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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_15
foreigncurrencyexchangeratesandthereforefacilitatesa
comparative view of business growth. The percentages
reportedinthefinancialtablesthroughouttheManagement
Discussionarecalculatedfromtheunderlyingwhole-dollar
numbers.See“CurrencyRateFluctuations” onpage 42 for
additionalinformation.
HelpfulHints
ORGANIZATION OF INFORMATION
• ThisManagementDiscussionsectionprovidesthereaderof
the financial statements with a narrative on the company’s
financialresults.Itcontainstheresultsofoperationsforeach
segment of the business, followed by a description of the
company’s financial position, as well as certain employee
data.ItisusefultoreadtheManagementDiscussionincon-
junction with note W, “Segment Information,” on pages 95
through 99.
• Pages 48 through 53 include the Consolidated Financial
Statements. These statements provide an overview of the
company’sincomeandcashflowperformanceanditsfinan-
cialposition.
• The notes follow the Consolidated Financial Statements.
Among other things, the notes contain the company’s
accountingpolicies(pages 54 to 61),detailedinformationon
specificitemswithinthefinancialstatements,certaincontin-
genciesand commitments (pages 76 through 78),and the
resultsofeachIBMsegment(pages 95 through 99).
2004AnnualReport
EffectiveJanuary1,2005,thecompanyadoptedtheprovisionsof
StatementofFinancialAccountingStandards(SFAS)No.123(R),
“Share-BasedPayment,” (“SFAS123(R)”).Thecompanyelected
toadoptthemodifiedretrospectiveapplicationmethodprovided
bySFAS123(R).Thismethodpermitstherestatementofhistorical
financialstatementamounts.Seenote A,“SignificantAccounting
Policies,” on pages 58 and 59 and note U, “Stock-Based
Compensation,” onpages 83 to 85 foradditionalinformation.
In addition, as a result of the divestiture of the Personal
Computingbusinessin2005,thecompanyreviseditsoperating
segments in the second quarter. See note W, “Segment
Information,” onpage 95 foradditionalinformation.Accordingly,
asaresultoftheseactions,thecompanyfiledarestated2004
Annual Report with the Securities and Exchange Commission
(SEC) onForm8-KonJuly27,2005.
DiscontinuedOperations
On December 31, 2002, the company sold its hard disk drive
(HDD) business to Hitachi, Ltd. (Hitachi). The HDD business
wasaccountedforasadiscontinuedoperationunder generally
acceptedaccountingprinciples (GAAP) whichrequiresthatthe
incomestatement and cashflowinformationbereformattedto
separatethedivestedbusinessfromthecompany’scontinuing
operations.Seepage 36 foradditionalinformation.
Forward-LookingandCautionaryStatements
CertainstatementscontainedinthisAnnualReportmayconsti-
tuteforward-lookingstatementswithinthemeaningofthePrivate
Securities Litigation Reform Act of 1995. These statements
involve a number of risks, uncertainties and other factors that
could cause actual results to be materially different, as dis-
cussed more fully elsewhere in this Annual Report and in the
company’s filings with the SEC, including the company’s 2005
Form10-KfiledonFebruary28,2006.
ManagementDiscussionSnapshot
(Dollarsandsharesinmillionsexceptpershareamounts)
YR. TOYR.
PERCENT/
MARGIN
FORTHEYEARENDEDDECEMBER31: 2005 2004 CHANGE
Revenue $««91,134 $««96,293 (5.4) % *
Grossprofitmargin «40.1% «36.9% 3.2 pts.
Totalexpenseand
otherincome $««24,306 $««24,900 (2.4) %
Totalexpenseandother
incometorevenueratio «26.7% «25.9% 0.8 pts.
Incomefromcontinuing
operationsbefore
incometaxes $««12,226 $««10,669 14.6%
Provisionforincometaxes $««««4,232 $««««3,172 33.4%
Incomefromcontinuing
operations $««««7,994 $««««7,497 6.6%
Earningspershareof
commonstock:
Assumingdilution:
Continuingoperations $««««««4.91 $««««««4.39 11.8%
Discontinuedoperations «(0.01) (0.01) 45.0%
Cumulativeeffect
ofchangein
accountingprinciple++ «(0.02) «— NM
Total $««««««4.87 +$««««««4.38 11.2%
Weighted-averageshares
outstanding:
Diluted «1,627.6 «1,707.2 (4.7) %
Assets** «$105,748 «$111,003 (4.7) %
Liabilities** «$««72,650 «$««79,315 (8.4) %
Equity** «$««33,098 «$««31,688 4.4%
* (5.8) percentadjusted forcurrency.
** AtDecember31
+ Doesnottotalduetorounding.
++ReflectsimplementationofFASBInterpretationNo.47.Seenote B,“Accounting
Changes,”onpages61 and62 foradditional information.
NM—NotMeaningful
ContinuingOperations
In 2005, the company delivered solid growth in earnings and
cashgeneration—balancedacrossitsportfolio—andexecuteda
series of actions to improve productivity and to reallocate
resourcestothefastergrowingareasofthebusiness.