IBM 2002 Annual Report Download - page 56

Management Discussion
54 international business machines corporation and Subsidiary Companies
Results of Discontinued Operations
(dollars in millions)
for the year ended december 31: 2002 2001 2000
Revenue $««1,946 $«2,799 $«3,307
Pre-tax (loss)/income $«(2,037) $«««(497) $««««123
Income tax benefit (282) (74) (96)
(Loss)/income $«(1,755) $«««(423) $««««219
See the “Basis of Presentation” section in note a, “Significant
Accounting Policies” on page 70 and note c, “Acquisitions/
Divestitures” on pages 78 to 80 for a discussion of the com-
pany’s divestiture of the HDD business.
Revenue from discontinued operations in 2002 totalled
$1,946 million, a decline of 30.5 percent compared with rev-
enue of $2,799 million in 2001. Revenue from discontinued
operations decreased 15.4 percent in 2001 compared with
2000 revenue of $3,307 million. The HDD revenue declined
as the company’s ability to sell HDDs is highly dependent on
the personal computer industry, which experienced a signifi-
cant downturn beginning in 2000, as well as a result of
general industry price declines.
Loss from discontinued operations in 2002 was $1,755 mil-
lion as compared to a loss of $423 million in 2001 and income
of $219 million in 2000. The loss in 2002 was primarily
attributable to the operational loss of $1,373 million, net of
tax, and an estimated loss on disposal of the HDD business of
$382 million, net of tax. Included in the operational net loss in
2002 was a $508 million, net of tax, increase for certain actions
taken by the company in the second and fourth quarters of
2002, a $217 million, net of tax, increase for inventory write-
offs as compared to 2001 and a $57 million, net of tax, increase
in warranty costs as compared to 2001. The announcement of
the Hitachi transaction led the company to a strategic decision
to cease reworking and selling efforts for some of the company’s
older HDD products. The increase in inventory write-offs
was especially pronounced for these older products.
The second quarter actions primarily included charges for
the abandonment and associated removal costs for machinery,
equipment and tooling that are no longer needed by the com-
pany and will not be purchased by Hitachi. The fourth
quarter actions primarily included the abandonment and
associated removal costs for machinery and equipment and
tooling, workforce reduction-related charges and excess
leased space charges associated with the HDD business, all as
a result of the final agreement completed with Hitachi.
The 2002 and 2001 discontinued operations tax rates of
approximately 14 percent and 15 percent, respectively, resulted
primarily from the mix of losses in countries with low tax rates.
Additionally, the 2002 tax rate included an incremental U.S. tax
charge of $248 million attributable to the December repatria-
tion of non-U.S. transaction proceeds. The 2000 discontinued
operations tax rate was impacted by the geographic mix of
income and changes in the value of IP rights that were previ-
ously transferred to several non-U.S. subsidiaries.
Fourth Quarter
Continuing Operations
The company’s fourth-quarter 2002 diluted earnings per
common share from continuing operations was $1.11, com-
pared with diluted earnings per common share of $1.46 in the
fourth quarter of 2001. Fourth-quarter income from contin-
uing operations was $1.9 billion compared with $2.6 billion
in fourth quarter 2001. Revenue from continuing operations
for the fourth quarter was $23.7 billion, up 7 percent (4 per-
cent at constant currency) compared with the fourth quarter
of 2001 revenue of $22.1 billion.
In the Americas, revenue was $10.3 billion, an increase
of 4.6 percent (7 percent at constant currency) from the
2001 period. Revenue from Europe/Middle East/Africa was
$7.8 billion, up 12.6 percent (1 percent at constant currency).
Asia-Pacific revenue grew 7.1 percent (4 percent at constant
currency) to $4.8 billion. OEM revenue decreased 11.3 per-
cent (11 percent at constant currency) to $828 million
compared with the fourth quarter of 2001.
Revenue from Global Services, including maintenance,
grew 16.7 percent (13 percent at constant currency) in the
fourth quarter to $10.6 billion, driven by the PwCC acquisi-
tion. Global Services revenue, excluding maintenance,
increased 19 percent (15 percent at constant currency). IBM
signed more than $18 billion in services contracts in the quar-
ter compared with $9 billion in the 2002 third quarter.
Hardware revenue increased 1.3 percent (down 1 percent
at constant currency) to $8.1 billion from the 2001 fourth
quarter. Despite continued weak IT spending, revenue at
constant currency from xSeries Intel-based servers grew with
high-end server demand particularly strong, while revenue
from pSeries UNIX-based servers was flat with fourth-quarter
2001 revenue. IBM eServer revenue from iSeries declined as
compared to the fourth quarter of 2001, due to the weak
economic environment. While zSeries revenue also declined
in the quarter from a year ago, total deliveries of zSeries com-
puting power as measured in MIPS increased 13 percent
compared with 7 percent in third-quarter 2002. Storage
products revenue declined although disk storage revenue
increased, driven by high-end products. Microelectronics
revenue decreased as compared to the fourth quarter of 2001.
The personal computer unit increased revenue as compared
to the fourth quarter of 2001 due to higher sales of desktop
and mobile products.
Software revenue was flat (down 2 percent at constant
currency) at $3.8 billion compared to the 2001 fourth quarter
due to the weak economic environment. Middleware products
declined 1 percent at constant currency in the fourth quarter
of 2002.
Operating systems revenue decreased compared with the
prior-year period due primarily to the related volume trends
of eServer hardware sales.