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What will we
make of
this moment?
2013 IBM Annual Report

Table of contents

  • Page 1
    What will we make of this moment? 2013 IBM Annual Report

  • Page 2
    ..., as societies? What will we make with a planet generating unprecedented amounts of data? What will we create from-and with-global networks of consumers, workers, citizens, students, patients? How will we make use of powerful business and technology services available on demand? How will we engage...

  • Page 3
    ... broadest and deepest capabilities in Big Data and analytics-both technology and expertise. We have invested more than $24 billion, including $17 billion of gross spend on more than 30 acquisitions. We have 15,000 consultants and 400 mathematicians. Twothirds of IBM Research's work is now devoted to...

  • Page 4
    ... keep up with Big Data in constant motion. For that, we need a new paradigm. These new systems are not programmed; rather, they learn, from the vast quantities of information they ingest, from their own experiences, and from their interactions with people. IBM launched this era three years ago, when...

  • Page 5
    FPO Virginia M. Rometty Chairman, President and Chief Executive Officer

  • Page 6
    ...Sun Life Stadium, US Open Tennis and hundreds of top online games with a user base exceeding 100 million-is a testament to that. These companies and a growing number of others understand that their customer-facing applications-which they deploy on public clouds for reasons of cost, accessibility and...

  • Page 7
    ...these individuals use their mobile devices to engage with a company, they expect personalized service. Indeed, 80 percent of people are willing to trade their information for a customized offering. The good news is that this is increasingly possible, thanks to social business and data analytics. But...

  • Page 8
    ... Uses of Cash Since 2000 ($ in billions) Net capital expenditures $59 21% $108 Net share repurchases $170 $32 Net acquisitions** $30 Dividends 10% $165 2000 2013 2000 2013 3. We deliver long-term value and performance while achieving our 2015 operating EPS target along the way. Key drivers...

  • Page 9
    ... of Big Data, cloud and mobile require enterprisestrength computing, and no other company can match IBM's ongoing capabilities and commitment to developing those essential technologies. We also announced, in January, an agreement to sell much of our Intel-based x86 server business to Lenovo. This...

  • Page 10
    ...-performance and high-end systems, storage and cognitive computing, and we will continue to invest in R&D for advanced semiconductor technology. The second challenge involves the world's growth markets. While IBM's growth in Latin America and Middle East and Africa was strong, enterprise spending...

  • Page 11
    ...see shifting: Competitive advantage will be created through data and analytics, business models will be shaped by cloud, and individual engagement will be powered by mobile and social technologies. Therefore, IBM is making a new future for our clients, our industry and our company. This is how. The...

  • Page 12
    The IBM Strategy 11 01 We are making markets by transforming industries and professions with data. 02 We are remaking enterprise IT for the era of cloud. 03 We are enabling systems of engagement for enterprises. And leading by example.

  • Page 13
    12 01 We are making markets by transforming industries and professions with data.

  • Page 14
    ... WE SEE SHIFTING: Data is becoming the world's new natural resource. Today, every discussion about changes in technology, business and society must begin with data. In its exponentially increasing volume, velocity and variety, data is becoming a new natural resource. It promises to be for the 21st...

  • Page 15
    ... technology, providing industry-leading speed and efficiency to enable data to be realtime ready for analytics 1 1,000 university partnerships, and 2,215 IBM Business Partners 500 analytics patents generated each year 2/3 of IBM Research is focused on data, analytics and cognitive computing

  • Page 16
    ...cognitive computing. In January 2014 we launched the IBM Watson Group to bring cognitive capabilities-built on technologies like machine learning, complex algorithms and natural language processing-to enterprises, institutions and individuals via the cloud. Watson technology processes information by...

  • Page 17
    16 02 We are remaking enterprise IT for the era of cloud.

  • Page 18
    ... by data, the information technology infrastructure of the world is being transformed by the emergence of cloud computing-that is, the delivery of IT and business processes as digital services. 85% of new software is now being built for the cloud 1/4 of the world's applications will be available...

  • Page 19
    ... cloud middleware services. Seek-or be required-to manage cloud environments with the same rigor as an on-premises data center. Use cloud to reinvent core business processes and to innovate. THEREFORE: We have built the world's most complete cloud portfolio, delivering our clients' technology and...

  • Page 20
    ...(2) China (2) France Germany India Japan Mexico United Kingdom United States (2) 40 total cloud data centers across five continents Connecting applications via the cloud "Cloud middleware services" are emerging to connect securely customer applications and core enterprise systems such as finance...

  • Page 21
    20 03 We are enabling systems of engagement for enterprises. And we are leading by example.

  • Page 22
    ... response time users expect from a company once they have contacted it via social media 84% of smartphone users check an app as soon as they wake up 80% of individuals are willing to trade their information for a personalized offering 2 /3 of US adults say they would not return to a business that...

  • Page 23
    ... companies acquired for security technologies like web fraud detection, sophisticated malware, and device management 25 security labs globally, 10 security operations centers globally 15 billion security events monitored daily in 130 countries * IDC, Worldwide Enterprise Social Software 2013-2017...

  • Page 24
    ... are now shaping our systems for hiring, learning and management. 45% growth in Social Business 30,000+ IBMers active in Client Collaboration Hubs for our top 300 accounts 300,000 active IBM users on our Connections social platform 250,000 employees collaborated in an online Jam to shape nine...

  • Page 25
    ...058 3.70 2013 $ 19,586 4,307 11,995 3,773 3.30 2012 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 26
    ... Lease Commitments Stock-Based Compensation Retirement-Related Benefits Segment Information Subsequent Events 84 94 95 100 107 107 110 110 111 112 114 116 119 121 123 123 124 124 127 141 146 147 148 149 150 151 77 CONSOLIDATED FINANCIAL STATEMENTS Earnings Comprehensive Income Financial Position...

  • Page 27
    ... Business Machines Corporation (IBM or the company) 2013 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. This Overview is designed to provide the reader with some perspective regarding the information...

  • Page 28
    ... The Software, Global Services and Global Financing businesses all grew pre-tax income and expanded their pre-tax margin in 2013 compared to 2012. Systems and Technology impacted the company's overall performance in 2013. Revenue decreased 18.7 percent (18 percent adjusted for currency) year to year...

  • Page 29
    ...positioned to support the business over the long term. Cash and marketable securities at year end was $11,066 million, consistent with the year-end 2012 balance. Key drivers in the balance sheet and total cash flows are: DESCRIPTION OF BUSINESS Please refer to IBM's Annual Report on Form 10-K filed...

  • Page 30
    ... Discussion International Business Machines Corporation and Subsidiary Companies 29 The company creates value for clients and solves business problems through integrated solutions that leverage information technology and deep knowledge of business processes. IBM solutions typically create value by...

  • Page 31
    ... Commerce model can integrate and transform how companies manage and adapt their buy, market, sell and service processes to place the customer experience at the center of their business. IBM's Smarter Cities initiative helps federal, state and local governments to make better decisions, anticipate...

  • Page 32
    ..., the company has increased its Big Data software skills, and it will leverage an IBM Integrated Managed Services Centre to capture the significant growth in cloud. In November 2013, IBM opened its first Africa Research Lab in Kenya, IBM's 12th lab worldwide. The facility will conduct applied and...

  • Page 33
    ... in service management and technology with the ability to exploit the power of new technologies from IBM systems and software, such as cloud computing, analytics and virtualization, to deliver high performance, innovation and improved ability to achieve business objectives. Global Process Services...

  • Page 34
    ... 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. The primary focus on the company's offerings and...

  • Page 35
    ...The majority of IBM's revenue, excluding the company's original equipment manufacturer (OEM) technology business, occurs in industries that are broadly grouped into six sectors: • Financial Services: Banking, Financial Markets, Insurance • Public: Education, Government, Healthcare, Life Sciences...

  • Page 36
    ... For the year ended December 31: 2013 2012 Revenue Global Technology Services Gross margin Global Business Services Gross margin Software Gross margin Systems and Technology Gross margin Global Financing Gross margin Other Gross margin Total consolidated revenue Total consolidated gross pro...

  • Page 37
    ...currency led by the major markets. ($ in millions) Yr.-to-Yr. Percent/ Margin Change For the year ended December 31: 2013 2012 Global Services Global Technology Services External gross profit External gross profit margin Pre-tax income Pre-tax margin Global Business Services External gross pro...

  • Page 38
    ... Outsourcing. GBS pre-tax income increased 7.7 percent in 2013 with a pre-tax margin of 16.8 percent, an improvement of 1.3 points year to year. GBS benefitted from reductions in performance-related compensation, the company's enterprise productivity initiatives and the second-quarter 2013 workforce...

  • Page 39
    ... performance in the growth initiatives that address the key market trends-Smarter Planet, business analytics and cloud. The Software business completed eight acquisitions in 2013, adding to its capabilities in mobile, big data analytics and security. The Software business grew segment pre-tax profit...

  • Page 40
    ...increased 2.7 percent and the pre-tax margin improved 0.5 points to 38.1 percent. The Software business had another successful year leveraging revenue growth and expense savings, primarily from the company's Systems and Technology ($ in millions) enterprise productivity initiatives, to drive profit...

  • Page 41
    ... year. Pre-tax margin decreased 10.1 points in 2013 versus 2012. The decline in pre-tax income was driven by the hardware businesses which are dealing with business model challenges due to market shifts and System z, as it entered the backend of the mainframe product cycle late in the year. Global...

  • Page 42
    ... assets Stock-based compensation Bad debt expense Total consolidated selling, general and administrative expense Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs)/income For the year ended December 31: 2013...

  • Page 43
    ..., 2013, an increase of 20 basis points from year-end 2012. Research, Development and Engineering ($ in millions) Yr.-to-Yr. Percent Change For the year ended December 31: 2013 2012 Total consolidated research, development and engineering Non-operating adjustment Non-operating retirement-related...

  • Page 44
    ... business. See page 75 for additional information regarding Global Financing debt and interest expense. Overall interest expense (excluding capitalized interest) for 2013 was $989 million, a decrease of $15 million year to year. Stock-Based Compensation Total pre-tax stock-based compensation cost...

  • Page 45
    ...increase in discount rates, primarily in the U.S. 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 less than $700 million per year through 2015. In 2013, the return on the U.S. Personal Pension...

  • Page 46
    ... A decrease in retirement and nonpension benefit obligations of $4,176 million driven by plan remeasurements; partially offset by • An increase of $2,326 million in other liabilities primarily driven by deferred tax increases related to the pension plan remeasurements. Debt The company's funding...

  • Page 47
    ... International Business Machines Corporation and Subsidiary Companies "Core" debt-to-capitalization ratio (excluding Global Financing debt and equity) was 39.0 percent at December 31, 2013 compared to 36.1 percent at December 31, 2012. The increase was primarily driven by an increase in non-Global...

  • Page 48
    Management Discussion International Business Machines Corporation and Subsidiary Companies 47 Consolidated Fourth-Quarter Results ($ and shares in millions except per share amounts) Yr.-to-Yr. Percent/ Margin Change For the fourth quarter: 2013 2012 Revenue Gross profit margin Total expense ...

  • Page 49
    ...: 2013 2012 Revenue Global Technology Services Gross margin Global Business Services Gross margin Software Gross margin Systems and Technology Gross margin Global Financing Gross margin Other Gross margin Total consolidated revenue Total consolidated gross profit Total consolidated gross margin...

  • Page 50
    ...pre-tax margin of 19.1 percent, an improvement of 2.0 points year to year. The primary year-to-year profit drivers were reductions in performance-related compensation, continued benefits from the enterprise productivity initiatives and the second-quarter 2013 workforce rebalancing actions. Software...

  • Page 51
    ... by a decrease in used equipment sales revenue. The Global Financing fourth-quarter pre-tax income increased 13.8 percent to $589 million and the pre-tax margin increased 2.7 points to 49.6 percent. The increase in pre-tax income was driven by the increase in internal gross profit ($118 million...

  • Page 52
    ... by increased cash used for gross common stock repurchases ($2,791 million). For the fourth quarter: 2013 2012 Total consolidated expense and other (income) Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs...

  • Page 53
    ...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 2012: GAAP Gross profit Gross profit margin SG&A RD&E Other (income) and expense Total expense...

  • Page 54
    ... International Business Machines Corporation and Subsidiary Companies 53 PRIOR YEAR IN REVIEW The "Prior Year in Review" section provides a summary of the company's financial performance in 2012 as compared to 2011. For a detailed discussion of prior-year performance, see the 2012 Annual Report...

  • Page 55
    ..., Price and Promotion Optimization and Sales Performance Management. The value proposition in business analytics uniquely leverages the integration between the software portfolio and the GBS consulting expertise. In 2012, business analytics revenue increased 13 percent compared to the prior year...

  • Page 56
    ... For the year ended December 31: 2012 2011 Revenue Global Technology Services Gross margin Global Business Services Gross margin Software Gross margin Systems and Technology Gross margin Global Financing Gross margin Other Gross margin Total consolidated revenue Total consolidated gross pro...

  • Page 57
    ... International Business Machines Corporation and Subsidiary Companies ($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted for Currency For the year ended December 31: 2012 2011 Global Services external revenue Global Technology Services Outsourcing Integrated Technology...

  • Page 58
    ... International Business Machines Corporation and Subsidiary Companies 57 The total Global Services business delivered strong profit and margin expansion throughout 2012. Pre-tax income of $9,944 million in 2012 increased 7.0 percent year to year. Normalized for the higher level of workforce...

  • Page 59
    ... Companies Other software revenue increased 7.0 percent (9 percent adjusted for currency) driven by growth in software-related services. ($ in millions) For the year ended December 31: 2012 2011 Software External gross profit External gross profit margin Pre-tax income Pre-tax margin...

  • Page 60
    Management Discussion International Business Machines Corporation and Subsidiary Companies 59 Microelectronics OEM revenue decreased 14.4 percent (14 percent adjusted for currency) in 2012 versus 2011. ($ in millions) For the year ended December 31: 2012 2011 Systems and Technology External ...

  • Page 61
    ... 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 62
    ... in cost of financing in the Consolidated Statement of Earnings only if the related external borrowings are to support the Global Financing external business. See page 75 for additional information regarding Global Financing debt and interest expense. Overall interest expense (excluding capitalized...

  • Page 63
    ... defined benefit plans did hold European sovereign debt securities in their trust funds. See note S, "Retirement-Related Benefits," on page 135 for additional information. During 2012, the company generated $19,586 million in cash from operations, a decrease of $260 million compared to 2011. In...

  • Page 64
    ...of optimizing long-term performance. A long-term perspective ensures that the company is well-positioned to take advantage of major shifts occurring in technology, business and the global economy. In May 2010, the company met with investors to describe how the company manages its business, allocates...

  • Page 65
    ...company continues to invest in the Software business and is confident in its profit trajectory going into 2014, expecting the business to grow consistently with its performance the past few years. The Global Services business delivered pre-tax income and margin expansion in 2013. The Global Services...

  • Page 66
    Management Discussion International Business Machines Corporation and Subsidiary Companies 65 The company expects 2014 pre-tax retirement-related plan cost to be approximately $2.1 billion, a decrease of approximately $800 million compared to 2013. This estimate reflects current pension plan ...

  • Page 67
    ...of 2013, the Board of Directors increased the company's quarterly common stock dividend from $0.85 to $0.95 per share. The table below represents the way in which management reviews cash flow as described on page 65 and above. ($ in billions) For the year ended December 31: 2013 2012 2011 2010 2009...

  • Page 68
    ... of the company's policy and increased tax expense. Total Contractual Payment Stream Payments Due In 2014 2015-16 2017-18 After 2018 Long-term debt obligations Interest on long-term debt obligations Capital (finance) lease obligations Operating lease obligations Purchase obligations Other...

  • Page 69
    ...) and the projected benefit obligation (PBO). The company increased the discount rate assumption for the IBM Personal Pension Plan (PPP), a U.S.-based defined benefit plan, by 90 basis points to 4.50 percent on December 31, 2013. This change will decrease pre-tax cost and expense recognized in...

  • Page 70
    ...income taxes, consolidated net income would have decreased/improved by $195 million in 2013. Valuation of Assets The application of business combination and impairment accounting requires the use of significant estimates and assumptions. The acquisition method of accounting for business combinations...

  • Page 71
    ... the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment, and obtaining forward-looking product information such as marketing plans and technological innovations. Residual value estimates are periodically reviewed and "other than...

  • Page 72
    .... The company has software solutions that deliver identity and access management, data security, application security, network security and endpoint security. IBM's software solutions include a security intelligence dashboard that can collect information on customer IT security events and provide...

  • Page 73
    72 Management Discussion International Business Machines Corporation and Subsidiary Companies Employees and Related Workforce Yr.-to-Yr. Percent Change For the year ended December 31: 2013 2012 2011 2013-12 2012-11 IBM/wholly owned subsidiaries Less-than-wholly owned subsidiaries Complementary ...

  • Page 74
    ... 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 75
    ...from equipment returned at the end of a lease, represented 55.8 percent and 51.6 percent of Global Financing's revenue in 2013 and 2012, respectively. The increase was due to a shift from operating leases to used equipment sales for internal transactions. The gross profit margins on these sales were...

  • Page 76
    ...International Business Machines Corporation and Subsidiary Companies 75 Debt At December 31: 2013 2012 Debt-to-equity ratio 7.2x 7.0x The company funds Global Financing through borrowings using a debt-to-equity ratio target of approximately 7 to 1. The debt used to fund Global Financing assets...

  • Page 77
    ...of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable...

  • Page 78
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was...

  • Page 79
    78 Consolidated Statement of Earnings International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) For the year ended December 31: Notes 2013 2012 2011 Revenue Services Sales Financing Total revenue Cost Services Sales Financing Total cost Gross ...

  • Page 80
    ... Statement of Comprehensive Income International Business Machines Corporation and Subsidiary Companies 79 ($ in millions) For the year ended December 31: Notes 2013 2012 2011 Net income Other comprehensive income/(loss), before tax Foreign currency translation adjustments Net changes related...

  • Page 81
    80 Consolidated Statement of Financial Position International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) At December 31: Notes 2013 2012 Assets Current assets Cash and cash equivalents Marketable securities Notes and accounts receivable-trade (...

  • Page 82
    Consolidated Statement of Cash Flows International Business Machines Corporation and Subsidiary Companies 81 ($ in millions) For the year ended December 31: 2013 2012 2011 Cash ï¬,ows from operating activities Net income Adjustments to reconcile net income to cash provided by operating activities...

  • Page 83
    82 Consolidated Statement of Changes in Equity International Business Machines Corporation and Subsidiary Companies ($ in millions) Common Stock and Additional Paid-In Capital Accumulated Other Treasury Comprehensive Stock Income/(Loss) Total IBM Stockholders' Equity NonControlling Interests ...

  • Page 84
    Consolidated Statement of Changes in Equity International Business Machines Corporation and Subsidiary Companies 83 ($ in millions) Common Stock and Additional Paid-In Capital Accumulated Other Treasury Comprehensive Stock Income/(Loss) Total IBM Stockholders' Equity NonControlling Interests ...

  • Page 85
    ...the amounts of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) (OCI) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management's best knowledge of current events, historical experience, actions...

  • Page 86
    ..., hardware and/or software. Services The company's primary services offerings include information technology (IT) datacenter and business process outsourcing, application management services, consulting and systems integration, technology infrastructure and system maintenance, Web hosting and the...

  • Page 87
    ...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 and the sale of semiconductors. The company also offers installation services for...

  • Page 88
    ...The company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged to software cost within cost of sales as incurred. Extended Warranty Liability (Deferred Income) ($ in millions) 2013 2012...

  • Page 89
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Shipping and Handling Costs related to shipping and handling are recognized as incurred and included in cost in the Consolidated Statement of Earnings. Expense and Other Income Selling, General...

  • Page 90
    ... value of benefits payable in the next 12 months exceeding the fair value of plan assets, measured on a plan-by-plan basis. This obligation is recorded in compensation and benefits in the Consolidated Statement of Financial Position. Net periodic pension and nonpension postretirement benefit cost...

  • Page 91
    ...Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Defined Contribution Plans The company's contribution for defined contribution plans is recorded when the employee renders service to the company. The charge is recorded in Cost, SG&A and...

  • Page 92
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 91 Where the company applies hedge accounting, the company designates each derivative as a hedge of: (1) the fair value of a recognized financial asset or liability, or of an ...

  • Page 93
    ... using the company's cash flow projections. Inventories Raw materials, work in process and finished goods are stated at the lower of average cost or market. Cash flows related to the sale of inventories are reflected in net cash provided by operating activities in the Consolidated Statement...

  • Page 94
    ...Statements International Business Machines Corporation and Subsidiary Companies 93 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...

  • Page 95
    94 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies NOTE B. ACCOUNTING CHANGES Standards Implemented In July 2013, the FASB issued guidance allowing the use of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a ...

  • Page 96
    ... 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. 2013 In 2013, the company completed 10 acquisitions at an aggregate cost of $3,219 million. SoftLayer Technologies, Inc...

  • Page 97
    96 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2013. 2013 Acquisitions ($ in millions) ...

  • Page 98
    ... and manage shared computing environments that are used in compute-and-data intensive applications such as simulations, computer modeling and analytics. TMS designs and sells highperformance solid state storage solutions. For the "Other Acquisitions," the overall weighted-average life of the...

  • Page 99
    ...of IBM's system software, including Systems Director and Platform Computing solutions. Following the closing of the transaction, Lenovo will assume related customer service and maintenance operations. IBM will continue to provide maintenance delivery on Lenovo's behalf for an extended period of time...

  • Page 100
    ..., and was essentially breakeven on a pre-tax income basis. 2013 On September 10, 2013, IBM and SYNNEX announced a definitive agreement in which SYNNEX will acquire the company's worldwide customer care business process outsourcing services business for $505 million, consisting of approximately...

  • Page 101
    ... assets and financial liabilities that are measured at fair value on a recurring basis at December 31, 2013 and 2012. ($ in millions) At December 31, 2013: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit Commercial paper Money market funds...

  • Page 102
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 101 ($ 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 Money market funds Other ...

  • Page 103
    102 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies ($ in millions) Adjusted Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value At December 31, 2013: Debt securities-noncurrent (1) Available-for-sale equity investments ...

  • Page 104
    ... The company issues debt in the global capital markets, principally to fund its financing lease and loan portfolio. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses...

  • Page 105
    ... have terms of one year or less. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at December 31, 2013 and 2012.

  • Page 106
    ...-derivative instrument-related risk management activity as of December 31, 2013 and 2012 as well as for the years ended December 31, 2013, 2012 and 2011, respectively. Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position ($ in millions) Fair Value of Derivative...

  • Page 107
    ... Machines Corporation and Subsidiary Companies The Effect of Derivative Instruments in the Consolidated Statement of Earnings ($ in millions) Gain/(Loss) Recognized in Earnings Consolidated Statement of Earnings Line Item For the year ended December 31: Recognized on Derivatives(1) 2013 2012 2011...

  • Page 108
    ...to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 107 NOTE E. INVENTORIES ($ in millions) At December 31: 2013 2012 Finished goods Work in process and raw materials Total $ 444 1,866 $2,310 $ 475 1,812 $2,287 NOTE F. FINANCING RECEIVABLES...

  • Page 109
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies ($ in millions) At December 31, 2012: Major Markets Growth Markets Total Impaired Loans The company considers any loan with an individually evaluated reserve as an impaired loan. Depending...

  • Page 110
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 109 Lease Receivables ($ in millions) At December 31, 2013: Major Markets Growth Markets Lease Receivables ($ in millions) At December 31, 2012: Major Markets Growth Markets Credit ...

  • Page 111
    ..., PLANT AND EQUIPMENT ($ in millions) At December 31: 2013 2012 Deferred transition and setup costs and other deferred arrangements* Derivatives-noncurrent ** Alliance investments Equity method Non-equity method Prepaid software Long-term deposits Other receivables Employee benefit-related Prepaid...

  • Page 112
    ... 477 322 $1,267 884 660 477 322 2015 2016 2017 2018 At December 31, 2012: Intangible asset class Capitalized software Client relationships Completed technology In-process R&D Patents/trademarks Other* Total processes, methodologies and systems. $1,527 2,103 2,709 28 281 31 $6,679 $ (665) (961...

  • Page 113
    112 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Goodwill The changes in the goodwill balances by reportable segment, for the years ended December 31, 2013 and 2012, are as follows: ($ in millions) Foreign Currency Translation and ...

  • Page 114
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 113 Long-Term Debt Pre-Swap Borrowing ($ in millions) At December 31: Maturities 2013 2012 U.S. dollar notes and debentures (average interest rate at December 31, 2013): 0.70% 3.05% 3....

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    ... Statements International Business Machines Corporation and Subsidiary Companies Post-Swap Borrowing (Long-Term Debt, Including Current Portion) (in millions) 2013 For the year ended December 31: Amount Average Rate Amount 2012 Average Rate Fixed-rate debt Floating-rate debt* Total "Financial...

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    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 115 In response to changing business needs, the company periodically takes workforce reduction actions to improve productivity, cost competitiveness and to rebalance skills. The ...

  • Page 117
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies NOTE L. EQUITY ACTIVITY The authorized capital stock of IBM consists of 4,687,500,000 shares of common stock with a $.20 per share par value, of which 1,054,390,937 shares were outstanding at...

  • Page 118
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 117 ($ in millions) For the year ended December 31, 2012: Before Tax Amount Tax (Expense)/ Benefit Net of Tax Amount Other comprehensive income/(loss) Foreign currency translation ...

  • Page 119
    ...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 adjustments Net changes related...

  • Page 120
    ... liabilities for the years ended December 31, 2013, 2012 and 2011 were not material to the Consolidated Financial Statements. In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In...

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    120 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies service program processing in Indiana. The State terminated the contract, claiming that IBM was in breach, and the State is seeking damages. IBM believes the State's claims against ...

  • Page 122
    ...in millions) For the year ended December 31: 2013 2012 2011 U.S. federal Current Deferred U.S. state and local Current Deferred Non-U.S. Current Deferred Total provision for income taxes Provision for social security, real estate, personal property and other taxes Total taxes included in net income...

  • Page 123
    ...deferred tax assets and liabilities that are recorded in the Consolidated Statement of Financial Position were as follows: Deferred Tax Liabilities ($ in millions) At December 31: 2013 2012* Depreciation Retirement benefits Goodwill and intangible assets Leases Software development costs Deferred...

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    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 123 and has been included in the 2013 reductions for tax positions of prior years. In April 2011, the company received notification that the appeal was denied. In June 2011, the company filed...

  • Page 125
    ... table presents total stock-based compensation cost included in the Consolidated Statement of Earnings. ($ in millions) For the year ended December 31: 2013 2012 2011 Incentive Awards Stock-based incentive awards are provided to employees under the terms of the company's long-term performance plans...

  • Page 126
    ... by employees 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, 2013, 2012 and 2011, the company did not grant stock options. The following table summarizes...

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    126 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The tables below summarize RSU and PSU activity under the Plans during the years ended December 31, 2013, 2012 and 2011. RSUs 2013 WeightedAverage Grant Price Number of Units ...

  • Page 128
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 127 IBM Employees Stock Purchase Plan The company maintains a non-compensatory Employees Stock Purchase Plan (ESPP). The ESPP enables eligible participants to purchase full or fractional shares...

  • Page 129
    ... benefit plan that provides medical and dental benefits to eligible U.S. retirees and eligible dependents, as well as life insurance for eligible U.S. retirees. Effective July 1, 1999, the company established a Future Health Account (FHA) for employees who were more than five years from retirement...

  • Page 130
    ...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: 2013 2012 2011 2013 Non-U.S. Plans 2012 2011 2013 Total 2012...

  • Page 131
    ... 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: 2013 2012 2011 2013 Non-U.S. Plans 2012 2011 Service cost Interest cost Expected return on plan...

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    ...the government on the use of those plan assets. ** Represents the benefit obligation assuming no future participant compensation increases. N/A-Not applicable The following table presents the net funded status recognized in the Consolidated Statement of Financial Position. ($ in millions) Defined...

  • Page 133
    ... of the company, in litigation involving one of IBM UK's defined benefit plans. As a result of the ruling, the company recorded an additional pre-tax retirement-related obligation of $162 million in 2012 in selling, general and administrative expense in the Consolidated Statement of Earnings...

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    ... benefit plans. Defined Benefit Pension Plans U.S. Plans 2013 2012 2011 2013 Non-U.S. Plans 2012 2011 Weighted-average assumptions used to measure net periodic (income)/cost for the year ended December 31 Discount rate Expected long-term returns on plan assets Rate of compensation increase...

  • Page 135
    ... 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, 2013, 2012 and 2011, the expected long-term return on plan assets and the actual return on those assets were not material. For...

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    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 135 Plan Assets Retirement-related benefit plan assets are recognized and measured at fair value as described in note A, "Significant Accounting Policies," on pages 91 and 92. Because of...

  • Page 137
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 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, 2013. The U.S. Plan...

  • Page 138
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 137 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 consists of the Qualified ...

  • Page 139
    ... Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31, 2013 and 2012 for the U.S. Plan. ($ in millions...

  • Page 140
    ... are traded. IBM common stock is valued at the closing price reported on the New York Stock Exchange. Equity commingled/mutual funds are typically valued using the net asset value (NAV) provided by the administrator of the fund and reviewed by the company. The NAV is based on the value of the...

  • Page 141
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Nonpension Postretirement Benefit Plans The company contributed $80 million and $693 million to the nonpension postretirement benefit plans during the years ended December 31, 2013 and 2012...

  • Page 142
    ...services that are used internally, Global Technology Services and Global Business Services recover cost, as well as a reasonable fee, that is intended to reflect the arm'slength value of providing the services. The Global Services segments enter into arm's-length loans at prices equivalent to market...

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    ... Services Global Business Services Systems and Technology Global Financing Total Segments For the year ended December 31: Software 2013 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 2012...

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    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 143 Reconciliations of IBM as Reported ($ in millions) For the year ended December 31: 2013 2012 2011 Immaterial Items Investment in Equity Alliances and Equity Alliances Gains/(Losses)...

  • Page 145
    ... 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 2013 Assets Depreciation/amortization of intangibles* Capital expenditures...

  • Page 146
    ... year ended December 31: 2013 2012 2011 Assets Total reportable segments Elimination of internal transactions Unallocated amounts Cash and marketable securities Notes and accounts receivable Deferred tax assets Plant, other property and equipment Pension assets Other Total IBM consolidated assets...

  • Page 147
    ...the Board of Directors approved a quarterly dividend of $0.95 per common share. The dividend is payable March 10, 2014 to shareholders of record on February 10, 2014. On January 31, 2014, the company completed the initial closing of the sale of its customer care business process outsourcing services...

  • Page 148
    ... Comparison of Selected Financial Data International Business Machines Corporation and Subsidiary Companies 147 ($ in millions except per share amounts) For the year ended December 31: 2013 2012 2011 2010 2009 Revenue Net income Operating (non-GAAP) earnings* Earnings per share of common stock...

  • Page 149
    ... for the full 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...

  • Page 150
    Performance Graph International Business Machines Corporation and Subsidiary Companies 149 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 ...

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    ...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 152
    ... downloadable sections at http://www.ibm.com/responsibility. IBM on the Internet Topics featured in this Annual Report can be found on the IBM home page on the Internet (www.ibm.com). Financial results, news on IBM products, services and other activities can also be found at that address. IBM files...

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    International Business Machines Corporation New Orchard Road, Armonk, New York 10504 (914) 499-1900 AIX, Algorithmics, BladeCenter, Cognos, DemandTec, Emptoris, IBM, IBM Flex System, IBM SmartCloud, InfoSphere, Kenexa, Netezza, OpenPOWER, POWER, POWER7+, POWER8, Power Systems, PureData, PureSystems,...

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