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2008 ANNUAL REPORT

Table of contents

  • Page 1
    2008 ANNUAL REPORT

  • Page 2

  • Page 3
    ..., that your company is well positioned to continue delivering strong results, as we have been doing and did again in 2008- achieving record revenue, record pre-tax earnings, record earnings per share and record free cash flow. Even more importantly, we are also positioned to lead in the new era that...

  • Page 4
    ... remarkable array of new capabilities. No longer content with cost savings from off-the-shelf technologies and solutions, they were seeking to innovate-and not just in their products and services, but also their business processes, management systems, policies and core business models. To accomplish...

  • Page 5
    Samuel J. Palmisano CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER

  • Page 6
    ...as service­oriented architecture (SOA), virtualization, business intelligence and 4 We Enter this Period Strong Put it all together, IBM today is a very different company, which is evident in our results. Since the dot­com crash in 2002, we have more than doubled our pre­tax income and free cash...

  • Page 7
    ... by driving productivity and Global Financing receivables, was $14.3 billion, an increase of $1.9 billion from 2007. Our business model has allowed us to generate more than $84 billion in free cash flow over the past nine years. IBM ended 2008 with $12.9 billion of cash and marketable securities...

  • Page 8
    ... excellent financial position, strong balance sheet, solid recurring revenue, strong profit streams and unmatched global reach, we are confident about 2009 and are ahead of pace to achieve our 2010 objective of $10 to $11 in earnings per share. The information on pages 10-15-"Generating Higher Value...

  • Page 9
    ...-free loans and financial services to support income-generating businesses. smartsr tslscommunications: IBM is helping traditional telecom service providers, mobile and broadband operators and broadcasters transform their networks and services. IBM's solutions are being used in India to deliver new...

  • Page 10
    ... -we see improved productivity, efficiency, responsiveness, profitability and societal benefit. With so much technology and networking abundantly available at such low cost, what service wouldn't you provide a customer, citizen, student or patient? What wouldn't you connect? What information wouldn...

  • Page 11
    ... to the SEC on January 20, 2009 (Attachment II- Non-GAAP Supplementary Materials). Information about references to local currency is provided in the company's 2008 Annual Report to Stockholders (Management Discussion-Year in Review) and in the company's Form 10-K for 2008 (Part II, Item 7). 9

  • Page 12
    ... solutions. SEGMENT PRE-TAX INCOME MIX From 2000 to 2008 we acquired more than 100 companies to complement and scale our portfolio of products and offerings. This has changed our business mix toward higher-value, more profitable segments of the industry. 2000 Pre-tax Margin 2000 Pre-tax Income...

  • Page 13
    ... our global reach and integrated model to drive higher profitability across the company. 2008 GROWTH In local currency (excludes OEM) 15% 13 12 10 9 7 6 9 3 2 1 0 Revenue Gross Profit Sales and Marketing Expense General and Administrative Expense Total IBM 0 11 Major Markets Growth Markets

  • Page 14
    .... Pre-tax earnings from continuing operations were $16.7 billion, an increase of 15 percent. EARNINGS PER SHARE ...and record cash performance. In 2008 our free cash flow, excluding the year-to-year change in Global Financing receivables, was $14.3 billion-an increase of $1.9 billion from 2007...

  • Page 15
    ... businesses, global presence and a balanced business mix. Margin expansion: We focus on delivering higher value to clients and on increasing productivity, to improve profitability. Share repurchases: Our strong cash generation lets us return value to shareholders by reducing shares outstanding...

  • Page 16
    ... supplies and costs, as well as growing environmental concerns, a smart grid can save electricity and money and protect the planet, by linking smart meters in the home with instrumented power lines and plants. And it even paves the way to integrate renewable sources like wind and solar. IBM today is...

  • Page 17
    ..., power lines, roadways and more. By 2012, video will account for nearly 90 percent of consumer IP traffic. To handle this vast data stream, we'll need a smart global network. Fortunately, next-generation digital platforms are already enabling telecom providers to deliver new services, and helping...

  • Page 18
    ...147 1.50 at year end: 2008 2007 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 subsidiaries $ 12,907...

  • Page 19
    ... Goodwill Borrowings Derivatives and Hedging Transactions Other Liabilities Stockholders' Equity Activity Contingencies and Commitments Taxes Research, Development and Engineering Earnings Per Share of Common Stock Rental Expense and Lease Commitments Stock-Based Compensation Retirement-Related...

  • Page 20
    ...not add due to the use of rounded numbers for disclosure purposes. Percentages reported in the financial tables throughout this Annual Report are calculated from the underlying whole-dollar numbers. discontinued operations On December 31, 2002, the company sold its hard disk drive (HDD) business to...

  • Page 21
    ... businesses, pricing for value and the continued focus on productivity and cost management. Pre-tax income from continuing operations grew 15.4 percent and net income from continuing operations increased 18.4 percent reflecting an improvement in the company's tax rate. Diluted earnings per share...

  • Page 22
    ... by decreases in total debt ($1,349 million) and accounts payable ($1,041 million). Stockholders' equity of $13,465 million decreased $15,004 million versus 2007. Net income of $12,334 million was offset by the effects of pension remeasurements and other retirement-related items ($14,856 million...

  • Page 23
    .... The business model has been developed over time through strategic investments in capabilities and technologies that have the best long-term growth and profitability prospects based on the value they deliver to clients. The company's global capabilities include services, software, hardware...

  • Page 24
    ...A number of support services from product maintenance through solution support to maintain and improve the availability of clients' IT infrastructure. WebSphere Software. Management of a wide variety of business processes using open standards to interconnect applications, data and operating systems...

  • Page 25
    ... international buSineSS machineS corpor ation and Subsidiary companies rational Software. Software tools that help clients manage their software development processes and capabilities. With the acquisition of Telelogic in 2008, Rational software supports software development for both IT solutions...

  • Page 26
    ... highly efficient, world-class delivery capabilities in IBM's business process delivery operations, which include Business Transformation Outsourcing, Business Process Outsourcing and Business Process Services. BPD has employees and delivery centers in over 40 countries worldwide. 24 Management...

  • Page 27
    ... each reportable segment's pre-tax income as a percentage of total segment pre-tax income. Revenue Pre-tax Income* 2007 2008 2007 for the year ended December 31: 2008 Global Technology Services Global Business Services Total Global Services Software Systems and Technology Global Financing TOTAL...

  • Page 28
    Management Discussion international buSineSS machineS corpor ation and Subsidiary companies In 2008, Global Services and Software increased as a percentage of total segment revenue and total segment pre-tax income. Global Services increased its revenue and profit contribution by 2.0 points and 4.5 ...

  • Page 29
    ... pricing and lower retirement-related costs. Long term Short term TOTAL $ 5,333 14,264 $19,597 $ 6,330 13,411 $19,741 (15.8)% 6.4 (0.7)% Global Services signings are management's initial estimate of the revenue value of a client's commitment under a Global Services contract. Signings are used...

  • Page 30
    ...: SOFTWARE REVENUE: 2008 2007 $22,089 $17,305 12,383 $19,982 $15,505 10,827 10.5% 11.6% 14.4 6.2 24.5 10.4 2.9 13.2 5.2 0.8 (8.6) 34.4 Middleware Key Branded Middleware WebSphere Family Information Management Lotus Tivoli Rational Other middleware Operating systems Product Lifecycle Management...

  • Page 31
    ... the frame and POWER6 systems. company's custom semiconductors through the software stack, to Retail Stores Solutions revenue decreased 15.0 percent (16 percent achieve these high levels of efficiency and lower cost of ownership. adjusted for currency) in 2008 versus 2007, reflecting weakness in the...

  • Page 32
    Management Discussion international buSineSS machineS corpor ation and Subsidiary companies Overall, gross margin decreased by 1.7 points versus the prior year. This decrease was primarily driven by margin declines in System z, System x and Microelectronics OEM which impacted the overall margin by ...

  • Page 33
    ... year ended December 31: 2008 2007 Yr.-to-Yr. Change Selling, general and administrative - base Advertising and promotional expense Workforce reductions - ongoing Amortization expense -acquired intangibles Retirement-related expense Stock-based compensation Bad debt expense TOTAL $20,006 1,259 706...

  • Page 34
    ... company's stock-based incentive awards. RETIREMENT-RELATED BENEFITS for the year ended December 31: 2008 2007* Cost: Software (Sales) Global Technology Services (Services) Global Business Services (Services) Systems and Technology (Sales) Selling, general and administrative expense TOTAL $173...

  • Page 35
    ... shares lower in 2008 versus 2007. The decrease was The assets and debt associated with the Global Financing business primarily the result of the company's common stock repurchase proare a significant part of the company's financial position. The financial gram. See note N, "Stockholders' Equity...

  • Page 36
    ... international buSineSS machineS corpor ation and Subsidiary companies WORKING CAPITAL ( $ in millions) • 2008 2007 at December 31: An increase of $436 million (net of a $288 million negative currency impact) in deferred income mainly driven by Software ($285 million) and Global Services...

  • Page 37
    ... total debt, on a net basis, the company utilized $2,444 million in net cash to retire debt versus $12,112 million in net cash proceeds in 2007. The net cash used to retire debt in 2008 was comprised of: $10,248 million in cash payments to settle debt and net payments of $6,025 million in short-term...

  • Page 38
    ... international buSineSS machineS corpor ation and Subsidiary companies The Global financing business provides funding predominantly for the company's external client assets as well as for assets under contract by other IBM units. These assets, primarily for Global Services, generate long-term...

  • Page 39
    ... optimization throughout the globally integrated capacity model as well as effective balancing of domestic, global and subcontracted resources. GBS also benefited from continued deal selectivity, stable pricing, lower managed labor costs and ongoing operational efficiencies. Software segment revenue...

  • Page 40
    Management Discussion international buSineSS machineS corpor ation and Subsidiary companies Systems and Technology segment revenue was $5,425 million, a decrease of 20.2 percent (16 percent adjusted for currency), reflecting growth in high-end servers offset by a decline in x86 and storage products...

  • Page 41
    ...from investing activities was a use of cash of $880 million in fourth quarter of 2008 versus a source of cash of $1,098 million in the fourth quarter of 2007, resulting primarily from the disposition of higher levels of short-term marketable securities in 2007. ( $ and shares in millions except per...

  • Page 42
    ... income taxes in 2007 was primarily due to the revenue growth and gross profit margin improvements in the Global Services and Systems and Tech­ nology segments. The following is an analysis of the 2007 versus 2006 reportable segment results for Global Services, Systems and Technology and Software...

  • Page 43
    ...(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. by the Notes/Domino family of products. Lotus Connections, released in...

  • Page 44
    Management Discussion international buSineSS machineS corpor ation and Subsidiary companies Systems and Technology segment revenue decreased 3.0 percent (6 percent adjusted for currency). On June 1, 2007, the company completed the divestiture of its printing business to Ricoh. This resulted in the ...

  • Page 45
    ... cash and cash equivalents ($6,969 million), prepaid pension assets ($6,788 million), total financing receivables ($2,729 million) and goodwill ($1,431 million). These increases were partially offset by decreases in long-term deferred tax assets ($2,367 million) and short-term marketable securities...

  • Page 46
    ... 2009 in an excellent operational and financial position. The company has shifted its business to higher value services and software, with less dependence on commoditizing and cyclical businesses. The Global Services business in 2008 contributed 42 percent of total segment pre-tax income and managed...

  • Page 47
    ...participation rates for IBM products and services transactions. In addition, the business will be focused on optimizing its global infrastructure, resources and processes through the deployment of its single operating model initiative. The company expects 2009 pre-tax retirement-related plan cost to...

  • Page 48
    ..., net Free cash flow (excluding Global Financing accounts receivable) Acquisitions Divestitures Share repurchase Dividends Non-Global Financing debt Other (includes Global Financing accounts receivable and Global Financing debt) CHANGE IN CASH, CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES...

  • Page 49
    ... markets. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described on pages 97 to 99. With respect to pension funding, in 2008, the company contributed $917 million to its non-U.S. defined benefit plans, versus $503 million in 2007...

  • Page 50
    ... U, "Retirement-Related Benefits, " on pages 106 to 116 for a description of the company's defined benefit pension plans. 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...

  • Page 51
    ... contracts through its GTS and GBS businesses. During the contractual period, revenue, cost and profits may be impacted by estimates of the ultimate profitability of each contract, especially contracts for which the company uses the percentage-of-completion (POC) method of accounting. If at any time...

  • Page 52
    ...million in 2008. Valuation of Assets and Reporting Units The application of business combination and impairment accounting requires the use of significant estimates and assumptions. The purchase method of accounting for business combinations requires the company to estimate the fair value of assets...

  • Page 53
    ... any material losses from these risks. The company's debt, in support of the Global financing business and the geographic breadth of the company's operations, contains an element of market risk from changes in interest and currency rates. The company manages this risk, in part, through the use of...

  • Page 54
    Management Discussion international buSineSS machineS corpor ation and Subsidiary companies The financial instruments that are included in the sensitivity analysis comprise all of the company's cash and cash equivalents, marketable securities, short-term and long-term loans, commercial financing ...

  • Page 55
    ... lease and loan financing to end users and internal clients for terms generally between two and seven years. Internal financing is predominantly in support of Global Services' long-term client service contracts. Global financing also factors a selected portion of the company's accounts receivable...

  • Page 56
    ... loans and external debt. A portion of Global Financing debt is in support of the company's internal business, or related to intercompany mark-up embedded in the Global Financing assets. See table on page 57. (b) (c) (d) Global Financing gross profit increased 2.2 percent in 2007 versus...

  • Page 57
    Management Discussion international buSineSS machineS corpor ation 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 ...

  • Page 58
    ... table, intercompany activity is comprised of internal loans and leases at arm's length pricing in support of Global Services' long-term contracts and other internal activity. The company believes these assets should be appropriately levered in line with the overall Global financing business model...

  • Page 59
    ... and dividends to the company in order to maintain an appropriate debt-to-equity ratio. fetufn on equity ( $ in millions) at December 31: 2008 2007 Numerator: Global Financing after-tax income (a)* Denominator: Average Global Financing equity (b)** Global Financing return on equity (a)/(b) $1,049...

  • Page 60
    ... financial Statements and 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 61
    Report of Independent Registered Public Accounting Firm international buSineSS machineS corpor ation and Subsidiary companies to tfe stockfolders and board of directors of international business macfines corporation: In our opinion, the accompanying Consolidated financial Statements appearing on ...

  • Page 62
    Consolidated Statement of Earnings international buSineSS machineS corpor ation and Subsidiary companies ( $ in millions except per share amounts) for the year ended December 31: Notes 2008 2007 2006 REVENUE: Services Sales Financing TOTAL REVENUE COST: $ 58,892 42,156 2,582 103,630 40,937 ...

  • Page 63
    Consolidated Statement of financial Position international buSineSS machineS corpor ation and Subsidiary companies ( $ in millions except per share amounts) at December 31: Notes 2008 2007 ASSETS Current assets: Cash and cash equivalents Marketable securities Notes and accounts receivable - ...

  • Page 64
    ... 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* Non-operating finance receivables - net* Divestiture of businesses, net of cash transferred...

  • Page 65
    ...Statement of Stockholders' Equity international buSineSS machineS corpor ation and Subsidiary companies ( $ in millions) Common Stock and Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Gains and (Losses) not Affecting Retained Earnings Total 2006 Stockholders' equity...

  • Page 66
    ...Statement of Stockholders' Equity international buSineSS machineS corpor ation and Subsidiary companies ( $ in millions) Common Stock and Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Gains and (Losses) not Affecting Retained Earnings Total 2007 Stockholders' equity...

  • Page 67
    ... securities (net of tax benefit of $207) 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 (39,374,439 shares) Purchases (1,505,107 shares...

  • Page 68
    ...page 75 within "Marketable Securities." Equity investments in non­ publicly traded entities are primarily accounted for using the cost method. All intercompany transactions and accounts have been eliminated in consolidation. 66 Management Discussion ...18 Consolidated Statements ...60 Notes ...66...

  • Page 69
    ... fair value of the undelivered item(s). The revenue policies described below are then applied to each unit of accounting, as applicable. Services The company's primary services offerings include information technology (IT) datacenter and business process outsourcing, application management services...

  • Page 70
    ... of systems and processes and are amortized on a straight-line basis over the expected period of benefit, not to exceed the term of the contract. Additionally, fixed assets associated with outsourcing contracts are capitalized and depreciated on a straight-line basis over the expected useful life of...

  • Page 71
    ... 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 to software cost as...

  • Page 72
    ... of promoting and selling products and services are classified as selling expense and include such items as compensation, advertising, sales commissions and travel. General and administrative expense includes such items as compensation, office supplies, non-income taxes, insurance and office rental...

  • Page 73
    .... The average service lives of the participants in the IBM Personal Pension Plan, a United States (U.S.) defined benefit pension plan, currently depreciation and amortization Plant, rental machines and other property are carried at cost and depreciated over their estimated useful lives using the...

  • Page 74
    ...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 for awards...

  • Page 75
    ... of the underlying cash flow, the applicable offsetting amount of the gain or loss from the derivative that is deferred in stockholders' equity is released to net income and reported in interest expense, cost, SG&A expense or other (income) and expense in the Consolidated Statement of Earnings based...

  • Page 76
    .... for derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument. In the event of an other­than­ temporary impairment of a nonpublic equity method investment, the company uses the net asset value of its...

  • Page 77
    ... financial Statements international buSineSS machineS corpor ation and Subsidiary companies marketable securities Debt securities included in current assets represent securities that are expected to be realized in cash within one year of the balance sheet date. Long-term debt securities that...

  • Page 78
    Notes to Consolidated financial Statements international buSineSS machineS corpor ation and Subsidiary companies earnings per share of common stock Basic earnings per share of common stock is computed by dividing net income by the weighted-average number of common shares outstanding for the period....

  • Page 79
    ... practicable. Subsequent to initial recognition, the company may use either the amortization method or the fair value measurement method to account for servicing assets and servicing liabilities within the scope of this Statement. The adoption of this Statement did not have a material effect on the...

  • Page 80
    ... 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 benefit plans in the Consolidated...

  • Page 81
    ... global provider of solutions that enable organizations to align the development of products, complex systems and software with business objectives and customer needs. This results in improved quality and predictability, while reducing time-to-market and overall costs. Clients will benefit from...

  • Page 82
    ... accounting policies related to business combinations and intangible assets, including goodwill. 2007 In 2007, the company completed 12 acquisitions at an aggregate cost of $1,144 million. The Software segment completed six acquisitions: in the first quarter, Consul Risk Management International BV...

  • Page 83
    ...average useful life of the intangible assets purchased, excluding goodwill, is 5.9 years. INTERNET SECURITY SYSTEMS, INC. (ISS)- On October 20, 2006, the company acquired 100 percent of the outstanding com­ mon shares of ISS for cash consideration of $1,368 million. ISS provides security solutions...

  • Page 84
    ... overall weighted-average useful life of the intangible assets purchased, excluding goodwill, is 5.6 years. MRO SOFTWARE INC. (MRO)- On October 5, 2006, the company Software, Global Technology Services and Global Business Services segments upon acquisition and goodwill, as reflected in the table on...

  • Page 85
    ... Financial Statements international buSineSS machineS corpor ation and Subsidiary companies 2006 ACQUISITIONS ( $ in millions) Amortization Life (in Years) Internet Security Systems, Inc. MRO Software, Inc. Other Acquisitions Current assets Fixed assets/noncurrent Intangible assets: Goodwill...

  • Page 86
    ... items measured at fair value on a nonrecurring basis In the fourth quarter, the company recorded an other-than-temporary impairment of $81 million for an equity method investment. The resulting investment which is classified as Level 3 in the fair value hierarchy was valued using a discounted cash...

  • Page 87
    ... a current market transaction. The following methods and assumptions are used to estimate fair values: ( $ in millions) Fair Value at December 31: 2008 2007 Cash and cash equivalents:* Time deposits and certificates of deposit Commercial paper Money market funds Other securities TOTAL $ 4,805...

  • Page 88
    ... Statements international buSineSS machineS corpor ation and Subsidiary companies Proceeds from sales of debt securities and marketable equity securities were approximately $787 million and $286 million at December 31, 2008 and 2007, respectively. The gross realized gains and losses (before taxes...

  • Page 89
    ... Intangible Asset Class 2008 2007* at December 31: Deferred transition and setup costs and other deferred arrangements** Derivatives - noncurrent + Alliance investments: Equity method Non-equity method Prepaid software Long-term deposits Marketable securities Other assets TOTAL $1,548 1,117...

  • Page 90
    ... in 2008. ( $ in millions) Balance January 1, 2008 Purchase Price Adjustments Foreign Currency Translation and Other Adjustments Balance December 31, 2008 Segment Goodwill Additions Divestitures Global Business Services Global Technology Services Software Systems and Technology TOTAL $ 4,041...

  • Page 91
    ... to Consolidated Financial Statements international buSineSS machineS corpor ation and Subsidiary companies long-term debt Pre-Swap Borrowing ( $ in millions) at December 31: Maturities 2008 2007 U.S. Dollar Notes and Debentures (average interest rate at December 31, 2008): 3.55% 5.67% 6.25% 8.375...

  • Page 92
    ...to Consolidated financial Statements international buSineSS machineS corpor ation and Subsidiary companies Pre-swap annual contractual maturities of long-term debt outstanding at December 31, 2008, are as follows: ( $ in millions) 2009 2010 2011 2012 2013 2014 and beyond TOTAL $ 8,931 2,170 3,097...

  • Page 93
    ... as compared to 281 days at December 31, 2007. 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...

  • Page 94
    ... international buSineSS machineS corpor ation and Subsidiary companies subsidiary cash and foreign currency asset/liability management The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost...

  • Page 95
    ...Consolidated Financial Statements international buSineSS machineS corpor ation and Subsidiary companies ( $ in millions) Hedge Designation Net Investment Non-Hedge/ Other at December 31, 2008 Fair Value Cash Flow Derivatives - net asset/(liability): Debt risk management Long-term investments in...

  • Page 96
    ... financial Statements international buSineSS machineS corpor ation and Subsidiary companies accumulated derivative gains or losses At December 31, 2008, in connection with its cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $88 million, net of tax...

  • Page 97
    ... cleanup periods and changing environmental remediation regulations. Note N. Stockholders' Equity Activity The authorized capital stock of IBM consists of 4,687,500,000 shares of common stock with a $.20 per share par value, of which 1,339,095,922 shares were outstanding at December 31, 2008 and...

  • Page 98
    ...Gains/(Losses) on Cash Flow Hedge Derivatives Foreign Currency Translation Adjustments* Net Change Retirement-related Benefit Plans Net Unrealized Gains/(Losses) on Marketable Securities Accumulated Gains/(Losses) Not Affecting Retained Earnings December 31, 2006 Change for period December 31, 2007...

  • Page 99
    ... company is involved in a variety of claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property (IP), product liability, employment, benefits, securities...

  • Page 100
    ... not prohibit IBM Korea from selling products and services to business partners who sold to government-controlled entities in Korea. In addition, the U.S. Department of Justice and the SEC have both contacted the company in connection with this matter. In March 2008, the company received a request...

  • Page 101
    ...million at December 31, 2008 and 2007, respectively. A portion of these amounts was available 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...

  • Page 102
    ... of the company's income tax returns for 2004 and 2005 and issued a final Revenue Agent's Report (RAR). The company has agreed with deferred ta x liabilities ( $ in millions) at December 31: 2008 2007* Leases Depreciation Software development costs Retirement-related benefits Other GROSS...

  • Page 103
    Notes to Consolidated Financial Statements international buSineSS machineS corpor ation and Subsidiary companies for income tax return purposes, the company has foreign and domestic loss carryforwards, the tax effect of which is $989 million as well as state tax credit carryforwards of $515 million...

  • Page 104
    ... Statements international buSineSS machineS corpor ation 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: 2008 2007 2006 Weighted-average number...

  • Page 105
    ... shares available to be granted under the Plans as of December 31, 2008 and 2007, respectively. Under the company's long-standing practices and policies, all awards are approved prior to or on the date of grant. The exercise price of at-the-money stock options is the average of the high and 2008...

  • Page 106
    ... term of ten years. The plan element permitting executives to defer annual incentive compensation into IBM equity and receive 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...

  • Page 107
    ... and fixed on the grant date based on the company's stock price adjusted for the exclusion of dividend equivalents. The following table summarizes RSU activity under the Plans during the years ended December 31, 2008, 2007 and 2006. Exercises of Employee Stock Options The total intrinsic value of...

  • Page 108
    ... shares were available for purchase under the ESPP at December 31, 2008, 2007 and 2006, respectively. Note U. Retirement-Related Benefits description of plans IBM sponsors defined benefit pension plans and defined contribution plans that cover substantially all regular employees, a supplemental...

  • Page 109
    ...international buSineSS machineS corpor ation and Subsidiary companies second method is a cash balance formula that calculates benefits using a percentage of employees' annual salary, as well as an interest crediting rate. Benefit accruals under the IBM Personal Pension Plan ceased December 31, 2007...

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    ... companies plan financial information Summary of Financial Information The following table presents a summary of the total retirement-related benefits net periodic (income)/cost recorded in the Consolidated Statement of Earnings. ( $ in millions) U.S. Plans 2008 2007* 2006* 2008 Non-U.S. Plans 2007...

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    ... table presents the components of net periodic (income)/cost of the company's retirement-related benefit plans recognized in Consolidated Statement of Earnings. ( $ in millions) Defined Benefit Pension Plans U.S. Plans Non-U.S. Plans 2006 2008 2007 2006 for the year ended December 31: 2008 2007...

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    ... Statements international buSineSS machineS corpor ation and Subsidiary companies The following table presents the changes in benefit obligations and plan assets of the company's retirement-related benefit plans. ( $ in millions) Defined Benefit Pension Plans U.S. Plans 2008 2007 Non-U.S. Plans...

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    ... Statement of Stockholders' Equity for components of net periodic (income)/cost, including the related tax effects, recognized in gains and (losses) not affecting retained earnings for the company's retirement-related benefit plans. The following table presents the pre-tax estimated net loss...

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    ... to Consolidated financial Statements international buSineSS machineS corpor ation and Subsidiary companies Defined Benefit Pension Plans U.S. Plans Non-U.S. Plans 2006 2008 2007 2006 for the year ended December 31: WEIGHTED-AVERAGE ASSUMPTIONS USED TO MEASURE NET PERIODIC (INCOME)/COST FOR THE...

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    ... healthcare cost trend rate would not have a material effect on the 2008, 2007 and 2006 net periodic cost or the benefit obligations as of December 31, 2008 and 2007. Plan Assets Retirement-related benefit plan assets are recognized and measured at fair value using quoted prices in active markets...

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    ... Consolidated financial Statements international buSineSS machineS corpor ation and Subsidiary companies non-u.S. plans (Weighted-average) Plan Assets at December 31: 2008 2007 2009 Target Allocation Asset Category: Equity securities Debt securities Real estate Other TOTAL 46.0% 48.5 1.6 4.0 100...

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    ... Financial Statements international buSineSS machineS corpor ation and Subsidiary companies and pension obligations for funding purposes and raises tax deduction limits for contributions to retirement-related benefit plans. The additional funding requirements by the Act apply to plan years...

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    ... the internal use of IT services, Global Technology Services and Global Business Services recover cost, as well as a reasonable fee, reflecting the arm's-length value of providing the services. The Global Services segments enter into arm's-length leases and loans at prices equivalent to market rates...

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    ... segment view ( $ in millions) Global Services Segments Global Technology Services Global Business Services Systems and Technology Global Financing Total Segments for the year ended December 31: 2008: Software External revenue Internal revenue TOTAL REVENUE PRE-TAX INCOME $39,264 1,546 $40,810...

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    ... expense Management Discussion ...18 Consolidated Statements ...60 Notes ...66 A - E ...66 F - J ...86 K- Q ...88 R -W ...102 R. S. T. U. V. W. EARNINGS PER SHARE OF COMMON STOCK ...102 RENTAL EXPENSE AND LEASE COMMITMENTS ...103 STOCK-BASED COMPENSATION ...103 RETIREMENT-RELATED BENEFITS ...106...

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    ... or more of the company's total revenue. The table below presents external revenue for similar classes of products or services within the company's reportable segments. Within Global Technology Services and Global Business Services, client solutions often include IBM software and hardware and other...

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    ... Before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle* Total Cash dividends paid on common stock Per share of common stock Investment in plant, rental machines and other property Return on stockholders' equity** $103,630 $ 12,334 - 12,334...

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    ... year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters' EPS does not equal the full-year EPS. ** 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...

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    ... Graphs international buSineSS machineS corpor ation 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...

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    Performance Graphs international buSineSS machineS corpor ation and Subsidiary companies ten-year ( $ usd) 180 160 140 120 100 80 60 40 98 99 00 01 02 03 04 05 06 07 08 Ten-year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 • • • IBM Common Stock S & P 500 Index...

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    ... buSineSS machineS corpor ation and Subsidiary companies board of directors alain J.p. belda Chairman Alcoa Inc. cathleen black President Hearst Magazines William r. brody President Salk Institute for Biological Studies Kenneth i. chenault Chairman and Chief Executive Officer American Express...

  • Page 127
    ...OFFICES International Business Machines Corporation New Orchard Road Armonk, New York 10504 (914) 499-1900 The IBM Annual Report is printed on recycled paper and is recyclable. Cognos, DataMirror, Diligent Technologies, Domino, DS8000, FileNet, IBM, Lotus, Lotus Notes, Micromuse, MRO Software, Notes...

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