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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
16_ ManagementDiscussion
The company’s reported results include the Personal
Computingbusinessforfourmonthsin2005versus 12 months
in2004.
Total revenue, as reported, declined 5.4 percent versus
2004;excludingthePersonal Computing businessexternalrev-
enuefrombothyears,totalrevenueincreased3.2percent(2.8
percent adjusted forcurrency).Pre-taxincomefromcontinuing
operationsgrew14.6percent,whiledilutedearningspershare
fromcontinuingoperationsincreased11.8percent comparedto
2004.Netcashprovidedbyoperatingactivitieswas$14,914mil-
lion.Thecompany’s financial performancein2005 was driven
byacombinationofsegmentperformance,portfolioactionsand
executionofthecompany’sproductivityinitiatives.
Theincreaseinrevenue,excluding thePersonalComputing
business,in2005ascomparedto2004wasprimarily dueto:
• Improving demand in the hardware business driven
by pSeries and xSeries server products, as well as
Storage products, Microelectronics and Engineering and
TechnologyServices
• Improved demand in the software business, driven by key
brandedmiddlewareproducts
• Continued growth in emerging countries (up 23 percent)
andinBusinessPerformance TransformationServices(up
28percent)
Theincreasein incomefromcontinuingoperationsin2005
as comparedto2004 wasprimarilydueto:
• ModeraterevenuegrowthintheHardware andSoftwareseg-
mentsasdiscussedabove
• Execution of the company’s restructuring and productivity
initiatives,primarilyfocusedonGlobalServices
• Improveddemandandcontinuedoperational improvement
intheMicroelectronicsbusiness
In addition to improved earnings, in 2005, the company exe-
cutedaseriesofimportantactionsthatbenefitedthecompany’s
performanceinthecurrentyearandstrengtheneditscapabili-
tiesgoingforward.Theseactionsincluded:
• Completion of the divestiture of the Personal Computing
businesstoLenovo
• Continuation of investment in acquisitions to strengthen the
company’s on demand capabilities; in 2005, the company
completed16acquisitionsatacostofapproximately$2billion
• Implementationof alargerestructuringactiontoimprovethe
company’scostcompetitiveness
• Changeof thecompany’soperatingmodelinEurope—shift-
ingresourcesanddecision-makingclosertotheclients
• Redesignof thecompany’sU.S.pensionplan,aswellastak-
ing actions in other countries; over the longer term, these
actionswillreducevolatilityandprovideamorecompetitive
coststructure
• Repatriation of $9.5 billion of foreign earnings under the
American Jobs Creation Act of 2004 improving the com-
pany’s geographic liquidityposition
• Further extension of thecompany’s commitment to innova-
tionandopenstandards
Theconsolidatedgrossprofitmarginincreased3.2points
to40.1 percentversus 2004.An improvementin the Hardware
margin(5.6points)contributed1.9pointstotheoverallmargin
improvement.Thisincreasewasprimarilydrivenbythesaleof
the company’s Personal Computing business in the second
quarter of 2005. In addition, the Global Services margin
improved1.7pointsversus2004to25.9percent.Thisincrease
was drivenbyseveralfactors:therestructuringactionstakenin
the second quarter of 2005 to improve cost competitiveness;
improvedutilizationlevels;andabetter overall contractprofile.
The Software margin increased slightly and the Enterprise
Investments/Other marginimproved 6.3points in 2005 to 46.5
percent,but these increasesonlyslightlyimprovedtheoverall
company margin. The Global Financing margin declined 5.2
points versus 2004 to 54.7 percent primarily driven by a mix
towardslowermarginremarketingsalesandincreasedinterest
cost.This declinehadanimmaterialimpactonthecompany’s
overallmarginduetothesizeofthesegment.
Total expense and other income declined 2.4 percent in
2005 versus 2004. The decline was primarily due to the gain
associatedwiththesaleofthecompany’sPersonalComputing
business,againfrom alegalsettlement withMicrosoft, partially
offsetby the incrementalrestructuringchargesrecordedinthe
secondquarter.
Overall,retirement-relatedplancostsincreased$993 million
versus 2004, impacting both gross margin and expense. See
note V, “Retirement-Related Benefits” on pages 85 to 95 and
“Retirement-RelatedBenefits” onpage 27 foradditionalinforma-
tion. Inaddition,stock-basedcompensationexpensedecreased
$543 million versus 2004, impacting both gross margin and
expense. See “Stock-Based Compensation,” on pages 26 and
27 foradditionalinformation.
The provision for income taxes resulted in an effective tax
rateof 34.6 percentfor2005,comparedwiththe2004 effective
taxrate of 29.7 percent.The 4.9 point increaseintheeffective
taxratein2005 wasprimarilyduetothe third-quarter taxcharge
associated with the repatriation under the American Jobs
CreationActof2004.Seenote P,“Taxes,” onpage80 foraddi-
tionalinformationconcerningthisrepatriationtaxcharge.
With regard to the decrease in total Assets, the impact of
currency was approximately $5.7 billion. Other asset changes
primarilyconsistedofanincreaseinCashandcashequivalents,
anincreaseinGoodwillassociatedwith 2005 acquisitionsand
increased Prepaid pension assets. These increases were par-
tially offset by lower financing receivables and lower deferred
taxassets.
ThedecreaseintotalLiabilitieswasprimarilydrivenbythe
impact of currency, approximately $4.1 billion. In addition,