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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_27
general and administrative expense ($308 million); Research,
developmentandengineeringexpense($94million);and,Other
(income) and expense ($8 million). See note U, “Stock-Based
Compensation,” onpages 83 to 85 foradditionalinformation.
RETIREMENT-RELATED BENEFITS
Thefollowing table providesthe total pre-taxcostfor allretire-
ment-relatedplans.Costamountsareincludedasanadditionto
thecompany’scostandexpenseamountsintheConsolidated
Statement of Earnings within the caption (e.g., Cost, SG&A,
RD&E)relatingtothejobfunctionoftheindividualsparticipating
intheplans.
(Dollarsinmillions)
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004 CHANGE
Retirement-relatedplanscost:
Definedbenefitandcontribution
pensionplanscost $«2,058 $«1,072 92.0%%
Nonpensionpostretirement
planscosts 379 372 1.9
Total $«2,437 $«1,444 68.8%
Overall,retirement-relatedplancostsincreased$993millionver-
sus 2004. The 2005 increase was driven by the amortization of
deferredcharges,aswellaschangesinthediscountrates,akey
assumption underlying the valuation of the plans. During 2005,
the company recognized approximately $1,100 million of previ-
ouslydeferredactuariallosses(asaresultoftheamortizationof
assumptionchanges)whichcontributedapproximately$700mil-
lionoftheincreaseinretirement-relatedexpensein2005.Inaddi-
tion,onDecember 31,2004,the company lowered the discount
rate assumption inanumberofcountries whichincreasedpre-tax
expense by approximately $300 million in 2005. Additionally,
during2005,thecompanyrecordedacurtailmentchargeof$267
million in the fourth quarter as a result of U.S. pension plan
amendments,aswellasa$65millionchargeinthesecondquar-
terrelatedtotherestructuringactions.Offsettingtheyear-to-year
effectsofthese one-time charges recordedin2005 was a one-
timechargeof $320millionrecordedin2004forthepartialsettle-
mentofcertainlegalclaimsagainsttheU.S.pensionplan.
The $993 million year-to-year increase impacted Cost,
SG&A, RD&EandOther(income)and expensebyapproximately
$648 million, $236 million, $95 million and $14 million, respec-
tively.Seenote V,“Retirement-RelatedBenefits,” onpages 85 to
95 for a detailed discussion of the company’s benefit plans
including a description of the plans, accounting policies, plan
financialinformationandassumptions.
INCOME TAXES
Theprovisionforincometaxesresultedinaneffectivetaxrateof
34.6 percentfor2005,comparedwiththe2004 effectivetaxrate
of 29.7 percent.The 4.9 point increaseintheeffectivetaxratein
2005 wasprimarilyduetothe third-quarter2005taxchargeasso-
ciated with the repatriation of $9.5 billion under the American
JobsCreationActof 2004. Seenote P, “Taxes,” onpage 80 for
additionalinformationconcerningthisrepatriationtaxcharge.
WEIGHTED-AVERAGE COMMON SHARES
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004 CHANGE
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%
Basic:
Continuingoperations $«««««4.99 $«««««4.48 11.4%
Discontinuedoperations «(0.02) «(0.01) 44.6
Cumulativeeffect
ofchangein
accountingprinciple** «(0.02) ««««— NM
Total $«««««4.96* $«««««4.47 11.0%
Weighted-averageshares
outstanding(inmillions):
Assumingdilution «1,627.6 ««««1,707.2 (4.7) %
Basic 1,600.6 1,675.0 (4.4)
* Doesnottotalduetorounding.
** ReflectsimplementationofFASBInterpretationNo.47.Seenote B,“Accounting
Changes,” onpages61 and62 foradditionalinformation.
NM—NotMeaningful
Theaveragenumberofcommonsharesoutstandingassuming
dilutionwaslowerby 79.6 millionsharesin2005 versus 2004.
Thedecreasewasprimarilytheresultofthecompany’scommon
share repurchase program. See note N, “Stockholders’ Equity
Activity,” onpages 75 and 76 foradditionalinformationregard-
ingthecommonshareactivities.Alsoseenote S,“EarningsPer
ShareofCommonStock,” onpage 82.
SegmentDetails
The following is an analysis of the 2005 versus 2004 external
segmentresults.Theanalysisof2004versus2003externalseg-
mentresultsisonpages 34 to 36.
GLOBAL SERVICES
(Dollarsinmillions)
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004 CHANGE
GlobalServicesrevenue: $«47,357 $«46,213 2.5%
StrategicOutsourcing $«19,766 $«19,309 2.4%
BusinessConsultingServices 14,185 13,767 3.0
IntegratedTechnologyServices 7,538 7,441 1.3
Maintenance 5,868 5,696 3.0
Global Services revenue increased 2.5 percent (2.1 percent
adjusted for currency) in 2005 versus 2004. Although SO rev-
enuecontinuedtogrow,itexperiencedaslowdowninitsrevenue