IBM 2007 Annual Report Download

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Dear IBM Investor:
I am very pleased to report to you on a superb
year for your company
—
a year of record revenue,
profit, cash flow and earnings per share. It reflects
the hard work of some of the world’s brightest
and most innovative women and men
—
the
IBMers I’m proud to call my colleagues. It is also
the result of important strategic choices we made
several years ago
—
choices that have put IBM in
a strong position to continue to grow profitably,
to strengthen our client relationships, and to seize
the most attractive opportunities in a very
dynamic global economy.

Table of contents

  • Page 1
    Dear IBM Investor: I am very pleased to report to you on a superb year for your company- a year of record revenue, profit, cash ï¬,ow and earnings per share. It reï¬,ects the hard work of some of the world's brightest and most innovative women and men- the IBMers I'm proud to call my colleagues. It...

  • Page 2
    006 07 08 9 Annual Report

  • Page 3
    ... confronted with fundamental changes: the reality of global integration, a new computing model and new ways for businesses and institutions to apply technology to create value. Samuel J. Palmisano Chairman, President and Chief Executive Officer It was clear that we had to change - and not only to...

  • Page 4
    ... 03 7.5 04 8.0 05 9.4 06 10.4 07 2005 performance includes results from four months of the IBM PC business, which was divested on April 30, 2005. 2 Technology: IBM has been saying it for many years: The basic computing model has changed. The PC model of the 1980s has receded in importance to...

  • Page 5
    ... longer content with cost savings from off-the-shelf technologies and solutions, they were seeking to innovate. And this involved not just their products and services, but their entire companies: business processes, management systems, policies and even their core business model. To accomplish that...

  • Page 6
    ...This strengthened business model and our excellent performance in 2007 have increased our confidence that we will meet our 2010 objective of $10 to $11 in earnings per share. I think the information on pages 6 to 7 will help you understand the sources of that confidence. 4 The IBM Difference We...

  • Page 7
    ...system utilization, generated about $200 million in incremental gross profit for us in 2007. And our industry-leading solutions in SOA enable clients to reinvent their entire business model. Clients in both the developed and developing worlds will be migrating to this new data center model, and IBM...

  • Page 8
    ...we grew more than 10 percent in local currency in 2007. In aggregate, IBM's business in this group grew at a rate of more than 20 percent in local currency last year, and comprised 15 percent of our geographic revenues. IBM operates in 170 countries and enjoys an increasingly broad-based geographic...

  • Page 9
    ... lets us return value to shareholders by reducing shares outstanding while reinvesting for future growth. Growth initiatives and future acquisitions: We invest in key growth initiatives and strategic acquisitions to complement and scale our product portfolio. Retirement-related savings: We expect...

  • Page 10
    ..., risk management, business intelligence, business optimization and transformation, as well as how a company expands its client base in order to gain share. Companies are seeking to identify and classify security risks and protect their data from all forms of attack. They face regulatory demands and...

  • Page 11
    ...the exchange of raw materials for industrial goods. Instead, they are innovating. They are differentiating. Most importantly, their people are becoming consumers; they're joining the middle class. Hundreds of millions of people are opening their first bank accounts, getting their first cell phones...

  • Page 12
    ... the most promising opportunities for organizational innovation in business today - driven by the need to help our people succeed in this new environment. Last year we introduced the IBM Global Citizen's Portfolio. It aims to provide our employees with the tools they need to enhance their expertise...

  • Page 13
    support the IBMer's own learning and exploration - even if not related to his or her current job. We are helping retiring IBMers to transition to second careers in teaching, government service and nongovernmental organizations. And we've established a program called the Corporate Service Corps, in ...

  • Page 14
    ...,828 2,147 1.50 2007 $ 15,019 4,737 8,084 1,683 1.10 2006 Cash, cash equivalents and marketable securities Total 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...

  • Page 15
    ... 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 64 73 76 82 83 83 84 84 84 85 88 91 92 94 97 99 99 101 101 102 105 116 119 Report of Management Report of...

  • Page 16
    ... The financial section of the International Business Machines Corporation (IBM or the company) 2007 Annual Report, consisting of this Management Discussion, the Consolidated Financial Statements that follow and the notes related thereto, comprises 109 pages of information. This Road Map is designed...

  • Page 17
    ...tax. The adoption of SFAS No. 158 had no impact on the company's existing debt covenants, credit ratings or financial flexibility. See note U, "Retirement-Related Benefits," on pages 105 to 116 for additional information, including 2007 impacts. U The company divested its Personal Computing business...

  • Page 18
    ... Discussion International Business Machines Corporation and Subsidiary Companies Management Discussion Snapshot ($ and shares in millions except per share amounts) YR.-TO-YR. PERCENT/ MARGIN CHANGE Continuing Operations The company's performance in 2007 reflected the strength of its global model...

  • Page 19
    .... The Global Services backlog is estimated to be $118 billion at December 31, 2007, versus $116 billion at December 31, 2006. For additional information and details, see the "Year in Review" section on pages 23 to 37. Description of Business Please refer to IBM's Annual Report on Form 10-K filed on...

  • Page 20
    ...real value creation. U IBM has a long heritage of transforming the business operations of large enterprises and has earned the trust to be their innovation partner and global integrator. U The company has a deep set of global assets and capabilities it is applying to improve services profitability...

  • Page 21
    ... Systems Integration Application Management Services WebSphere Information Management Tivoli Lotus Rational Operating Systems Software Systems & Financing Servers Storage Retail Store Solutions Microelectronics Commercial Financing Client Financing Business Segments and Capabilities The company...

  • Page 22
    ... deployed to support services solutions. Software Capabilities Servers. IBM systems, which are typically connected to a network and provide the required infrastructure for business. These systems use both IBM and non-IBM operating systems and all IBM servers can also run Linux, a key open source...

  • Page 23
    Management Discussion International Business Machines Corporation and Subsidiary Companies IBM Worldwide Organizations The following worldwide organizations play key roles in IBM's delivery of value to its clients: U Sales and Distribution Organization U Research, Development and Intellectual ...

  • Page 24
    ... tools, which can be used to develop and upgrade other companies' software products. Key Business Drivers The following are some of the key drivers of the company's business. ECONOMIC ENVIRONMENT AND CORPORATE SPENDING BUDGETS Global demand for systems, software and services is a key driver...

  • Page 25
    Management Discussion International Business Machines Corporation and Subsidiary Companies Year in Review Results of Continuing Operations SEGMENT DETAILS The following is an analysis of the 2007 versus 2006 reportable segment results. The analysis of 2006 versus 2005 reportable segment results is ...

  • Page 26
    ...Global Business Services acquisition of Internet Security Systems (ISS), in the fourth quarter of 2006, also contributed to the revenue growth this year. ITS signings increased 4 percent in 2007, with good performance in the key offerings, including Green Data Center, Server Management Services and...

  • Page 27
    ... and Technology Services Retail Store Solutions Printing Systems Systems and Technology revenue decreased 3.0 percent (6 percent adjusted for currency) in 2007 versus 2006. On June 1, 2007, the company completed the divestiture of its printing business to Ricoh. This resulted in the loss of...

  • Page 28
    ....5 19.1 14.7 8.7 18.0 13.7 3.5 2.0 (6.4) 26.7 Middleware Key Branded Middleware WebSphere Family Information Management Lotus Tivoli Rational Other middleware Operating Systems Product Lifecycle Management Other * Reclassified to conform with 2007 presentation. 4,678 2,319 1,051 1,107 4,518 2,273...

  • Page 29
    ... Financial Services, Public and Small and Medium Business sectors. Clients are using IBM middleware to effectively improve their operating leverage and business efficiency. Revenue from Key Branded Middleware, which includes WebSphere, Information Management, Lotus, Tivoli and Rational products, was...

  • Page 30
    ... Snapshot ...16 Description of Business ...17 Year in Review ...23 Prior Year in Review ...37 Discontinued Operations ...42 Other Information...42 Global Financing ...50 Report of Management ...56 Report of Independent Registered Public Accounting Firm ...57 Consolidated Statements...58 Notes...64

  • Page 31
    ...acquisition-related spending (3 points), the effects of currency (3 points) and investments in the software and services businesses, as well as emerging markets. These investments reflect the continuing business mix shift to higher value offerings which require higher operating expenses. The returns...

  • Page 32
    ... stock-based compensation cost at December 31, 2007 and 2006. (17.7)% See note T, "Stock-Based Compensation," on pages 102 to 105 4.6 for additional information on the company's stock-based incentive 18.8 awards. 6.4% Retirement-Related Benefits The timing and amount of Sales and other transfers...

  • Page 33
    ... the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, stock awards, convertible notes and shares which may be required to settle ASR agreements. The assets and debt associated with the Global Financing business are a significant part of...

  • Page 34
    ... the fair value of the plan assets and the benefit obligation. The funded status is recognized in the Consolidated Statement of Financial Position. (See note A, "Significant Accounting Policies," on pages 69 and 70 for additional information). At December 31, 2007, as a result of the company's plan...

  • Page 35
    ... short-term borrowings, partially offset by $11,306 million in cash payments to settle debt. See note J, "Borrowings," on pages 85 to 88 for a listing of the company's debt securities. Noncurrent Assets and Liabilities ($ in millions) AT DECEMBER 31: 2007 2006 primarily due to the impact of pension...

  • Page 36
    ...' equity: Total $28,470 $28,506 marily due to pension remeasurement; and U An increase of $298 million in long-term derivative liabilities due to The company's consolidated Stockholders' equity decreased $36 million in 2007 as a result of several key factors: U A decrease related to net stock...

  • Page 37
    ...cash equity impacts related to an increase in overfunded pension plans reflecting yearend remeasurements. Consolidated Fourth-Quarter Results ($ and shares in millions except per share amounts) YR.-TO-YR. PERCENT/ MARGIN CHANGE FOR THE FOURTH QUARTER: 2007 2006 Revenue Gross profit margin Total...

  • Page 38
    ... software. Lotus Connections, which was released in June 2007, has been rapidly adopted by customers. Tivoli software revenue increased 19.0 percent with double-digit growth in Systems Management, Security and Storage products. Rational revenue increased 22.2 percent in the quarter, as the company...

  • Page 39
    ... agreements (see note M, "Stockholders Equity Activity," on pages 92 and 93). The weighted-average number of diluted common shares outstanding in the fourth quarter of 2007 was 1,412.9 million compared with 1,532.5 million in the fourth quarter of 2006. The company generated $5,151 million in cash...

  • Page 40
    ... to 2005, benefiting from a 5.3 point improvement in the effective tax rate year to year. The increased revenue, excluding the Personal Computing business, in 2006 as compared to 2005, was primarily due to: U Improved demand in the Software business, driven by Key Branded Middleware products, with...

  • Page 41
    ... Services Maintenance Business Transformation Outsourcing Global Business Services The GTS segment pre-tax margin was 9.6 percent, an increase of 1.9 points versus 2005. This increase and the gross margin increase were driven by productivity initiatives and cost efficiencies, including benefits...

  • Page 42
    ... Financing ...50 Report of Management ...56 Report of Independent Registered Public Accounting Firm ...57 Consolidated Statements...58 Notes...64 Software segment revenue increased 7.9 percent (7 percent adjusted for currency) in 2006 versus 2005 reflecting strong demand for the company's industry...

  • Page 43
    ... in the second quarter of 2005. In addition, retirement-related expense and stock-based compensation decreased versus 2005. Those decreases were partially offset by increased operational expenses as a result of strategic acquisitions and investments in the software and services businesses as well as...

  • Page 44
    ..., the company reported net income of $76 million, net of tax, primarily related to tax benefits from tax audit settlements. The company incurred a loss from discontinued operations of $24 million in 2005, net of tax. This loss was primarily due to additional costs associated with parts warranty as...

  • Page 45
    ... of pension plan redesign efforts. See note U, "Retirement-Related Benefits," on page 106 for additional information. The actual return on the IBM Personal Pension Plan (PPP) assets in 2007 was 14 percent, compared to a 15 percent return in 2006. The company expects that its effective tax rate in...

  • Page 46
    ... of Directors meets quarterly to consider the dividend payment. The company expects to fund dividend payments through cash from operations. In the second quarter of 2007, the Board of Directors increased the company's quarterly common stock dividend from $0.30 to $0.40 per share. Senior long-term...

  • Page 47
    Management Discussion International Business Machines Corporation and Subsidiary Companies The table below represents the way in which management reviews cash flow as described on page 44. ($ in billions) FOR THE YEAR ENDED DECEMBER 31: 2007 2006 2005 2004 2003 Net cash from operating activities (...

  • Page 48
    ..."Stockholders' Equity Activity," on pages 92 and 93 for further information on the ASR agreements entered into by the company. Management Discussion ...14 Road Map ...14 Forward-Looking and Cautionary Statements ...15 Management Discussion Snapshot ...16 Description of Business ...17 Year in Review...

  • Page 49
    ... of discount rates and expected return on plan assets. 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 pages 111 and 112 for information regarding the discount rate...

  • Page 50
    ... and other employee separation costs, realizable values of assets made redundant or obsolete, lease cancellation and other exit costs. If the actual amounts differ from the company's estimates, the amount of restructuring charges could be materially impacted. See note Q, "2005 Actions," on pages 99...

  • Page 51
    ... instruments relating to the financing or hedging of those items are included by definition. Excluded items include forecasted foreign currency cash flows and the company's net investment in foreign operations. As a consequence, reported changes in the values of some Currency Rate Fluctuations...

  • Page 52
    ... the 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 Workforce YR.-TO-YR. CHANGE FOR THE YEAR ENDED DECEMBER 31: 2007 2006 2005 2007-06 2006-05 IBM/wholly owned subsidiaries...

  • Page 53
    ... portion of the company's accounts receivable, primarily for cash management purposes. All internal financing arrangements are at arm's-length rates and are based upon market conditions. U Commercial financing provides primarily short-term inventory and equipment sales to the Systems and Technology...

  • Page 54
    ... Business Machines Corporation and Subsidiary Companies Financial Condition BALANCE SHEET ($ in millions) AT DECEMBER 31: 2007 2006 Cash Net investment in sales-type leases Equipment under operating leases: External clients (a) Internal clients (b) (c) Client loans Total client financing assets...

  • Page 55
    ... the product plans and cycles for the IBM products under lease. Based upon this information, Global Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio. See note A, "Significant Accounting Policies," on page 73...

  • Page 56
    Management Discussion International Business Machines Corporation and Subsidiary Companies UNGUARANTEED RESIDUAL VALUE ($ in millions) TOTAL 2006 2007 2008 ESTIMATED RUN OUT OF 2007 BALANCE 2009 2010 2011 AND BEYOND Sales-type leases Operating leases Total unguaranteed residual value $ 854 342 ...

  • Page 57
    Management Discussion International Business Machines Corporation and Subsidiary Companies LIQUIDITY AND CAPITAL RESOURCES Global Financing is a segment of the company and as such, is supported by the company's overall liquidity position and access to capital markets. Cash generated by Global ...

  • Page 58
    ... meets periodically and privately with the independent registered public accounting firm, with the company's internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and financial reporting matters. MANAGEMENT'S REPORT ON INTERNAL CONTROL...

  • Page 59
    ... 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: In our opinion, the accompanying Consolidated Financial Statements appearing on pages 58...

  • Page 60
    ... Statement of Earnings International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) FOR THE YEAR ENDED DECEMBER 31: NOTES 2007 2006* 2005* Revenue: Services Sales Financing Total Revenue Cost: Services Sales Financing Total Cost Gross Profit...

  • Page 61
    ... Machines Corporation and Subsidiary Companies ($ in millions except per share amount) AT DECEMBER 31: NOTES 2007 2006 Assets Current assets: Cash and cash equivalents Marketable securities Notes and accounts receivable - trade (net of allowances of $241 in 2007 and $221 in 2006) Short-term...

  • Page 62
    ... Stock-based compensation Deferred income taxes Net gain on asset sales and other Change in operating assets and liabilities, net of acquisitions/divestitures: Receivables (including financing receivables) Retirement related Inventories Other assets/other liabilities Accounts payable Net Cash...

  • Page 63
    ...(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 (1,250...

  • Page 64
    ...211,279 shares) Purchases (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...

  • Page 65
    ... securities (net of tax expense of $132) Total gains and (losses) not affecting retained earnings Subtotal: Net income plus gains and (losses) not affecting retained earnings Cash dividends declared - common stock Common stock issued under employee plans (49,137,038 shares) Purchases (1,282...

  • Page 66
    ... related to tax benefits from tax audit settlements. For 2005, the Loss from discontinued operations, net of tax, is primarily additional costs associated with parts warranty as agreed upon by the company and Hitachi. Consolidated Statement of Cash Flows Subsequent to the company's Form 10-Q filing...

  • Page 67
    ..., or has inventory risk. Consideration is also given to whether the company adds meaningful value to the vendor's product or service, was involved in the selection of the vendor's product or service, has latitude in establishing the sales price or has credit risk. The company reports revenue net of...

  • Page 68
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies If the allocation of consideration in a profitable arrangement results in a loss on an element (other than service elements as discussed below), that loss is recognized at the earlier of ...

  • Page 69
    ... Capitalized amounts are amortized using the straight-line method, which is applied over periods ranging up to three years. The company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged...

  • Page 70
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The company capitalizes certain costs that are incurred to purchase or to create and implement internal-use computer software, which includes software coding, installation, testing and ...

  • Page 71
    ... of asset retirement obligations. Certain special actions discussed in note Q, "2005 Actions," on pages 99 and 100 are also included in Other (income) and expense. Business Combinations and Intangible Assets Including Goodwill The company accounts for business combinations using the purchase method...

  • Page 72
    ... employee requisite service period. The company estimates the fair value of stock options using a BlackScholes valuation model. The cost is recorded in Cost, SG&A, and RD&E in the Consolidated Statement of Earnings based on the employees' respective function. The company records deferred tax assets...

  • Page 73
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Income Taxes Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary differences between asset and liability amounts ...

  • Page 74
    ... retained earnings within Stockholders' equity. Realized gains and losses are calculated based on the specific identification method. Other-thantemporary declines in market value from original cost are charged to Other (income) and expense in the period in which the loss occurs. In determining...

  • Page 75
    ...Machines Corporation and Subsidiary Companies Allowance for Uncollectible Receivables TRADE An allowance for uncollectible trade receivables is estimated based on a combination of write-off history, aging analysis and any specific, known troubled accounts. Estimated Residual Values of Lease Assets...

  • Page 76
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," which will become effective in 2009 via prospective application to new business combinations. This Statement ...

  • Page 77
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 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, ...

  • Page 78
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies As of December 31, 2005, the company was unable to estimate the range of settlement dates and the related probabilities for certain asbestos remediation AROs. These conditional AROs are ...

  • Page 79
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies ($ in millions) 2007 ACQUISITIONS AMORTIZATION LIFE (IN YEARS) ACQUISITIONS Current assets Fixed assets/noncurrent Intangible assets: Goodwill Completed technology Client relationships ...

  • Page 80
    ...-average useful life of the intangible assets purchased, excluding Goodwill, is 5.6 years. MRO Software Inc.- On October 5, 2006, the company acquired 100 percent of the outstanding common shares of MRO Software, Inc. for cash consideration of $739 million. MRO's asset and service management...

  • Page 81
    ... Statements International Business Machines Corporation and Subsidiary Companies ($ in millions) MICROMUSE, INC. AMORTIZATION LIFE (IN YEARS) ORIGINAL AMOUNT DISCLOSED IN FIRST QTR. 2006 PURCHASE ADJUSTMENTS* TOTAL ALLOCATION FILENET CORPORATION 2006 ACQUISITIONS Current assets Fixed assets...

  • Page 82
    ...a publicly traded company, to form a joint venture company based on the Printing System Division (a division of the Systems and Technology segment). 80 Management Discussion ...14 Consolidated Statements...58 Notes...64 A-F ...64 A. Significant Accounting Policies ...64 B. Accounting Changes ...73...

  • Page 83
    ...the Hong Kong Stock Exchange. The total consideration that the company agreed to on December 7, 2004 (the date the definitive agreement was signed) was $1,750 million which included $650 million in cash, $600 million in Lenovo equity (valued at the December 6, 2004 closing price) and the transfer of...

  • Page 84
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies was valued at $1,725 million, comprised of: $650 million in cash, $542 million in Lenovo equity and $533 million in net liabilities transferred. Transaction related expenses and provisions...

  • Page 85
    ... Assets," on page 84. Note E. Inventories ($ in millions) AT DECEMBER 31: 2007 2006 Finished goods Work in process and raw materials Total $ 668 1,996 $2,664 $ 506 2,304 $2,810 Net investment in sales-type leases is for leases that relate principally to the company's equipment and are for terms...

  • Page 86
    ...: Equity method Non-equity method Long-term deposits Derivatives - noncurrent + Marketable securities Prepaid software Other assets Total $1,513 1,475 271 879 285 259 531 221 1,327 $6,761 $3,880 1,232 416 628 228 213 361 146 1,277 $8,381 INTANGIBLE ASSET CLASS Capitalized software Client-related...

  • Page 87
    ... Statements International Business Machines Corporation and Subsidiary Companies The net carrying amount of intangible assets decreased by $95 million for the year ended December 31, 2007, primarily due to the amortization of acquired intangibles, partially offset by net increases in capitalized...

  • Page 88
    ... Business Consulting and Technology Services Unit partners. The notes were convertible into 4,764,543 shares of IBM common stock at the option of the holders at any time based on a fixed conversion price of $68.81 per share of the company's common stock. As of December 31, 2007, all of the shares...

  • Page 89
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Post-Swap Borrowing (Long-Term Debt, Including Current Portion) ($ in millions) 2007 AT DECEMBER 31: AMOUNT AVERAGE RATE AMOUNT 2006 AVERAGE RATE Fixed-rate debt* Floating-rate debt** Total $10...

  • Page 90
    ... hedging programs follows. Debt Risk Management The company issues 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...

  • Page 91
    ... hedge the exposures related to certain employee compensation obligations. The derivatives are linked to the total return on 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 also reported in SG&A expense...

  • Page 92
    ... subsidiaries ("net investments") Anticipated royalties and cost transactions Anticipated commodity purchase transactions Subsidiary cash and foreign currency asset/liability management Equity risk management Other derivatives Total derivatives Debt: Long-term investments in foreign subsidiaries...

  • Page 93
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Accumulated Derivative Gains or Losses At December 31, 2007, in connection with its cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $...

  • Page 94
    ... actuarially calculated gains/losses related to long-term retirement benefits in Europe. The workforce accruals primarily relate to the Global Services business. The remaining liability relates to terminated employees who are no longer working for the company who were granted annual payments...

  • Page 95
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies reflect certain other amounts including the banks' carrying costs, compensation for ordinary dividends declared by the company during the settlement period and interest benefits for receiving the...

  • Page 96
    ... business, including actions with respect to contracts, intellectual property (IP), product liability, employment, benefits, securities, and environmental matters. These actions may be commenced by a number of different parties, including competitors, partners, clients, current or former employees...

  • Page 97
    ... related to the company's disclosures concerning first-quarter 2005 earnings and the expensing of equity compensation. Pursuant to an Order from the Court dated March 28, 2006, the two lawsuits were consolidated into a single action captioned "In re International Business Machines Corp. Securities...

  • Page 98
    .... Management Discussion ...14 Consolidated Statements...58 Notes...64 A-F ...64 G-M ...84 N-S ...94 N. Contingencies and Commitments ...94 O. Taxes ...97 P. Research, Development and Engineering ...99 Q. 2005 Actions...99 R. Earnings Per Share of Common Stock ...101 S. Rental Expense and Lease...

  • Page 99
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Note O. Taxes ($ in millions) FOR THE YEAR ENDED DECEMBER 31: 2007 2006 2005 A reconciliation of the statutory U.S. federal tax rate to the company's continuing operations effective tax rate is...

  • Page 100
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies For income tax return purposes, the company has available foreign, domestic and capital loss carryforwards, the tax effect of which is $799 million, as well as state tax credit ...

  • Page 101
    ...as well as services and their application. Within these amounts, software-related expense was $3,037 million, $2,842 million and $2,689 million in 2007, 2006 and 2005, Total pre-tax restructuring activity was as follows: ($ in millions) PRE-TAX CHARGES RECORDED IN SECOND-QTR. 2005 ASSET IMPAIRMENTS...

  • Page 102
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies ($ in millions) LIABILITY AS OF DEC. 31, 2005 LIABILITY AS OF DEC. 31, 2006 LIABILITY AS OF DEC. 31, 2007 PAYMENTS OTHER* PAYMENTS OTHER+ Workforce reductions Vacant space Total ...

  • Page 103
    ... Statements International Business Machines Corporation and Subsidiary Companies Note R. 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: 2007 2006 2005 Weighted-average number...

  • Page 104
    ...employee requisite service period. See note A, "Significant Accounting Policies," on page 70 for additional information. The following table presents total stock-based compensation cost included in the Consolidated Statement of Earnings: ($ in millions) FOR THE YEAR ENDED DECEMBER 31: 2007 2006 2005...

  • Page 105
    ...10 years. The plan element permitting deferral of annual incentive compensation into IBM equity and receiving at-the-money stock options was terminated at December 31, 2006. The company estimates the fair value of stock options using the Black-Scholes valuation model, consistent with the provisions...

  • Page 106
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The shares under option at December 31, 2007 were in the following exercise price ranges: OPTIONS OUTSTANDING WTD. AVG. EXERCISE PRICE NUMBER OF SHARES UNDER OPTION AGGREGATE INTRINSIC VALUE WTD...

  • Page 107
    ... of retiree medical and dental benefits for eligible retirees and dependents. These benefits form an important part of the company's total compensation and benefits program that is designed to attract and retain highly skilled and talented employees. IBM Employees Stock Purchase Plan The company...

  • Page 108
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies U.S. PLANS Defined Benefit Pension Plans IBM Personal Pension Plan IBM provides U.S. regular, full-time and part-time employees hired prior to January 1, 2005 with noncontributory ...

  • Page 109
    ... 2007 TOTAL 2006 2005 Significant defined benefit pension plans* Other defined benefit pension plans** SERP Total defined benefit pension plans cost IBM Savings Plan and Non-U.S. Plans EDCP Total defined contribution plans cost Nonpension postretirement benefit plans cost Total retirement-related...

  • Page 110
    ... postretirement benefit plan represents the U.S. nonpension postretirement benefit plan. 108 Management Discussion ...14 Consolidated Statements...14 Notes...64 A-F ...64 G-M ...84 N-S ...94 T-W...102 T. Stock-Based Compensation ...102 U. Retirement-Related Benefits ...105 V. Segment Information...

  • Page 111
    ... Statements International Business Machines Corporation and Subsidiary Companies The following table presents the components of net periodic cost of the significant retirement-related benefit plans recognized in Consolidated Statement of Earnings: ($ in millions) SIGNIFICANT DEFINED BENEFIT PENSION...

  • Page 112
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The following table presents the funded status recognized in the Consolidated Statement of Financial Position for the company's significant retirement-related benefit plans: ($ in ...

  • Page 113
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The following table presents the estimated net loss, estimated prior service credits and estimated transition assets of the company's significant retirement-related benefit plans that ...

  • Page 114
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies For the PPP, the changes in discount rate assumptions impacted both net periodic cost and the PBO. For purposes of measuring the net periodic cost for the years ended December 31, 2007, 2006 and 2005, the...

  • Page 115
    ... Statements International Business Machines Corporation and Subsidiary Companies Healthcare Cost Trend Rate For nonpension postretirement benefit plan accounting, the company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates...

  • Page 116
    ...Statements International Business Machines Corporation and Subsidiary Companies Outside the U.S., the investment objectives are similar, subject to local regulations. In some countries, a higher percentage allocation to fixed income securities is required. In others, the responsibility for managing...

  • Page 117
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Nonpension Postretirement Benefit Plan... comprised of previously unrecognized gains/(losses), prior service credits/(costs) and transition assets/(obligations). Implementation of SFAS No...

  • Page 118
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Other Plan Information /ˆiÃ'w Â'Â' 勛€Ã'Ã">LÂ'iÃ'°Ã...iÈi›Ã"ÈÃ'‹›w Ã...Â->Ã"‹ ›Ã'w Ã...Ã'ȋ€›‹w‹V>›Ã"Ã'`iw‹›i`Ã'Li›iw‹Ã"Ã'°i›È‹ ›Ã'°Â'>›ÈÃ'å‹Ã"ˆÃ'>VV...

  • Page 119
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies Management System Segment View ($ in millions) GLOBAL SERVICES SEGMENTS GLOBAL TECHNOLOGY SERVICES GLOBAL BUSINESS SERVICES SYSTEMS AND TECHNOLOGY GLOBAL FINANCING PERSONAL COMPUTING DIVISION TOTAL SEGMENTS...

  • Page 120
    ... ›µ Management System Segment View ($ in millions) GLOBAL SERVICES SEGMENTS GLOBAL TECHNOLOGY SERVICES GLOBAL BUSINESS SERVICES SYSTEMS AND TECHNOLOGY GLOBAL FINANCING PERSONAL COMPUTING DIVISION TOTAL SEGMENTS FOR THE YEAR ENDED DECEMBER 31: SOFTWARE 2007: Assets i°Ã...iV...

  • Page 121
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies RECONCILIATIONS OF IBM AS REPORTED ($ in millions) AT DECEMBER 31: 2007 2006* 2005* Major Clients iÃ'VÂ'‹i›Ã"Ã'Ã...i°Ã...iÈi iÃ...Vi iÃ' wÃ'Ã"ˆiÃ'V iäi›Þiµ ÈÈi i° ...

  • Page 122
    ... International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) FOR THE YEAR ENDED DECEMBER 31: 2007 2006 2005 ... * Reflects implementation of FASB Interpretation No. 47. See note B, "Accounting Changes," on page 75 for additional information. §Ûí

  • Page 123
    ... year is computed 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. II The stock prices reflect the high and low prices for IBM's common stock on the New York Stock Exchange composite tape for the last...

  • Page 124
    ...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... 2001 2002 2003 2004 2005 2006 2007 Ã' Ã' VÂ'Ã' Ã'-Ã'EÃ'*Ã'yííÃ'›`iæÃ'Ã' S & P Information Ã' Ã' /iV iæÃ'...

  • Page 125
    ... Officers International Business Machines Corporation and Subsidiary Companies Board of Directors Cathleen Black President Hearst Magazines William R. Brody President The Johns Hopkins University Kenneth I. Chenault Chairman and Chief Executive Officer American Express Company Juergen Dormann...

  • Page 126
    ... Annual Report is printed on recycled paper and is recyclable. BladeCenter, Blue Gene, Domino, FileNet, IBM, Lotus, Lotus Notes, Micromuse, Notes, POWER5+, POWER6, Rational, S/390, System i, System p, System x, System z, Tivoli, and WebSphere are trademarks or registered trademarks of International...

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    2007 Annual Report