IBM 2007 Annual Report Download - page 39

Management Discussion
International Business Machines Corporation and Subsidiary Companies
37
Prior Year in Review
($ and shares in millions except per share amounts)
YR.-TO-YR.
PERCENT/
MARGIN
FOR THE YEAR ENDED DECEMBER 31: 2006 2005 CHANGE
Revenue $ 91,424 $ 91,134 0.3%*
Gross profit margin 41.9% 40.1% 1.8 pts.
Total expense and other income $ 24,978 $ 24,306 2.8%
Total expense and other
income-to-revenue ratio 27.3% 26.7% 0.7 pts.
Income from continuing
operations before income taxes $ 13,317 $ 12,226 8.9%
Provision for income taxes $ 3,901 $ 4,232 (7.8)%
Income from continuing
operations $ 9,416 $ 7,994 17.8%
Income/(loss) from
discontinued operations $ 76 $ (24) NM
Income before cumulative
effect of change in
accounting principle $ 9,492 $ 7,970 19.1%
Cumulative effect of change
in accounting principle,
net of tax** $ — $ (36) NM
Net income $ 9,492 $ 7,934 19.6%
Net income margin 10.4% 8.7% 1.7 pts.
Earnings per share of
common stock:
Assuming dilution:
Continuing operations $ 6.06 $ 4.91 23.4%
Discontinued operations 0.05 (0.01) NM
Cumulative effect of
change in accounting
principle** — (0.02) NM
Total $ 6.11 $ 4.87 25.5%
Weighted-average shares
outstanding:
Assuming dilution 1,553.5 1,627.6 (4.6)%
Assets
+ $103,234 $105,748 (2.4)%
Liabilities
+ $ 74,728 $ 72,650 2.9%
Equity
+ $ 28,506 $ 33,098 (13.9)%
* Flat adjusted for currency.
** Reflects implementation of FASB Interpretation No. 47, “Accounting for Conditional
Asset Retirement Obligations.” See note B, “Accounting Changes,” on page 75 for
additional information.
+ At December 31.
NM — Not meaningful
adjusted for currency). In addition to the BRIC markets, there are
many other nations with a similar profile that have demonstrated
rapidly growing markets with strong demand for business and IT
infrastructure solutions. In December 2007, the company announced
a new organization and management structure aimed at continuing
to capture these opportunities.
Total expense and other income increased 8.6 percent compared
to the fourth quarter of 2006. Total expense and other income to
revenue ratio improved 0.3 points to 25.9 percent. Selling, general
and administrative expense increased 7.0 percent (3 percent adjusted
for currency), primarily driven by currency, continuing investments
in key markets and acquisitions and increased accounts receivable
provisions. Interest expense was $214 million, an increase of $144
million versus the fourth quarter of 2006. The higher level of interest
expense was primarily driven by the increased debt utilized to fund the
ASR agreements in the second quarter. Other (income) and expense
was $98 million of income, a reduction of $52 million (34.5 percent)
versus the fourth quarter of 2006. A reduction in gains on real estate
transactions and losses from foreign currency transactions were par-
tially offset by increased interest income due to higher cash balances.
The company’s effective tax rate in the fourth-quarter 2007 was
28.0 percent, flat when compared to the fourth-quarter 2006 rate.
Share repurchases totaled approximately $0.5 billion in the fourth
quarter, including $0.3 billion related to the settlement of the ASR
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 com-
pared with 1,532.5 million in the fourth quarter of 2006.
The company generated $5,151 million in cash flow provided by
operating activities, driven primarily by Net income. Net cash from
investing activities was a source of cash of $1,098 million in fourth
quarter of 2007 versus a use of cash of $5,634 million in the fourth
quarter of 2006, resulting primarily from the disposition of higher
levels of short term marketable securities.