IBM 2007 Annual Report Download - page 48

Management Discussion
International Business Machines Corporation and Subsidiary Companies
46
Total contractual obligations are reported in the table above excluding
the effects of time value and therefore, may not equal the amounts
reported in the Consolidated Statement of Financial Position.
Purchase obligations include all commitments to purchase goods
or services of either a fixed or minimum quantity that meet any of the
following criteria: (1) they are noncancelable, (2) the company would
incur a penalty if the agreement was canceled, or (3) the company
must make specified minimum payments even if it does not take
delivery of the contracted products or services (“take-or-pay”). If the
obligation to purchase goods or services is noncancelable, the entire
value of the contract is included in the table above. If the obligation
is cancelable, but the company would incur a penalty if canceled, the
dollar amount of the penalty is included as a purchase obligation.
Contracted minimum amounts specified in take-or-pay contracts are
also included in the table as they represent the portion of each con-
tract that is a firm commitment.
In the ordinary course of business, the company enters into con-
tracts that specify that the company will purchase all or a portion of
its requirements of a specific product, commodity or service from a
supplier or vendor. These contracts are generally entered into in order
to secure pricing or other negotiated terms. They do not specify fixed
or minimum quantities to be purchased and, therefore, the company
does not consider them to be purchase obligations.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, the company enters into off-bal-
ance sheet arrangements as defined by the SEC Financial Reporting
Release 67 (FRR-67), “Disclosure in Management’s Discussion and
Analysis about Off-Balance Sheet Arrangements and Aggregate Con-
tractual Obligations.”
On May 25, 2007, the company entered into ASR agreements
with three investment banks. The initial purchase price of the ASR
agreements is subject to adjustment based on the volume weighted-
average price of the company’s common stock over the contractual
settlement period. The settlement can be effected in cash or common
shares of the company at the company’s election. In accordance with
Emerging Issues Task Force Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company’s Own Stock,” the financial instruments generated by
this settlement mechanism are not recognized in the company’s
financial statements until settlement, at which time the settlement
payment or receipt is recorded in Stockholders’ equity. The liquidity
risk related to the settlement of these contracts is mitigated by the
company’s contractual ability to elect cash or share settlement.
Additionally, these contracts restrict the maximum amount of shares
potentially deliverable by the company. Refer to note M, “Stock-
holders’ Equity Activity,” on pages 92 and 93 for further information
on the ASR agreements entered into by the company.
CONTRACTUAL OBLIGATIONS
($ in millions)
TOTAL
CONTRACTUAL PAYMENTS DUE IN
PAYMENT STREAM 2008 2009 -10 2011-12 AFTER 2012
Long-term debt obligations $26,066 $3,618 $10,450 $4,629 $ 7,369
Capital (finance) lease obligations 297 88 135 36 38
Operating lease obligations 5,074 1,220 1,958 1,143 753
Purchase obligations 1,814 702 676 306 130
Other long-term liabilities:
Minimum pension funding (mandated)* 3,258 637 1,308 1,313 —
Executive compensation 1,118 60 135 154 769
Long-term termination benefits 2,123 254 241 158 1,470
Tax reserves** 2,737 772 — — —
Other 844 89 195 89 472
Total $43,331 $7,440 $15,098 $7,828 $11,001
* Represents future pension contributions that are mandated by local regulations or statute, all associated with non-U.S. pension plans. The projected payments beyond 2012 are not currently
determinable. See note U, “Retirement-Related Benefits,” on pages 105 to 116 for additional information on the non-U.S. plans’ investment strategies and expected contributions and for
information regarding the company’s unfunded pension liability of $14,109 million at December 31, 2007.
** These amounts represent the liability for unrecognized tax benefits under FIN 48. The company estimates that approximately $772 million of the liability is expected to be settled within
the next 12 months. The settlement period for the noncurrent portion of the income tax liability cannot be reasonably estimated as the timing of the payments will depend on the progress
of tax examinations with the various tax authorities; however, it is not expected to be due within the next 12 months.
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