IBM 2013 Annual Report Download - page 67

66 Management Discussion
International Business Machines Corporation and Subsidiary Companies
in sales cycle working capital. These decreases were partially offset
by lower capital expenditures and the prepayment of certain post-
retirement benefit plan contributions in 2012.
In 2013, the company continued to focus its cash utilization on
returning value to shareholders including $4.1 billion in dividends and
$12.8 billion in net stock transactions, including the common stock
repurchase program. In addition, $3.1 billion was utilized to acquire
10 companies. For the full year, the company generated $15.0 billion
in free cash flow and utilized $19.9 billion on acquisitions, net share
repurchases and dividends.
Over the past five years, the company generated over $81 billion
in free cash flow. During that period, the company invested nearly
$16 billion in strategic acquisitions and returned over $69 billion to
shareholders through dividends and net share repurchases. The
company’s performance during this period demonstrates that
there is fungibility across the elements of share repurchases, divi-
dends and acquisitions. The amount of prospective returns to
shareholders in the form of dividends and share repurchases will
vary based upon several factors including each year’s operating
results, capital expenditure requirements, research and develop-
ment investments and acquisitions, as well as the factors
discussed below.
The company’s Board of Directors meets quarterly to consider
the dividend payment. In the second quarter 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
Net cash from operating activities per GAAP $ 17.5 $ 19.6 $ 19.8 $ 19.5 $20.8
Less: the change in Global Financing receivables (1.3) (2.9) (0.8) (0.7) 1.9
Net cash from operating activities, excluding Global Financing receivables 18.8 22.5 20.7 20.3 18.9
Capital expenditures, net (3.8) (4.3) (4.1) (4.0)(3.7)
Free cash flow 15.0 18.2 16.6 16.3 15.1
Acquisitions (3.1) (3.7) (1.8) (5.9)(1.2)
Divestitures 0.3 0.6 0.0 0.1 0.4
Share repurchase (13.9) (12.0) (15.0) (15.4)(7.4)
Dividends (4.1) (3.8) (3.5) (3.2) (2.9)
Non-Global Financing debt 3.2 0.7 1.7 2.3 (4.7)
Other (includes Global Financing receivables and Global Financing debt) 2.4 (0.8) 2.3 3.5 1.7
Change in cash, cash equivalents and short-term marketable securities $ (0.1) $ (0.8)$ 0.3 $ (2.3) $ 1.1
Events that could temporarily change the historical cash flow dynam-
ics discussed above include significant changes in operating results,
material changes in geographic sources of cash, unexpected
adverse impacts from litigation, future pension funding requirements
during periods of severe downturn in the capital markets or the timing
of tax payments. Whether any litigation has such an adverse impact
will depend on a number of variables, which are more completely
described in note M, “Contingencies and Commitments,” on pages
119 to 121. With respect to pension funding, in 2013, the company
contributed $507 million to its non-U.S. defined benefit plans versus
$617 million in 2012. As highlighted in the Contractual Obligations
table on page 67, the company expects to make legally mandated
pension plan contributions to certain non-U.S. plans of approximately
$3.3 billion in the next five years. The 2014 contributions are currently
expected to be approximately $600 million. Cash disbursements
related to all retirement-related plans is expected to be approximately
$2.9 billion in 2014, an increase of approximately $0.2 billion com-
pared to 2013. Financial market performance could increase the
legally mandated minimum contributions in certain non-U.S. coun-
tries that require more frequent remeasurement of the funded status.
The company is not quantifying any further impact from pension
funding because it is not possible to predict future movements in the
capital markets or pension plan funding regulations.
The Pension Protection Act of 2006 was enacted into law in
2006, and, among other things, increases the funding requirements
for certain U.S. defined benefit plans beginning after December 31,
2007. No mandatory contribution is required for the U.S. defined
benefit plan in 2014 as of December 31, 2013.
The company’s U.S. cash flows continue to be sufficient to fund
its current domestic operations and obligations, including investing
and financing activities such as dividends and debt service. The
company’s U.S. operations generate substantial cash flows, and,
in those circumstances where the company has additional cash
requirements in the U.S., the company has several liquidity options
available. These options may include the ability to borrow additional
funds at reasonable interest rates, utilizing its committed global
credit facility, repatriating certain foreign earnings and utilizing inter-
company loans with certain foreign subsidiaries.
The company does earn a significant amount of its pre-tax
income outside the U.S. The company’s policy is to indefinitely rein-
vest the undistributed earnings of its foreign subsidiaries, and
accordingly, no provision for federal income taxes has been made
on accumulated earnings of foreign subsidiaries. The company
periodically repatriates a portion of these earnings to the extent that
it does not incur an additional U.S. tax liability. Quantification of the
deferred tax liability, if any, associated with indefinitely reinvested