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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, 2012

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 8, 2013
  Name of each exchange
on which registered
Capital stock, par value $.20 per share   1,114,509,771   New York Stock Exchange
        Chicago Stock Exchange

6.625% Notes due 2014

 

 

 

New York Stock Exchange
1.375% Notes due 2019       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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "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 $223.4 billion.

Documents incorporated by reference:

         Portions of IBM's Annual Report to Stockholders for the year ended December 31, 2012 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 30, 2013 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 innovation, and its operations and aims have been international in nature. This was signaled over 85 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 strong performance, with a steady track record of sustained earnings per share growth and cash generation. The company has shifted its business mix, exiting certain 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 more than 140 companies since 2000, complementing and scaling its portfolio of products and offerings.

        IBM's strategy of delivering high value solutions to enterprise clients has yielded consistent business results. Working with enterprise clients across the full spectrum of their business and technical opportunities, IBM delivers leadership innovation in technology, high value solutions and insights that improve client and industry outcomes. A highly engaged, global workforce with deep technical and business skills, teamed with an unmatched ecosystem of partners provides a world-class client experience.

        These priorities reflect a broad shift in client spending toward innovation and efficiency, 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, sustained investment in core and applied research and development (R&D), global reach and the breadth and depth of the company's capabilities.

        New types of solutions, new market opportunities and new decision makers are emerging as clients look to make use of technology to generate innovation and competitive advantage. These opportunities are driven by a new era of computing that is enabled by analytics, cloud computing, Big Data, mobility, social computing and supported by enterprise grade security solutions. The company's strategy is to establish leadership in this new era of smarter computing—computing that is designed for Big Data, built on software-defined environments and open—in order to enhance the value we deliver, create new markets and engage new clients.

        To capture the opportunities arising from these market trends, IBM is focused on four key growth initiatives: Smarter Planet, Growth Markets, Business Analytics and Optimization and Cloud Computing. Each initiative represents a significant growth opportunity with attractive profit margins for IBM.

Smarter Planet

        Smarter Planet is IBM's vision of a technology-enabled world that is more instrumented, interconnected and intelligent than ever before, enabling people and organizations to tackle significant

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business and societal challenges. At the heart of this vision is the opportunity for meaningful innovation—exploring and extending the boundaries of businesses, industries and communities. It's about helping the company's clients become better at what they do for their clients. IBM's strategy is to accelerate progress toward a "smarter planet" by equipping clients with the advanced, integrated capabilities they need to thrive in this exciting new world that is unfolding before us—capabilities such as analytics for business and physical systems, business process management, social business, mobile computing and cloud computing.

        IBM has continued to deepen its commitment to understanding and delivering on the promise of Smarter Planet for both line of business and IT executives across a broad range of industries. An industry-based approach is central to the strategy, since every industry confronts a distinct set of challenges and opportunities in today's constantly transforming world. Whether "smarter" means helping a hospital group to deliver improved healthcare, a local government to ease traffic congestion, or a retail chain to execute a successful cross-channel campaign, IBM is aggressively developing and investing in a portfolio of industry solutions that helps these clients achieve their goals.

        Three initiatives that drive significant value illustrate IBM's deep commitment to building a smarter planet: Smarter Commerce, Smarter Cities and Social Business. IBM's Smarter Commerce model integrates and transforms how companies manage and adapt their buy, market, sell and service processes, placing the customer squarely at the center of their business. IBM's Smarter Cities initiative enables federal, state and local governments to make smarter decisions, anticipate issues and coordinate resources more effectively, while delivering citizen-centric services that underpin sustainable economic growth. IBM's Social Business initiative helps clients integrate social technologies and practices into their front-end processes to more effectively create and share knowledge to accelerate innovation, improve customer service, and build a smarter workforce. Each of these initiatives is powered by market-leading IBM innovations and software, developed both by IBM and through acquisitions.

Growth Markets

        The company has benefited from its investments over the past several years in the growth markets. The focus now is on geographic expansion of IBM's presence; on selected industries of the highest impact and opportunity; on countries' build-outs 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. The company's effort in developing new growth markets within the African continent is a good example of this focus. Many of these initiatives are leading-edge, both in technologies and business models, and are delivering both increased revenue and margin expansion.

        In order to support this growth, IBM continues to invest significantly in these markets to expand capacity, to develop talent and to deepen its R&D capabilities on the ground. At the same time, IBM continues to leverage talent across the growth markets under its globally integrated enterprise model to the benefit of both its clients and the company worldwide.

Business Analytics and Optimization

        Business Analytics and Optimization (BAO) is the category of software, systems and services that help organizations take advantage of all the data available to them for better and faster decision making and process optimization. This includes data that is being labeled "Big Data," which is data of extreme volume, data being generated at a high velocity, and newer varieties of data like blogs, tweets, pictures, videos, unstructured text created by the explosion of social media websites and the instrumentation of nearly everything. BAO is core to achieving a smarter planet, helping leaders of this new information-centric and insight-driven world infuse intelligence into their business processes.

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        Smarter Analytics is IBM's unique offering for the BAO category. With Smarter Analytics and the company's deep expertise, IBM can help organizations: 1) grow, retain and satisfy customers through deep insight on individual customers and similar segments; 2) increase operational efficiency through, for example, supply chain optimization, predictive maintenance, fraud reduction and optimization of sales incentives and compensation; 3) transform their financial processes such as planning, budgeting, forecasting, financial consolidation, regulatory filing and financial reporting; and 4) better manage risk and regulatory compliance.

        The company's approach to analytics is to ensure clients have complete end-to-end solutions across industries and functional focus areas like finance, sales, marketing, operations and risk. These solutions are designed to help organizations: 1) align around all their data—both traditional and big data—and establish a strong information foundation; 2) apply analytics to their data so they can anticipate and shape business outcomes, identify patterns and gain insights into future performance; 3) enable workers on the front lines who collectively make thousands and even millions of decisions daily with insight that is immediately actionable so they can make the best possible decision—decisions like what claims to fast track in an insurance call center, or what offer is the best for each individual customer who calls a call center; and 4) create a culture that takes action on analytics and that truly transforms.

        IBM is committed to continually innovating across the spectrum of analytic capabilities, systems, research, services, deployment and skills. For example, in 2012, the game changing innovations in Watson were applied to Healthcare and Financial Services, analytic research like the ground-breaking work being done on temporal causal modeling and visualization, and investments in analytic skills and deployment ability in our new Analytics research centers in Columbus, Ohio and Halifax, Nova Scotia.

Cloud Computing

        Cloud is a model for consuming and delivering business and IT services. It can deliver significant economies, enable new levels of speed, flexibility and agility and even serve as a transformative platform for business innovation. From a business perspective, cloud computing is reshaping industry ecosystems, invigorating product innovation and enabling new business models that leverage new sources of competitive differentiation. From an IT perspective, cloud offers improved access to and utilization of information technology through use of highly efficient virtualization and management technology, consumer-style user interfaces and ubiquitous connectivity, including via mobile technologies.

        IBM has already helped thousands of its clients adopt and leverage cloud computing through its broad portfolio of IBM SmartCloud products, solutions and services. Organizations moving beyond initial exploration of cloud computing seek solutions that align with their specific needs. IBM's breadth of cloud capabilities gives it a unique ability to help clients exploit the advantages of cloud. IBM has cloud solutions that span infrastructure, platform, applications and business process services all geared to enable clients to drive significant business value through the rapid adoption and exploitation of new cloud capabilities. IBM's expert consulting, breakthrough technologies and a portfolio of cloud-based services are squarely focused on the requirements of the enterprise.

        The company offers a full array of cloud delivery models, including private clouds, public clouds and a hybrid of both. IBM helps build out private, on-premises cloud-based environments that provide the control, security and isolation that clients require for their most mission-critical workloads. IBM public clouds provide infrastructure, platforms and applications as rapidly provisioned and highly-scalable cloud services on a pay-as-you-go basis. Hybrid clouds provide seamless integration across private and public cloud models, ensuring the interoperability, portability and scalability that clients need to realize the full value of cloud.

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BUSINESS MODEL

        The company's business model is built to support two principal goals: helping clients to become more innovative, efficient and competitive through the application 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 superior 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 integrated solutions to the company's clients.

        The business model is resilient, adapting to the continuously changing market and economic environment. The company continues to divest certain businesses and strengthen its position through strategic organic 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 expanding participation in the world's fastest growing markets.

        This business model, supported by the company's financial model, has enabled the company to deliver strong earnings, cash flows and returns to shareholders over the long term.

BUSINESS SEGMENTS AND CAPABILITIES

        The company's major operations consists of five business segments: Global Technology Services and Global Business Services, which the company collectively calls Global Services, and Software, Systems and Technology and Global Financing.

         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 and maintenance 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 and business process services, creating business value for clients through unique technology and IP, integrated services within its global delivery model. By leveraging insights and experience drawn from IBM's global scale, skills and technology, with applied innovation from IBM Research, clients gain access to leading-edge, high-quality services with improved productivity, flexibility, cost and outcomes.

GTS Capabilities

         Strategic Outsourcing Services: delivers comprehensive IT outsourcing services dedicated to transforming clients' existing infrastructures to consistently deliver improved quality, flexibility, risk management and financial value. The company integrates longstanding expertise in service management and technology with the ability to exploit the power of new technologies from IBM systems and software, such as cloud computing, analytics and virtualization, to deliver high performance, innovation and improved ability to achieve business objectives.

         Global Process Services: delivers a range of offerings consisting of standardized through transformational solutions including processing platforms and business process outsourcing. These services deliver improved business results to clients through the strategic change and/or operation of the client's business processes, applications and infrastructure.

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         Integrated Technology Services: delivers a portfolio of project- based and managed services that enable clients to transform and 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.

         Technology Support Services: delivers a complete line of support services from product maintenance through solution support to maintain and improve the availability of clients' IT infrastructures.

         Global Business Services (GBS) has the mission to deliver predictable business outcomes to the company's clients across two primary business areas: Consulting and Application Management Services. These professional services deliver business value and innovation to clients through solutions which leverage industry and business process expertise. The role of GBS is to drive initiatives that integrate IBM content and solutions and drive the progress of the company's four primary growth initiatives.

        As clients transform themselves in response to market trends like Big Data, social and mobile computing, GBS is aligning its expertise and capabilities to address two interdependent categories of opportunity: Front Office Digitization, which describes the markets forming around new models of engagement with all audiences; and the Globally Integrated Enterprise, which describes the mandate to integrate data and processes in support of the new front-office programs, and build far more flexible information applications.

GBS Capabilities

         Consulting: delivering client value with solutions in Strategy and Transformation, Application Innovation Services, Enterprise Applications and Smarter Analytics. Consulting is also focused on bringing to market client solutions that drive Front Office Digitization in Smarter Commerce, Cloud, Mobile and Social Business.

         Application Management Services: application management, maintenance and support services for packaged software, as well as custom and legacy applications. Value is delivered through advanced capabilities in areas such as application testing and modernization, cloud application services, the company's highly differentiated globally integrated capability model, industry knowledge and the standardization and automation of application management.

         Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform to improve their business results, solve critical problems and gain competitive advantage within their industries. 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 post-contract support. The remaining one-third relates to one-time charge (OTC) arrangements in which clients pay one, up-front payment for a perpetual license. Typically, the sale of OTC software includes one year of post-contract support. Clients can also purchase ongoing post-contract support after the first year, which includes unspecified product upgrades and technical support.

Software Capabilities

         WebSphere Software: delivers capabilities that enable organizations to run high-performance business applications. With these applications, clients can integrate and manage business processes across their organizations with the flexibility and agility they need to respond to changing conditions. Built on services-oriented architecture (SOA), and open standards support for cloud, mobile and social interactions, the WebSphere platform enables enterprises to extend their reach and optimize interactions with their key constituents. Smarter Commerce software helps companies better manage

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and improve each step of their value chain and capitalize on opportunities for profitable growth, efficiency and increased customer loyalty.

         Information Management Software: enables clients to integrate, manage and analyze enormous amounts of data from a large variety of sources in order to gain competitive advantage and improve their business outcomes. With this approach, clients can extract real value out of their data and use it to make better business decisions. IBM's middleware and integrated solutions include advanced database management, information integration, data governance, enterprise content management, data warehousing, business analytics and intelligence, predictive analytics and big data analytics.

         Tivoli Software: helps clients optimize the value they get from their infrastructures and technology assets through greater visibility, control and automation across their end-to-end business operations. These asset management solutions foster integrated service delivery for cloud and datacenter management, enterprise endpoint and mobile device management, asset and facilities management, and storage management. Tivoli includes security systems software that provides clients with a single security intelligence platform that enables them to better secure all aspects of their enterprise and prevent security breaches.

         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, IBM's social business offerings help organizations reap real benefits associated with social networking, as well as create a more efficient and effective workforce.

         Rational Software: supports software development for both IT, as well as complex and embedded system solutions, with a suite of Collaborative Lifecycle Management products. Jazz, Rational's technology platform, transforms the way people work together to build software, making software delivery more integrated and collaborative, while optimizing for successful business outcomes.

         Operating Systems: software that manages the fundamental processes that make computers run.

         Systems and Technology (STG) provides clients with business solutions requiring advanced computing power and storage capabilities. Approximately half of Systems and Technology's server and storage sales transactions are through the company's business partners; with the balance direct to end-user clients. In addition, Systems and Technology provides leading semiconductor technology, products and packaging solutions for IBM's own advanced technology needs and for external clients.

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—System z, Power Systems 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 PureSystems, IBM Smart Analytics, IBM Netezza, IBM SmartCloud Entry and IBM BladeCenter for Cloud. 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: 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, security, compliance and storage optimization including data deduplication, availability and virtualization. The portfolio consists of a broad range of disk and tape storage systems and software.

         Microelectronics: semiconductor design and manufacturing primarily for use in IBM systems and storage products as well as delivering semiconductors and related services to external clients.

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         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 one 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.

         Remanufacturing and Remarketing: as equipment is returned at the conclusion of a lease transaction, these assets are refurbished and sold or leased to new or existing clients both externally and internally. Externally remarketed equipment revenue represents sales or leases to clients and resellers. Internally remarketed equipment revenue primarily represents used equipment that is sold internally to Systems and Technology and Global Services. Systems and Technology 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

    Enterprise Transformation

    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, Inside Sales and local Business Partner resources.

        Through its growth markets organization, the company continues to increase its focus on the emerging markets around the world that have market growth rates greater than the global

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average—countries within Southeast Asia, Eastern Europe, the Middle East and Latin America. The company's major markets include the G7 countries of Canada, France, Germany, Italy, Japan, the United States (U.S.) and the United Kingdom (UK) plus Austria, the Bahamas, Belgium, the Caribbean region, Cyprus, Denmark, Finland, Greece, Iceland, Ireland, Israel, Malta, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.

        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: Cross-sector representation of intermediate- sized large enterprises as well as midmarket clients (less than 1,000 employees)

Research, Development and Intellectual Property

        IBM's R&D operations differentiate the company from its competitors. IBM annually invests over $6 billion for R&D, focusing on high- growth, high-value opportunities.

        IBM Research works with clients and the company's business units through 12 global labs on near-term and mid-term innovations. It contributes many new technologies to IBM's portfolio every year and helps clients address their most difficult challenges. IBM Research also explores the boundaries of science and technology—from nanotechnology, to future systems, to big data analytics, to secure clouds, to IBM Watson, a "cognitive" learning system that applied advanced analytics to defeat the all-time champions on the television quiz show, Jeopardy! . The Watson system has been introduced to the market for advanced healthcare applications and is being further developed and extended within healthcare and in other industries.

        IBM Research also focuses on differentiating IBM's services businesses providing new capabilities and solutions. It has the world's largest mathematics department of any public company, enabling IBM to create unique analytic solutions and actively engage with clients on their toughest challenges.

        In 2012, IBM was awarded more U.S. patents than any other company for the 20th consecutive year. IBM's 6,478 patents in 2012 included inventions that will enable fundamental advancements in analytics, big data, cybersecurity, cloud, mobile, social networking and software defined environments, as well as industry solutions for retail, banking, healthcare, and transportation. It was the most U.S. patents ever awarded to one company in a single year.

        The company continues to actively seek intellectual property protection for its innovations, while increasing emphasis on other initiatives designed to leverage its intellectual property leadership. 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.

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Enterprise Transformation

        A key element of the company's strategy has been focused on becoming the premier globally integrated enterprise. The company has implemented a consistent set of processes and standards worldwide to reduce inefficiencies and improve collaboration. With its processes fully standardized, the company implemented a new operating model with work shared in global resource centers of excellence located where it made the most business sense. The company has shifted resources toward building client relationships and employee skills, while positioning the company for new market opportunities. During this transformation, IBM pioneered this new operating model, changing from a classic "multinational," with smaller versions of the parent company replicated in countries around the world, to a global model with one set of processes, shared services and broadly distributed decision making.

        The company has now embarked on the next generation of its transformation in which new capabilities and technologies like business analytics and cloud computing will drive performance. The proven principles of the globally integrated enterprise will be applied to all of the company's spending to continue to drive additional productivity benefits in shared services, end-to-end process transformation and integrated operations. The company primarily reinvests the benefits of its enterprise transformation initiatives in remixing its spending profile and resources to the higher growth, higher margin initiatives such as business analytics, Smarter Planet and cloud computing, in addition to improving profitability.

Integrated Supply Chain

        IBM spends approximately $35 billion annually through its supply chain, procuring materials and services globally. In addition, in 2012, the company managed approximately $20 billion in procurement spending for its clients through the Global Process Services organization. The supply, manufacturing, and logistics and customer fulfillment operations are integrated in one operating unit that has optimized inventories over time. Simplifying and streamlining internal processes has improved sales force productivity and operational effectiveness and efficiency. Continuous improvements to supply chain resiliency against marketplace changes and risks have been particularly valuable in maintaining continuity during natural disasters and other disruptive events.

        The company's continuing efforts to derive business value from its own globally integrated supply chain provides 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.

        Increasingly the company is using analytics to measure, manage and fine tune its supply chain operations, which will help to reshape its operations and create value for clients. The goal is to continue to increase the use of analytics in the five major areas of supply chain: 1) Supply Chain Visibility, 2) Risk Management, 3) Customer Insight, 4) Cost Containment, and 5) Global Supply Chain and Sustainability.

COMPETITION

        The company is a globally-integrated enterprise, operating in more than 170 countries. The company participates in a highly competitive environment, 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.

        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, a corporation must continue to invest, innovate and integrate. The company has

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been executing a strategy to transform its business, including shifting to higher value market segments and offerings and increasing its capabilities through organic investments and strategic acquisitions. As the company executes its strategy, it enters new markets, such as smarter planet and business analytics, which exposes the company to new competitors. 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 process outsourcing, cloud services, and a wide range of technical 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, industry knowledge and experience, value and speed, 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, global delivery model, best-of-breed process and industry skills, extensive technology expertise, services assets, 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, Amazon.com, Inc., Computer Sciences Corporation, Fujitsu and Hewlett-Packard Company (HP); India-based service providers; the consulting practices of public accounting firms; and many companies that primarily focus on local markets or niche service areas.

Software:

        The enterprise management software market is highly competitive and, increasingly, technology companies are looking to implement software solutions that will improve business outcomes for their clients. The key competitive factors in this segment include: functionality, ease-of-use, scalability, open standards, total cost-of-ownership and business value. IBM's leadership in each of these areas, and the ability to deliver solutions that drive business results, provides it with competitive advantages. The company's software business includes middleware, solutions offerings and operating systems. The middleware portfolio is the broadest in the industry and covers both mainframe and distributed computing environments. The middleware portfolio also underpins IBM's solutions business and enhances the business value the company brings to clients. The solutions portfolio provides comprehensive business and industry- specific offerings to new types of IT decision makers, such as chief marketing and procurement officers, chief information security officers, and chief financial officers. The depth and breadth of the company's software offerings, coupled with its global sales and technical support infrastructure, differentiate the software business from its competitors. The company's research and development capabilities and intellectual property patent portfolio also contribute to this segment's leadership. The company's principal competitors in this segment include CA, Inc., Microsoft Corporation and Oracle Corporation (Oracle). The company also competes with smaller, niche competitors in specific geographic or product markets worldwide.

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 Cisco Systems, Inc. (Cisco), Dell, Inc., EMC Corporation, HP and Oracle. 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

10


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:

        Global Financing provides client financing, commercial financing and participates in the remarketing of used equipment. The economic crisis of 2008 and 2009 drove an increase in credit spreads and a tightening supply of credit which have subsequently eased. However, going forward credit spreads may increase and the supply of credit may tighten based on worldwide economic conditions. 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, global capabilities 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 entities of companies such as Cisco and HP and non-captive financing entities of 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

        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"). Forward-looking statements are based on the company's current assumptions regarding future business and financial performance. These statements by their nature address matters that are uncertain to different degrees. 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. Any forward-looking statement in this Form 10-K speaks only as of the date on which it is made. 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 12 to 17 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 2012 Annual Report to Stockholders and is incorporated herein by reference:

        Segment information and revenue by classes of similar products or services—pages 134 to 138.

        Financial information by geographic areas—page 138.

        Amount spent during each of the last three years on R&D activities—page 115.

        Financial information regarding environmental activities—pages 106 and 107.

        The number of persons employed by the registrant—page 63.

        The management discussion overview—pages 18 to 21.

        Available information—page 143.

Also refer to Item 1A. entitled "Risk Factors" in Part I of this Form.

11


Executive Officers of the Registrant (at February 26, 2013):

 
  Age   Officer since  

Virginia M. Rometty, Chairman of the Board, President and Chief Executive Officer*

    55     2005  

Rodney C. Adkins, Senior Vice President, Systems and Technology Group

    54     2007  

Colleen F. Arnold, Senior Vice President, Application Management Services

    55     2010  

James P. Bramante, Senior Vice President, Growth Markets

    54     2012  

Erich Clementi, Senior Vice President, Global Technology Services

    54     2010  

Michael E. Daniels, Senior Vice President**

    58     2005  

Bruno V. Di Leo Allen, Senior Vice President, Sales and Distribution

    55     2012  

Jon C. Iwata, Senior Vice President, Marketing and Communications

    50     2002  

James J. Kavanaugh, Vice President and Controller

    46     2008  

John E. Kelly III, Senior Vice President and Director, Research

    59     2000  

Robert J. LeBlanc, Senior Vice President, Middleware Software Group

    54     2010  

Mark Loughridge, Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation

    59     1998  

J. Randall MacDonald, Senior Vice President, Human Resources

    64     2000  

Steven A. Mills, Senior Vice President and Group Executive, Software and Systems

    61     2000  

Michael D. Rhodin, Senior Vice President, Software Solutions Group

    52     2010  

Linda S. Sanford, Senior Vice President, Enterprise Transformation

    60     2000  

Timothy S. Shaughnessy, Senior Vice President, GTS Services Delivery

    55     2004  

Bridget A. van Kralingen, Senior Vice President, Global Business Services

    49     2012  

Robert C. Weber, Senior Vice President, Legal and Regulatory Affairs, and General Counsel

    62     2006  

*
Member of the Board of Directors.

**
Mr. Daniels will retire on March 31, 2013, after a 36-year career with the company.

        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 has been an executive of IBM or its subsidiaries during the past five years.


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 and offerings in both emerging and more established markets. These various initiatives may not yield their intended gains in quality, productivity and enablement of rapid scaling, which may impact the company's competitiveness and its 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 certain segments 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 a highly competitive environment, the company could fail in its ongoing

12


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, cloud computing, and new and emerging markets and countries to drive revenue growth and market share gains. Client adoption rates and viable economic models are less certain in the high-value and rapidly-growing segments, and new delivery models may unfavorably impact demand for our other products or services. 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, legal 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.

         Cybersecurity and Privacy Considerations could impact the Company's Business: The company's products, services, and systems may affect critical third party operations or involve the storage, processing and transmission of proprietary information and sensitive or confidential data, including personal information of employees, customers and others. Breaches of security could expose the company, its customers or others to risks of loss, including the misuse of information or systems, 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. Also, the company could be negatively impacted by existing and proposed laws and regulations related to privacy and data protection.

         The Company's Financial Results 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 and the seasonality of technology purchases. The company's financial results may also be impacted by the structure of products and services contracts and the nature of its customers' businesses; for example, certain of the company's services contracts with commercial customers in regulated industries are subject to periodic review by regulators with respect to controls and processes. As a result of the above-mentioned factors, the company's financial results are difficult to predict. Historically, the company has had lower revenue in the first quarter than in the immediately preceding fourth quarter. In addition, the high volume of products typically 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

13


inadequate enforcement of laws or policies, could affect the company's business 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 non-U.S. currencies. Further, as the company expands its customer base and the scope of its offerings, both within the U.S. and globally, it may be impacted by additional regulatory or other risks. In addition, any widespread outbreak of an illness, pandemic or other local or global health issue, natural disasters, 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, which could negatively impact the company's earnings. IBM's 2012 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,

14


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 application of generally accepted accounting principles requires the company to make estimates and assumptions about certain items and future events that directly affect its reported financial condition. The company's most critical accounting estimates are described in the Management Discussion in IBM's 2012 Annual Report to Stockholders, under "Critical Accounting Estimates." In addition, as discussed in note M, "Contingencies and Commitments," in IBM's 2012 Annual Report to Stockholders, the company makes certain estimates including decisions related to legal proceedings and reserves. These estimates and assumptions involve the use of judgment. As a result, 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, training 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 could be impacted by its Business with Government Clients: The company's customers include numerous governmental entities within and outside the U.S., including the U.S. Federal Government and state and local entities. Some of the company's agreements with these customers may be subject to periodic funding approval. Also, some agreements may contain provisions allowing the customer to terminate without cause and providing for higher liability limits for certain losses. In addition, the company could be suspended or debarred as a governmental contractor and could incur civil and criminal fines and penalties, which could negatively impact the company's results of operations and financial results.

         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.

15


         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 2012 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 creditworthiness 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 allowance for credit losses, 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 recruit 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. 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

16


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.


Item 1B. Unresolved Staff Comments:

        Not applicable.


Item 2. Properties:

        At December 31, 2012, IBM's manufacturing and development facilities in the United States had aggregate floor space of 18 million square feet, of which 16 million was owned and 2 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 14 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 vacant.

        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 M, "Contingencies and Commitments," on pages 110 to 112 of IBM's 2012 Annual Report to Stockholders, which is incorporated herein by reference.


Item 4. Mine Safety Disclosures:

        Not applicable.

17



PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities:

        Refer to pages 139 and 143 of IBM's 2012 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 488,800 common stockholders of record at February 8, 2013.

        The following table provides information relating to the company's repurchase of common stock for the fourth quarter of 2012.

 
  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, 2012—
October 31, 2012

    4,601,621   $ 202.42     4,601,621   $ 10,722,136,206  

November 1, 2012—
November 30, 2012

    5,593,491   $ 191.01     5,593,491   $ 9,653,711,820  

December 1, 2012—
December 31, 2012

    5,212,946   $ 192.14     5,212,946   $ 8,652,080,389  
                     

Total

    15,408,058   $ 194.80     15,408,058        
                     

(1)
On April 24, 2012, the Board of Directors authorized $7.0 billion in funds for use in the company's common stock repurchase program. On October 30, 2012, the Board of Directors authorized an additional $5.0 billion 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 139 and 140 of IBM's 2012 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 67 of IBM's 2012 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 page 62 of IBM's 2012 Annual Report to Stockholders, which is incorporated herein by reference.


Item 8. Financial Statements and Supplementary Data:

        Refer to pages 70 through 138 of IBM's 2012 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.

18



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 68 and 69 of IBM's 2012 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 materially affect, the company's internal control over financial reporting.


Item 9B. Other Information:

        The following are compensation arrangements for the company's named executive officers identified in the 2012 Proxy Statement (1) . Information regarding the structure of compensation programs and awards is included in the company's proxy statement.

 
  2013 Cash   2013 Long-Term
Incentive Award
 
 
  Salary
Rate
  Annual Incentive
Target
  Performance
Share Units*
 

M. Loughridge

  $ 775,000   $ 1,046,000   $ 5,750,000  

S. A. Mills

  $ 716,000   $ 968,000   $ 5,000,000  

(1)
Mr. S. J. Palmisano, Mr. M. E. Daniels and Mrs. V. M. Rometty were named executive officers in the company's 2012 Proxy Statement filed on March 12, 2012, but were not included in the table above; Mr. Palmisano retired from the company effective December 1, 2012; Mr. Daniels will retire on March 31, 2013; and there are no new compensation arrangements for Mrs. Rometty.

*
Performance share units will be granted on June 7, 2013. The actual number of units granted on this date will be determined by dividing the value shown above by a predetermined, formulaic Planning Price for the second quarter 2013. These performance share units will be paid out in February 2016 as explained in the company's proxy statement.

19



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 30, 2013, 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 26, 2013)" on page 12 for additional information on the company's executive officers.


Item 11. Executive Compensation:

        Refer to the information under the captions "General Information—2012 Director Compensation Narrative," "2012 Director Compensation Table," "2012 Compensation Discussion and Analysis," "2012 Summary Compensation Table Narrative," "2012 Summary Compensation Table," "2012 Grants of Plan-Based Awards Table," "2012 Outstanding Equity Awards at Fiscal Year-End Narrative," "2012 Outstanding Equity Awards at Fiscal Year-End Table," "2012 Option Exercises and Stock Vested Table," "2012 Retention Plan Narrative," "2012 Retention Plan Table," "2012 Pension Benefits Narrative," "2012 Pension Benefits Table," "2012 Nonqualified Deferred Compensation Narrative," "2012 Nonqualified Deferred Compensation Table," "2012 Potential Payments Upon Termination Narrative," "2012 Potential Payments Upon Termination Table," "Compensation Committee Interlocks and Insider Participation" and "2012 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 30, 2013, 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 30, 2013, all of which information is incorporated herein by reference.

20


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

    1,401,475   $ 97.86      

RSUs

    6,973,298     n/a      

PSUs

    4,020,419 (2)   n/a      

Subtotal

   
12,395,192
 
$

97.86
   
105,509,920
 

Equity compensation plans not approved by security holders

                   

Options

    9,988,246   $ 93.03      

RSUs

    2,868,163     n/a      

PSUs

    737,883 (2)     n/a      

DCEAP Shares

    135,040     n/a      

Subtotal

   
13,729,332
 
$

93.03
   
15,649,090
 

Total

   
26,124,524
 
$

93.63
   
121,159,010
 

n/a is not applicable

RSUs—Restricted Stock Units, including Retention Restricted Stock Units

PSUs—Performance Share Units

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

(1)
In connection with 37 acquisition transactions, 920,848 additional share based awards, consisting of stock options and RSU's, were outstanding at December 31, 2012 as a result of the company's assumption of awards granted by the acquired entities. The weighted-average exercise price of these awards was $67.64. 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 2,680,279 and for equity compensation plans not approved by security holders is 491,922. For additional information about PSUs, including payout calculations, refer to the information under "2012 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 30, 2013.

        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") has been used to fund awards for employees other than senior executives of the company. Awards for senior executives of the company

21


have been and will continue to be funded from the stockholder-approved 1999 Long-Term Performance Plan (the "1999 Plan"); the 1999 Plan is also used to fund awards for employees other than senior executives. 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 "General Information—2012 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 30, 2013).


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

22


the Annual Meeting of Stockholders to be held April 30, 2013, 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 30, 2013, 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 2012 Annual Report to Stockholders, which are incorporated herein by reference:

        Report of Independent Registered Public Accounting Firm (page 69).

        Consolidated Statement of Earnings for the years ended December 31, 2012, 2011 and 2010 (page 70).

        Consolidated Statement of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010 (page 71).

        Consolidated Statement of Financial Position at December 31, 2012 and 2011 (page 72).

        Consolidated Statement of Cash Flows for the years ended December 31, 2012, 2011 and 2010 (page 73).

        Consolidated Statement of Changes in Equity at December 31, 2012, 2011 and 2010 (pages 74 and 75).

        Notes to Consolidated Financial Statements (pages 76 through 138).

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

Page
  Schedule
Number
   
 

30

       

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. 

 

 

 

 

23


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
 
      The Certificate of Incorporation of IBM is Exhibit 3.2 to Form 8-K filed April 27, 2007, and is hereby incorporated by reference.         

 

 

 

The By-laws of IBM, as amended through October 1, 2012, is Exhibit 3.2 to Form 10-Q for the quarter ended September 30, 2012, and is hereby incorporated by reference. 

 

 

 

 

 

(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 6.625% Notes due 2014 is Exhibit 2 to Form 8-K, filed November 5, 2008, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 2.1% Notes due 2013 is Exhibits 2.1 to Form 8-K, filed on November 5, 2009, and are hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 1.000% Notes due 2013 is Exhibit 2.1 to Form 8-K, filed August 4, 2010, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 2.000% Notes due 2016 is Exhibit 2.1 to Form 8-K, filed December 8, 2010, and is hereby incorporated by reference. 

 

 

 

 

24


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
 
      The instrument defining the rights of the holders of the 1.250% Notes due 2014 is Exhibit 2.1 to Form 8-K, filed May 11, 2011, and is hereby incorporated by reference.         

 

 

 

The instrument defining the rights of the holders of the 1.950% Notes due 2016 is Exhibit 2.1 to Form 8-K, filed July 21, 2011, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instruments defining the rights of the holders of the 0.875% Notes due 2014 and the 2.900% Notes due 2021 are Exhibits 2.1 and 3.1 to Form 8-K, filed October 31, 2011, and are hereby incorporated by reference. 

 

 

 

 

 

 

 

The instruments defining the rights of the holders of the 0.550% Notes due 2015 and the 1.250% Notes due 2017 are Exhibits 2.1 and 3.1 to Form 8-K, filed February 3, 2012, and are hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 2.20% Notes due 2017 is Exhibit 2.1 to Form 8-K, filed February 9, 2012, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instruments defining the rights of the holders of the 0.750% Notes due 2015 and the 1.875% Notes due 2019 are Exhibits 2.1 and 3.1 to Form 8-K, filed May 10, 2012, and are hereby incorporated by reference. 

 

 

 

 

 

 

 

The instruments defining the rights of the holders of the 1.875% Notes due 2022 is Exhibit 2.1 to Form 8-K, filed July 27, 2012, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instruments defining the rights of the holders of the 1.375% Notes due 2019 is Exhibit 2.1 to Form 8-K, filed November 16, 2012, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instruments defining the rights of the holders of the 1.250% Notes due 2018 and Floating Rate Notes due 2015 are Exhibits 2.1 and 3.1 to Form 8-K, filed February 7, 2013, and are hereby incorporated by reference

 

 

 

 

 

(9)

 

Voting trust agreement

 

 

Not applicable

 

 

(10)

 

Material contracts

 

 

 

 

 

 

 

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.*

 

 

 

 

25


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
 
      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.*

 

 

 

 

 

 

 

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, 2011, were filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2011, are hereby incorporated by reference.*

 

 

 

 

 

 

 

Board of Directors compensatory plans, as described under the caption "General Information—2012 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 30, 2013, 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.*

 

 

 

 

 

 

 

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.*

 

 

 

 

26


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
 
      The IBM Excess 401(k) Plus Plan, a compensatory plan (formerly the IBM Executive Deferred Compensation Plan), as amended and restated through January 1, 2010, which was filed as Exhibit 10.1 to the Form 10-K for the year ended December 31, 2009 contained in Registration Statement No. 333-171968, is hereby incorporated by reference.*        

 

 

 

Amendment No. 1 to the IBM Excess 401(k) Plus Plan, a compensatory plan, effective January 1, 2013.*

 

 

10.1

 

 

 

 

Amendment No. 2 to the IBM Excess 401(k) Plus Plan, a compensatory plan, effective January 1, 2013.*

 

 

10.2

 

 

 

 

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.*

 

 

 

 

 

 

 

Form of Noncompetition Agreement, filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2012, is hereby incorporated by reference.*

 

 

 

 

 

 

 

Letter dated September 25, 2012, signed by Samuel J. Palmisano and IBM was included as Exhibit 99.2 to the Form 8-K filed September 25, 2012, and is hereby incorporated by reference.*

 

 

 

 

 

 

 

The $10,000,000 5-Year Credit Agreement dated as of November 10, 2011, among International Business Machines Corporation, the Subsidiary Borrowers parties thereto, the Lenders parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the Syndication and Documentation Agents named therein, which was filed as Exhibit 10.1 to Form 8-K dated November 14, 2011, the term of which was extended through November 10, 2017, is hereby incorporated by reference. 

 

 

 

 

 

(11)

 

Statement re computation of per share earnings

 

 

 

 

 

 

 

The statement re computation of per share earnings is note P, "Earnings Per Share of Common Stock," on page 116 of IBM's 2012 Annual Report to Stockholders, and is hereby incorporated by reference. 

 

 

 

 

 

(12)

 

Statement re computation of ratios

 

 

12

 

 

(13)

 

Annual report to security holders**

 

 

13

 

 

(18)

 

Letter re: change in accounting principles

 

 

Not applicable

 

27


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
 
  (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, 2012, 2011 and 2010, (ii) Consolidated Statement of Comprehensive Income for the twelve month period ended December 31, 2012, 2011 and 2010, (iii) the Consolidated Statement of Financial Position at December 31, 2012 and 2011, (iv) the Consolidated Statement of Cash Flows for the twelve months ended December 31, 2012, 2011 and 2010, (v) the Consolidated Statement of Changes in Equity for the twelve month period ended December 31, 2012, 2011 and 2010, (vi) Financial Statement Schedule II and (vii) the notes to the Consolidated Financial Statements

 

 

101

 

*
Management contract or compensatory plan or arrangement.

**
The Performance Graph, set forth on page 141 of IBM's 2012 Annual Report to Stockholders, is deemed to be furnished but not filed.

28



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/ VIRGINIA M. ROMETTY

Virginia M. Rometty
Chairman of the Board,
President and Chief Executive Officer

 

 

 

 

Date: February 26, 2013

        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/ VIRGINIA M. ROMETTY


Virginia M. Rometty
 

    Chairman of the Board,
President and Chief Executive
Officer

  February 26, 2013


/s/ MARK LOUGHRIDGE


Mark Loughridge

 


Senior Vice President and Chief
Financial Officer,
Finance and Enterprise
Transformation


 


February 26, 2013


/s/ JAMES J. KAVANAUGH


James J. Kavanaugh

 


Vice President and Controller


 


February 26, 2013

 


Alain J. P. Belda

 

Director

 

 

 

 

William R. Brody

 

Director

 

 

 

 

Kenneth I. Chenault

 

Director

 

By:

 

/s/ MICHELLE H. BROWDY

Michelle H. Browdy
Michael L. Eskew   Director       Attorney-in-fact
February 26, 2013
David N. Farr   Director        

Shirley Ann Jackson

 

Director

 

 

 

 

Andrew N. Liveris

 

Director

 

 

 

 

W. James McNerney, Jr.

 

Director

 

 

 

 

James W. Owens

 

Director

 

 

 

 

Joan E. Spero

 

Director

 

 

 

 

Sidney Taurel

 

Director

 

 

 

 

Lorenzo H. Zambrano

 

Director

 

 

 

 

29



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 26, 2013 appearing in the 2012 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 26, 2013

30



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

                               

2012

                               

—Current

  $ 578   $ 41   $ (45 ) $ (15 ) $ 560  
                       

—Noncurrent

  $ 38   $ 10   $ 0   $ 17   $ 66  
                       

2011

                               

—Current

  $ 676   $ 90   $ (154 ) $ (34 ) $ 578  
                       

—Noncurrent

  $ 58   $ 1   $ (17 ) $ (3 ) $ 38  
                       

2010

                               

—Current

  $ 669   $ 49   $ (146 ) $ 104   $ 676  
                       

—Noncurrent

  $ 100   $ (12 ) $ (29 ) $ (1 ) $ 58  
                       

Allowance For Inventory Losses

                               

2012

  $ 625   $ 294   $ (240 ) $ (28 ) $ 652  
                       

2011

  $ 674   $ 230   $ (279 ) $ 1   $ 625  
                       

2010

  $ 679   $ 254   $ (285 ) $ 26   $ 674  
                       

Revenue Based Provisions

                               

2012

  $ 861   $ 3,228   $ (3,345 ) $ 33   $ 777  
                       

2011

  $ 888   $ 3,157   $ (3,132 ) $ (51 ) $ 861  
                       

2010

  $ 871   $ 3,234   $ (3,216 ) $ (1 ) $ 888  
                       

*
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 10.1

 

IBM EXCESS 401(k) PLUS PLAN

(As Amended and Restated effective as of January 1, 2010)

 

AMENDMENT No. 1

 

Instrument of Amendment

 

Recitals:

 

International Business Machines Corporation (“IBM”) has established and maintains the IBM Excess 401(k) Plus Plan (the “Plan”), an unfunded deferred compensation plan described in Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (ERISA).

 

In accordance with Section 10.01 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, 2010.

 

IBM has determined to amend the Plan, as heretofore restated, in the manner set forth in this Instrument of Amendment, to be effective for Deferral Periods that begin on or after January 1, 2013, except as otherwise specified herein.

 

Amendment:

 

1.                                       Section 1.01 (“Name of Plan and Effective Date”) is amended by adding the following at the end of the existing text:

 

The Plan was amended on December 6, 2012 to change the eligibility requirements for, and the manner of calculating, Company Contributions under the Plan. Articles II, III, IV, and V, as so amended, apply to Company Contributions for Deferral Periods that begin on or after January 1, 2013.

 

2.                                       Article II (“Definitions”) is amended by adding the following definition immediately following the definition of “Company”:

 

“Company Contribution-Eligible Individual” generally means, with respect to a Plan Year, any individual who satisfies (a) or (b) below:

 

(a) On December 15 of the Plan Year, the individual is employed by the Company or a Domestic Subsidiary, is on a U.S. payroll, and is not a Supplemental Employee; for this purpose, an individual (other than a Supplemental Employee) shall be treated as “employed” if the individual is on a leave of absence that is classified in the employer’s payroll records as a bridge leave, a pre-retirement planning leave, a paid or unpaid leave of absence, or a military leave.

 

1



 

(b) The individual terminates employment with the Company and its Domestic Subsidiaries during the Plan Year due to Retirement.

 

An individual shall not be a Company Contribution-Eligible Individual for a Plan Year if the individual terminates employment with the Company and its Domestic Subsidiaries prior to December 15 of the Plan Year for any reason other than Retirement, including death, or if the individual is receiving LTD benefits on December 15 of the Plan Year and did not satisfy the age and/or service requirements for Retirement on the date the LTD benefits commenced. Notwithstanding the general rule set forth in (a) and (b) above, an individual shall not be a Company Contribution-Eligible Individual for a Plan Year if the individual terminates employment with the Company and its Domestic Subsidiaries during the Plan Year for a reason other than Retirement and is rehired later in the Plan Year.

 

Notwithstanding any other provision in this definition, IBM’s chief human resources officer may, in such officer’s sole discretion, determine that an individual shall be treated as a Company Contribution Eligible Individual for a Plan Year even if the individual does not otherwise satisfy the requirements set forth above.

 

3.                                       Article II (“Definitions”) is amended by adding the following definition immediately following the definition of “Rehire Pay”:

 

“Retirement” means termination of employment (a) with at least 30 years of service, (b) after reaching age 55 with at least 15 years of service, (c) after reaching age 62 with at least 5 years of service, (d) after reaching age 65 with at least 1 year of service, or (e) while participating in the Transition to Retirement program. For purposes of this definition, “year of service” means a year of Eligibility Service as defined in the IBM Personal Pension Plan.

 

4.                                       Section 3.01 (“Eligibility for Elective Deferrals”) is amended by modifying subsection (b) to read, in its entirety, as follows:

 

(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, or determines that the Employee is eligible to participate pursuant to the Transition to Retirement program; and

 

5.                                       Section 3.01 (“Eligibility for Elective Deferrals”) is amended by adding the following at the end of the existing text:

 

Notwithstanding any other provision in this Section 3.01, IBM’s chief human resources officer may, in such officer’s sole discretion, determine that an Employee shall be eligible to make Elective Deferrals for a Deferral Period even if the Employee does not otherwise satisfy the requirements set forth above. Any such determination shall be made between September 1 and November 15 immediately preceding the Deferral Period.

 

2



 

6.                                       Section 3.02 (“Eligibility for Matching and Match Maximizer Contributions”) is amended to read, in its entirety, as follows:

 

3.02.       Eligibility for Matching Contributions.   An Employee shall be eligible for Matching Contributions for a Plan Year 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, and effective for Matching Contributions payable with respect to Deferral Periods that begin on or after January 1, 2013, is a Company Contribution-Eligible Individual for the Plan Year. However, an Employee’s Matching Contributions for a Plan Year shall be calculated without regard to any Elective Deferrals or Excess 401(k) Eligible Pay for any payroll period:

 

(a) beginning after the Employee has a 409A Separation from Service and ending before the next Deferral Period for which the Employee is eligible for, and makes, Elective Deferrals;

 

(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; and, solely with respect to Performance Pay, within the first quarter of the Plan Year immediately following the Plan Year in which the hardship withdrawal occurs;

 

(c) beginning after the Employee becomes a Supplemental Employee and ending before the next Deferral Period for which the Employee is eligible for, and makes, Elective Deferrals; or

 

(d) beginning after the Employee begins to receive LTD Benefits (whether or not he or she makes Elective Deferrals) and ending before the next Deferral Period for which the Employee is eligible for, and makes, Elective Deferrals.

 

7.                                       Section 3.03 (“Eligibility for Automatic Contributions and Transition Credits”) is amended to read, in its entirety, as follows:

 

3.03.       Eligibility for Automatic Contributions.

 

(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 for a Plan Year only if:

 

(1)                                  the Employee is eligible during that Plan Year for “automatic contributions” under the 401(k) Plan;

 

(2)                                  the Employee is eligible to make Elective Deferrals during the Plan Year (regardless of whether the Employee has elected to make Elective Deferrals for the Plan Year); and

 

(3)                                  effective for Automatic Contributions payable with respect to Deferral Periods that begin on or after January 1, 2013, the Employee is a Company Contribution-Eligible Individual for the Plan Year.

 

3



 

Notwithstanding any Plan provision to the contrary, 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, if at all, 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 2013 but is not eligible to make Elective Deferrals for Deferral Periods that begin in 2014, the individual is not eligible for Automatic Contributions in 2014 except with respect to any Elective Deferrals of Performance Pay for the Performance Pay Deferral Period ending March 31, 2014 (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 for a Plan Year if the Employee is eligible during that Plan Year for “automatic contributions” under the 401(k) Plan as described in subsection (a)(1), above, and, effective for Automatic Contributions payable with respect to Deferral Periods that begin on or after January 1, 2013, is a Company Contribution-Eligible Individual for the Plan Year as described in subsection (a)(3), above, even if the Employee is not eligible to make Elective Deferrals during the Plan Year.

 

(c) Eligibility after 409A Separation from Service .  An Employee’s Automatic Contributions for a Plan Year shall be calculated without regard to any Elective Deferrals or Excess 401(k) Eligible Pay for any payroll period that begins after the Employee has a 409A Separation from Service and ends before the next Deferral Period for which the Employee is eligible for, and makes, Elective Deferrals.

 

8.                                       Section 4.02 (“Matching Contributions”) is amended to read, in its entirety, as follows:

 

4.02.       Matching Contributions. For each Plan Year, a Matching Contribution 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 Plan Year. An Eligible Employee’s Matching Contribution is the sum of the following:

 

(a) 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 the Plan Year, multiplied by the Eligible Employee’s Elective Deferrals for the Plan Year, for each payroll period that ends after the Employee’s Program Eligibility Date; and

 

(b) 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 the Plan Year, multiplied by the Eligible Employee’s Excess 401(k) Eligible Pay for the Plan Year;

 

4



 

provided that the sum of (a) and (b) shall not exceed the Elective Deferrals credited to the Eligible Employee for such Plan Year, for payroll periods that end after the Employee’s Program Eligibility Date.

 

9.                                       Section 5.01 (“Automatic Contributions”) is amended to read, in its entirety, as follows:

 

5.01                         Automatic Contributions.   For each Plan Year, an Automatic Contribution shall be credited to the Post-2004 Company Account for each Employee who is eligible for Automatic Contributions for the Plan Year 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 each payroll period that ends after the Employee’s Program Eligibility Date; 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 Plan Year.

 

Notwithstanding the foregoing, for purposes of calculating the Automatic Contributions payable to Employees in the Transition to Retirement program, the Employee’s Elective Deferrals and Excess 401(k) Eligible Pay shall be calculated based on the Employee’s actual Performance Pay, and the Base Pay the Employee would have received if the Employee had received a full-time rate of Base Pay for all portions of the Plan Year in which the Employee received a reduced rate of Base Pay.

 

10.                                Section 5.02 (“Transition Credits”) is deleted in its entirety. Sections 5.03 and 5.04 are re-numbered as Sections 5.02 and 5.03, respectively, and all cross-references thereto are modified accordingly.

 

11.                                Section 7.03 (“Applicable Company Contributions”) is amended by modifying the first sentence to read, in its entirety, as follows:

 

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 last day of the Plan Year in which the Participant terminates employment with the Company.

 

12.                                Article XII (“Claims Procedure”) is amended by adding the following paragraph at the end of the existing text:

 

Any limitations periods for filing claims in court that apply under the 401(k) Plan shall also apply under this Plan. This incorporation by reference is not intended to broaden the scope of the claims that are available under this Plan. For example, certain claims that may be pursued under the 401(k) Plan in certain circumstances (such as claims for breach of fiduciary duty) may not be pursued under this Plan.

 

5




Exhibit 10.2

 

IBM EXCESS 401(k) PLUS PLAN

(As Amended and Restated effective as of January 1, 2010)

 

AMENDMENT No. 2

 

Instrument of Amendment

 

Recitals:

 

International Business Machines Corporation (“IBM”) has established and maintains the IBM Excess 401(k) Plus Plan (the “Plan”), an unfunded deferred compensation plan described in Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (ERISA).

 

In accordance with Section 10.01 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, 2010.

 

IBM has determined to amend the Plan, as heretofore restated, in the manner set forth in this Instrument of Amendment, to be effective for Deferral Periods that begin on or after January 1, 2013, except as otherwise specified herein.

 

Amendment:

 

1.                                       Article II (“Definitions”) is amended by modifying the definition of “Company Contribution-Eligible Individual” to read, in its entirety, as follows:

 

“Company Contribution-Eligible Individual” generally means, with respect to a Plan Year, any individual who satisfies (a), (b), or (c) below:

 

(a) On December 15 of the Plan Year, the individual is employed by the Company, is on a U.S. payroll, and is not a Supplemental Employee; for this purpose, an individual (other than a Supplemental Employee) shall be treated as “employed” if the individual is on a leave of absence that is classified in the employer’s payroll records as a bridge leave, a pre-retirement planning leave, a paid or unpaid leave of absence, or a military leave.

 

(b) The individual terminates employment with the Company during the Plan Year due to Retirement.

 

(c) The individual terminates U.S. employment during the Plan Year due to participation in the Global IBMer program, or any successor thereto.

 

An individual shall not be a Company Contribution-Eligible Individual for a Plan Year if the individual terminates employment with the Company prior to December 15 of the Plan Year for any reason not described in (b) or (c) above, including death, or if the individual is receiving

 

1



 

LTD Benefits on December 15 of the Plan Year and did not satisfy the age and/or service requirements for Retirement on the date the LTD benefits commenced. Notwithstanding the general rules set forth in (a) through (c) above, if an individual terminates employment with the Company during the Plan Year for a reason not described in (b) or (c) above and is rehired by the Company later in the Plan Year, the individual shall be a Company Contribution-Eligible Individual for the Plan Year only for Company Contributions to which the individual is entitled for periods of service following the date of rehire, and only to the extent the individual satisfies (a), (b) or (c) above. For the avoidance of doubt, the individual would not be entitled to Company Contributions for the remainder of the Plan Year following the date of rehire if the individual’s termination was a 409A Separation from Service.

 

2.                                       Article II (“Definitions”) is amended by modifying the definition of “Retirement” to add the following sentence at the end of the existing text:

 

Retirement does not include a transfer to an affiliate of the Company that is not participating in the Plan, or death while employed by the Company, even if the Participant satisfies one of the above requirements prior to his or her transfer or death.

 

3.                                       Section 4.02 (“Matching Contributions”) is amended by adding the following paragraph at the end of the existing text:

 

If an Eligible Employee’s company matching contribution percentage under the 401(k) Plan changes during a Plan Year, and the Eligible Employee is eligible for Matching Contributions for the portion of the Plan Year before and/or after the change pursuant to the definition of “Company Contribution-Eligible Individual” and Section 3.02, the Eligible Employee’s Matching Contributions for each such portion of the Plan Year shall be calculated separately, in each case based solely on the Employee’s company matching contribution percentage, Elective Deferrals, and Excess 401(k) Eligible Pay for the applicable portion of the Plan Year.

 

4.                                       Section 5.01 (“Automatic Contributions”) is amended by adding the following paragraph at the end of the existing text:

 

If an Eligible Employee’s automatic contribution percentage under the 401(k) Plan changes during a Plan Year, and the Eligible Employee is eligible for Automatic Contributions for the portion of the Plan Year before and/or after the change pursuant to the definition of “Company Contribution-Eligible Individual” and Section 3.02, the Eligible Employee’s Automatic Contributions for each such portion of the Plan Year shall be calculated separately, in each case based solely on the Employee’s automatic contribution percentage, Elective Deferrals, and Excess 401(k) Eligible Pay for the applicable portion of the Plan Year.

 

2




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EXHIBIT 12

COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
(Unaudited)

 
  Years Ended December 31:  
(Dollars in millions)
  2012   2011   2010   2009   2008  

Income before income taxes(1)

  $ 21,914   $ 21,012   $ 19,737   $ 18,159   $ 16,742  

Add:

                               

Fixed charges, excluding capitalized interest

    1,593     1,576     1,499     1,667     2,021  
                       

Income as adjusted before income taxes

  $ 23,507   $ 22,588   $ 21,236   $ 19,826   $ 18,763  
                       

Fixed charges:

                               

Interest expense

  $ 1,004   $ 964   $ 923   $ 1,108   $ 1,461  

Capitalized interest

    18     9     5     13     15  

Portion of rental expense representative of interest

    589     612     576     559     560  
                       

Total fixed charges

  $ 1,611   $ 1,585   $ 1,504   $ 1,680   $ 2,036  
                       

Ratio of income to fixed charges

    14.6     14.3     14.1     11.8     9.2  

(1)
Income 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 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

21

Year in Review

26

Prior Year in Review

44

Other Information

55

Looking Forward

55

Liquidity and Capital Resources

56

Critical Accounting Estimates

59

Currency Rate Fluctuations

61

Market Risk

62

Financing Risks

62

Employees and Related Workforce

63

Global Financing

63

 

 

Report of Management

68

 

 

Report of Independent Registered Public Accounting Firm

69

 

 

Consolidated Financial Statements

 

 

 

Earnings

70

Comprehensive Income

71

Financial Position

72

Cash Flows

73

Changes in Equity

74

 

 

Notes to Consolidated Financial Statements

 

 

 

A

Significant Accounting Policies

76

B

Accounting Changes

86

C

Acquisitions/Divestitures

87

D

Financial Instruments

92

E

Inventories

98

F

Financing Receivables

99

G

Property, Plant and Equipment

102

H

Investments and Sundry Assets

102

I

Intangible Assets Including Goodwill

102

J

Borrowings

104

K

Other Liabilities

106

L

Equity Activity

107

M

Contingencies and Commitments

110

N

Taxes

113

O

Research, Development and Engineering

115

P

Earnings Per Share of Common Stock

116

Q

Rental Expense and Lease Commitments

116

R

Stock-Based Compensation

117

S

Retirement-Related Benefits

120

T

Segment Information

134

U

Subsequent Events

138

 

 

 

Five-Year Comparison of Selected Financial Data

139

 

 

Selected Quarterly Data

140

 

 

Performance Graph

141

 

 

Board of Directors and Senior Leadership

142

 

 

Stockholder Information

143

 

17



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Overview

 

The financial section of the International Business Machines Corporation (IBM or the company) 2012 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 to 21, presents an overview of the key performance drivers in 2012.

 

·                   Beginning with the “Year in Review” on page 26, 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 page 55, and “Liquidity and Capital Resources” on pages 56 through 58.

 

·                   Global Financing is a reportable segment that is measured as a stand-alone entity. A separate “Global Financing” section is included beginning on page 63.

 

·                   The Consolidated Financial Statements are presented on pages 70 through 75. 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 76 to 86), acquisitions and divestitures (pages 87 through 91), detailed information on specific items within the financial statements, certain contingencies and commitments (pages 110 to 113) and retirement-related benefits information (pages 120 to 134).

 

·                   The Consolidated Financial Statements and the Notes have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).

 

·                   The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. Certain financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior year period’s currency conversion rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. See “Currency Rate Fluctuations” on page 61 for additional information.

 

·                   Within the financial statements and 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.

 

Operating (non-GAAP) Earnings

 

In an effort to provide better transparency into the operational results of the business, the company separates business results into operating and non-operating categories. Operating earnings is a non-GAAP measure that excludes the effects of certain acquisition-related charges and retirement-related costs, and their related tax impacts. For acquisitions, operating earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable restructuring and related expenses and tax charges related to acquisition integration. For retirement-related costs, the company characterizes certain items as operating and others as non-operating. The company includes defined benefit plan and nonpension postretirement benefit plan service cost, amortization of prior service cost and the cost of defined contribution plans in operating earnings. Non-operating retirement-related cost includes defined benefit plan and nonpension postretirement benefit plan interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and multi-employer plan costs, pension insolvency costs and other costs. Non-operating costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance and the company considers these costs to be outside the operational performance of the business.

 

Overall, the company believes that providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. For its 2015 earnings per share road map, the company is utilizing an operating view to establish its objectives and track its progress. The company’s reportable segment financial results reflect operating earnings, consistent with the company’s management and measurement system.

 

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. Any forward-looking statement in this Annual Report speaks only as of the date on which it is made; the company assumes no obligation to update or revise any such statements. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance; these statements, by their nature, address matters that are uncertain to different degrees. Forward-looking 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 2012 Form 10-K filed on February 26, 2013.

 

18



 

Management Discussion Snapshot

 

($ and shares in millions except per share amounts)

 

For the year ended December 31:

 

2012

 

2011

 

Yr.-to-Yr. 
Percent/ 
Margin 
Change

 

Revenue

 

$

104,507

 

$

106,916

 

(2.3

)%*

Gross profit margin

 

48.1

%

46.9

%

1.2

pts.

Total expense and other income

 

$

28,396

 

$

29,135

 

(2.5

)%

Total expense and other income-to-revenue ratio

 

27.2

%

27.3

%

(0.1)

pts.

Income before income taxes

 

$

21,902

 

$

21,003

 

4.3

%

Provision for income taxes

 

5,298

 

5,148

 

2.9

%

Net income

 

$

16,604

 

$

15,855

 

4.7

%

Net income margin

 

15.9

%

14.8

%

1.1

pts.

Earnings per share of common stock

 

 

 

 

 

 

 

Assuming dilution

 

$

14.37

 

$

13.06

 

10.0

%

Weighted-average shares outstanding

 

 

 

 

 

 

 

Assuming dilution

 

1,155.4

 

1,213.8

 

(4.8

)%

Assets**

 

$

119,213

 

$

116,433

 

2.4

%

Liabilities**

 

$

100,229

 

$

96,197

 

4.2

%

Equity**

 

$

18,984

 

$

20,236

 

(6.2

)%

 


*

0.0 percent adjusted for currency.

**

At December 31.

 

The following table provides the company’s operating (non-GAAP) earnings for 2012 and 2011.

 

($ in millions except per share amounts)

 

For the year ended December 31:

 

2012

 

2011

 

Yr.-to-Yr. 
Percent 
Change

 

Net income as reported

 

$

16,604

 

$

15,855

 

4.7

%

Non-operating adjustments (net of tax)

 

 

 

 

 

 

 

Acquisition-related charges

 

641

 

495

 

29.5

 

Non-operating retirement-related costs/(income)

 

381

 

(32

)

NM

 

Operating (non-GAAP) earnings*

 

$

17,627

 

$

16,318

 

8.0

%

Diluted operating (non-GAAP) earnings per share

 

$

15.25

 

$

13.44

 

13.5

%

 


NM—Not meaningful

* See page 38 for a more detailed reconciliation of net income to operating earnings.

 

In 2012, the company reported revenue of $104.5 billion, expanded gross, pre-tax and net income margins, and delivered diluted earnings per share growth of 10.0 percent as reported and 13.5 percent on an operating (non-GAAP) basis. This was the 10th consecutive year of double-digit earnings per share growth for the company. The company generated $19.6 billion in cash from operations, and $18.2 billion in free cash flow driving shareholder returns of $15.8 billion in gross common stock repurchases and dividends. The free cash flow performance in 2012 was $12.3 billion greater than the company generated in 2002. The financial results demonstrate the strength and flexibility of the company’s business model, which is designed to deliver profit and cash on a sustained basis.

 

The company continued to deliver value to its clients and capitalize on key trends in 2012. The company had strong performance in business analytics, cloud and Smarter Planet—key growth initiatives that leverage the software portfolio and contribute to margin expansion. Within the growth markets, the company continued to expand its capabilities and build out IT infrastructures in emerging markets. In 2012, the growth markets revenue growth rate at constant currency outpaced the major markets by 8 points. The company continues to invest for innovation and technological leadership. These investments supported the introduction of the new System z mainframe, storage and POWER7+ products in hardware, as well as a series of major launches across software that included more than 400 new or upgraded product announcements. The introduction of PureSystems, a new category of expert integrated systems, brings together hardware and software and provides built-in expertise to deliver a more efficient and effective solution to the company's clients. In addition, the company was awarded more U.S. patents in 2012 than any other company for the 20th consecutive year with many of the patents this year in key areas such as business analytics, Big Data, cybersecurity, cloud, mobile, social networking and software-defined environments.  The company also continued to add to its capabilities to support the growth initiatives by acquiring 11 companies in 2012— investing approximately $4 billion. At the same time, the company divested its Retail Store Solutions (RSS) business as it focused the Smarter Commerce portfolio on higher value, intellectual property-based opportunities. Throughout the year, the company continued the transformation of the business—shifting to higher value areas and improving its structure—resulting in a higher quality revenue stream and margin expansion.

 

Segment performance was led by Software which increased revenue 2.0 percent (4 percent adjusted for currency) driven by key branded middleware which increased 2.9 percent (5 percent adjusted for currency). Global Services revenue decreased 2.3 percent as reported, but was up 0.4 percent on a constant currency basis. Global Services revenue performance was led by the growth markets which were up 4.8 percent (9 percent adjusted for currency) and now represents more than 20 percent of total Global Services revenue. Systems and Technology revenue decreased 6.9 percent; adjusting for the divested RSS business, revenue declined 5.1 percent (4 percent adjusted for currency). The company’s new mainframe was well received in the market, with System z revenue increasing 5.4 percent (6 percent adjusted for currency) versus the prior year. Global Financing revenue decreased 4.2 percent as reported, 1 percent on a constant currency basis, compared to the prior year.

 

        Across all of the segments, the company continued to have strong performance in its key growth initiatives. These are not stand-alone offerings; they are integrated into the overall client offerings and are included in the financial results of the segments. In the growth markets, revenue increased 4.2 percent (7 percent adjusted for currency) year to year and represented 24 percent of total geographic revenue, an increase of 8 points since 2006. The company has been successful in capturing the opportunity in these faster growing markets. The company’s business analytics initiative continues to expand. The company has made significant strides and expanded its leadership in a number of strategic areas

 

19



 

including Risk Management, Price and Promotion Optimization and Sales Performance Management. The value proposition in business analytics uniquely leverages the integration between the software portfolio and the Global Business Services (GBS) consulting expertise. In 2012, business analytics revenue increased 13 percent compared to the prior year, led by the GBS consulting practice. Within cloud computing, the company’s SmartCloud portfolio addresses the full scope of enterprise client requirements. In 2012, the company continued to see strong demand for the foundational offerings in hardware and software that help clients build and run their private clouds, as well as for cloud-based solutions, like the company’s Software as a Service (SaaS) offerings. With strong global growth, cloud revenue for 2012 increased 80 percent compared to the prior year. The Smarter Planet growth initiative expanded significantly in the past year—measured in terms of offerings, markets, clients and revenue performance. Clients are leveraging the company’s growing capabilities in areas like: Smarter Commerce, Social Business and Smarter Cities, and in next generation systems, like Watson, which are helping clients with their complex challenges. For the year, Smarter Planet solutions generated revenue growth of over 25 percent versus the prior year. Overall, within the offerings in business analytics, cloud and Smarter Planet, approximately half of the revenue is software. Therefore, as these offerings become a larger percentage of total revenue, they are driving the higher quality revenue stream and improved mix and margins.

 

The consolidated gross profit margin increased 1.2 points versus 2011 to 48.1 percent. This was the ninth consecutive year of improvement in the gross profit margin. The operating (non-GAAP) gross margin of 48.7 percent increased 1.5 points compared to the prior year. The increase in gross margin in 2012 was driven by margin improvements in Software and both Global Services segments, and an improved revenue mix driven by Software.

 

Total expense and other income decreased 2.5 percent in 2012 versus the prior year. Total operating (non-GAAP) expense and other income decreased 3.9 percent compared to the prior year. The year-to-year drivers were approximately:

 

 

 

Total

 

Operating

 

 

Consolidated

 

(non-GAAP)

·                   Currency*

 

(5) points

 

(5) points

·                   Acquisitions**

 

3 points

 

2 points

·                   Base expense

 

(0) points

 

(2) points

 


* Reflects impacts of translation and hedging programs.

** Includes acquisitions completed in prior 12-month period.

 

Pre-tax income grew 4.3 percent and the pre-tax margin was 21.0 percent, an increase of 1.3 points versus 2011. Net income increased 4.7 percent and the net income margin was 15.9 percent, an increase of 1.1 points versus 2011. The effective tax rate for 2012 was 24.2 percent compared with 24.5 percent in the prior year. Operating (non-GAAP) pre-tax income grew 7.3 percent and the operating (non-GAAP) pre-tax margin was 22.2 percent, an increase of 2.0 points versus the prior year. Operating (non-GAAP) net income increased 8.0 percent and the operating (non-GAAP) net income margin of 16.9 percent increased 1.6 points versus the prior year. The operating (non-GAAP) effective tax rate was 24.0 percent versus 24.5 percent in 2011.

 

Diluted earnings per share improved 10.0 percent year to year reflecting the growth in net income and the benefits of the common stock repurchase program. In 2012, the company repurchased approximately 61 million shares of its common stock. Diluted earnings per share of $14.37 increased $1.31 from the prior year. Operating (non-GAAP) diluted earnings per share of $15.25 increased $1.81 versus 2011 driven by the following factors:

 

·                   Revenue decrease at actual rates

 

$

(0.30

)

·                   Margin expansion

 

$

1.38

 

·                   Common stock repurchases

 

$

0.73

 

 

At December 31, 2012, the company’s balance sheet and liquidity positions remained strong and were well positioned to support the company’s objectives. Cash and marketable securities at year end was $11,128 million. Key drivers in the balance sheet and total cash flows are highlighted below.

 

Total assets increased $2,780 million ($3,242 million adjusted for currency) from December 31, 2011 driven by:

 

·                   Increases in total receivables ($3,053 million), goodwill ($3,034 million), marketable securities ($717 million) and intangible assets ($395 million), partially offset by

·                   Decreases in prepaid pension assets ($1,899 million), cash and cash equivalents ($1,511 million) and prepaid expenses and other current assets ($1,224 million).

 

Total liabilities increased $4,032 million ($4,511 million adjusted for currency) from December 31, 2011 driven by:

 

·                   Increased retirement and nonpension postretirement benefit obligations ($2,044 million), total debt ($1,949 million), taxes ($1,635 million) and total deferred income ($399 million), partially offset by

·                   Decreases in other liabilities ($1,389 million) and accounts payable ($565 million).

 

Total equity of $18,984 million decreased $1,252 million from December 31, 2011 as a result of:

 

·                   Increased treasury stock ($12,168 million) driven by share repurchases and increased losses in accumulated other comprehensive income/(loss) of ($3,874 million) driven by pension remeasurements, partially offset by

·                   Higher retained earnings ($12,783 million) and common stock ($1,980 million).

 

The company generated $19,586 million in cash flow provided by operating activities, a decrease of $260 million when compared to 2011, primarily driven by a decrease in cash due to receivables ($1,290 million) and an increased use of cash for accounts payable ($675 million), partially offset by a decrease in net taxes paid ($999 million) and the increase in net income ($749 million). Net cash used in investing activities of $9,004 million was $4,608 million higher than 2011, primarily due to an increase in cash used of $2,719 million associated with net purchases and sales of marketable securities

 

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and other investments, increased cash used for acquisitions ($1,911 million) and increased net capital investments ($248 million), partially offset by increased cash from divestitures ($585 million). Net cash used in financing activities of $11,976 million was $1,719 million lower, compared to 2011, primarily due to lower cash used for common stock repurchases ($3,051 million), partially offset by lower cash provided by common stock transactions ($914 million) and increased dividend payments ($300 million).

 

In January 2013, the company disclosed that it is expecting GAAP earnings of at least $15.53 and operating (non-GAAP) earnings of at least $16.70 per diluted share for the full year 2013.

 

For additional information and details, see the “Year in Review” section on pages 26 through 43. For additional information regarding 2002 free cash flow, see the company’s Form 8-K filed with the SEC on January 22, 2013.

 

Description of Business

 

Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 26, 2013 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 strong performance, with a steady track record of sustained earnings per share growth and cash generation. The company has shifted its business mix, exiting certain 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 more than 140 companies since 2000, complementing and scaling its portfolio of products and offerings.

 

IBM’s strategy of delivering high value solutions to enterprise clients has yielded consistent business results. Working with enterprise clients across the full spectrum of their business and technical opportunities, IBM delivers leadership innovation in technology, high value solutions and insights that improve client and industry outcomes. A highly engaged, global workforce with deep technical and business skills, teamed with an unmatched ecosystem of partners provides a world-class client experience.

 

These priorities reflect a broad shift in client spending toward innovation and efficiency, 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, sustained investment in core and applied research and development (R&D), global reach and the breadth and depth of the company’s capabilities.

 

New types of solutions, new market opportunities and new decision makers are emerging as clients look to make use of technology to generate innovation and competitive advantage. These opportunities are driven by a new era of computing that is enabled by analytics, cloud computing, Big Data, mobility, social computing and supported by enterprise grade security solutions. The company’s strategy is to establish leadership in this new era of smarter computing — computing that is designed for Big Data, built on software-defined environments and open — in order to enhance the value we deliver, create new markets and engage new clients.

 

To capture the opportunities arising from these market trends, IBM is focused on four key growth initiatives: Smarter Planet, Growth Markets, Business Analytics and Optimization and Cloud Computing. Each initiative represents a significant growth opportunity with attractive profit margins for IBM.

 

Smarter Planet

 

Smarter Planet is IBM’s vision of a technology-enabled world that is more instrumented, interconnected and intelligent than ever before, enabling people and organizations to tackle significant business and societal challenges. At the heart of this vision is the opportunity for meaningful innovation—exploring and extending the boundaries of businesses, industries and communities. It’s about helping the company’s clients become better at what they do for their clients. IBM’s strategy is to accelerate progress toward a “smarter planet” by equipping clients with the advanced, integrated capabilities they need to thrive in this exciting new world that is unfolding before us—capabilities such as analytics for business and physical systems, business process management, social business, mobile computing and cloud computing.

 

IBM has continued to deepen its commitment to understanding and delivering on the promise of Smarter Planet for both line of business and IT executives across a broad range of industries. An industry-based approach is central to the strategy, since every industry confronts a distinct set of challenges and opportunities in today’s constantly transforming world. Whether “smarter” means helping a hospital group to deliver improved healthcare, a local government to ease traffic congestion, or a retail chain to execute a successful cross-channel campaign, IBM is aggressively developing and investing in a portfolio of industry solutions that helps these clients achieve their goals.

 

Three initiatives that drive significant value illustrate IBM’s deep commitment to building a smarter planet: Smarter Commerce, Smarter Cities and Social Business. IBM’s Smarter Commerce model integrates and transforms how companies manage and adapt their buy, market, sell and service processes, placing the customer squarely at the center of their business. IBM’s Smarter Cities initiative enables federal, state and local governments to make smarter decisions, anticipate issues and coordinate resources more effectively, while delivering citizen-centric services that underpin sustainable economic growth. IBM’s Social Business initiative helps clients integrate social technologies and practices into their front-end processes to more effectively create and share knowledge to accelerate innovation, improve customer service, and build a smarter workforce.  Each of these initiatives is powered by market-leading IBM innovations and software, developed both by IBM and through acquisitions.

 

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Growth Markets

 

The company has benefited from its investments over the past several years in the growth markets. The focus now is on geographic expansion of IBM’s presence; on selected industries of the highest impact and opportunity; on countries’ build-outs 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. The company’s effort in developing new growth markets within the African continent is a good example of this focus. Many of these initiatives are leading-edge, both in technologies and business models, and are delivering both increased revenue and margin expansion.

 

In order to support this growth, IBM continues to invest significantly in these markets to expand capacity, to develop talent and to deepen its R&D capabilities on the ground. At the same time, IBM continues to leverage talent across the growth markets under its globally integrated enterprise model to the benefit of both its clients and the company worldwide.

 

Business Analytics and Optimization

 

Business Analytics and Optimization (BAO) is the category of software, systems and services that help organizations take advantage of all the data available to them for better and faster decision making and process optimization. This includes data that is being labeled “Big Data,” which is data of extreme volume, data being generated at a high velocity, and newer varieties of data like blogs, tweets, pictures, videos, unstructured text created by the explosion of social media websites and the instrumentation of nearly everything. BAO is core to achieving a smarter planet, helping leaders of this new information-centric and insight-driven world infuse intelligence into their business processes.

 

Smarter Analytics is IBM’s unique offering for the BAO category. With Smarter Analytics and the company’s deep expertise, IBM can help organizations: 1) grow, retain and satisfy customers through deep insight on individual customers and similar segments; 2) increase operational efficiency through, for example, supply chain optimization, predictive maintenance, fraud reduction and optimization of sales incentives and compensation; 3) transform their financial processes such as planning, budgeting, forecasting, financial consolidation, regulatory filing and financial reporting; and 4) better manage risk and regulatory compliance.

 

The company’s approach to analytics is to ensure clients have complete end-to-end solutions across industries and functional focus areas like finance, sales, marketing, operations and risk. These solutions are designed to help organizations: 1) align around all their data—both traditional and big data—and establish a strong information foundation; 2) apply analytics to their data so they can anticipate and shape business outcomes, identify patterns and gain insights into future performance; 3) enable workers on the front lines who collectively make thousands and even millions of decisions daily with insight that is immediately actionable so they can make the best possible decision—decisions like what claims to fast track in an insurance call center, or what offer is the best for each individual customer who calls a call center; and 4) create a culture that takes action on analytics and that truly transforms.

 

IBM is committed to continually innovating across the spectrum of analytic capabilities, systems, research, services, deployment and skills. For example, in 2012, the game changing innovations in Watson were applied to Healthcare and Financial Services, analytic research like the ground-breaking work being done on temporal causal modeling and visualization, and investments in analytic skills and deployment ability in our new Analytics research centers in Columbus, Ohio and Halifax, Nova Scotia.

 

Cloud Computing

 

Cloud is a model for consuming and delivering business and IT services. It can deliver significant economies, enable new levels of speed, flexibility and agility and even serve as a transformative platform for business innovation. From a business perspective, cloud computing is reshaping industry ecosystems, invigorating product innovation and enabling new business models that leverage new sources of competitive differentiation. From an IT perspective, cloud offers improved access to and utilization of information technology through use of highly efficient virtualization and management technology, consumer-style user interfaces and ubiquitous connectivity, including via mobile technologies.

 

IBM has already helped thousands of its clients adopt and leverage cloud computing through its broad portfolio of IBM SmartCloud products, solutions and services. Organizations moving beyond initial exploration of cloud computing seek solutions that align with their specific needs. IBM’s breadth of cloud capabilities gives it a unique ability to help clients exploit the advantages of cloud. IBM has cloud solutions that span infrastructure, platform, applications and business process services all geared to enable clients to drive significant business value through the rapid adoption and exploitation of new cloud capabilities. IBM’s expert consulting, breakthrough technologies and a portfolio of cloud-based services are squarely focused on the requirements of the enterprise.

 

The company offers a full array of cloud delivery models, including private clouds, public clouds and a hybrid of both. IBM helps build out private, on-premises cloud-based environments that provide the control, security and isolation that clients require for their most mission-critical workloads. IBM public clouds provide infrastructure, platforms and applications as rapidly provisioned and highly-scalable cloud services on a pay-as-you-go basis. Hybrid clouds provide seamless integration across private and public cloud models, ensuring the interoperability, portability and scalability that clients need to realize the full value of cloud.

 

Business Model

 

The company’s business model is built to support two principal goals: helping clients to become more innovative, efficient and competitive through the application 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 superior 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 integrated solutions to the company’s clients.

 

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The business model is resilient, adapting to the continuously changing market and economic environment. The company continues to divest certain businesses and strengthen its position through strategic organic 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 expanding participation in the world’s fastest growing markets.

 

This business model, supported by the company’s financial model, has enabled the company to deliver strong earnings, cash flows and returns to shareholders over the long term.

 

Business Segments and Capabilities

 

The company’s major operations consists of five business segments: Global Technology Services and Global Business Services, which the company collectively calls Global Services, and Software, Systems and Technology and Global Financing.

 

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 and maintenance 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 and business process services, creating business value for clients through unique technology and IP integrated services within its global delivery model. By leveraging insights and experience drawn from IBM’s global scale, skills and technology, with applied innovation from IBM Research, clients gain access to leading-edge, high-quality services with improved productivity, flexibility, cost and outcomes.

 

GTS Capabilities

 

Strategic Outsourcing Services: delivers comprehensive IT outsourcing services dedicated to transforming clients’ existing infrastructures to consistently deliver improved quality, flexibility, risk management and financial value. The company integrates longstanding expertise in service management and technology with the ability to exploit the power of new technologies from IBM systems and software, such as cloud computing, analytics and virtualization, to deliver high performance, innovation and improved ability to achieve business objectives.

 

Global Process Services: delivers a range of offerings consisting of standardized through transformational solutions including processing platforms and business process outsourcing. These services 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: delivers a portfolio of project-based and managed services that enable clients to transform and 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.

 

Technology Support Services: delivers a complete line of support services from product maintenance through solution support to maintain and improve the availability of clients’ IT infrastructures.

 

Global Business Services (GBS) has the mission to deliver predictable business outcomes to the company’s clients across two primary business areas: Consulting and Application Management Services. These professional services deliver business value and innovation to clients through solutions which leverage industry and business process expertise. The role of GBS is to drive initiatives that integrate IBM content and solutions and drive the progress of the company’s four primary growth initiatives.

 

As clients transform themselves in response to market trends like Big Data, social and mobile computing, GBS is aligning its expertise and capabilities to address two interdependent categories of opportunity: Front Office Digitization, which describes the markets forming around new models of engagement with all audiences; and the Globally Integrated Enterprise, which describes the mandate to integrate data and processes in support of the new front-office programs, and build far more flexible information applications.

 

GBS Capabilities

 

Consulting: delivering client value with solutions in Strategy and Transformation; Application Innovation Services; Enterprise Applications and Smarter Analytics. Consulting is also focused on bringing to market client solutions that drive Front Office Digitization in Smarter Commerce, Cloud, Mobile and Social Business.

 

Application Management Services: application management, maintenance and support services for packaged software, as well as custom and legacy applications. Value is delivered through advanced capabilities in areas such as application testing and modernization, cloud application services, the company’s highly differentiated globally integrated capability model, industry knowledge and the standardization and automation of application management.

 

Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform to improve their business results, solve critical problems and gain competitive advantage within their industries. 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 post-contract support. The remaining one-third relates to one-time charge (OTC) arrangements in which clients pay one, up-front payment for a perpetual license. Typically, the sale of OTC software includes one year of post-contract support. Clients can also purchase ongoing post-contract support after the first year, which includes unspecified product upgrades and technical support.

 

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Software Capabilities

 

WebSphere Software: delivers capabilities that enable organizations to run high-performance business applications. With these applications, clients can integrate and manage business processes across their organizations with the flexibility and agility they need to respond to changing conditions. Built on services-oriented architecture (SOA), and open standards support for cloud, mobile and social interactions, the WebSphere platform enables enterprises to extend their reach and optimize interactions with their key constituents. Smarter Commerce software helps companies better manage and improve each step of their value chain and capitalize on opportunities for profitable growth, efficiency and increased customer loyalty.

 

Information Management Software: enables clients to integrate, manage and analyze enormous amounts of data from a large variety of sources in order to gain competitive advantage and improve their business outcomes. With this approach, clients can extract real value out of their data and use it to make better business decisions. IBM’s middleware and integrated solutions include advanced database management, information integration, data governance, enterprise content management, data warehousing, business analytics and intelligence, predictive analytics and big data analytics.

 

Tivoli Software: helps clients optimize the value they get from their infrastructures and technology assets through greater visibility, control and automation across their end-to-end business operations. These asset management solutions foster integrated service delivery for cloud and datacenter management, enterprise endpoint and mobile device management, asset and facilities management, and storage management. Tivoli includes security systems software that provides clients with a single security intelligence platform that enables them to better secure all aspects of their enterprise and prevent security breaches.

 

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, IBM’s social business offerings help organizations reap real benefits associated with social networking, as well as create a more efficient and effective workforce.

 

Rational Software: supports software development for both IT, as well as complex and embedded system solutions, with a suite of Collaborative Lifecycle Management products. Jazz, Rational’s technology platform, transforms the way people work together to build software, making software delivery more integrated and collaborative, while optimizing for successful business outcomes.

 

Operating Systems: software that manages the fundamental processes that make computers run.

 

Systems and Technology (STG) provides clients with business solutions requiring advanced computing power and storage capabilities. Approximately half of Systems and Technology’s server and storage sales transactions are through the company’s business partners; with the balance direct to end-user clients. In addition, Systems and Technology provides leading semiconductor technology, products and packaging solutions for IBM’s own advanced technology needs and for external clients.

 

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—System z, Power Systems 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 PureSystems, IBM Smart Analytics, IBM Netezza, IBM SmartCloud Entry and IBM BladeCenter for Cloud. 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: 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, security, compliance and storage optimization including data deduplication, availability and virtualization. The portfolio consists of a broad range of disk and tape storage systems and software.

 

Microelectronics: semiconductor design and manufacturing primarily for use in IBM systems and storage products as well as delivering semiconductors and related services 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 one 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.

 

Remanufacturing and Remarketing: as equipment is returned at the conclusion of a lease transaction, these assets are refurbished and sold or leased to new or existing clients both externally and internally. Externally remarketed equipment revenue represents sales or leases to clients and resellers. Internally remarketed equipment revenue primarily represents used equipment that is sold internally to Systems and Technology and Global Services. Systems and Technology may also sell the equipment that it purchases from Global Financing to external clients.

 

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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

·     Enterprise Transformation

·     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, Inside Sales and local Business Partner resources.

 

Through its growth markets organization, the company continues 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 G7 countries of Canada, France, Germany, Italy, Japan, the United States (U.S.) and the United Kingdom (UK) plus Austria, the Bahamas, Belgium, the Caribbean region, Cyprus, Denmark, Finland, Greece, Iceland, Ireland, Israel, Malta, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.

 

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: Cross-sector representation of intermediate-sized large enterprises as well as mid-market clients (less than 1,000 employees)

 

Research, Development and Intellectual Property

 

IBM’s R&D operations differentiate the company from its competitors. IBM annually invests over $6 billion for R&D, focusing on high-growth, high-value opportunities.

 

IBM Research works with clients and the company’s business units through 12 global labs on near-term and mid-term innovations. It contributes many new technologies to IBM’s portfolio every year and helps clients address their most difficult challenges. IBM Research also explores the boundaries of science and technology— from nanotechnology, to future systems, to big data analytics, to secure clouds, to IBM Watson, a “cognitive” learning system that applied advanced analytics to defeat the all-time champions on the television quiz show, Jeopardy!. The Watson system is being introduced to the market for advanced healthcare applications and is being further developed and extended within healthcare and in other industries.

 

IBM Research also focuses on differentiating IBM’s services businesses providing new capabilities and solutions. It has the world’s largest mathematics department of any public company, enabling IBM to create unique analytic solutions and actively engage with clients on their toughest challenges.

 

In 2012, IBM was awarded more U.S. patents than any other company for the 20th consecutive year. IBM’s 6,478 patents in 2012 included inventions that will enable fundamental advancements in analytics, big data, cybersecurity, cloud, mobile, social networking and software defined environments, as well as industry solutions for retail, banking, healthcare and transportation. It was the most U.S. patents ever awarded to one company in a single year.

 

The company continues to actively seek intellectual property protection for its innovations, while increasing emphasis on other initiatives designed to leverage its intellectual property leadership. 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.

 

Enterprise Transformation

 

A key element of the company’s strategy has been focused on becoming the premier globally integrated enterprise. The company has implemented a consistent set of processes and standards worldwide to reduce inefficiencies and improve collaboration. With its processes fully standardized, the company implemented a new operating model with work shared in global resource centers of excellence located where it made the most business sense. The company has shifted resources toward building client relationships and employee skills, while positioning the company for new market opportunities. During this transformation, IBM pioneered this new operating model, changing from a classic “multinational,” with smaller versions of the parent company replicated in countries around the world, to a global model with one set of processes, shared services and broadly distributed decision making.

 

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The company has now embarked on the next generation of its transformation in which new capabilities and technologies like business analytics and cloud computing will drive performance. The proven principles of the globally integrated enterprise will be applied to all of the company’s spending to continue to drive additional productivity benefits in shared services, end-to-end process transformation and integrated operations. The company primarily reinvests the benefits of its enterprise transformation initiatives in remixing its spending profile and resources to the higher growth, higher margin initiatives such as business analytics, Smarter Planet and cloud computing, in addition to improving profitability.

 

Integrated Supply Chain

 

IBM spends approximately $35 billion annually through its supply chain, procuring materials and services globally. In addition, in 2012, the company managed approximately $20 billion in procurement spending for its clients through the Global Process Services organization. The supply, manufacturing, and logistics and customer fulfillment operations are integrated in one operating unit that has optimized inventories over time. Simplifying and streamlining internal processes has improved sales force productivity and operational effectiveness and efficiency. Continuous improvements to supply chain resiliency against marketplace changes and risks have been particularly valuable in maintaining continuity during natural disasters and other disruptive events.

 

The company’s continuing efforts to derive business value from its own globally integrated supply chain provides 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.

 

Increasingly the company is using analytics to measure, manage and fine tune its supply chain operations, which will help to reshape its operations and create value for clients. The goal is to continue to increase the use of analytics in the five major areas of supply chain: 1) Supply Chain Visibility, 2) Risk Management, 3) Customer Insight, 4) Cost Containment, and 5) Global Supply Chain and Sustainability.

 

Year in Review

 

Segment Details

 

The following is an analysis of the 2012 versus 2011 reportable segment results. The table below presents each reportable segment’s external revenue and gross margin results.

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/
Margin

 

Percent Change
Adjusted for

 

For the year ended December 31:

 

2012

 

2011

 

Change

 

Currency

 

Revenue

 

 

 

 

 

 

 

 

 

Global Technology Services

 

$

40,236

 

$

40,879

 

(1.6

)%

1.3

%

Gross margin

 

36.6

%

35.0

%

1.6

pts.

 

 

Global Business Services

 

18,566

 

19,284

 

(3.7

)%

(1.6

)%

Gross margin

 

30.0

%

28.8

%

1.2

pts.

 

 

Software

 

25,448

 

24,944

 

2.0

%

4.3

%

Gross margin

 

88.7

%

88.5

%

0.2

pts.

 

 

Systems and Technology

 

17,667

 

18,985

 

(6.9

)%

(5.9

)%

Gross margin

 

39.1

%

39.8

%

(0.7

)pts.

 

 

Global Financing

 

2,013

 

2,102

 

(4.2

)%

(1.2

)%

Gross margin

 

46.5

%

49.8

%

(3.3)

pts.

 

 

Other

 

577

 

722

 

(20.1

)%

(18.7

)%

Gross margin

 

(71.6

)%

(54.5

)%

(17.1

)pts.

 

 

Total consolidated revenue

 

$

104,507

 

$

106,916

 

(2.3

)%

0.0

%

 

 

 

 

 

 

 

 

 

 

Total consolidated gross profit

 

$

50,298

 

$

50,138

 

0.3

%

 

 

Total consolidated gross margin

 

48.1

%

46.9

%

1.2 

pts.

 

 

Non-operating adjustments

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

375

 

340

 

10.3

%

 

 

Acquisition-related charges

 

1

 

1

 

13.1

 

 

 

Retirement-related costs/(income)

 

264

 

2

 

NM

 

 

 

Operating (non-GAAP) gross profit

 

$

50,938

 

$

50,481

 

0.9

%

 

 

Operating (non-GAAP) gross margin

 

48.7

%

47.2

%

1.5

pts.

 

 

 

NM—Not meaningful

 

26


 

The 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:

 

2012

 

2011

 

2012

 

2011

 

Global Technology Services

 

38.7

%

38.5

%

29.0

%

27.4

%

Global Business Services

 

17.9

 

18.2

 

12.4

 

13.1

 

Total Global Services

 

56.6

 

56.7

 

41.4

 

40.6

 

Software

 

24.5

 

23.5

 

45.0

 

43.5

 

Systems and Technology

 

17.0

 

17.9

 

5.1

 

7.1

 

Global Financing

 

1.9

 

2.0

 

8.5

 

8.8

 

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 T, “Segment Information,” on pages 134 to 138 for additional information.

 

Global Services

 

In 2012, the Global Services segments, Global Technology Services (GTS) and Global Business Services (GBS), delivered revenue of $58,802 million, grew pre-tax profit 7 percent and expanded pre-tax margin 1.5 points on an as-reported basis. Revenue performance was led by strength in the growth markets which were up 4.8 percent (9 percent adjusted for currency) and now represents over 20 percent of total Global Services revenue. Revenue from the major markets declined 4.0 percent (2 percent adjusted for currency) year to year. The services segments also had strength in all the key growth initiatives, which are becoming a larger part of the services business as the company continues to shift toward higher value content. Total outsourcing revenue of $27,552 million decreased 2.6 percent (flat adjusted for currency) and total transactional revenue of $23,907 million decreased 1.8 percent (flat adjusted for currency) year to year.

 

($ in millions)

 

For the year ended December 31:

 

2012

 

2011

 

Yr.-to-Yr. 
Percent 
Change

 

Yr.-to-Yr.
Percent Change
Adjusted for
Currency

 

Global Services external revenue

 

$

58,802

 

$

60,163

 

(2.3

)%

0.4

%

Global Technology Services

 

$

40,236

 

$

40,879

 

(1.6)%

 

1.3

%

Outsourcing

 

23,344

 

23,911

 

(2.4

)

0.5

 

Integrated Technology Services

 

9,550

 

9,453

 

1.0

 

3.7

 

Maintenance

 

7,343

 

7,515

 

(2.3

)

0.6

 

Global Business Services

 

$

18,566

 

$

19,284

 

(3.7

)%

(1.6

)%

Outsourcing

 

4,209

 

4,390

 

(4.1

)

(1.7

)

Consulting and Systems Integration

 

14,358

 

14,895

 

(3.6

)

(1.6

)

 

27



 

Global Technology Services revenue of $40,236 million in 2012 decreased 1.6 percent as reported, but increased 1 percent adjusted for currency year to year. Revenue growth from the backlog was partially offset by a decline in revenue from new signings and a decrease in sales in existing accounts. Revenue performance was led by the growth markets which were up 5.0 percent (9 percent adjusted for currency). GTS Outsourcing revenue decreased 2.4 percent as reported, but increased 1 percent adjusted for currency in 2012. Outsourcing revenue from the growth markets increased 2.4 percent (7 percent adjusted for currency), as the outsourcing offerings help clients build out their IT infrastructures. Integrated Technology Services (ITS) revenue increased 1.0 percent (4 percent adjusted for currency) in 2012 compared to 2011, and continued to be led by strength in the growth markets which increased 10.3 percent (13 percent adjusted for currency).

 

Global Business Services revenue of $18,566 million decreased 3.7 percent (2 percent adjusted for currency) in 2012. On a geographic basis, solid performance in the growth markets, with revenue up 4.3 percent (8 percent adjusted for currency), was offset by a 5.1 percent decline (3 percent adjusted for currency) in the major markets. The growth initiatives—business analytics, Smarter Planet and cloud had solid double-digit revenue growth, and represented over one-third of total GBS revenue in 2012. As GBS shifts more of its business to higher value content, these larger, more complex engagements are having a positive effect on the GBS backlog. The GBS backlog grew for the fourth consecutive year at constant currency—although the backlog is mixing to longer duration engagements. Application Outsourcing revenue decreased 4.1 percent (2 percent adjusted for currency) in 2012 year to year, and Consulting and Systems Integration (C&SI) revenue decreased 3.6 percent (2 percent adjusted for currency). Both GBS lines of business had solid revenue performance year to year in the growth markets with Application Outsourcing and C&SI up 1.5 percent and 5.3 percent, respectively, as reported, and up 6 percent and 8 percent, respectively, at constant currency.

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.
Percent/
Margin

 

For the year ended December 31:

 

2012

 

2011

 

Change

 

Global Services

 

 

 

 

 

 

 

Global Technology Services

 

 

 

 

 

 

 

External gross profit

 

$

14,740

 

$

14,320

 

2.9

%

External gross profit margin

 

36.6

%

35.0

%

1.6

pts.

Pre-tax income

 

$

6,961

 

$

6,284

 

10.8

%

Pre-tax margin

 

16.8

%

14.9

%

1.9

pts.

Global Business Services

 

 

 

 

 

 

 

External gross profit

 

$

5,564

 

$

5,545

 

0.3

%

External gross profit margin

 

30.0

%

28.8

%

1.2

pts.

Pre-tax income

 

$

2,983

 

$

3,006

 

(0.8

)%

Pre-tax margin

 

15.5

%

15.0

%

0.5

pts.

 

GTS gross profit increased 2.9 percent in 2012 and the gross profit margin improved 1.6 points year to year with margin expansion in each line of business, led by Outsourcing. Pre-tax income of $6,961 million in 2012 increased 10.8 percent year to year and the pre-tax margin expanded 1.9 points to 16.8 percent. Normalized for workforce rebalancing charges of $151 million and $5 million in the third quarter of 2012 and 2011, respectively, GTS pre-tax income was up 13.1 percent and pre-tax margin expanded 2.2 points. The year over-year gross and pre-tax margin expansion was driven by several factors: the work done to improve the profitability of a number of low margin contracts in the outsourcing portfolio, increased contribution from the higher margin growth markets, and increased efficiency and productivity from the focus on automation and process primarily through the company’s enterprise productivity initiatives.

 

The GBS gross profit margin expanded 1.2 points, led primarily by improved profit performance in Application Outsourcing. GBS pre-tax income of $2,983 million declined 0.8 percent in 2012 with a pre-tax margin of 15.5 percent, an improvement of 0.5 points year to year. Normalized for workforce rebalancing charges of $113 million and $5 million in the third quarter of 2012 and 2011, respectively, GBS pre-tax income was up 2.8 percent and the pre-tax margin expanded 1.1 points. The gross and pre-tax margins benefitted from improved service delivery and yield from the company’s enterprise productivity initiatives.

 

The total Global Services business delivered strong profit and margin expansion throughout 2012. Pre-tax income of $9,944 million in 2012 increased 7.0 percent year to year. Normalized for the higher level of workforce rebalancing charges in 2012, pre-tax income was up 9.8 percent and the pre-tax margin expanded 1.9 points compared to the prior year.

 

Global Services Backlog

 

The estimated Global Services backlog at December 31, 2012 was $140 billion, a decrease of 0.3 percent as reported, but an increase of 1 percent adjusted for currency compared to the December 31, 2011 balance, and an increase of 1.9 percent (3 percent adjusted for currency) compared to the September 30, 2012 balance. Revenue generated from the backlog is approximately 70 percent of total services annual revenue in any year, with the remainder coming from transactional signings in the year, and sales and volumes into the existing client base. In 2013, the projected total services revenue from the backlog is expected to be up 1 percent year to year at consistent foreign currency exchange rates. This includes 2 percent growth from the run out of the opening backlog and a 1 percent impact from the work done to restructure a number of lower margin contracts in the outsourcing business. Despite the impact to revenue growth, these restructured contracts have improved the profitability of the backlog. These contracts provided year-to-year profit improvement in 2012. This impact, which will carryforward to 2013, will contribute modest profit growth in 2013 off this higher profit base, with the gross profit coming from the backlog more representative of a 2 percent backlog growth versus a 1 percent growth.

 

The total estimated growth markets backlog at December 31, 2012 increased 13.6 percent (15 percent adjusted for currency) year to year. The estimated transactional backlog at December 31, 2012 increased 8.7 percent (9 percent adjusted for currency) and the estimated outsourcing backlog decreased 3.3 percent (2 percent adjusted for currency), respectively, from the December 31, 2011 levels.

 

28



 

($ in billions)

 

At December 31:

 

2012

 

2011

 

Yr.-to-Yr.
Percent
Change

 

Yr.-to-Yr.
Percent Change
Adjusted for
Currency

 

Backlog

 

 

 

 

 

 

 

 

 

Total backlog

 

$

140.3

 

$

140.6

 

(0.3

)%

0.6

%

Outsourcing backlog

 

89.4

 

92.5

 

(3.3

)

(2.4

)

 

Total Global Services backlog includes GTS Outsourcing, ITS, GBS Outsourcing, Consulting and Systems Integration and Maintenance. Outsourcing backlog includes GTS Outsourcing and GBS Outsourcing. Transactional backlog includes ITS and Consulting and Systems Integration. Total 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, adjustments for revenue not materialized and adjustments for currency.

 

Global Services signings are management’s initial estimate of the value of a client’s commitment under a Global Services contract. There are no third-party standards or requirements governing the calculation of signings. The 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.

 

Signings include GTS Outsourcing, ITS, GBS Outsourcing and Consulting and Systems Integration contracts. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Maintenance is not included in signings as maintenance contracts tend to be more steady state, where revenues equal renewals.

 

Contract 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.

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.
Percent

 

Yr.-to-Yr.
Percent Change
Adjusted for

 

For the year ended December 31:

 

2012

 

2011

 

Change

 

Currency

 

Total signings

 

$

56,595

 

$

57,435

 

(1.5

)%

1.1

%

Outsourcing signings

 

$

27,891

 

$

29,251

 

(4.6

)%

(1.9

)%

Transactional signings

 

28,703

 

28,184

 

1.8

 

4.1

 

 

Software

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.
Percent

 

Yr.-to-Yr.
Percent Change
Adjusted for

 

For the year ended December 31:

 

2012

 

2011*

 

Change

 

Currency

 

Software external revenue

 

$

25,448

 

$

24,944

 

2.0

%

4.3

%

Middleware

 

$

20,983

 

$

20,650

 

1.6

%

3.9

%

Key Branded Middleware

 

16,528

 

16,055

 

2.9

 

5.2

 

WebSphere Family

 

 

 

 

 

7.8

 

9.9

 

Information Management

 

 

 

 

 

1.5

 

3.8

 

Lotus

 

 

 

 

 

(2.1

)

0.3

 

Tivoli

 

 

 

 

 

4.1

 

6.2

 

Rational

 

 

 

 

 

(1.6

)

0.6

 

Other middleware

 

4,455

 

4,596

 

(3.1

)

(0.6

)

Operating systems

 

2,525

 

2,480

 

1.8

 

4.3

 

Other

 

1,940

 

1,813

 

7.0

 

9.2

 

 


* Reclassified to conform with 2012 presentation.

 

Software revenue of $25,448 million increased 2.0 percent (4 percent adjusted for currency) in 2012 compared to 2011. Software revenue growth continued to be led by the key branded middleware products with constant currency growth in all the brands, and particular strength and share gains in WebSphere and Tivoli. Software continued its momentum throughout 2012 in the growth initiatives with strong performance in business analytics, Smarter Commerce and cloud. The Software business delivered $10.8 billion in segment

 

29



 

pre-tax profit, an increase of $840 million from 2011. The results reflect the company’s sustained investment in strategic branded software. In addition to organic investments, acquisitions have provided additional capabilities, while leveraging the existing portfolio of offerings. The software business completed nine acquisitions in 2012, further increasing the company’s capabilities in analytics, cloud and Smarter Planet.

 

Key branded middleware revenue increased 2.9 percent (5 percent adjusted for currency) and again gained market share in 2012, as the Software business continued to be the leader in the middleware market. Revenue continued to mix to the faster growing and higher value branded middleware products which accounted for 65 percent of total software revenue in 2012, an increase of 1 point from 2011.

 

WebSphere revenue increased 7.8 percent (10 percent adjusted for currency) in 2012, with strong performance throughout the year, and gained share. Revenue performance included strong growth in the core offerings of commerce and application servers. Commerce revenue increased 14 percent (15 percent adjusted for currency) and application server products increased 6 percent (8 percent adjusted for currency). The company further strengthened its WebSphere portfolio during the year with the acquisitions of Worklight, DemandTec, Emptoris and Tealeaf.

 

Information Management revenue increased 1.5 percent (4 percent adjusted for currency) in 2012 compared to 2011. Performance was led by growth in the business analytics offerings. The acquisitions of Varicent and Vivisimo expanded the Business Analytics and Optimization software capabilities. Varicent’s analytics software helps clients optimize sales performance management. Vivisimo expands the breadth of the company’s big data capabilities and creates the most complete end-to-end big data solution for clients.

 

Tivoli revenue increased 4.1 percent (6 percent adjusted for currency) in 2012, led by its storage and security offerings, and gained share. Tivoli storage revenue was up 12 percent (14 percent adjusted for currency) in 2012, with double-digit constant currency growth in each quarter, reflecting the value of storage software. Tivoli security revenue increased 8 percent (10 percent adjusted for currency), with strong contribution from Q1 Labs which provides next generation security intelligence.

 

Lotus revenue decreased 2.1 percent as reported, but was flat year to year at constant currency in 2012. The social business offerings performed well, including contribution from the acquisition of Kenexa, a leading provider of recruiting and talent management solutions.

 

Rational revenue decreased 1.6 percent as reported, but increased 1 percent at constant currency in 2012 year over year, and held share.

 

Operating systems revenue increased 1.8 percent (4 percent adjusted for currency) in 2012 compared to 2011, driven by Platform Computing which provides cluster and grid management software for distributed computing environments.

 

Other software revenue increased 7.0 percent (9 percent adjusted for currency) driven by growth in software-related services.

 

($ in millions)

 

For the year ended December 31:

 

2012

 

2011

 

Yr.-to-Yr.
Percent/
Margin
Change

 

Software

 

 

 

 

 

 

 

External gross profit

 

$

22,569

 

$

22,065

 

2.3

%

External gross profit margin

 

88.7

%

88.5

%

0.2

pts.

Pre-tax income

 

$

10,810

 

$

9,970

 

8.4

%

Pre-tax margin

 

37.6

%

35.3

%

2.3

pts.

 

Software gross profit increased 2.3 percent to $22,569 million in 2012, with a gross profit margin of 88.7 percent, up 0.2 points year to year. Software pre-tax income of $10,810 million increased 8.4 percent and the pre-tax margin improved 2.3 points to 37.6 percent. Normalized for workforce rebalancing charges of $94 million and $6 million in the third quarter of 2012 and 2011, respectively, software pre-tax income was up 9.3 percent and the pre-tax margin expanded 2.6 points. The Software business had another successful year leveraging revenue growth and expense productivity to drive significant margin expansion and profit growth.

 

Systems and Technology

 

($ in millions)

 

For the year ended December 31:

 

2012

 

2011*

 

Yr.-to-Yr.
Percent
Change

 

Yr.-to-Yr.
Percent Change
Adjusted for
Currency

 

Systems and Technology external revenue

 

$

17,667

 

$

18,985

 

(6.9

)%

(5.9

)%

System z

 

 

 

 

 

5.4

%

6.3

%

Power Systems

 

 

 

 

 

(8.5

)

(7.4

)

System x

 

 

 

 

 

(3.7

)

(2.7

)

Storage

 

 

 

 

 

(5.8

)

(4.1

)

Total Systems excluding Retail Store Solutions

 

 

 

 

 

(3.7

)

(2.5

)

Microelectronics OEM

 

 

 

 

 

(14.4

)

(14.4

)

Total Systems and Technology excluding Retail Store Solutions

 

 

 

 

 

(5.1

)

(4.0

)

Retail Store Solutions (Divested in 2012)

 

 

 

 

 

(52.6

)

(51.7

)

 


* Reclassified to conform with 2012 presentation.

 

30



 

Systems and Technology revenue decreased 6.9 percent (6 percent adjusted for currency) in 2012 versus 2011. Adjusting for the divested RSS business, revenue declined 5.1 percent (4 percent adjusted for currency) in 2012. Growth markets revenue increased 0.3 percent (1 percent adjusted for currency) in 2012, compared to the prior year while major markets revenue decreased 8.3 percent (7 percent adjusted for currency). During 2012, the company’s continued investments for innovation supported the introduction of the new System z mainframe, the PureSystems offerings and new Storage and POWER7+ products. In its introductory year, the company sold more than 2,300 PureSystems in over 70 countries.

 

System z revenue increased 5.4 percent (6 percent adjusted for currency) in 2012 versus 2011. The increase was driven by the new mainframe which began shipping late in the third quarter. Fourth quarter revenue increased 55.6 percent (56 percent adjusted for currency), as revenue increased in the major markets over 50 percent and over 65 percent in the growth markets. MIPS (millions of instructions per second) shipments increased 19 percent in 2012 versus the prior year. The increase in MIPS was driven by the new mainframe shipments, including specialty engines, which increased 44 percent year over year driven by Linux workloads. This is a good indicator of new workloads moving to this platform. The performance reflects the technology leadership and value of the vertically integrated stack that the company’s flagship server is delivering to its clients.

 

Power Systems revenue decreased 8.5 percent (7 percent adjusted for currency) in 2012 versus 2011. Low-end servers increased 6 percent (7 percent adjusted for currency) offset by declines in high-end and mid-range products. Early in October, the company announced new POWER7+ based servers. The high-end and midrange models available in the fourth quarter performed well in the period. The company will continue to refresh the Power portfolio in the first half of 2013. In 2012, the company had nearly 1,200 competitive displacements resulting in over $1 billion of business; almost equally from Hewlett Packard and Oracle/Sun.

 

System x revenue decreased 3.7 percent (3 percent adjusted for currency) in 2012 versus 2011. High-end System x revenue increased 5 percent (6 percent adjusted for currency) in 2012 versus the prior year, while high-volume and blade servers declined year to year.

 

Storage revenue decreased 5.8 percent (4 percent adjusted for currency) in 2012 versus 2011. Total disk revenue decreased 3 percent (1 percent adjusted for currency) in 2012 versus 2011. Tape revenue decreased 16 percent (14 percent adjusted for currency) in 2012 versus the prior year. The value in storage solutions continues to shift to software, as demonstrated by the ongoing success the company is having in its Tivoli storage software offerings.

 

Retail Stores Solutions revenue decreased 52.6 percent (52 percent adjusted for currency) in 2012 versus 2011. In the third quarter, the company divested the Retail Stores Solutions business to Toshiba Tec. See the caption, “Divestitures,” on page 91 for additional information regarding the transaction.

 

Microelectronics OEM revenue decreased 14.4 percent (14 percent adjusted for currency) in 2012 versus 2011.

 

($ in millions)

 

For the year ended December 31:

 

2012

 

2011

 

Yr.-to-Yr.
Percent/
Margin
Change

 

Systems and Technology

 

 

 

 

 

 

 

External gross profit

 

$

6,903

 

$

7,555

 

(8.6

)%

External gross profit margin

 

39.1

%

39.8

%

(0.7

)pts.

Pre-tax income

 

$

1,227

 

$

1,633

 

(24.9

)%

Pre-tax margin

 

6.7

%

8.2

%

(1.5

)pts.

 

The decrease in external gross profit in 2012 versus 2011 was due to lower revenue and a lower overall gross profit margin.

 

Overall gross margin decreased 0.7 points in 2012 versus the prior year. The decrease was driven by lower margins in System x (0.6 points), Microelectronics (0.6 points), Storage (0.5 points) and Power Systems (0.2 points), partially offset by improvement due to revenue mix (1.2 points).

 

Systems and Technology’s pre-tax income decreased $406 million (24.9 percent) to $1,227 million in 2012, with a pre-tax margin of 6.7 percent. Normalized for workforce rebalancing charges of $46 million and $3 million in the third quarter of 2012 and 2011, respectively, pre-tax income decreased 22.2 percent and the pre-tax margin decreased by 1.3 points.

 

Global Financing

 

See pages 63 through 67 for an analysis of Global Financing’s segment results.

 

31


 

Geographic Revenue

 

In addition to the revenue presentation by reportable segment, the company also measures revenue performance on a geographic basis. The following geographic, regional and country-specific revenue performance excludes OEM revenue, which is discussed separately below.

 

($ in millions)

 

For the year ended December 31:

 

2012

 

2011

 

Yr.-to-Yr.
Percent
Change

 

Yr.-to-Yr.
Percent Change
Adjusted for
Currency

 

Total revenue

 

$

104,507

 

$

106,916

 

(2.3

)%

0.0

%

Geographies

 

$

102,268

 

$

104,170

 

(1.8

)%

0.5

%

Americas

 

44,556

 

44,944

 

(0.9

)

0.0

 

Europe/Middle East/Africa

 

31,775

 

33,952

 

(6.4

)

(1.0

)

Asia Pacific

 

25,937

 

25,273

 

2.6

 

3.3

 

Major markets

 

 

 

 

 

(3.5

)%

(1.3

)%

Growth markets

 

 

 

 

 

4.2

%

6.9

%

BRIC countries

 

 

 

 

 

7.4

%

12.2

%

 

Total geographic revenue decreased 1.8 percent (flat adjusted for currency) in 2012; excluding the divested RSS business, revenue decreased 1.4 percent as reported, but increased 1 percent at constant currency compared to the prior year. Revenue performance at constant currency was driven by strong results in the growth markets, offsetting a modest decline year to year in the major markets.

 

Across all geographies, growth markets revenue increased 4.2 percent (7 percent adjusted for currency) and these countries now represent 24 percent of total geographic revenue, an increase of 8 points since 2006 when the company introduced its 2010 road map. Adjusted for currency, revenue growth in these fast growing markets outpaced the major markets in 2012 by approximately 8 points. The BRIC countries of Brazil, Russia, India and China combined revenue increased 7.4 percent (12 percent adjusted for currency) in 2012, with double-digit growth in Russia, India and China, adjusted for currency. Overall in 2012, the company had double-digit constant currency revenue growth in nearly 35 growth market countries. The company is continuing to expand into new countries and territories, to build out IT infrastructures in support of economic growth and to take a leadership position in key industries. To drive market expansion, in 2012 the company accelerated the opening of new branch offices resulting in a doubling of the number of face-to-face branches when compared to 2011. The company now has almost 450 face-to-face and virtual branch offices in the growth markets.

 

Americas revenue decreased 0.9 percent (flat adjusted for currency) in 2012. Within the major market countries, the U.S. decreased 1.1 percent and Canada decreased 1.5 percent as reported (flat adjusted for currency). Revenue in the Latin America growth markets increased 1.4 percent (8 percent adjusted for currency) with constant currency growth in Brazil of 6 percent, down 4.6 percent as reported.

 

Europe/Middle East/Africa (EMEA) revenue decreased 6.4 percent (1 percent adjusted for currency) in 2012 compared to 2011. Within the major market countries, the UK was essentially flat (up 1 percent adjusted for currency), Germany was down 7.6 percent (flat adjusted for currency), France was down 12.6 percent (6 percent adjusted for currency) and Italy was down 8.4 percent (1 percent adjusted for currency). The EMEA growth markets increased 0.8 percent (5 percent at constant currency) led by growth in Russia of 11.7 percent (13 percent adjusted for currency).

 

Asia Pacific revenue increased 2.6 percent (3 percent adjusted for currency) year over year. The Asia Pacific growth markets increased 6.0 percent (7 percent adjusted for currency), with growth led by China (17.9 percent as reported, 16 percent at constant currency) and India (decreased 0.9 percent as reported, increased 13 percent at constant currency). Japan revenue decreased 1.9 percent (2 percent adjusted for currency) but improved sequentially throughout the year at constant currency and returned to growth in the fourth quarter of 2012.

 

OEM revenue of $2,239 million in 2012 decreased 18.5 percent (18 percent adjusted for currency) compared to 2011, driven by the Microelectronics OEM business.

 

Total Expense and Other Income

 

($ in millions)

 

For the year ended December 31:

 

2012

 

2011

 

Yr.-to-Yr.
Percent/
Margin
Change

 

Total consolidated expense and other (income)

 

$

28,396

 

$

29,135

 

(2.5

)%

Non-operating adjustments

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

(328

)

(289

)

13.3

 

Acquisition-related charges

 

(35

)

(45

)

(21.2

)

Non-operating retirement-related (costs)/income

 

(274

)

74

 

NM

 

Total operating (non-GAAP) expense and other (income)

 

$

27,760

 

$

28,875

 

(3.9

)%

Total consolidated expense-to-revenue ratio

 

27.2

%

27.3

%

(0.1

)pts.

Operating (non-GAAP) expense-to-revenue ratio

 

26.6

%

27.0

%

(0.4

)pts.

 

NM—Not meaningful

 

32



 

Total expense and other (income) decreased 2.5 percent in 2012 versus 2011. Total operating (non-GAAP) expense and other (income) decreased 3.9 percent versus the prior year. The key drivers of the year-to-year change in total expense and other (income) were approximately:

 

 

 

 

Total

 

Operating

 

 

 

 

Consolidated

 

(non-GAAP)

 

·

Currency*

 

(5) points

 

(5) points

 

·

Acquisitions**

 

3 points

 

2 points

 

·

Base expense

 

(0) points

 

(2) points

 

 


*   Reflects impacts of translation and hedging programs.

** Includes acquisitions completed in prior 12-month period.

 

In the execution of its strategy, the company continues to invest in its growth initiatives, innovation and strategic acquisitions. The company also has had an ongoing focus on increasing efficiency and productivity across the business.

 

For additional information regarding total expense and other income, see the following analyses by category.

 

Selling, General and Administrative

 

($ in millions)

 

For the year ended December 31:

 

2012

 

2011

 

Yr.-to-Yr.
Percent
Change

 

Selling, general and administrative expense

 

 

 

 

 

 

 

Selling, general and administrative—other

 

$

19,589

 

$

20,287

 

(3.4

)%

Advertising and promotional expense

 

1,339

 

1,373

 

(2.5

)

Workforce rebalancing charges

 

803

 

440

 

82.5

 

Retirement-related costs

 

945

 

603

 

56.7

 

Amortization of acquired intangible assets

 

328

 

289

 

13.3

 

Stock-based compensation

 

498

 

514

 

(3.0

)

Bad debt expense

 

50

 

88

 

(42.5

)

Total consolidated selling, general and administrative expense

 

$

23,553

 

$

23,594

 

(0.2

)%

Non-operating adjustments

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

(328

)

(289

)

13.3

 

Acquisition-related charges

 

(22

)

(20

)

10.2

 

Non-operating retirement-related (costs)/income

 

(294

)

(13

)

NM

 

Operating (non-GAAP) selling, general and administrative expense

 

$

22,910

 

$

23,272

 

(1 .6

)%

 

NM—Not meaningful

 

Total Selling, general and administrative (SG&A) expense decreased 0.2 percent in 2012 versus 2011. The decrease was primarily driven by the effects of currency (3 points), partially offset by acquisition-related spending (2 points), while base spending was essentially flat.

 

Operating (non-GAAP) SG&A expense decreased 1.6 percent primarily driven by the effects of currency (3 points) and lower base spending (1 point), partially offset by acquisition-related spending (2 points). The increase in workforce rebalancing charges was due to actions primarily focused on the company’s non-U.S. operations in the third quarter of 2012. The increase in retirement-related costs was primarily driven by the charge related to a court decision regarding one of IBM UK’s defined benefit plans. As a result of the ruling, the company recorded an additional retirement-related obligation of $162 million in the third quarter of 2012. This charge is not reflected in operating (non-GAAP) SG&A expense. See note M, “Contingencies and Commitments,” on pages 110 through 112 for additional information. Bad debt expense decreased $37 million in 2012 versus 2011, as the company increased its provisions in 2011 reflecting the European credit environment. The accounts receivable provision coverage is 1.4 percent at December 31, 2012, a decrease of 10 basis points from year-end 2011.

 

Other (Income) and Expense

 

($ in millions)

 

For the year ended December 31:

 

2012

 

2011

 

Yr.-to-Yr.
Percent
Change

 

Other (income) and expense

 

 

 

 

 

 

 

Foreign currency transaction losses/(gains)