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Annual
Report
2010

Table of contents

  • Page 1
    Annual Report 2010

  • Page 2
    On June 16, 2011, IBM marks its centennial. As we reï¬,ect on our first century, it has sparked new thinking about the possibilities for our second. Join us at IBM100.com

  • Page 3
    ... pre-tax earnings, record earnings per share, record free cash ï¬,ow and improved profit margins, with increased revenues. At the same time, we continued to deliver superior returns to you, our owners. Most importantly, we are well positioned to grow as the global economy recovers. These results...

  • Page 4
    ... indicator of real business performance. In 2010 our free cash flow, excluding the year-toyear change in Global Financing receivables, was $16.3 billion, an increase of $1.2 billion from 2009. IBM ended 2010 with $11.7 billion of cash and marketable securities. Investment and return to shareholders...

  • Page 5
    A Letter from the Chairman 3 Samuel J. Palmisano Chairman, President and Chief Executive Officer

  • Page 6
    ... they would lead to new high-growth market opportunities and a new form of the corporation itself-what we came to call the globally integrated enterprise. 2. Changes in technology: At the same time, a new model of computing was replacing the PC-based, client/server approach. Computational capability...

  • Page 7
    ... new road map isn't just a list of targets; it's a management model, organized around the major drivers of IBM's earnings per share performance. Those are: operating leverage, share repurchase and growth strategies. Operating leverage will come from our continuing shift to higher-margin businesses...

  • Page 8
    ... services. Our road map calls for $7 billion in revenue from cloud by 2015. By becoming a very different company from what we were just a few years ago, we have become much more like the company IBM has been for most of its history. In sum, our superior strategic positioning, strong balance sheet...

  • Page 9
    ...at least $20 per share, to generate another $100 billion in free cash ï¬,ow, to return an additional $70 billion to you, to grow our software profit to about half of total segment profit and to increase growth markets' contribution to our revenue to nearly 30 percent. The information on pages 9 to...

  • Page 10
    ...the company's financial results related to (i) free cash flow excluding Global Financing receivables and (ii) operating (non-GAAP) earnings, which are in each case non-GAAP measures, see the company's Form 8-K submitted to the SEC on January 18, 2011 (Attachment II - Non-GAAP Supplementary Materials...

  • Page 11
    ...Generating Higher Value at IBM Over the past decade, IBM has built a record of leadership by pursuing the most transformational opportunities, inventing the breakthrough technologies to capture them and building an organization able to deliver superior results over the long term. This wasn't new. It...

  • Page 12
    ...cash performance. In 2010 our free cash ï¬,ow, excluding the year-to-year change in Global Financing receivables, was $16.3 billion-an increase of $1.2 billion from 2009. Since the end of 2000 we have generated $109 billion in free cash ï¬,ow. Financial Performance History (% of total revenue, $ in...

  • Page 13
    ... Income*, ** Software Services Hardware/Financing 2000 2006 2007 2008 2009 2010 2015 Key Drivers for 2015 EPS Road Map *Excludes acquisition-related and nonoperating retirement-related charges. **2000 and 2001 exclude Enterprise Investments and not restated for stock-based compensation. Sum...

  • Page 14
    ...the delivery of new services to millions of clients and employees. Danone is working with IBM to provide a secure cloud trading network for its customers and business partners, while ADP is using IBM's cloud integration software to expand its tax filing offerings to new markets serving employers of...

  • Page 15
    Generating Higher Value at IBM 13 Business Analytics $ in revenue by 2015 16 billion Opportunity: Global data volumes are predicted to increase by 29 times over the next 10 years to 35 zettabytes.* (A zettabyte is a 1 followed by 21 zeros.) 2015 Road Map Objective: Business analytics revenue is...

  • Page 16
    ...York State save nearly $1 billion preventing tax fraud with advanced analytics. Automating Aviation Industry Operations 1962 Created the Sabre airline reservation system for American Airlines-a precursor of everything from the ATM to e-commerce. 2010 Helping New Delhi's international airport manage...

  • Page 17
    ... IBM 15 IBM Share Price* (Adjusted for stock splits) $160 ...IBM has changed global business and society, in the process generating strong financial results and superior returns to our owners. Since 1915, IBM stock has appreciated more than Over that same period the Dow Jones Industrial Average...

  • Page 18
    ...3,177 2.50 2010 $ 20,773 3,747 7,429 2,860 2.15 2009 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...

  • Page 19
    ... Currency Rate Fluctuations Market Risk Financing Risks Employees and Related Workforce Global Financing 18 18 18 20 25 39 46 46 47 50 53 53 54 54 55 60 61 Notes to Consolidated Financial Statements A B C D E F G H I J K L M N O P Q R S T U V W Significant Accounting Policies Accounting Changes...

  • Page 20
    ... Machines Corporation and Subsidiary Companies Overview The financial section of the International Business Machines Corporation (IBM or the company) 2010 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to the Consolidated Financial State...

  • Page 21
    ...52 per share. The resilience of the business model enabled the company to exceed its objective even while managing through the severe global recession. Total revenue for 2010 increased 4.3 percent (3 percent adjusted for currency) compared to 2009; excluding the divested Product Lifecycle Management...

  • Page 22
    ... • Revenue increase at actual rates, $0.43 Operating leverage, $0.62 Common stock repurchases, $0.46 At December 31, 2010, the company's balance sheet and liquidity positions remained strong. Cash and marketable securities at year end were $11,651 million. Total debt of $28,624 million increased...

  • Page 23
    ... to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and IT solutions; and providing long-term value to shareholders. The business model has been developed over time through...

  • Page 24
    ...available to clients through highly skilled employees and delivery centers in over 40 countries worldwide. Global Business Services (GBS) primarily provides professional services and application management services, delivering business value and innovation to clients through solutions which leverage...

  • Page 25
    ... half of Systems and Technology's server and storage sales transactions are through the company's business partners; with the balance direct to end-user clients. In addition, Systems and Technology provides leading semiconductor technology, products and packaging solutions to clients and for IBM...

  • Page 26
    ..., the company implemented a new operating model with work shared in Financial Services: Banking, Financial Markets, Insurance Public: Education, Government, Healthcare, Life Sciences Industrial: Aerospace and Defense, Automotive, Chemical and Petroleum, Electronics Distribution: Consumer Products...

  • Page 27
    ... and improve service quality, speed and risk management. The company has shifted resources toward building client relationships and employees skills, while positioning the company for new market opportunities. During this period, IBM has pioneered this new operating model, changing from a classic...

  • Page 28
    ... are intended to reflect an arm's-length transfer price and excludes certain unallocated corporate items; see note V, "Segment Information" for additional information. Workforce rebalancing charges were recorded in the first quarter of 2009 and 2010. The PLM and Geodis divestiture transactions were...

  • Page 29
    Management Discussion International Business Machines Corporation and Subsidiary Companies 27 Global Technology Services revenue of $38,201 million increased 2.3 percent (1 percent adjusted for currency) in 2010 versus 2009. The rate of year-to-year revenue growth, adjusted for currency, ...

  • Page 30
    Management Discussion 28 International Business Machines Corporation and Subsidiary Companies whether it is a new contract or an extension of an existing contract. The company's outsourcing business revenue is more determined by backlog, and period signings are just one of several inputs to ...

  • Page 31
    Management Discussion International Business Machines Corporation and Subsidiary Companies 29 Software revenue of $22,485 million increased 5.1 percent (5 percent adjusted for currency) in 2010 compared to 2009. Adjusting for the divested PLM operations, revenue grew at 8.1 percent (8 percent ...

  • Page 32
    ...and wireless communications. Retail Stores Solutions revenue increased 22.4 percent (23 percent adjusted for currency) in 2010 versus 2009 as the company extended its leadership position as a point of sale provider. ($ in millions) For the year ended December 31: 2010 2009 Yr.-to-Yr. Change Systems...

  • Page 33
    ... Microelectronics OEM business. Total Expense and Other Income ($ in millions) For the year ended December 31: 2010 2009 Yr.-to-Yr. Change Total expense and other income Expense-to-revenue ratio $26,291 26.3% $25,647 26.8% 2.5% (0.5) pts. The key drivers year to year in total expense and other...

  • Page 34
    Management Discussion 32 International Business Machines Corporation and Subsidiary Companies The company's expense-to-revenue ratio improved in 2010 versus 2009. The increase in total expense and other income was primarily driven by the company's acquisitions and the effects of currency. ...

  • Page 35
    ... average debt balances in 2010 versus 2009. Total debt at December 31, 2010 was $28.6 billion; an increase of $2.5 billion from the prior year-end position. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings if the related external borrowings are to support...

  • Page 36
    ... 31: 2010 2009 Financial Position Dynamics At December 31, 2010, the company's balance sheet and liquidity positions remain strong and are positioned to support the business over the long term. Cash and marketable securities at year end were $11,651 million. Total debt of $28,624 million increased...

  • Page 37
    ... of the Geodis transaction in 2009; and A decrease in cash provided by Global Financing non-operating receivables of $221 million as a result of improved originations in 2010; partially offset by The net impact of purchases and sales of short-term marketable securities and other investments that...

  • Page 38
    ... 2009 and represented the 32nd consecutive quarter of earnings per share growth for the company. The company delivered solid financial results while continuing a high level of investment to drive future growth and delivering strong shareholder returns. Total revenue increased 6.6 percent as reported...

  • Page 39
    ... quarter of 2009 with growth both in outsourcing and the transactional businesses: consulting and systems integration. In the quarter, GBS gained share overall with gains in Consulting and sustained share in Application Management Services. From a geographic perspective, revenue performance was...

  • Page 40
    ... Discussion 38 International Business Machines Corporation and Subsidiary Companies the acquisition of Netezza, the value of business analytics can be extended to both large enterprises and smaller clients with a system that is simple, economical and offers quick time-to-value. Netezza got...

  • Page 41
    ...continued to deliver value to its clients and strong financial results to its investors-with profit growth driven by continued margin expansion, expense productivity, market share gains in software and systems and a continuing strong cash position. The company again achieved record levels of pre-tax...

  • Page 42
    ...46 Common stock repurchases, $ 0.34 Global Technology Services Global Business Services Software Systems and Technology Global Financing 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 43
    ... both labor and non-labor productivity actions. GTS has been executing a strategy to deliver services out of key global delivery centers using consistent global delivery methods and processes. The delivery centers are also improving labor utilization with analytics and by applying supply chain tools...

  • Page 44
    ... Machines Corporation and Subsidiary Companies Software ($ in millions) Yr.-to-Yr. Yr.-to-Yr. Change Adjusted Change for Currency For the year ended December 31: 2009* 2008* Software external revenue: Middleware Key Branded Middleware WebSphere Information Management Lotus Tivoli Rational...

  • Page 45
    ... 4 percent, primarily 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 gained share in four consecutive quarters. The company's improved sales model and enhanced product offerings were the key...

  • Page 46
    ... and Technology's pre-tax income decreased 8.5 percent in 2009 when compared to 2008 driven by lower revenue. Pre-tax margin increased 0.6 points in 2009 versus the prior year, reflecting the focus on cost and expense management and improving productivity. Global Financing See pages 55 through 59...

  • Page 47
    ... increase process efficiency and productivity; leveraging the The decrease in interest expense was primarily due to lower company's scale and global presence. The company's efforts have debt balances in 2009 versus 2008. Total debt at December 31, been focused on all areas of the business-from sales...

  • Page 48
    ... costs. These costs are primarily those related to changes in pension plan assets and liabilities which are tied to financial market performance and the company considers these costs to be outside the operational performance of the business. Overall, the company believes that providing investors...

  • Page 49
    ... workforce rebalancing charges to decline in total in 2011 versus 2010. In February 2011, the company completed the majority of the asset sale and will record a pre-tax gain of approximately $175 million in the first quarter of 2011. The company expects 2011 pre-tax retirement-related plan cost...

  • Page 50
    ...in a material adverse effect on its financial position or liquidity. Moody's Investors Service Standard & Poor's Fitch Ratings Senior long-term debt Commercial paper A+ A-1 Aa3 Prime-1 A+ F1 The company prepares its Consolidated Statement of Cash Flows in accordance with applicable accounting...

  • Page 51
    ... 2015 Long-term debt 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...

  • Page 52
    ... on page 118, the company decreased the discount rate assumption for the IBM Personal Pension Plan (PPP), a U.S.-based defined benefit plan, by 60 basis points to 5.00 percent on December 31, 2010. This change will increase pre-tax cost and expense recognized in 2011 by an estimated $166 million...

  • Page 53
    ... by $89 million (excluding Global Financing receivables reserves discussed on page 57). Costs to Complete Service Contracts The company enters into numerous service contracts through its GTS and GBS businesses. During the contractual period, revenue, cost and profits may be impacted by estimates...

  • Page 54
    ...value of equipment under lease as of the end of the lease. Residual value estimates impact the determination of whether a lease is classified as operating or capital. Global Financing estimates the future fair value of leased equipment by using historical models, analyzing the current market for new...

  • Page 55
    ...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 a variety of financial instruments...

  • Page 56
    ... items are included by definition. Excluded items include short-term and long-term receivables from sales-type and direct financing leases, forecasted foreign currency cash flows and the company's net investment in foreign operations. As a consequence, reported changes in the values of some of the...

  • Page 57
    ... to lower average asset balances and lower asset yields. Global Financing gross profit increased 3.4 percent compared to 2009 primarily due to higher used equipment sales gross profit. Gross margin increased 2.0 points primarily due to a higher financing margin. Total revenue in 2009 decreased $375...

  • Page 58
    ... 56 International Business Machines Corporation and Subsidiary Companies Financial Condition Balance Sheet ($ in millions) At December 31: 2010 2009 Cash and cash equivalents Net investment in sales-type and direct financing leases Equipment under operating leases: External clients (a) Internal...

  • Page 59
    ... 78 for the company's accounting policy for residual values. Global Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients. Sales of equipment, which are primarily...

  • Page 60
    ... 58 International Business Machines Corporation and Subsidiary Companies Unguaranteed Residual Value ($ in millions) Total 2009 2010 2011 Estimated Run Out of 2010 Balance 2012 2013 2014 and Beyond Sales-type and direct financing leases Operating leases Total unguaranteed residual value Related...

  • Page 61
    ... 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. A protracted period where IBM...

  • Page 62
    ... 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 63
    Report of Independent Registered Public Accounting Firm International Business Machines Corporation and Subsidiary Companies 61 To the Stockholders and Board of Directors of International Business Machines Corporation: In our opinion, the accompanying Consolidated Financial Statements appearing on ...

  • Page 64
    ... Earnings 62 International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) For the year ended December 31: Notes 2010 2009 2008 Revenue: Services Sales Financing Total revenue Cost: Services Sales Financing Total cost Gross profit Expense and other...

  • Page 65
    Consolidated Statement of Financial Position International Business Machines Corporation and Subsidiary Companies 63 ($ in millions except per share amounts) At December 31: Notes 2010 2009 Assets Current assets: Cash and cash equivalents Marketable securities Notes and accounts receivable - trade...

  • Page 66
    ... intangibles Stock-based compensation Deferred taxes Net (gain)/loss on asset sales and other Change in operating assets and liabilities, net of acquisitions/divestitures: Receivables (including financing receivables) Retirement related Inventories Other assets/other liabilities Accounts payable Net...

  • Page 67
    ...of Changes in Equity International Business Machines Corporation and Subsidiary Companies 65 ($ in millions) Common Stock and Additional Paid-in Capital Accumulated Other Comprehensive Income/ (Loss) Retained Earnings Treasury Stock Total IBM Stockholders' Equity Noncontrolling Interests Total...

  • Page 68
    ...Equity 66 International Business Machines Corporation and Subsidiary Companies ($ in millions) Common Stock and Additional Paid-in Capital Accumulated Other Comprehensive Income/ (Loss) Retained Earnings Treasury Stock Total IBM Stockholders' Equity Noncontrolling Interests Total Equity 2009...

  • Page 69
    ...of Changes in Equity International Business Machines Corporation and Subsidiary Companies 67 ($ in millions) Common Stock and Additional Paid-in Capital Accumulated Other Comprehensive Income/ (Loss) Retained Earnings Treasury Stock Total IBM Stockholders' Equity Noncontrolling Interests Total...

  • Page 70
    ... accounted for using the equity method and the company's proportionate share of income or loss is recorded in other (income) and expense. The accounting policy for other investments in equity securities is described on page 77 within "Marketable Securities." Equity investments in non-publicly traded...

  • Page 71
    ...'s relative selling price. The following revenue policies 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, consulting and...

  • Page 72
    ... Consolidated Financial Statements 70 International Business Machines Corporation and Subsidiary Companies Hardware The company's hardware offerings include the sale or lease of system servers, storage solutions, retail store systems and the sale of semiconductors. The company provides warranties...

  • Page 73
    ... accounts receivable, unamortized deferred costs incurred to purchase specific assets utilized in the delivery of services and to pay any additional costs incurred by the company to transition the services. Software Costs Costs that are related to the conceptual formulation and design of licensed...

  • Page 74
    Notes to Consolidated Financial Statements 72 International Business Machines Corporation and Subsidiary Companies Revenue from separately priced extended warranty contracts is recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period. Changes in the...

  • Page 75
    ...The funded status of the company's defined benefit pension plans and nonpension postretirement benefit plans (retirement-related benefit plans) is recognized in the Consolidated Statement of Financial Position. The funded status is measured as the difference between the fair value of plan assets and...

  • Page 76
    ... Financial Statements 74 International Business Machines Corporation and Subsidiary Companies Net periodic pension and nonpension postretirement benefit cost/(income) is recorded in the Consolidated Statement of Earnings and includes service cost, interest cost, expected return on plan assets...

  • Page 77
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 75 The company recognizes tax liabilities when, despite the company's belief that its tax return positions are supportable, the company believes that certain positions may not be fully ...

  • Page 78
    ... from financing activities in the Consolidated Statement of Cash Flows. Financial Instruments In determining the fair value of its financial instruments, the company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. Refer...

  • Page 79
    ... exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative. Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments...

  • Page 80
    ... Business Machines Corporation and Subsidiary Companies Financing Receivables Financing receivables include sales-type leases, direct financing leases and loans. Leases are accounted for in accordance with lease accounting standards. Loan receivables are financial assets recorded at amortized cost...

  • Page 81
    ...Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 79 Common Stock Common stock refers to the $.20 par value per share capital stock as designated in the company's Certificate of Incorporation. Treasury stock is accounted for using the cost method...

  • Page 82
    ... company adopted these amendments for the year ended December 31, 2009. There was no material impact in the Consolidated Financial Statements. In May 2009, the FASB issued guidelines on subsequent event accounting which sets forth: 1) the period after the balance sheet date during which management...

  • Page 83
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 81 In April 2009, the FASB issued an amendment to the revised business combination guidance regarding the accounting for assets acquired and liabilities assumed in a business combination that...

  • Page 84
    ... analytics and IT solutions to the public sector. Storwize, a provider of in-line data compression appliance solutions, will help the company to make it more affordable for clients to analyze massive amounts of data in order to provide new insights and business outcomes. BLADE provides server...

  • Page 85
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies 83 2009 In 2009, the company completed six acquisitions at an aggregate cost of $1,471 million. SPSS, Inc. (SPSS)-On October 2, 2009, the company acquired 100 percent of the outstanding common shares...

  • Page 86
    ... Financial Statements 84 International Business Machines Corporation and Subsidiary Companies 2008 In 2008, the company completed 15 acquisitions at an aggregate cost of $6,796 million. Cognos, Inc. (Cognos)-On January 31, 2008, the company acquired 100 percent of the outstanding common shares...

  • Page 87
    .... Divestitures 2010 On March 31, 2010, the company completed the sale of its activities associated with the sales and support of Dassault Systemes' (Dassault) product lifecycle management (PLM) software, including customer contracts and related assets to Dassault. The company received net proceeds...

  • Page 88
    ... Consolidated Financial Statements 86 International Business Machines Corporation and Subsidiary Companies 2009 On October 1, 2009, the company completed the divestiture of its UniData and UniVerse software products and related tools to Rocket Software, a privately held global software development...

  • Page 89
    ... Statements International Business Machines Corporation and Subsidiary Companies 87 ($ in millions) At December 31, 2009: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents (1) Time deposits and certificates of deposit Commercial paper Money market funds Other securities Total Debt...

  • Page 90
    ... Long-Term Receivables Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. Long-Term Debt Fair value of publicly traded long-term debt is based on quoted market prices...

  • Page 91
    ... International Business Machines Corporation and Subsidiary Companies 89 ($ in millions) Adjusted Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value At December 31, 2009: Cash and cash equivalents (1) Time deposits and certificates of deposit Commercial paper Money market funds...

  • Page 92
    ...primarily to clients to finance the purchase of software and services. Separate contractual relationships on these financing arrangements are for terms ranging generally from two to seven years. Each financing contract is priced independently at competitive market rates. The company has a history of...

  • Page 93
    ... are based on rating agency data, publicly available information and information provided by the companies, and are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody's Investors Service credit ratings as shown below...

  • Page 94
    ...Financial Statements 92 International Business Machines Corporation and Subsidiary Companies Past Due Financing Receivables ($ in millions) Total Past Due > 90 days* Total Financing Receivables Recorded Investment > 90 Days and Accruing At December 31, 2010: Current Major markets Growth markets...

  • Page 95
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 93 Note J. Intangible Assets Including Goodwill Intangible Assets The following table details the company's intangible asset balances by major asset class. ($ in millions) Gross Carrying ...

  • Page 96
    Notes to Consolidated Financial Statements 94 International Business Machines Corporation and Subsidiary Companies Goodwill The changes in the goodwill balances by reportable segment, for the years ended December 31, 2010 and 2009, are as follows: ($ in millions) Foreign Currency Translation and ...

  • Page 97
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 95 Long-Term Debt Pre-Swap Borrowing ($ in millions) At December 31: Maturities 2010 2009 U.S. dollar notes and debentures (average interest rate at December 31, 2010): 2.88% 3.76% 5.92%...

  • Page 98
    ...to Consolidated Financial Statements 96 International Business Machines Corporation and Subsidiary Companies Pre-swap annual contractual maturities of long-term debt outstanding at December 31, 2010, are as follows: ($ in millions) ($ in millions) At December 31: 2010 2009 Unused lines: From the...

  • Page 99
    ... issues debt in the global capital markets, principally to fund its financing lease and loan portfolio. Access to costeffective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest-rate...

  • Page 100
    ... related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company's common stock. They are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement...

  • Page 101
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 99 The following tables provide a quantitative summary of the derivative and non-derivative instrument related risk management activity as of December 31, 2010 and 2009 as well as for the...

  • Page 102
    Notes to Consolidated Financial Statements 100 International Business Machines Corporation and Subsidiary Companies Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position ($ in millions) Fair Value of Derivative Assets Designated as Hedging Instruments Not ...

  • Page 103
    ... in fair value hedges: Interest rate contracts Derivative instruments not designated as hedging instruments: (1) Foreign exchange contracts Equity contracts Total Other (income) and expense SG&A expense 299 105 $ 805 (128) 177 $(219) N/A N/A $(116) N/A N/A $537 Cost of financing Interest expense...

  • Page 104
    ... Consolidated Financial Statements 102 International Business Machines Corporation and Subsidiary Companies Note M. Other Liabilities ($ in millions) At December 31: 2010 2009 Income tax reserves Executive compensation accruals Disability benefits Derivative liabilities Special actions Workforce...

  • Page 105
    ...common shares at a cost of $166 million in 2010, 2009 and 2008, respectively, were remitted by employees to the company in order to satisfy minimum statutory tax withholding requirements. These amounts are included in the treasury stock balance in the Consolidated Statement of Financial Position and...

  • Page 106
    ...Statements 104 International Business Machines Corporation and Subsidiary Companies (including matters related to contested employment decisions, country-specific labor and employment laws, and the company's pension, retirement and other benefit plans), as well as actions with respect to contracts...

  • Page 107
    ... 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 approximately $2,825 million and $2,788 million at December 31, 2010 and 2009, respectively...

  • Page 108
    ... of Financial Position were as follows: Deferred Tax Assets ($ in millions) At December 31: 2010 2009 Retirement benefits Share-based and other compensation Deferred income Domestic tax loss/credit carryforwards Foreign tax loss/credit carryforwards Bad debt, inventory and warranty reserves...

  • Page 109
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 107 Deferred Tax Liabilities ($ in millions) At December 31: 2010 2009 Leases Depreciation Goodwill and intangible assets Software development costs Retirement benefits Other Gross ...

  • Page 110
    ... the development of new and improved products and their uses, as well as services and their application. Within these amounts, software-related expense was $3,028 million, $2,991 million and $3,359 million in 2010, 2009 and 2008, respectively. In addition, included in the expense was a charge of $24...

  • Page 111
    ... Compensation Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. See note A, "Significant Accounting Policies," on page 74 for additional information. The following table presents total stock...

  • Page 112
    ... Financial Statements 110 International Business Machines Corporation and Subsidiary Companies Stock Options Stock options are awards which allow the employee to purchase shares of the company's stock at a fixed price. Stock options are granted at an exercise price equal to the company stock price...

  • Page 113
    ...year period. The fair value of the awards is determined and fixed on the grant date based on the company's stock price. RSUs granted to employees prior to January 1, 2008 are considered participating securities as they receive nonforfeitable dividend equivalents at the same rate as common stock. Any...

  • Page 114
    ..., years of service, mortality and other participant-specific factors. The 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...

  • Page 115
    ...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 For the year ended December 31: 2010 2009 2008 2010 Non-U.S. Plans 2009 2008 2010 Total 2009...

  • Page 116
    ...Financial Position. ($ in millions) Benefit Obligations At December 31: 2010 2009 Fair Value of Plan Assets 2010 2009 Funded Status* 2010 2009 U.S. plans: Overfunded plans: Qualified PPP Underfunded plans: Excess PPP Retention Plan Nonpension postretirement benefit plan Total underfunded U.S. plans...

  • Page 117
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies 115 Defined Benefit Pension and Nonpension Postretirement Benefit Plan Financial Information The following tables through page 117 represent financial information for the company's retirement-related benefit...

  • Page 118
    ...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, excluding defined contribution plans. ($ in millions) Defined Benefit Pension Plans U.S. Plans 2010...

  • Page 119
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies 117 ($ in millions) Defined Benefit Pension Plans U.S. Plans For the year ended December 31: 2010 2009 Non-U.S. Plans 2010 2009 Nonpension Postretirement Benefit Plans U.S. Plan 2010 2009 Non-U.S. Plans 2010...

  • Page 120
    ... retirement-related benefit plans. Defined Benefit Pension Plans U.S. Plans For the year ended December 31: 2010 2009 2008 2010 Non-U.S. Plans 2009 2008 Weighted-average assumptions used to measure net periodic (income)/cost for the year ended December 31: Discount rate Expected long-term returns...

  • Page 121
    ...market-related value of plan assets recognizes changes in the fair value of plan assets systematically over a five-year period in the expected return on plan assets line in net periodic (income)/cost. For the U.S. defined benefit pension plan, the Qualified PPP, the expected long-term rate of return...

  • Page 122
    ... plan at December 31, 2010. The impact was insignificant as a result of the terms of the plan which limit the company' obligation to the participants. Plan Assets Retirement-related benefit plan assets are recognized and measured at fair value as described in note A, "Significant Accounting Policies...

  • Page 123
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 121 Defined Benefit Pension Plan Assets The following table presents the company's defined benefit pension plans' asset classes and their associated fair value at December 31, 2010. The U.S. Plan...

  • Page 124
    Notes to Consolidated Financial Statements 122 International Business Machines Corporation and Subsidiary Companies The following table presents the company's defined benefit pension plans' asset classes and their associated fair value at December 31, 2009. The U.S. Plan consists of the Qualified ...

  • Page 125
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 123 The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31, 2010 and 2009 for the U.S. Plan: ($ in millions...

  • Page 126
    ... as Level 2. If available, they are valued using the closing price reported on the major market on which the individual securities are traded. Cash includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short-term investments...

  • Page 127
    ... participants. The company received a total subsidy of $45 million for prescription drug-related coverage during each of the years ended December 31, 2010 and 2009, which was utilized to reduce the company contributions to the U.S. nonpension postretirement benefit plan. The company has included the...

  • Page 128
    ...length leases and loans at prices equivalent to market rates with Global Financing 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 organizations...

  • Page 129
    ... Technology Global Financing Total Segments For the year ended December 31: Software 2010: External revenue Internal revenue Total revenue Pre-tax income Revenue year-to-year change Pre-tax income year-to-year change Pre-tax income margin 2009: External revenue Internal revenue Total revenue Pre...

  • Page 130
    ... International Business Machines Corporation and Subsidiary Companies Reconciliations of IBM as Reported ($ in millions) For the year ended December 31: 2010 2009 2008 Segment Assets and Other Items Global Technology Services assets are primarily accounts receivable, plant, property and equipment...

  • Page 131
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 129 Management System Segment View ($ in millions) Global Services Segments Global Technology Services Global Business Services Systems and Technology Global Financing Total Segments For...

  • Page 132
    ... include IBM software and systems and other suppliers' products if the client solution requires it. Within Software, product license charges and ongoing subscription and support are reported as Software and consulting, education, training and other product-related services are reported as Services...

  • Page 133
    Five-Year Comparison of Selected Financial Data International Business Machines Corporation and Subsidiary Companies 131 ($ in millions except per share amounts) For the year ended December 31: 2010 2009 2008 2007 2006 Revenue Income from continuing operations Income/(loss) from discontinued ...

  • Page 134
    ...Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts and stock prices) 2010: First Quarter Second Quarter Third Quarter Fourth Quarter Full Year Revenue Gross profit Net income Earnings per share of common stock: Assuming dilution Basic Dividends per share...

  • Page 135
    ...Graphs International Business Machines Corporation and Subsidiary Companies 133 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...

  • Page 136
    ... Graphs 134 International Business Machines Corporation and Subsidiary Companies Ten-Year (U.S. Dollar) 200 175 150 125 100 75 50 25 00 01 02 03 04 05 06 07 08 09 10 Ten-Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 • IBM Common Stock • S & P 500 Index...

  • Page 137
    ... International Business Machines Corporation and Subsidiary Companies 135 Board of Directors Alain J.P. Belda Managing Director Warburg Pincus LLC William R. Brody President Salk Institute for Biological Studies Kenneth I. Chenault Chairman and Chief Executive Officer American Express Company...

  • Page 138
    ... Topics featured in this Annual Report can be found via the IBM home page on the Internet (http://www.ibm.com). Financial results, news on IBM products, services and other activities can also be found via that address. Stockholders of record can receive online account information and answers to...

  • Page 139
    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, DataPower, Diligent Technologies, DS8000, IBM, ibm.com, ILOG, InfoSphere, Initiate Systems, Jazz, Lotus, POWER7, Power...

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