IBM 2013 Annual Report Download - page 65

64 Management Discussion
International Business Machines Corporation and Subsidiary Companies
integrated enterprise and how this has allowed the company to cap-
ture new growth and productivity. The company highlighted that by
aligning its business model with its clients’ needs, the company can
achieve its financial goals which will allow the company to invest in
future sources of growth and provide strong returns to its sharehold -
ers. This delivers long-term value and performance to all key
stakeholders. The execution of the company’s strategy results in the
2015 road map with the expectation of at least $20 of operating
(non-GAAP) earnings per share in 2015.
Looking forward, the company expects to continue its transfor-
mation in 2014, shifting its investments to the growth areas and
mixing to higher value. The company will continue to acquire key
capabilities, divest of certain businesses, rebalance its workforce
and invest in innovation as it continues to return value to its share-
holders. In January 2014, the company disclosed that it is expecting
GAAP earnings of at least $17.00 and operating (non-GAAP) earnings
of at least $18.00 per diluted share for the full year 2014. The operat-
ing (non-GAAP) earnings per share expectation exclude
acquisition-related charges of $0.76 per share and non-operating
retirement-related costs of $0.24 per share. This expectation results
in an increase year to year of 13.8 percent in GAAP earnings per
share and an increase of 10.5 percent year to year in operating (non-
GAAP) earnings per share which keeps the company on track to its
2015 objective. The company’s expectation for 2014 includes: a gain
from the sale of its customer care business to SYNNEX of approxi-
mately $150-$175 million, flat year to year pre-tax income in the
Systems and Technology business, a continued headwind from cur -
rency, approximately flat workforce rebalancing charges year to year,
benefits from both the 2013 and 2014 workforce actions, continued
benefits from productivity initiatives and a 23 percent assumption for
the tax rate. The company also stated that in the first quarter of 2014
it expects to close the initial phase of the sale of its customer care
business, and that it also expects to take the majority of its workforce
rebalancing charges in the same period. As a result, the company
expects first-quarter 2014 GAAP and operating (non-GAAP) earnings
per share to be approximately 14 percent of the full year expectation,
reflecting about half of the divestiture gain, the workforce rebalancing
charges and continued impacts from currency. The year-to-year
dynamics of the workforce rebalancing charges will impact the com-
pany’s quarterly earning profile in the first half. The company expects
first-quarter 2014 GAAP and operating (non-GAAP) earnings per
share to be down year to year as a result of the expected workforce
rebalancing charges, and it expects second-quarter 2014 GAAP and
operating (non-GAAP) earnings per share to increase year to year
due to the workforce rebalancing charges recorded in the prior year.
For the first half of 2014, the company expects low double-digit
growth in its GAAP and operating (non-GAAP) earnings per share
compared to the prior year.
From a segment perspective, the Software business again deliv-
ered improved revenue, pre-tax income and margin expansion in
2013. The 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 business continues
to see strength in cloud, Smarter Planet and business analytics and
the company will continue to invest to extend its capabilities. There
is good momentum in Global Business Services which delivered
double-digit profit growth in the second half of 2013. In Global Tech-
nology Services, the company expects the profit base in this
segment to improve in 2014. Contribution from significant contracts
that the business signed in 2013 should improve as the transitional
investments mature and productivity improves. Overall, the busi-
ness expects Global Services to improve profit in 2014 consistent
with its model for that business, 8-10 percent. In 2013, pre-tax
income in the Systems and Technology business was down $1.7
billion year to year. The performance was driven by the business
model issues in the Power Systems, System x and Storage business
units and System z mainframe product cycle. The company remains
confident in the secular strength of the mainframe and the product
cycle. However, the business will take actions to address the busi-
ness model challenges including making the products more
relevant to clients and right-sizing these businesses to meet the
new value proposition. In January 2014, the company announced
a definitive agreement with Lenovo Group Limited in which Lenovo
will acquire the company’s x86 server portfolio. The company
expects to recognize a total pre-tax gain on the sale of approxi-
mately $1 billion. See the caption “Divestitures” on page 98 for
additional information. While the company is focused on getting
the Systems and Technology business back to profit growth, in its
earnings per share expectation for 2014, the company has assumed
flat pre-tax income year to year for this business, excluding the
divestiture gain.
Within the growth markets, performance in 2013 was mixed;
however, the company was disappointed with the overall results.
The new governmental economic reforms in China impacted per-
formance. As the company expands its footprint in China, the
company continues to see good long-term opportunity and it con-
tinues to invest to capture that opportunity. Overall, in the growth
markets, the company believes it is on a trajectory to growth and
expects mid-single-digit revenue growth at constant currency by
the end of 2014.
Currency movements impacted the company’s year-to-year
revenue and earnings per share growth in 2013. Revenue growth
for the full year was impacted by 2.1 points from currency. Currency
also impacted the company’s profit performance. While there were
a number of currency movements year to year, the company’s
results were significantly impacted by the depreciation of the Yen.
Due to the fact that the company’s business in Japan is more heavily
skewed to local services, the company has less ability to hedge
cross-border cash flows in Japan as compared to most other coun-
tries. As a result, the currency impact related to the Yen largely falls
to profit. In January 2014, the company indicated that at current spot
rates, it expects this impact to continue through 2014.
The company’s free cash flow performance in 2013 compared
to the prior year was impacted by operational performance, changes
in sales cycle working capital and cash tax payments. The company
expects free cash flow in 2014 to increase by approximately $1 billion
year to year, including continued impacts of cash tax payments, and
grow faster than net income. Cash tax payments are expected to be
a year-to-year headwind in 2014 of about $2 billion, with the majority
of that impact in the first quarter.