IBM 2009 Annual Report Download

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2009 Annual Report

Table of contents

  • Page 1
    2009 Annual Report

  • Page 2

  • Page 3
    ...I am happy to report that your company has continued to outperform our industry and the market at large. We delivered strong results in 2009, once again achieving record pre-tax earnings, record earnings per share and record free cash flow- despite reduced revenues. At the same time, we continued to...

  • Page 4
    Samuel J. Palmisano CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 2

  • Page 5
    ... free cash flow. strong cash flow, a key iniicator of real business nerformance. In 2009 our free cash flow, excluiing the year-to-year change in Global Financing receivables, was $15.1 billion, an increase of $800 million from 2008. IBM eniei 2009 with $14 billion of cash ani marketable securities...

  • Page 6
    ...lead to new business models and a new form of the corporation itself - what we came to call the globally integrated enterprise. Since the dot-com crash in 2002, we have added $12 billion to IBM's pre-tax profit base, increased our pre-tax margin 2.5 times, quadrupled our earnings per share and more...

  • Page 7
    ...and institutions were no longer content with cost savings from off-the-shelf technologies and solutions. They now sought to innovate - not just in their products and services, but also their business processes, management systems, policies and core business models. To accomplish that, they needed to...

  • Page 8
    ... such as Cognos and SPSS. Our new Business Analytics and Optimization service line targets the highest-growth opportunities by delivering integrated analytics solutions based on the needs of specific industries. 1. Growth Markets IBM has among the broadest global footprints of any corporation or...

  • Page 9
    ... economic and societal value. software and optimized systems. We have also established a portfolio of cloud services that clients can access externally from IBM or offer internally to users on their own premises. And because of IBM's track record of integrating new technology paradigms like open...

  • Page 10
    ... annually. Eight hospitals and 470 primary care clinics in Spain implemented smarter healthcare systems across their facilities - and improved clinical results and operational efficiency by up to 10 percent. Banks and other financial services organizations around the world are achieving new levels...

  • Page 11
    ...me close by expressing my pride in the 400,000 women and men of the global IBM team who have brought us to this point. And let me express my gratitude to you, our shareholders, for your unwavering support. I hope that you are pleased with how your company is performing and evolving. And I trust that...

  • Page 12
    ... in areas such as analytics, next-generation data centers, cloud computing and green solutions. Segment Pre-tax Income* ( $ in billions ) 2000** 2.7 1.2 4.5 2.8 24% 11% 40% 25% 2009 1.4 1.7 8.1 8.1 7% 9% 42% 42% Hardware Financing Services Software * Sum of external segment pre-tax...

  • Page 13
    ... underway in emerging markets. During this period, IBM has pioneered a new operating model, changing from a classic "multinational," with smaller versions of the parent company replicated in countries around the world, to a global model with one set of processes, shared services and broadly...

  • Page 14
    4 As a result, IBM today is a higher-performing enterprise...and record cash performance. In 2009 our free cash flow, excluding the year-to-year change in Global Financing receivables, was $15.1 billion-an increase of $800 million from 2008. Our business model is more aligned with our clients' ...

  • Page 15
    ... in key growth initiatives and strategic acquisitions to complement and scale our product portfolio. Retirement-related costs Retirement-related costs vary based on market performance and plan redesigns. Note: 2006 -2008 EPS reflects the adoption of amendments to ASC 260, "Earnings Per Share" 13

  • Page 16
    ... in 14 acquisitions since 2005, creating seven analytics solution centers around the world. ...and our investments position us for growth Cloud and next-generation data center: These new models are enabling efficient consumption and delivery of IT-based services. More than 18 million people use...

  • Page 17
    ...global financial systems Industry: Electronics (Japan) Panasonic's Global Treasury System integrates financial management for 600+ subsidiaries around the world. By managing cash flow, currency exchange and settlements as a global, in-house bank, the company has significantly reduced financial costs...

  • Page 18
    ...Cash, cash equivalents and marketable securities Total assets Working capital Total debt Total equity Common shares outstanding (in millions) Market capitalization Stock price per common share Number of employees in IBM/wholly owned subsidiaries are participating securities. See note B, "Accounting...

  • Page 19
    ... Liquidity and Capital Resources Critical Accounting Estimates Currency Rate Fluctuations Market Risk Financing Risks Employees and Related Workforce Global Financing REPORT OF MANAGEMENT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Notes to Consolidated Financial Statements 18 18 19 20...

  • Page 20
    ... The financial section of the International Business Machines Corporation (IBM or the company) 2009 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. This Overview is designed to provide the reader with...

  • Page 21
    ... return Percent/ capital to shareholders. Key areas of investment include Smarter Margin For the year ended December 31: 2009 2008 Change Planet solutions, business analytics, growth market opportuniRevenue $ 95,758 $103,630 (7.6)%* ties and new computing models such as cloud computing. Gross profit...

  • Page 22
    ... increase of 1.7 points: Expense productivity: Tax rate decrease of 0.2 points: Common stock repurchases: $(0.68) $0.85 $0.58 $0.03 $0.34 At December 31, 2009, the company's balance sheet and liquidity positions remained strong. Cash on hand was $12,183 million. Total debt decreased $7,826 million...

  • Page 23
    ... practice, leveraging IBM consulting capabilities and software products, along with systems and research assets. IBM's breadth of expertise uniquely positions the company for revenue and profit growth. Cloud Computing "Cloud" is an emerging consumption and delivery model for many IT-related services...

  • Page 24
    ... for worldwide service delivery supporting the Strategic Outsourcing business. It manages the world's largest privately-owned IT infrastructure with employees in over 40 countries, supporting over 450 data centers. ITD operates a globally integrated delivery model which supports regional client...

  • Page 25
    ... of collaboration tools, Lotus helps organizations reap the benefits of social networking and other Web 2.0 modalities. Rational Software. Supports software development for both IT and embedded system solutions with a suite of Application Lifecycle Management products. Jazz, Rational's technology...

  • Page 26
    ... in support of Global Services' long-term client service contracts. Global Financing also factors a selected 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...

  • Page 27
    ...fixed costs to variable costs. Simplifying and streamlining internal processes has improved operations, sales force productivity and processes. Year in Review Segment Details The following is an analysis of the 2009 versus 2008 reportable segment results. The analysis of 2008 versus 2007 reportable...

  • Page 28
    ... each reportable segment's pre-tax income as a percentage of total segment pre-tax income. Revenue For the year ended December 31: 2009 2008 Pre-tax Income* 2009 2008 Global Technology Services Global Business Services Total Global Services Software Systems and Technology Global Financing Total 39...

  • Page 29
    ... driven primarily by improved delivery center utilization, reduced subcontractor spending and improved cost and expense management. GLOBAL SERVICES SIGNINGS The table on page 28 presents Global Services signings as reported. Signings at actual currency rates provide investors with a better view of...

  • Page 30
    ... For the year ended December 31: 2009 2008* Software external revenue: Middleware Key Branded Middleware WebSphere Family Information Management Lotus Tivoli Rational Other middleware Operating systems Product Lifecycle Management Other * Reclassified to conform with 2009 presentation. $21,396...

  • Page 31
    ... and Dassault Systemes (DS) signed an agreement in October 2009 under which DS intends to acquire the company's sales and client support operations encompassing DS's Product Lifecycle Management software application portfolio, as well as customer contracts and related assets. The company expects to...

  • Page 32
    ... driven by decreased low-end server revenue (10 percent) in 2009 versus 2008. Blades revenue increased 11 percent in 2009 versus 2008. System x server has gained share in four consecutive quarters. The company's improved sales model and enhanced product offerings were the key contributors to...

  • Page 33
    ... 0.6 points in 2009 versus the prior year, reflecting the focus on cost and expense management and improving productivity. Global Financing See page 57 for an analysis of Global Financing's segment results. Geographic Revenue In addition to the revenue presentation by reportable segment, the company...

  • Page 34
    ... business-from sales efficiency, supply chain management and service delivery to the global support functions. The company's cost and expense base (approximately $80 billion) provides ample opportunity for savings and the company yielded approximately $3.7 billion in cost and expense savings in 2009...

  • Page 35
    ... is presented in cost of financing in the Consolidated Statement of Earnings if the related external borrowings are to support the Global Financing external business. Overall interest expense for 2009 was $1,109 million, a decrease of $353 million versus 2008. Stock-Based Compensation Total pre...

  • Page 36
    ... retirement-related benefit costs decreased $24 million versus 2008. Total plan costs decreased $142 millon year-toyear, driven by lower defined contribution plans cost of $160 million compared to 2008. This decrease was offset by higher costs for mandatory pension insolvency insurance coverage...

  • Page 37
    ... prepaid pension assets and retirement and nonpension postretirement benefit obligations which increased $1,401 million and decreased $3,500 million, respectively, from year-end 2008 levels. Due to the improvement in the equity markets in 2009, the return on the U.S. Personal Pension Plan assets was...

  • Page 38
    ...Within total debt, on a net basis, the company utilized $7,463 million in net cash to retire debt versus $2,444 million in net cash used in 2008. The net cash used to retire debt in 2009 was comprised of: $13,495 million in cash payments to settle debt and net payments of $651 million in short-term...

  • Page 39
    ... 60. Total debt decreased $7,826 million in 2009 versus 2008, primarily as a result of the repayment of debt issued in support of the 2007 accelerated share repurchase program. Given the significant leverage, the company presents a debtto-capitalization ratio which excludes Global Financing debt and...

  • Page 40
    ... for currency, versus the fourth quarter of 2008. Systems and Technology year-to-year revenue growth improved sequentially in the quarter with share gains in System p, System x and Storage. Software had share gains in WebSphere, Tivoli and Key Branded Middleware. Global Services revenue, adjusted...

  • Page 41
    .... The company continues to execute its operational plan to increase efficiency and drive productivity by leveraging its scale and global presence. Initiatives such as globalization of support functions and services delivery and workforce balancing have yielded significant expense and cost savings...

  • Page 42
    ... company's global model and the results of the ongoing transformation of the business. The key elements of the company's transformation include: For the year ended December 31: 2008 2007 Revenue Gross profit margin Total expense and other income Total expense and other income-to-revenue ratio...

  • Page 43
    ...in 2008 versus 2007 led by growth in key infrastructure offerings such as Green Data Center and Converged Communications. ITS infrastructure offerings deliver high-value, standardized, asset-based services that leverage the company's services, systems and software capabilities, providing clients end...

  • Page 44
    ...Yr. Change Adjusted for Currency For the year ended December 31: 2008 2007 Software external revenue: Middleware Key Branded Middleware WebSphere Family Information Management Lotus Tivoli Rational Other middleware Operating systems Product Lifecycle Management Other $22,089 $17,305 12,383 $19...

  • Page 45
    ... software. In December 2008, the company completed the acquisition of ILOG, whose products help customers improve business decisions with optimization, visualization and business rules software. The WebSphere products provide the foundation for Web-enabled applications and are a key product...

  • Page 46
    ... The company's POWER architecture supports hundreds of partitions, often driving utilization rates of over 60 percent. Both of these platforms leverage the entire system, from the company's custom semiconductors through the software stack, to achieve these high levels of efficiency and lower cost of...

  • Page 47
    ... mix benefit of 2.7 points due to the increased revenue in System z and converged System p. Systems and Technology segment pre-tax margin declined 2.0 points to 7.7 percent in 2008 reflecting the lower revenue and gross profit margin in 2008 versus 2007. Global Financing See page 57 for an analysis...

  • Page 48
    ... at constant currency) year to year. Total SG&A expense increased 6.0 percent (4 percent adjusted for currency) in 2008 versus 2007. The increase in SG&A was primarily due to acquisition-related spending, predominantly for Cognos and Telelogic, which accounted for 5 points of the increase, while the...

  • Page 49
    ... in total debt ($1,349 million) and accounts payable ($1,041 million). Total equity of $13,584 million decreased $15,030 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), common/treasury stock...

  • Page 50
    ... growth in the fourth quarter of 2009. The company is confident in its ability to continue to leverage its business model to expand margins, grow profit, generate cash, return value to shareholders and return to revenue growth in 2010. The continued investments in Software have led to this segment...

  • Page 51
    ... activities Cash and short-term marketable securities Committed global credit facilities Trade receivables securitization facility $20.8 $18.8 $16.1 $15.0 $14.9 $14.0 $12.9 $16.1 $10.7 $13.7 $10.0 $10.0 $10.0 $10.0 $10.0 0.5 The major rating agencies' ratings on the company's debt securities...

  • Page 52
    ...of 2009, the Board of Directors increased the company's quarterly common stock dividend from $0.50 to $0.55 per share. The table below represents the way in which management reviews cash flow as described above. ($ in billions) For the year ended December 31: 2009 2008 2007 2006 2005 Net cash from...

  • Page 53
    ... obligations Interest on long-term debt obligations Capital (finance) lease obligations Operating lease obligations Purchase obligations Other long-term liabilities: Minimum pension funding (mandated)* Executive compensation Long-term termination benefits Tax reserves** Other Total $23,842 12,381...

  • Page 54
    ... (PBO). As presented on page 115, the company decreased the discount rate assumption for the IBM Personal Pension Plan (PPP), a U.S.-based defined benefit plan, by 15 basis points to 5.60 percent on December 31, 2009. This change will increase pre-tax cost and expense recognized in 2010 by an...

  • Page 55
    ... (POC) method of accounting. If at any time these estimates indicate the POC contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost. The company performs ongoing profitability analyses of its services contracts in order to determine...

  • Page 56
    ... Global Financing estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment and obtaining forward-looking product information such as marketing plans and technological innovations. Residual value estimates are periodically...

  • Page 57
    ... manages currency risk in these entities by linking prices and contracts to U.S. dollars. The company is continuing to monitor the current economic conditions in Venezuela. In Venezuela, there is an official currency rate that is fixed by the government, and a parallel market of currency exchange...

  • Page 58
    ... 24 for a discussion of the financing risks associated with the Global Financing business and management's actions to mitigate such risks. Employees and Related Workforce Yr.-to-Yr. Change For the year ended December 31: 2009 2008 2007 2009-08 2008-07 IBM/wholly owned subsidiaries Less-than-wholly...

  • Page 59
    ...in external and internal financing revenue was due to higher average asset balances and higher asset yields. Global Financing gross profit increased 18.4 percent in 2008 versus 2007, with gross margin increasing 3.3 points. This was due to higher margins on financing and used equipment sales. Global...

  • Page 60
    ... of IBM systems, software and services, but also include non-IBM equipment, software and services to meet IBM clients' total solutions requirements. Client financing assets are primarily sales-type, direct financing and operating leases for systems products, as well as loans for systems, Cash...

  • Page 61
    ... margin internal used equipment sales. The table on page 60 presents the recorded amount of unguaranteed residual value for sales-type, direct financing and operating leases at December 31, 2008 and 2009. In addition, the table presents the residual value as a percentage of the related original...

  • Page 62
    ... 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 leveraged in line with the overall Global Financing business model. ($ in millions) December 31, 2009 December 31, 2008...

  • Page 63
    ... cost and access to the capital markets. Overall, Global Financing's originations will be dependent upon the demand for IT products and services as well as client participation rates. IBM continues to access both the short-term commercial paper market and the medium- and long-term debt markets...

  • Page 64
    ... to stockholder ratification. The Audit Committee 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...

  • Page 65
    ... 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...

  • Page 66
    ... Statement of Earnings INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ($ in millions except per share amounts) For the year ended December 31: Notes 2009 2008 2007 Revenue: Services Sales Financing Total revenue Cost: Services Sales Financing Total cost Gross profit...

  • Page 67
    Consolidated Statement of Financial Position INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ($ in millions except per share amounts) At December 31: Notes 2009 2008 Assets Current assets: Cash and cash equivalents Marketable securities Notes and accounts receivable - trade (...

  • Page 68
    Consolidated Statement of Cash Flows INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ($ in millions) For the year ended December 31: 2009 2008 2007 Cash flow from operating activities from continuing operations: Net income (Income)/loss from discontinued operations Adjustments...

  • Page 69
    ...INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ($ in millions) Common Stock and Additional Paid-in Capital Accumulated Other Comprehensive Treasury Income/ Stock (Loss) Retained Earnings Total IBM Stockholders' Equity* Noncontrolling Interests* Total Equity* 2007** Equity...

  • Page 70
    ...INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ($ in millions) Common Stock and Additional Paid-in Capital Accumulated Other Comprehensive Treasury Income/ Stock (Loss) Retained Earnings Total IBM Stockholders' Equity* Noncontrolling Interests* Total Equity* 2008** Equity...

  • Page 71
    Consolidated Statement of Changes in Equity INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ($ in millions) Common Stock and Additional Paid-in Capital Accumulated Other Comprehensive Treasury Income/ Stock (Loss) Retained Earnings Total IBM Stockholders' Equity* ...

  • Page 72
    ... Accounting Policies Basis of Presentation The accompanying Consolidated Financial Statements and footnotes thereto of the International Business Machines Corporation (IBM and/or the company) have been prepared in accordance with accounting principles generally accepted in the United States...

  • Page 73
    ... known by management. The company performs ongoing profitability analyses of its services contracts accounted for under the POC method in order to determine whether the latest estimates of revenue, costs and profits require updating. If at any time these estimates indicate that the contract will be...

  • Page 74
    ... the term of the lease. Services Costs Recurring operating costs for services contracts, including costs related to bid and proposal activities, are recognized as incurred. For fixed-price design and build contracts, the costs of external hardware and software accounted for under the POC method are...

  • Page 75
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES clients in excess of the fair value of acquired assets is recorded as an offset of revenue and is estimated at December 31, 2009 to be $39 million in 2010, $23 million in 2011, $7 million...

  • Page 76
    ... are capitalized as an intangible asset. See "Software Costs" on page 73. Intellectual Property and Custom Development Income The company licenses and sells the rights to certain of its intellectual property (IP) including internally developed patents, trade secrets and technological know-how...

  • Page 77
    ... the timing or the amount of the original expected cash flows to the related assets. Defined Benefit Pension and Nonpension Postretirement Benefit Plans The funded status of the company's defined benefit pension plans and nonpension postretirement benefit plans (retirement-related benefit plans) is...

  • Page 78
    ... employee requisite service period. The company estimates the fair value of stock options using a Black-Scholes 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 79
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES (net investment hedge) in a foreign operation. In addition, the company may enter into derivative contracts that economically hedge certain of its risks, even though hedge accounting does...

  • Page 80
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES value of its investment in the investee adjusted using discounted cash flows for the company's estimate of the price that it would receive to sell the investment to a market participant ...

  • Page 81
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed. Subsequent recoveries, if any, are credited to the ...

  • Page 82
    ... consolidated with the transferor in the financial statements being presented, and/or when the transferor has continuing involvement with the transferred financial asset. The company will adopt these amendments for interim and annual reporting periods beginning on January 1, 2010. The company does...

  • Page 83
    ... unobservable inputs (Level 3) on changes in plan assets; and (e) significant concentrations of risk within plan assets. The disclosures are required annually and have been included in the December 31, 2009 Consolidated Financial Statements. See note U "Retirement-Related Benefits" on pages...

  • Page 84
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES basis (at least annually), to January 1, 2009. The application of these amendments did not have a material impact on the Consolidated Financial Statements. In February 2007, the FASB ...

  • Page 85
    ... 2008, IBM acquired 100 percent of the outstanding common shares of Telelogic for cash consideration of $885 million. Telelogic is a leading global provider of solutions that enable organizations to align the development of products, complex systems and software with business objectives and customer...

  • Page 86
    ... Linux-based applications onto the IBM systems that make the most sense for their business needs. Purchase price consideration for the "Other Acquisitions" was paid all in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents. 2008...

  • Page 87
    ... with Dassault Systemes (DS) under which DS would acquire the company's activities associated with sales and support of DS's product lifecycle management (PLM) software solutions, including customer contracts and related assets. This transaction is subject to customary closing conditions and...

  • Page 88
    ... applicable net assets was appropriate. The company's investment in InfoPrint is accounted for under the equity method of accounting. The company will provide maintenance services for one year, certain hardware products for three years and other information technology and business process services...

  • Page 89
    ... to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ($ in millions) At December 31, 2008: Level 1 Level 2 Level 3 Netting(1) Total Assets: Cash and cash equivalents Marketable securities Derivative assets(2) Investments and sundry assets Total...

  • Page 90
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Debt and Marketable Equity Securities The following table summarizes the company's debt and marketable equity securities all of which are considered available-for-sale and recorded at ...

  • Page 91
    ... transition and setup costs and other deferred arrangements** Derivatives - noncurrent + Alliance investments: Equity method Non-equity method Prepaid software Long-term deposits Other receivables Employee benefit-related Other assets Total * Reclassified to conform with 2009 presentation. $1,772...

  • Page 92
    ...,190 $1,004 Segment Balance January 1, 2008 Goodwill Additions Purchase Price Adjustments Divestitures Foreign Currency Translation and Other Adjustments Balance December 31, 2008 Global Business Services Global Technology Services Software Systems and Technology Total $ 4,041 2,914 6,846...

  • Page 93
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Long-Term Debt Pre-Swap Borrowing ($ in millions) At December 31: Maturities 2009 2008 U.S. Dollar Notes and Debentures (average interest rate at December 31, 2009): 3.33% 4.99% 6.63% 7....

  • Page 94
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Pre-swap annual contractual maturities of long-term debt outstanding at December 31, 2009, are as follows: ($ in millions) 2010 2011 2012 2013 2014 2015 and beyond Total $ 2,251 3,953 ...

  • Page 95
    .... Interest Rate Risk Fixed and Variable Rate Borrowings 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 mismatches with the underlying assets. To manage these mismatches...

  • Page 96
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Foreign Exchange Risk Long-Term Investments in Foreign Subsidiaries (Net Investment) A significant portion of the company's foreign currency denominated debt portfolio is designated as a ...

  • Page 97
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Fair Values of Derivative Instruments on the Consolidated Statement of Financial Position ($ in millions) Fair value of derivative assets Designated as hedging instruments Not designated ...

  • Page 98
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The Effect of Derivative Instruments on the Consolidated Statement of Earnings ($ in millions) For the year ended December 31, 2009: Gain (loss) recognized in earnings Derivative ...

  • Page 99
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Note M. Other Liabilities ($ in millions) At December 31: 2009 2008* Income tax reserves Executive compensation accruals Disability benefits Derivative liabilities Restructuring actions ...

  • Page 100
    ...2008 and 9,282,055 treasury shares in 2007, as a result of exercises of stock options by employees of certain recently acquired businesses and by non-U.S. employees. At December 31, 2009, $6,113 million of Board common stock repurchase authorization was still available. The company plans to purchase...

  • Page 101
    ... Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Net Change in Unrealized Gains/(Losses) on Marketable Securities (net of tax) ($ in millions) For the period ended December 31: 2009 2008 Net unrealized gains/(losses) arising during the period...

  • Page 102
    ... 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 103
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Commitments The company's extended lines of credit to third-party entities include unused amounts of $3,576 million and $3,857 million at December 31, 2009 and 2008, respectively. A ...

  • Page 104
    ... to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES A reconciliation of the statutory U.S. federal tax rate to the company's continuing operations effective tax rate is as follows: For the year ended December 31: 2009 2008 2007 Statutory rate...

  • Page 105
    ... of scientific advances to the development of new and improved products and their uses, as well as services and their application. Within these amounts, software-related expense was $2,991 million, $3,359 million and $3,037 million in 2009, 2008 and 2007, respectively. In addition, included in the...

  • Page 106
    ... 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: 2009 2008 2007 Weighted-average number...

  • Page 107
    ...employee requisite service period. See note A, "Significant Accounting Policies," on page 76 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: 2009 2008 2007...

  • Page 108
    ... on daily price changes of the company's stock over the expected option term, as well as the additional requirements included in accounting guidance on sharebased payments. The following table summarizes option activity under the Plans during the years ended December 31, 2009, 2008 and 2007. 2009...

  • Page 109
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The shares under option at December 31, 2009 were in the following exercise price ranges: Options Outstanding Wtg. Avg. Exercise Price Number of Shares Under Option Wtd. Avg. Aggregate ...

  • Page 110
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES RSUs 2009 Wtd. Avg. Grant Price Number of Units Wtd. Avg. Grant Price 2008 Number of Units Wtd. Avg. Grant Price 2007 Number of Units Balance at January 1 RSUs granted RSUs released RSUs...

  • Page 111
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Employees purchased 3.2 million, 3.5 million and 4.0 million shares under the ESPP during the years ended December 31, 2009, 2008 and 2007, respectively. Cash dividends declared and paid ...

  • Page 112
    ... 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 For the year ended December 31: 2009 2008 2007 2009 Non-U.S. Plans 2008* 2007* 2009 Total 2008* 2007* Defined benefit pension...

  • Page 113
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The following table presents a summary of the total projected benefit obligation (PBO) for defined benefit plans, accumulated postretirement benefit obligation (APBO) for nonpension ...

  • Page 114
    ... Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ($ in millions) Defined Benefit Pension Plans U.S. Plans For the year ended December 31: 2009 2008 2007 2009 Non-U.S. Plans 2008* 2007* Service cost Interest cost Expected return on plan assets...

  • Page 115
    ... Statements INTERNATIONAL BUSINESS MACHINES CORPORATION 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 2009 2008 Non-U.S. Plans* 2009...

  • Page 116
    ...Consolidated Statement of Changes in Equity for components of net periodic (income)/cost, including the related tax effects, recognized in other comprehensive income/(loss) for the retirement-related benefit plans. The following table presents the pre-tax estimated net loss, estimated prior service...

  • Page 117
    ...Defined Benefit Pension Plans U.S. Plans For the year ended December 31: 2009 2008 2007 2009 Non-U.S. Plans 2008 2007 Weighted-average assumptions used to measure net periodic (income)/cost for the year ended December 31: Discount rate Expected long-term returns on plan assets Rate of compensation...

  • Page 118
    ... cost for the years ended December 31, 2009, 2008 and 2007 and on the APBO at December 31, 2009 and 2008. EXPECTED LONG-TERM RETURNS ON PLAN ASSETS For the nonpension postretirement benefit plans, the company maintains a nominal, highly liquid trust fund balance to ensure payments are made timely...

  • Page 119
    ... years. A one percentage point increase or decrease in the assumed healthcare cost trend rate would not have a material effect on 2009, 2008 and 2007 net periodic cost or the benefit obligations as of December 31, 2009 and 2008. Plan Assets Retirement-related benefit plan assets are recognized and...

  • Page 120
    ... 3 Total Level 1 Non-U.S. Plans Level 2 Level 3 Total Equity: Equity securities(a) Equity commingled/mutual funds(b)(c) Fixed income: Government and related(d) Corporate bonds Mortgage and asset-backed securities Fixed income commingled/mutual funds(b)(e) Insurance contracts Cash and short-term...

  • Page 121
    ... to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The following table presents the reconciliation of the beginning and ending balances of Level 3 assets for the year ended December 31, 2009 for the U.S. Plan: ($ in millions) Equity Commingled...

  • Page 122
    ... and foreign exchange rates. These assets are classified as Level 1 or Level 2 depending on availability of quoted market prices. Expected Contributions DEFINED BENEFIT PENSION PLANS It is the company's general practice to fund amounts for pensions sufficient to meet the minimum requirements...

  • Page 123
    ... in a reduction in 2009, 2008 and 2007 net periodic cost of $28 million, $40 million and $36 million, respectively. Other Plan Information The following table presents information for defined benefit pension plans with accumulated benefit obligations (ABO) in excess of plan assets. For a more...

  • Page 124
    ...'s-length leases and loans at prices equivalent to market rates with the Global Financing segment to facilitate the acquisition of equipment used in services engagements. All internal transaction prices are reviewed annually, and reset if appropriate. The company utilizes globally integrated support...

  • Page 125
    ... 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 Total Segments For the year ended December 31: Software 2009...

  • Page 126
    ... INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Reconciliations of IBM as Reported ($ in millions) For the year ended December 31: 2009 2008 2007 Segment Assets and Other Items Global Technology Services assets are primarily accounts receivable, plant, property and equipment...

  • Page 127
    ... the year ended December 31: 2009 2008 2007 Assets: Total reportable segments Elimination of internal transactions Unallocated amounts: Cash and marketable securities Notes and accounts receivable Deferred tax assets Plant, other property and equipment Pension assets Other Total IBM consolidated 12...

  • Page 128
    Notes to Consolidated Financial Statements INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Revenue by Classes of Similar Products or Services The table presents external revenue for similar classes of products or services within the company's reportable segments. Within Global ...

  • Page 129
    Five-year Comparison of Selected Financial Data INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ($ in millions except per share amounts) For the year ended December 31: 2009 2008 2007 2006 2005 Revenue Income from continuing operations Income/(loss) from discontinued ...

  • Page 130
    ... 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. ** 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 two years...

  • Page 131
    ... INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES 150 120 Comparison of One-, Five- and Ten-year Cumulative Total Return for IBM, S&P 500 Stock Index and S&P Information Technology Index The 90 following graphs compare the one-, five- and ten-year cumulative total returns...

  • Page 132
    ... Graphs INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Ten-year ($ usd) 150 120 90 60 30 0 99 00 01 02 03 04 05 06 07 08 09 Ten-year 1999 180 • IBM Common Stock $100.00 2000 2001 2002 2003 2004 2005 1602006 $ 95.11 108.15 140 45.33 120 2007 2008 2009 $79...

  • Page 133
    Board of Directors and Senior Leadership INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Board of Directors Alain J.P. Belda Chairman Alcoa Inc. and Managing Director Warburg Pincus LLC Cathleen Black President Hearst Magazines William R. Brody President Salk Institute for ...

  • Page 134
    ... of the 2009 Annual Report will be available for sight-impaired stockholders in June. The IBM Corporate Responsibility Report details the company's distinct strategy, results and key performance metrics in the areas of employees, communities, environment, supply chain, public policy and governance...

  • Page 135
    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. CloudBurst, Cognos, DataMirror, DataPower, Diligent Technologies, DS8000, IBM, ILOG, InfoSphere, Jazz, Lotus, POWER, POWER6, ...

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