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2012 IBM Annual Report

Table of contents

  • Page 1
    2012 IBM Annual Report

  • Page 2
    ... of double-digit EPS growth. Margins: IBM's operating pre-tax income margin rose for the 10th consecutive year - to 22.2 percent, up 12 points since 2000. Cash ï¬,ow: IBM has consistently generated strong cash flow, a key indicator of real business performance. In 2012 our free cash flow was $18...

  • Page 3
    ... Free cash ï¬,ow Returned to shareholders $ 15.25 $104.50 $ 17.60 $ 18.20 $ 15.80 We make markets: We create new markets by category, by geography and by client. • We make markets by category: Our software and services businesses today look very different from just a few years ago, offering new...

  • Page 4
    ... the course of our 2015 Road Map. Sixty percent of our productivity savings are reinvested in the business. Revenue Increase for IBM Growth Initiatives in 2012 For the year ended December 31: 2012 Smarter Planet Business Analytics Cloud Growth Markets * at constant currency 25% 13% 80% 7%* We use...

  • Page 5
    4 Virginia M. Rometty CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER

  • Page 6
    ... this several years ago with our point of view on building a Smarter Planet - a world that was becoming instrumented, interconnected and intelligent. Now, the IT environment is moving from monolithic applications to dynamic services; from structured data at rest to unstructured data in motion; from...

  • Page 7
    ... wave of business technology investment since the era of enterprise resource planning. City mayors are deploying Intelligent Operations Centers to transform public services in Davao, Philippines; Rio de Janeiro, Brazil; and Miami-Dade County, Florida. And urban transportation managers, such as...

  • Page 8
    ...robust profit streams, global reach - and especially our institutional capacity for innovation and continuous transformation - give us confidence that we will continue to provide differentiating value to our clients, employees, partners and communities - and therefore to you, our owners. "Generating...

  • Page 9
    8 Generating Higher Value at IBM IBM is an innovation company. We pursue continuous transformation both in what we do and how we do it-always remixing to higher value in our offerings and skills, in our operations and management practices, and in the transformational capabilities we deliver to our ...

  • Page 10
    ... to capture new growth and productivity. Growth Markets Share of Geographic Revenue 2012 1. We continuously change our business mix toward higher-value, more profitable technologies and market opportunities. Segment Pre-tax Income* ($ in billions) 24 10.8 % 22 % 21 % 19 % 11 % 2011 2010 2009...

  • Page 11
    ...) Free Cash Flow Operating Pre-tax Income Margin 18.2 $20 Acquisitions: Since the beginning of 2000, we have acquired more than 140 companies in strategic areas including analytics, cloud, security and Smarter Commerce. We expect to spend $20 billion in acquisitions over the 2015 Road Map period...

  • Page 12
    ... strong cash generation to return value to shareholders by reducing shares outstanding. $ 20 Operating EPS* $15.25 $13.44 $11.67 $3.32 Operating (non-GAAP) EPS* Segment Pre-tax Income*, ** Software Services Hardware / Financing * Excludes acquisition-related and nonoperating retirement-related...

  • Page 13
    ... business analytics consultants, 400 researchers and 9 analytics solution centers. We have acquired 33 companies since 2005, including five in 2012, to build targeted analytics and information expertise-helping clients turn massive volumes of real-time, unstructured data into high-value knowledge...

  • Page 14
    ... well as software, can be tuned ï¬,exibly to a desired workload. Hardware systems optimized for these new environments-such as IBM's System z mainframe, Power Systems, storage systems and our new PureSystems- are creating significant new business value. IBM's SmartCloud manages 13 billion security...

  • Page 15
    ... support system for physicians that will offer individualized, confidence-weighted treatment options for their patients. Smarter City Operations The Philippines city of Davao's 1.5 million citizens will be the first in Asia to benefit from an Intelligent Operations Center. It ties together data...

  • Page 16
    .... For information about the company's financial results related to (i) operating pre-tax income, operating pre-tax income margin and operating earnings per share and (ii) free cash ï¬,ow for 2012, see the company's Forms 8-K dated on January 22, 2013 and February 28, 2013 (Attachment II-Non-GAAP...

  • Page 17
    ...19,846 4,059 15,046 3,473 2.90 2011 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 * See page 38 for...

  • Page 18
    ... 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 18 18 19 21 26 44 55 55 56 59 61 62 62 63 63 68 69 Notes to Consolidated Financial Statements...

  • Page 19
    18 Management Discussion International Business Machines Corporation and Subsidiary Companies Overview The financial section of the International Business Machines Corporation (IBM or the company) 2012 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the ...

  • Page 20
    ... profit and cash on a sustained basis. The company continued to deliver value to its clients and capitalize on key trends in 2012. The company had strong performance in business analytics, cloud and Smarter Planet-key growth initiatives that leverage the software portfolio and contribute to margin...

  • Page 21
    ...Machines Corporation and Subsidiary Companies including Risk Management, Price and Promotion Optimization and Sales Performance Management. The value proposition in business analytics uniquely leverages the integration between the software portfolio and the Global Business Services (GBS) consulting...

  • Page 22
    ... a smarter planet: Smarter Commerce, Smarter Cities and Social Business. IBM's Smarter Commerce model integrates and transforms how companies manage and adapt their buy, market, sell and service processes, placing the customer squarely at the center of their business. IBM's Smarter Cities initiative...

  • Page 23
    ... and optimization of sales incentives and compensation; 3) transform their financial processes such as planning, budgeting, forecasting, financial consolidation, regulatory filing and financial reporting; and 4) better manage risk and regulatory compliance. The company's approach to analytics is...

  • Page 24
    ..., with applied innovation from IBM Research, clients gain access to leading-edge, high-quality services with improved productivity, flexibility, cost and outcomes. GBS Capabilities Consulting: delivering client value with solutions in Strategy and Transformation; Application Innovation Services...

  • Page 25
    ...and related services to external clients. Global Financing facilitates clients' acquisition of IBM systems, software and services. Global Financing invests in financing assets, leverages with debt and manages the associated risks with the objective of generating consistently strong returns on equity...

  • Page 26
    .... IBM annually invests over $6 billion for R&D, focusing on highgrowth, high-value opportunities. IBM Research works with clients and the company's business units through 12 global labs on near-term and mid-term innovations. It contributes many new technologies to IBM's portfolio every year and...

  • Page 27
    ... such as business analytics, Smarter Planet and cloud computing, in addition to improving profitability. Integrated Supply Chain IBM spends approximately $35 billion annually through its supply chain, procuring materials and services globally. In addition, in 2012, the company managed approximately...

  • Page 28
    ... and each reportable segment's pre-tax income as a percentage of total segment pre-tax income. Revenue For the year ended December 31: 2012 2011 Pre-tax Income* 2012 2011 Global Technology Services Global Business Services Total Global Services Software Systems and Technology Global Financing...

  • Page 29
    ... in 2012 and the gross profit margin improved 1.6 points year to year with margin expansion in each line of business, led by Outsourcing. Pre-tax income of Global Services Backlog The estimated Global Services backlog at December 31, 2012 was $140 billion, a decrease of 0.3 percent as reported, but...

  • Page 30
    ... backlog adjustments provided those contracts meet the company's requirements for initial signings. A new signing will be recognized if a new services agreement is signed incidental or coincidental to an acquisition or divestiture. For the year ended December 31: 2012 2011 Yr.-to-Yr. Percent...

  • Page 31
    ... intelligence. Lotus revenue decreased 2.1 percent as reported, but was flat year to year at constant currency in 2012. The social business offerings performed well, including contribution from the acquisition of Kenexa, a leading provider of recruiting and talent management solutions. Rational...

  • Page 32
    ...For the year ended December 31: 2012 2011 Systems and Technology External gross profit External gross profit margin Pre-tax income Pre-tax margin $6,903 39.1% $1,227 6.7% $7,555 39.8% $1,633 8.2% (8.6)% (0.7) pts. (24.9)% (1.5) pts. The decrease in external gross profit in 2012 versus 2011 was...

  • Page 33
    ...) Yr.-to-Yr. Percent/ Margin Change For the year ended December 31: 2012 2011 Total consolidated expense and other (income) Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs)/income Total operating (non-GAAP...

  • Page 34
    ... year ended December 31: 2012 2011 Selling, general and administrative expense Selling, general and administrative-other Advertising and promotional expense Workforce rebalancing charges Retirement-related costs Amortization of acquired intangible assets Stock-based compensation Bad debt expense...

  • Page 35
    ... cost Expected return on plan assets Recognized actuarial losses Plan amendments/curtailments/ settlements Multi-employer plan/other costs Total non-operating costs/ (income) Total retirement-related plans-cost NM-Not meaningful For the year ended December 31: 2012 2011 Sales and other transfers...

  • Page 36
    ... reduction in discount rates more than offset the returns on plan assets. At year end, the company's qualified defined benefit plans were well funded and the cash requirements related to these plans remain stable going forward at approximately $1 billion per year through 2015. In 2012, the return on...

  • Page 37
    36 Management Discussion International Business Machines Corporation and Subsidiary Companies The assets and debt associated with the Global Financing business are a significant part of the company's financial position. The financial position amounts appearing on page 72 are the consolidated ...

  • Page 38
    ...'s core business operations. This ratio can vary from period to period as the company manages its global cash and debt positions. "Core" debt-to-capitalization ratio (excluding Global Financing debt and equity) was 36.1 percent at December 31, 2012 compared to 32.0 percent at December 31, 2011. The...

  • Page 39
    ...) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective ($ in millions except per share amounts) AcquisitionRelated Adjustments RetirementRelated Adjustments Operating (non-GAAP) For the year ended December 31, 2011...

  • Page 40
    Management Discussion International Business Machines Corporation and Subsidiary Companies 39 Consolidated Fourth-Quarter Results ($ and shares in millions except per share amounts) Yr.-to-Yr. Percent/ Margin Change For the fourth quarter: 2012 2011 Revenue Gross profit margin Total expense ...

  • Page 41
    ...Total consolidated gross margin Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Retirement-related costs/(income) Operating (non-GAAP) gross profit Operating (non-GAAP) gross margin NM-Not meaningful 3.6% 2.1pts. Global Services The Global Services...

  • Page 42
    ...International Business Machines Corporation and Subsidiary Companies 41 revenue growth in the quarter. First, GTS did a tremendous amount of work to address a number of low margin contracts to improve the profitability of the outsourcing portfolio. The benefits of that work were realized in profit...

  • Page 43
    ... millions) Yr.-to-Yr. Percent/ Margin Change For the fourth quarter: 2012 2011 Total consolidated expense and other (income) Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs)/income Total operating (non-GAAP...

  • Page 44
    ...-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective ($ in millions except per share amounts) AcquisitionRelated Adjustments RetirementRelated Adjustments Operating (non-GAAP) For the fourth quarter 2011: GAAP Gross...

  • Page 45
    ...Management Discussion International Business Machines Corporation and Subsidiary Companies Prior Year in Review The "Prior Year in Review" section provides a summary of the company's financial performance in 2011 as compared to 2010. For a detailed discussion of prior-year performance, see the 2011...

  • Page 46
    Management Discussion International Business Machines Corporation and Subsidiary Companies 45 The consolidated gross profit margin increased 0.8 points versus 2010 to 46.9 percent. This was the eighth consecutive year of improvement in the gross profit margin. The operating (non-GAAP) gross margin...

  • Page 47
    ... price and excludes certain unallocated corporate items. ($ in millions) Yr.-to-Yr. Percent/ Margin Change Yr.-to-Yr. Percent Change Adjusted for Currency For the year ended December 31: 2011 2010 Revenue Global Technology Services Gross margin Global Business Services Gross margin Software...

  • Page 48
    ...) year to year. For the year ended December 31: 2011 2010 Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted for Currency Global Services external revenue Global Technology Services Outsourcing Integrated Technology Services Maintenance Global Business Services Outsourcing Consulting...

  • Page 49
    ... and delivery of solutions to clients. Both Global Services segments had strong profit and margin performance in 2011 as they continued to mix to higher value offerings and markets, and continued to focus on productivity and cost management. For the year ended December 31: 2011 2010 Yr.-to-Yr...

  • Page 50
    ...November 2010, the Software business has expanded the Netezza customer base by over 40 percent. The company's business analytics software offerings, most of which are part of Information Management, continued to outpace the market with double-digit revenue growth, year to year in 2011. Lotus revenue...

  • Page 51
    50 Management Discussion International Business Machines Corporation and Subsidiary Companies Power Systems revenue increased 12.0 percent (9 percent adjusted for currency) in 2011 versus 2010 with performance driven by strong growth in high-end systems. High-end systems revenue increased 31 ...

  • Page 52
    ...) Yr.-to-Yr. Percent/ Margin Change For the year ended December 31: 2011 2010 Total consolidated expense and other (income) Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs)/income Total operating (non-GAAP...

  • Page 53
    ... year ended December 31: 2011 2010 Selling, general and administrative expense Selling, general and administrative-other Advertising and promotional expense Workforce rebalancing charges Retirement-related costs Amortization of acquired intangible assets Stock-based compensation Bad debt expense...

  • Page 54
    ... in discount rates more than offset the returns on plan assets. At year end, the company's qualified defined benefit plans were well funded and its cash requirements related to these plans remained stable going forward. In 2011, the return on the U.S. Personal Pension Plan assets was 8.4 percent...

  • Page 55
    ...-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual ($ in millions except per share amounts) AcquisitionRelated Adjustments RetirementRelated Adjustments Operating (non-GAAP) For the year ended December 31, 2010: GAAP...

  • Page 56
    ... and financing accounts receivables at December 31, 2012 and 2011, respectively. The company will continue to monitor potential exposures in these countries in conjunction with the application of its credit policies. The company expects 2013 pre-tax retirement-related plan cost to be approximately...

  • Page 57
    ... Ratings Senior long-term debt Commercial paper AAA-1+ Aa3 Prime-1 A+ F1 The company prepares its Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 73 and highlights causes and events underlying sources and uses of cash...

  • Page 58
    ... Global Financing receivables Capital expenditures, net Free cash ï¬,ow Acquisitions Divestitures Share repurchase Dividends Non-Global Financing debt Other (includes Global Financing receivables and Global Financing debt) Change in cash, cash equivalents and short-term marketable securities...

  • Page 59
    ... Business Machines Corporation and Subsidiary Companies Contractual Obligations ($ in millions) Total Contractual Payment Stream Payments Due In 2013 2014-15 2016-17 After 2017 Long-term debt obligations Interest on long-term debt obligations Capital (finance) lease obligations Operating lease...

  • Page 60
    ... in the discount rate will cause a corresponding decrease or increase, respectively, in the PPP's PBO of an estimated $1.4 billion based upon December 31, 2012 data. The expected long-term return on plan assets assumption is used in calculating the net periodic pension (income)/cost (see page...

  • Page 61
    ... through its Global Services business. 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 these...

  • Page 62
    ... technology innovations and any resulting changes in the useful lives of used equipment. To the extent that actual residual value recovery is lower than management's estimates by 10 percent, Global Financing's segment pre-tax income and the company's consolidated income before income taxes for 2012...

  • Page 63
    ... and cash equivalents, marketable securities, short-term and long-term loans, commercial financing and installment payment receivables, investments, longterm and short-term debt and all derivative financial instruments. The company's derivative financial instruments generally include interest rate...

  • Page 64
    ...-time and limitedterm employment arrangements to meet specific business needs in a flexible and cost-effective manner. Results of Operations ($ in millions) For the year ended December 31: 2012 2011 2010 External revenue Internal revenue Total revenue Cost Gross profit Gross profit margin Pre...

  • Page 65
    ... 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, software and services with terms generally from one to seven years. Global...

  • Page 66
    ... 86 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 67
    ...The cost of guarantees was $5 million and $4 million for the year ended December 31, 2012 and 2011, respectively. Estimated Run Out of 2012 Balance 2012 2013 2014 2015 2016 and Beyond Sales-type and direct financing leases Operating leases Total unguaranteed residual value Related original amount...

  • Page 68
    ...of the company, and therefore is supported by the company's overall liquidity position and access to capital markets. Cash generated by Global Financing was primarily deployed to pay intercompany payables and dividends to the company in order to maintain an appropriate debt-to-equity ratio. Looking...

  • Page 69
    ... year, subject 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...

  • Page 70
    ... of Independent Registered Public Accounting Firm International Business Machines Corporation and Subsidiary Companies 69 To the Stockholders and Board of Directors of International Business Machines Corporation: In our opinion, the accompanying Consolidated Financial Statements appearing on pages...

  • Page 71
    70 Consolidated Statement of Earnings International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) For the year ended December 31: Notes 2012 2011 2010 Revenue Services Sales Financing Total revenue Cost Services Sales Financing Total cost Gross ...

  • Page 72
    Consolidated Statement of Comprehensive Income International Business Machines Corporation and Subsidiary Companies 71 ($ in millions) For the year ended December 31: Notes 2012 2011 2010 Net income Other comprehensive income/(loss), before tax Foreign currency translation adjustments Net changes...

  • Page 73
    ... Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) At December 31: Notes 2012 2011 Assets Current assets Cash and cash equivalents Marketable securities Notes and accounts receivable-trade (net of allowances of $255 in 2012 and $256 in 2011) Short-term...

  • Page 74
    ...finance receivables-net Acquisition of businesses, net of cash acquired Divestiture of businesses, net of cash transferred Net cash used in investing activities Cash ï¬,ows from financing activities Proceeds from new debt Payments to settle debt Short-term borrowings/(repayments) less than 90 days...

  • Page 75
    ...) Cash dividends declared-common stock Common stock issued under employee plans (34,783,386 shares) Purchases (2,334,932 shares) and sales (7,929,318 shares) of treasury stock under employee plans-net Other treasury shares purchased, not retired (117,721,650 shares) Changes in other equity Changes...

  • Page 76
    ...) Cash dividends declared-common stock Common stock issued under employee plans (15,091,320 shares) Purchases (2,406,007 shares) and sales (2,746,169 shares) of treasury stock under employee plans-net Other treasury shares purchased, not retired (61,246,371 shares) Changes in other equity Changes...

  • Page 77
    ..., net of tax, for the years ended December 31, 2012, 2011 and 2010, respectively, are included in the Consolidated Statement of Earnings within the other (income) and expense line item. Principles of Consolidation The Consolidated Financial Statements include the accounts of IBM and its controlled...

  • Page 78
    ...in one reporting period and the software support and hardware maintenance services delivered across multiple reporting periods. In another example, a client may outsource the running of its datacenter operations to the company on a long-term, multiple-year basis and periodically purchase servers and...

  • Page 79
    78 Notes to Consolidated Financial Statements 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 also offers ...

  • Page 80
    ... to support or service licensed programs are charged to software cost within cost of sales as incurred. The company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software programs, including software coding, installation, testing and certain data...

  • Page 81
    ... in the Consolidated Statement of Financial Position, are presented in the following tables: Standard Warranty Liability ($ in millions) 2012 2011 Advertising and Promotional Expense The company expenses advertising and promotional costs as incurred. Cooperative advertising reimbursements from...

  • Page 82
    ...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 83
    ...to Consolidated Financial Statements 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...

  • Page 84
    ... debt risk management program as addressed in note D, "Financial Instruments," on pages 94 to 98), cash flows directly associated with the settlement of the principal element of these swaps are reported in payments to settle debt in cash flows from financing activities in the Consolidated Statement...

  • Page 85
    84 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 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 ...

  • Page 86
    ... other accounts for which it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan agreement. Income recognition is discontinued on these receivables. Cash collections are first applied as a reduction to principal outstanding. Any cash...

  • Page 87
    ... common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, stock awards and convertible notes. Note B. Accounting Changes Standards Implemented In February 2013, the Financial Accounting Standards Board (FASB...

  • Page 88
    ... in the tables in this note, is paid primarily in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents. 2012 In 2012, the company completed 11 acquisitions at an aggregate cost of $3,964 million. Kenexa Corporation (Kenexa)-On...

  • Page 89
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2012. 2012 Acquisitions ($ in millions) Amortization Life (in Years...

  • Page 90
    ...Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 89 On February 1, 2013, the company announced that it had entered into a definitive agreement to acquire the software portfolio of Star Analytics Inc., a privately held business analytics company...

  • Page 91
    ... Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 2010 In 2010, the company completed 17 acquisitions at an aggregate cost of $6,538 million. Netezza Corporation (Netezza)-On November 10, 2010, the company completed the acquisition of...

  • Page 92
    ...-year business partner agreement to integrate retail store solutions for Smarter Commerce. The transaction price was $850 millon, and the company will receive approximately $800 million in cash, net of closing date working capital adjustments. Through December 31, 2012, the company completed the...

  • Page 93
    ... the company's financial assets and financial liabilities that are measured at fair value on a recurring basis at December 31, 2012 and 2011. ($ in millions) At December 31, 2012: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit Commercial paper...

  • Page 94
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 93 ($ in millions) At December 31, 2011: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit* Commercial paper * Money market funds U.S....

  • Page 95
    94 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Debt and Marketable Equity Securities The company's cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which is not materially ...

  • Page 96
    ... 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 and to reduce overall interest cost, the company uses interest rate...

  • Page 97
    ... 2011, no instruments relating to this program were outstanding. 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-effective...

  • Page 98
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies 97 The following tables provide a quantitative summary of the derivative and non-derivative instrument related risk management activity as of December 31, 2012 and 2011 as well as for the years ended...

  • Page 99
    ... (for cash flow hedges); nor are there any anticipated in the normal course of business. Refer to note A, "Significant Accounting Policies," on page 83 for additional information on the company's use of derivative financial instruments. Note E. Inventories ($ in millions) At December 31: 2012 2011...

  • Page 100
    ...three years. Client loan receivables and installment payment receivables financing contracts are priced independently at competitive market rates. The company has a history of enforcing the terms of these separate financing agreements. Financing receivables Lease receivables Loan receivables Ending...

  • Page 101
    ..., excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history. Growth markets Total ($ in millions) Interest Income Recognized on Cash Basis For the year ended December 31, 2011...

  • Page 102
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 101 Lease Receivables ($ in millions) At December 31, 2012: Major Markets Growth Markets Lease Receivables ($ in millions) At December 31, 2011: Major Markets Growth Markets Credit rating...

  • Page 103
    ... investments 2012 2011 $1,630 585 120 226 306 318 204 439 459 735 $5,021 $1,784 753 131 127 233 307 208 493 261 598 $4,895 Property, Plant and Equipment ($ in millions) At December 31: Equity method Non-equity method Prepaid software Long-term deposits Other receivables Employee benefit-related...

  • Page 104
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 103 ($ in millions) Gross Carrying Accumulated Amount Amortization Net Carrying Amount At December 31, 2011: Intangible asset class Capitalized software Client relationships Completed ...

  • Page 105
    104 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Note J. Borrowings Short-Term Debt ($ in millions) At December 31: 2012 2011 Commercial paper Short-term loans Long-term debt-current maturities Total $1,800 1,789 5,593 $9,181 ...

  • Page 106
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 105 Post-Swap Borrowing (Long-Term Debt, Including Current Portion) (in millions) 2012 For the year ended December 31: Amount Average Rate Amount 2011 Average Rate Fixed-rate debt Floating-rate...

  • Page 107
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Note K. Other Liabilities ($ in millions) At December 31: 2012 2011 Income tax reserves Executive compensation accruals Disability benefits Derivative liabilities Special actions Workforce...

  • Page 108
    ... shares in 2012, 4,920,198 treasury shares in 2011 and 7,929,318 treasury shares in 2010, as a result of exercises of stock options by employees of certain acquired businesses and by nonU.S. employees. Also, as part of the company's stock-based compensation plans, 2,406,007 common shares at a cost...

  • Page 109
    108 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies ($ in millions) For the year ended December 31, 2011: Before Tax Amount Tax (Expense)/ Benefit Net of Tax Amount Other comprehensive income/(loss) Foreign currency translation ...

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    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 109 ($ in millions) For the year ended December 31, 2010: Before Tax Amount Tax (Expense)/ Benefit Net of Tax Amount Other comprehensive income/(loss) Foreign currency translation ...

  • Page 111
    ... and investor, customer and employee relations considerations. With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings...

  • Page 112
    ...the UK Trust membership. IBM UK is seeking a declaration that it acted lawfully both in notifying the Trustee of the UK Trust that it was closing its UK defined benefit plans to future accruals for most participants and in implementing the company's new retirement policy. The trial in the High Court...

  • Page 113
    112 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies In a separate but related proceeding, in March 2011, the Trustee of the IBM UK Trust was granted leave to initiate a claim before the High Court in London against IBM UK and one ...

  • Page 114
    ...and $56 million at December 31, 2012 and 2011, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material. Note N. Taxes ($ in millions) For the year ended December 31: 2012 2011 2010 Income before income taxes U.S. operations Non...

  • Page 115
    ... U.S. federal tax rate to the company's effective tax rate is as follows: Deferred Tax Liabilities ($ in millions) At December 31: 2012 2011 For the year ended December 31: 2012 2011 2010 Leases Depreciation Goodwill and intangible assets Software development costs Retirement benefits Other...

  • Page 116
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 115 In April 2010, the company appealed the determination of a nonU.S. taxing authority with respect to certain foreign tax losses. The tax benefit of these losses, approximately $1,475 ...

  • Page 117
    ...per share of common stock. ($ in millions except per share amounts) For the year ended December 31: 2012 2011 2010 Weighted-average number of shares on which earnings per share calculations are based Basic Add-incremental shares under stock-based compensation plans Add-incremental shares associated...

  • Page 118
    ... who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the company. During the years ended December 31, 2012, 2011 and 2010, the company did not grant stock options. Total unrecognized compensation cost related to...

  • Page 119
    ...Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The following table summarizes option activity under the Plans during the years ended December 31, 2012, 2011 and 2010. 2012 WeightedAverage Exercise Price Number of Shares Under Option...

  • Page 120
    ...of unrecognized compensation cost related to non-vested RSUs. The company received no cash from employees as a result of employee vesting and release of RSUs for the years ended December 31, 2012, 2011 and 2010. In the second quarter of 2011, the company granted equity awards valued at approximately...

  • Page 121
    ... 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 for all participants. U.S. Supplemental Executive Retention Plan The company...

  • Page 122
    ... in the Consolidated Statement of Financial Position. Effective January 1, 2013, matching and automatic contributions are made once annually at the end of the year. In order to receive such contributions each year, a participant must be employed on December 15 of the plan year. However, if...

  • Page 123
    ... 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 For the year ended December 31: 2012 2011...

  • Page 124
    ... retirement-related benefit plans recognized in the Consolidated Statement of Earnings, excluding defined contribution plans. Defined Benefit Pension Plans U.S. Plans For the year ended December 31: 2012 2011 2010 2012 Non-U.S. Plans 2011 2010 Service cost Interest cost Expected return on plan...

  • Page 125
    ... Notes to Consolidated Financial 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, excluding defined contribution plans. ($ in millions...

  • Page 126
    ... and the UK). No significant amendments of retirement-related benefit plans occurred during the years ended December 31, 2012 and 2011 that had a material effect in the Consolidated Statement of Earnings. On October 12, 2012, the High Court in London issued a ruling against IBM United Kingdom...

  • Page 127
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The table below presents the assumptions used to measure the net periodic (income)/cost and the year-end benefit obligations for retirementrelated benefit plans. Defined Benefit Pension Plans...

  • Page 128
    ... periodic (income)/cost. For the nonpension postretirement benefit plans, the company maintains a highly liquid trust fund balance to ensure timely payments are made. As a result, for the years ended December 31, 2012, 2011 and 2010, the expected long-term return on plan assets and the actual return...

  • Page 129
    128 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Investment Policies and Strategies The investment objectives of the Qualified PPP portfolio are designed to generate returns that will enable the plan to meet its future obligations....

  • Page 130
    ...Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 129 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, 2012. The U.S. Plan...

  • Page 131
    130 Notes to Consolidated Financial Statements 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, 2011. The U.S. Plan consists of the Qualified ...

  • Page 132
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 131 The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31, 2012 and 2011 for the U.S. Plan. ($ in ...

  • Page 133
    ... 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 set forth in applicable employee benefits laws and local tax laws. From time to time, the company contributes...

  • Page 134
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 133 Expected Benefit Payments Defined Benefit Pension Plan Expected Payments The following table presents the total expected benefit payments to defined benefit pension plan participants...

  • Page 135
    ...arm'slength value of providing the services. The Global Services segments enter into arm's-length 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...

  • Page 136
    ... Services Global Business Services Systems and Technology Global Financing Total Segments For the year ended December 31: Software 2012 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 2011...

  • Page 137
    ... of IBM as Reported ($ in millions) For the year ended December 31: 2012 2011 2010 Segment Assets and Other Items Global Technology Services assets are primarily plant, property and equipment including the assets associated with the outsourcing business, accounts receivable, goodwill, acquired...

  • Page 138
    ... Business Machines Corporation and Subsidiary Companies 137 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 2012 Assets...

  • Page 139
    ... consulting services. See "Description of the Business," beginning on page 21 for additional information. ($ in millions) For the year ended December 31: 2012 2011 2010 Global Technology Services Services Maintenance Systems Software Global Business Services Services Software Systems Software...

  • Page 140
    ... Comparison of Selected Financial Data International Business Machines Corporation and Subsidiary Companies 139 ($ in millions except per share amounts) For the year ended December 31: 2012 2011 2010 2009 2008 Revenue Net income Operating (non-GAAP) earnings* Earnings per share of common stock...

  • Page 141
    ...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 periods...

  • Page 142
    Performance Graph International Business Machines Corporation and Subsidiary Companies 141 Comparison of Five-Year Cumulative Total Return for IBM, S&P 500 Stock Index and S&P Information Technology Index The adjacent graph compares the five-year cumulative total returns for IBM common stock with ...

  • Page 143
    ...Business Machines Corporation and Subsidiary Companies 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 Michael L. Eskew Retired...

  • Page 144
    ... Relations, 1 New Orchard Road, Armonk, New York 10504 IBM Stock IBM common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange, and outside the United States. Stockholder Communications Stockholders can get quarterly financial results, a summary of the Annual Meeting...

  • Page 145
    ...AIX, Algorithmics, BigFix, Cast Iron, Coremetrics, DemandTec, Emptoris, i2, IBM, IBM SmartCloud, iCluster, Initiate Systems, Jazz, Lombardi, Lotus, Netezza, OpenPages, Power, POWER7+, Power Systems, PureSystems, Rational, Smarter Analytics, Smarter Cities, Smarter Commerce, Smarter Planet, Sterling...

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