IBM 2013 Annual Report Download - page 63

62 Management Discussion
International Business Machines Corporation and Subsidiary Companies
Consistent with accounting standards, the company remeasured
the funded status of its retirement and postretirement plans at
December 31. At December 31, 2012, the overall net underfunded
position was $20,190 million, an increase of $3,800 million from
December 31, 2011, as the increase in the benefit obligation due to
the reduction in discount rates more than offset the returns on plan
assets. At year-end 2012, the company’s qualified defined benefit
plans were well funded and the cash requirements related to these
plans remained stable going forward at approximately $1 billion per
year through 2015. In 2012, the return on the U.S. Personal Pension
Plan assets was 11.3 percent and the plan was 98 percent funded.
Overall, global asset returns were 11.1 percent and the company’s
qualified defined benefit plans worldwide were 94 percent funded.
The company’s qualified defined benefit plans did hold European
sovereign debt securities in their trust funds. See note S, “Retire-
ment-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
addition, the company generated $18,185 million in free cash flow
in 2012, an increase of $1,581 million over the prior year. See pages
65 to 67 for additional information on free cash flow. The company
returned $15,768 million to shareholders in 2012, with $11,995 mil-
lion in gross share repurchases and $3,773 million in dividends. In
2012, the company repurchased approximately 61 million shares
and had $8.7 billion remaining in share repurchase authorization
at year end. The company’s strong cash generation permitted
the company to invest and deploy capital to areas with the most
attractive long-term opportunities.
Income Taxes
The effective tax rate for 2012 was 24.2 percent compared with 24.5
percent in 2011. The operating (non-GAAP) tax rate for 2012 was
24.0 percent compared with 24.5 percent in 2011. The 0.3 point
decrease in the as-reported effective tax rate was primarily driven
by a more favorable geographic mix of pre-tax earnings (2.6 points)
and a one-time benefit in the first quarter associated with a tax
restructuring in Latin America (0.8 points), primarily offset by a
decrease in the utilization of foreign tax credits in 2012 (2.9 points)
and the unfavorable tax impact of the gain on the RSS divestiture
(0.3 points).The remaining items were individually insignificant.
Financial Position
Cash and marketable securities at year end were $11,128 million,
a decrease of $794 million from the prior year-end position. During
the year the company continued to manage the investment port-
folio to meet its capital preservation and liquidity objectives. At
December 31, 2012, there were no holdings of European sovereign
debt securities in the investment portfolio.
Total debt of $33,269 million increased $1,949 million from the
prior year-end level. The commercial paper balance at December
31, 2012 was $1,800 million, a decrease of $500 million from the
prior year. Within total debt, $24,501 million was in support of the
Global Financing business which was leveraged at a 7.0 to 1 ratio.
The company continued to have substantial flexibility in the market.
During 2012, the company completed bond issuances totaling
$7,875 million, with terms ranging from three to 30 years and priced
from 0.55 to 4.00 percent depending on the maturity. The com-
pany has consistently generated strong cash flow from operations
and continued to have access to additional sources of liquidity
through the capital markets and its $10 billion global credit facility,
with 100 percent of the facility available on a same-day basis.