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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
26_ ManagementDiscussion
OTHER(INCOME)ANDEXPENSE
(Dollarsinmillions)
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004* CHANGE
Other(income)andexpense:
Foreigncurrency
transactionlosses $«««««170 $««381 (55.4) %
Interestincome (307) (180) 70.6
Netrealizedgainsonsalesof
securitiesandotherinvestments (111) (59) 88.1
Netrealized(gains)/lossesfrom
certainrealestateactivities (179) (71) 152.1
Restructuring 231 —NM
Lenovo/Microsoftgains (1,883) —NM
Other (43) (94) (54.3)
Total $«(2,122) $«««(23) NM
* Reclassifiedtoconformwith2005presentation.
NM—NotMeaningful
Other(income) and expense wasincome of $2,122 millionand
$23 millionin2005and2004,respectively.Theincreasewaspri-
marilydrivenbythegainonthesaleofthecompany’sPersonal
Computing business. The pre-tax gain associated with this
transaction was $1,108 million. See note C, “Acquisitions/
Divestitures” on pages 66 to 67 for additional information. In
addition, the company settled certain antitrust issues with the
MicrosoftCorporationandthegainfromthissettlementwas$775
million;additionalInterestincomegeneratedbythecompanyin
2005;andlowerforeigncurrencytransactionlosseswhichrelate
tolossesoncertainhedgecontractsoffsetby settlementoffor-
eign currency receivables and payables. See “Currency Rate
Fluctuations,” on page 42 for additionaldiscussion of currency
impacts on the company’s financial results. The company also
hadadditionalgainsfromthesaleofcertainrealestatetransac-
tionsin 2005 versus 2004.These gainswerepartially offset by
real-estaterelatedrestructuringchargesrecordedinthesecond
quarterof2005.Seenote R,“2005Actions” onpages 80 and81
foradditionalinformation.
RESEARCH,DEVELOPMENTANDENGINEERING
(Dollarsinmillions)
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004 CHANGE
Research,development
andengineering:
Total $«5,842 $«5,874 (0.6) %
ThedeclineinResearch, developmentand engineering(RD&E)
was driven by the sale of the company’s Personal Computing
businessinthesecondquarterof2005($93million)andlower
spending in Microelectronics ($93 million) and Software ($25
million). These decreases were partially offset by increased
spendinginSystemsandTechnologyforserverproducts($171
million).Included in RD&Eexpense was increasedretirement-
relatedexpenseof$95 million andadecreaseof$94millionfor
stock-basedcompensationexpensein2005versus2004.
INTELLECTUALPROPERTYANDCUSTOMDEVELOPMENTINCOME
(Dollarsinmillions)
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004 CHANGE
Intellectualpropertyand
customdevelopmentincome:
Salesandothertransfers
ofintellectualproperty $«236 $««««466 (49.4) %%
Licensing/royalty-basedfees 367 393 (6.6)
Customdevelopmentincome 345 310 11.3
Total «$«948 $«1,169 (19.0) %
Thedecreasein Sales andothertransfersofintellectualprop-
erty was primarily due to Applied Micro Circuits Corporation’s
(AMCC) acquisition of the company’s IP associated with its
embeddedPowerPC4xxstandardproductsfor$208millionin
2004. ThetimingandamountofSalesandothertransfersofIP
may vary significantly from period to period depending upon
timing of divestitures, industry consolidation, economic condi-
tionsandthetimingofnewpatentsandknow-howdevelopment.
actions and the Personal Computing business divestiture,
lower stock-based compensation expense (see “Stock-Based
Compensation” caption below for additional information) and
lower ongoing workforce reductions. In addition, Bad debt
expensedeclinedprimarilydueto decreasedspecificreserve
requirements, an overallreductioninthefinancingassetportfo-
lio(seeGlobalFinancingReceivablesandAllowancesonpage
45 for additional information), the improvement in economic
conditionsandimprovedcreditquality.
INTERESTEXPENSE
(Dollarsinmillions)
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004 CHANGE
Interestexpense:
Total $«220 $«139 58.6%%
The increase in Interest expense was primarily driven by higher
average non-Global Financing debt and higher effective interest
ratesin2005versus2004.InterestexpenseispresentedinCostof
GlobalFinancingintheConsolidatedStatementofEarningsonlyif
the related external borrowings are to support the Global
Financingexternalbusiness.Seepages 46 and 47 foradditional
informationregardingGlobalFinancingdebtandinterestexpense.
STOCK-BASED COMPENSATION
Total pre-tax stock-based compensation expense of $1,035 mil-
lion decreased $543 million compared to 2004. This decrease
wasprincipallytheresultofchangesinthecompany’sequitypro-
grams, primarily driven by: (1) a reduction in the level and fair
value ofstockoptiongrants($306million)and(2)changestothe
terms of the company’s employee stock purchase plan, which
renderedit non-compensatory in thesecond quarter of 2005 in
accordancewiththeprovisionsofSFAS 123(R)($186million).The
year-to-year reductions in pre-tax compensation expense were
reflectedinthefollowingcategories:Cost($133million);Selling,