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3434 Management Discussion
International Business Machines Corporation and Subsidiary Companies
Research, Development and Engineering
($ in millions)
For the year ended December 31: 2012 2011
Yr.-to-Yr.
Percent
Change
Total consolidated research,
development and engineering $6,302 $6,258 0.7%
Non-operating adjustment
Non-operating retirement-related
(costs)/income 20 88 (76.9)
Operating (non-GAAP) research,
development and engineering $6,322 $6,345 (0.4)%
The company continues to invest in research and development,
focusing its investments on high-value, high-growth opportunities
and extending its technology leadership. Total research, development
and engineering (RD&E) expense increased 0.7 percent in 2012
versus 2011, primarily driven by acquisitions (3 points), partially offset
by the effects of currency (2 points) and lower base spending (1
point). Operating (non-GAAP) RD&E expense decreased 0.4 percent
in 2012 compared to the prior year primarily driven by the effects of
currency (2 points) and lower base spending (2 points), partially
offset by acquisitions (3 points). RD&E investments represented
6.0 percent of revenue in 2012, compared to 5.9 percent in 2011.
Intellectual Property and Custom Development Income
($ in millions)
For the year ended December 31: 2012 2011
Yr.-to-Yr.
Percent
Change
Sales and other transfers
of intellectual property $ 324 $ 309 4.7%
Licensing/royalty-based fees 251 211 19.0
Custom development income 500 588 (14.9)
To t a l $1,074 $1,108 (3.0)%
The timing and amount of sales and other transfers of IP may vary
significantly from period to period depending upon timing of dives-
titures, industry consolidation, economic conditions and the timing
of new patents and know-how development. There were no signifi-
cant individual IP transactions in 2012 or 2011.
Interest Expense
($ in millions)
For the year ended December 31: 2012 2011
Yr.-to-Yr.
Percent
Change
Interest expense
To t a l $459 $411 11.8%
The increase in interest expense in 2012 versus 2011 was primarily
driven by higher average debt levels, partially offset by lower average
interest rates. Interest expense is presented in cost of financing in
the Consolidated State ment of Earnings only if the related external
borrowings are to support the Global Financing external business.
See pages 66 and 67 for additional information regarding Global
Financing debt and interest expense. Overall interest expense
(excluding capitalized interest) for 2012 was $1,004 million, an increase
of $40 million year to year.
Stock-Based Compensation
Total pre-tax stock-based compensation cost of $688 million
decreased $9 million compared to 2011. The decrease was primarily
related to the company’s performance share units ($30 million), par-
tially offset by increases related to restricted stock units ($16 million)
and the assumption of stock-based awards previously issued by
acquired entities ($5 million). Cost, and the year-to-year change, was
reflected in the following categories: Cost: $132 million, up $11
million; SG&A expense: $498 million, down $16 million; and RD&E
expense: $59 million, down $4 million.
See note R, “Stock-Based Compensation,” on pages 117 to 120
for additional information on stock-based incentive awards.
Retirement-Related Plans
The following table provides the total pre-tax cost for all retirement-
related plans. These amounts are included in the Consolidated
Statement of Earnings within the caption (e.g., Cost, SG&A, RD&E)
relating to the job function of the plan participants.
($ in millions)
For the year ended December 31: 2012 2011
Yr.-to-Yr.
Percent
Change
Retirement-related plans—cost
Service cost $ 493 $ 549 (10.2)%
Amortization of prior
service cost/(credits) (148)(157)(5.5)
Cost of defined contribution plans 1,506 1,513 (0.4)
Total operating costs $ 1,851 $ 1,905 (2.8)%
Interest cost 4,238 4,601 (7.9)
Expected return on plan assets (6,356)(6,574) (3.3)
Recognized actuarial losses 2,407 1,788 34.6
Plan amendments/curtailments/
settlements 11 14.4
Multi-employer plan/other costs 247 112 121.3
Total non-operating costs/
(income) $ 538 $ (72) NM%
Total retirement-related
plans—cost $ 2,389 $ 1,832 30.3%
NM—Not meaningful
In 2012, total retirement-related plans cost increased by $556 million
compared to 2011, primarily driven by an increase in recognized
actuarial losses of $619 million, lower expected return on plan assets
($219 million) and the charge related to the UK pension litigation
($162 million). These increases were partially offset by lower interest
cost of $363 million and lower service cost of $56 million.