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63
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Events that could temporarily change the historical cash flow
dynamics discussed previously include significant changes in
operating results, material changes in geographic sources of cash,
unexpected adverse impacts from litigation, future pension funding
requirements during periods of severe downturn in the capital mar-
kets or the timing of tax payments. Whether any litigation has such
an adverse impact will depend on a number of variables, which are
more completely described in noteM, “Contingencies and Com-
mitments,” on pages 118 to 120. With respect to pension funding, in
2015, the company contributed $514million to its non-U.S. defined
benefit plans versus $519million in 2014. As highlighted in the Con-
tractual Obligations table, the company expects to make legally
mandated pension plan contributions to certain non-U.S. plans of
approximately $2.5billion in the next five years. The 2016 contri-
butions are currently expected to be approximately $500million.
Contributions related to all retirement-related plans is expected to
be approximately $2.6billion 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.
The company is not quantifying any further impact from pension
funding because it is not possible to predict future movements in
the capital markets or pension plan funding regulations.
The Pension Protection Act of 2006 was enacted into law in
2006, and, among other things, increased the funding require-
ments for certain U.S. defined benefit plans beginning after
December31, 2007. No mandatory contribution is required for
the U.S. defined benefit plan in 2016 as of December31, 2015.
The company’s U.S. cash flows continue to be sufficient to fund
its current domestic operations and obligations, including invest-
ing and financing activities such as dividends and debt service.
The company’s U.S. operations generate substantial cash flows,
and, in those circumstances where the company has additional
cash requirements in the U.S., the company has several liquidity
options available. These options may include the ability to borrow
additional funds at reasonable interest rates, utilizing its commit-
ted global credit facility, repatriating certain foreign earnings and
utilizing intercompany loans with certain foreign subsidiaries.
The company does earn a significant amount of its pre-tax
income outside the U.S. The company’s policy is to indefinitely
reinvest the undistributed earnings of its foreign subsidiaries, and
accordingly, no provision for federal income taxes has been made
on accumulated earnings of foreign subsidiaries. The company
periodically repatriates a portion of these earnings to the extent
that it does not incur an additional U.S. tax liability. Quantification
of the deferred tax liability, if any, associated with indefinitely rein-
vested earnings is not practicable. While the company currently
does not have a need to repatriate funds held by its foreign sub-
sidiaries, if these funds are needed for operations and obligations
in the U.S., the company could elect to repatriate these funds
which could result in a reassessment of the company’s policy and
increased tax expense.
Contractual Obligations
($ inmillions)
Total Contractual
Payment Stream
Payments Due In
2016 2017–18 2019–20 After 2020
Long-term debt obligations $38,805 $ 5,266 $10,360 $ 8,504 $14,675
Interest on long-term debt obligations 9,688 1,184 1,892 1,252 5,360
Capital (fi nance) lease obligations 15744—
Operating lease obligations 6,435 1,347 2,338 1,761 988
Purchase obligations 3,057 764 1,093 1,154 45
Other long-term liabilities:
Minimum defi ned benefi t plan pension funding (mandated)* 2,500 500 1,000 1,000 —
Excess 401(k) Plus Plan 1,621 176 385 430 630
Long-term termination benefi ts 1,164 221 195 131 617
Tax rese r ves** 3,014 413
Divestiture related 1,158 692 377 66 23
Other 977 95 123 91 667
Total $68,434 $10,666 $17,767 $14,393 $23,006
*
As funded status on plans will vary, obligations for mandated minimum pension payments after 2020 could not be reasonably estimated.
** These amounts represent the liability for unrecognized tax benefits. The company estimates that $413million of the liability is expected to be settled within the next 12months.
The settlement period for the noncurrent portion of the income tax liability cannot be reasonably estimated as the timing of the payments will depend on the progress of tax
examinations with the various tax authorities; however, it is not expected to be due within the next 12months.