IBM 2014 Annual Report Download - page 26

25
Management Discussion
International Business Machines Corporation and Subsidiary Companies
The year-to-year drivers were approximately:
Total Operating
Consolidated (non-GAAP)
• Currency* (1) point (1) point
• Acquisitions** 2 points 2 points
• Base expense (8) points (7) points
* Reflects impacts of translation and hedging programs.
** Includes acquisitions completed in prior 12-month period; operating (non-GAAP) is
net of non-operating acquisition-related charges.
The reported base expense reflects not only the ongoing run rate
of the business, but also the impact of divestitures and work-
force rebalancing charges. The company recorded pre-tax gains
of $1.6billion in 2014 related to the divestitures of the industry
standard server ($1.4billion) and customer care ($0.2billion) busi-
nesses. Workforce rebalancing charges in 2014 were $1.5billion,
an increase of $0.4billion year to year. Excluding the gains from
the divested businesses and the impact of workforce rebalancing
charges, operating (non-GAAP) base expense decreased 3points
year to year versus the 7point as reported decrease. Within
base expense, the company is continuing to shift resources and
spending to areas with the most opportunity—including Watson,
SoftLayer, Bluemix and support of strategic partnerships, including
the Apple partnership.
Pre-tax income from continuing operations decreased 1.3per-
cent and the pre-tax margin was 21.5percent, an increase of
1.0points versus 2013. The continuing operations effective tax
rate for 2014 was 21.2percent, an increase of 4.6points versus
the prior year primarily driven by benefits in the 2013 rate associ-
ated with discrete items. Income from continuing operations of
$15.8billion decreased 6.7percent and the net income margin was
17.0percent, a decrease of 0.2points versus 2013. Losses from
discontinued operations, net of tax, were $3.7billion in 2014 com-
pared to $0.4billion 2013. Net income of $12.0billion decreased
$4.5billion year to year. Operating (non-GAAP) pre-tax income
from continuing operations decreased 4.4percent year to year
and the operating (non-GAAP) pre-tax margin from continuing
operations improved 0.3points to 22.8percent versus the prior
year. Operating (non-GAAP) income from continuing operations
of $16.7billion decreased 9.0percent and the operating (non-
GAAP) income margin from continuing operations of 18.0percent
decreased 0.7points. The operating (non-GAAP) effective tax
rate from continuing operations in 2014 was 21.0percent versus
17.0percent in 2013.
Diluted earnings per share from continuing operations of
$15.59 increased 1.9percent year to year reflecting the benefits
of the common stock repurchase program. In 2014, the company
repurchased 71.5 million shares of its common stock. Operat-
ing (non-GAAP) diluted earnings per share of $16.53 decreased
0.7percent versus the prior year driven primarily by the impacts
of decreased revenue and the higher tax rate, partially offset by
the impact of share repurchases. Diluted earnings per share from
discontinued operations was ($3.69) in 2014 compared to ($0.36)
in 2013.
At December31, 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 $8.7billion ($2.7billion adjusted for
currency) from December31, 2013 driven by:
• Decreases in prepaid pension assets ($3.4billion), property,
plant and equipment ($3.1billion) driven primarily by the
expected divestiture of the Microelectronics business
($2.4billion), cash and cash equivalents ($2.2 billion) and
total receivables ($1.7 billion); partially offset by
• Increased deferred taxes ($2.2 billion).
Total liabilities increased $2.2 billion ($7.0 billion adjusted for cur-
rency) from December31, 2013 driven by:
• Increases in pension liabilities ($2.0 billion) and total debt
($1.1 billion).
Total equity of $12.0 billion decreased $10.9 billion from Decem-
ber31, 2013 as a result of:
• Increased treasury stock ($13.5 billion) primarily from share
repurchases, and increased losses in accumulated other
comprehensive income/(loss) ($6.3 billion), driven primarily
by the year-end remeasurement of the retirement-related
liabilities; partially offset by
• Higher retained earnings ($7.8 billion) and higher common
stock ($1.1 billion).
The company generated $16.9 billion in cash flow provided by
operating activities, a decrease of $0.6 billion when compared
to 2013, driven primarily by a higher level of cash tax payments
($1.7 billion). Net cash used in investing activities of $3.0 billion
was $4.3 billion lower than 2013, primarily due to a decrease in
cash used for acquisitions ($2.4 billion) and an increase in cash
provided from divestitures ($2.1 billion). Net cash used in financing
activities of $15.5 billion increased $5.6 billion compared to the
prior year, driven primarily by lower net cash proceeds from total
debt ($5.2 billion).
In 2014, the company made significant progress in its con-
tinuing transformation, investing to position the business for the
longer term. In January 2015, the company disclosed that it is
expecting GAAP earnings in the range of $14.35 to $15.10 and
operating (non-GAAP) earnings between $15.75 and $16.50 per
diluted share from continuing operations for 2015. The company
also stated that it expects free cash flow in 2015 to be relatively
flat compared to 2014.
For the first quarter of 2015, the company expects mid sin-
gle-digit earnings per share growth from continuing operations,
primarily driven by the large workforce rebalancing charge that
was recorded in the first quarter of 2014.