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2015
IBM
Annual
Report

Table of contents

  • Page 1
    2015 IBM Annual Report

  • Page 2

  • Page 3
    Dear IBM Investor: IBM is unique. It is the only company in our industry that has reinvented itself through multiple technology eras and economic ... years ago. So is your company. Today, IBM is much more than a "hardware, software, services" company. IBM is now emerging as a cognitive solutions ...

  • Page 4
    2 A Letter from the Chairman Virginia M. Rometty Chairman, President and Chief Executive Officer

  • Page 5
    ... be done and the work of transformation is never complete, I believe we have reached a turning point in our journey. The Progress of Our Transformation Two years ago, we laid out our strategic plan to transform IBM, in order to ensure that we meet the changing needs of our clients and capture the...

  • Page 6
    ... Watson, every digital application, product and process can understand, reason and learn. You can see why cognitive is becoming the heart of our solutions businesses. What started as one Watson unit is now a growing family: the core Watson team, which continues to build new capabilities and nurture...

  • Page 7
    2015 IBM Annual Report 5 In IBM Watson Health, for example, our partners include Medtronic, Memorial Sloan Kettering Cancer Center, the New York Genome Center and CVS Health. We have enhanced our capabilities in healthcare with expertise and data sets acquired through population health management ...

  • Page 8
    ... of APIs from which partners and third parties across a broad ecosystem can create new, innovative solutions. And cloud offers access to multiple data sets and relevant expertise-not only about technology, but also from business and societal domains. The IBM Cloud is designed for this new era...

  • Page 9
    ...of 46 cloud data centers in every major market in the world. This business grew by double digits in 2015. The Weather Company is not just a source of enormously valuable weather data. It is a platform, and it forms the heart of our new IBM Watson Internet of Things solutions unit. Today the platform...

  • Page 10
    ... to designing and running core banking systems, supply chains, reservation and retail systems, and more. For example, we are bringing our large base of clients in IBM Global Technology Services (GTS) to the cloud. Last year, of our more than 70 services deals greater than $100 million, seven out...

  • Page 11
    ... $4.5 billion in 2015, with a year-end annual run rate of $5.3 billion. Even as we fueled these high-growth businesses, we continued to bring innovation to the businesses our clients have long valued and relied on. IBM Global Technology Services, which is increasingly injecting automation and...

  • Page 12
    ... earnings per share of $14.92 and delivered operating net income of $14.7 billion. The progress of our transformation-in particular our growth in hardware and GTS- shows what IBMers can do to reinvent our core businesses. In 2016, we will focus on: • Our software businesses, where we will...

  • Page 13
    ...to you in 2015, including dividends of nearly $5 billion and $4.6 billion in gross share repurchases. This marks the 20th consecutive year of an increased dividend, and IBM's 100th straight year of providing one. The Emerging IBM Because IBM uniquely transforms both technology and business, our own...

  • Page 14
    ... about the company's fi nancial results related to z Systems revenue and Power revenue adjusted for currency, operating earnings per share and operating net income on a continuing operations basis and free cash ï¬,ow, which are non-GAAP measures, see the company's 2015 Annual Report, which is...

  • Page 15
    2015 IBM Annual Report 13 What does it take to change the world and transform a company?

  • Page 16
    14

  • Page 17
    Explore 150+ stories of IBM Today. ibm.com/2015ar

  • Page 18
    16 Financial Highlights International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) For the year ended December 31: 2015 2014 Revenue Net income Income from continuing operations Operating (non-GAAP) earnings* $ 81,741 $ 13,190 $ 13,364 $ 14,659...

  • Page 19
    Report of Financials International Business Machines Corporation and Subsidiary Companies 17 MANAGEMENT DISCUSSION Overview Forward-Looking and Cautionary Statements Management Discussion Snapshot Description of Business Year in Review Prior Year in Review Other Information Looking Forward ...

  • Page 20
    ... OVERVIEW The financial section of the International Business Machines Corporation (IBM or the company) 2015 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. This Overview is designed to provide the reader...

  • Page 21
    ... retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance and the company considers these costs to be outside the operational performance of the business. Overall, the company believes that providing investors...

  • Page 22
    ... International Business Machines Corporation and Subsidiary Companies The following table provides the company's (non-GAAP) operating earnings for 2015 and 2014. ($ in millions except per share amounts) Yr.-to-Yr. Percent Change For the year ended December 31: 2015 2014 Net income as reported...

  • Page 23
    ...by margin declines in Global Services and Software. Total expense and other (income) decreased 6.4 percent in 2015 compared to the prior year. Total operating (non-GAAP) expense and other (income) decreased 7.8 percent compared to 2014. The key year-to-year drivers were: Total Consolidated Operating...

  • Page 24
    ... 31, 2015, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at year end was $8.2 billion, a decrease of $0.3 billion from December 31, 2014. Key drivers in the balance sheet and total cash flows were: Total assets...

  • Page 25
    ... than 20 acquisitions. Nearly half of IBM Research's spending is focused on analytics and cognitive. IBM's leading-edge cognitive technology is only the starting point. The company is developing entirely new solutions businesses around that cognitive capability. In 2015, the Watson Health unit was...

  • Page 26
    .... In 2015, IBM acquired: Blue Box Group, Inc. (private cloud), Compose (database-as-a-service), StrongLoop, Inc. (developer technology), Cleversafe, Inc. (object-based storage), Gravitant, Inc. (cloud brokerage) and Clearleap, Inc. (cloudbased video). The Weather Company acquisition in January 2016...

  • Page 27
    ... management and financial value. The company integrates long-standing expertise in service management and technology with the ability to exploit the power of new technologies from IBM systems and software, such as cloud computing, analytics, cognitive computing and virtualization, to deliver high...

  • Page 28
    ... tools, IBM's social business offerings help organizations reap real benefits associated with social networking, as well as create a more efficient and effective workforce. Rational: supports software development for both IT and complex embedded system solutions, with a portfolio of products...

  • Page 29
    ... purchase and technology upgrades to asset disposition decisions. Global Financing Capabilities Client Financing: lease, installment payment plan and loan financing to end users and internal clients for terms up to seven years. Assets financed are primarily IT products and services where the company...

  • Page 30
    ... group of patents or licenses. IBM owns 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 2015, the company also managed approximately...

  • Page 31
    ...Adjusted for Currency For the year ended December 31: 2015 2014** Revenue Global Technology Services Gross margin Global Business Services Gross margin Software Gross margin Systems Hardware Gross margin Global Financing Gross margin Other Gross margin Total consolidated revenue $32,017 37.4% 17...

  • Page 32
    30 Management Discussion International Business Machines Corporation and Subsidiary Companies ($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted for Currency For the year ended December 31: 2015 2014** Global Services external revenue Global Technology Services ...

  • Page 33
    Management Discussion International Business Machines Corporation and Subsidiary Companies 31 ($ in millions) For the year ended December 31: 2015 2014* Yr.-to-Yr. Percent/ Margin Change Global Services Global Technology Services External gross profit External gross profit margin Pre-tax ...

  • Page 34
    ... Yr.-to-Yr. Percent Change Adjusted for Currency For the year ended December 31: 2015 2014 Software external revenue Middleware Key branded middleware WebSphere Information Management Workforce Solutions Tivoli Rational Other middleware Operating systems Other $22,932 $19,473 15,778 $25,434...

  • Page 35
    Management Discussion International Business Machines Corporation and Subsidiary Companies 33 On an annual basis, approximately 70 percent of the company's software business is annuity-like, including Software-as-a-Service and subscription and support. Renewal rates are steady, the SaaS business ...

  • Page 36
    ... are driving demand for flash and object-based storage. The company is well positioned in these new areas with its FlashSystems offerings and the recent acquisition of Cleversafe, Inc. ($ in millions) Yr.-to-Yr. Percent/ Margin Change For the year ended December 31: 2015 2014 Systems Hardware...

  • Page 37
    ... (5 points). Total Expense and Other (Income) ($ in millions) Yr.-to-Yr. Percent/ Margin Change For the year ended December 31: 2015 2014 Total consolidated expense and other (income) Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating...

  • Page 38
    ...-related costs Amortization of acquired intangible assets Stock-based compensation Bad debt expense Total consolidated selling, general and administrative expense Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs...

  • Page 39
    ... compared to 2014. This was due primarily to decreases related to performance share units ($32 million), the conversion of stock-based awards previously issued by acquired entities ($6 million) and restricted stock units ($6 million). Stock-based compensation cost, and the year-to-year change, was...

  • Page 40
    38 Management Discussion International Business Machines Corporation and Subsidiary Companies In 2015, total pre-tax retirement-related plan cost increased by $598 million compared to 2014, primarily driven by an increase in recognized actuarial losses ($816 million), lower expected return on plan...

  • Page 41
    ... increase in discount rates. 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 approximately $500 million per year through 2020. In 2015, the return on the U.S. Personal Pension Plan assets was...

  • Page 42
    ... operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 79 are summarized in the table below. These amounts include the cash flows associated with the Global Financing business. ($ in millions) For the year ended December 31: 2015 2014 Net...

  • Page 43
    ... in consolidated financial statements. Refer to note B, "Accounting Changes," for additional information. Global Financing provides financing predominantly for the company's external client assets, as well as for assets under contract by other IBM units. These assets, primarily for Global Services...

  • Page 44
    42 Management Discussion International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amount) AcquisitionRelated Adjustments RetirementRelated Adjustments Operating (non-GAAP) For the year ended December 31, 2014: GAAP Gross profit Gross profit margin ...

  • Page 45
    ... and continued a high level of investment, including $2.5 billion in acquisitions and driving shareholder returns of $2.0 billion in gross common stock repurchases and dividends. Performance in the fourth quarter continued to reflect the transitions in the business as the company addressed both the...

  • Page 46
    44 Management Discussion International Business Machines Corporation and Subsidiary Companies the fourth quarter was 12.5 percent, down 9.7 points year to year. While the underlying effective tax rate was approximately 20 percent, the fourth quarter 2015 rate reflected the benefit from the recent ...

  • Page 47
    Management Discussion International Business Machines Corporation and Subsidiary Companies 45 Global Services In the fourth quarter of 2015, the Global Services segments, GTS and GBS, delivered combined revenue of $12,422 million, a decrease of 8.1 percent as reported and 1 percent adjusted for ...

  • Page 48
    ...equipment sales revenue. The Global Financing fourth quarter pre-tax income increased 28.3 percent to $674 million and the pre-tax margin increased 8.5 points to 55.4 percent. The increase in pre-tax income was driven by an increase in gross profit ($97 million) and decreases in financing receivable...

  • Page 49
    ... a loss of $31 million in 2014. For the fourth quarter: 2015 2014 Total consolidated expense and other (income) Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs)/income Operating (non-GAAP) expense and other...

  • Page 50
    ... 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's calculation...

  • Page 51
    ... 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 52
    ...Systems and Storage. In 2014, the company took significant actions to reposition the Systems Hardware business for higher value, and reinforced its commitment to driving innovation in high-end systems and storage. Revenue from the major markets declined 4.3 percent as reported and 1 percent adjusted...

  • Page 53
    ... ($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...

  • Page 54
    ... Adjusted for Currency For the year ended December 31: 2014** 2013** Revenue Global Technology Services Gross margin Global Business Services Gross margin Software Gross margin Systems Hardware Gross margin Global Financing Gross margin Other Gross margin Total consolidated revenue $35,442 39...

  • Page 55
    Management Discussion International Business Machines Corporation and Subsidiary Companies 53 ($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted for Currency For the year ended December 31: 2014** 2013** Global Services external revenue Global Technology Services ...

  • Page 56
    ... Discussion International Business Machines Corporation and Subsidiary Companies Software ($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted for Currency For the year ended December 31: 2014 2013 Software external revenue Middleware Key branded middleware WebSphere...

  • Page 57
    ...partially offset by an increase due to mix (0.7 points), driven by the divestiture of the System x business. In 2014, the company took significant actions to reposition its Systems Hardware business for higher value, and reinforced its commitment to driving innovation in high-end systems and storage...

  • Page 58
    ... Yr.-to-Yr. Percent/ Margin Change For the year ended December 31: 2014 2013 Total consolidated expense and other (income) Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs)/income Operating (non-GAAP) expense...

  • Page 59
    ...-related costs Amortization of acquired intangible assets Stock-based compensation Bad debt expense Total consolidated selling, general and administrative expense Non-operating adjustments Amortization of acquired intangible assets Acquisition-related charges Non-operating retirement-related (costs...

  • Page 60
    ... with accounting standards, the company remeasured the funded status of its retirement and postretirement plans at December 31. At December 31, 2014, the overall net underfunded position was $16,932 million, an increase of $5,498 million from December 31, 2013 driven by a decrease in discount rates...

  • Page 61
    Management Discussion International Business Machines Corporation and Subsidiary Companies 59 requirements related to these plans remain stable going forward at approximately $600 million per year through 2019. In 2014, the return on the U.S. Personal Pension Plan assets was 10.1 percent and the ...

  • Page 62
    ... System x and customer care businesses. In 2015, the company continued to take significant actions to drive the shift towards its strategic imperatives with targeted investments, as well as moving away from areas that do not support the strategic profile. The company's strategic direction is clear...

  • Page 63
    ...2015. For a discussion of new accounting standards that the company will adopt in future periods, please see note B, "Accounting Changes," beginning on page 92. Cash Flow and Liquidity Trends ($ in billions) 2015 2014 2013 2012 2011 Net cash from operating activities Cash and short-term marketable...

  • Page 64
    ... year ended December 31: 2015 2014 2013 2012 2011 Net cash from operating activities per GAAP Less: the change in Global Financing receivables Net cash from operating activities, excluding Global Financing receivables Capital expenditures, net Free cash ï¬,ow (FCF) Acquisitions Divestitures Share...

  • Page 65
    ... all retirement-related plans is expected to be approximately $2.6 billion in 2016, approximately flat compared to 2015. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status...

  • Page 66
    ... cost components of the net periodic pension (income)/cost calculation and the projected benefit obligation (PBO). The company increased the discount rate assumption for the IBM Personal Pension Plan (PPP), a U.S.-based defined benefit plan, by 30 basis points to 4.00 percent on December 31, 2015...

  • Page 67
    Management Discussion International Business Machines Corporation and Subsidiary Companies 65 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 68
    ... growth rates and operating margins used to calculate projected future cash flows, discount rates and future economic and market conditions. The company's estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require...

  • Page 69
    ... the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment, and obtaining forward-looking product information such as marketing plans and technological innovations. Residual value estimates are periodically reviewed and "other than...

  • Page 70
    ... 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. As a consequence, reported changes in the values of some of the...

  • Page 71
    ...of equivalent full-time employees hired under temporary, part-time and limited-term employment arrangements to meet specific business needs in a flexible and cost-effective manner. financing revenue and the associated borrowing costs. Originations, which determine the asset base of Global Financing...

  • Page 72
    ...in return on equity from the period 2013 to 2014 was driven by a higher average equity balance. Financial Condition Balance Sheet ($ in millions) At December 31: 2015 2014 Cash and cash equivalents Net investment in sales-type and direct financing leases Equipment under operating leases- external...

  • Page 73
    ..., software and services to meet IBM clients' total solutions requirements. Client financing assets are primarily sales-type, direct financing and operating leases for systems products, as well as loans and installment plans for systems, software and services with terms up to seven years. Global...

  • Page 74
    ... cost of guarantees was $5 million and $2 million for the years ended December 31, 2015 and 2014, respectively. Estimated Run Out of 2015 Balance 2015 2016 2017 2018 2019 and Beyond Sales-type and direct financing leases Operating leases Total unguaranteed residual value Related original amount...

  • Page 75
    ... result of the company's borrowing cost and access to the capital markets. Overall, Global Financing's originations will be dependent upon the demand for IT products and services as well as client participation rates. IBM continues to access both the short-term commercial paper market and the medium...

  • Page 76
    ... Audit Committee meets periodically and privately with the independent registered public accounting firm, with the company's internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and financial reporting matters. Management's Report on Internal...

  • Page 77
    Report of Independent Registered Public Accounting Firm International Business Machines Corporation and Subsidiary Companies 75 To the Stockholders and Board of Directors of International Business Machines Corporation: In our opinion, the accompanying Consolidated Financial Statements appearing on...

  • Page 78
    76 Consolidated Statement of Earnings International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) For the year ended December 31: Notes 2015 2014 2013 Revenue Services Sales Financing Total revenue Cost Services Sales Financing Total cost Gross ...

  • Page 79
    ... Statement of Comprehensive Income International Business Machines Corporation and Subsidiary Companies 77 ($ in millions) For the year ended December 31: Notes 2015 2014 2013 Net income Other comprehensive income/(loss), before tax Foreign currency translation adjustments Net changes related...

  • Page 80
    ...Consolidated Statement of Financial Position International Business Machines Corporation and Subsidiary Companies ($ in millions except per share amounts) At December 31: Notes 2015 2014 Assets Current assets Cash and cash equivalents Marketable securities Notes and accounts receivable-trade (net...

  • Page 81
    ... Stock-based compensation Deferred taxes Net (gain)/loss on asset sales and other Loss on microelectronics business disposal Change in operating assets and liabilities, net of acquisitions/divestitures Receivables (including financing receivables) Retirement related Inventories Other assets...

  • Page 82
    ...loss) Cash dividends paid-common stock Common stock issued under employee plans (9,961,389 shares) Purchases (1,666,069 shares) and sales (1,849,883 shares) of treasury stock under employee plans-net Other treasury shares purchased, not retired (73,121,942 shares) Changes in other equity Changes in...

  • Page 83
    ... Equity 2015 Equity, January 1, 2015 Net income plus other comprehensive income/(loss) Net income Other comprehensive income/(loss) Total comprehensive income/(loss) Cash dividends paid-common stock Common stock issued under employee plans (6,013,875 shares) Purchases (1,625,820 shares) and sales...

  • Page 84
    ... 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 85
    ... 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 86
    .... Unbilled receivables are expected to be billed within four months. Hardware The company's hardware offerings include the sale or lease of system servers, storage solutions and the sale of semiconductors. The company also offers installation services for its more complex hardware products. Revenue...

  • Page 87
    ... 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 88
    ... and other liabilities in the Consolidated Statement of Financial Position, are presented in the following tables: Standard Warranty Liability ($ in millions) 2015 2014 insurance and office rental. In addition, general and administrative expense includes other operating items such as an allowance...

  • Page 89
    ... accounting, valuation and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the Consolidated Financial Statements from the acquisition date. Environmental The cost of internal environmental protection programs...

  • Page 90
    ... prior service granted in plan amendments. The measurement of benefit obligations and net periodic cost/ (income) is based on estimates and assumptions approved by the company's management. These valuations reflect the terms of the plans and use participant-specific information such as compensation...

  • Page 91
    ... Financial Statements International Business Machines Corporation and Subsidiary Companies 89 Translation of Non-U.S. Currency Amounts Assets and liabilities of non-U.S. subsidiaries that have a local functional currency are translated to United States (U.S.) dollars at year-end exchange rates...

  • Page 92
    ...to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies currency denominated debt (included in the company's debt risk management program as addressed in note D, "Financial Instruments," on pages 101 through 105), cash flows directly associated with...

  • Page 93
    ... cost or market. Cash flows related to the sale of inventories are reflected in net cash provided by operating activities in the Consolidated Statement of Cash Flows. Allowance for Credit Losses Receivables are recorded concurrent with billing and shipment of a product and/or delivery of a service...

  • Page 94
    ... common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock awards, convertible notes and stock options. NOTE B. ACCOUNTING CHANGES New Standards to be Implemented In January 2016, the Financial Accounting Standards Board...

  • Page 95
    ...the 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. 2015 In 2015, the company completed fourteen acquisitions at an aggregate cost of $3,555 million. Merge Healthcare, Inc. (Merge)-On...

  • Page 96
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies cross-reference medical images against billions of data points already in the Watson Health Cloud. Goodwill of $695 million has been assigned to the Software segment. At the acquisition date...

  • Page 97
    ...identity and access management solutions. The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2014. 2014 Acquisitions ($ in millions) Amortization Life (in Years) Total Acquisitions Current assets Fixed assets...

  • Page 98
    ...Life (in Years) SoftLayer Other Acquisitions Current assets Fixed assets/noncurrent assets Intangible assets Goodwill Completed technology Client relationships In-process R&D Patents/trademarks Total assets acquired Current liabilities Noncurrent liabilities Total liabilities assumed Total purchase...

  • Page 99
    ...over two years. Reporting the related assets and liabilities initially as held for sale at September 30, 2014 was based on meeting all of the criteria for such reporting in the applicable accounting guidance. While the company met certain criteria for held for sale reporting in prior periods, it did...

  • Page 100
    ... April 17, 2012, the company announced that it had signed a definitive agreement with Toshiba TEC for the sale of its Retail Store Solutions business. As part of the transaction, the company agreed to transfer the maintenance business to Toshiba TEC within three years of the original closing of the...

  • Page 101
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 99 2013-In the first quarter of 2013, the company completed the divestiture of its Showcase Reporting product set to Help/Systems. In the fourth quarter of 2013, the company completed two...

  • Page 102
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies ($ in millions) At December 31, 2014: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit Commercial paper Money market funds U.S. government...

  • Page 103
    ... in the Consolidated Statement of Earnings. The adjusted cost basis of these securities was $185 million as of December 31, 2015. Sales of debt and available-for-sale equity investments during the period were as follows: ($ in millions) For the year ended December 31: 2015 2014 2013 ($ in millions...

  • Page 104
    102 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency ...

  • Page 105
    ....1 billion, respectively. Equity Risk Management The company is exposed to market price changes in certain broad market indices and in the company's own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded...

  • Page 106
    ... instrument-related risk management activity as of December 31, 2015 and 2014, as well as for the years ended December 31, 2015, 2014 and 2013, respectively. Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position ($ in millions) Fair Value of Derivative Assets At...

  • Page 107
    ...Effectiveness Testing (3) 2015 2014 2013 Consolidated Statement of 2013 Earnings Line Item Derivative instruments in cash ï¬,ow hedges Interest rate contracts Foreign exchange contracts $ - 618 $ - 958 $ - Interest expense 43 Other (income) and expense Cost of sales SG&A expense Instruments in net...

  • Page 108
    ... to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Client loan and installment payment financing contracts are priced independently at competitive market rates. The company has a history of...

  • Page 109
    ...placed on a non-accrual status. The following tables present impaired client loan receivables at December 31, 2015 and 2014. ($ in millions) At December 31, 2015: Recorded Investment Related Allowance Financing receivables Lease receivables Loan receivables Ending balance Collectively evaluated for...

  • Page 110
    ... 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 periodically...

  • Page 111
    ... International Business Machines Corporation and Subsidiary Companies 109 Past Due Financing Receivables ($ in millions) Total Past Due > 90 Days* Total Financing Receivables* Recorded Investment > 90 Days and Accruing At December 31, 2015: Current* Major markets Growth markets Total lease...

  • Page 112
    ... Equity method Non-equity method Prepaid software Long-term deposits Other receivables Employee benefit-related Prepaid income taxes Other assets Total $1,624 702 $1,527 681 * Other intangibles are primarily acquired proprietary and nonproprietary business * Deferred transition and setup costs...

  • Page 113
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 111 Goodwill The changes in the goodwill balances by reportable segment, for the years ended December 31, 2015 and 2014, are as follows: ($ in millions) Foreign Currency Translation and ...

  • Page 114
    112 Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Long-Term Debt Pre-Swap Borrowing ($ in millions) At December 31: Maturities 2015 2014 U.S. dollar notes and debentures (average interest rate at December 31, 2015): 2.80% 3.34% 1....

  • Page 115
    ...-rate debt. (See note D, ** Reclassified to reflect adoption of the FASB guidance on debt issuance costs in consolidated financial statements. Refer to note B, "Accounting Changes," for additional information. Pre-swap annual contractual maturities of long-term debt outstanding at December 31, 2015...

  • Page 116
    ... 31: 2015 2014 Income tax reserves Excess 401(k) Plus Plan Disability benefits Derivative liabilities Special restructuring actions Workforce reductions Deferred taxes Other taxes payable Environmental accruals Warranty accruals Asset retirement obligations Acquisition related Divestiture related...

  • Page 117
    ...Financial Statements International Business Machines Corporation and Subsidiary Companies 115 Other Stock Transactions The company issued the following shares of common stock as part of its stock-based compensation plans and employees stock purchase plan: 6,013,875 shares in 2015, 7,687,026 shares...

  • Page 118
    ...Financial Statements International Business Machines Corporation and Subsidiary Companies ($ in millions) For the year ended December 31, 2014: Before Tax Amount Tax (Expense)/ Benefit Net of Tax Amount Other comprehensive income/(loss) Foreign currency translation adjustments Net changes related...

  • Page 119
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 117 ($ 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 120
    ... issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company's pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and...

  • Page 121
    ... 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 breached its implied duty of good faith both in implementing these changes and in the manner in which it consulted with employees...

  • Page 122
    ... In May 2015, a related putative class action was also commenced in the United States District Court for the Southern District of New York based on the same underlying facts, alleging violations of the Employee Retirement Income Security Act. The company, management's Retirement Plans Committee, and...

  • Page 123
    ...to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 121 The income from continuing operations provision for income taxes by geographic operations is as follows: ($ in millions) For the year ended December 31: 2015 2014 2013 U.S. operations Non...

  • Page 124
    ...Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Deferred Tax Liabilities ($ in millions) At December 31: 2015 2014 Depreciation Retirement benefits Goodwill and intangible assets Leases Software development costs Deferred transition...

  • Page 125
    ...per share of common stock. ($ in millions except per share amounts) For the year ended December 31: 2015 2014 2013 Weighted-average number of shares on which earnings per share calculations are based Basic Add-incremental shares under stock-based compensation plans Add-incremental shares associated...

  • Page 126
    ... table presents total stock-based compensation cost included in income from continuing operations. ($ in millions) For the year ended December 31: 2015 2014 2013 Incentive Awards Stock-based incentive awards are provided to employees under the terms of the company's long-term performance plans...

  • Page 127
    ... Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 125 Committee. Awards that are given as part of annual total compensation for senior management and other employees are made on specific cycle dates scheduled in advance. With respect to awards...

  • Page 128
    ...benefits realized by the company for the years ended December 31, 2015, 2014 and 2013 were $228 million, $222 million and $312 million, respectively. Stock Options Stock options are awards which allow the employee to purchase shares of the company's stock at a fixed price. Stock options are granted...

  • Page 129
    ... stock units, outstanding at December 31, 2015, as a result of the company's conversion of stock-based awards previously granted by the acquired entities. The weighted-average exercise price of these awards was $50 per share. U.S. Plans Defined Benefit Pension Plans IBM Personal Pension Plan IBM...

  • Page 130
    ... eligible to receive company match and automatic contributions (at the same rate as under the 401(k) Plus Plan) on eligible compensation deferred into the Excess 401(k) and on compensation earned in excess of the Internal Revenue Code pay limit once they have completed one year of service. Amounts...

  • Page 131
    ...Financial Information The following 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: 2015 2014 2013 2015 Non-U.S. Plans 2014 2013 2015 Total 2014...

  • Page 132
    ...periodic (income)/cost of the retirement-related 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: 2015 2014 2013 2015 Non-U.S. Plans 2014 2013 Service...

  • Page 133
    ... the benefit obligation assuming no future participant 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: 2015 2014...

  • Page 134
    ... the retirement-related benefit plans. The following table presents the pre-tax estimated net loss, estimated prior service costs/(credits) and estimated transition (assets)/ liabilities of the retirement-related benefit plans that will be amortized from AOCI into net periodic (income)/cost in 2016...

  • Page 135
    ...-related benefit plans. Defined Benefit Pension Plans U.S. Plans 2015 2014 2013 2015 Non-U.S. Plans 2014 2013 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 136
    ... 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, 2015, 2014 and 2013, the expected long-term return on plan assets and the actual return on those assets were not material. Rate of Compensation...

  • Page 137
    ... next eight years. A one percentage point increase or decrease in the assumed healthcare cost trend rate would not have had a material effect on 2015, 2014 and 2013 net periodic cost or the benefit obligations as of December 31, 2015 and 2014. Plan Assets Retirement-related benefit plan assets are...

  • Page 138
    ... 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, 2015. The U.S. Plan...

  • Page 139
    Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies 137 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 consists of the Qualified ...

  • Page 140
    ... 2014 for the non-U.S. Plans. ($ in millions) Government and Related Corporate Bonds Private Equity Other Private Commingled/ Real Estate Mutual Funds Total Balance at January 1, 2015 Return on assets held at end of year Return on assets sold during the year Purchases, sales and settlements, net...

  • Page 141
    ... or discounted cash flows and are generally classified as Level 2. If available, they are valued using the closing price reported on the major market on which the individual securities are traded. Cash includes money market accounts that are valued at their cost plus interest on a daily basis...

  • Page 142
    ... to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies Defined Contribution Plans The company contributed $1,117 million and $1,239 million in cash to the defined contribution plans during the years ended December 31, 2015 and 2014, respectively...

  • Page 143
    ... the services. The Global Services segments enter into arm's-length loans at prices equivalent to market rates with Global Financing to facilitate the acquisition of equipment used in services engagements. All internal transaction prices are reviewed annually, and reset if appropriate. The company...

  • Page 144
    ... for the prior-year periods. Management System Segment View ($ in millions) Global Services Segments Global Technology Services Global Business Services Systems Hardware Global Financing Total Segments For the year ended December 31: Software 2015 External revenue Internal revenue Total revenue...

  • Page 145
    ... of IBM as Reported ($ in millions) For the year ended December 31: 2015 2014 2013 Segment Assets and Other Items Global Technology Services assets are primarily plant, property and equipment, including the assets associated with the outsourcing business, goodwill, accounts receivable, deferred...

  • Page 146
    ... International Business Machines Corporation and Subsidiary Companies Management System Segment View ($ in millions) Global Services Segments Global Technology Services Global Business Services Systems Hardware Global Financing Total Segments For the year ended December 31: Software 2015 Assets...

  • Page 147
    ... year ended December 31: 2015 2014 2013 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 assets...

  • Page 148
    ... license charges and ongoing subscription and support are reported as Software; Software-as-a-Service, consulting, education, training and other product-related services are reported as Services; and appliances are reported as Systems. ($ in millions) For the year ended December 31: 2015 2014* 2013...

  • Page 149
    ... Financial Data International Business Machines Corporation and Subsidiary Companies 147 ($ in millions except per share amounts) For the year ended December 31: 2015 2014 2013 2012 2011 Revenue Income from continuing operations Loss from discontinued operations, net of tax Net income Operating...

  • Page 150
    ...The stock prices reflect the high and low prices for IBM's common stock on the New York Stock Exchange composite tape for the periods presented. *** Refer to page 70 of the company's first-quarter 2015 Form 10-Q filed on April 28, 2015, page 85 of the company's second-quarter 2015 Form 10-Q filed on...

  • Page 151
    Performance Graph International Business Machines Corporation and Subsidiary Companies 149 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 152
    150 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* Retired President Salk Institute for Biological Studies Kenneth I. Chenault Chairman and ...

  • Page 153
    ... to receive future IBM Annual Reports and Proxy Statements online through this site. For answers to general questions about IBM from within the continental United States, call (800) IBM-4YOU. From outside the United States, Canada and Puerto Rico, call (914) 499-1900. IBM Investor Services Program...

  • Page 154
    ... Business Machines Corporation New Orchard Road, Armonk, New York 10504 (914) 499-1900 AlchemyAPI, Aspera, Blekko, Blue Box, Bluemix, Clearleap, Cloudant, Daeja, Explorys, Fiberlink, FlashSystem, Gravitant, IBM, IBM Watson, ILOG, Kenexa, OpenPOWER, Phytel, POWER, POWER8, Power Systems, Rational...

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