IBM 2005 Annual Report Download - page 37
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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
36_ ManagementDiscussion
initiatives also contributed to the company’s overall margin
improvement, however, the company has passed a portion of
the savings to clients to improve competitive leadership and
gainmarketshareinkeyindustrysectors.Inaddition,anincrease
in retirement-related plan costs of approximately $490 million
comparedto2003impactedoverallsegmentmargins.
Totalexpenseandotherincomeincreased7.7percent(4.8
percent adjusted forcurrency)in2004versus2003.
TotalSG&A expense of $20,079millionincreased8.0per-
cent(4.6percent adjusted forcurrency)versus$18,601 millionin
2003.Theincreasewasprimarilydrivenbyincreasedexpense
forretirement-relatedplancosts of approximately $515million,
whichincludedaone-timechargeof$320millionrelatedtothe
partialsettlementofcertainlegalclaimsagainstthecompany’s
PPP,unfavorablecurrencytranslationof$626millionandprovi-
sion for certain litigation-related expenses of $125 million in
2004.Theseincreaseswerepartiallyoffsetbylowerworkforce
reductions of $122 million and lower Advertising and promo-
tional expense of $71 million. In addition, Bad debt expense
declined$72millionduetolowerreserverequirementsassoci-
ated with the improvement in economic conditions and
improvedcreditquality,aswellasthelowerassetbaseofGlobal
Financing’sreceivablesportfolio.
Other(income) and expensewasincomeof$23million in
2004versusexpenseof$238millionin2003.Theimprovement
wasprimarilydrivenbyincreasedgainsfromvariousassetsales
including certain real estate transactions ($87 million) in 2004
versus2003,additionalInterestincome($28million)generated
by the company in 2004 and other nonrecurring gains/settle-
mentsof$121 millionin2004comparedto2003.
Research,developmentandengineering (RD&E)expense
of$5,874millionincreased$560millionor10.5percentin2004
versus2003primarilytheresultofincreasedspending inmid-
dleware software including new acquisitions (approximately
$240 million). In addition, RD&E expense increased due to
spendingrelatedtothePOWER5technologyinitiatives(approx-
imately $140 million) and higher retirement-related plan costs
(approximately$77million).
Intellectualpropertyandcustomdevelopmentincome was
flatin2004versus2003andInterestexpensedeclined$6million
versus2003primarilyduetolowereffectiveinterestratesin2004.
Theprovisionfor income taxes resultedinaneffectivetax
rateof29.7percentfor2004,comparedwiththe2003effective
taxrateof30.0percent.The0.3pointdecreaseintheeffective
taxratein2004wasprimarilyduetothetaxeffectofthesettle-
mentofcertainpensionclaimsinthethirdquarterof2004.
WithregardtoAssets,approximately$3.6billionoftheyear-
to-year increase relates to the impact of currency translation.
TheremainingincreaseprimarilyconsistsofanincreaseinCash
andcashequivalents,anincreaseinGoodwillassociatedwith
recentacquisitionsandincreasedPrepaidpensionassets.The
increases were partially offset by lower financing receivables
andlowerdeferredtaxassets.
Global Financing debt decreased, but the company’s
GlobalFinancingdebt-to-equityratiowas7.0to1 for2004and
7.1 to1 for2003whichiswithinthecompany’stargetedrange.
DiscontinuedOperations
OnDecember31,2002,thecompanysolditsHDDbusinessto
Hitachiforapproximately$2billion.The final cash paymentof
$399millionwasreceivedonDecember30,2005. Inaddition,
thecompanypaidHitachi$80milliontosettlewarrantyobliga-
tions during 2005. These transactions were consistent with
the company’s previous estimates. The HDD business was
accountedforasadiscontinuedoperationwherebytheresults
ofoperationsandcashflowswereremovedfromthecompany’s
resultsfromcontinuingoperationsforallperiodspresented.
Thecompanyincurredalossfromdiscontinuedoperations
of $24 million in 2005, $18 million in 2004 and $30 million in
2003,netoftax. Theselosseswere primarilyduetoadditional
costs associated with parts warranty as agreed upon by the
companyandHitachi,underthetermsoftheagreementforthe
saleoftheHDDbusinesstoHitachi.
LookingForward
Thefollowingkeydriversimpactingthecompany’sbusinessare
discussedonpage 21:
• Economicenvironmentandcorporate spendingbudgets
• Internal business transformation and global integration
initiatives
• Innovation initiatives
• Openstandards
• Investingingrowth opportunities
With respect to the economic environment, in 2005 the global
economyslowedmodestlyfollowingtherecovery’speakayear
earlier. Looking forward, while uncertainties make it difficult to
predict future developments, the company anticipates similar
moderategrowthfortheeconomyandthetraditionalITindustry.
Several factors-including increasing complexity, globalization
andthepace of technologychange-aredriving clients to con-
tinue to transform their businesses. The deeper integration of
technologyintobusinessmodels,processesandpracticeshas
created new long-term opportunities for the company. IBM is
addressingtheseopportunitiesthroughits BPTS offerings.The
company expects continued double-digit revenue growth in
theseofferingsin2006.
With respect to business transformation and the continual
conversionofthecompanyintoanondemandbusiness,thecom-
pany’s supply-chain initiatives are expected to allow continued
flexibility to drive additional competitive advantages. Also, the
companywill leveragetheactionstakenin2005and continueto
focusonincreasedproductivityandefficiencyto accelerate the
globalizationandtransformationofitsglobalbusinessmodel.
Finally,withrespecttotechnology,in2005 thecompanyhas
againbeenawardedmoreU.S.patentsthananyothercompany
forthe thirteenth yearinarow.Thecompanycontinuestofocus
internaldevelopmentinvestmentsonhigh-growthopportunities
andtobroadenitsabilitytodeliverindustry-specificsolutions.