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2014 IBM Annual Report

Table of contents

  • Page 1
    2014 IBM Annual Report

  • Page 2
    .... We would reimagine work by helping clients build systems of engagement, underpinned by the imperative of security. At the same time, we would address significant challenges in some of our businesses, principally hardware. We knew we faced a critical year of transformation. It proved to be just...

  • Page 3
    2 VIRGINIA M. ROMETTY Chairman, President and Chief Executive Officer

  • Page 4
    ... the commercialization of IBM Watson, bringing cognitive computing to more clients and partners in more industries. $1.2 billion to expand our SoftLayer cloud centers around the world. We expect to have 46 locations by the end of 2015. $1 billion to create IBM Bluemix, our cloud platform-asa-service...

  • Page 5
    ... is a Big Data problem - which is why our security business, with unequalled data and analytics capability, grew 19 percent in 2014. At the same time that we have been growing new businesses, we have been reinventing our core franchises. Last year we promised to address challenges in our Systems and...

  • Page 6
    ...core business processes, data and systems. In 2014, our strategic imperatives generated $25B in revenue, growing by 16 percent. STRATEGIC IMPERATIVE REVENUE MIX STRATEGIC IMPERATIVE REVENUE GROWTH VS THE MARKET* 23% 27% 20% 16% 13% 9% 18% 17% 16% 9% 10% 9% 2010 2014 2010 2011 2012 2013...

  • Page 7
    ...continue to bring innovation to our core franchises - innovation highly valued by our clients. I previously mentioned the entirely refreshed line of mainframes, IBM Power Systems and storage. We will continue to apply breakthroughs from IBM Research to our products and services. In software, we will...

  • Page 8
    ...a portfolio in the client's living room; an in-store sales assistant to act as a trusted fashion advisor; or an emergency responder to have real-time situation-risk awareness, including live video. 3. We believe open ecosystems and partnerships are key to our future innovation. This is a significant...

  • Page 9
    ...strategic imperatives revenue which has been measured on a consistent basis. For information about the company's financial results related to operating pre-tax income and operating earnings per share, on a continuing operations basis, which are non-GAAP measures, see the company's 2014 Annual Report...

  • Page 10
    2014 IBM Annual Report 9 What We Are Making of this Moment: A year of transformation One year ago, we described our strategy to lead ad a rapidly r reordering information technology industry. We said t that a new era was driving the reinvention of all enterprises - including our own. And we ...

  • Page 11
    ... a new class of advanced analytics. IBM's unmatched analytics capabilities draw upon more than 30 acquisitions and include nine Analytics Solutions Centers with an ecosystem of more than 6,000 business partners. Our global leadership in analytics was also key to last year's alliance between IBM and...

  • Page 12
    2014 IBM Annual Report 11 Business analytics revenue was $17B in 2014 Business analytics revenue increased 7% in 2014 $1B investment in IBM Watson, including $100 million dedicated to venture capital to support start-ups IBM Watson doubled its client base every quarter in 2014. It now spans ...

  • Page 13
    12 Remaking enterprise IT for the era of cloud INTERNET OF THINGS QUESTION AND ANSWER (IBM WATSON) SPEECH TO TE XT (IBM WATSON) TR ADEOFF ANALYTICS (IBM WATSON) TIME SERIES DATABASE CLOUDANT NoSQL DB DASH DB GEOSPATIAL ANALYTICS

  • Page 14
    ... IBM Annual Report 13 Cloud revenue was $7B in 2014 Cloud revenue increased 60% in 2014 IBM's cloud business has grown rapidly, thanks to increasing client demand for high-value solutions across public, private and hybrid clouds. Cloud revenue grew 60 percent, to $7 billion, in 2014. One reason...

  • Page 15
    ...-end device management. Our mobile revenue more than tripled in 2014. IBM INTERACTIVE EXPERIENCE Reimagining work also means transforming how products and services are created, delivered and used. We are globally expanding our hybrid consulting and digital agency services to help clients create new...

  • Page 16
    ... - from flight crews and retailers, to bankers, financial advisors, insurance agents, government caseworkers and law enforcement officers. We currently have 14 IBM MobileFirst for iOS apps in market, and many more are planned by the end of 2015. Built exclusively for iPhone and iPad, these apps...

  • Page 17
    16 Rethinking the challenge of security

  • Page 18
    ..., and leading application, data and infrastructure security capabilities - as well as cloud and mobile solutions to help clients innovate without increasing risk. For example, in 2014 IBM introduced the Threat Protection System which includes an end-to-end architecture of analytics and forensics...

  • Page 19
    ..., created a breakout IBM Power Systems strategy focused on open innovation, developed next-generation software defined storage technology and made strategic moves across our portfolio to combine the strengths of middleware, servers and storage for a modern IT backbone. At the same time, we exited...

  • Page 20
    ... 30,000 IBM software defined storage can reduce storage costs by up to 90% IBM z13 The new z13, launched in January 2015, reinvents the mainframe for the growing mobile economy. Capable of processing 2.5 billion transactions a day, it incorporates real-time encryption and analytics to exceed...

  • Page 21
    20 Financial Highlights International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) For the year ended December 31: 2014 2013 Revenue Net income Income from continuing operations Operating (non-GAAP) earnings* $ 92,793 $ 12,022 $ 15,751 $ 16,702...

  • Page 22
    ... of Business Year in Review Prior Year in Review Other Information Looking Forward Liquidity and Capital Resources Critical Accounting Estimates Currency Rate Fluctuations Market Risk Financing Risks Cybersecurity Employees and Related Workforce Global Financing Report of Management Report of...

  • Page 23
    ... an overview of the key performance drivers in 2014. Beginning with the "Year in Review" on page 33, the Management Discussion contains the results of operations for each reportable segment of the business and a discussion of the company's financial position and cash flows. Other key sections...

  • Page 24
    ...per share amounts) Yr.-to-Yr. Percent Change For the year ended December 31: 2014 2013 Net income as reported Loss from discontinued operations, net of tax Income from continuing operations Non-operating adjustments (net of tax): Acquisition-related charges Non-operating retirement-related costs...

  • Page 25
    ...strategic imperatives and solutions that address clients' most critical needs. During 2014, the company spent approximately 6 percent of revenue in research and development and invested approximately $4 billion on capital investments- supporting actions in a number of areas that will yield financial...

  • Page 26
    ...2014, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at year end was $8.5 billion, a decrease of $2.6 billion from December 31, 2013. Key drivers in the balance sheet and total cash flows were: Total assets decreased...

  • Page 27
    .... One third of IBM Research's spending is focused on data, analytics and cognitive computing. In 2014, IBM reported nearly $17 billion in business analytics revenue, and the company established the Watson Group to develop and commercialize cognitive computing innovations. The company has committed...

  • Page 28
    ...our clients high-end consulting, advanced fraud and threat protection, identity and access management, application and data security, mobile and cloud security, network and end-point protection with services for cloud. (1) IDC Worldwide Enterprise Social Networks 2014-2018 Forecast and 2013 Vendor...

  • Page 29
    ... over time through strategic investments in capabilities and technologies that have superior long-term growth and profitability prospects based on the value they deliver to clients. The company's global capabilities include services, software, systems, fundamental research and related financing...

  • Page 30
    ...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: included within Strategic Outsourcing, delivers a range of...

  • Page 31
    30 Management Discussion International Business Machines Corporation and Subsidiary Companies Software Capabilities WebSphere: delivers capabilities that enable organizations to run high-performance business applications. With these applications, clients can integrate and manage business processes...

  • Page 32
    ... for R&D, focusing on high-growth, high-value opportunities. IBM Research works with clients and the company's business units through global labs on near-term and mid-term innovations. It contributes many new technologies to IBM's portfolio every year and helps clients address their most difficult...

  • Page 33
    ... or is licensed under a number of patents, which vary in duration, relating to its products. Integrated Supply Chain IBM has an extensive integrated supply chain, procuring materials and services globally. In 2014, the company also managed approximately $21.8 billion in procurement spending for its...

  • Page 34
    Management Discussion International Business Machines Corporation and Subsidiary Companies 33 YEAR IN REVIEW Results of Continuing Operations Segment Details The following is an analysis of the 2014 versus 2013 reportable segment results. The table below presents each reportable segment's ...

  • Page 35
    ...during 2013. In 2014, clients continued to sign large outsourcing engagements that leverage the company's cloud, business analytics and mobile solutions. Maintenance revenue decreased 3.6 percent but was flat year to year adjusted for the divestiture of the industry standard server business (1 point...

  • Page 36
    ...2013. Pre-tax income decreased 6.7 percent to $2,999 million and the pre-tax margin declined 0.5 points to 16.3 percent. In 2014, profit was impacted by lower revenue on a relatively fixed cost base. In areas where the company has strong differentiation, such as solutions that address the strategic...

  • Page 37
    ...to-Yr. Percent Change Adjusted for Currency For the year ended December 31: 2014 2013 Software external revenue Middleware Key Branded Middleware WebSphere Family Information Management Workforce Solutions Tivoli Rational Other middleware Operating systems Other $25,434 $21,474 17,098 $25,932...

  • Page 38
    ... a gross profit margin of 88.6 percent. Software pre-tax income decreased 3.7 percent year to year and pre-tax margin declined 1.2 points. Across software, the company continues to drive innovation and capture growth areas, integrating analytics and security capabilities that are needed to operate...

  • Page 39
    ... percent and pre-tax margin decreased 1.3 points in 2014 versus the prior year. In 2014, the company took significant actions to reposition its Systems and Technology business for higher value, and reinforced its commitment to driving innovation in high-end systems and storage. It repositioned Power...

  • Page 40
    ... market countries. China decreased 17.2 percent as reported and 15 percent adjusted for divestitures (3 points) and currency (0 points), but reflected improvement in its sequential year-to-year growth rate in the last quarter of the year with strong software performance and several large mainframe...

  • Page 41
    ...-Yr. Percent/ Margin Change Workforce rebalancing charges Retirement-related costs Amortization of acquired intangible assets Stock-based compensation Bad debt expense For the year ended December 31: 2014 2013 Total consolidated expense and other (income) Non-operating adjustments Amortization...

  • Page 42
    Management Discussion International Business Machines Corporation and Subsidiary Companies 41 Research, development and engineering (RD&E) expense in continuing operations was 5.9 percent of revenue in 2014 and 5.8 percent of revenue in 2013. RD&E expense decreased 5.3 percent in 2014 versus 2013 ...

  • Page 43
    42 Management Discussion International Business Machines Corporation and Subsidiary Companies Retirement-Related Plans The following table provides the total pre-tax cost for all retirementrelated plans. These amounts are included in the Consolidated Statement of Earnings within the caption (e.g.,...

  • Page 44
    ...from December 31, 2013 driven by a decrease in discount rates and changes in U.S. mortality rate assumptions, partially offset by strong asset returns worldwide. At year end, the company's qualified defined benefit plans were well funded and the cash requirements related to these plans remain stable...

  • Page 45
    ... to manage the overall asset and liability profile. Additionally, the company maintains sufficient flexibility to access global funding sources as needed. Net cash provided by operating activities decreased by $616 million in 2014 driven by the following key factors: • An increase in income taxes...

  • Page 46
    ..., 2013. The ratio was impacted by retirement-related declines in equity of $6,366 million primarily driven by plan remeasurements, the non-recurring charge GAAP Reconciliation The tables below provide a reconciliation of the company's income statement results as reported under GAAP to its operating...

  • Page 47
    46 Management Discussion International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) AcquisitionRelated Adjustments RetirementRelated Adjustments Operating (non-GAAP) For the year ended December 31, 2013: GAAP Gross profit Gross profit margin SG...

  • Page 48
    Management Discussion International Business Machines Corporation and Subsidiary Companies 47 with diluted earnings per share of $5.51. The company generated $6.1 billion in cash from operations and $6.6 billion in free cash flow in the fourth quarter driving shareholder returns of $1.2 billion in...

  • Page 49
    48 Management Discussion International Business Machines Corporation and Subsidiary Companies Results of Continuing Operations Segment Details The following is an analysis of the fourth quarter of 2014 versus the fourth quarter of 2013 reportable segment external revenue and gross margin results. ...

  • Page 50
    ... year. The year-to-year decrease was driven by several key factors. First, GTS lost profit on a year-toyear basis as a result of the customer care and industry standard server divestitures. Second, the fourth quarter workforce rebalancing charge of $277 million impacted profit. Finally, the company...

  • Page 51
    ... to that of the z10, program-to-date System z revenue and gross profit is right on top of that cycle. The company continues to innovate on the platform, and in January 2015 announced the z13, the new generation of the IBM mainframe. Power Systems revenue decreased 13.4 percent (11 percent adjusted...

  • Page 52
    ... by decreased cash used for gross common stock repurchases ($5,665 million). For the fourth quarter: 2014 2013 Total consolidated expense and other (income) Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs...

  • Page 53
    ... Management Discussion International Business Machines Corporation and Subsidiary Companies GAAP Reconciliation The tables below provide a reconciliation of the company's income statement results as reported under GAAP to its operating earnings presentation which is a non-GAAP measure. The company...

  • Page 54
    Management Discussion 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 2013 as compared to 2012. As discussed in the "Organization of Information" section on ...

  • Page 55
    ... primarily by margin expansion and common stock repurchases, partially offset by decreased revenue. At December 31, 2013, the company's balance sheet and liquidity positions were strong and well positioned to support the business over the long term. Cash and marketable securities at year end was $11...

  • Page 56
    ... transfer price and excludes certain unallocated corporate items. ($ in millions) Yr.-to-Yr. Percent/ Margin Change Yr.-to-Yr. Percent Change Adjusted for Currency For the year ended December 31: 2013 2012 Revenue Global Technology Services Gross margin Global Business Services Gross margin...

  • Page 57
    56 Management Discussion International Business Machines Corporation and Subsidiary Companies Global Services In 2013, the Global Services segments delivered $56,947 million of revenue, grew pre-tax income 2.5 percent and expanded pretax margin 1.0 points. GBS returned to revenue growth in 2013, ...

  • Page 58
    ... profit performance in Application Outsourcing. GBS Software ($ in millions) 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 benefited from reductions in performance-related compensation, the company's enterprise...

  • Page 59
    58 Management Discussion International Business Machines Corporation and Subsidiary Companies Tivoli revenue increased 3.9 percent (5 percent adjusted for currency) in 2013 and gained share, driven by storage growth and the security solutions portfolio. Tivoli storage revenue was up 7 percent (8 ...

  • Page 60
    ... in both high-end System x and blade were partially offset by increased revenue driven by Pure Systems. Storage revenue decreased 10.8 percent (10 percent adjusted for currency) in 2013 versus 2012. The company's flash solutions continued to gain momentum in 2013 with positive revenue growth...

  • Page 61
    ... For the year ended December 31: 2013 2012 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...

  • Page 62
    Management Discussion International Business Machines Corporation and Subsidiary Companies 61 Total SG&A expense decreased 0.1 percent in 2013 versus 2012. The decrease was primarily driven by the effects of currency (1 point), offset by acquisition-related spending (2 points). Operating (non-GAAP...

  • Page 63
    ...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 Plan assets...

  • Page 64
    Management Discussion International Business Machines Corporation and Subsidiary Companies 63 GAAP Reconciliation The tables below provide a reconciliation of the company's income statement results as reported under GAAP to its operating earnings presentation which is a non-GAAP measure. The ...

  • Page 65
    ... the large workforce rebalancing charge that was taken in the prior year. Overall, and most importantly, the company expects to exit 2015 with a higher-value, higher-margin business. Within the company's earnings per share expectation for 2015, the company is expecting a 2-3 point benefit from share...

  • Page 66
    ..., workforce rebalancing and working capital, all this results in the expectation that free cash flow will be essentially flat year to year. The company expects, in the normal course of business, that its effective tax rate and operating (non-GAAP) tax rate will be approximately 20 percent in 2015...

  • Page 67
    ... Board of Directors increased the company's quarterly common stock dividend from $0.95 to $1.10 per share. The table below represents the way in which management reviews cash flow as described above. ($ in billions) For the year ended December 31: 2014 2013 2012 2011 2010 Net cash from operating...

  • Page 68
    ... debt obligations Capital (finance) lease obligations Operating lease obligations Purchase obligations Other long-term liabilities: Minimum defined benefit plan pension funding (mandated)* Excess 401(k) Plus Plan Long-term termination benefits Tax reserves** Divestiture related Other Total $39,708...

  • Page 69
    ...pension (income)/cost calculation and the projected benefit obligation (PBO). The company decreased the discount rate assumption for the IBM Personal Pension Plan (PPP), a U.S.-based defined benefit plan, by 80 basis points to 3.70 percent on December 31, 2014. This change will increase pre-tax cost...

  • Page 70
    Management Discussion International Business Machines Corporation and Subsidiary Companies 69 The expected long-term return on plan assets assumption is used in calculating the net periodic pension (income)/cost. Expected returns on plan assets are calculated based on the market-related value of ...

  • Page 71
    ... on the company's results of operations and financial position. Global Financing Receivables Allowance for Credit Losses The Global Financing business reviews its financing receivables port folio at least quarterly in order to assess collectibility. A description of the methods used by management to...

  • Page 72
    ... Consolidated Statement of Earnings. At December 31, 2014, the company's net asset position in Venezuela was $42 million. The company's operations in Venezuela comprised less than 1 percent of total 2014, 2013 and 2012 revenue, respectively. In February 2015, the Venezuelan government created a new...

  • Page 73
    ...financial instruments relating to the financing or hedging of those items are included by definition. Excluded items include short-term and long-term receivables from sales-type and direct financing leases, forecasted foreign currency cash flows and the company's net investment in foreign operations...

  • Page 74
    ... health of the economy and its impact on corporate IT budgets, key drivers of Global Financing's results are interest rates and originations. Interest rates directly impact External revenue Internal revenue Total revenue Cost Gross profit Gross profit margin Pre-tax income After-tax income* Return...

  • Page 75
    ... decreases in return on equity from 2013 to 2014 and 2012 to 2013 were driven by higher average equity balances. Financial Condition Balance Sheet ($ in millions) At December 31: 2014 2013 Cash and cash equivalents Net investment in sales-type and direct financing leases Equipment under operating...

  • Page 76
    Management Discussion International Business Machines Corporation and Subsidiary Companies 75 Sources and Uses of Funds The primary use of funds in Global Financing is to originate client and commercial financing assets. Client financing assets for end users consist of IBM systems, software and ...

  • Page 77
    76 Management Discussion International Business Machines Corporation and Subsidiary Companies Global Financing optimizes the recovery of residual values by selling assets sourced from lease returns, leasing used equipment to new clients, or extending lease arrangements with current clients. Sales ...

  • Page 78
    ...supported by the company's overall liquidity position and access to capital markets. Cash generated by Global Financing was deployed to pay dividends to the company in order to maintain an appropriate debt-to-equity ratio. Return on Equity ($ in millions) At December 31: 2014 2013 Numerator Global...

  • Page 79
    78 Report of Management International Business Machines Corporation and Subsidiary Companies Management Responsibility for Financial Information Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with IBM management. The accompanying...

  • Page 80
    ..., the financial position of International Business Machines Corporation and its subsidiaries at December 31, 2014 and 2013 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally...

  • Page 81
    80 Consolidated Statement of Earnings International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) For the year ended December 31: Notes 2014 2013* 2012* Revenue Services Sales Financing Total revenue Cost Services Sales Financing Total cost Gross ...

  • Page 82
    Consolidated Statement of Comprehensive Income International Business Machines Corporation and Subsidiary Companies 81 ($ in millions) For the year ended December 31: Notes 2014 2013 2012 Net income Other comprehensive income/(loss), before tax Foreign currency translation adjustments Net changes...

  • Page 83
    82 Consolidated Statement of Financial Position International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) At December 31: Notes 2014 2013 Assets Current assets Cash and cash equivalents Marketable securities Notes and accounts receivable-trade (...

  • Page 84
    Consolidated Statement of Cash Flows International Business Machines Corporation and Subsidiary Companies 83 ($ in millions) For the year ended December 31: 2014 2013 2012 Cash flows from operating activities Net income Adjustments to reconcile net income to cash provided by operating activities ...

  • Page 85
    .../(loss) Cash dividends paid-common stock Common stock issued under employee plans (15,091,320 shares) Purchases (2,406,007 shares) and sales (2,746,169 shares) of treasury stock under employee plans-net Other treasury shares purchased, not retired (61,246,371 shares) Changes in other equity Changes...

  • Page 86
    .../(loss) Cash dividends paid-common stock Common stock issued under employee plans (7,687,026 shares) Purchases (1,313,569 shares) and sales (1,264,232 shares) of treasury stock under employee plans-net Other treasury shares purchased, not retired (71,504,867 shares) Changes in other equity Changes...

  • Page 87
    ... Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Within the financial statements and tables presented...

  • Page 88
    ... the software support and hardware maintenance services delivered across multiple reporting periods. In another example, a client may outsource the running of its datacenter operations to the company on a long-term, multiple-year basis and periodically purchase servers and/or software products from...

  • Page 89
    ... client. Unbilled accounts receivable of $1,833 million and $2,053 million at December 31, 2014 and 2013, respectively, is included in notes and accounts receivable-trade in the Consolidated Statement of Financial Position. Billings usually occur in the month after the company performs the services...

  • Page 90
    ... revenue. Costs to support or service licensed programs are charged to software cost within cost of sales as incurred. The company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software programs, including software coding, installation, testing and...

  • Page 91
    ... rebalancing charges for contractually obligated payments to employees terminated in the ongoing course of business, acquisition costs related to business combinations, amortization of certain intangible assets and environmental remediation costs. Advertising and Promotional Expense The company...

  • Page 92
    ...Defined Benefit Pension and Nonpension Postretirement Benefit Plans The funded status of the company's defined benefit pension plans and nonpension postretirement benefit plans (retirement-related benefit plans) is recognized in the Consolidated Statement of Financial Position. The funded status is...

  • Page 93
    ...a one- to five-year period. The fair value of the awards is determined and fixed on the grant date based on the company's stock price, adjusted for the exclusion of dividend equivalents. Stock-based compensation cost is recorded in Cost, SG&A, and RD&E in the Consolidated Statement of Earnings based...

  • Page 94
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 93 The company recognizes tax liabilities when, despite the company's belief that its tax return positions are supportable, the company believes that certain positions may not be fully ...

  • Page 95
    ... the fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use Cash Equivalents All highly liquid investments with maturities of three months or less at the date of purchase are considered to be...

  • Page 96
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 95 Marketable Securities Debt securities included in current assets represent securities that are expected to be realized in cash within one year of the balance sheet date. Long-term debt...

  • Page 97
    ... shares include outstanding stock options, stock awards and convertible notes. NOTE B. ACCOUNTING CHANGES New Standards to be Implemented In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers. Revenue recognition...

  • Page 98
    ... 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. 2014 In 2014, the company completed six acquisitions at an aggregate cost of $608 million. The Software segment completed acquisitions...

  • Page 99
    98 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies enterprise storage, sharing virtual images or accessing the cloud for increased computing capacity. Cloudant will extend the company's mobile and cloud platform by enabling developers...

  • Page 100
    ... acquisitions and the resulting purchase price allocations as of December 31, 2012. 2012 Acquisitions ($ in millions) Amortization Life (in Years) Kenexa Other Acquisitions Current assets Fixed assets/noncurrent assets Intangible assets Goodwill Completed technology Client relationships In-process...

  • Page 101
    ... manufacturing assets and operations in East Fishkill, New York and Essex Junction, Vermont. The commercial OEM business to be acquired by GLOBALFOUNDRIES includes custom logic and specialty foundry, manufacturing and related operations. The companies have also agreed to a 10-year exclusive...

  • Page 102
    ...to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 101 Summarized financial information for discontinued operations is shown below. ($ in millions) For the year ended December 31: 2014 2013 2012 Total revenue Loss from discontinued operations...

  • Page 103
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Others-On June 30, 2014, the company completed the divestitures of its solidDB suite of products to UNICOM Systems, Inc. and its Human Capital Management business line in France to Sopra Group...

  • Page 104
    ... tables present the company's financial assets and financial liabilities that are measured at fair value on a recurring basis at December 31, 2014 and 2013. ($ in millions) At December 31, 2014: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit...

  • Page 105
    ...a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $251 million each. (5) (6) (7) During the year ended December 31, 2014, the company transferred trading security...

  • Page 106
    ... the Consolidated Statement of Financial Position. During the first quarter of 2014, the company acquired equity securities in conjunction with the sale of the customer care business which are classified as trading securities. At December 31, 2014, unrealized gains related to trading securities of...

  • Page 107
    106 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations. As a result of ...

  • Page 108
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 107 At December 31, 2014 and 2013, net gains of approximately $1 million (before taxes), respectively, were recorded in AOCI in connection with cash flow hedges of the company's borrowings...

  • Page 109
    ...risk management activity as of December 31, 2014 and 2013, as well as for the years ended December 31, 2014, 2013 and 2012, respectively. Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position ($ in millions) Fair Value of Derivative Assets At December 31: Balance...

  • Page 110
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies 109 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...

  • Page 111
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies NOTE E. INVENTORIES ($ in millions) At December 31: 2014 2013 Finished goods Work in process and raw materials Total $ 430 1,674 $2,103 $ 444 1,866 $2,310 NOTE F. FINANCING RECEIVABLES The...

  • Page 112
    ...placed on a non-accrual status. The following tables present impaired client loan receivables at December 31, 2014 and 2013. ($ in millions) At December 31, 2014: Recorded Investment Related Allowance Financing receivables Lease receivables Loan receivables Ending balance Collectively evaluated for...

  • Page 113
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Credit Quality Indicators The company's credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed...

  • Page 114
    ... December 31: 2014 2013 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 income taxes Other assets Total $1,527 681...

  • Page 115
    ...for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at December 31, 2014: ($ in millions) Capitalized Software Acquired Intangibles Total 2015 2016 2017 $420 211 65 - - $648 605...

  • Page 116
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 115 Goodwill The changes in the goodwill balances by reportable segment, for the years ended December 31, 2014 and 2013, are as follows: ($ in millions) Foreign Currency Translation and ...

  • Page 117
    116 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Long-Term Debt Pre-Swap Borrowing ($ in millions) At December 31: Maturities 2014 2013 U.S. dollar notes and debentures (average interest rate at December 31, 2014): 0.97% 4.73% 2....

  • Page 118
    ... terms of borrowing under these lines of credit vary from country to country, depending on local market conditions. 2015 2016 2017 2018 2019 2020 and beyond Total $ 4,600 5,331 5,242 2,621 4,069 17,874 $39,737 Interest on Debt ($ in millions) For the year ended December 31: 2014 2013 2012 Cost...

  • Page 119
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies NOTE K. OTHER LIABILITIES ($ in millions) At December 31: 2014 2013 Income tax reserves Excess 401(k) Plus Plan Disability benefits Derivative liabilities Special restructuring actions Workforce...

  • Page 120
    ...stock balance in the Consolidated Statement of Financial Position and the Consolidated Statement of Changes in Equity. Reclassifications and Taxes Related to Items of Other Comprehensive Income ($ in millions) For the year ended December 31, 2014: Before Tax Amount Tax (Expense)/ Benefit Net of Tax...

  • Page 121
    120 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies ($ in millions) For the year ended December 31, 2013: Before Tax Amount Tax (Expense)/ Benefit Net of Tax Amount Other comprehensive income/(loss) Foreign currency translation ...

  • Page 122
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 121 ($ 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 123
    ... reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the years ended December 31, 2014, 2013 and 2012 were not material to the company's results of continuing operations and financial position. In accordance with the relevant accounting guidance, the company...

  • Page 124
    ... Trust that it was closing its UK defined benefit plans to future accruals for most participants and in implementing the company's new retirement policy. In April 2014, the High Court acknowledged that the changes made to its UK defined benefit plans were within IBM's discretion, but ruled that IBM...

  • Page 125
    ...$44 million at December 31, 2014 and 2013, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position was immaterial. NOTE N. TAXES ($ in millions) For the year ended December 31: 2014 2013* 2012* Commitments The company's extended lines of credit...

  • Page 126
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 125 The components of the income from continuing operations provision for income taxes by taxing jurisdiction are as follows: ($ in millions) For the year ended December 31: 2014 2013* 2012...

  • Page 127
    ... this balance represents cash tax deposits paid over time to protect the company's right to appeal various income tax assessments made by the Indian Tax Authorities. In the first quarter of 2014, the IRS commenced its audit of the company's U.S. tax returns for 2011 and 2012. The company anticipates...

  • Page 128
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 127 NOTE O. RESEARCH, DEVELOPMENT AND ENGINEERING RD&E expense was $5,437 million in 2014, $5,743 million in 2013 and $5,816 million in 2012. In addition, RD&E expense included in ...

  • Page 129
    ... table presents total stock-based compensation cost included in income from continuing operations: ($ in millions) For the year ended December 31: 2014 2013 2012 Incentive Awards Stock-based incentive awards are provided to employees under the terms of the company's long-term performance plans...

  • Page 130
    ...respectively, of unrecognized compensation cost related to non-vested RSUs. The company received no cash from employees as a result of employee vesting and release of RSUs for the years ended December 31, 2014, 2013 and 2012. In the second quarter of 2011, the company granted equity awards valued at...

  • Page 131
    ... 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, 2014, 2013 and 2012, the company did not grant stock options. The following table summarizes...

  • Page 132
    ... 31, 2014, as a result of the company's assumption of stock-based awards previously granted by the acquired entities. The weighted-average exercise price of these awards was $56 per share. U.S. Plans Defined Benefit Pension Plans IBM Personal Pension Plan IBM provides U.S. regular, full-time and...

  • Page 133
    ... deposits funds under various fiduciary-type arrangements, purchases annuities under group contracts or provides reserves for these plans. Benefits under the defined benefit plans are typically based either on years of service and the employee's compensation (generally during a fixed number of years...

  • Page 134
    ...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: 2014 2013 2012 2014 Non-U.S. Plans 2013 2012 2014 Total 2013 2012 Defined benefit pension plans...

  • Page 135
    ... benefit plans recognized in the Consolidated Statement of Earnings, excluding defined contribution plans. ($ in millions) Defined Benefit Pension Plans U.S. Plans For the year ended December 31: 2014 2013 2012 2014 Non-U.S. Plans 2013 2012 Service cost Interest cost Expected return on plan assets...

  • Page 136
    ...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 Benefit Pension Plans U.S. Plans At December 31: 2014 2013 Non-U.S. Plans 2014 2013 Nonpension Postretirement Benefit...

  • Page 137
    136 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The following table presents the pre-tax net loss and prior service costs/(credits) and transition (assets)/liabilities recognized in OCI and the changes in the pre-tax net loss, ...

  • Page 138
    ...-related benefit plans. Defined Benefit Pension Plans U.S. Plans 2014 2013 2012 2014 Non-U.S. Plans 2013 2012 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...

  • Page 139
    ... 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, 2014, 2013 and 2012, the expected long-term return on plan assets and the actual return on those assets were not material. Rate of Compensation...

  • Page 140
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 139 Investment Policies and Strategies The investment objectives of the Qualified PPP portfolio are designed to generate returns that will enable the plan to meet its future obligations....

  • Page 141
    ... 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, 2014. The U.S. Plan...

  • Page 142
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 141 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 consists of the Qualified ...

  • Page 143
    ... 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, 2014 and 2013 for the U.S. Plan. ($ in millions...

  • Page 144
    ... Level 2 depending on availability of quoted market prices. Expected Contributions Defined Benefit Pension Plans It is the company's general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and local tax laws. From time...

  • Page 145
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies Defined Contribution Plans The company contributed $1,239 million and $1,361 million in cash to the defined contribution plans during the years ended December 31, 2014 and 2013, respectively. In 2015...

  • Page 146
    ... are used by Global Technology Services in outsourcing engagements are primarily sourced internally from Systems and Technology and Software. For providing IT services that are used internally, Global Technology Services and Global Business Services recover cost, as well as a reasonable fee, that is...

  • Page 147
    ...Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies The following tables reflect the results of continuing operations of the company's segments consistent with the management and measurement system utilized within the company. Performance...

  • Page 148
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 147 Reconciliations of IBM as Reported ($ in millions) For the year ended December 31: 2014 2013* 2012* Segment Assets and Other Items Global Technology Services assets are primarily plant...

  • Page 149
    ...Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 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...

  • Page 150
    ... the year ended December 31: 2014 2013** 2012** 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...

  • Page 151
    ... Global Technology Services and Global Business Services, client solutions often include IBM software and systems and other suppliers' products if the client solution requires it. Within Software, product license charges and ongoing subscription and support are reported as Software, and software...

  • Page 152
    ... Comparison of Selected Financial Data International Business Machines Corporation and Subsidiary Companies 151 ($ in millions except per share amounts) For the year ended December 31: 2014 2013 2012 2011 2010 Revenue Income from continuing operations Loss from discontinued operations, net of tax...

  • Page 153
    ... 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 for...

  • Page 154
    Performance Graph International Business Machines Corporation and Subsidiary Companies 153 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN FOR IBM, S&P 500 STOCK INDEX AND S&P INFORMATION TECHNOLOGY INDEX The following graph compares the five-year cumulative total returns for IBM common stock with...

  • Page 155
    154 Board of Directors and Senior Leadership International 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 ...

  • Page 156
    ... can get quarterly financial results, a summary of the Annual Meeting remarks, and voting results from the meeting by calling (914) 499-7777, by sending an e-mail to [email protected], or by writing to International Business Machines Corporation, 1 New Orchard Road, M/D 325, Armonk, New York 10504.

  • Page 157
    International Business Machines Corporation New Orchard Road, Armonk, New York 10504 (914) 499-1900 Aspera, BladeCenter, Bluemix, Cloudant, Cognos, Daeja, DemandTec, Emptoris, FlashSystem, Flex System, Focal Point, IBM, IBM Watson, ILOG, Kenexa, Netezza, OpenPOWER, POWER, POWER8, Power Systems, Pure...

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