IBM 2012 Annual Report Download - page 20

19
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Management Discussion Snapshot
($ and shares in millions except per share amounts)
For the year ended December 31: 2012 2011
Yr.-to-Yr.
Percent/
Margin
Change
Revenue $104,507 $106,916 (2.3)%*
Gross profit margin 48.1% 46.9% 1.2 pts.
Total expense and other income $ 28,396 $ 29,135 (2.5)%
Total expense and other
income-to-revenue ratio 27.2% 27.3% (0.1)pts.
Income before income taxes $ 21,902 $ 21,003 4.3%
Provision for income taxes 5,298 5,148 2.9%
Net income $ 16,604 $ 15,855 4.7%
Net income margin 15.9% 14.8% 1.1 pts.
Earnings per share
of common stock
Assuming dilution $ 14.37 $ 13.06 10.0%
Weighted-average shares
outstanding
Assuming dilution 1,155.4 1,213.8 (4.8)%
Assets** $119,213 $116,433 2.4%
Liabilities** $100,229 $ 96,197 4.2%
Equity** $ 18,984 $ 20,236 (6.2)%
* 0.0 percent adjusted for currency.
** At December 31.
The following table provides the company’s operating (non-GAAP)
earnings for 2012 and 2011.
($ in millions except per share amounts)
For the year ended December 31: 2012 2011
Yr.-to-Yr.
Percent
Change
Net income as reported $16,604 $15,855 4.7%
Non-operating adjustments
(net of tax)
Acquisition-related charges 641 495 29.5
Non-operating retirement-related
costs/(income) 381 (32)NM
Operating (non-GAAP) earnings* $17,627 $16,318 8.0%
Diluted operating (non-GAAP)
earnings per share $ 15.25 $ 13.44 13.5%
NM—Not meaningful
* See page 38 for a more detailed reconciliation of net income to operating earnings.
In 2012, the company reported revenue of $104.5 billion, expanded
gross, pre-tax and net income margins, and delivered diluted
earnings per share growth of 10.0 percent as reported and 13.5
percent on an operating (non-GAAP) basis. This was the 10th
consecutive year of double-digit earnings per share growth for
the company. The company generated $19.6 billion in cash from
operations, and $18.2 billion in free cash flow driving shareholder
returns of $15.8 billion in gross common stock repurchases and
dividends. The free cash flow performance in 2012 was $12.3
billion greater than the company generated in 2002. The financial
results demonstrate the strength and flexibility of the company’s
business model, which is designed to deliver 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 busi-
ness analytics, cloud and Smarter Planet—key growth initiatives that
leverage the software portfolio and contribute to margin expansion.
Within the growth markets, the company continued to expand its capa-
bilities and build out IT infrastructures in emerging markets. In 2012, the
growth markets revenue growth rate at constant currency outpaced
the major markets by 8 points. The company continues to invest
for innovation and technological leadership. These investments
supported the introduction of the new System z mainframe, stor-
age and POWER7+ products in hardware, as well as a series of
major launches across software that included more than 400 new or
upgraded product announcements. The introduction of PureSystems,
a new category of expert integrated systems, brings together hardware
and software and provides built-in expertise to deliver a more efficient
and effective solution to the company’s clients. In addition, the company
was awarded more U.S. patents in 2012 than any other company for
the 20th consecutive year, with many of the patents this year in key
areas such as business analytics, Big Data, cybersecurity, cloud, mobile,
social networking and software-defined environments. The company
also continued to add to its capabilities to support the growth initiatives
by acquiring 11 companies in 2012—investing approximately $4 billion.
At the same time, the company divested its Retail Store Solutions
(RSS) business as it focused the Smarter Commerce portfolio on higher
value, intellectual property-based opportunities. Throughout the
year, the company continued the transformation of the business—
shifting to higher value areas and improving its structure—resulting
in a higher quality revenue stream and margin expansion.
Segment performance was led by Software which increased
revenue 2.0 percent (4 percent adjusted for currency) driven by key
branded middleware which increased 2.9 percent (5 percent adjusted
for currency). Global Services revenue decreased 2.3 percent as
reported, but was up 0.4 percent on a constant currency basis.
Global Services revenue performance was led by the growth markets
which were up 4.8 percent (9 percent adjusted for currency) and now
represents more than 20 percent of total Global Services revenue.
Systems and Technology revenue decreased 6.9 percent; adjusting
for the divested RSS business, revenue declined 5.1 percent (4 percent
adjusted for currency). The company’s new mainframe was well
received in the market, with System z revenue increasing 5.4 percent
(6 percent adjusted for currency) versus the prior year. Global
Financing revenue decreased 4.2 percent as reported, 1 percent
on a constant currency basis, compared to the prior year.
Across all of the segments, the company continued to have
strong performance in its key growth initiatives. These are not stand-
alone offerings; they are integrated into the overall client offerings
and are included in the financial results of the segments. In the
growth markets, revenue increased 4.2 percent (7 percent adjusted
for currency) year to year and represented 24 percent of total geo-
graphic revenue, an increase of 8 points since 2006. The company
has been successful in capturing the opportunity in these faster
growing markets. The company’s business analytics initiative
continues to expand. The company has made significant strides
and expanded its leadership in a number of strategic areas