chief human resources officer, but only if the chief human resource officer’s 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.

 

10.02.     Responsibilities.

 

(a) The following persons and groups of persons shall severally have the authority to control and manage the operation and administration of the Plan as herein delineated:

 

(1) the Board,

 

(2) IBM’s chief human resources officer, and

 

( 3) the Plan Administrator and each person on any committee serving as the Plan Administrator.

 

Each person or group of persons shall be responsible for discharging only the duties assigned to it by the terms of the Plan.

 

(b) The Board shall be responsible only for approval of a resolution in accordance with Section 10.01 to amend or terminate the Plan.

 

(c) IBM’s chief human resources officer may, pursuant to a duly adopted resolution, delegate to any officer or employee of IBM, or a committee thereof, authority to carry out any decision, directive, or resolution of IBM’s chief human resources officer. IBM’s chief human resources officer may appoint one or more executives employed by IBM to serve as Plan Administrator or as a committee to fulfill the function of Plan Administrator.  The VP HR with functional responsibilities for IBM’s benefit programs shall serve as the Plan Administrator if no such appointment is made by IBM’s chief human resources officer.

 

(d) In the sole discretion of the Plan Administrator, the Plan Administrator shall have the full power and authority to:

 

(1) promulgate and enforce such rules and regulations as shall be deemed to be necessary or appropriate for the administration of the Plan;

 

(2) adopt any amendments to the Plan that are required by law;

 

(3) interpret the Plan consistent with the terms and intent thereof; and

 

28



 

(4) resolve any possible ambiguities, inconsistencies, and omissions.

 

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 IBM’s chief human resources officer on a regular basis .

 

(e) IBM’s chief human resources officer and the Plan Administrator may engage the services of accountants, attorneys, actuaries, investment consultants, and such other professional personnel as are deemed necessary or advisable to assist them in fulfilling their responsibilities under the Plan.  IBM’s chief human resources officer, the Plan Administrator, and their delegates and assistants will be entitled to act on the basis of all tables, valuations, certificates, opinions, and reports furnished by such professional personnel.

 

29



 

ARTICLE XI.  GENERAL PROVISIONS

 

11.01.     Funding.

 

(a) All amounts payable in accordance with this Plan shall constitute a general unsecured obligation of the Company.  Such amounts, as well as any administrative costs relating to the Plan, shall be paid out of the general assets of the Company.  In the sole discretion of IBM’s chief human resources officer, a Participant’s accounts under the Plan may be reduced to reflect allocable administrative expenses.

 

(b) The Company, the IBM’s chief human resources officer, and the Plan Administrator do not guarantee the investment alternatives available under the Plan in any manner against loss or depreciation.

 

11.02.     No Contract of Employment.   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 employee’s 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.

 

11.03.     Facility of Payment.   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 minor’s 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 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 Section 11.03 shall be a complete discharge of any obligation arising under the Plan with respect to such benefit payments.

 

30



 

11.04.     Withholding Taxes. 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.

 

11.05.     Nonalienation.   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. On and after the Effective Date, compliance with any domestic relations order relating to a Participant’s Account that the Plan Administrator determines must be complied with under applicable law shall not be considered a violation of this provision; provided, however, that an administrative fee determined by the Plan Administrator shall be deducted from any Participant’s Account that is subject to a domestic relations order.

 

11.06.     Administration.   All decisions, determinations, or interpretations the Board, IBM’s chief human resources officer, 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 party’s sole discretion and shall be final, binding, and conclusive on all interested persons.

 

11.07.     Construction.   All rights hereunder shall be governed by and construed in accordance with federal law and, to the extent not preempted by federal law, the laws of the State of New York without regarding to the choice of law rules of any jurisdiction.

 

31



 

ARTICLE XII.   CLAIMS PROCEDURE

 

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.

 

32


 

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 .

 

(1)           Grandfathered Amounts .  Benefits earned and vested under the Plan before January 1, 2005, as adjusted for earnings, gains, or losses on those benefits (“Grandfathered Amounts”) are treated as grandfathered for purposes of Section 409A of the Code.  Grandfathered Amounts (including Grandfathered Amounts attributable to Deferred Shares) are subject to the terms of the Plan in effect on October 3, 2004, except to the extent such terms have been or are hereafter amended in a manner that does not constitute a “material modification,” as determined under Section 409A of the Code.  An amendment described in the preceding sentence may be accomplished through an amendment to this Plan document and/or through an amendment to the Excess Plan (or any successor plan) document.  For recordkeeping purposes, Grandfathered Amounts shall be accounted for separately.

 

(2)           Non-Grandfathered Amounts .  With respect to benefits earned under the Plan other than Grandfathered Amounts described in Paragraph D(1) above (“Non-Grandfathered Amounts”), the Plan is intended, and shall be construed, to comply with the requirements of Section 409A of the Code:

 

1



 

(A)          On and after January 1, 2005, and before January 1, 2008, the Plan was operated in good faith compliance with the requirements of Section 409A of the Code with respect to Non-Grandfathered Amounts.  In this respect, (I) the timing of deferral elections was modified as described in Articles 2.02(b) and 2.02(f), (II) the application of deferral elections was modified as described in Article 3.01, and (III) distribution rules were modified as described in Article 5.04.  In addition, any payment made during this period that was contingent upon a “termination of employment” or “retirement,” was contingent upon a “separation from service” (as defined in accordance with a good faith, reasonable interpretation of Section 409A of the Code).

 

(B)           On and after January 1, 2008:

 

(i)            Non-Grandfathered Amounts that are not attributable to Deferred Shares shall be distributed in accordance with the provisions of the Excess Plan (or any successor plan).
 
(ii)           Non-Grandfathered Amounts that are attributable to Deferred Shares shall be distributed in accordance with the provisions of ARTICLE 9 of this Plan.
 

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 Plan’s failure to satisfy the requirements of Section 409A of the Code, or as a result of the Plan’s failure to satisfy any other applicable requirements for the deferral of tax.

 

2



 

IBM EXECUTIVE DEFERRED COMPENSATION PLAN

 

TABLE OF CONTENTS

 

 

 

Page(s)

 

 

 

ARTICLE 1.          DEFINITIONS

1

 

 

 

ARTICLE 2.           PARTICIPATION

4

 

 

 

2.01

ELIGIBILITY

4

2.02

PARTICIPATION

4

2.03

APPLICATION OF THIS ARTICLE AFTER 2007

5

 

 

 

ARTICLE 3.          CONTRIBUTIONS

6

 

 

 

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

 

 

 

ARTICLE 4.          INVESTMENT OF DEFERRALS AND DEFERRAL ACCOUNTS

10

 

 

 

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

 

 

 

ARTICLE 5.          PAYMENT OF ACCOUNTS

12

 

 

 

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

 

 

 

ARTICLE 6.          GENERAL PROVISIONS

15

 

 

 

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

 

 

 

ARTICLE 7.          MANAGEMENT AND ADMINISTRATION

18

 

 

 

7.01

AMENDMENT OR TERMINATION

18

7.02

RESPONSIBILITIES

18

7.03

APPLICATION OF THIS ARTICLE AFTER 2007

20

 

 

 

ARTICLE 8.          CLAIMS PROCEDURE

21

 

 

 

ARTICLE 9.          PAYMENT OF NON-GRANDFATHERED DEFERRED SHARES ON OR AFTER JANUARY 1, 2008

22

 

 

 

9.01

PURPOSE

22

 

i



 

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

 

ii



 

ARTICLE 1.   DEFINITIONS

 

The following words and phrases as used herein have the following meanings unless a different meaning is required by the context:

 

1.01                            Accounts ” shall mean the Company Account and the Deferral Account.

 

1.02                            Beneficiary ” shall mean a person other than a Participant who is designated by a Participant or by the terms of the Plan to receive a benefit under the Plan by reason of the death of the Participant.

 

1.03                            Board ” shall mean the Board of Directors of IBM.

 

1.04                            Code ” shall mean 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.

 

1.05                            Committee ” shall mean the Executive Compensation and Management Resources Committee (“ECMRC”) appointed by the Board or any other person or committee that the ECMRC has delegated its responsibilities to under the Plan.

 

1.06                            Company ” shall mean International Business Machines Corporation (“IBM”), a New York corporation having its principal place of business at Armonk, New York, and its Domestic Subsidiaries, excluding Foreign Branches of the Company except as may be otherwise provided in these Articles.

 

1.07                            Company Account ” shall mean, with respect to a Participant, all amounts credited to the Participant under Articles 3.02, 3.03, and 3.07, and earnings, gains, or losses on those amounts pursuant to Article 3.04.

 

1.08                            Company Contributions ” shall mean the amount credited to a Participant under Articles 3.02 and 3.03.

 

1.09                            Compensation ” shall mean the Participant’s salary and annual incentive payment for a calendar year which would be payable to a Participant for services rendered to the Company after the Participant is no longer able to actively participate in the Savings Plan, or would have been unable to actively participate in the Savings Plan if the Participant was not an active participant in the Savings Plan, during the calendar year by reason of Code Section 401(a)(17) or Code Section 401(a)(30).  A Participant’s Compensation will be determined without regard to a Participant’s election to make compensation reduction contributions under the Savings Plan, or under a cafeteria plan pursuant to Code Section 125, or to make Deferrals under this Plan.  Compensation shall also include, solely for purposes of Article 3.07, the amount of any RSUs or performance share units that are determined to be eligible for deferral in accordance with Article 3.07.

 

1



 

1.10                            DCP Participant ” shall mean a Participant who, for a calendar year, was offered the opportunity by the Company to defer up to 100% of his or her annual incentive payment payable for that calendar year.

 

1.11                            Deferral Account ” shall mean, with respect to a Participant, the Participant’s account balance under the Deferred Compensation Plan that has been transferred to this Plan, all amounts credited to a Participant under Article 3.01 and earnings, gains, or losses on those amounts pursuant to Article 3.04.

 

1.12                            Deferral Election Agreement ” shall mean the agreement entered into by the Participant pursuant to Article 2.02 under which he or she elects to defer a portion of his or her Compensation under this Plan.

 

1.13                            Deferrals ” shall mean the amount credited to a Participant under Article 3.01.

 

1.14                            Deferred Compensation Plan ” shall mean the incentive compensation deferral program established by IBM in November 1993.

 

1.15                            Deferred Shares ” means a credit to a Participant’s Company Account as described in Article 3.07.

 

1.16                            Domestic Subsidiary ” shall mean a Subsidiary organized and existing under the laws of the United States or any state, territory, or possession thereof; provided however, that the Plan shall not be deemed to cover the employees of any Domestic Subsidiary unless authorized by the Company’s chief human resources officer.

 

1.17                            ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

 

1.18                            Effective Date ” shall mean January 1, 1995.

 

1.19                            Eligible Employee ” shall mean, for a calendar year, a domestic executive employee of the Company.

 

1.20                            Excess Plan ” shall mean the IBM Excess 401(k) Plus Plan, effective as of January 1, 2008, as amended from time to time.

 

1.21                            Grandfathered Amounts ” has the meaning provided in Paragraph D(1) of the Introduction to this Plan.

 

1.22                            IBM ” shall mean International Business Machines Corporation, any predecessor, or any successor by merger, purchase, or otherwise.

 

1.23                            Non-Grandfathered Amounts ” has the meaning provided in Paragraph D(2) of the Introduction to this Plan.

 

2



 

1.24                            Participant ” shall mean each Eligible Employee who has made the election described in Article 2.02(a) or 3.07, who is credited with an amount under Article 3.03, or whose account balance under the Deferred Compensation Plan has been transferred to the employee’s Deferral Account under this Plan.

 

1.25                            Plan ” shall mean this IBM Executive Deferred Compensation Plan, as now in effect or as hereafter amended.

 

1.26                            Plan Administrator ” shall mean a person or a committee appointed pursuant to ARTICLE 7 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 committee’s duties.  As of the Effective Date, the Director of Executive Compensation has been appointed as the Plan Administrator.

 

1.27                            Plan Year ” shall mean the calendar year with the first Plan Year commencing on January 1, 1995.

 

1.28                            PSU ” shall mean a performance share unit payable under an award granted under a Company Long-Term Performance Plan.

 

1.29                            RSU ” shall mean a restricted stock unit payable under an award granted under a Company Long-Term Performance Plan.

 

1.30                            Savings Plan ” shall mean the IBM TDSP 401(k) Plan before October 1, 2002, the IBM Savings Plan on or after October 1, 2002 and before January 1, 2008, and the IBM 401(k) Plus Plan on or after January 1, 2008, each as amended from time to time.

 

1.31                            Subsidiary ” shall mean a corporation or other form of business organization the majority interest of which is owned, directly or indirectly, by the Company.

 

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ARTICLE 2.   PARTICIPATION

 

2.01                            Eligibility

 

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 Company’s 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.

 

2.02                            Participation

 

(a)           No later than the end of the calendar year immediately preceding the first day of the calendar year during which an Eligible Employee desires to have contributions credited on his or her behalf pursuant to Article 3.01, an Eligible Employee must execute a Deferral Election Agreement authorizing Deferrals under this Plan for such year in accordance with the provisions of Article 3.01.
 
(b)           If an Eligible Employee becomes an employee of the Company during a calendar year, he or she may execute a Deferral Election Agreement as soon as practical after his or her date of hire.  Effective January 1, 2005, a new Eligible Employee may execute a Deferral Election Agreement within 30 days after becoming eligible.  The Deferral Election Agreement shall apply to Compensation earned by the Eligible Employee in the payroll periods beginning after such agreement is submitted to the Committee.
 
(c)           Each Deferral Election Agreement under the Plan shall be irrevocable for the calendar year to which it relates.
 
(d)           Irrespective of whether an employee has made the election described above, any employee who has been selected by the Committee to have Company Contributions credited on his or her behalf pursuant to Article 3.03 shall be a Participant.
 
(e)           As a condition to participation in the Plan, a Participant may also be required by the Committee to provide such other information as the Committee may deem necessary to properly administer the Plan.
 
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(f)            A DCP Participant’s Deferral Election Agreement with respect to his or her annual incentive payment for calendar year 2005 must be made on or before June 30, 2005 (in compliance with the rule for performance pay under Section 409A of the Code).  A DCP Participant’s Deferral Election Agreement with respect to his or her annual incentive payment for a calendar year that begins after December 31, 2005 must be made before the beginning of such calendar year.
 

2.03                            Application of this Article After 2007

 

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 individual’s Account.

 

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ARTICLE 3.   CONTRIBUTIONS

 

3.01                            Amount of Deferral Contributions

 

For each payroll period that an Eligible Employee has Compensation beginning on or after the effective date of an Eligible Employee’s 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 Employee’s 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 Employee’s 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 Participant’s 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.

 

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3.02                            Matching Contributions

 

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 Participant’s Deferrals for the payroll period; provided however, that no Company Matching Contributions will be made for a Participant’s Deferrals in excess of 6% of the Participant’s 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 Participant’s 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 Participant’s Deferrals for the payroll period; provided, however, that in neither case shall Company Matching Contributions be made for a Participant’s Deferrals in excess of 6% of the Participant’s 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).

 

3.03                            Additional Company Contributions

 

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.

 

3.04                            Investment of Accounts

 

A Participant’s 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 Participant’s 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 Participant’s Company Account after retirement will be treated as if they were transferred to the Participant’s Deferral Account for purposes of this Article 3.04 and Article 4.

 

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3.05                            Vesting of Accounts

 

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.

 

3.06                            Individual Accounts

 

The Committee shall maintain, or cause to be maintained, records showing the individual balances of each Participant’s Accounts.  Periodically, each Participant shall be furnished with a statement setting forth the value of his or her Accounts.

 

3.07                            Deferral of RSUs or Performance Share Units

 

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 Participant’s deferral election and shall be credited to the Participant’s 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.

 

3.08                            Application of this Article After 2007

 

After December 31, 2007:

 

(a)            Deferrals with respect to annual incentive payments paid during the first quarter of 2008 shall be determined and credited to Participants’ Accounts in accordance with Participant Deferral Election Agreements made in 2006 for payments with respect to 2007 pursuant to Articles 2.02 and 3.01, and such deferrals shall be credited under the Excess Plan (and any matching or other contributions with respect to such deferrals shall be determined under the Excess Plan);
 
(b)            Deferred Shares shall continue to be credited as units of IBM stock in accordance with elections made by Participants on or before December 31, 2007 pursuant to Article 3.07; and
 
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(c)             Articles 3.04 through 3.06 shall continue to apply with respect to Grandfathered Amounts.
 

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.

 

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ARTICLE 4.   INVESTMENT OF DEFERRALS AND DEFERRAL ACCOUNTS

 

4.01                            Deemed Savings Plan Investments; Participant Control

 

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 Participant’s Deferrals are covered under the IBM Buy-First Executive Equity Program, such Deferrals are subject to the investment limitations specified under that program.

 

4.02                            Change of Investment Selection on Future Deferrals

 

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.

 

4.03                            Change of Investment Selection on Existing Deferral Accounts

 

(a)            Before January 1, 2008, with regard to a Participant’s existing Deferral Account balance, a Participant may elect to transfer balances among the available Savings Plan investment funds once per month; provided however, that the portion of the Deferral Account of a Company officer that is allocated to the IBM Stock Fund may not be transferred to another investment fund while the officer remains in Company employment.  The Participant must make this election in the manner and pursuant to the rules prescribed by the Committee and Plan Administrator.
 
(b)            On or after January 1, 2008, a Participant may elect, in such form and at such time in advance as may be prescribed by the Plan Administrator, to transfer balances in his or her Deferral Account among the available Savings Plan investment funds, provided that:
 
(ii)          Transfers must be made in multiples of 1%, provided that the minimum amount transferred shall be $250 if that is greater than 1% (provided, however, that the Plan Administrator may specify a different percentage and/or a different dollar amount to be applied in this paragraph); and
 
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(iii)        Any restrictions on transfers into or out of investment funds that apply under the Savings Plan shall also apply under the Plan.
 

The Committee may impose such additional rules and limitations upon transfers between investment funds as the Committee may consider necessary or appropriate.

 

4.04                            Application of this Article After 2007

 

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.

 

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ARTICLE 5.   PAYMENT OF ACCOUNTS

 

5.01                            Commencement of Deferral Payments

 

A Participant shall receive payment of his or her Accounts upon the Participant’s (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.

 

5.02                            Method of Payment

 

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:

 

(i)          effective July 31, 2001 and before January 1, 2008, such election shall be effective if it is made at least six months in advance of, and in a calendar year preceding, the Participant’s termination of employment; and
 
(ii)        effective January 1, 2008, such election shall be effective if it is made at least twelve months in advance of the Participant’s termination of employment.
 

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-

 

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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 Participant’s 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 Participant’s 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.

 

5.03                            Designation of Beneficiary

 

Before January 1, 2008, each Participant’s Beneficiary under this Plan shall automatically be the person or persons designated as the Participant’s 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 Participant’s death, or if no designated Beneficiary survives the Participant, the Participant’s Beneficiary shall be deemed to be the Participant’s beneficiary according to the provisions of the Savings Plan.

 

On or after January 1, 2008, each Participant’s Beneficiary under the Plan shall be the person or persons designated as the Participant’s 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 Participant’s death, or if no designated beneficiary under the Plan survives the Participant, the Participant’s Beneficiary shall be the person or persons determined to be the Participant’s 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 Participant’s death pursuant to this Article 5.03; provided however, that the Beneficiary is alive at the time of the Participant’s death.

 

5.04                            Distributions to Specified Employees

 

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

 

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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 Participant’s 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.

 

5.05                            Application of this Article After 2007

 

This ARTICLE 5 shall apply on and after January 1, 2008 only with respect to Grandfathered Amounts.

 

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ARTICLE 6.   GENERAL PROVISIONS

 

6.01                            Funding

 

(a)             All amounts payable in accordance with this Plan shall constitute a general unsecured obligation of the Company.  Such amounts, as well as any administrative costs relating to the Plan, shall be paid out of the general assets of the Company, to the extent not paid by a grantor trust established pursuant to paragraph (b) below.  In the sole discretion of the Committee, a Participant’s Accounts may be reduced to reflect allocable administrative expense.
 
(b)            IBM may, for administrative reasons, establish a grantor trust for the benefit of Participants participating in the Plan.  The assets of said trust will be held separate and apart from other Company funds and shall be used exclusively for the purposes set forth in the Plan and the applicable trust agreement, subject to the following conditions:
 
(i)           The creation of said trust shall not cause the Plan to be other than “unfunded” for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended;
 
(ii)        The Company shall be treated as “grantor” of said trust for purposes of Section 677 of the Code; and
 
(iii)        Said trust agreement shall provide that its assets may be used to satisfy claims of the Company’s general creditors in the event of its insolvency, and the rights of such general creditors are enforceable by them under federal and state law.
 
(c)            Neither the Company nor the Committee guarantees the investment alternatives available under the Plan in any manner against loss or depreciation.
 

6.02                            No Contract of Employment

 

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 Employee’s 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.

 

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6.03                            Facility of Payment

 

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 minor’s 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.

 

6.04                            Withholding Taxes

 

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.

 

6.05                            Nonalienation

 

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 Participant’s Account that the Plan Administrator determines must be complied with under applicable law shall not be considered a violation of this provision.

 

6.06                            Administration

 

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 party’s sole discretion and shall be final, binding, and conclusive on all interested persons.

 

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6.07                            Construction

 

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.

 

6.08                            Application of this Article After 2007

 

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 Participant’s Accounts that is not attributable to Deferred Shares.

 

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ARTICLE 7.   MANAGEMENT AND ADMINISTRATION

 

7.01                            Amendment or Termination

 

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 Committee’s 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.

 

7.02                            Responsibilities

 

(a)             The following persons and groups of persons shall severally have the authority to control and manage the operation and administration of the Plan as herein delineated:
 
(i)               the Board,
 
(ii)             the Committee,
 
(iii)            the chief human resources officer, and
 
(iv)            the Plan Administrator and each person on any committee serving as the Plan Administrator.
 

Each person or group of persons shall be responsible for discharging only the duties assigned to it by the terms of the Plan.

 

(b)             The Board shall be responsible only for designating those persons who will serve on the Committee and for approval of any resolution to amend or terminate the Plan.
 
(c)             The Committee may, pursuant to a duly adopted resolution, delegate to the chief financial officer or the chief human resources officer, the Treasurer, the Plan Administrator or any other officer or employee of IBM, authority to carry out any decision, directive, or resolution of the Committee.
 
(d)             The Committee shall appoint one or more executives employed by IBM to serve as Plan Administrator or as a committee to fulfill the function of Plan Administrator.  In the sole discretion of the Plan Administrator, the Plan Administrator shall have the full power and authority to:

 

(i)               promulgate and enforce such rules and regulations as shall be deemed be necessary or appropriate for the administration of the Plan;

 

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(ii)             adopt any amendments to the Plan that are required by law;
 
(iii)            interpret the Plan consistent with the terms and intent thereof; and
 
(iv)            resolve any possible ambiguities, inconsistencies, and omissions.
 

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.

 

(e)              The Committee and the Plan Administrator may engage the services of accountants, attorneys, actuaries, investment consultants, and such other professional personnel as are deemed necessary or advisable to assist them in fulfilling their responsibilities under the Plan.  The Committee, the Plan Administrator, and their delegates and assistants will be entitled to act on the basis of all tables, valuations, certificates, opinions, and reports furnished by such professional personnel.
 
(f)              Effective July 31, 2001, the chief human resources officer of IBM, in addition to the powers set forth in Article 7.02(d), shall have the full power and authority to adopt and implement changes to the Plan relating to:
 
(i)              amending the Plan to conform, to the extent he or she deems appropriate, to the Savings Plan, including but not limited to the authority to make changes related to maximum deferral percentages of pay, the amount of IBM match provided based on deferral percentage selected by the Participant, and vesting provisions;
 
(ii)             the form and timing of distributions available under the Plan, including the procedures for distribution elections and rules regarding default distributions;
 
(iii)            deferral elections, including the manner and timing of such elections;
 
(iv)            the integration of other deferred compensation liabilities relating to newly hired or acquired employees; and
 
(v)             any Plan administration rules that are consistent with the intent of the Plan and do not materially change the Company’s liability.

 

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7.03                            Application of this Article After 2007

 

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 Participant’s Accounts that is not attributable to Deferred Shares.

 

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ARTICLE 8.   CLAIMS PROCEDURE

 

Before January 1, 2008, IBM’s 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.

 

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ARTICLE 9.   PAYMENT OF NON-GRANDFATHERED DEFERRED SHARES
ON OR AFTER JANUARY 1, 2008

 

9.01                            Purpose

 

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”).

 

9.02                            Definitions

 

The following words and phrases used in this ARTICLE 9 have the following meanings unless a different meaning is required by the context:

 

(a)              409A Key Employee ” has the meaning described in the IBM Section 409A Umbrella Document.
 
(b)             409A Separation from Service ” has the meaning described in the IBM Section 409A Umbrella Document.
 
(c)             Pay Limit ” means, for a Plan Year, the limit on compensation that may be taken into account under a tax-qualified plan as determined under Code Section 401(a)(17).
 
(d)             Retirement-Eligible Participant ” means a Participant who:
 
(i)               when his or her 409A Separation from Service occurs, is (A) at least age 55 with at least 15 years of service, (B) at least age 62 with at least 5 years of service, (C) at least age 65 with at least 1 year of service, or (D) begins to receive benefits under the Company’s long-term disability plan;
 
(ii)             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
 
(iii)            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.

 

9.03                            Payment Upon Death

 

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 Participant’s Beneficiary on the date that is 30 days after the date of the Participant’s 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

 

22



 

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.

 

9.04                            Form of Payment for Amounts Paid Upon a 409A Separation from Service

 

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):

 

(a)             A lump sum payment as of the first business day that is at least 30 days after the Participant’s 409A Separation from Service;
 
(b)             A lump sum payment as of January 31 of the calendar year immediately following the calendar year in which the Participant’s 409A Separation from Service occurs; or
 
(c)             From two to 10 annual installments (as elected by the Participant), each paid as of January 31 beginning with the January 31 immediately following the calendar year in which the Participant’s 409A Separation from Service occurs, until the elected number of installments have been paid, subject to Article 9.06(c) (involuntary cash-outs).  This installment option is treated as the entitlement to a single payment for purposes of Treasury Regulation section 1.409A-2(b)(2)(iii).
 

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 Participant’s NG Deferred Shares shall be paid in shares of IBM stock.

 

9.05                            Electing and Changing Payment Options

 

(a)              Election of Payment Option.   A Participant shall elect a payment option for his or her NG Deferred Shares in the form and manner prescribed by the Plan Administrator and during the special election period in 2007 (except as provided in Article 9.07, below, with respect to a separation during the first quarter of 2008).  During the special election period designated by the Plan Administrator and ending no later than December 31, 2007, an Eligible Employee may elect the payment option that will apply to his or her NG Deferred Shares under the Plan in the event his or her 409A Separation from Service occurs on or after April 1, 2008, if the Eligible Employee:

 

23



 

(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.

 

(b)             Irrevocability and Default Payment Option.   If a Participant does not make an election under subsection (a), above (including a Participant who is not eligible to make an election under that subsection), the Participant’s initial payment election shall be the payment option described in Article 9.04(a) (immediate lump sum), above.  A Participant’s initial payment election (including the default option described in the previous sentence) becomes irrevocable, and can be changed only in accordance with subsection (c), below, after the deadline specified in subsection (a).
 
(c)             Changing Payment Options.   A Participant may elect, in the form and manner prescribed by the Plan Administrator, to change the Participant’s initial payment option determined under this Article 9.05, provided that:
 
(i)               The Participant must make such election at least 12 months before the date of his 409A Separation from Service;
 
(ii)             If the election is made on or after January 1, 2009, the payment date for any lump sum or the start date for any series of installments provided for under the new payment option shall be the fifth anniversary of the payment date or start date that would have applied absent a change in payment option; and
 
(iii)            The Participant may change his or her payment option:
 

(A)             only once during 2008; and

 

(B)              only once on or after January 1, 2009.

 

24



 

9.06                            Payment of NG Deferred Shares Upon a 409A Separation from Service

 

A Participant’s 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:

 

(a)             Delay for 409A Key Employees.   If the Participant is a 409A Key Employee on the date of his or her 409A Separation from Service, the payment date for any lump sum or the start date for any series of installments provided for under the applicable payment option shall be the later of (I) the first business day that is six months after the date of the Participant’s 409A Separation from Service, or (II) the otherwise applicable payment date or start date, subject to subsection (b) (death).  If the start date of a series of installments occurs other than as of January 31 due to application of this paragraph, installments after the first installment shall be paid as of January 31 of each subsequent year, as scheduled without regard to the delay described in this subsection (a).
 
(b)            Death of Participant After 409A Separation from Service.   If the death of a Participant (including a 409A Key Employee described in subsection (a), above) occurs before the payment date for any lump sum or installment provided for under the applicable payment option, payment shall be made to the Participant’s Beneficiary as provided in Article 9.03.
 
(c)            Involuntary Cash-Out.   If (i) the applicable payment option is the installment option described in Article 9.04(c), above, and (ii) the aggregate value of all of the Participant’s Deferred Shares (including Grandfathered and Non-Grandfathered Amounts) and all of his or her “accounts” under the Excess Plan determined as of the date of his or her 409A Separation from Service is less than 50% of the Pay Limit in effect for the calendar year in which the Participant’s 409A Separation from Service occurs, the Participant’s NG Deferred Shares shall be distributed in a lump sum on the start date that would otherwise have applied for the elected installments, taking into account any applicable delay for a 409A Key Employee described in subsection (a), above.
 

9.07                            Special Rules for Payment in First Quarter of 2008

 

If a Participant’s 409A Separation from Service occurs on or after January 1, 2008, and before April 1, 2008, the Participant’s 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):

 

(a)             Non-Retirement-Eligible or Benefit Is Less than $25,000.   If the Participant is not a Retirement-Eligible Participant or if the aggregate value of all of the Participant’s Deferred Shares (including Grandfathered and Non-Grandfathered Amounts) and all of his or her “accounts” under the Excess Plan is less than $25,000

 

25



 

as of the date of his or her 409A Separation from Service, the Participant’s NG Deferred Shares shall be paid in an immediate lump sum as described in Article 9.04(a), above;
 
(b)             Retirement-Eligible Without Valid Payment Election.   If the Participant is a Retirement-Eligible Participant but has not made a valid payment election, the Participant’s NG Deferred Shares shall be paid in a lump sum as of the January 31 following the year of the Participant’s 409A Separation from Service as described in Article 9.04(b), above, provided that the aggregate value of all of the Participant’s Deferred Shares (including Grandfathered and Non-Grandfathered Amounts) and all of his or her “accounts” under the Excess Plan is at least $25,000 as of the date of his or her 409A Separation from Service.
 
(c)             Retirement-Eligible With Valid Payment Election.   If the Participant is a Retirement-Eligible Participant and has made a valid payment election, the Participant’s NG Deferred Shares shall be paid in accordance with the payment option elected, as described in Article 9.04, above, provided that the aggregate value of all of the Participant’s Deferred Shares (including Grandfathered and Non-Grandfathered Amounts) and all of his or her “accounts” under the Excess Plan is at least $25,000 as of the date of his or her 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 Participant’s 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 Participant’s valid payment election shall be his or her valid payment election for his or her Deferred Shares that are Grandfathered Amounts, if any.

 

9.08                            Valuation of NG Deferred Shares.

 

For purposes of determining the amount of any lump sum, the Participant’s 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 Participant’s 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 Participant’s Account.

 

9.09                            Effect of Rehire on Payment of NG Deferred Shares.

 

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.

 

9.10                            Payment of Dividend Equivalents on NG Deferred Shares.

 

Dividend equivalents allocated with respect to a Participant’s NG Deferred Shares will be paid to the Participant (or to the Beneficiary of a deceased Participant) in cash

 

26



 

as soon as practicable after, but no later than 30 days following, the date dividends are paid to IBM shareholders.

 

27


 

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 IBM’s 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 IBM’s rules and regulations) on IBM’s 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 IBM’s 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 IBM’s 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 IBM’s 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.

 

2




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  Employee’s severance from employment with the Employer or an Affiliate or the end of the Plan Year that includes the date of the Employee’s 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 Participant’s 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

 

IBM 401(k) PLUS PLAN

(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).

 

2




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EXHIBIT 12

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  

(1)
Income from continuing operations before income taxes excludes (a) amortization of capitalized interest and (b) the company's share in the income and losses of less-than-fifty percent owned affiliates.



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COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES (Unaudited)

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

 

17



 

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 company’s financial results and certain factors that may affect its future prospects from the perspective of the company’s 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 company’s 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 company’s income and cash flow performance and its financial position.

·                   The notes follow the Consolidated Financial statements. Among other items, the notes contain the company’s 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 period’s 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 company’s 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 company’s filings with the Securities and Exchange Commission (SEC), including the company’s 2009 Form 10-K filed on February 23, 2010.

 

18



 

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 company’s global model and the results of the strategic transformation of the business.

 

The company’s 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 company’s 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

 

19



 

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 Company’s 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 company’s 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 IBM’s 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 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.

 

20



 

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:

 

·                   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 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 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 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.

 

21



 

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.

 

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 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 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. 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 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 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.

 

22



 

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 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. 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 world’s systems—from transportation to water, energy and telecommunications—run 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, Rational’s 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 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, s ystems and t echnology provides leading semiconductor technology, products and packaging solutions to clients and for IBM’s 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 x—are typically the core technology in data centers that provide required infrastructure for business and institutions. a lso, 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. p oint-of-sale retail systems (network connected cash registers) as well as solutions which connect them to other store systems.

 

23



 

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 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.

 

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 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. 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 IBM’s 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 company’s 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, 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 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 average–countries 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, 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:

 

·                   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

 

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 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.

 

24



 

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. s ome 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.

 

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 segment’s 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.

 

 

 

25


 

t he following table presents each reportable segment’s external revenue as a percentage of total segment external revenue and each reportable segment’s 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 arm’s-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 company’s 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

)%

 

26



 

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.

 

27



 

($ 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 management’s initial estimate of the revenue value of a client’s 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 client’s 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 company’s 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.

 

28



 

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 company’s 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 company’s 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 ational’s 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 brand’s 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 company’s 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.

 

29



 

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 platform’s 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 company’s 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 company’s 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 company’s 45 nanometer technology is in production and on track to drive the launch of the poWer 7 systems in 2010.

 

30



 

($ 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 Technology’s 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 Financing’s 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).

 

31



 

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 globally—much of which is outside the traditional IT opportunity—to 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 company’s scale and global presence. t he company’s efforts have been focused on all areas of the business—from sales efficiency, supply chain management and service delivery to the global support functions. t he company’s 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 company’s 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 administrative—base

 

$

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 expense—acquired 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 company’s 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 company’s 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 M—Not meaningful

 

32



 

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.

 

33


 

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.
Change

 

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.
Change

 

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 company’s 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.

 

34



 

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 company’s 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 company’s 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 company’s 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 company’s 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.

 

35



 

($ 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 company’s 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:

 

36



 

·                   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 company’s 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 company’s 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 company’s 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.
Percent/
Margin
Change

 

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.

 

37



 

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 company’s 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).

 

38



 

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 company’s 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 company’s 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.

 

39



 

Prior Year in Review

 

The Prior Year in Review section provides a summary of the company’s 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.
Percent/
Margin
Change

 

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

 

NM—Not 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 company’s global model and the results of the ongoing transformation of the business. The key elements of the company’s 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.

 

40



 

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.
Change

 

Yr.-to-Yr.
Change Adjusted
for Currency

 

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 year’s 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 company’s 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.

 

41



 

($ in millions)

 

For the year ended December 31:

 

2008

 

2007

 

Yr.-to-Yr.
Change

 

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.
Change

 

Yr.-to-Yr.
Change Adjusted
for Currency

 

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

 

 

42



 

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 company’s 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 segment’s 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 client’s 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. Telelogic’s suite of system programming tools complements Rational’s 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.
Change

 

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 company’s 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.

 

43


 

Systems and Technology

 

($ in millions)

 

For the year ended December 31:

 

2008

 

2007

 

Yr.-to-Yr.
Change

 

Yr.-to-Yr.
Change Adjusted
for Currency

 

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

 

 

NM–Not 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 company’s POWER architecture supports hundreds of partitions, often driving utilization rates of over 60 percent. Both of these platforms leverage the entire system, from the company’s 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 platform’s 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.

 

44



 

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.
Change

 

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 Financing’s segment results.

 

Geographic Revenue

 

($ in millions)

 

For the year ended December 31:

 

2008

 

2007

 

Yr.-to-Yr.
Change

 

Yr.-to-Yr.
Change Adjusted
for Currency

 

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 company’s 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

 

45



 

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 reductions—ongoing 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 company’s 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 company’s 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 company’s 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.

 

46



 

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 company’s business mix, improving leverage through productivity and investing to capture growth opportunities.

 

The company has remixed its business to move into higher value areas—exiting 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 company’s 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 improves—with solid operating leverage off of the company’s leaner cost base.

 

47



 

A nother key element of the company’s transformation is the significant investments it has made for growth—investments 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 opportunities—areas 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 company’s 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 company’s 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 company’s 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 company’s 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 segment’s emergence as a strong source of revenue and the largest contributor to the company’s 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 company’s 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

 

48



 

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 company’s debt securities at December 31, 2009 appear in the table below and remain unchanged from December 31, 2008. The company’s 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 company’s contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if the company’s 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 company’s 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.

 

 

 

 

 

Moody’s

 

 

 

 

 

Standard

 

Investors

 

Fitch

 

 

 

& Poor’s

 

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 company’s operating results, plan share repurchase levels, evaluate strategic investments and assess the company’s 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

 

49



 

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 year’s operating results, capital expenditure requirements, research and development investments and acquisitions, as well as the factors discussed below.

 

The company’s 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 company’s 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.

 

50



 

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 company’s 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 Management’s 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 company’s contractual obligations and note O, “Contingencies and Commitments,” on pages 99 to 101, for detailed information about the company’s 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.

 

51


 

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 company’s financial condition or operating performance. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of the company’s Board of Directors. The company’s 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 management’s 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 company’s 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 company’s 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 PPP’s PBO of an estimated $1.2 billion based upon December 31, 2009 data. The PPP’s 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 year’s pre-tax net periodic pension cost/(income) (based upon the PPP’s 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 company’s 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.

 

52



 

Revenue recognition is also impacted by the company’s 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 company’s 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 company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s 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

 

53



 

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 unit’s goodwill. If the carrying value of a reporting unit’s 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 company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s 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 company’s 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 company’s 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 company’s 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 Financing’s receivables portfolio.

 

To the extent that actual collectibility differs from management’s estimates currently provided for by 10 percent, Global Financing’s segment pre-tax income and the company’s 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 management’s estimates by 10 percent, Global Financing’s segment pre-tax income and the company’s 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 management’s 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 company’s 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.

 

54



 

In 2009, the company’s 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 company’s 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 company’s financial results. In addition to the translation of earnings, the impact of currency changes also may affect the company’s 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. entity’s financial statements into the company’s 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 company’s 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 company’s debt, in support of the Global Financing business and the geographic breadth of the company’s 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 company’s debt and other financial instruments.

 

The financial instruments that are included in the sensitivity analysis comprise all of the company’s 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 company’s 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.

 

55



 

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 company’s 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 company’s 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 company’s 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 company’s financial instrument portfolio for these theoretical changes in the level of interest rates are primarily driven by changes in the company’s 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 company’s 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 company’s 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 management’s 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 company’s 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.

 

56



 

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 competencies—providing IT financing to the company’s 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 Financing’s results are interest rates and originations. Interest rates directly impact Global Financing’s business by increasing or decreasing both financing revenue and the associated borrowing costs. Originations, which determine the asset base of Global Financing’s annuity-like business, are impacted by IBM’s non-Global Financing sales volumes and Global Financing’s participation rates. Participation rates are the propensity of IBM’s 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.

 

57



 

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 company’s product divisions, which is eliminated in IBM’s consolidated results.

 

(b)          E ntire amount eliminated for purposes of IBM’s 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 company’s 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 Financing’s 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 Financing’s external financing assets are in the segment’s 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.

 

58



 

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
U
sed*

 

Additions/
(Reductions)

 

Other**

 

Dec. 31,
2009

 

$

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 Financing’s 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 company’s 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 Financing’s 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.

 

59


 

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 arm’s-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 company’s 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 Financing’s 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 company’s Consolidated Statement of Earnings on page 64, however, the external debt-related interest expense supporting Global Financing’s 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 arm’s-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

 

 

60



 

Liquidity and Capital Resources

 

Global Financing is a segment of the company and therefore, is supported by the company’s 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 Financing’s geographic mix of earnings as IBM’s 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 Financing’s financial position provides flexibility and funding capacity which enables the company to be well positioned in the current environment. Global Financing’s assets and new financing volumes are primarily IBM products and services financed to the company’s clients and business partners, and substantially all financing assets are IT related assets which provide a stable base of business for future growth. Global Financing’s offerings are competitive and available to clients as a result of the company’s borrowing cost and access to the capital markets. Overall, Global Financing’s 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 company’s 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 company’s 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.

 

61



 

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 IBM’s 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 company’s internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and financial reporting matters.

 

Management’s 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 company’s 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 company’s 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 Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the company’s 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

 

 

62



 

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 Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s 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 Management’s Report on Internal Control over Financial Reporting appearing on page 62. Our responsibility is to express opinions on these financial statements and on the Company’s 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 company’s 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 company’s 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 company’s 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

 

 

63



 

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.

 

64



 

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.

 

65


 

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 receivables–net

 

(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 days–net

 

(651

)

(6,025

)

1,674

 

Common stock repurchases

 

(7,429

)

(10,578

)

(18,828

)

Common stock transactions–other

 

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 paid–net 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.

 

66



 

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
of $32)

 

 

 

 

 

 

 

(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 declared–common 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 plans–net

 

 

 

(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.

 

67



 

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
of $207)

 

 

 

 

 

 

 

(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 declared–common 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 plans–net

 

 

 

(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.

 

68



 

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 declared–common 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 plans–net

 

 

 

(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.

 

 

69


 

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 company’s 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 company’s 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 management’s 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 company’s 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 company’s 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 vendor’s product or service, was involved in the selection of the vendor’s product or service, has latitude in establishing the sales price or has credit risk.

 

70



 

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 unit’s 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 company’s 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 client’s 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.

 

71



 

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 client’s 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 unit’s 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

 

72



 

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 company’s 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.

 

73



 

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 licensee’s 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.

 

74



 

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 company’s 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 company’s 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 company’s 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 company’s 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.

 

75


 

 

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 company’s 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 company’s 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 property—net 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

 

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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 company’s 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 1—Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

·                   Level 2—Quoted 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

 

77



 

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 company’s 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 investment’s 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 company’s 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 company’s 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 company’s 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 company’s 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.

 

78



 

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 company’s 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 company’s 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 management’s 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 product’s 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)

 

79



 

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.

 

80



 

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 entity’s 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

 

81



 

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 company’s 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/A–Not applicable

 

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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 company’s 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 industry’s 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 company’s 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 company’s 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 company’s 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 IBM’s New Enterprise Data Center model, which helps clients improve IT efficiency and facilitates the rapid deployment of new IT services for future business growth. PSI’s technologies and skills, along with its intellectual capital, will be integrated into the company’s 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

 

83



 

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. Transitive’s 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/A–Not 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 company’s 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,

 

84



 

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 company’s 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 company’s 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/A–Not 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 company’s activities associated with sales and support of DS’s 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 company’s 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).

 

85


 

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 company’s 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 company’s 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 company’s services segments, as services are provided to InfoPrint.

 

The royalty agreements are related to the use of certain of the company’s 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 company’s 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 company’s 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.

 

86



 

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 company’s 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.

 

87



 

Notes to Consolidated Financial Statements

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES

 

Debt and Marketable Equity Securities

 

The following table summarizes the company’s 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 securities—current:**

 

 

 

 

 

Commercial paper

 

$

1,491

 

$

166

 

Securities of U.S. Federal government and its agencies

 

300

 

 

Total

 

$

1,791

 

$

166

 

Debt securities—noncurrent:***

 

 

 

 

 

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 company’s 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

 

88



 

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 property—net

 

12,455

 

12,321

 

Rental machines

 

3,656

 

3,946

 

Less: Accumulated depreciation

 

1,946

 

1,962

 

Rental machines—net

 

1,710

 

1,984

 

Total—net

 

$

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

 

Derivatives—noncurrent+

 

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 company’s 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,

 

89


 

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
Software

 

Acquired
Intangibles

 

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
January 1,
2009

 

Goodwill
Additions

 

Purchase
Price
Adjustments

 

Divestitures

 

Foreign
Currency
Translation
and Other
Adjustments

 

Balance
December 31,
2009

 

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
January 1,
2008

 

Goodwill
Additions

 

Purchase
Price
Adjustments

 

Divestitures

 

Foreign
Currency

Translation
and Other
Adjustments

 

Balance
December 31,
2008

 

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.

 

90



 

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 2010—2012. 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 debt’s 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).

 

91



 

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 company’s 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 company’s 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 company’s 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.

 

92



 

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 company’s 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 company’s 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 company’s 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.

 

93



 

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 company’s 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 company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s 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 company’s 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 company’s 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 company’s 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:

 

94



 

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
as hedging
instruments

 

Not designated
as hedging
instruments

 

Total

 

Designated
as hedging
instruments

 

Not designated
as hedging
instruments

 

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

 

 

95


 

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
designated as hedging instruments(1)

 

Consolidated Statement
of Earnings line item

 

Gain (loss) recognized
in earnings

 

 

 

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 company’s 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.

 

96



 

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 company’s 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 country’s 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 company’s 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 company’s 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

 

97



 

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 IIG’s 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 company’s 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.

 

98



 

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&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s 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 Novell’s waiver of SCO’s 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 IBM’s motion for summary judgment and dismissed T3’s 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 Neon’s efforts to license its zPrime software. They seek damages and injunctive relief. In late January 2010, IBM filed its answer to Neon’s complaint and asserted counterclaims against Neon.

 

99



 

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 company’s 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 company’s 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.

 

100



 

Notes to Consolidated Financial Statements

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES

 

Commitments

 

The company’s 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 company’s 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 client’s 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 guarantor’s 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 party’s claims. While typically indemnification provisions do not include a contractual maximum on the company’s payment, the company’s 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 company’s 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 company’s 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

 

 

101


 

Notes to Consolidated Financial Statements

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES

 

A reconciliation of the statutory U.S. federal tax rate to the company’s 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 company’s 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.

 

102



 

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 company’s 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 company’s 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 company’s 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 company’s income tax returns for 2004 and 2005 and issued a final Revenue Agent’s 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 company’s 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 company’s 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 company’s 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.

 

103



 

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

 

104



 

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 company’s 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 company’s 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 company’s existing Plans. As such, 66.4 million and 47.6 million additional awards were considered authorized to be issued under the company’s 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 company’s 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

 

105


 

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 company’s 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 company’s 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 company’s stock, the risk-free rate and the company’s 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 company’s estimates of expected volatility are principally based on daily price changes of the company’s 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

 

 

106



 

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 company’s 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 company’s 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 company’s 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.

 

107



 

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 company’s 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 company’s 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 company’s 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.

 

108



 

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 participant’s 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 participant’s 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 company’s 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.

 

109


 

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 company’s 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 employee’s 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 company’s 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.

 

110



 

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*

 

At December 31:

 

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 company’s 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 company’s 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 company’s 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 company’s 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 company’s subsidiaries.

 

The tables on page 112 present the components of net periodic (income)/cost of the company’s retirement-related benefit plans recognized in Consolidated Statement of e arnings.

 

111



 

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

 

 

112



 

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 company’s 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/A—not 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 liabilities—Compensation 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 status—net

 

$

(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.

 

113


 

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.

 

114



 

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/A–Not 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/A–Not 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 company’s 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.

 

115



 

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.

 

116



 

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 company’s 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 portfolio’s 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 portfolio’s 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 company’s 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 company’s 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 plan’s 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 company’s 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 company’s 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.

 

117


 

Notes to Consolidated Financial Statements

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES

 

DEFINED BENEFIT PENSION PLAN ASSETS

 

The following table presents the company’s 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 company’s 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 company’s 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.

 

118



 

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
Commingled/
Mutual
Funds

 

Mortgage
And
Asset-Backed
Securities

 

Fixed
Income
Commingled/
Mutual Funds

 

Hedge
Funds

 

Private
Equity

 

Private
Real
Estate

 

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
Equity

 

Private
Real Estate

 

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.

 

119



 

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 company’s 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
U.S. Plan
Payments

 

Nonqualified
U.S. Plans
Payments

 

Qualified
Non-U.S. Plans
Payments

 

Nonqualified
Non-U.S. Plans
Payments

 

Total Expected
Benefit
Payments

 

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.

 

120



 

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 company’s share of the Medicare subsidy described below. These payments have been estimated based on the same assumptions used to measure the plan’s APBO at December 31, 2009.

 

($ in millions)

 

 

 

U.S. Plan
Payments

 

Less: IBM Share
of Expected
Medicare Subsidy

 

Net Expected
U.S. Plan
Payments

 

Qualified
Non-U.S. Plans
Payments

 

Nonqualified
Non-U.S. Plans
Payments

 

Total Expected
Benefit
Payments

 

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 company’s defined benefit pension plans, see the table on page 113.

 

($ in millions)

 

 

 

2009

 

2008

 

At December 31:

 

Benefit
Obligation

 

Plan Assets

 

Benefit
Obligation

 

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

 

 

121


 

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 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.

 

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. 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 company’s 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 segment’s business and the products and services that generate each segment’s 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 arm’s-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 arm’s-length value of providing the services. The Global Services segments enter into arm’s-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 company’s 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 company’s 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.

 

122



 

Notes to Consolidated Financial Statements

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES

 

Management System Segment View

 

($ in millions)

 

 

 

Global Services Segments

 

 

 

 

 

 

 

 

 

 

 

Global
Technology

 

Global
Business

 

 

 

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

%

 

123



 

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 segment’s 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 company’s 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 company’s 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.

 

124



 

Notes to Consolidated Financial Statements

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES

 

Management System Segment View

 

($ in millions)

 

 

 

Global Services Segments

 

 

 

 

 

 

 

 

 

 

 

Global
Technology

 

Global
Business

 

 

 

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 company’s 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

 

 

125


 

 

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 company’s 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 company’s 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 company’s 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 company’s network management offerings. At the date of issuance of the financial statements, the initial purchase accounting was not complete.

 

126



 

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.

 

127



 

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 quarter’s EPS does not equal the full-year EPS.

 

**           The stock prices reflect the high and low prices for IBM’s 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.

 

128



 

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 & Poor’s (S&P) indices. Due to the fact that IBM is a company included in the S&P 500 Stock Index, the SEC’s 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

 

 

129


 

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

 

 

130



 

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
Chief Executive Officer

 

 

 

131



 

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.

 

IBM’s website (http://www.ibm.com) contains a significant amount of information about IBM, including the company’s 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 SEC’s 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 IBM’s 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 company’s distinct strategy, results and key performance metrics in the areas of employees, communities, environment, supply chain, public policy and governance. The report highlights IBM’s 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.

 

132



 

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.

 

CloudBurst, Cognos, DataMirror, DataPower, Diligent Technologies, DS8000, IBM, ILOG, InfoSphere, Jazz, Lotus, POWER, POWER6, POWER7, Rational, Smarter Planet, SPSS, System i, System p, System x, System z, Tivoli, Watchfire, WebDialogs, WebSphere, XIV and z10 are trademarks or registered trademarks of International Business Machines Corporation or its  wholly owned subsidiaries. Java is a trademark of Sun Microsystems, Inc. Linux is a trademark of Linus Torvalds. UNIX is a registered trademark of The Open Group in the United States  and other countries. Other company product  and service names may be trademarks or service marks of others.

 

Printed in the U.S.A. COL03002-USEN-00

 

133




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EXHIBIT 21


INTERNATIONAL BUSINESS MACHINES CORPORATION SUBSIDIARIES

Subsidiaries—as 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 Brasil—Industria, Maquinas e Servicos Limitada

  Brazil     100.00  

IBM Bulgaria Ltd. 

  Bulgaria     100.00  

IBM Canada Limited—IBM 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  

IBM—International 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 AG—IBM Suisse SA—IBM Suizzera SA—IBM 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 FZ—LLC

  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  

(A)
Minor percentage held by other IBM shareholders subject to repurchase option.



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Exhibit 23.1


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




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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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.

 




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Exhibit 31.1

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:

1.
I have reviewed this annual report on Form 10-K of International Business Machines Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c.
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 23, 2010

/s/ SAMUEL J. PALMISANO

Samuel J. Palmisano
Chairman, President and Chief Executive Officer
   



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Exhibit 31.2

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:

1.
I have reviewed this annual report on Form 10-K of International Business Machines Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c.
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 23, 2010

/s/ MARK LOUGHRIDGE

Mark Loughridge
Senior Vice President, Chief Financial Officer
   



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Exhibit 32.1


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.




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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

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Exhibit 32.2


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.




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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