IBM 2006 Annual Report Download

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cyan mag yelo black
MAC
Dear IBM Investor: I am happy to report to you on a very strong
year for our company. In my letter last year, I said that we
believed we had positioned ourselves to capture the most attractive
growth and profit opportunities in our industry. In 2006 we did
just that, setting new records in profit, earnings per share and
cash performance.
What our numbers do not reveal
—
and what is perhaps IBM’s
most notable accomplishment during this period
—
is that we
achieved these results while fundamentally reshaping our company.
Whether you look at our technology, strategy, business model,
processes or culture, IBM is a very different enterprise today than
it was at the beginning of the decade. We have prepared the company
for growth and leadership in a radically different future
—
while
continuing to deliver steady results.

Table of contents

  • Page 1
    Dear IBM Investor: I am happy to report to you on a very strong year for our company. In my letter last year, I said that we believed we had positioned ourselves to capture the most attractive growth and profit opportunities in our industry. In 2006 we did just that, setting new records in profit,...

  • Page 2

  • Page 3
    ... return on invested capital significantly above the average for the S&P 500 over the past several years, and we did so again in 2006, with ROIC of 34 percent , excluding our Global Financing business. IBM's gross profit margin rose for the third consecutive year - to 41.9 percent, an increase...

  • Page 4
    ... to change our processes and structures to push decision making close to the marketplace - what we internally call "lowering the center of gravity" of IBM. 3. We believed that globalization would fundamentally change business. Because of free trade policies, the Internet and the emergence of highly...

  • Page 5
    Samuel J. Palmisano - Chairman, President and Chief Executive Officer 

  • Page 6
    ...2006, grouped under Information Management, grew 68 percent. Our acquisition of companies such as FileNet, MRO and Micromuse enhanced our growth in information and systems management. Our industry-leading WebSphere family grew 23 percent for the year, with particular • global Services: The global...

  • Page 7
    ... Business Services segment were essentially ï¬,at at $16 billion, but improvements in utilization, pricing, contract management and delivery optimization enabled it to grow its pretax margin by 2.7 points, to 9.8 percent, excluding 2005 special actions. IBM Global Services is ranked as the number...

  • Page 8
    ... 23% SERVICES SYSTEMS AND FINANCING 37% 40% SOFTWARE . and we decided to become a globally integrated enterprise, in order to improve iBM's overall productivity and to participate in the world's growth markets. IBM operates in 170 countries, with about 65 percent of our employees outside the...

  • Page 9
    ...to investors ...Primary uses of cash over the Past Five Years (Dollars in billions) $80 70 net cash from operations, excluding global Financing receivables (Dollars in billions) $18 16 14 12 10 8 6 4 2 0 02 03 04 05 06 70 Returned to Shareholders 15.3 12.6 10.5 12.9 13.1 60 50 40 30 20 10 SHARE...

  • Page 10
    ... items, and (3) excluding the Global Financing business are non-GAAP financial measures, as is the reference to return on invested capital (ROIC), and these references are made to facilitate a comparative view of the company's ongoing operational performance. Additional information on the use...

  • Page 11
    What does it take to change the way the world works? www.ibm.com/ibm/think 

  • Page 12
    ... assets Working capital Total debt Stockholders' equity Common shares outstanding (in millions) Market capitalization Stock price per common share Number of employees in IBM/wholly owned subsidiaries * Does not total due to rounding. ** Reflects implementation of FASB Interpretation No. 47. See note...

  • Page 13
    ... Other Liabilities Stockholders' Equity Activity Contingencies and Commitments Taxes Research, Development and Engineering 2005 Actions Earnings Per Share of Common Stock Rental Expense and Lease Commitments Stock-Based Compensation Retirement-Related Benefits Segment Information Subsequent Events...

  • Page 14
    ... the financial section of the international Business Machines corporation (iBM or the company) 00 annual report, consisting of this Management Discussion, the Consolidated Financial Statements that follow and the notes related thereto, comprises 108 pages of information. This Road Map is designed...

  • Page 15
    ManageMent diScuSSion international BuSineSS MachineS corPoration and SuBSidiarY coMPanieS or financial flexibility. See note V, "Retirement-Related Benefits," on pages 100 to 111 for additional information, including the incremental effect on the Consolidated Statement of Financial Position. • ...

  • Page 16
    ... Computing Division, while the results for 2005 include four months of activity. Total revenue, as reported, increased 0.3 percent versus 2005; excluding the Personal Computing business external revenue from 2005, total 2006 revenue increased 3.6 percent ( 3.2 percent adjusted for currency). Pre-tax...

  • Page 17
    ... shareholders through dividends and common stock repurchases. The company's ability to meet these objectives depends on a number of factors, including those outlined on page 21 and on pages 89 to 92. deScriPtion oF BuSineSS Please refer to IBM's Annual Report on Form 10-K filed on February 27, 2007...

  • Page 18
    ...14 Description of Business ...15 Year in review...22 Prior Year in review ...37 Discontinued Operations ...41 Other Information ...41 Global Financing ...49 report of Management ...54 report of independent registered Public accounting Firm ...55 consolidated Statements ...56  2006 Annual Report

  • Page 19
    ...oPerating SYSteMS BuSineSS tranSForMation outSourcing inForMation ManageMent SoFtWare lotuS ServiceS Maintenance Strategic outSourcing rational tivoli WeBSPhere integrated technologY ServiceS aPPlication on deMand Product liFecYcle ManageMent aPPlication ManageMent ServiceS iBM'S caPaBilitieS...

  • Page 20
    ..., print management software, services and maintenance. retail Store Solutions. Point-of-sale retail systems, software and solutions. Financing commercial Financing. Short-term inventory and accounts receivable financing to dealers and remarketers of IT products. client Financing. Lease and loan...

  • Page 21
    ManageMent diScuSSion international BuSineSS MachineS corPoration and SuBSidiarY coMPanieS BuSineSS SegMentS organizationally, the company's major operations comprise a global technology Services segment; a Global Business Services segment; a Systems and Technology Group segment; a Software segment...

  • Page 22
    ... to service delivery across its solutions and services lines of business. In addition to its own manufacturing operations, the company uses a number of contract manufacturing (CM) companies around the world to manufacture IBM-designed products. The use of CM companies is intended to generate cost...

  • Page 23
    ... and the development of Rational software development tools, which can be used to develop and upgrade other companies' software products. internal Business transformation and global integration initiatives IBM continues to drive greater productivity, flexibility and cost savings by transforming and...

  • Page 24
    ...14 Description of Business ...15 Year in review...22 Prior Year in review ...37 Discontinued Operations ...41 Other Information ...41 Global Financing ...49 report of Management ...54 report of independent registered public accounting firm ...55 consolidated statements ...56 22 2006 Annual Report

  • Page 25
    ManageMent diScuSSion international BuSineSS MachineS corPoration and SuBSidiarY coMPanieS The company divested its Personal Computing business to Lenovo on April 30, 2005. The details of this significant transaction are discussed in note C, "Acquisitions/Divestitures", on pages 77 and 78. As a ...

  • Page 26
    ...Machines corporation anD subsiDiary coMpanies revenue excluding divested Personal computing Business (Dollars in millions) YR. TO YR. PERCENT CHANGE CONSTANT CURRENCY FOR THE YEAR ENDED DECEMBER 31: 2006 2005 YR. TO YR. PERCENT CHANGE Statement of Earnings Revenue Presentation: Global Services...

  • Page 27
    ... of Rational which grew 4.4 percent. Global Financing revenue decreased 1.1 percent in 2006 versus 2005 due to lower remarketing equipment sales, partially offset by an increase in financing revenue. See pages 49 through 53 for additional information regarding Global Financing. gross Profit FOR...

  • Page 28
    ... Selling, general and adMiniStrative (Dollars in millions) FOR THE YEAR ENDED DECEMBER 31: 2006 2005* YR. TO YR. CHANGE additional information. In addition, retirement-related expense and stock-based compensation expense (see "Retirement-Related Benefits" and "Stock-Based Compensation," on pages 27...

  • Page 29
    ... support the Global Financing external business. See page 52 for additional information regarding Global Financing debt and interest expense. Overall, retirement-related plan costs decreased $9 million versus 2005. The 2005 retirement-related plan costs included $332 million related to unique items...

  • Page 30
    ... Statement of Earnings. See note I, "Intangible Assets Including Goodwill," on pages 80 and 81 for additional information. (Dollars in millions) FOR THE YEAR ENDED DECEMBER 31: 2006 2005 YR. TO YR. CHANGE Cost: Software Global Services Hardware Selling, general and administrative expense Total...

  • Page 31
    .... The analysis of 2005 versus 2004 reportable segment results is on pages 39 and 40. The following table presents each reportable segment's external revenue as a percentage of total external segment revenue, excluding the Personal Computing business. FOR THE YEAR ENDED DECEMBER 31: 2006 2005 Global...

  • Page 32
    ... benefits from productivity initiatives and cost efficiencies, including benefits resulting from the company's targeted restructuring action in the second quarter of 2005. Gross profit margin improvement was achieved in each of the services lines of business. global services signings In 2006, total...

  • Page 33
    ... above. software (Dollars in millions) FOR THE YEAR ENDED DECEMBER 31: 2006 2005* YR. TO YR. CHANGE Software segment revenue: Middleware Key Branded Middleware WebSphere family Information Management Lotus Tivoli Rational Other middleware Operating systems Product Lifecycle Management Other $18...

  • Page 34
    ... brand and contributed to the revenue growth. Rational revenue increased 4.4 percent ( 3 percent adjusted for currency) in 2006 versus 2005, in a slower growing market. Rational software provides customers with products that manage the business process of software and systems delivery. Revenue from...

  • Page 35
    ... Short-term debt as the company increased commercial paper balances in support of the increased Global Financing asset base discussed above; • Growth in Deferred income driven by Software ($557 million) and Global Services ($423 million); • Increase of $1,270 million in Compensation and benefits...

  • Page 36
    ...and the debtto-capital ratio at December 31, 2006 was at 1.5 percent. Non-Global Financing debt decreased versus 2005 as the company paid down debt, including debt used in 2005 to facilitate the company's repatriation actions under the American Jobs Creation Act of 2004. equity (Dollars in millions...

  • Page 37
    ... quarter of 2005. The company is continuing to make investments in sales, delivery and business development skills across its entire set of offerings, as well as investing in strategic outsourcing infrastructure and BTO capabilities. Global Business Services revenue increased 6.1 percent ( 3 percent...

  • Page 38
    ... Tivoli brands. The WebSphere family of software grew 21.8 percent, with continued strong performance from Application Servers and Business Integration products. Information Management software increased 27.9 percent, driven by the company's distributed relational database and information on demand...

  • Page 39
    ...of actions to improve productivity and to reallocate resources to the faster growing areas of the business. The company's reported results include the Personal Computing business for four months in 2005 versus 12 months in 2004. Total revenue, as reported, declined 5.4 percent versus 2004; excluding...

  • Page 40
    ... the clients; • Redesign of the company's U.S. pension plan, as well as taking actions in other countries; over the longer term, these actions will reduce volatility and provide a more competitive cost structure; • Repatriation of $9.5 billion of foreign earnings under the American Jobs Creation...

  • Page 41
    ManageMent diScuSSion international BuSineSS MachineS corPoration and SuBSidiarY coMPanieS The following is an analysis of the reportable segment results for Global Services, Hardware and Software. The Global Financing analysis is included in the Global Financing section on pages 49 and 50. ...

  • Page 42
    ... 7,957 WebSphere family Information Management Lotus Tivoli Rational Other middleware 4,595 Operating systems 2,426 Product Lifecycle Management 1,077 Other 775 * Reclassified to conform with 2005 presentation. 4,662 2,474 1,047 652 (1.4) (2.0) 2.9 18.8 Software revenue increased 4.3 percent...

  • Page 43
    ... offset by increased spending in Systems and Technology for server products ($171 million). Included in RD&E expense was increased retirement-related expense of $95 million and a decrease of $94 million for stock-based compensation expense in 2005 versus 2004. Intellectual property (IP) and custom...

  • Page 44
    ... as increases due to changes in the actuarial assumptions (used to determine 2007 expense) will be offset by expected savings due to better-than-expected 2006 return on asset performance. The actual return on the U.S. Personal Pension Plan (PPP) assets for 2006 was 15 percent. Pre-tax stock-based...

  • Page 45
    ... company's two primary objectives of its Global Financing business is to generate strong return on equity. Increasing receivables is the basis for growth in a financing business. Accordingly, management considers Global Financing receivables as a profit-generating investment, not as working capital...

  • Page 46
    ... in review ...37 Discontinued Operations ...41 Other Information ...41 Global Financing ...49 report of Management ...54 report of independent registered public accounting Firm ...55 Consolidated statements ...56 contributed approximately $1 billion to the U.K. pension plan, and on January 19, 2005...

  • Page 47
    ... PAYMENTS DUE IN 2007 2008-09 2010-11 AFTER 2011 Long-term debt obligations Capital (finance) lease obligations Operating lease obligations Purchase obligations Other long-term liabilities: Minimum pension funding (mandated)* Executive compensation Long-term termination benefits Other Total $16...

  • Page 48
    ManageMent diScuSSion international BuSineSS MachineS corPoration and SuBSidiarY coMPanieS Changes in the discount rate assumptions will impact the service cost, (gain)/loss amortization and interest cost components of the net periodic pension cost/(income) calculation (see page 107 for information...

  • Page 49
    ...." Generally, the company manages currency risk in these entities by linking prices and contracts to U.S. dollars and by entering into foreign currency hedge contracts. valuation of assets and reporting units The application of business combination and impairment accounting requires the use of...

  • Page 50
    ... "global Financing-description of Business" on page  for a discussion of the financing risks associated with the company's Global Financing business and management's actions to mitigate such risks while striving for consistently strong returns on Global Financing's equity. eMPloYeeS and related...

  • Page 51
    ... manage two of the major risks (credit and residual value) that are normally associated with financing. Global Financing comprises three lines of business: External revenue Internal revenue Total revenue Cost Gross profit Gross profit margin Pre-tax income After-tax income* Return on equity...

  • Page 52
    ... non-IBM equipment, software and services to meet clients' total solutions requirements. Client financing assets are primarily sales type, direct financing and operating leases for equipment, as well as loans for hardware, software and services with terms generally for two to seven years. Global...

  • Page 53
    ... international business Machines corporation anD subsiDiary coMpanies Commercial financing receivables arise primarily from inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory financing and accounts receivable financing...

  • Page 54
    ... Information ...41 Global Financing ...49 report of Management ...54 report of independent registered public accounting Firm ...55 consolidated statements ...56 debt is used to fund Global Financing assets and is composed of intercompany loans and external debt. The terms of the intercompany loans...

  • Page 55
    ...and access to capital markets. Cash generated from operations in 2006 was deployed to reduce intercompany payables and pay dividends to the company in order to maintain an appropriate debt-to-equity ratio. return on equity (Dollars in millions) AT DECEMBER 31: 2006 2005 Numerator: Global Financing...

  • Page 56
    ... and management's assessment of the effectiveness of the internal control over financial reporting. Its accompanying report is based on audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Audit Committee of the Board of Directors is...

  • Page 57
    report oF inDepenDent reGistereD public accountinG FirM international business Machines corporation anD subsiDiary coMpanies to the stockholders and board of Directors of international business Machines corporation: We have completed integrated audits of International Business Machines Corporation...

  • Page 58
    ... international business Machines corporation anD subsiDiary coMpanies (Dollars in millions except per share amounts) FOR THE YEAR ENDED DECEMBER 31: NOTES 2006 2005 2004 Revenue: Global Services Hardware Software Global Financing Other Total Revenue Cost: Global Services Hardware Software Global...

  • Page 59
    ... stateMent oF Financial position international business Machines corporation anD subsiDiary coMpanies (Dollars in millions except per share amounts) AT DECEMBER 31: NOTES 2006 2005 Assets Current assets: Cash and cash equivalents Marketable securities Notes and accounts receivable -trade (net of...

  • Page 60
    ... from disposition of plant, rental machines and other property Investment in software Purchases of marketable securities and other investments Proceeds from disposition of marketable securities and other investments Divestiture of businesses, net of cash transferred Acquisition of businesses, net of...

  • Page 61
    ... shares) Purchases (422,338 shares) and sales (2,840,648 shares) of treasury stock under employee plans-net Other treasury shares purchased, not retired (78,562,974 shares) Decrease in shares remaining to be issued in acquisition Income tax benefits-stock transactions Stockholders' equity, December...

  • Page 62
    ... Purchases (606,697 shares) and sales (2,594,786 shares) of treasury stock under employee plans-net Other treasury shares purchased, not retired (90,237,800 shares) Decrease in shares remaining to be issued in acquisition Income tax benefits-stock transactions Stockholders' equity, December 31, 2005...

  • Page 63
    ...(633,769 shares) and sales ( 3,489,803 shares) of treasury stock under employee plans-net Other treasury shares purchased, not retired ( 97,564,462 shares) Decrease in shares remaining to be issued in acquisition Income tax benefits-stock transactions Stockholders' equity, December 31, 2006 $28,926...

  • Page 64
    ...information. The company filed a Form 8-K with the Securities and Exchange Commission (SEC) on June 13, 2006 to reclassify its historical financial statements and related footnotes to reflect these management system changes. The Consolidated Financial Statements and accompanying notes, as applicable...

  • Page 65
    ...business Machines corporation anD subsiDiary coMpanies The company reduces revenue for estimated client returns, stock rotation, price protection, rebates and other similar allowances. (See Schedule II, "Valuation and Qualifying Accounts and Reserves" included in the company's Annual Report on Form...

  • Page 66
    notes to consoliDateD Financial stateMents international business Machines corporation anD subsiDiary coMpanies Revenue from fixed-price Design and Build contracts is recognized in accordance with SOP No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts,"...

  • Page 67
    ... in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the company for the recovery of unbilled accounts receivable, unamortized deferred costs incurred to purchase specific assets utilized in the delivery of services and to pay any additional...

  • Page 68
    ... real estate activity, foreign currency transaction gains and losses, gains and losses from the sale of businesses and amounts related to accretion of asset retirement obligations. Certain special actions discussed in note R, "2005 Actions," on pages 93 and 94 are also included in Other (income...

  • Page 69
    ... therein. See note B, "Accounting Changes" on page 71 and note V, "Retirement-Related Benefits," on pages 100 to 111 for additional information. Defined benefit pension and nonpension postretirement benefit plans The funded status of the company's retirement-related benefit plans is recognized in...

  • Page 70
    ... stateMents international business Machines corporation anD subsiDiary coMpanies Net periodic pension cost/(income) is recorded in the Consolidated Statement of Earnings and includes service cost, interest cost, expected return on plan assets, amortization of prior service cost and (gains)/ losses...

  • Page 71
    notes to consoliDateD Financial stateMents international business Machines corporation anD subsiDiary coMpanies Inventories, plant, rental machines and other property-net, and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars are translated...

  • Page 72
    ..., including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost are used to determine fair value. Dealer quotes are used for the remaining financial...

  • Page 73
    ... pages 62 to 71, effective December 31, 2006, the company adopted sFas No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106 and 132(R)," which requires the recognition of the funded status of the retirement-related...

  • Page 74
    ... No. 123. See note A, "Significant Accounting Policies," on pages 62 to 71 and note U, "Stock-Based Compensation," on pages 96 to 100 for additional information. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of...

  • Page 75
    ... costs and address compliance mandates. Micromuse was integrated into the Software segment upon acquisition and Goodwill, as reflected in the table on page 74, has been entirely assigned to the Software segment. The overall weighted-average useful life of the intangible assets purchased, excluding...

  • Page 76
    ... the table below, has been entirely assigned to the Software segment. The overall weighted-average useful life of the intangible assets purchased, excluding Goodwill, is 5.9 years. internet security systeMs, inc.- On October 20, 2006, the company acquired 100 percent of the outstanding common shares...

  • Page 77
    notes to consoliDateD Financial stateMents international business Machines corporation anD subsiDiary coMpanies (Dollars in millions) AMORTIZATION LIFE (IN YEARS) INTERNET SECURITY SYSTEMS, INC. MRO SOFTWARE, INC. OTHER ACQUISITIONS 2006 ACQUISITIONS Current assets Fixed assets/non-current ...

  • Page 78
    ... in the table on page 77, has been assigned to Global Technology Services segment for $269 million and to Global Business Services segment for $157 million. The overall weighted-average useful life of the intangible assets acquired, excluding Goodwill, is 4.7 years. other acquisitions - The company...

  • Page 79
    ... the closing date, Lenovo's capital structure changed due to new third-party investments. As a result, the company's equity at June 30, 2005 represented 9.9 percent of ordinary voting shares and 17.05 percent of total ownership in Lenovo. The equity securities have been accounted for under the cost...

  • Page 80
    ... to provide maintenance, warranty and financing services to Lenovo. The company retained the warranty liability for all Personal Computing business products sold prior to the closing date. Lenovo will have the right to use certain IBM trademarks under a Trademark License Agreement for a term of five...

  • Page 81
    ... IBM and non-IBM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days. Client loan receivables relate to loans that are provided by Global Financing primarily to the company's clients to finance the purchase of the company's software and services...

  • Page 82
    ...goodwill The following table details the company's intangible asset balances by major asset class: (Dollars in millions) AT DECEMBER 31, 2006 GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION NET CARRYING AMOUNT INTANGIBLE ASSET CLASS Capitalized software Client-related Completed technology Strategic...

  • Page 83
    ... for which it received a servicing fee. In 2005, both the pre-tax loss on the sale of receivables and the servicing fees received were insignificant. The facility was terminated in 2006 as the company determined that it had sufficient liquidity and alternative funding sources. No trade...

  • Page 84
    ... international business Machines corporation anD subsiDiary coMpanies lonG-terM Debt pre-swap borrowing (Dollars in millions) AT DECEMBER 31: MATURITIES 2006 2005 U.S. Dollars: Debentures: 5.875% 6.22% 6.5% 7.0% 7.0% 7.125% 7.5% 8.375% 3.43% convertible note* Notes: 5.9% average Medium-term note...

  • Page 85
    ... on local market conditions. (Dollars in millions) AT DECEMBER 31: 2006 2005 Cost of Global Financing Interest expense Interest capitalized Total interest on debt $692 278 11 $981 $525 220 16 $761 $428 139 4 $571 Refer to the related discussion on page 113 in note W, "Segment Information," for...

  • Page 86
    ... debt in the global capital markets, principally to fund its financing lease and loan portfolio. Access to cost-effective financing can result in interest rate and/or currency mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses...

  • Page 87
    ... certain broad equity market indices or the total return on the company's common stock. They are recorded at fair value with gains or losses reported in SG&A expense in the Consolidated Statement of Earnings. risk ManaGeMent proGraM (Dollars in millions) HEDGE DESIGNATION AT DECEMBER 31, 2006 FAIR...

  • Page 88
    notes to consoliDateD Financial stateMents international business Machines corporation anD subsiDiary coMpanies (Dollars in millions) HEDGE DESIGNATION AT DECEMBER 31, 2005 FAIR VALUE CASH FLOW NET INVESTMENT NON-HEDGE/ OTHER Derivatives-net asset/(liability): Debt risk management Long-term ...

  • Page 89
    ... related to hardware and software longterm maintenance agreements. Also see note A, "Significant Accounting Policies," on pages 62 to 71 for additional information. In response to changing business needs, the company periodically takes workforce reduction actions to improve productivity, cost...

  • Page 90
    ...included in the Treasury stock balance in the Consolidated Statement of Financial Position and the Consolidated Statement of Stockholders' Equity. accuMulateD Gains anD (losses) not aFFectinG retaineD earninGs (net oF tax) (Dollars in millions) RETIREMENT-RELATED BENEFIT PLANS* NET UNREALIZED GAINS...

  • Page 91
    ... to time in the ordinary course of its business, including actions with respect to contracts, intellectual property, product liability, employment, benefits, securities and environmental matters. These actions may be commenced by a number of different constituents, including competitors, partners...

  • Page 92
    ... 29, 2006, the company filed a lawsuit against Platform Solutions, Inc. (PSI) in the United States District Court for the Southern District of New York. IBM asserted claims for patent infringement and breach of contract in connection with PSI's development and marketing 90 2006 Annual Report

  • Page 93
    ... to the company's business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $2,496 million and $2,155 million at December 31, 2006 and 2005, respectively...

  • Page 94
    ... tax law changes on deferred tax assets and liabilities did not have a material impact on the company's effective tax rate. The significant components of deferred tax assets and liabilities that are recorded in the Consolidated Statement of Financial Position were as follows: 92 2006 Annual Report

  • Page 95
    ...business maChines COrpOratiOn and subsidiary COmpanies DeFerreD tax assets (Dollars in millions) AT DECEMBER 31: 2006 2005* Stock-based and other compensation Retirement-related benefits Capitalized research and development Bad debt, inventory and warranty reserves Deferred income Foreign tax loss...

  • Page 96
    ... Engineering ...93 R. 2005 Actions...93 S. Earnings Per Share of Common Stock ...95 T-X ...96 AT DECEMBER 31: Global Technology Services $ 718 Global Business Services 442 Systems and Technology Group 132 Software 98 Global Financing 16 Total reportable segments Unallocated corporate amounts Total...

  • Page 97
    ... international business Machines corporation anD subsiDiary coMpanies s. earninGs per share oF coMMon stock The following table presents the computation of basic and diluted earnings per share of common stock: FOR THE YEAR ENDED DECEMBER 31: 2006 2005* 2004 Weighted-average number of shares...

  • Page 98
    ...See note A, "Significant Accounting Policies," on page 68 for additional information. The following table represents total stock-based compensation expense included in the Consolidated Statement of Earnings: (Dollars in millions) FOR THE YEAR ENDED DECEMBER 31: 2006 2005 2004 Cost Selling, general...

  • Page 99
    ... are reviewed periodically with the Committee. Options that are awarded as part of annual total compensation for senior management and other employees are made on specific cycle dates scheduled in advance. With respect to option awards given in connection with promotions or new hires, the company...

  • Page 100
    nOtes tO COnsOlidated FinanCial statements internatiOnal business maChines COrpOratiOn and subsidiary COmpanies The following table summarizes option activity under the Plans during the years ended December 31, 2006, 2005 and 2004: 2006 WTD. AVG. EXERCISE PRICE NO. OF SHARES UNDER OPTION WTD. AVG. ...

  • Page 101
    ...the average market price on the last business day of each pay period. Effective April 1, 2005, the company modified the terms of the plan whereas eligible participants may purchase full or fractional shares of IBM common stock under the ESPP at a five percent discount off the average market price on...

  • Page 102
    ... all eligible U.S. employees and an increase in the amount of company matching contribution for all eligible U.S. employees hired on or before December 31, 2004. V. retireMent-relateD beneFits Description oF plans ibM sponsors defined benefit pension plans and defined contribution plans that cover...

  • Page 103
    ... company deposits funds under various fiduciary-type arrangements, purchases annuities under group contracts or provides reserves for these plans. Benefits under the defined benefit plans are typically based either on years of service and the employee's compensation (generally during a fixed number...

  • Page 104
    notes to consoliDateD Financial stateMents international business Machines corporation anD subsiDiary coMpanies plan Financial inForMation summary of Financial information The following table presents a summary of the total retirement-related benefits net periodic cost/(income) recorded in the ...

  • Page 105
    nOtes tO COnsOlidated FinanCial statements internatiOnal business maChines COrpOratiOn and subsidiary COmpanies defined benefit pension and nonpension postretirement benefit plan Financial information The following represents financial information for the company's significant retirement-related ...

  • Page 106
    ... statements internatiOnal business maChines COrpOratiOn and subsidiary COmpanies The following table presents the changes in the pension benefit and postretirement nonpension benefit obligations (benefit obligations) and plan assets of the significant retirement-related benefit plans: (Dollars in...

  • Page 107
    ... the pre-tax net loss, prior service costs/(credits) and transition assets/(obligations) recognized in Accumulated gains and (losses) not affecting retained earnings for the company's significant retirement-related benefit plans: (Dollars in millions) SIGNIFICANT DEFINED BENEFIT PENSION PLANS AT...

  • Page 108
    ... BENEFIT PLANS U.S. PLAN 2004 2006 2005 2004 SIGNIFICANT DEFINED BENEFIT PENSION PLANS U.S. PLAN 2006 2005 2004 2006 NON-U.S. PLANS 2005* Weighted-average assumptions used to determine net periodic cost/(income) for the year ended December 31: Discount rate Expected long-term return on plan assets...

  • Page 109
    notes to consoliDateD Financial stateMents international business Machines corporation anD subsiDiary coMpanies Discount rate The discount rate assumptions used for the retirement-related benefit plans accounting reflect the yields available on high-quality, fixed income debt instruments. For the ...

  • Page 110
    Notes to CoNsolidated FiNaNCial statemeNts iNterNatioNal busiNess maChiNes CorporatioN aNd subsidiary CompaNies healthcare cost trenD rate material Non-u.s. plans (Weighted-average) PLAN ASSETS AT DECEMBER 31: 2006 2005* 2007 TARGET ALLOCATION For nonpension postretirement benefit plan accounting...

  • Page 111
    ...other factors. nonpension postretireMent beneFit plans It is the company's general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and local tax laws. From time to time, the company contributes additional amounts as it...

  • Page 112
    ...status of the company's significant pension plans, see the table on page 102. consolidated statements...56 Notes ...62 A-G ...62 H-M ...80 N-S ...88 T-X ...96 T. Rental Expense and Lease Commitments ...96 U. Stock-Based Compensation ...96 V. Retirement-Related Benefits ...100 W. Segment Information...

  • Page 113
    ... and pre-tax income include transactions between the segments that are intended to reflect an arm's-length transfer price. Hardware and software that is used by the Global Technology Services segment in outsourcing engagements is primarily sourced internally from the Systems and Technology Group and...

  • Page 114
    ... GLOBAL TECHNOLOGY SERVICES GLOBAL BUSINESS SERVICES SYSTEMS AND TECHNOLOGY GROUP GLOBAL FINANCING PERSONAL COMPUTING DIVISION TOTAL SEGMENTS FOR THE YEAR ENDED DECEMBER 31: SOFTWARE 2006: External revenue Internal revenue Total revenue Pre-tax income/(loss) Revenue year-to-year change Pre-tax...

  • Page 115
    ...Technology Group segment and the Personal Computing Division are primarily plant, property and equipment and manufacturing inventory. The assets of the Global Financing segment are primarily financing receivables and fixed assets under operating leases. To accomplish the efficient use of the company...

  • Page 116
    ... subsidiary CompaNies ManaGeMent systeM seGMent View (Dollars in millions) GLOBAL SERVICES SEGMENTS GLOBAL TECHNOLOGY SERVICES GLOBAL BUSINESS SERVICES SYSTEMS AND TECHNOLOGY GROUP GLOBAL FINANCING PERSONAL COMPUTING DIVISION TOTAL SEGMENTS FOR THE YEAR ENDED DECEMBER 31: SOFTWARE 2006: Assets...

  • Page 117
    ...based on location of client. $105,748 $111,003 Net plant, property and equipment reVeNue by Classes oF similar produCts or serViCes For the personal Computing division, software, global business services and global Financing segments, the data on page 112 represents the revenue contributions from...

  • Page 118
    ...3,842 24.5% $ 1,174 0.70 $ 4,368 24.4% $ 1,085 0.63 $ 4,398 24.5% $ 1,005 0.59 $ 5,022 9.8% 2006 2005 2004 2003 2002 Total assets Net investment in plant, rental machines and other property Working capital Total debt Stockholders' equity $103,234 14,440 4,569 22,682 28,506 $105,748 13,756...

  • Page 119
    ... using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarter's EPS does not equal the full-year EPS. ** Reflects implementation of FASB Interpretation No. 47. See note B, "Accounting Changes," on page 72 for additional information. + The stock prices...

  • Page 120
    ...international business Machines corporation anD subsiDiary coMpanies coMparison oF one- FiVe- anD ten-year cuMulatiVe total return For ibM, s&p 500 stock inDex anD s&p inForMation technoloGy inDex The following graphs compare the one- five- and ten-year cumulative total returns for IBM common stock...

  • Page 121
    FiVe-year 160 140 160 120 DOLLARS (USD) DOLLARS (USD) 140 100 120 80 100 60 80 40 60 20 40 0 20 0 '01 '02 '03 '04 '05 '06 '01 '02 '03 '04 '05 '06 2001 2002 2003 2004 2005 2006 l IBM Common Stock l S & P 500 Index l S & P Information Technology Index $100.00 100.00 100.00 $64.53 77.90...

  • Page 122
    boarD oF Directors anD senior executiVe oFFicers international business Machines corporation anD subsiDiary coMpanies boarD oF Directors cathleen black President Hearst Magazines kenneth i. chenault Chairman and Chief Executive Officer American Express Company juerGen DorMann Chairman of the Board ...

  • Page 123
    ...by IBM's Chief Executive Officer are included in the company's filings with the New York Stock Exchange and the Chicago Stock Exchange (including filings in 2006). IBM's website (http://www.ibm.com) contains a significant amount of information about IBM, including the company's annual report on Form...

  • Page 124
    2006 Annual Report