IBM 2002 Annual Report Download - page 57

Management Discussion
55international business machines corporation and Subsidiary Companies
Global Financing revenue decreased 10.5 percent (11 per-
cent at constant currency) in the fourth quarter of 2002 to
$829 million. Revenue from the Enterprise Investments/
Other area, which includes industry-specific IT solutions,
increased 1.1 percent (down 6 percent at constant currency)
compared to the fourth quarter of 2001 to $343 million.
The company’s overall gross profit margin was 38.8 per-
cent in the fourth quarter, compared to 40.3 percent in the
2001 fourth quarter, primarily due to lower Global Services
margin as a result of PwCC being at a lower gross profit
margin than the company’s base business. Also, signings in
the company’s ITS Services business came late in the quarter,
which resulted in the company’s utilization rates being
lower. This decline was partially offset by an increase in
Software and Hardware gross profit margins in the fourth
quarter of 2002.
In the fourth quarter, total expense and other income of
$6.5 billion increased 21.4 percent over the year-earlier
period, including charges of $614 million associated with the
acquisition and integration of PwCC and related restructuring
as well as one-time compensation costs, which are partially
offset by a $40 million benefit from net adjustments to
restructuring charges from the second-quarter 2002 actions.
Specifically, SG&A expense increased 16 percent, reflecting
the PwCC charges offset by the benefit from net adjustments
related to second-quarter actions and lower goodwill expense
due to the implementation of new accounting rules. RD&E
expense decreased 2.9 percent in the fourth quarter. Lower IP
and custom development income had a negative impact on
results compared with the year-earlier period, despite two
sizable contracts totaling, in the aggregate, approximately
$170 million in the quarter. Other (income) and expense was
negatively affected by foreign exchange losses as well as lower
gains from certain real estate activities. Overall, IBM continues
to benefit from the company’s continuing e-business trans-
formation and productivity enhancements.
The company’s effective tax rate in the fourth quarter was
29.5 percent compared with 28.6 percent in the fourth quarter
of 2001.
The company spent $74 million on common share repur-
chases in the fourth quarter. The average number of common
shares outstanding assuming dilution was lower by 29.3 mil-
lion shares in fourth quarter of 2002 versus the fourth quarter
of 2001, primarily as a result of the ongoing common share
repurchase program. The average number of shares assuming
dilution was 1,728.7 million in fourth-quarter 2002 versus
1,758.0 million in fourth-quarter 2001.
Discontinued Operations
Revenue from discontinued operations for the fourth quarter
of 2002 was $548 million, a 19.9 percent decrease from the
fourth quarter of 2001. Net loss from discontinued operations
for the fourth quarter of 2002 was $893 million as compared
to a loss of $232 million in 2001. The underlying business
dynamics causing these fourth quarter financial trends are
consistent with those underlying the full-year 2002 and 2001
trends discussed in the Results of Discontinued Operations
section on page 54, including the additional loss of $247 mil-
lion, net of tax, incurred in the fourth quarter on disposal of
the HDD business.
Financial Condition
Dynamics
The assets and debt associated with the company’s Global
Financing business are a significant part of IBM’s financial
condition. Accordingly, although the financial position
amounts appearing below and on pages 56 and 57 are the
company’s consolidated amounts including Global Financing,
to the extent the Global Financing business is a major driver
of the consolidated financial position, reference in the narra-
tive section will be made to a separate Global Financing
section in this Management Discussion on pages 60 through
63. The amounts appearing in the separate Global Financing
section are supplementary data presented to facilitate an
understanding of the company’s Global Financing business.
Overall
During 2002, the company made significant acquisitions as
well as ongoing investments in RD&E and in fixed assets. In
addition, the company fully funded, on an ABO basis, the IBM
Personal Pension Plan (PPP). In spite of this activity, the
company ended the year with $5,975 million in Cash and cash
equivalents and current Marketable securities. In the fourth
quarter, the company took advantage of the low interest rate
environment to execute some term-debt financing that
increased the non-Global Financing debt to $2,189 million at
December 31, 2002. The debt-to-capital ratio of 10.2 percent
is well within the company’s target.
Cash Flow
The company’s cash flow from operating, investing and
financing activities, as reflected in the Consolidated Statement
of Cash Flows on page 69, are summarized in the table on
page 56. These amounts include the cash flows associated
with the company’s Global Financing business, which are pre-
sented on pages 60 through 63.