IBM 2007 Annual Report Download - page 44

Management Discussion
International Business Machines Corporation and Subsidiary Companies
42
FINANCIAL POSITION
Total assets of $103,234 million declined $2,514 million ($6,223 mil-
lion adjusted for currency) primarily due to lower prepaid pension
assets and a decrease in Cash and cash equivalents. These decreases
were partially offset by increases in Goodwill, long-term deferred tax
assets, Marketable Securities, trade receivables, financing receivables
and Intangible Assets.
Total liabilities of $74,728 million increased $2,078 million (down
$362 million adjusted for currency) primarily driven by Compensation
and benefits, Deferred income and Accounts payable. Partially off-
setting those increases were decreases in long-term deferred tax and
restructuring liabilities.
Stockholders’ equity decreased $4,592 million to $28,506 million
primarily driven by retirement-related charges and net common
stock transactions, partially offset by increased Retained earnings.
The retirement-related driven decrease in Stockholders’ equity and
the decrease in prepaid pension assets were a result of the adoption
of SFAS No. 158 in 2006.
The company generated $15,019 million in cash flow provided by
operating activities, an increase of $105 million compared to 2005.
The increase was primarily driven by increased Net income ($1,559
million), lower pension funding in 2006 ($549 million) and an
increase in cash driven by Accounts payable ($891 million) primarily
resulting from the divestiture of the Personal Computing business in
2005. These increases were partially offset by growth in accounts
receivable ($2,731 million) primarily driven by asset growth in
Global Financing and a decrease in cash related to deferred income
taxes ($461 million), due to utilization of tax credit carryforwards in
2005. Net cash used in investing increased $7,126 million versus
2005 primarily due to net purchases of marketable securities and
other investments ($2,668 million), increased spending on acquisitions
($2,316 million), increased net capital spending ($1,210 million) and
a decline in divestiture-related cash proceeds ($932 million). Net
cash used in financing activities increased $1,057 million primarily
due to higher dividend payments ($434 million) and increased net
cash used to retire debt ($730 million).
Discontinued Operations
On December 31, 2002, the company sold its HDD business to
Hitachi for approximately $2 billion. The final cash payment of $399
million was received on December 30, 2005. In addition, the com-
pany paid Hitachi $80 million to settle warranty obligations during
2005. These transactions were consistent with the company’s previous
estimates. The HDD business was accounted for as a discontinued
operation whereby the results of operations and cash flows were
removed from the company’s results from continuing operations for
all periods presented.
In 2006, 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 agreed upon by the company and
Hitachi, under the terms of the agreement for the sale of the HDD
business to Hitachi.
Other Information
Looking Forward
Looking forward, the company enters 2008 in an excellent opera-
tional and financial position.
The company has a significant global presence, operating in 170
countries, with approximately 63 percent of its revenue generated
outside the U.S. In addition, approximately 69 percent of the com-
pany’s employees are located outside the United States, including
about 35 percent in Asia Pacific. This global reach gives the company
access to markets, with well-established organizations and manage-
ment systems who understand the clients and their challenges and
who can respond to these opportunities with value-add solutions.
The company’s transformation to a globally integrated enterprise
provides the capabilities to service clients globally and deliver the
best skills and cost from anywhere in the world.
In emerging markets, the company will continue to invest for
revenue growth and leadership. The company is focused on identi-
fying growth opportunities and following a disciplined investment
policy to capitalize on these opportunities. The company has had
good success in the emerging markets of Brazil, Russia, India and
China. In addition, there are additional opportunities around
the world that are growing at a rapid rate; countries and markets
within Southeast Asia, Eastern Europe, the Middle East and Latin
America that have market growth rates greater than the global
average. Through its investments, the company has developed
extensive capabilities in emerging countries to capture these growth
opportunities. In 2008, the company will also implement a new
organization and management structure that will focus on these
emerging nations and markets.
The company is a proven infrastructure provider of IT technology.
Through its history, the company has built the infrastructure in most
countries that are now considered to have “mature” economies. This
track record will enable the company to capture opportunities in
new, expanding markets worldwide. The company’s broad product
and services portfolio delivers value to clients — through a combina-
tion of services, hardware and software. The portfolio is focused on
Management Discussion ............................ 14
Road Map .........................................................14
Forward-Looking and
Cautionary Statements .....................................15
Management Discussion 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