FINANCIAL REPORT
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Report of Management 50
Report of Independent Accountants 51
Management Discussion 52
Consolidated Financial Statements
EARNINGS 64
FINANCIAL POSITION 65
STOCKHOLDERS' EQUITY 66
CASH FLOWS 68
Notes to Consolidated Financial Statements
A SIGNIFICANT ACCOUNTING POLICIES 69
B ACCOUNTING CHANGES 71
C COMMON STOCK SPLIT 72
D ACQUISITIONS/DIVESTITURES 72
E INVENTORIES 74
F FINANCING RECEIVABLES 74
G PLANT, RENTAL MACHINES AND OTHER PROPERTY 74
H INVESTMENTS AND SUNDRY ASSETS 74
I SALE AND SECURITIZATION OF RECEIVABLES 74
J BORROWINGS 75
K FINANCIAL INSTRUMENTS 76
L OTHER LIABILITIES 78
M STOCKHOLDERS' EQUITY ACTIVITY 79
N CONTINGENCIES 79
O TAXES 80
P ADVERTISING 81
Q 1999 ACTIONS 81
R RESEARCH, DEVELOPMENT AND ENGINEERING 82
S EARNINGS PER SHARE OF COMMON STOCK 83
T RENTAL EXPENSE AND LEASE COMMITMENTS 83
U STOCK-BASED COMPENSATION PLANS 84
V RETIREMENT PLANS 85
W NONPENSION POSTRETIREMENT BENEFITS 88
X SEGMENT INFORMATION 89
Five-Year Comparison of Selected Financial Data 94
Selected Quarterly Data 94
Stockholder Information 95
Board of Directors and Senior Management 96
PAGE NO.
FORTY-NINE
REPORT OF MANAGEMENT
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Responsibility for the integrity and objectivity of the financial information
presented in this Annual Report rests with IBM management. The accompanying
financial statements have been prepared in conformity with generally accepted
accounting principles, applying certain estimates and judgments as required.
IBM maintains an effective internal control structure. It consists, in
part, of organizational arrangements with clearly defined lines of
responsibility and delegation of authority, and comprehensive systems and
control procedures. We believe this structure provides reasonable assurance that
transactions are executed in accordance with management authorization, and that
they are appropriately recorded in order to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
adequately safeguard, verify and maintain accountability of assets. An important
element of the control environment is an ongoing internal audit program.
To assure the effective administration of internal control, we carefully
select and train our employees, develop and disseminate written policies and
procedures, provide appropriate communication channels, and foster an
environment conducive to the effective functioning of controls. We believe that
it is essential for the company to conduct its business affairs in accordance
with the highest ethical standards, as set forth in the IBM Business Conduct
Guidelines. These guidelines, translated into numerous languages, are
distributed to employees throughout the world, and reemphasized through internal
programs to assure that they are understood and followed.
PricewaterhouseCoopers LLP, independent accountants, is retained to
examine IBM's financial statements. Its accompanying report is based on an
examination conducted in accordance with generally accepted auditing standards,
including a review of the internal control structure and tests of accounting
procedures and records.
The Audit Committee of the Board of Directors is composed solely of
outside directors, and is responsible for recommending to the Board the
independent accounting firm to be retained for the coming year, subject to
stockholder approval. The Audit Committee meets periodically and privately with
the independent accountants, with our internal auditors, as well as with IBM
management, to review accounting, auditing, internal control structure and
financial reporting matters.
/s/ Louis V. Gerstner, Jr. /s/ John R. Joyce
Louis V. Gerstner, Jr. John R. Joyce
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
PAGE NO.
FIFTY
REPORT OF INDEPENDENT ACCOUNTANTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
To the Stockholders and Board of Directors of
International Business Machines Corporation:
In our opinion, the accompanying consolidated financial statements, appearing on
pages 64 through 93, present fairly, in all material respects, the financial
position of International Business Machines Corporation and subsidiary companies
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
January 17, 2001
PAGE NO.
FIFTY-ONE
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
OVERVIEW OF 2000
IBM finished the year 2000 with a strong fourth quarter performance after three
challenging quarters. The company's revenue, net income and earnings per share
again reached record levels and cash flow was strong. In many respects, the
full-year financial performance reflects momentum that had been building
steadily all year, momentum that is an affirmation of the strategies adopted
over the last several years: a focus on services and solutions; powerful,
scalable servers; and open-source platforms. The company also had solid
full-year results in the strategic high-growth areas of services, middleware
software and technology. In addition, Global Services ended the year with a
strong backlog of services contracts totaling $85 billion, up from $60 billion
at year-end 1999.
The company reported revenue of $88.4 billion, net income of $8.1 billion
and $4.44 diluted earnings per common share. The effects of adverse currency
movements lowered year-to-year revenue growth from approximately 4 percent at
constant currency to 1 percent on an as reported basis. In Europe/Middle
East/Africa, revenue declined 5 percent (up 6 percent at constant currency).
Asia Pacific revenue grew 16 percent (15 percent at constant currency). In the
Americas, revenue decreased 0.5 percent (flat at constant currency).
In 2000, aggressive focus on cost and expense management improved the
company's gross profit margin (despite a changing mix of business) and net
income margin. The company continued to use technology and other productivity
improvements to enhance the efficiency of its operations, particularly by
increasing the revenue generation and customer service capabilities of ibm.com
and significantly increasing electronic processing within the procurement
function.
The company ended 2000 with cash and cash equivalents and current
marketable securities of $3.7 billion, after funding investments of over $18
billion in capital expenditures; research, development and engineering;
strategic acquisitions; and repurchases of common stock. During 2000, the
company announced a multi-year, $5 billion program to build an advanced
chip-making facility and to expand operations at its worldwide technology
facilities. Share repurchases resulted in common shares outstanding at year-end
2000 of 1.74 billion, down 2 percent compared with 1.78 billion last year.
During 2000, the company's non-global financing related debt was reduced while
Global Financing debt increased in line with the asset growth of the Global
Financing business.
CHALLENGES
The company's broad portfolio and geographic diversification position it well
relative to its competitors in 2001. The company's top priority is to build on
the momentum of last year, driven, for the most part, by business strategies
taking hold; the marketplace moving in the company's direction; demand
increasing for IBM's products and services (particularly e-business applications
and services); and the company's improved execution.
In 2001, the company faces concerns that economic softness in the United
States could worsen and expand into non-U.S. markets. Increasingly aggressive
price competition and the potential effects of ongoing adverse currency
movements are other areas of volatility.
Yet, even against a backdrop of uncertainty, the company is in a unique
competitive position. Its traditional customer base--essentially large, global
institutions--requires the technology and services of the company to improve
competitiveness, in both good times and bad. The company's ability to integrate
complex technologies across the full range of computing platforms sets it apart
from competitors.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements contained in this Annual Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks,
uncertainties and other factors that could cause actual results to be materially
different, as discussed more fully elsewhere in this Annual Report and in the
company's filings with the Securities and Exchange Commission, including the
company's 2000 Form 10-K to be filed on or about March 12, 2001.
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS
EXCEPT PER SHARE AMOUNTS) 2000 1999 1998
======================================================================
Revenue $88,396 $ 87,548 $ 81,667
Cost 55,972 55,619 50,795
- ----------------------------------------------------------------------
Gross profit 32,424 31,929 30,872
Gross profit margin 36.7% 36.4% 37.8%
Total expense 20,890 20,172 21,832
- ----------------------------------------------------------------------
Income before
income taxes 11,534 11,757 9,040
- ----------------------------------------------------------------------
Net income $ 8,093 $ 7,712 $ 6,328
======================================================================
Earnings per share
of common stock:
Assuming dilution $ 4.44 $ 4.12 $ 3.29
Basic $ 4.58 $ 4.25 $ 3.38
PAGE NO.
FIFTY-TWO
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The average number of common shares outstanding assuming dilution was lower by
59.0 million shares in 2000 versus 1999 and 49.1 million shares in 1999 versus
1998, primarily as a result of the company's common share repurchase program.
The average number of shares outstanding assuming dilution was 1,812.1 million,
1,871.1 million and 1,920.1 million, respectively, at December 31, 2000, 1999
and 1998.
The following table identifies the company's percentage of revenue by
segment:
2000 1999* 1998*
======================================================
Hardware 42.7% 43.3% 44.2%
Global Services 37.5 36.7 35.4
Software 14.3 14.5 14.5
Global Financing 3.9 3.6 3.5
Enterprise Investments/
Other 1.6 1.9 2.4
- ------------------------------------------------------
Total 100.0% 100.0% 100.0%
======================================================
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
The overall gross profit margin of 36.7 percent increased 0.3 points from 1999,
following a 1.4 point decline in 1999 versus 1998. The increase in gross profit
margin was primarily driven by improvement in the hardware margin associated
with microelectronics and personal computer products. This increase was
partially offset by a lower Global Services margin and the company's continued
shift in revenue to Global Services, which has a lower gross profit margin than
the company's server products. The decline in 1999 versus 1998 was primarily due
to the company's changing mix of revenue toward Global Services and away from
server products.
In the Americas, full-year 2000 revenue was $38.6 billion, down 0.5
percent (flat at constant currency) from the 1999 period. Revenue from
Europe/Middle East/Africa was $24.3 billion, a decrease of 5.3 percent (up 6
percent at constant currency). Asia Pacific revenue grew 16.4 percent (15
percent at constant currency) to $17.7 billion. Original equipment manufacturer
(OEM) revenue decreased 0.9 percent (1 percent decrease at constant currency) to
$7.8 billion.
Information about the company's operating segments can be found in note X,
"Segment Information," on pages 89 through 93. Note X provides additional
information, including a description of the products and services of each
segment, as well as financial data pertaining to each segment.
The following discussion is based on the Consolidated Financial Statements
on pages 64 through 68, which reflect, in all material respects, the company's
segment results on an external basis.
HARDWARE
(DOLLARS IN MILLIONS) 2000 1999* 1998*
========================================================
Revenue $37,777 $37,888 $36,096
Cost 27,038 27,591 24,653
- --------------------------------------------------------
Gross profit $10,739 $10,297 $11,443
========================================================
Gross profit margin 28.4% 27.2% 31.7%
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
Hardware revenue was essentially flat (up 2 percent at constant currency) in
2000 versus 1999 and increased 5.0 percent (5 percent at constant currency) in
1999 compared with 1998.
In January 2000, the company reorganized the Server segment and renamed it
the Enterprise Systems segment. In accordance with that organizational change,
the company transferred system-level product businesses from the Technology
segment to the Enterprise Systems segment. Those system-level product businesses
are the company's disk storage products, which include the Enterprise Storage
Server known as "Shark," tape subsystems and the company's storage area
networking program, and networking products. Also, in January 2000, the company
transferred the Retail Store Solutions business, a leader in providing
point-of-sale solutions, to the Personal Systems segment from the Enterprise
Investments segment. All amounts disclosed herein for all years presented have
been reclassified to conform with these changes.
Technology revenue increased 4.0 percent when compared with 1999,
following an increase of 13.0 percent in 1999 versus 1998. The increase in 2000
revenue was driven by strong growth in custom logic, networking and pervasive
computing products, partially offset by lower hard disk drive (HDD) revenue.
Although HDD revenue declined for the full year due primarily to delays in the
10K RPM drive, revenue sequentially improved each quarter in 2000 and from the
1999 fourth quarter to the 2000 fourth quarter.
The Technology segment results were also affected by supply constraints of
wafers and ceramic substrates in the second half of 2000. In both cases, strong
demand for these items from internal users and external OEM customers exceeded
the company's ability to supply these components. The company improved its
ability to manage this challenge toward the end of the year through short-term
and strategic actions. In addition, on October 10, 2000, the company announced
plans to invest $5.0 billion in the following projects: (1) building an advanced
chip-making facility in East Fishkill, New York; (2) expanding its chip-making
capacity in Burlington, Vermont and Yasu, Japan, as well as at a joint venture
in Essonnes, France; and (3) expanding its organic and ceramic chip-packaging
operations worldwide.
PAGE NO.
FIFTY-THREE
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The company took actions in 1999 in the microelectronics and storage areas
that were aimed at strengthening the Technology segment over the long term.
Those actions were intended to shift the focus of the Technology segment to
higher margin businesses and more efficient operations. To further achieve these
goals, the company sold its MiCRUS semiconductor business in June 2000. (See
note Q, "1999 Actions," on pages 81 and 82 for additional information.)
Strong growth in OEM technology, primarily custom logic and
high-performance static random access memory (SRAM) revenue drove the increase
in 1999 revenue. A slower growth rate in HDD storage revenue in 1999 versus 1998
reflected pricing pressures.
Personal Systems revenue grew 0.8 percent in 2000 from 1999, following an
increase of 20.1 percent in 1999 versus 1998. The change in 2000 revenue was
driven by increased revenue in xSeries servers and mobile products, partially
offset by lower desktop personal computer and retail store solutions revenue.
The decline in desktop revenue was driven by consumer products, as the company
decided in 1999 to exit retail channels in the United States and Europe. The
Personal Systems segment has benefited from the companywide focus on building a
competitive cost and expense structure, which has been crucial in enabling the
company to price personal computers competitively. The segment was profitable
for the second half of 2000 despite a challenging industry environment. The
increase in 1999 revenue versus 1998 was primarily driven by strong revenue
growth in Netfinity servers and mobile products. Mobile revenue was constrained
due to a shortage of flat-panel displays in the second half of 1999.
In October 2000, the company announced IBM eServers to manage the
unprecedented demands of e-business. This new generation of servers features
mainframe-class reliability and scalability, broad support of open standards for
the development of new applications, and capacity on demand. The new servers
feature technology from the company's high-end server brands and share the best
attributes of all mainframe-class computing. The entire IBM eServer family uses
Tivoli e-infrastructure management software which manages all components of a
heterogeneous e-business infrastructure.
IBM zSeries mainframe servers are at the heart of the e-business
infrastructure for mission-critical data and transaction processing.
IBM pSeries servers are the most powerful, technologically advanced UNIX
servers.
IBM iSeries mid-range servers are integrated mid-range business servers
that run sophisticated business applications.
IBM xSeries servers are Intel-based servers.
In 2000, Enterprise Systems revenue declined 1.4 percent from 1999,
following a decrease of 16.9 percent in 1999 versus 1998. Revenue grew for the
pSeries UNIX servers with particular strength in the mid-range and high-end Web
servers in 2000 versus 1999. This increase was more than offset by revenue
declines for the mid-range iSeries servers and the zSeries servers in 2000 as
compared to 1999. Although zSeries servers revenue declined, total deliveries of
computing power increased more than 20 percent as measured in MIPS (millions of
instructions per second) versus 1999. In addition, revenue from the company's
storage systems products, which include "Shark," increased year over year, while
revenue from networking products declined, consistent with the company's
divestment strategy.
In 1999, lower revenue primarily from S/390, AS/400 and RS/6000 servers
drove the revenue decline versus 1998. These declines were primarily driven by
Y2K-related issues that affected the second-half results. Many of the company's
large customers locked down their systems and technology purchases heading into
the Y2K transition. In addition, the storage networking product decreases
resulted, in part, from the sale of routing and switching intellectual property
to Cisco Systems, Inc.
Hardware gross profit dollars increased 4.3 percent in 2000 from 1999,
following a 10.0 percent decline in 1999 versus 1998. The increase in gross
profit dollars was primarily driven by increased revenue and improvements in the
gross profit margin for microelectronics and personal computers. The decline in
gross profit dollars in 1999 resulted from a shift in the company's revenue away
from servers, pricing pressures associated with HDDs, and memory chip price
declines.
The hardware gross profit margin increased in 2000 by 1.2 points versus
1999 and declined 4.5 points in 1999 compared to 1998. The increase in 2000 was
primarily driven by improved margins in microelectronics and personal computers.
The decrease in 1999 was driven by the shift in the company's revenue away from
servers to lower gross profit products, such as personal computers, OEM chip
technology and HDDs, as well as price pressures.
GLOBAL SERVICES
(DOLLARS IN MILLIONS) 2000 1999 1998
====================================================================
Revenue $ 33,152 $ 32,172 $ 28,916
Cost 24,309 23,304 21,125
- --------------------------------------------------------------------
Gross profit $ 8,843 $ 8,868 $ 7,791
====================================================================
Gross profit margin 26.7% 27.6% 26.9%
PAGE NO.
FIFTY-FOUR
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Global Services revenue increased 3.0 percent (6 percent at constant
currency) in 2000 over 1999 and 11.3 percent (11 percent at constant currency)
in 1999 over 1998. Revenue comparisons in 2000 were adversely affected by two
events: the sale of the Global Network to AT&T in 1999 and the decline in Y2K
services activity year over year. After adjusting for those two factors, Global
Services revenue (excluding maintenance) increased 9 percent in 2000 and 17
percent in 1999. (See note D, "Acquisitions/Divestitures," on pages 72 through
74 for additional information about the Global Network sale.) Maintenance
revenue was flat in 2000 when compared to 1999 and declined 1 percent in 1999
versus 1998.
Strategic Outsourcing Services and Integrated Technology Services were the
major contributors to the revenue growth in 2000 and 1999. Strategic Outsourcing
Services continued to demonstrate good revenue growth in 2000 as compared to
1999, with particularly strong growth in Asia Pacific. Integrated Technology
Services benefited from growth in OEM alliance revenue, especially as related to
Cisco Systems products. These increases were partially offset by the loss of
revenue due to the sale of the Global Network and lower revenue growth from
Business Innovation Services primarily resulting from the decline in Y2K
activity. Business Innovation Services recovered in the second half of 2000 as
customers shifted from mature offerings such as custom systems integration and
Y2K remediation to the company's e-business offerings. Business Innovation
Services revenue, exclusive of Y2K and custom systems integration, experienced
strong growth in 2000.
e-business spans many of the Global Services offerings and contributed
significantly to 2000 performance. The company's total discrete e-business
revenue grew more than 70 percent to approximately $5 billion in 2000. This
increase was driven by e-commerce consulting, e-business enablement and
e-hosting services.
In 2000, the company signed contracts totaling $55 billion, including 60
contracts in excess of $100 million, 6 of which exceeded $1 billion. These
transactions contributed to a services backlog at December 31, 2000, of $85
billion compared with $60 billion at December 31, 1999. The company continued to
meet the demand for its services by hiring more than 19,000 employees in 2000
and 17,000 employees in 1999.
Global Services gross profit dollars were essentially flat in 2000
compared to 1999 and increased 13.8 percent in 1999 versus 1998. The decline in
gross profit margin in 2000 of 0.9 points was driven by lower utilization rates
in Business Innovation Services and Integrated Technology Services due to rapid
hiring and retraining associated with rebalancing skills toward e-business
services. Also contributing to the decline was a revenue shift to OEM alliances,
which have a lower gross profit margin. The maintenance gross profit margin
improved 0.6 points in 2000 versus 1999 due to continued productivity
improvements and effective cost management.
Global Services gross profit dollars and gross profit margins improved in
1999 as compared with 1998 due to significant productivity improvements that
more than offset competitive pressures and the negative effect of the changing
mix of services and maintenance within the Global Services portfolio.
SOFTWARE
(DOLLARS IN MILLIONS) 2000 1999 1998
===============================================================
Revenue $ 12,598 $ 12,662 $ 11,863
Cost 2,283 2,240 2,260
- ---------------------------------------------------------------
Gross profit $ 10,315 $ 10,422 $ 9,603
===============================================================
Gross profit margin 81.9% 82.3% 80.9%
Software revenue declined 0.5 percent (up 4 percent at constant currency) in
2000 from 1999, following an increase of 6.7 percent (8 percent at constant
currency) from 1998. The company's middleware products had revenue growth of 3
percent in 2000 and 12 percent in 1999. Middleware comprises data management,
transaction processing, Tivoli systems management and Lotus Notes messaging and
collaboration for both IBM and non-IBM platforms. This growth was driven by the
company's key products on UNIX and Windows NT platforms, led by WebSphere (Web
application server software), MQSeries (business integration software) and DB2
(data management) offerings. These increases in middleware revenue were
partially offset by revenue declines for Tivoli products as they were affected
by a transition in the systems management software marketplace. The company
continues to focus on helping customers use its software to transform their
businesses to e-businesses, particularly in collaboration with the company's
Global Services offerings, Independent Software Vendors, Web integrators and
other service providers.
Operating systems software revenue declined 9 percent in 2000 and 4
percent in 1999 when compared with the previous period. The decline in 2000 was
driven by lower revenue associated with eSeries servers and legacy products. The
1999 decline was driven by lower AS/400 revenue.
Software gross profit dollars decreased 1.0 percent in 2000 from 1999,
following an increase of 8.5 percent in 1999 from 1998. The decline in gross
profit dollars in 2000 was primarily because of lower revenue, higher costs for
purchased vendor software and higher vendor royalty payments, partially offset
by lower amortization and services costs. Increased revenue and lower
amortization costs associated with previously capitalized software development
spending drove the 1999 improvement, partially offset by higher vendor royalty
payments primarily due to increased volumes.
PAGE NO.
FIFTY-FIVE
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
GLOBAL FINANCING
(DOLLARS IN MILLIONS) 2000 1999 1998
==========================================================
Revenue $ 3,465 $ 3,137 $ 2,877
Cost 1,595 1,446 1,494
- ----------------------------------------------------------
Gross profit $ 1,870 $ 1,691 $ 1,383
==========================================================
Gross profit margin 54.0% 53.9% 48.1%
Global Financing revenue increased 10.4 percent (13 percent at constant
currency) in 2000 from 1999, following an increase of 9.0 percent (10 percent at
constant currency) in 1999 versus 1998. Growth in sales of used equipment and in
commercial financing drove the revenue increase in 2000. The revenue increase in
1999 over 1998 was due to growth in commercial financing and in financing of
software and services.
Gross profit dollars increased 10.6 percent in 2000 versus 1999, following
an increase of 22.3 percent in 1999 over 1998. The increase in 2000 was
primarily driven by higher sales of used equipment and an improving gross profit
margin on these sales. The increase in 1999, as well as in 2000, reflects the
company's ongoing strategy to increase its use of the Global Treasury Centers
rather than have the Global Financing business directly access external funding
sources. This strategy minimizes the company's overall cost of borrowing via an
efficient and economical centralized funding strategy that enables the company
to access the global capital markets. This results in a shift of some costs
within the Consolidated Statement of Earnings from Cost of Global Financing to
Interest expense. (See the Debt/Equity section of the Management Discussion on
page 60 for additional discussion of Global Financing debt and note J,
"Borrowings," on page 75 for additional discussion of the company's interest
expense.)
ENTERPRISE INVESTMENTS/OTHER
(DOLLARS IN MILLIONS) 2000 1999* 1998*
=================================================================
Revenue $ 1,404 $ 1,689 $ 1,915
Cost 747 1,038 1,263
- -----------------------------------------------------------------
Gross profit $ 657 $ 651 $ 652
=================================================================
Gross profit margin 46.8% 38.5% 34.0%
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
Enterprise Investments/Other revenue decreased 16.9 percent (13 percent at
constant currency) from 1999, following a decrease of 11.8 percent (12 percent
at constant currency) in 1999 from 1998. The decrease in both years was driven
by lower revenue associated with the company's decision in 1999 to discontinue
certain product lines, such as automated teller machines (ATMs), partially
offset by growth in computer-aided three-dimensional interactive application
(CATIA) software.
The gross profit dollars from Enterprise Investments/ Other increased 0.9
percent in 2000 versus 1999, and were flat in 1999 versus 1998. The increase in
2000 gross profit dollars and gross profit margin was primarily due to a shift
in the mix of revenue to software products that have a higher gross profit
margin than the hardware product lines the company discontinued in 1999.
EXPENSES
(DOLLARS IN MILLIONS) 2000 1999 1998
================================================================================
Selling, general and
administrative $ 15,639 $ 14,729 $ 16,662
Percentage of revenue 17.7% 16.8% 20.4%
Research, development
and engineering $ 5,151 $ 5,273 $ 5,046
Percentage of revenue 5.8% 6.0% 6.2%
Selling,general and administrative (SG&A) expense increased 6.2 percent in 2000
versus 1999, following a decline of 11.6 percent in 1999 compared with 1998. The
increase in 2000 was primarily driven by the 1999 net pre-tax benefit of $2,107
million associated with the sale of the Global Network, actions taken by the
company in 1999 to improve its competitiveness and to strengthen the company's
overall business portfolio, and implementation of a change in personal
computers' depreciable lives. (See note D, "Acquisitions/Divestitures," on pages
72 through 74, and note Q, "1999 Actions," on pages 81 and 82 for further
information.) Excluding the 1999 actions and sale of the Global Network, 2000
SG&A expense would have declined 7.1 percent versus 1999 and increased 1.0
percent in 1999 compared with 1998. In addition, its percentage of revenue would
have been 17.7 percent for 2000, 19.2 percent for 1999 and 20.4 percent for
1998.
This improved expense-to-revenue ratio in 2000 results from the company's
aggressive management of its infrastructure expense and discretionary spending,
and improvements in its productivity through the use of technology and other
productivity tools. Examples include revenue generation and customer services
capabilities of ibm.com and a significant increase in electronic processing
within the procurement function. The company also continues to benefit from
growth in its licensing of intellectual property. In addition, the company has
lower expenses as a result of the sale of the Global Network and actions taken
in 1999 to exit such businesses as networking hardware and DRAM (dynamic random
access memory) manufacturing. SG&A expense also benefited from the effects of
currency and asset sales, excluding securities, in 2000.
PAGE NO.
FIFTY-SIX
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The increase in 1999 compared to 1998, excluding the benefit from the
action taken by the company in 1999, was primarily driven by the company's
ongoing investments in software marketing and major marketing campaigns
including the e-business campaign. These expenditures were consistent with the
company's objective of growing revenue while improving the expense-to-revenue
ratio over time.
Research, development and engineering (RD&E) expense declined 2.3 percent
in 2000 from 1999, following an increase of 4.5 percent in 1999 from 1998. The
decline in 2000 is primarily due to a $111 million pre-tax charge taken in 1999
for acquired in-process research and development (IPR&D) associated with the
acquisition of Sequent Computer Systems, Inc., Mylex Corporation and DASCOM,
Inc. See note D, "Acquisitions/Divestitures," on pages 72 through 74 for further
detail about the IPR&D charge. Overall, the company continues to invest in
high-growth opportunities such as e-business, Tivoli software products and
initiatives to support Linux.
As a result of its ongoing research and development efforts, the company
received 2,886 patents in 2000, placing it number one in patents granted in the
United States for the eighth consecutive year. The application of these
technological advances transforms the company's research and development into
new products.
Recent advances include high-quality inductors and transformers that can
be integrated into silicon chips without consuming excess chip area, enhancing
miniaturization. These high-speed circuits are used in wireless communications
applications and can operate at high frequencies, which extends the use of
circuits in many applications, such as cell phones and personal digital
assistants.
Included in the company's cost and expense is $327 million of benefit for
retirement-related plans, including pension plans and nonpension postretirement
benefits, for the year ended December 31, 2000. The comparable amounts for the
years ended December 31, 1999 and 1998, were additional costs of $83 million and
$286 million, respectively. See note V, "Retirement Plans," on pages 85 through
88 and note W, "Nonpension Postretirement Benefits," on pages 88 and 89 for the
benefit and cost amounts for the major pension and nonpension postretirement
plans.
For the year ended December 31, 2000, the company realized cost and
expense reductions of $1,171 million due to the funded status of its pension
plans. Of the total 2000 reductions, the change in actuarial assumptions for the
primary U.S. plan contributed an estimated $221 million.
For the year ended December 31, 1999, the company realized cost and
expense reductions of $694 million due to the funded status of its pension
plans. Of the total 1999 reductions, the amendment to the U.S. plan, as more
fully discussed in note V, "Retirement Plans," on pages 85 through 88,
contributed an estimated $167 million. The impact in 1999 of changes in
actuarial assumptions for the U.S. Plan was approximately $143 million of
additional cost. This amount is included in the $694 million cost and expense
reduction amount previously noted.
The change in the discount rate from 7.75 percent to 7.25 percent,
effective December 31, 2000, is not expected to have a material effect on the
company's 2001 results of operations. Effective January 1, 2001, the company
increased pension benefits to recipients who retired before January 1, 1997. The
increases ranged from 2.5 percent to 25 percent, and are based on the year of
retirement and the pension benefit currently being received. This improvement is
expected to result in an additional cost to the company of approximately $100
million in 2001.
The company does not expect to provide additional funding for the U.S.
plan in 2001 because of the aforementioned items. Future effects of pension
plans, including the changes noted above, on the operating results of the
company depend on economic conditions, employee demographics, mortality rates
and investment performance.
See note X, "Segment Information," on pages 89 through 93 for additional
information about the pre-tax income of each segment, as well as the
methodologies employed by the company to allocate shared expenses to the
segments.
Other income increased 10.9 percent in 2000 from 1999 and declined 5.5
percent in 1999 from 1998. The increase was primarily a result of gains from
sales of available-for-sale securities held by the company, partially offset by
lower interest income. The decline in 1999 versus 1998 was primarily due to
lower interest income.
PROVISION FOR INCOME TAXES
The provision for income taxes resulted in an effective tax rate of 29.8 percent
for 2000, compared with the 1999 effective tax rate of 34.4 percent and a 1998
effective tax rate of 30.0 percent. The 4.6 point decrease in the 2000 rate from
the 1999 rate and the 4.4 point increase in the 1999 rate from the 1998 rate
were primarily the result of the company's 1999 sale of its Global Network
business and various other actions implemented during 1999.
As reflected in the reconciliation of the company's effective tax rate in
note O, "Taxes," on pages 80 and 81, the increased benefit on the company's tax
rate of the foreign tax differential in 2000 was principally due to the U.S. tax
benefit from the repatriation of profits previously subject to foreign taxes,
partially offset by a less favorable mix of profits arising in markets with
lower effective tax rates. The decreased benefit of the foreign tax differential
from 1998 to 1999 primarily reflects a less favorable mix of profits arising in
markets with lower effective tax rates.
PAGE NO.
FIFTY-SEVEN
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
FOURTH QUARTER
The company's fourth-quarter results reflect the momentum that has been building
steadily all year. For the quarter ended December 31, 2000, the company had
revenue of $25.6 billion, an increase of 5.9 percent (12 percent at constant
currency) compared with the fourth quarter of 1999. Fourth quarter 2000 net
income was $2.7 billion ($1.48 per diluted common share), compared with net
income of $2.1 billion ($1.12 per diluted common share) in the fourth quarter of
1999.
In the Americas, fourth-quarter revenue was $10.8 billion, an increase of
3.3 percent (4 percent at constant currency) from the 1999 period. Revenue from
Europe/Middle East/ Africa was $7.4 billion, up 3.0 percent (18 percent at
constant currency). Asia Pacific revenue increased 13.3 percent (20 percent at
constant currency) to $5.0 billion. OEM revenue increased 13.4 percent (14
percent at constant currency) to $2.4 billion compared with the fourth quarter
of 1999.
Hardware revenue increased 9.7 percent (15 percent at constant currency)
to $11.4 billion from the fourth quarter of 1999, with revenue growth across all
server, storage and technology hardware categories. The company began shipping
its new z900 server in mid-December, contributing to a greater than 100 percent
increase in shipments of mainframe computing capacity in the fourth quarter, as
measured in MIPS. Revenue grew strongly for the pSeries UNIX servers, with
particular strength in the mid-range and high-end Web server models. Revenues
for the mid-range iSeries servers also increased, with growth across all
geographic areas. Personal Systems revenue grew significantly and the unit was
profitable in the quarter. Microelectronics revenue also increased strongly,
principally due to continued acceleration in growth of sophisticated,
leading-edge custom chips. Revenue for HDDs increased as well. Excluding
networking products, storage revenue increased, driven by Shark and shipment of
its advanced functions.
Revenue from Global Services, including maintenance, grew 5.2 percent (12
percent at constant currency) in the fourth quarter to $9.2 billion, reflecting
revenue growth across all services categories. e-business services revenue grew
more than 70 percent year over year. Revenue comparisons for Global Services
were adversely affected by a year-over-year decline in the Y2K services business
and the sale of the Global Network in 1999. After adjusting for these factors,
Global Services revenue (excluding maintenance) increased 10.1 percent (17
percent at constant currency). The company signed more than $12.5 billion in
services contracts in the quarter.
Software revenue totaled $3.6 billion, decreasing 1.0 percent (up 6
percent at constant currency) versus the fourth quarter of 1999. Revenues
continued to grow strongly in the company's middleware segment, with significant
growth in database and Web-management software. Tivoli revenues declined in the
quarter, reflecting an ongoing transition in this product area.
Global Financing revenue increased 6.2 percent (10 percent at constant
currency) in the fourth quarter to $1.0 billion, primarily as a result of
increased sales of used equipment.
Revenue from the Enterprise Investments/Other area, which includes custom
hardware and software products for specialized customer uses, declined 10.7
percent (3 percent at constant currency) year over year to $425 million.
The company's total gross profit margin was 37.7 percent in the fourth
quarter of 2000 compared with 36.7 percent in the fourth quarter of 1999. The
increase was driven by a 3.5 point improvement in the hardware gross profit
margin as eServer, personal computer and HDD gross profit margins improved year
over year. In addition, the Global Financing gross profit margin increased 6.1
points, primarily as a result of higher margins for hardware remarketing. These
increases were partially offset by a decline in the Global Services gross profit
margin of 0.9 points. This decline was primarily driven by lower Business
Innovation Services revenue, which benefited from Y2K services in 1999,
partially offset by an improvement in the Strategic Outsourcing Services gross
profit margin.
Total fourth-quarter 2000 expense declined 0.3 percent when compared with
the fourth quarter of 1999. SG&A expense decreased 2.4 percent, primarily driven
by the effects of currency, while RD&E expense increased 2.4 percent year over
year. The expense-to-revenue ratio in the fourth quarter of 2000 was 23.0
percent, compared with 24.4 percent in 1999.
The company's tax rate was 29.5 percent in the fourth quarter, down
slightly as compared with 30.0 percent in the fourth quarter of last year.
The company spent approximately $1.4 billion on common share repurchases
in the fourth quarter. The average number of common shares outstanding assuming
dilution was lower by 57.2 million shares in fourth quarter 2000 versus fourth
quarter 1999, primarily as a result of these repurchases. The average number of
shares assuming dilution was 1,790.6 million in fourth quarter 2000 versus
1,847.8 million in fourth quarter 1999.
PAGE NO.
FIFTY-EIGHT
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
FINANCIAL CONDITION
During 2000, the company continued to demonstrate strong financial performance,
enabling it to make significant investments to fund future growth and increase
shareholder value without increasing its non-global financing debt. The company
spent $5,645 million for research, development and engineering, excluding $9
million of IPR&D; $4,360 million for plant and other property, including
machines used in strategic outsourcing contracts; $1,256 million for machines on
operating leases with customers; and $6,659 million for the repurchase of the
company's common shares. In addition, of the company's nine acquisitions in
2000, the company paid cash totaling approximately $300 million of the aggregate
$511 million purchase price. The company had $3,722 million in cash and cash
equivalents and current marketable securities at December 31, 2000. The
company's debt levels remained essentially flat with a small increase in Global
Financing debt, offset by a decline in non-global financing debt.
The company maintains a $10 billion committed global credit facility that
expires in February 2002. As of December 31, 2000 and 1999, $9.1 billion and
$8.6 billion were unused and available, respectively. In addition, the company
had outstanding other committed and uncommitted lines of credit of approximately
$4.7 billion and $5.5 billion as of December 31, 2000 and 1999, respectively. As
of December 31, 2000 and 1999, $4.1 billion and $4.5 billion were unused and
available, respectively.
The company managed assets of $136 million and $273 million at December
31, 2000 and 1999, respectively, from the securitization of loans, leases and
trade receivables. For additional information, see note I, "Sale and
Securitization of Receivables," on page 74.
The changes in the company's U.S. pension plan, including the increased
benefits for retirees and the 1999 amendment to the plan, are not expected to
have a material effect on the company's financial condition.
The major rating agencies' ratings of the company's debt securities and
preferred stock as of December 31, 2000, appear in the table below:
STANDARD MOODY'S
AND INVESTORS
POOR'S SERVICE FITCH, INC.
===============================================================
Senior long-term debt A+ A1 AA-
Commercial paper A-1 Prime-1 F-1+
Preferred stock A a1 A+
CASH FLOWS
The company's cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statement of Cash Flows on page 68, are summarized
in the following table:
(DOLLARS IN MILLIONS) 2000 1999 1998
=====================================================================
Net cash provided from/
(used in):
Operating activities $ 9,274 $10,111 $ 9,273
Investing activities (4,248) (1,669) (6,131)
Financing activities (6,359) (8,625) (4,993)
Effect of exchange rate
changes on cash and
cash equivalents (147) (149) 120
- ---------------------------------------------------------------------
Net change in cash and
cash equivalents $(1,480) $ (332) $(1,731)
=====================================================================
WORKING CAPITAL
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
=====================================================================
Current assets $43,880 $ 43,155
Current liabilities 36,406 39,578
- ---------------------------------------------------------------------
Working capital $ 7,474 $ 3,577
=====================================================================
Current ratio 1.21:1 1.09:1
=====================================================================
Current assets increased $725 million due primarily to an increase in accounts
receivable of $3,108 million, offset by decreases of $2,109 million in cash and
cash equivalents and current marketable securities, and $206 million in deferred
taxes. The increase in accounts receivable was due to strong year-end business
volumes and global financing activity in the software and services businesses
across all geographies. The decrease in cash and cash equivalents and current
marketable securities resulted primarily from stock repurchases and capital
expenditures, partially offset by cash generated from operations.
The company ended 2000 with inventories of $4,765 million, the lowest
level since 1983, primarily a result of lower inventory levels within Enterprise
Systems segment and Microelectronics Division, and currency translation on
inventories outside the United States. The company's inventory turnover ratio
improved to 6.3 in 2000 from 5.9 in 1999.
Current liabilities declined $3,172 million from year-end 1999, primarily
due to decreases of $4,025 million in short-term debt and $922 million in other
accrued expenses and liabilities, offset by an increase in accounts payable of
$1,792 million. The increase was primarily due to strong year-end business
volumes, primarily in the Enterprise Systems segment, across all geographies.
PAGE NO.
FIFTY-NINE
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
INVESTMENTS
The company's investments for plant, rental machines and other property were
$5,616 million for 2000, a decrease of $343 million from 1999.
In addition to software development expenses included in research,
development and engineering, the company capitalized $565 million of software
costs during 2000, an increase of $101 million from the 1999 period. The
increase resulted, in part, from the adoption of Emerging Issues Task Force
Issue No. 00-2, "Accounting for Web Site Development Costs." In 2000 the company
capitalized $81 million of certain Web site development costs.
Investments and sundry assets were $14,447 million at the end of 2000, an
increase of $775 million from 1999, primarily the result of increases in prepaid
pension assets and deferred taxes, offset by declines in alliance investments
and goodwill. See note H, "Investments and Sundry Assets," on page 74 for
additional information.
The company continues to invest significantly in its rapidly growing
services business, primarily in the management of customers' information
technology and in manufacturing capacity for microelectronics. The company has
announced plans to redirect approximately $1 billion in 2001 to the open-source
Linux operating system including hardware and software development, the
operation of its Linux Technology Center, and various marketing initiatives
across the country. Additionally, the company plans to invest $4 billion over
the next three years in the information technology outsourcing sector.
On October 10, 2000, the company announced plans to invest $5.0 billion in
the following projects: (1) building an advanced chip-making facility in East
Fishkill, New York; (2) expanding its chip-making capacity in Burlington,
Vermont and Yasu, Japan, as well as at a joint venture in Essonnes, France; and
(3) expanding its organic and ceramic chip packaging operations worldwide. The
company anticipates these actions to be completed over the next four years.
The company has remaining authorization as of December 31, 2000, to
purchase $2,870 million of IBM common shares in the open market from time to
time, based on market conditions.
The company expects to fund these investments primarily with cash from
ongoing operations.
DEBT AND EQUITY
The majority of the company's funding is executed by Corporate Treasury in
support of the Global Financing segment. A process has been established for
monitoring the Global Financing funding requirements and executing strategies to
manage the company's overall asset and liability profile. Additionally, the
company maintains sufficient flexibility to access global funding sources as
needed. During 2000, the company issued debt denominated in U.S. dollars,
Japanese yen, Euros and Swiss francs to meet existing financing needs.
The company's total debt increased $222 million to $28,576 million.
Financing businesses have different capital structures than non-financing
businesses, and therefore the analysis of this change and certain ratios are
discussed below on both a Global Financing and a non-global financing basis.
GLOBAL FINANCING
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
================================================================
Assets* $ 40,822 $ 39,686
Debt** 27,514 26,799
Equity 4,142 4,864
- ----------------------------------------------------------------
Debt/Equity 6.6x 5.5x
* GLOBAL FINANCING ASSETS INCLUDE CASH, FINANCING RECEIVABLES (SEE NOTE F,
"FINANCING RECEIVABLES," ON PAGE 74), INTERCOMPANY AMOUNTS, RENTAL MACHINE
FIXED ASSETS AND OTHER ASSETS.
** GLOBAL FINANCING DEBT INCLUDES EXTERNAL DEBT OF THE GLOBAL FINANCING
BUSINESS THAT GENERATES THE INTEREST EXPENSE INCLUDED IN COST OF GLOBAL
FINANCING ON THE CONSOLIDATED STATEMENT OF EARNINGS. GLOBAL FINANCING DEBT
ALSO INCLUDES INTERCOMPANY BORROWINGS FROM OTHER COMPANY UNITS. THE TOTAL
INTEREST EXPENSE RELATED TO GLOBAL FINANCING DEBT IS PRESENTED IN NOTE X,
"SEGMENT INFORMATION," ON PAGES 89 THROUGH 93.
The Global Financing segment is a financial services business and is, therefore,
more debt dependent than the company's other businesses. At December 31, 2000,
more than 95 percent of the company's total debt was attributable to this
business, and supported almost half of the company's total assets. In 2000,
Global Financing debt to equity ratio increased to 6.6x, which is within
management's acceptable target range. Typically, a financial services business
has a higher leverage than an industrial or technology business given its low
return on asset characteristics.
NON-GLOBAL FINANCING
(DOLLARS IN MILLIONS) AT
DECEMBER 31: 2000 1999
=============================================================
Debt* $ 1,062 $ 1,555
Debt/Capitalization 6.1% 9.0%
EBITDA/Interest Expense** 24x 19x
* NON-GLOBAL FINANCING DEBT IS THE COMPANY'S TOTAL EXTERNAL DEBT LESS THE
GLOBAL FINANCING DEBT DESCRIBED IN THE GLOBAL FINANCING TABLE ABOVE.
** EBITDA IS EARNINGS BEFORE INTEREST AND TAXES, PLUS DEPRECIATION AND
AMORTIZATION, ADJUSTED FOR MINIMUM RENTAL COMMITMENTS AND FOR ONE-TIME
ITEMS SUCH AS THE 1999 ACTIONS AND THE SALE OF THE GLOBAL NETWORK. THE
INTEREST EXPENSE USED IN THE DENOMINATOR REPRESENTS THE COMPANY'S TOTAL
INTEREST EXPENSE LESS THE GLOBAL FINANCING INTEREST EXPENSE DISCLOSED IN
NOTE X, "SEGMENT INFORMATION," ON PAGES 89 THROUGH 93.
PAGE NO.
SIXTY
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The company's non-global financing businesses generate significant cash from
ongoing operations and therefore generally do not require a significant amount
of debt. Cash flows from operations are these businesses' primary source of
funds for future investments.
The company's total consolidated stockholders' equity increased $113
million to $20,624 million at December 31, 2000, primarily due to the increase
in retained earnings, partially offset by the company's ongoing stock repurchase
program and Accumulated gains and losses not affecting retained earnings. (See
note M, "Stockholders' Equity Activity," on page 79).
CURRENCY RATE FLUCTUATIONS
Changes in the relative values of non-U.S. currencies to the U.S. dollar affect
the company's results. At December 31, 2000, currency changes resulted in assets
and liabilities denominated in local currencies being translated into fewer
dollars than at year-end 1999. The currency rate changes had an unfavorable
effect on revenue growth of approximately 3 percent in 2000, minimal effect in
1999 and an unfavorable effect of approximately 2 percent in 1998.
For non-U.S. subsidiaries and branches that operate in U.S. dollars or
whose economic environment is highly inflationary, translation adjustments are
reflected in results of operations, as required by Statement of Financial
Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." Generally,
the company manages currency risk in these entities by linking prices and
contracts to U.S. dollars and entering into foreign currency hedge contracts.
The company uses a variety of financial hedging instruments to limit
specific currency risks related to financing transactions and other foreign
currency-based transactions. Further discussion of currency and hedging appears
in note K, "Financial Instruments," on pages 76 and 77.
On January 1, 2001, the company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The company does not expect this
standard to have a significant impact on the Consolidated Statement of Earnings.
This standard will result in an incremental gross-up of certain assets and
liabilities, including fair value adjustments to the company's portfolio of
fixed-rate debt. In addition, the standard may result in increased volatility
within the stockholders' equity section of the Consolidated Statement of
Financial Position (Accumulated gains and losses not affecting retained
earnings). See note B, "Accounting Changes," on pages 71 and 72 for additional
information regarding SFAS No. 133.
MARKET RISK
In the normal course of business, the financial position of the company
routinely is subject to a variety of risks. In addition to the market risk
associated with interest rate and currency movements on outstanding debt and
non-U.S. dollar denominated assets and liabilities, other examples of risk
include collectibility of accounts receivable and recoverability of residual
values on leased assets.
The company regularly assesses all of these risks and has established
policies and business practices to protect against the adverse effects of these
and other potential exposures. As a result, the company does not anticipate any
material losses from these risks.
The company's debt in support of the Global Financing business and the
geographic breadth of the company's operations include an element of market risk
from changes in interest and currency rates. The company manages this risk, in
part, through the use of a variety of financial instruments including
derivatives, as explained in note K, "Financial Instruments," on pages 76 and
77.
To meet disclosure requirements, the company performs sensitivity analysis
to determine the effects that market risk exposures may have on the fair values
of the company's debt and other financial instruments.
The financial instruments that are included in the sensitivity analysis
comprise all of the company's cash and cash equivalents, marketable securities,
long-term non-lease receivables, investments, long-term and short-term debt and
all derivative financial instruments. The company's portfolio of derivative
financial instruments includes interest rate swaps, interest rate options,
foreign currency swaps, forward contracts and foreign currency option contracts.
To perform sensitivity analysis, the company assesses the risk of loss in
fair values from the effect of hypothetical changes in interest rates and
foreign currency exchange rates on market-sensitive instruments. The market
values for interest and foreign currency exchange risk are computed based on the
present value of future cash flows as affected by the changes in rates that are
attributable to the market risk that is being measured. The company selected the
discount rates that it used for the present value computations based on market
interest and foreign currency exchange rates in effect at December 31, 2000 and
1999. The differences in this comparison are the hypothetical gains or losses
associated with each type of risk.
PAGE NO.
SIXTY-ONE
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Information provided by the sensitivity analysis does not necessarily
represent the actual changes in fair value that the company would incur under
normal market conditions because, due to practical limitations, all variables
other than the specific market risk factor are held constant. In addition, the
results of the model are constrained by the fact that certain items are
specifically excluded from the analysis, while the financial instruments that
relate to the financing or hedging of those items are included by definition.
Excluded items include leased assets, forecasted foreign currency cash flows,
and the company's net investment in foreign operations. As a consequence, the
reported changes in the values of some financial instruments that affect the
results of the sensitivity analysis are not matched with the offsetting changes
in the values of the items that those instruments are designed to finance or
hedge.
The results of the sensitivity analysis at December 31, 2000, and December
31, 1999, are as follows:
INTEREST RATE RISK
As of December 31, 2000, a 10 percent decrease in the levels of interest rates
with all other variables held constant would result in a decrease in the fair
value of the company's financial instruments of $99 million as compared with a
decrease of $164 million as of December 31, 1999. A 10 percent increase in the
levels of interest rates with all other variables held constant would result in
an increase in the fair value of the company's financial instruments of $83
million as of December 31, 2000, as compared with an increase of $145 million as
of December 31, 1999. Changes in the relative sensitivity of the fair value of
the company's financial instrument portfolio for these theoretical changes in
the level of interest rates primarily are driven by changes in the company's
debt maturity and interest rate profile and amount. In 2000 versus 1999, the
reported decline in interest rate sensitivity primarily is due to adjustments in
the company's "receive fixed/pay floating" interest rate swap portfolio to more
closely match the maturity profile of the company's fixed rate debt.
FOREIGN CURRENCY EXCHANGE RATE RISK
As of December 31, 2000, a 10 percent decrease or increase in the levels of
foreign currency exchange rates against the U.S. dollar with all other variables
held constant would result in a decrease in the fair value of the company's
financial instruments of $1,352 million or an increase in the fair value of the
company's financial instruments of $1,435 million, respectively, compared with a
decrease of $1,319 million or an increase of $1,340 million, respectively, as of
December 31, 1999. The change in the relative sensitivity of the fair value of
the company's financial instrument portfolio to the level of foreign currency
exchange rates was primarily driven by increased hedging activity of foreign
currency transactions in accordance with the company's established risk
management practices. As the effect of offsetting changes in the fair market
value of the company's anticipated foreign currency cash flows are not included
in the sensitivity model, the results of the analysis are not indicative of an
increase in the company's actual exposure to foreign currency exchange rate
risk.
FINANCING RISKS
Global Financing is an integral part of the company's total worldwide offerings.
Inherent in Global Financing are certain risks, including credit, interest rate,
currency and residual value. The company manages credit risk through
comprehensive credit evaluations and pricing practices. To manage the risks
associated with an uncertain interest rate environment, the company pursues a
funding strategy of substantially matching the interest rate profile of its debt
with the interest rate profile of its assets. Currency risks are managed by
denominating liabilities in the same currency as the assets.
Residual value risk is managed by developing projections of future
equipment values at lease inception, reevaluating these projections
periodically, and effectively deploying remarketing capabilities to recover
residual values and potentially earn a profit. The following table presents the
recorded amount of unguaranteed residual values for sales-type and operating
leases as of December 31, 1998, 1999 and 2000. In addition, the table presents
the run out of the unguaranteed residual value over the remaining lives of these
leases as of December 31, 2000. The following table excludes approximately $34
million of estimated residual value associated with non-information technology
equipment. There was no significant change in the ratio of the unguaranteed
residual value to total net investment in sales-type leases from December 31,
1999 to December 31, 2000.
TOTAL RUN OUT OF 2000 BALANCE
----------------------- --------------------------------------
2004 AND
(DOLLARS IN MILLIONS) 1998 1999 2000 2001 2002 2003 BEYOND
==========================================================================================
Sales-type leases $ 685 $ 737 $ 751 $ 275 $ 273 $ 174 $ 29
Operating leases 731 609 396 230 124 37 5
- ------------------------------------------------------------------------------------------
Total residual value $1,416 $1,346 $1,147 $ 505 $ 397 $ 211 $ 34
==========================================================================================
PAGE NO.
SIXTY-TWO
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
EMPLOYEES AND RELATED WORKFORCE
PERCENTAGE CHANGES
------------------
2000 1999 1998 2000-99 1999-98
==========================================================================================
IBM/wholly owned subsidiaries 316,303 307,401 291,067 2.9 5.6
Less than wholly owned subsidiaries 21,886 17,176 21,704 27.4 (20.9)
Complementary 25,500 29,800 36,900 (14.4) (19.2)
In 2000, the number of IBM employees, including employees in wholly owned
subsidiaries, increased nearly 9,000 year over year. The company's strategic
growth areas--services, software and technology--continue to drive the increase;
Global Services hired in excess of 19,000 people in 2000. Acquisitions, such as
the LGS Group Inc. in Canada, contributed to the increase, as well. The company
continues to reduce its infrastructure and to withdraw from certain businesses,
offsetting some of the growth.
The increase in employees in the less than wholly owned subsidiaries over 1999
reflects growth primarily in subsidiaries within the company's storage, personal
computer and microelectronics businesses in China, and services in Japan and
Australia.
The company's complementary workforce is an approximation 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.
PAGE NO.
SIXTY-THREE
CONSOLIDATED STATEMENT OF EARNINGS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31: NOTES 2000 1999* 1998*
=============================================================================================================
Revenue:
Hardware $ 37,777 $ 37,888 $ 36,096
Global Services 33,152 32,172 28,916
Software 12,598 12,662 11,863
Global Financing 3,465 3,137 2,877
Enterprise Investments/Other 1,404 1,689 1,915
- -------------------------------------------------------------------------------------------------------------
Total revenue 88,396 87,548 81,667
- -------------------------------------------------------------------------------------------------------------
Cost:
Hardware 27,038 27,591 24,653
Global Services 24,309 23,304 21,125
Software 2,283 2,240 2,260
Global Financing J 1,595 1,446 1,494
Enterprise Investments/Other 747 1,038 1,263
- -------------------------------------------------------------------------------------------------------------
Total cost 55,972 55,619 50,795
- -------------------------------------------------------------------------------------------------------------
Gross profit 32,424 31,929 30,872
- -------------------------------------------------------------------------------------------------------------
Expense:
Selling, general and administrative P 15,639 14,729 16,662
Research, development and engineering R 5,151 5,273 5,046
Other income (617) (557) (589)
Interest expense J & K 717 727 713
- -------------------------------------------------------------------------------------------------------------
Total expense 20,890 20,172 21,832
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 11,534 11,757 9,040
Provision for income taxes O 3,441 4,045 2,712
- -------------------------------------------------------------------------------------------------------------
Net income 8,093 7,712 6,328
Preferred stock dividends 20 20 20
- -------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 8,073 $ 7,692 $ 6,308
=============================================================================================================
Earnings per share of common stock:
Assuming dilution S $ 4.44 $ 4.12 $ 3.29
Basic S $ 4.58 $ 4.25 $ 3.38
=============================================================================================================
Average number of common shares outstanding:
Assuming dilution: 2000--1,812,118,422; 1999--1,871,073,912; 1998--1,920,130,470
Basic: 2000--1,763,037,049; 1999--1,808,538,346; 1998--1,869,005,570
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
THE ACCOMPANYING NOTES ON PAGES 69 THROUGH 93 ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
PAGE NO.
SIXTY-FOUR
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
AT DECEMBER 31: NOTES 2000 1999*
=======================================================================================================
Assets
Current assets:
Cash and cash equivalents $ 3,563 $ 5,043
Marketable securities K 159 788
Notes and accounts receivable--trade, net of allowances 10,447 9,103
Short-term financing receivables F 18,705 17,156
Other accounts receivable 1,574 1,359
Inventories E 4,765 4,868
Deferred taxes O 2,701 2,907
Prepaid expenses and other current assets 1,966 1,931
- --------------------------------------------------------------------------------------------------------
Total current assets 43,880 43,155
- --------------------------------------------------------------------------------------------------------
Plant, rental machines and other property G 38,455 39,616
Less: Accumulated depreciation 21,741 22,026
- --------------------------------------------------------------------------------------------------------
Plant, rental machines and other property--net 16,714 17,590
- --------------------------------------------------------------------------------------------------------
Long-term financing receivables F 13,308 13,078
Investments and sundry assets H 14,447 13,672
- --------------------------------------------------------------------------------------------------------
Total assets $ 88,349 $ 87,495
========================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Taxes O $ 4,827 $ 4,792
Short-term debt J & K 10,205 14,230
Accounts payable 8,192 6,400
Compensation and benefits 3,801 3,840
Deferred income 4,516 4,529
Other accrued expenses and liabilities 4,865 5,787
- --------------------------------------------------------------------------------------------------------
Total current liabilities 36,406 39,578
- --------------------------------------------------------------------------------------------------------
Long-term debt J & K 18,371 14,124
Other liabilities L 12,948 13,282
- --------------------------------------------------------------------------------------------------------
Total liabilities 67,725 66,984
- --------------------------------------------------------------------------------------------------------
Contingencies N
Stockholders' equity: M
Preferred stock, par value $.01 per share 247 247
Shares authorized: 150,000,000
Shares issued and outstanding (2000 and 1999--2,546,011)
Common stock, par value $.20 per share C 12,400 11,762
Shares authorized: 4,687,500,000
Shares issued (2000--1,893,940,595; 1999--1,876,665,245)
Retained earnings 23,784 16,878
Treasury stock, at cost (shares: 2000--131,041,411; 1999--72,449,015) (13,800) (7,375)
Employee benefits trust (shares: 2000 and 1999--20,000,000) (1,712) (2,162)
Accumulated gains and losses not affecting retained earnings (295) 1,161
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,624 20,511
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 88,349 $ 87,495
========================================================================================================
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
THE ACCOMPANYING NOTES ON PAGES 69 THROUGH 93 ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
PAGE NO.
SIXTY-FIVE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
ACCUMULATED
GAINS AND
LOSSES NOT
EMPLOYEE AFFECTING
PREFERRED COMMON RETAINED TREASURY BENEFITS RETAINED
(DOLLARS IN MILLIONS) STOCK STOCK EARNINGS STOCK TRUST EARNINGS TOTAL
==================================================================================================================================
1998
Stockholders' equity, January 1, 1998 $ 252 $ 8,601 $ 11,010 $ (86) $ (860) $ 899 $19,816
Net income plus gains and losses not
affecting retained earnings:
Net income 6,328 $ 6,328
-------
Gains and losses not affecting retained
earnings (net of tax):
Foreign currency translation adjustments
(net of tax benefit of $45) 69 69
Net unrealized losses on marketable
securities (net of tax benefit of $36) (57) (57)
-------
Total gains and losses not affecting
retained earnings 12
-------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 6,340
=======
Cash dividends declared--common stock (814) (814)
Cash dividends declared--preferred stock (20) (20)
Common stock purchased and retired
(113,993,636 shares) (556) (6,291) (6,847)
Preferred stock purchased and retired (51,250 shares) (5) (5)
Common stock issued under employee
plans (29,701,038 shares) 709 (1) 708
Purchases (9,100,678 shares) and sales (9,024,296 shares)
of treasury stock under employee plans--net (71) (47) (118)
Fair value adjustment of employee benefits trust 1,002 (994) 8
Tax effect--stock transactions 365 365
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1998 $ 247 $ 10,121 $ 10,114 $ (133) $(1,854) $ 911 $19,433
===================================================================================================================================
1999
Net income plus gains and losses not
affecting retained earnings:
Net income 7,712 $ 7,712
-------
Gains and losses not affecting retained
earnings (net of tax):
Foreign currency translation adjustments
(net of tax expense of $180) (546) (546)
Net unrealized gains on marketable
securities (net of tax expense of $456) 796 796
-------
Total gains and losses not affecting
retained earnings 250
-------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 7,962
=======
Cash dividends declared--common stock (859) (859)
Cash dividends declared--preferred stock (20) (20)
Treasury shares purchased, not retired
(70,711,971 shares) (7,192) (7,192)
Common stock issued under employee
plans (22,927,141 shares) 741 (1) 740
Purchases (6,418,975 shares) and sales (6,606,223 shares)
of treasury stock under employee plans--net (95) (50) (145)
Fair value adjustment of employee benefits trust 318 (308) 10
Increase due to shares issued by subsidiary 37 37
Tax effect--stock transactions 545 545
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1999 $ 247 $ 11,762 $ 16,878 $ (7,375) $(2,162) $ 1,161 $20,511
===================================================================================================================================
PAGE NO.
SIXTY-SIX
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
ACCUMULATED
GAINS AND
LOSSES NOT
EMPLOYEE AFFECTING
PREFERRED COMMON RETAINED TREASURY BENEFITS RETAINED
(DOLLARS IN MILLIONS) STOCK STOCK EARNINGS STOCK TRUST EARNINGS TOTAL
==================================================================================================================================
2000
Stockholders' equity, December 31, 1999 $ 247 $ 11,762 $ 16,878 $(7,375) $(2,162) $ 1,161 $20,511
Net income plus gains and losses not
affecting retained earnings:
Net income 8,093 $ 8,093
-------
Gains and losses not affecting retained
earnings (net of tax):
Foreign currency translation adjustments
(net of tax expense of $289) (531) (531)
Net unrealized losses on marketable
securities (net of tax benefit of $506) (925) (925)
-------
Total gains and losses not affecting
retained earnings (1,456)
-------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 6,637
=======
Cash dividends declared--common stock (909) (909)
Cash dividends declared--preferred stock (20) (20)
Treasury shares purchased, not retired
(58,867,226 shares) (6,431) (6,431)
Common stock issued under employee
plans (17,275,350 shares) 615 1 616
Purchases (8,799,382 shares) and sales (9,074,212 shares)
of treasury stock under employee plans--net (259) 6 (253)
Fair value adjustment of employee benefits trust (439) 450 11
Increase due to shares remaining to be issued
in acquisition 40 40
Tax effect--stock transactions 422 422
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 2000 $ 247 $12,400 $23,784 $(13,800) $(1,712) $ (295) $20,624
===================================================================================================================================
The accompanying notes on pages 69 through 93 are an integral part of the
financial statements.
PAGE NO.
SIXTY-SEVEN
CONSOLIDATED STATEMENT OF CASH FLOWS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999 1998
================================================================================================
Cash flow from operating activities:
Net income $ 8,093 $ 7,712 $ 6,328
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation 4,513 6,159 4,475
Amortization of software 482 426 517
Deferred income taxes 29 (713) (606)
Gain on disposition of fixed and other assets (792) (4,791) (261)
Other changes that (used)/provided cash:
Receivables (4,720) (1,677) (2,736)
Inventories (55) 301 73
Other assets (643) (130) 219
Accounts payable 2,245 (3) 362
Other liabilities 122 2,827 902
- ------------------------------------------------------------------------------------------------
Net cash provided from operating activities 9,274 10,111 9,273
- ------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Payments for plant, rental machines and other property (5,616) (5,959) (6,520)
Proceeds from disposition of plant, rental machines
and other property 1,619 1,207 905
Investment in software (565) (464) (250)
Purchases of marketable securities and other investments (1,079) (3,949) (4,211)
Proceeds from marketable securities and other investments 1,393 2,616 3,945
Proceeds from sale of the Global Network -- 4,880 --
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,248) (1,669) (6,131)
- ------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from new debt 9,604 6,133 7,567
Short-term (repayments)/borrowings less than 90 days--net (1,400) 276 499
Payments to settle debt (7,561) (7,510) (5,942)
Preferred stock transactions--net -- -- (5)
Common stock transactions--net (6,073) (6,645) (6,278)
Cash dividends paid (929) (879) (834)
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,359) (8,625) (4,993)
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (147) (149) 120
- ------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,480) (332) (1,731)
Cash and cash equivalents at January 1 5,043 5,375 7,106
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 3,563 $ 5,043 $ 5,375
================================================================================================
Supplemental data:
Cash paid during the year for:
Income taxes $ 2,697 $ 1,904 $ 1,929
Interest $ 1,447 $ 1,574 $ 1,605
================================================================================================
The accompanying notes on pages 69 through 93 are an integral part of the
financial statements.
PAGE NO.
SIXTY-EIGHT
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
A SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of International
Business Machines Corporation and its controlled subsidiary companies, which in
general are majority owned. Investments in business entities in which the
company does not have control, but has the ability to exercise significant
influence over operating and financial policies (generally 20-50 percent
ownership), are accounted for by the equity method. Other investments are
accounted for by the cost method. The accounting policy for other investments in
securities is described on page 70 within Marketable Securities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts that are reported in the consolidated financial statements
and accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions that the company may undertake in
the future, actual results may be different from the estimates.
REVENUE
The company recognizes revenue when it is realized or realizable and earned. The
company considers revenue realized or realizable and earned when it has
persuasive evidence of an arrangement, the product has been shipped or the
services have been provided to the customer, the sales price is fixed or
determinable and collectibility is reasonably assured. The company reduces
revenue for estimated customer returns. In addition to the aforementioned
general policy, the following are the specific revenue recognition policies for
each major category of revenue.
HARDWARE
Revenue from hardware sales or sales-type leases is recognized when the product
is shipped to the customer and there are either no unfulfilled company
obligations or any obligations will not affect the customer's final acceptance
of the arrangement. Any cost of these obligations is accrued when the
corresponding revenue is recognized. Revenue from rentals and operating leases
is recognized monthly as the fees accrue.
SERVICES
Revenue from time and material service contracts is recognized as the services
are provided. Revenue from fixed price long-term service contracts is recognized
over the contract term based on the percentage of services that are provided
during the period compared with the total estimated services to be provided over
the entire contract. Losses on fixed price contracts are recognized during the
period in which the loss first becomes apparent. Revenue from maintenance is
recognized over the contractual period or as the services are performed. Revenue
in excess of billings on service contracts is recorded as unbilled receivables
and is included in trade accounts receivable. Billings in excess of revenue that
is recognized on service contracts are recorded as deferred income until the
aforementioned revenue recognition criteria are met.
SOFTWARE
Revenue from delivered elements of one-time charge licensed software is
recognized at the inception of the license term, provided the company has
vendor-specific objective evidence of the fair value of each undelivered
element. Revenue is deferred for undelivered elements. Revenue is also deferred
for the entire arrangement if vendor-specific objective evidence does not exist
for each undelivered contract element. Examples of undelivered elements in which
the timing of delivery is uncertain include contractual elements that give
customers rights to any future upgrades at no additional charge, future
maintenance that is provided within the overall price, and standard performance
and function guarantees. The revenue that is deferred for any contract element
is recognized when all of the revenue recognition criteria have been met for
that element, which typically occurs within two to three years. Revenue from
monthly software licenses is recognized on a subscription basis.
FINANCING
Revenue from financing is recognized at level rates of return over the term of
the lease or receivable.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense is charged to income as incurred.
Expenses of promoting and selling products are classified as selling expense and
include such items as advertising, sales commissions and travel. General and
administrative expense includes such items as officers' salaries, office
supplies, taxes, insurance and office rental. In addition, general and
administrative expense includes recurring other operating items such as gains
and losses from sales and disposals of assets other than securities, licensing
of intellectual property, amortization of goodwill and currency exchange
gains/losses.
INCOME TAXES
Income tax expense is based on reported income before income taxes. Deferred
income taxes reflect the effect of temporary differences between assets and
liabilities that are recognized for financial reporting purposes and the amounts
that are recognized for income tax purposes. These deferred taxes are measured
by applying currently enacted tax laws. Valuation allowances are recognized to
reduce the deferred tax assets to the amount that is more likely than not to be
realized. In assessing the likelihood of realization, management considers
estimates of future taxable income.
PAGE NO.
SIXTY-NINE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL
BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
TRANSLATION OF NON-U.S. CURRENCY AMOUNTS
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment are translated to U.S. dollars at year-end exchange rates. Income
and expense items are translated at weighted-average rates of exchange
prevailing during the year. Translation adjustments are recorded in Accumulated
gains and losses not affecting retained earnings within stockholders' equity.
Inventories, plant, rental machines and other property, and other
non-monetary assets and liabilities of non-U.S. subsidiaries and branches that
operate in U.S. dollars, or whose economic environment is highly inflationary,
are translated at approximate exchange rates prevailing when the company
acquired the assets or liabilities. All other assets and liabilities are
translated at year-end exchange rates. Cost of sales and depreciation are
translated at historical exchange rates. All other income and expense items are
translated at the weighted-average rates of exchange prevailing during the year.
Gains and losses that result from translation are included in net income.
DERIVATIVE/FINANCIAL INSTRUMENTS
In the normal course of business, the company uses a variety of derivative
financial instruments to manage currency exchange rate and interest rate risk.
To qualify for hedge accounting, the company requires that the instruments are
effective in reducing the risk exposure that they are designed to hedge. For
instruments that are associated with the hedge of an anticipated transaction,
hedge effectiveness criteria also require that it be probable that the
underlying transaction will occur. Instruments that meet these hedging criteria
are formally designated as hedges at the inception of the contract. When the
terms of an underlying transaction are modified, or when the underlying hedged
item ceases to exist, all changes in the fair value of the instrument are
marked-to-market with changes in value included in net income each period until
the instrument matures. Those risk management instruments that do not meet the
hedging criteria are marked-to-market each period. Refer to note K, "Financial
Instruments," on pages 76 and 77 for descriptions of the major risk management
programs and classes of financial instruments used by the company, including the
specific methods used to account for them.
In determining fair value of its financial instruments, the company uses a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. For the majority of financial instruments
including most derivatives, long-term investments and long-term debt, standard
market conventions and techniques such as discounted cash flow analysis, option
pricing models, replacement cost and termination cost are used to determine fair
value. Dealer quotes are used for the remaining financial instruments. All
methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at date of
purchase are carried at fair value and considered to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities included in current assets represent securities with a
maturity of less than one year. The company also has marketable securities,
including non-equity method alliance investments, with a maturity of more than
one year. These non-current investments are included in Investments and sundry
assets. The company's marketable securities, including certain non-equity method
alliance investments, are considered available for sale and are reported at fair
value with changes in unrealized gains and losses, net of applicable taxes,
recorded in Accumulated gains and losses not affecting retained earnings within
stockholders' equity. Realized gains and losses are calculated based on the
specific identification method. Other than temporary declines in market value
from original cost are charged to net income in the period the loss occurs. All
other investment securities not described above or in the Principles of
Consolidation on page 69, primarily non-publicly traded securities, are
accounted for using the cost method.
INVENTORIES
Raw materials, work in process and finished goods are stated at the lower of
average cost or net realizable value.
CUSTOMER LOAN RECEIVABLES
Global Financing is one of many sources of funding from which customers can
choose. Customer loan receivables, net of allowances, comprise almost entirely
loans made by the company's Global Financing segment, primarily to finance the
purchase of the company's software and services. Separate contractual
relationships on these financing agreements are generally for terms ranging from
one to three years requiring straight-line payments over the term. Therefore,
these agreements do not represent extended payment terms. Each financing
contract is priced independently at competitive market rates. An allowance for
loan losses is established based upon management's historical collection
experience, adverse situations that may affect the customer's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
PAGE NO.
SEVENTY NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
DEPRECIATION
Plant, rental machines and other property are carried at cost and depreciated
over their estimated useful lives using the straight-line method.
The estimated useful lives of depreciable properties generally are as
follows: buildings, 50 years; building equipment, 20 years; land improvements,
20 years; plant, laboratory and office equipment, 2 to 15 years; and computer
equipment, 1.5 to 5 years.
SOFTWARE COSTS
Costs that are related to the conceptual formulation and design of licensed
programs are expensed as research and development. Also, for licensed programs,
the company capitalizes costs that are incurred to produce the finished product
after technological feasibility is established. The annual amortization of the
capitalized amounts is the greater of the amount computed based on the estimated
revenue distribution over the products' revenue-producing lives, or the
straight-line method, and is applied over periods ranging up to three years. The
company performs periodic reviews to ensure that unamortized program costs
remain recoverable from future revenue. The company charges costs to support or
service licensed programs against net income as the costs are incurred.
The company capitalizes certain costs that are incurred to purchase or to
create and implement internal use computer software, which include software
coding, installation, testing and data conversion. Capitalized costs are
amortized on a straight-line basis over two years.
The company capitalizes costs incurred during certain phases of
internal Web site development. Capitalized costs are amortized on a
straight-line basis over two years.
RETIREMENT PLANS AND NONPENSION POSTRETIREMENT BENEFITS
Current service costs of retirement plans and postretirement health care and
life insurance benefits are accrued in the period. Prior service costs that
result from amendments to the plans are amortized over the average remaining
service period of the employees expected to receive benefits. Unrecognized net
gains and losses that exceed 10 percent of the greater of the projected benefit
obligation or the market-related value of plan assets are amortized over the
average remaining service life of employees expected to receive benefits.
Experience gains and losses, as well as the effects of changes in actuarial
assumptions and plan provisions, are amortized over the average future service
period of employees. See note V, "Retirement Plans," on pages 85 through 88 and
note W, "Nonpension Postretirement Benefits," on pages 88 and 89 for further
discussion.
GOODWILL
Goodwill is amortized to expense on a straight-line basis over the periods
estimated to benefit, generally not to exceed five years. The company performs
reviews to evaluate the recoverability of goodwill and takes into account events
or circumstances that warrant revised estimates of useful lives or that indicate
that an impairment exists.
Common Stock
Common stock refers to the $.20 par value capital stock as designated in the
company's Certificate of Incorporation. Treasury stock is accounted for using
the cost method. When treasury stock is reissued, the value is computed and
recorded using a weighted-average basis.
EARNINGS PER SHARE OF COMMON STOCK
Earnings per share of common stock--basic is computed by dividing Net income
applicable to common stockholders by the weighted-average number of common
shares outstanding for the period. Earnings per share of common stock-- assuming
dilution reflects the maximum potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock and would then share in the net income of the company. See note S,
"Earnings Per Share of Common Stock," on page 83 for further discussion.
B ACCOUNTING CHANGES
STANDARDS IMPLEMENTED
The company implemented new accounting standards in 2000, 1999 and 1998. These
standards do not have a material effect on the financial position or results of
operations of the company.
In 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of Accounting Principles Board Opinion No.
25." The requirements of FIN No. 44 are either not applicable to the company or
are already consistent with the company's existing accounting policies.
Effective July 1, 2000, the company adopted Emerging Issues Task Force
(EITF) Issue No. 00-2, "Accounting for Web Site Development Costs." See note A,
"Significant Accounting Policies" on pages 69 through 71 for a description of
the company's policies for Web site development costs.
Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," the
company has reviewed its accounting policies for the recognition of revenue. SAB
No. 101 was required to be implemented in
PAGE NO.
SEVENTY-ONE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
fourth quarter 2000. SAB No. 101 provides guidance on applying generally
accepted accounting principles to revenue recognition in financial statements.
The company's policies for revenue recognition are consistent with the views
expressed within SAB No. 101. See note A, "Significant Accounting Policies," on
pages 69 through 71 for a description of the company's policies for revenue
recognition.
Effective January 1, 1999, the company adopted American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires a company to capitalize certain costs that are
incurred to purchase or to create and implement internal use computer software.
See note A, "Significant Accounting Policies" on pages 69 through 71 for a
description of the company's policies for internal use software.
Effective December 31, 1998, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
operating segments and disclosures about products and services, geographic areas
and major customers. See note X, "Segment Information," on pages 89 through 93
for the company's segment information.
Effective December 31, 1998, the company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which establishes
standard disclosures for defined benefit pension and postretirement benefit
plans. See note V, "Retirement Plans," on pages 85 through 88 and note W,
"Nonpension Postretirement Benefits," on pages 88 and 89 for the disclosures.
Effective January 1, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
in a full set of general-purpose financial statements the gains and losses not
affecting retained earnings. The disclosures required by SFAS No. 130 are
presented in the Accumulated gains and losses not affecting retained earnings
section in the Consolidated Statement of Stockholders' Equity on pages 66 and 67
and in note M, "Stockholders' Equity Activity," on page 79.
Effective January 1, 1998, the company adopted the AICPA SOP No. 97-2,
"Software Revenue Recognition." This SOP provides guidance on revenue
recognition for software transactions. See note A, "Significant Accounting
Policies" on pages 69 through 71 for a description of the company's policy for
software revenue recognition.
NEW STANDARDS TO BE IMPLEMENTED
Effective January 1, 2001, the company adopted SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities--a replacement of SFAS No. 125." This statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and revises the accounting standards for
securitizations and transfers of financial assets and collateral. Management
does not expect the adoption to have a material effect on the company's results
of operations and financial position. This standard also requires new
disclosures in 2000. Such requirements were not applicable to the company.
On January 1, 2001, the company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments. Specifically, SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and to measure those instruments at fair value. Additionally,
the fair value adjustments will affect either stockholders' equity or net income
depending on whether the derivative instrument qualifies as a hedge for
accounting purposes and, if so, the nature of the hedging activity. As of
January 1, 2001, the adoption of the new standard results in a net-of-tax
increase of $219 million to Accumulated gains and losses not affecting retained
earnings in the Consolidated Statement of Stockholders' Equity and a charge of
$6 million to Cumulative effect of adopting accounting principle, net of tax in
the Consolidated Statement of Earnings.
C COMMON STOCK SPLIT
On April 27, 1999, the stockholders of the company approved amendments to the
Certificate of Incorporation to increase the number of authorized shares of
common stock from 1,875.0 million to 4,687.5 million, which was required to
effect a two-for-one stock split approved by the company's Board of Directors on
January 26, 1999. In addition, the amendment reduced the par value of the common
shares from $.50 to $.20 per share. Common stockholders of record at the close
of business on May 10, 1999, received one additional share for each share held.
All share and per share data prior to the second quarter of 1999 presented in
the consolidated financial statements and notes thereto reflect the two-for-one
stock split.
D ACQUISITIONS/DIVESTITURES
ACQUISITIONS
2000
In 2000, the company completed nine acquisitions at a cost of approximately $511
million.
The largest acquisition was LGS Group Inc. (LGS). The company acquired all
the outstanding stock of LGS in April for $190 million. LGS offers services
ranging from application development to information technology consulting.
PAGE NO.
SEVENTY-TWO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The following table presents the allocation of the purchase price of the
2000 acquisitions.
(DOLLARS IN MILLIONS) LGS OTHER
================================================================================
Purchase price $ 190 $ 321
Tangible net assets 31 68
Identifiable intangible assets -- 36
Goodwill 159 220
In-process research
and development -- 9
Deferred tax liabilities
related to identifiable
intangible assets -- (12)
1999
In 1999, the company completed 17 acquisitions at a cost of approximately $1,551
million. Three of the major acquisitions for the year are detailed in the
following discussion.
On September 24, 1999, the company acquired all of the outstanding capital
stock of Sequent Computer Systems, Inc., an acknowledged leader in systems based
on NUMA (non-uniform memory access) architecture, for approximately $837
million.
On September 29, 1999, the company acquired all of the outstanding stock
of Mylex Corporation, a leading developer of technology for moving, storing,
protecting and managing data in desktop and networked environments, for
approximately $259 million.
On September 27, 1999, the company acquired all the outstanding stock of
DASCOM, Inc., an industry leader in Web-based and enterprise-security
technology, for approximately $115 million.
The following table presents the allocation of the purchase price of the
1999 acquisitions.
(DOLLARS IN MILLIONS) SEQUENT MYLEX DASCOM OTHER
================================================================================
Purchase price $ 837* $ 259 $ 115 $ 340
Tangible net assets/
(liabilities) 382 67 (17) 45
Identifiable intangible
assets 187 35 13 --
Current technology 87 26 19 9
Goodwill 192* 145 92 286
In-process research
and development 85 7 19 --
Deferred tax liabilities
related to identifiable
intangible assets (96) (21) (11) --
* In 2000, the total purchase price and goodwill numbers were adjusted
primarily for increased stock options being exercised versus being
converted to IBM options and at a higher gain per option than originally
assumed.
1998
In 1998, the company completed nine acquisitions at a cost of approximately $828
million. In January 1998, the company acquired all of the outstanding stock of
Software Artistry, Inc., a leading provider of both consolidated service desk
and customer relationship management solutions for distributed enterprise
environments for approximately $203 million. In 2000, the company sold most of
Software Artistry, representing the part of the business that is no longer
considered strategic. In March 1998, the company acquired all of the outstanding
stock of CommQuest Technologies, Inc., a company that designs and markets
advanced semiconductors for wireless communications applications such as
cellular phones and satellite communications for approximately $183 million.
The following table presents the allocation of the purchase price of the
1998 acquisitions.
SOFTWARE
(DOLLARS IN MILLIONS) ARTISTRY COMMQUEST OTHER
================================================================================
Purchase price $ 203 $ 183 $ 442
Tangible net assets 22 2 188
Identifiable intangible assets 24 79 --
Current technology 46 12 --
Goodwill 66 81 254
In-process research
and development 70 41 --
Deferred tax liabilities
related to identifiable
intangible assets (25) (32) --
All of these acquisitions were accounted for as purchase transactions, and
accordingly, the assets and liabilities of the acquired entities were recorded
at their estimated fair value at the date of acquisition. The effects of these
acquisitions on the company's consolidated financial statements were not
material. Hence, the company has not provided pro forma financial information as
if the companies had combined at the beginning of the current period or the
immediately preceding period.
The tangible net assets comprise primarily cash, accounts receivable,
land, buildings and leasehold improvements. The identifiable intangible assets
comprise primarily patents, trademarks, customer lists, assembled workforce,
employee agreements and leasehold interests. The identifiable intangible assets
and goodwill will be amortized on a straight-line basis, generally not to exceed
five years.
In connection with these acquisitions, the company recorded pre-tax
charges of $9 million, $111 million and $111 million for acquired in-process
research and development (IPR&D) for 2000, 1999 and 1998, respectively. At the
date of the acquisitions, the IPR&D projects had not yet reached technological
feasibility and had no alternative future uses. The value of the IPR&D reflects
the relative value and contribution of the acquired research and development to
the company's existing research or product lines.
PAGE NO.
SEVENTY-THREE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
DIVESTITURES
During 1999, the company completed the sale of its Global Network business to
AT&T for $4,991 million. More than 5,300 IBM employees joined AT&T as a result
of these sales of operations in 71 countries.
During 1999, the company recognized a pre-tax gain of $4,057 million
($2,495 million after tax, or $1.33 per diluted common share). The net gain
reflects dispositions of plant, rental machines and other property of $410
million, other assets of $182 million and contractual obligations of $342
million. The gain was recorded as a reduction of Selling, general and
administrative expense in the Consolidated Statement of Earnings.
E INVENTORIES
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
================================================================================
Finished goods $1,446 $1,162
Work in process and raw materials 3,319 3,706
- --------------------------------------------------------------------------------
Total $4,765 $4,868
================================================================================
F FINANCING RECEIVABLES
The following table includes receivables resulting from leasing activities and
installment loans to customers, as well as commercial financing activities
primarily to dealers, arising from the Global Financing business. See note X,
"Segment Information," on pages 89 through 93 for information on the total
assets of the Global Financing segment, which also includes cash, rental machine
fixed assets, intercompany amounts and other.
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
================================================================================
Short term:
Commercial financing receivables $ 6,851 $ 6,062
Customer loan receivables 4,065 3,764
Installment payment receivables 1,221 1,110
Net investment in sales-type leases 6,568 6,220
- --------------------------------------------------------------------------------
Total short-term financing
receivables $18,705 $17,156
================================================================================
Long term:
Commercial financing receivables $ 779 $ 30
Customer loan receivables 4,359 4,219
Installment payment receivables 574 848
Net investment in sales-type leases 7,596 7,981
- --------------------------------------------------------------------------------
Total long-term financing receivables $13,308 $13,078
================================================================================
Net investment in sales-type leases is for leases that relate principally to IBM
equipment and is generally for terms ranging from two to five years. Net
investment in sales-type leases includes unguaranteed residual values of
approximately $751 million and $737 million at December 31, 2000 and 1999,
respectively, and is reflected net of unearned income at those dates of
approximately $1,500 million and $1,600 million, respectively. Scheduled
maturities of minimum lease payments outstanding at December 31, 2000, expressed
as a percentage of the total, are approximately as follows: 2001, 50 percent;
2002, 30 percent; 2003, 14 percent; 2004, 4 percent; and 2005 and beyond, 2
percent.
G PLANT, RENTAL MACHINES AND OTHER PROPERTY
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
================================================================================
Land and land improvements $ 896 $ 1,026
Buildings and building improvements 9,904 10,395
Plant, laboratory and
office equipment 22,354 22,503
- --------------------------------------------------------------------------------
33,154 33,924
Less: Accumulated depreciation 18,857 19,268
- --------------------------------------------------------------------------------
14,297 14,656
Rental machines 5,301 5,692
Less: Accumulated depreciation 2,884 2,758
- --------------------------------------------------------------------------------
2,417 2,934
- --------------------------------------------------------------------------------
Total $16,714 $17,590
================================================================================
H INVESTMENTS AND SUNDRY ASSETS
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
================================================================================
Deferred taxes $ 2,968 $ 2,654
Prepaid pension assets 6,806 5,636
Alliance investments:
Equity method 629 595
Other 909 1,439
Goodwill (less accum. amortization) 848 1,045
Marketable securities--non-current 171 113
Software 782 663
Other assets 1,334 1,527
- --------------------------------------------------------------------------------
Total $14,447 $13,672
================================================================================
I SALE AND SECURITIZATION OF RECEIVABLES
The company manages assets of $136 million and $273 million from the
securitization of loans, leases and trade receivables, at year-end 2000 and
1999, respectively. The company did not sell any receivables in 2000, and
therefore had no cash proceeds for the year. Cash proceeds from the sale and
securitization of these receivables and assets were $1,311 million in 1999. No
significant gain or loss resulted from these transactions. The company expects
recourse amounts associated with the aforementioned sale and securitization
activities to be minimal and has adequate reserves to cover potential losses.
PAGE NO.
SEVENTY-FOUR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
J BORROWINGS
SHORT-TERM DEBT
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
================================================================================
Commercial paper $ 3,521 $ 5,074
Short-term loans 3,975 3,351
Long-term debt: Current maturities 2,709 5,805
- --------------------------------------------------------------------------------
Total $10,205 $14,230
================================================================================
The weighted-average interest rates for commercial paper at December 31, 2000
and 1999, were 6.7 percent and 5.9 percent, respectively. The weighted-average
interest rates for short-term loans at December 31, 2000 and 1999, were 2.9
percent and 4.0 percent, respectively.
LONG-TERM DEBT
(DOLLARS IN MILLIONS)
AT DECEMBER 31: MATURITIES 2000 1999*
================================================================================
U.S. Dollars:
Debentures:
6.22% 2027 $ 500 $ 500
6.5% 2028 700 700
7.0% 2025 600 600
7.0% 2045 150 150
7.125% 2096 850 850
7.5% 2013 550 550
8.375% 2019 750 750
Notes: 6.3% average 2001-2014 2,933 4,191
Medium-term note
program: 5.8% average 2001-2014 4,305 6,230
Other: 6.8% average 2001-2012 1,092 1,618
- --------------------------------------------------------------------------------
12,430 16,139
Other currencies
(average interest
rate at December 31, 2000,
in parentheses):
Euros (5.3%) 2002-2005 3,042 --
Japanese yen (1.4%) 2001-2014 4,845 3,141
Canadian dollars (5.7%) 2002-2005 302 316
Swiss francs (3.5%) 2001-2003 231 78
Other (8.1%) 2001-2014 275 295
- --------------------------------------------------------------------------------
21,125 19,969
Less: Net unamortized
discount 45 40
- --------------------------------------------------------------------------------
21,080 19,929
Less: Current maturities 2,709 5,805
- --------------------------------------------------------------------------------
Total $18,371 $14,124
================================================================================
* Reclassified to conform with 2000 presentation.
Annual maturities in millions of dollars on long-term
debt outstanding at December 31, 2000, are as follows: 2001, $2,709; 2002,
$5,405; 2003, $3,364; 2004, $763; 2005, $1,873; 2006 and beyond, $7,011.
INTEREST ON DEBT
Interest paid and accrued on borrowings of the company and its subsidiaries was
$1,449 million in 2000, $1,475 million in 1999 and $1,585 million in 1998. Of
these amounts, the company capitalized $20 million in 2000, $23 million in 1999
and $28 million in 1998. Of the remainder, the company charged $717 million in
2000, $727 million in 1999 and $713 million in 1998 to Interest expense on the
Consolidated Statement of Earnings and charged $712 million in 2000, $725
million in 1999 and $844 million in 1998 to Cost of Global Financing in the
Consolidated Statement of Earnings. Refer to the table and related discussion on
page 92 in note X, "Segment Information," for the total interest expense of the
Global Financing segment.
The decrease in total interest in 2000 versus 1999 was due primarily to
lower average interest rates and a decline in average debt outstanding during
2000. The decrease in total interest in 1999 versus 1998 was due primarily to
lower average interest rates, partially offset by an increase in average debt
outstanding during 1999. The average effective interest rate for total debt was
5.0 percent, 5.1 percent and 5.7 percent in 2000, 1999 and 1998, respectively.
These rates include the results of currency and interest rate swaps applied to
the debt previously described.
LINES OF CREDIT
The company maintains a $10.0 billion global credit facility. The company's
other committed and uncommitted lines of credit were $4.7 billion and $5.5
billion at December 31, 2000 and 1999, respectively. Interest rates and other
terms of borrowing under these lines of credit vary from country to country
depending on local market conditions at the time of the borrowing.
(DOLLARS IN BILLIONS)
AT DECEMBER 31: 2000 1999
================================================================================
Unused lines
From the global credit facility $ 9.1 $ 8.6
From other committed and
uncommitted lines 4.1 4.5
- --------------------------------------------------------------------------------
Total unused lines of credit $ 13.2 $ 13.1
================================================================================
PAGE NO.
SEVENTY-FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
K FINANCIAL INSTRUMENTS
The company maintains on- and off-balance sheet portfolios of financial
instruments.
FINANCIAL INSTRUMENTS ON-BALANCE SHEET
(EXCLUDING DERIVATIVES)
Cash and cash equivalents, marketable securities, notes and other accounts
receivable and other investments are financial assets with carrying values that
approximate fair value. Accounts payable, other accrued expenses and
liabilities, and short-term and long-term debt are financial liabilities with
carrying values that approximate fair value.
The following table summarizes the company's marketable securities, all of
which are considered available for sale, and alliance investments.
MARKETABLE SECURITIES*
(DOLLARS IN MILLIONS) FAIR VALUE
--------------------
AT DECEMBER 31: 2000 1999
================================================================================
Current marketable securities:
U.S. government securities $ -- $ 15
Time deposits and other obligations 153 746
Non-U.S. government securities and
other fixed-term obligations 6 27
- --------------------------------------------------------------------------------
Total $ 159 $ 788
================================================================================
Marketable securities--non-current:**
Time deposits and other obligations $ 163 $ 105
Non-U.S. government securities and
other fixed-term obligations 8 8
- --------------------------------------------------------------------------------
Total $ 171 $ 113
================================================================================
Non-equity method alliance
investments** $ 909 $1,439
================================================================================
* Gross unrealized gains (before taxes) on marketable securities and
alliance investments were $47 million and $1,310 million at December 31,
2000 and 1999, respectively. Gross unrealized losses (before taxes) on
marketable securities and alliance investments were $175 million and $7
million at December 31, 2000 and 1999, respectively. See note M,
"Stockholders' Equity Activity," on page 79 for accumulated and net change
in unrealized gains and losses on marketable securities.
** Included within Investments and sundry assets on the Consolidated
Statement of Financial Position. (See note H, "Investments and Sundry
Assets," on page 74.)
FINANCIAL INSTRUMENTS OFF-BALANCE SHEET
(EXCLUDING DERIVATIVES)
The company has guaranteed certain loans and financial commitments of its
affiliates. The approximate amount of these financial guarantees was $0.4
billion and $1.2 billion at December 31, 2000 and 1999, respectively.
The company extended lines of credit, of which the unused amounts were
$4.2 billion and $4.5 billion at December 31, 2000 and 1999, respectively. A
portion of these amounts was available to the company's dealers to support their
working capital needs.
The company enters into contracts that effectively provide the company
with committed future borrowings in select foreign currencies. The aggregate
amount of these contracts was $9.0 billion and $6.4 billion at December 31, 2000
and 1999, respectively. The terms of these contracts generally are less than
eighteen months. Foreign exchange gains and losses associated with these
contracts are recorded in net income as they are realized. These amounts have
not been and are not expected to be material to the company's financial results.
DERIVATIVES AND HEDGING
The company operates in approximately 40 functional currencies and is a
significant lender and a borrower in the global financial markets. In the normal
course of business, the company is exposed to the impact of interest rate
changes and foreign currency fluctuations. The company limits these risks by
following established risk management policies and procedures including the use
of derivatives and, where cost-effective, financing with debt in the currencies
in which assets are denominated. For interest rate exposures, derivatives are
primarily used to align rate movements between interest rates associated with
the company's lease and other financial assets and interest rates associated
with its financing debt and to manage the related cost of debt. For currency
exposures, derivatives are used to limit the effects of foreign exchange rate
fluctuations on financial results.
The company does not use derivatives for trading or speculative purposes,
nor is it a party to leveraged derivatives. Further, the company has a policy of
only entering into contracts with carefully selected major financial
institutions based upon their credit ratings and other factors and maintains
strict dollar and term limits that correspond to the institution's credit
rating. The company's current credit exposure under these agreements is limited
to the fair value of instruments with a positive fair value at the reporting
date. When viewed in conjunction with the underlying and offsetting exposure
that the derivatives are designed to hedge, the company has not sustained a
material loss from these instruments nor does it anticipate any material adverse
effect on its net income or financial position in the future from the use of
derivatives.
In its hedging programs, the company employs the use of options, forwards,
interest rate and currency swaps, caps, floors or a combination thereof
depending upon the underlying exposure.
PAGE NO.
SEVENTY-SIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
A description of the major hedging programs follows:
DEBT RISK MANAGEMENT
The company issues debt in the global capital markets, principally to fund its
Global Financing lease and loan portfolio. Access to cost-effective financing
can result in interest rate and/or currency mismatches with the underlying
assets. To manage these mismatches and to reduce overall interest cost, the
company uses interest-rate and currency instruments, principally swaps, to
convert a portion of its fixed-rate debt into variable-rate debt and to convert
a portion of its variable-rate debt to fixed-rate debt. Interest rate and
currency rate differentials that arise under these swap contracts are recognized
in interest expense over the life of the contracts. The resulting cost of funds
is usually lower than that which would have been available if debt with matching
characteristics was issued directly. The weighted-average remaining maturity of
these swaps is approximately six years.
ANTICIPATED ROYALTIES AND INTERCOMPANY TRANSACTIONS
The company's operations generate significant non-functional currency
intercompany payments for royalties and goods and services among the company's
non-U.S. subsidiaries and with the parent company. In anticipation of these
foreign currency cash flows and in view of the volatility of the currency
markets, the company selectively employs foreign currency contracts to manage
its currency risk. The terms of these instruments are generally less than
eighteen months, commensurate with the underlying hedged anticipated cash flows.
The effects of these instruments are reported in net income when the underlying
transaction occurs.
For purchased options that hedge qualifying anticipated transactions,
gains and losses are deferred and recognized in net income in the same period
that the underlying transaction occurs, expires or otherwise is terminated. At
December 31, 2000 and 1999, there were no material deferred gains or losses. The
premiums associated with entering into these option contracts generally are
amortized over the life of the options and are not material to the company's
results. Unamortized premiums are recorded in prepaid assets. Gains and losses
on purchased options that are intended to hedge anticipated transactions and do
not qualify for hedge accounting are recorded in net income as they occur and
are not material to the company's results. Similarly, gains and losses on
written options are recorded in net income as they occur and are not material to
the company's results.
SUBSIDIARY CASH AND FOREIGN CURRENCY ASSET/LIABILITY MANAGEMENT
The company uses its Global Treasury Centers to manage the cash of its
subsidiaries. These centers principally use currency swaps to convert cash flows
in a cost-effective manner, predominantly for the company's European
subsidiaries. In addition, the company uses foreign exchange forward contracts
to hedge, on a net basis, the foreign currency exposure of a portion of the
company's non-functional currency assets and liabilities. The terms of these
forward and swap contracts are generally less than one year. The interest rate
differentials of these instruments are generally recognized in interest expense
over the life of the contracts.
LONG TERM INVESTMENTS IN FOREIGN SUBSIDIARIES ("NET INVESTMENT")
A significant portion of the company's foreign denominated debt portfolio is
designated as a hedge to reduce the volatility in stockholders' equity caused by
changes in foreign exchange rates in the functional currency of major foreign
subsidiaries with respect to the U.S. dollar. The company also uses currency
swaps and other foreign currency contracts for this risk management purpose. The
currency effects of these hedges are reflected in the Accumulated gains and
losses not affecting retained earnings section of stockholders' equity thereby
offsetting a portion of the translation of the net foreign assets.
The following table summarizes the notional value, carrying value and fair
value of the company's derivative financial instruments, principally interest
rate and currency contracts, both on- and off-balance sheet. The notional value
at December 31 provides an indication of the extent of the company's involvement
in these instruments at that time, but does not represent exposure to credit,
interest rate or foreign exchange rate market risks.
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
---------------------------- ---------------------------
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
(DOLLARS IN MILLIONS) VALUE VALUE VALUE* VALUE VALUE VALUE*
================================================================================================
Derivative financial instruments $18,873 $(21) $178 $31,535 $(198) $(437)
AMOUNTS IN PARENTHESES ARE LIABILITIES.
* THE ESTIMATED FAIR VALUE OF DERIVATIVES BOTH ON- AND OFF-BALANCE SHEET AT
DECEMBER 31, 2000 AND 1999, COMPRISES ASSETS OF $393 MILLION AND $616
MILLION, RESPECTIVELY, AND LIABILITIES OF $215 MILLION AND $1,053 MILLION,
RESPECTIVELY.
PAGE NO.
SEVENTY-SEVEN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
L OTHER LIABILITIES
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
================================================================================
Nonpension postretirement
benefits--U.S. and
non-U.S. employees $ 7,128 $ 7,420
Deferred income taxes 1,623 1,354
Deferred income 1,266 1,081
Restructuring actions 854 1,162
Executive compensation accruals 769 746
Post-employment/
pre-retirement liability 585 710
Environmental accruals 226 228
Other 497 581
- --------------------------------------------------------------------------------
Total $12,948 $13,282
================================================================================
Post-employment/pre-retirement liabilities represent workforce accruals for
contractually obligated payments to employees terminated in the ongoing course
of business other than those accruals presented separately above.
The company executed restructuring actions through 1993 and special
actions in 1999. The non-current liabilities relating to these actions are
included in restructuring actions in the table above. See note Q, "1999
Actions," on pages 81 and 82 for more information regarding the 1999 actions.
The reconciliation of the December 31, 1999 to 2000 balances of the current and
non-current liabilities for restructuring actions are presented below. The
current liabilities presented in the table are included in Other accrued
expenses and liabilities on the Consolidated Statement of Financial Position.
DECEMBER 31, DECEMBER 31,
1999 OTHER 2000
(DOLLARS IN MILLIONS) BALANCE PAYMENTS ADJUSTMENTS* BALANCE
================================================================================
Current:
Workforce $ 188 $ 178 $ 138 $ 148
Space 144 126 73 91
MiCRUS
Investment 152 152 -- --
- --------------------------------------------------------------------------------
Total $ 484 $ 456 $ 211 $ 239
================================================================================
Non-current:
Workforce $ 659 $ -- $ (189) $ 470
Space 503 -- (119) 384
- --------------------------------------------------------------------------------
Total $1,162 $ -- $ (308) $ 854
================================================================================
* PRINCIPALLY REPRESENTS RECLASSIFICATION OF NON-CURRENT TO CURRENT AND
CURRENCY TRANSLATION ADJUSTMENTS.
The workforce accruals relate to terminated employees who are no longer
working for the company, but who were granted annual payments to supplement
their state pensions in certain countries. These contractually required payments
will continue until the former employee dies.
The space accruals are for ongoing obligations to pay rent for vacant
space that could not be sublet or space that was sublet at rates lower than the
committed lease arrangement. The length of these obligations varies by lease
with the longest extending through 2012.
The company employs extensive internal environmental protection programs
that primarily are preventive in nature. The cost of these ongoing programs is
recorded as incurred.
The company continues to participate in environmental assessments and
cleanups at a number of locations, including operating facilities, previously
owned facilities and Superfund sites. The company accrues for all known
environmental liabilities when it becomes probable that the company will incur
cleanup costs, and those costs can reasonably be estimated. In addition,
estimated environmental costs that are associated with post-closure activities
(for example, the removal and restoration of chemical storage facilities and
monitoring) are accrued when the decision is made to close a facility. The total
amounts accrued, including amounts classified as current on the Consolidated
Statement of Financial Position, that do not reflect actual or anticipated
insurance recoveries, were $248 million and $240 million at December 31, 2000
and 1999, respectively.
The amounts accrued do not cover sites that are in the preliminary stages
of investigation; that is, for which neither the company's percentage of
responsibility nor the extent of cleanup required has been identified. Estimated
environmental costs are not expected to materially affect the financial position
or results of the company's operations in future periods. However, estimates of
future costs are subject to change due to protracted cleanup periods and
changing environmental remediation regulations.
PAGE NO.
SEVENTY-EIGHT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
M STOCKHOLDERS' EQUITY ACTIVITY
STOCK REPURCHASES
From time to time, the Board of Directors authorizes the company to repurchase
IBM common stock. The company repurchased 61,041,820 common shares at a cost of
$6.7 billion and 71,618,800 common shares at a cost of $7.3 billion in 2000 and
1999, respectively. In 2000 and in 1999, the company did not retire the shares
it repurchased. In 2000 and 1999, the company issued 2,174,594 and 906,829
treasury shares, respectively, as a result of exercises of stock options by
employees of certain recently acquired businesses and by non-U.S. employees. At
December 31, 2000, approximately $2.9 billion of Board authorized repurchases
remained. The company plans to purchase shares on the open market from time to
time, depending on market conditions.
In 1995, the Board of Directors authorized the company to repurchase all
of its outstanding Series A 7-1/2 percent callable preferred stock. The company
did not repurchase any shares in 2000 or in 1999. The company plans to purchase
the outstanding shares on the open market and in private transactions from time
to time, depending on market conditions. There were 2,546,011 shares outstanding
at December 31, 2000 and 1999.
EMPLOYEE BENEFITS TRUST
Effective November 1, 1997, the company created an employee benefits trust to
which it contributed 20 million shares of treasury stock. The company is
authorized to instruct the trustee to sell shares from time to time and to use
proceeds from those sales, and any dividends paid on the contributed stock,
toward the partial satisfaction of the company's future obligations under
certain of its compensation and benefits plans. The shares held in trust are not
considered outstanding for purposes of calculating earnings per share until they
are committed to be released. The trustee will vote the shares in accordance
with its fiduciary duties.
As of December 31, 2000 and 1999, the company had not committed any shares
to be released. At December 31, 1998, the company began adjusting its valuation
of the employee benefits trust to fair value. These adjustments affect only line
items within stockholders' equity; not total stockholders' equity or net income.
ACCUMULATED GAINS AND LOSSES NOT AFFECTING
RETAINED EARNINGS*
NET TOTAL
UNREALIZED GAINS/(LOSSES)
FOREIGN GAINS/(LOSSES) NOT AFFECTING
CURRENCY ON MARKETABLE RETAINED
(DOLLARS IN MILLIONS) ITEMS SECURITIES EARNINGS
================================================================================
January 1, 1998 $ 791 $ 108 $ 899
Change for period 69 (57) 12
- --------------------------------------------------------------------------------
December 31, 1998 860 51 911
Change for period (546) 796 250
- --------------------------------------------------------------------------------
December 31, 1999 314 847 1,161
Change for period (531) (925) (1,456)
- --------------------------------------------------------------------------------
December 31, 2000 $ (217) $ (78) $ (295)
================================================================================
* NET OF TAX.
NET CHANGE IN UNREALIZED GAINS/(LOSSES) ON
MARKETABLE SECURITIES (NET OF TAX)
(DOLLARS IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31: 2000 1999
================================================================================
Net unrealized (losses)/gains arising
during the period $(810) $ 943
Less net gains included in net income
for the period 115 147
- --------------------------------------------------------------------------------
Net change in net unrealized (losses)/
gains on marketable securities $(925) $ 796
================================================================================
Unrealized losses arising in 2000 relate primarily to previous unrealized gains
from original cost occurring in prior years.
N CONTINGENCIES
The company is subject to a variety of claims and suits that arise from time to
time in the ordinary course of its business, including actions with respect to
contracts, intellectual property, product liability and environmental matters.
The company is a defendant and/or third-party defendant in a number of cases in
which claims have been filed by current and former employees, independent
contractors, estate representatives, offspring and relatives of employees
seeking damages for wrongful death and personal injuries allegedly caused by
exposure to chemicals in various of the company's facilities from 1964 to the
present. The company believes that plaintiffs' claims are legally baseless and
without factual support. The company will defend itself vigorously.
While it is not possible to predict the ultimate outcome of the matters
discussed above, the company believes that any losses associated with any of
such matters will not have a material effect on the company's business,
financial condition or results of operations.
PAGE NO.
SEVENTY-NINE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
O TAXES
(DOLLARS IN MILLIONS)
FOR THE YEAR ENDED
DECEMBER 31: 2000 1999 1998
================================================================================
Income before income taxes:
U.S. operations $ 5,871 $ 5,892 $ 2,960
Non-U.S. operations 5,663 5,865 6,080
- --------------------------------------------------------------------------------
$11,534 $11,757 $ 9,040
================================================================================
The provision for income
taxes by geographic
operations is as follows:
U.S. operations $ 1,692 $ 2,005 $ 991
Non-U.S. operations 1,749 2,040 1,721
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 3,441 $ 4,045 $ 2,712
================================================================================
The components of the provision for income taxes by taxing jurisdiction are as
follows:
(DOLLARS IN MILLIONS)
FOR THE YEAR ENDED
DECEMBER 31: 2000 1999 1998
================================================================================
U.S. federal:
Current $ 613 $ 1,759 $ 1,117
Deferred 286 (427) (475)
- --------------------------------------------------------------------------------
899 1,332 642
U.S. state and local:
Current 192 272 139
Deferred 47 7 (260)
- --------------------------------------------------------------------------------
239 279 (121)
Non-U.S.:
Current 2,607 2,727 2,062
Deferred (304) (293) 129
- --------------------------------------------------------------------------------
2,303 2,434 2,191
- --------------------------------------------------------------------------------
Total provision for
income taxes 3,441 4,045 2,712
Provision for social security,
real estate, personal
property and other taxes 2,766 2,831 2,859
- --------------------------------------------------------------------------------
Total provision for taxes $ 6,207 $ 6,876 $ 5,571
================================================================================
The effect of tax law changes on deferred tax assets and liabilities did not
have a significant effect on the company's effective tax rate.
The significant components of activities that gave rise to deferred tax assets
and liabilities that are recorded on the balance sheet were as follows:
DEFERRED TAX ASSETS
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
================================================================================
Employee benefits $ 3,673 $ 3,737
Alternative minimum tax credits 1,424 1,244
Bad debt, inventory and
warranty reserves 953 1,093
Capitalized research and development 848 880
Deferred income 837 870
General business credits 655 605
Infrastructure reduction charges 617 918
Foreign tax loss carryforwards 489 406
Equity alliances 437 377
Depreciation 376 326
State and local tax loss carryforwards 246 227
Intracompany sales and services 149 153
Other 2,809 2,763
- --------------------------------------------------------------------------------
Gross deferred tax assets 13,513 13,599
Less: Valuation allowance 572 647
- --------------------------------------------------------------------------------
Net deferred tax assets $12,941 $12,952
================================================================================
DEFERRED TAX LIABILITIES
(DOLLARS IN MILLIONS)
AT DECEMBER 31: 2000 1999
================================================================================
Retirement benefits $ 3,447 $ 3,092
Sales-type leases 2,450 2,914
Depreciation 1,179 1,237
Software costs deferred 306 250
Other 1,836 2,058
- --------------------------------------------------------------------------------
Gross deferred tax liabilities $ 9,218 $ 9,551
================================================================================
The valuation allowance at December 31, 2000, principally applies to certain
state and local, and foreign tax loss carryforwards that, in the opinion of
management, are more likely than not to expire before the company can use them.
A reconciliation of the company's effective tax rate to the statutory U.S.
federal tax rate is as follows:
FOR THE YEAR ENDED
DECEMBER 31: 2000 1999 1998
================================================================================
Statutory rate 35% 35% 35%
Foreign tax differential (6) (2) (6)
State and local 1 1 1
Valuation allowance
related items (1) -- (1)
Other 1 -- 1
- --------------------------------------------------------------------------------
Effective rate 30% 34% 30%
================================================================================
PAGE NO.
EIGHTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
For tax return purposes, the company has available tax credit
carryforwards of approximately $2,079 million, of which $1,424 million have an
indefinite carryforward period and the remainder begin to expire in 2004. The
company also has state and local, and foreign tax loss carryforwards, the tax
effect of which is $735 million. Most of these carryforwards are available for
more than 5 years or have an indefinite carryforward period.
Undistributed earnings of non-U.S. subsidiaries included in consolidated
retained earnings were $15,472 million at December 31, 2000, $14,900 million at
December 31, 1999, and $13,165 million at December 31, 1998. These earnings,
which reflect full provision for non-U.S. income taxes, are indefinitely
reinvested in non-U.S. operations or will be remitted substantially free of
additional tax.
P ADVERTISING
Advertising expense, which includes media, agency and promotional expenses, was
$1,746 million, $1,758 million and $1,681 million in 2000, 1999 and 1998,
respectively, and is recorded in Selling, general and administrative expense.
Q 1999 ACTIONS
TECHNOLOGY GROUP ACTIONS
During 1999, the company implemented actions that were designed to better align
the operations and cost structure of IBM's Technology Group with that group's
strategic direction in view of the competitive environment, overcapacity in the
industry and resulting pricing pressures. The actions affected the
Microelectronics Division (MD), the Storage Technology Division
(STD)--previously known as the Storage Systems Division--and the Networking
Hardware Division (NHD) of the company's Technology Group. The company completed
these actions during the first half of 2000.
In total, the Technology Group actions resulted in a charge of $1,690
million ($1,366 million after tax, or $.73 per diluted common share) as
described below and in the table on page 82.
The actions within MD addressed a prolonged, industry-wide downturn in
memory chip prices that affected the results of the company's semiconductor
business. They were intended to enable the company to (1) reconfigure the assets
and capabilities of the division to allow more focus on the faster-growth,
higher-margin custom logic portion of the MD business and (2) enhance its
ability to more cost-effectively manage a partnership agreement that was formed
to produce complementary metal oxide semiconductor (CMOS) based logic
components.
The company reduced its internal dynamic random access memory (DRAM)
capacity by converting its manufacturing facility in Essonnes, France, from DRAM
to custom logic. The company effected that conversion through a joint venture
with Infineon Technologies, a subsidiary of Siemens AG. Also related to DRAM,
the company executed contracts with various banks and other financing
institutions to sell and lease back test equipment.
The company also participated in a 50/50 joint venture (Dominion
Semiconductor Company) with Toshiba Corporation to produce DRAM memory
components. The company entered into an agreement whereby Toshiba assumed the
company's interest in Dominion effective December 1, 2000. The company
participated in the capacity output of Dominion at a significantly reduced rate
in the interim period.
The company held a majority interest in a joint venture (MiCRUS) with
Cirrus Logic Inc. (the partner) to produce CMOS-based logic components for IBM
and its partner based on contractual capacity agreements. The partner indicated
that it would not require the output capacity that was provided for in the
partnership agreement. The company determined that the most cost-effective
manner in which to address the partner's desire to exit the partnership
agreement was to acquire the minority interest held by that partner and to cut
back production. In the second quarter of 1999, the company accrued related
costs associated with the MiCRUS operations. The liability created was primarily
for lease termination charges for equipment under the MiCRUS operation. Since
June 1999, related activities were under way and were completed in June 2000.
The liabilities accrued in the second quarter of 1999 were utilized during the
second quarter of 2000. In June 2000, the company sold its MiCRUS semiconductor
operations to Philips Semiconductors, an affiliate of Royal Philips Electronics.
The company also announced aggressive steps intended to improve its
competitive position in the markets that STD serves by merging server hard disk
drive (HDD) product lines and realigning operations. The company integrated all
server HDDs into a single low-cost design platform that uses common development
and manufacturing processes. The company transferred manufacturing assembly and
test operations to Hungary and Mexico and completed these actions by mid 2000.
The actions within NHD relate to a global alliance with Cisco Systems,
Inc. As a result of the announcement of the alliance, demand for the router and
switch products by both existing and new customers deteriorated.
PAGE NO.
EIGHTY-ONE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The following table identifies the significant components of the pre-tax charge
related to the 1999 actions and the liability as of December 31, 2000 and 1999:
INVESTMENTS LIABILITY LIABILITY
TOTAL AND OTHER LIABILITY AS OF AS OF
PRE-TAX ASSET CREATED OTHER DECEMBER 31, OTHER DECEMBER 31,
(DOLLARS IN MILLIONS) CHARGES* WRITE-DOWNS IN 1999 PAYMENTS ADJUSTMENTS** 1999 PAYMENTS ADJUSTMENTS** 2000
===================================================================================================================================
Technology Group
MD Actions:
DRAM
Equipment (1) $ 662 $ 662 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Employee
terminations: (2)(8)
Current 30 -- 30 15 18 33 44 26 15
Non-current 137 -- 137 -- (21) 116 -- (30) 86
Dominion investment (3) 171 171 -- -- -- -- -- -- --
MiCRUS investment (4)(8) 152 -- 152 -- -- 152 152 -- --
STD Actions:
Equipment (5) 337 337 -- -- -- -- -- -- --
Employee
terminations (6)(8) 23 -- 23 16 -- 7 7 -- --
NHD Action:
Inventory write-downs
and contract
cancellations (7) 178 178 -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total 1999 actions $1,690 $1,348 $ 342 $ 31 $ (3) $ 308 $ 203 $ (4) $ 101
===================================================================================================================================
* With the exception of NHD inventory write-downs, all charges were recorded
in Selling, general and administrative expense. NHD inventory write-downs
were recorded in Hardware cost.
** Principally represents reclassification of non-current to current and
translation adjustments.
(1) Represents (a) the difference between net book value and fair value of
assets that were contributed to a joint venture, (b) the book value of
assets that were removed from service as a result of the MD actions and
were scrapped during the second quarter of 1999 and (c) the difference
between the net book value and the appraised fair value of test equipment
that is subject to sale-leaseback agreements and that is being used and
appropriately expensed.
(2) Workforce reductions that affected approximately 790 employees (455 direct
manufacturing and 335 indirect manufacturing) in France. The workforce
reductions were completed by the end of the first quarter of 2000.
(3) Write-off of investment in joint venture at the signing of the agreement
with Toshiba Corporation.
(4) Acquisition of minority interest in MiCRUS and charges for equipment
leasehold cancellation liabilities and lease rental payments for idle
equipment. The MiCRUS semiconductor operation was sold to Philips
Semiconductors during June 2000.
(5) Represents (a) the book value of assets that were removed from service as
a result of the STD actions and were scrapped during the second and third
quarters of 1999, (b) write-downs to fair value of equipment under
contract for sale and delivery by December 1, 1999 ($29 million), and
March 31, 2000 ($5 million), and (c) the difference between the net book
value and the appraised fair value of equipment that is subject to
sale-leaseback agreements and that is being used and appropriately
expensed.
(6) Workforce reductions that affected approximately 900 employees (780 direct
manufacturing and 120 indirect manufacturing) in the United States. The
workforce reductions were completed by the end of the first quarter of
2000.
(7) Write-down to net realizable value of inventory of router and switch
products ($144 million) and contract cancellation fees ($34 million)
related to deterioration in demand for router and switch products.
(8) The 1999 year-end and 2000 amounts are also disclosed in note L, "Other
Liabilities," on page 78.
CHANGE IN ESTIMATE
As a result of a change in the estimated useful life of personal computers from
five years to three years, the company recognized a charge in the second quarter
of 1999 of $404 million ($241 million after tax, $.13 per diluted common share).
In the second quarter of 1999, the company wrote off the net book value of
personal computers that were three years old or older and, therefore, had no
remaining useful life. The remaining book value of the assets will be
depreciated over the remaining new useful life. The net effect on future
operations is expected to be minimal as the increased depreciation due to the
shorter life will be offset by the lower depreciable base attributable to the
write-off of personal computers older than three years.
R RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expense was $5,151 million in 2000, $5,273
million in 1999 and $5,046 million in 1998.
The company had expenses of $4,345 million in 2000, $4,575 million in 1999
and $4,466 million in 1998 for basic scientific research and the application of
scientific advances to the development of new and improved products and their
uses. Of these amounts, software-related expenses were $1,948 million, $2,036
million and $2,086 million in 2000, 1999 and 1998, respectively. Included in the
expense for 2000, 1999 and 1998 are charges for acquired in-process research and
development of $9 million, $111 million and $111 million, respectively. See note
D, "Acquisitions/Divestitures" on pages 72 through 74 for further information
about that expense.
Expenses for product-related engineering were $806 million, $698 million
and $580 million in 2000, 1999 and 1998, respectively.
PAGE NO.
EIGHTY-TWO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
S EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share of common stock.
FOR THE YEAR ENDED DECEMBER 31: 2000 1999 1998
==============================================================================================================================
Weighted-average number of shares on which earnings per share
calculations are based:
Basic 1,763,037,049 1,808,538,346 1,869,005,570
Add--incremental shares under stock compensation plans 46,750,030 59,344,849 51,124,900
Add--incremental shares associated with contingently issuable shares 2,331,343 3,190,717 --
- ------------------------------------------------------------------------------------------------------------------------------
Assuming dilution 1,812,118,422 1,871,073,912 1,920,130,470
==============================================================================================================================
Net income applicable to common stockholders (millions) $ 8,073 $ 7,692 $ 6,308
Less--net income applicable to contingently issuable shares (millions) 21 (11) --
- ------------------------------------------------------------------------------------------------------------------------------
Net income on which diluted earnings per share is calculated (millions) $ 8,052 $ 7,703 $ 6,308
==============================================================================================================================
Earnings per share of common stock:
Assuming dilution $ 4.44 $ 4.12 $ 3.29
Basic $ 4.58 $ 4.25 $ 3.38
Stock options to purchase 34,633,343 common shares in 2000, 27,355,056 common
shares in 1999 and 4,124,730 common shares in 1998 were outstanding, but were
not included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price of the
common shares and, therefore, the effect would have been antidilutive. In
addition, 5,131,038 restricted stock units in 1998 relating to the company's
Long-Term Performance Plan were not included in the computation of diluted
earnings per share as their effect would have been antidilutive. Net income
applicable to common stockholders excludes preferred stock dividends of $20
million for 2000, 1999 and 1998.
T RENTAL EXPENSE AND LEASE COMMITMENTS
Rental expense, including amounts charged to inventories and fixed assets and
excluding amounts previously reserved, was $1,366 million in 2000, $1,397
million in 1999 and $1,431 million in 1998. The table below depicts gross
minimum rental commitments under noncancelable leases, amounts related to vacant
space associated with infrastructure reduction and restructuring actions taken
through 1993 (previously reserved), and sublease income commitments. These
amounts generally reflect activities related to office space and manufacturing
equipment.
BEYOND
(DOLLARS IN MILLIONS) 2001 2002 2003 2004 2005 2005
================================================================================
Gross rental commitments $1,363 $1,210 $ 962 $ 650 $ 491 $1,586
Vacant space 166 119 71 39 33 83
Sublease income commitments 100 75 53 40 36 19
PAGE NO.
EIGHTY-THREE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
U STOCK-BASED COMPENSATION PLANS
The company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock-based compensation plans. A description of the terms of
the company's stock-based compensation plans follows:
LONG-TERM PERFORMANCE PLAN
Incentive awards are provided to officers and other key employees under the
terms of the IBM 1999 Long-Term Performance Plan, which was approved by
stockholders in April 1999, and its predecessor plan, the IBM 1997 Long-Term
Performance Plan ("the Plans"). The Plans are administered by the Executive
Compensation and Management Resources Committee of the Board of Directors. The
committee determines the type and terms of the awards to be granted, including
vesting provisions.
Awards may include stock options, stock appreciation rights, restricted
stock, cash or stock awards, or any combination thereof. The number of shares
that may be issued under the IBM 1999 Long-Term Performance Plan is 118.7
million. There were 121.9 million and 118.7 million unused shares available to
be granted under the IBM 1999 Long-Term Performance Plan as of December 31, 2000
and 1999, respectively. The increase in unused shares available resulted from
the rollover of remaining 1997 Plan shares to the 1999 Plan. There were no
unused shares available and 33.7 million unused shares available to be granted
under the IBM 1997 Long-Term Performance Plan as of December 31, 2000 and 1999,
respectively.
With the exception of stock options, these awards (which are expressed in
terms of shares) are adjusted to fair value at the end of each period, and the
change in value is included in net income. Awards under the Plans resulted in
compensation expense of $134.0 million, $267.3 million and $322.4 million in
2000, 1999 and 1998, respectively.
STOCK OPTION GRANTS
Stock options are granted to employees at an exercise price equal to the fair
market value of the company's stock at the date of grant. Generally, options
vest 25 percent per year, are fully vested four years from the grant date and
have a term of ten years. The following tables summarize option activity under
the Plans during 2000, 1999 and 1998:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE NO. OF SHARES EXERCISE NO. OF SHARES EXERCISE NO. OF SHARES
PRICE UNDER OPTION PRICE UNDER OPTION PRICE UNDER OPTION
=======================================================================================================================
Balance at January 1 $ 60 146,136,523 $ 36 131,443,850 $ 27 123,456,722
Options granted 102 42,601,014 115 42,786,845 53 41,175,350
Options exercised 35 (18,243,347) 28 (23,160,228) 22 (29,633,476)
Options canceled/expired 87 (9,937,187) 61 (4,933,944) 36 (3,554,746)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 73 160,557,003 $ 60 146,136,523 $ 36 131,443,850
=======================================================================================================================
Exercisable at December 31 $ 45 66,599,878 $ 29 51,599,735 $ 22 46,191,636
=======================================================================================================================
The shares under option at December 31, 2000, were in the following exercise
price ranges:
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
--------------------------------------- --------------------
WTD. AVG.
WTD. AVG. REMAINING WTD. AVG.
NO. OF EXERCISE CONTRACTUAL NO. OF EXERCISE
EXERCISE PRICE RANGE OPTIONS PRICE LIFE (IN YEARS) OPTIONS PRICE
=======================================================================================
$ 10--40 50,046,086 $ 28 5 42,552,911 $ 27
$ 41--70 30,932,902 52 7 13,935,446 52
$ 71--100 16,777,572 88 8 3,911,821 85
$ 101 and over 62,800,443 116 9 6,199,700 129
- ---------------------------------------------------------------------------------------
160,557,003 $ 73 7 66,599,878 $ 45
=======================================================================================
PAGE NO.
EIGHTY-FOUR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
IBM EMPLOYEES STOCK PURCHASE PLAN
The IBM Employees Stock Purchase Plan (ESPP) enables substantially all regular
employees to purchase full or fractional shares of IBM common stock through
payroll deductions of up to 10 percent of eligible compensation. Effective July
1, 2000, ESPP was amended whereby the share price paid by an employee changed
from 85 percent of the average market price on the last business day of each pay
period, to the lesser of 85 percent of the average market price on the first
business day of each offering period or 85 percent of the average market price
on the last business day of each pay period. The current plan provides
semi-annual offerings over the five-year period commencing July 1, 2000. ESPP
participants are restricted from purchasing more than $25,000 of common stock in
one calendar year or 1,000 shares in an offering period. This change is not
expected to have a significant effect on the company's financial condition. The
stockholders approved the current plan in 2000. Approximately 26.3 million, 57.3
million and 63.0 million reserved unissued shares were available for purchase
under ESPP at December 31, 2000, 1999 and 1998, respectively. Shares for ESPP
may be sourced from authorized but unissued shares, treasury shares or shares
repurchased from time to time.
Pursuant to the provisions of the ESPP, during 2000, 1999 and 1998,
employees paid $621 million, $514 million and $415 million, respectively, to
purchase 6.9 million, 5.7 million and 8.0 million shares, respectively, all of
which were treasury shares.
PRO FORMA DISCLOSURE
In accordance with APB Opinion No. 25, the company does not recognize expense
for stock options granted under the Plans or for employee stock purchases under
the ESPP. SFAS No. 123, "Accounting for Stock-Based Compensation," requires a
company to determine the fair market value of all awards of stock-based
compensation at the grant date and to disclose pro forma net income and earnings
per share as if the resulting stock-based compensation amounts were recorded in
the Consolidated Statement of Earnings. The table below presents these pro forma
disclosures.
2000 1999 1998
---------------------- ---------------------- ----------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
======================================================================================================================
Net income applicable to
common stockholders $ 8,073 $ 7,183 $ 7,692 $ 7,044 $ 6,308 $ 5,985
Earnings per share of common stock:
Assuming dilution $ 4.44 $ 3.99 $ 4.12 $ 3.78 $ 3.29 $ 3.12
Basic $ 4.58 $ 4.07 $ 4.25 $ 3.89 $ 3.38 $ 3.20
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the estimated fair value of awards that was earned for the years
ended December 31, 2000, 1999 and 1998.
The fair market value of stock option grants is estimated using the
Black-Scholes option-pricing model with the following assumptions:
2000 1999 1998
================================================================================
Term (years)* 4/5 5/6 5/6
Volatility** 32.0% 27.3% 26.4%
Risk-free interest rate (zero
coupon U.S. treasury note) 5.1% 6.6% 5.1%
Dividend yield 0.5% 0.4% 0.8%
Weighted-average fair
value per option $ 36 $ 46 $ 18
* OPTION TERM IS 4 YEARS FOR TAX INCENTIVE OPTIONS AND 5 YEARS FOR NON-TAX
INCENTIVE OPTIONS FOR THE YEAR ENDED DECEMBER 31, 2000. OPTION TERM IS 5
YEARS FOR TAX INCENTIVE OPTIONS AND 6 YEARS FOR NON-TAX INCENTIVE OPTIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998.
** TO DETERMINE VOLATILITY, THE COMPANY MEASURED THE DAILY PRICE CHANGES OF
THE STOCK OVER THE RESPECTIVE TERM FOR TAX INCENTIVE OPTIONS AND NON-TAX
INCENTIVE OPTIONS.
V RETIREMENT PLANS
The company and its subsidiaries have defined benefit and defined contribution
retirement plans that cover substantially all regular employees, and a
supplemental retirement plan that covers certain executives. Total retirement
plan (income)/cost for the years ended December 31, 2000, 1999 and 1998, was
$(728) million, $(288) million and $(89) million, respectively. Total
retirement-related (income)/cost including postretirement medical coverage (see
note W, "Nonpension Postretirement Benefits," on pages 88 and 89) for the years
ended December 31, 2000, 1999 and 1998, was $(327) million, $83 million and $286
million, respectively.
U.S. PLANS
U.S. regular, full-time and part-time employees are covered by a noncontributory
plan that is funded by company contributions to an irrevocable trust fund, which
is held for the sole benefit of participants.
PAGE NO.
EIGHTY-FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Effective January 1, 2001, the company increased pension benefits to
recipients who retired before January 1, 1997. The increases range from 2.5
percent to 25 percent, and are based on the year of retirement and the pension
benefit currently being received. This improvement is expected to result in an
additional cost to the company of approximately $100 million in 2001.
Effective July 1, 1999, the company amended the IBM Retirement Plan to
establish the IBM Personal Pension Plan (the U.S. Plan). The new plan
establishes a new formula for determining pension benefits for many of its
employees. Under the amended U.S. Plan, a new formula was created whereby
retirement benefits are credited to each employee's cash balance account monthly
based on a percentage of the employee's pensionable compensation. Employees who
were retirement eligible or within five years of retirement eligibility with at
least one year of service, or who were at least forty years of age with at least
ten years of service as of June 30, 1999, could elect to participate under the
new formula or to have their service and earnings credit accrue under the
preexisting benefit formula. Benefits become vested on the completion of five
years of service under either formula.
The number of individuals receiving benefits for this plan at December 31,
2000 and 1999, was 129,290 and 124,175, respectively. Net periodic pension
(income)/cost for this plan for the years ended December 31, 2000, 1999 and 1998
was $(896) million, $(638) million and $(454) million, respectively.
U.S. regular, full-time and part-time employees are eligible to
participate in the Tax Deferred Savings Plan (TDSP), which is a qualified
voluntary defined contribution plan; the company matches 50 percent of the
employee's contribution up to the first 6 percent of the employee's
compensation. The total (income)/cost of all of the company's U.S. defined
contribution plans was $294 million, $275 million and $258 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
NON-U.S. PLANS
Most subsidiaries and branches outside the United States have defined benefit
and/or defined contribution retirement plans that cover substantially all
regular employees, under which the company deposits funds under various
fiduciary-type arrangements, purchases annuities under group contracts or
provides reserves. Benefits are typically based on years of service and the
employee's compensation, generally during a fixed number of years immediately
before retirement. The ranges of assumptions that are used for the non-U.S.
plans reflect the different economic environments within various countries. The
total non-U.S. retirement plan (income)/cost of these plans for the years ended
December 31, 2000, 1999 and 1998 was $(198) million, $7 million and $48 million,
respectively.
U.S. SUPPLEMENTAL EXECUTIVE RETENTION PLAN
The company also has a non-qualified U.S. Supplemental Executive Retention Plan
(SERP). The SERP, which is unfunded, provides defined pension benefits outside
the IBM Retirement Plan to eligible executives based on average earnings, years
of service and age at retirement. Effective July 1, 1999, the company adopted
the Supplemental Executive Retention Plan (which replaced the previous
Supplemental Executive Retirement Plan). Some participants of the pre-existing
SERP will still be eligible for benefits under that plan, but will not be
eligible for the new plan. The total (income)/cost of this plan for the years
ended December 31, 2000, 1999 and 1998, was $24 million, $30 million and $25
million, respectively. These amounts are reflected in cost of other defined
benefit plans below. At December 31, 2000 and 1999, the projected benefit
obligation was $163 million and $149 million, respectively, and the amounts
included in the Consolidated Statement of Financial Position were pension
liabilities of $131 million and $109 million, respectively.
(INCOME)/COST OF PENSION PLANS:
U.S. PLAN NON-U.S. PLANS
----------------------------- -----------------------------
(DOLLARS IN MILLIONS) 2000 1999 1998 2000 1999 1998
===============================================================================================================
Service cost $ 563 $ 566 $ 532 $ 445 $ 475 $ 399
Interest cost 2,553 2,404 2,261 1,234 1,282 1,213
Expected return on plan assets (3,902) (3,463) (3,123) (2,042) (1,937) (1,739)
Amortization of transition assets (141) (140) (140) (10) (11) (10)
Amortization of prior service cost 31 (21) 16 24 25 26
Recognized actuarial losses -- 16 -- 4 28 5
Settlement (gains)/losses -- -- -- (25) (23) 10
- ---------------------------------------------------------------------------------------------------------------
Net periodic pension (income)/cost--
U.S. Plan and material non-U.S. Plans $ (896) $ (638) $ (454) $ (370) $ (161) $ (96)
Cost of other defined benefit plans 72 68 59 23 37 54
- ---------------------------------------------------------------------------------------------------------------
Total net periodic pension (income)/cost
for all defined benefit plans $ (824) $ (570) $ (395) $ (347) $ (124) $ (42)
===============================================================================================================
Cost of defined contribution plans $ 294 $ 275 $ 258 $ 149 $ 131 $ 90
===============================================================================================================
Total retirement plan (income)/cost recognized
in the Consolidated Statement of Earnings $ (530) $ (295) $ (137) $ (198) $ 7 $ 48
===============================================================================================================
PAGE NO.
EIGHTY-SIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The changes in the benefit obligations and plan assets of the U.S. and material
non-U.S. defined benefit plans for 2000 and 1999 were as follows:
U.S. PLAN NON-U.S. PLANS
-------------------- --------------------
(DOLLARS IN MILLIONS) 2000 1999 2000 1999
========================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 34,434 $ 36,561 $ 21,770 $ 22,048
Service cost 563 566 445 475
Interest cost 2,553 2,404 1,234 1,282
Plan participants' contributions -- -- 28 29
Acquisitions/divestitures, net 36 68 (65) (47)
Amendments 645 75 63 --
Actuarial losses/(gains) 1,729 (2,766) 243 522
Benefits paid from trust (2,421) (2,474) (728) (737)
Direct benefit payments -- -- (218) (257)
Foreign exchange impact -- -- (1,626) (1,552)
Plan curtailments/settlements/termination benefits -- -- 4 7
- --------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 37,539 34,434 21,150 21,770
- --------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 45,584 41,593 27,843 25,294
Actual return on plan assets 1,395 6,397 (196) 5,184
Employer contribution -- -- 66 143
Acquisitions/divestitures, net 36 68 (50) (36)
Plan participants' contributions -- -- 28 29
Benefits paid from trust (2,421) (2,474) (728) (737)
Foreign exchange impact -- -- (2,015) (1,995)
Settlements -- -- (115) (39)
- --------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 44,594 45,584 24,833 27,843
- --------------------------------------------------------------------------------------------------------
Fair value of plan assets in excess of benefit obligation 7,055 11,150 3,683 6,073
Unrecognized net actuarial gains (2,768) (7,003) (1,860) (4,597)
Unrecognized prior service costs 883 269 168 140
Unrecognized net transition asset (491) (632) (56) (72)
Adjustment to recognize minimum liability -- -- (90) (84)
- --------------------------------------------------------------------------------------------------------
Net prepaid pension asset recognized in the
Consolidated Statement of Financial Position $ 4,679 $ 3,784 $ 1,845 $ 1,460
========================================================================================================
Actuarial assumptions used to determine costs and benefit obligations for
principal pension plans follow:
WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS U.S. PLANS NON-U.S. PLANS
------------------------------- ---------------------------------
AS OF DECEMBER 31: 2000 1999 1998 2000 1999 1998
=========================================================================================================
Discount rate 7.25% 7.75% 6.5% 4.5-7.1% 4.5-7.3% 4.5-7.5%
Expected return on plan assets 10.0% 9.5% 9.5% 5.0-11.0% 6.0-10.5% 6.5-10.0%
Rate of compensation increase 6.0% 6.0% 5.0% 2.6-6.1% 2.6-6.1% 2.7-6.1%
The company evaluates its actuarial assumptions on an annual basis and
considers changes in these long-term factors based upon market conditions and
the requirements of SFAS No. 87, "Employers' Accounting for Pensions."
The change in expected return on plan assets and the discount rate for the
2000 U.S. plan year had an effect of an additional $(195) million and $(26)
million of net retirement plan (income)/cost, respectively, for the year ended
December 31, 2000. This compares with an additional $46 million and $65 million
of net retirement plan (income)/cost for the year ended December 31, 1999, as a
result of plan year 1999 changes in the rate of compensation increase and the
discount rate, respectively.
Net periodic pension cost is determined using the Projected Unit Credit
actuarial method.
FUNDING POLICY
It is the company's practice to fund amounts for pensions sufficient to meet the
minimum requirements set forth in applicable employee benefits laws and local
tax laws. From
PAGE NO.
EIGHTY-SEVEN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
time to time, the company contributes additional
amounts as it deems appropriate. Liabilities for amounts in excess of these
funding levels are accrued and reported in the company's Consolidated Statement
of Financial Position. The assets of the various plans include corporate
equities, government securities, corporate debt securities and real estate.
OTHER
At December 31, 2000, the material non-U.S. defined benefit plans in which
the fair value of plan assets exceeded the benefit obligation had obligations of
$16,941 million and assets of $20,915 million. The material non-U.S. defined
benefit plans in which the benefit obligation exceeded the fair value of plan
assets had obligations of $4,209 million and assets of $3,919 million.
At December 31, 1999, the material non-U.S. defined benefit plans in which
the fair value of plan assets exceeded the benefit obligation had obligations of
$21,168 million and assets of $27,400 million. The material non-U.S. defined
benefit plans in which the benefit obligation exceeded the fair value of plan
assets had obligations of $602 million and assets of $443 million.
The change from 1999 to 2000 was the result of the company's pension plan
in Japan. In 1999, the Japan pension plan assets exceeded its benefit obligation
by approximately 15 percent. In 2000, the benefit obligation exceeded assets by
approximately 3 percent. Total assets of this plan at December 31, 2000 exceeded
$3,500 million.
W NONPENSION POSTRETIREMENT BENEFITS
The total (income)/cost of the company's nonpension postretirement benefits for
the years ended December 31, 2000, 1999 and 1998 were $401 million, $371 million
and $375 million, respectively. The company has a defined benefit postretirement
plan that provides medical, dental and life insurance for U.S. retirees and
eligible dependents. The total net (income)/cost of this plan for the years
ended December 31, 2000, 1999 and 1998, was $374 million, $342 million and $331
million, respectively. Effective July 1, 1999, the company established a "Future
Health Account (FHA) Plan" for employees who are more than five years away from
retirement eligibility. Employees who can retire within five years retain the
benefits under the company's preexisting retiree health benefits plan. Under
either the FHA or the preexisting plan, there is a maximum cost to the company
for retiree health care. For employees who retired before January 1, 1992, that
maximum will become effective in the year 2001. For all other employees, the
maximum is effective on retirement.
Certain of the company's non-U.S. subsidiaries have similar plans for
retirees. However, most of the retirees outside the United States are covered by
government-sponsored and administered programs. The total net (income)/cost of
these plans for the years ended December 31, 2000, 1999 and 1998 was $27
million, $29 million and $44 million, respectively. At December 31, 2000 and
1999, Other liabilities on the Consolidated Statement of Financial Position
include non-U.S. postretirement benefit liabilities of $208 million and $219
million, respectively.
The net periodic postretirement benefit cost for the U.S. plan for the
years ended December 31 include the following components:
(DOLLARS IN MILLIONS) 2000 1999 1998
================================================================================
Service cost $ 50 $ 48 $ 42
Interest cost 449 424 427
Expected return on
plan assets (2) (6) (5)
Amortization of
prior service costs (147) (143) (133)
Recognized actuarial losses 24 19 --
- --------------------------------------------------------------------------------
Net periodic post-
retirement benefit cost $ 374 $ 342 $ 331
================================================================================
The changes in the benefit obligation and plan assets of the U.S. plan for 2000
and 1999 are as follows:
(DOLLARS IN MILLIONS) 2000 1999
================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,178 $ 6,457
Service cost 50 48
Interest cost 449 424
Amendments -- (127)
Actuarial gains (69) (445)
Actuarial losses 432 371
Benefits paid from trust (87) (325)
Direct benefit payments (510) (225)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 6,443 6,178
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year 105 123
Actual loss on plan assets (14) (18)
Employer contributions -- 325
Benefits paid, net of employee
contributions (87) (325)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year 4 105
- --------------------------------------------------------------------------------
Benefit obligation in excess
of plan assets (6,439) (6,073)
Unrecognized net actuarial losses 986 631
Unrecognized prior service costs (801) (948)
- --------------------------------------------------------------------------------
Accrued postretirement benefit
liability recognized in the
Consolidated Statement
of Financial Position $(6,254) $(6,390)
================================================================================
The plan assets primarily comprise short-term fixed income investments.
PAGE NO.
EIGHTY-EIGHT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The benefit obligation was determined by applying the terms of medical,
dental and life insurance plans, including the effects of established maximums
on covered costs, together with relevant actuarial assumptions. These actuarial
assumptions include a projected health care cost trend rate of 6 percent.
WEIGHTED-AVERAGE
ACTUARIAL ASSUMPTIONS
AS OF DECEMBER 31: 2000 1999 1998
================================================================================
Discount rate 7.25% 7.75% 6.5%
Expected return on
plan assets 5.0% 5.0% 5.0%
The company evaluates its actuarial assumptions on an annual basis and considers
changes in these long-term factors based upon market conditions and the
requirements of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." The discount rate changes did not have a material effect
on net postretirement benefit cost for the years ended December 31, 2000, 1999
and 1998.
A one-percentage-point change in the assumed health care cost trend rate
would have the following effects as of December 31, 2000:
ONE-PERCENTAGE- ONE-PERCENTAGE-
(DOLLARS IN MILLIONS) POINT INCREASE POINT DECREASE
================================================================================
Effect on total service and
interest cost $ 8 $(10)
Effect on postretirement
benefit obligation $ 52 $(65)
X SEGMENT INFORMATION
IBM uses advanced information technology to provide customer solutions. The
company operates primarily in a single industry using several segments that
create value by offering a variety of solutions that include, either singularly
or in some combination, technologies, systems, products, services, software and
financing.
Organizationally, the company's major operations comprise three hardware
product segments--Technology, Personal Systems and Enterprise Systems; a Global
Services segment; a Software segment; a Global Financing segment and an
Enterprise Investments segment. The segments are determined based on several
factors, including customer base, homogeneity of products, technology and
delivery channels.
The Technology segment produces peripheral equipment for use in
general-purpose computer systems, including storage devices, networking
components, advanced function printers and display devices. In addition, the
segment provides components such as semiconductors and HDDs for use in the
company's products and for sale to original equipment manufacturers (OEM). Major
business units include Microelectronics, Storage Technology and Printing
Systems.
The Personal Systems segment produces general-purpose computer systems,
including some system and consumer software that operate applications for use by
one user at a time (personal computer clients) or as servers. Major brands
include the Aptiva home personal computers, IntelliStation workstations, IBM
xSeries servers, NetVista and ThinkPad mobile systems. Also, in the first
quarter of 2000, the company transferred the Retail Store Solutions (RSS)
business, a leader in providing point-of-sale solutions, to the Personal Systems
segment from the Enterprise Investments segment.
In the first quarter of 2000, the company reorganized the Server segment
and renamed it the Enterprise Systems segment. In accordance with the
organizational change, the company transferred system-level product businesses
from the Technology segment to the Enterprise Systems segment. The system-level
product businesses are the company's disk storage products, which include the
Enterprise Storage Server known as "Shark," tape subsystems and the company's
storage area networking program, and networking products. The segment also
produces powerful multi-purpose computer servers that operate many
open-network-based applications simultaneously for multiple users. They perform
high-volume transaction processing and serve data to personal systems and other
end-user devices. The servers are the engines behind the bulk of electronic
business transactions, including e-commerce. Brands include the zSeries
mainframe servers, the heart of the e-business infrastructure for
mission-critical data and transaction processing, the IBM pSeries servers, the
most powerful technologically advanced UNIX servers, and the IBM iSeries
mid-range servers, integrated mid-range business servers that run sophisticated
business applications.
The Global Services segment is the world's largest information technology
(I/T) services provider, supporting computer hardware and software products and
providing professional services to help customers of all sizes realize the full
value of information technology. The segment provides value through three
primary lines of business: Strategic Outsourcing Services, Business Innovation
Services and Integrated Technology Services. Strategic Outsourcing Services
creates business value through long-term strategic partnerships with customers
by taking on responsibility for their processes and systems. Business Innovation
Services provides business/industry consulting and end-to-end e-business
implementation of such offerings as Supply Chain Management, Customer
Relationship Management, Enterprise Resource Planning and Business Intelligence.
Integrated Technology Services offers customers a single I/T partner to manage
multi-vendor I/T systems' complexity in today's e-business environment including
such traditional offerings as Product Support, Business Recovery
PAGE NO.
EIGHTY-NINE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Services, Site and Connectivity Services, and Systems Management and Networking
Services. Learning Services supports the three primary lines of business and
helps customers design, develop and deploy curricula to educate their employees.
The Global Services segment is uniquely suited to integrate the full range of
the company's and key industry participants' capabilities, including hardware,
software, services and research.
The Software segment delivers operating systems for the company's servers
and e-business enabling software (middleware) for IBM and non-IBM platforms. The
segment's business offerings align with key customer opportunity
areas--transformation and integration, leveraging information, organizational
effectiveness and managing technology. In addition to its own development,
product and marketing effort, the segment supports more than 35,000 Independent
Software Vendors to ensure that the company's software and hardware offerings
are included in those partners' solutions.
The Global Financing segment is the world's largest provider of financing
services for I/T. The segment provides lease and loan financing that enables the
company's customers to acquire complete I/T and e-business solutions--hardware,
software and services--provided by the company and its business partners. Global
Financing, as a reliable source of capital for the distribution channel, also
provides the company's business partners with customized commercial financing
for inventory, accounts receivable and term loans, helping them manage their
cash flow, invest in infrastructure and grow their business.
The Enterprise Investments segment provides industry- specific information
technology solutions, supporting the hardware, software and services segments of
the company. The segment develops unique products designed to meet specific
marketplace requirements and to complement the company's overall portfolio of
products.
Segment revenue and pre-tax income include transactions between the
segments that are intended to reflect an arm's-length transfer price.
Specifically, semiconductors and HDDs are sourced internally from the Technology
segment for use in the manufacture of the Enterprise Systems segment and
Personal Systems segment products. In addition, technology, hardware and
software that are used by the Global Services segment in outsourcing engagements
are sourced internally from the Technology, Enterprise Systems, Personal Systems
and Software segments. For the internal use of information technology services,
the Global Services segment recovers cost, as well as a reasonable fee
reflecting the arm's-length value of providing the services. The Global Services
segment enters into arm's-length leases at prices equivalent to market rates
with the Global Financing segment to facilitate the acquisition of equipment
used in outsourcing engagements. Generally, all internal transaction prices are
reviewed and reset annually if appropriate.
The company uses shared-resources concepts to realize economies of scale
and efficient use of resources. Thus, a considerable amount of expense is shared
by all of the company's segments. This expense represents sales coverage,
marketing and support functions such as Accounting, Treasury, Procurement,
Legal, Human Resources, and Billing and Collections. Where practical, shared
expenses are allocated based on measurable drivers of expense, e.g., headcount.
When a clear and measurable driver cannot be identified, shared expenses are
allocated on a financial basis that is consistent with the company's management
system; e.g., image advertising is allocated based on the gross profit of the
segments. In the first quarter of 2000, the company decided to allocate to
specific segments certain expense items that previously were unallocated
(certain infrastructure reductions and currency exchange gains and losses). The
company also enhanced its pre-existing practice of allocating shared expenses,
where practical, based on measurable drivers of expense to give a more precise
representation of the expenses that are associated with each segment. The
unallocated corporate amounts arising from certain acquisitions, indirect
infrastructure reductions and certain intellectual property income are recorded
in net income but are not allocated to the segments.
The following tables reflect the results of the segments consistent with
the company's management system. These results are not necessarily a depiction
that is in conformity with generally accepted accounting principles; e.g.,
employee retirement plan costs are developed using actuarial assumptions on a
country-by-country basis and allocated to the segments on headcount. Different
amounts could result if actuarial assumptions that are unique to the segment
were used. Performance measurement is based on income before income taxes
(pre-tax income). These results are used, in part, by management, both in
evaluating the performance of, and in allocating resources to, each of the
segments. The results for 1999 and 1998 have been reclassified to reflect the
organizational changes, product transfers and expense allocation changes made in
2000.
PAGE NO.
NINETY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
MANAGEMENT SYSTEM SEGMENT VIEW
HARDWARE
------------------------------------
PERSONAL ENTERPRISE GLOBAL GLOBAL ENTERPRISE TOTAL
(DOLLARS IN MILLIONS) TECHNOLOGY SYSTEMS SYSTEMS SERVICES SOFTWARE FINANCING INVESTMENTS SEGMENTS
===============================================================================================================================
2000:
External revenue $ 10,221 $ 16,250 $ 11,340 $ 33,152 $ 12,598 $ 3,500 $ 1,369 $ 88,430
Internal revenue 3,017 85 624 2,439 828 944 3 7,940
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 13,238 $ 16,335 $ 11,964 $ 35,591 $ 13,426 $ 4,444 $ 1,372 $ 96,370
===============================================================================================================================
Pre-tax income/(loss) $ 758 $ (148) $ 2,092 $ 4,517 $ 2,793 $ 1,176 $ (297) $ 10,891
===============================================================================================================================
Revenue year-to-year change (2.7)% 1.1% (0.9)% 2.2% 0.0% 9.6% (17.8)% 0.6%
Pre-tax income year-
to-year change 29.4% 58.9% 14.2% 1.2% (9.9)% 12.3% 57.4% 9.2%
Pre-tax income margin 5.7% (0.9)% 17.5% 12.7% 20.8% 26.5% (21.6)% 11.3%
1999*:
External revenue $ 9,832 $ 16,118 $ 11,503 $ 32,172 $ 12,662 $ 3,219 $ 1,651 $ 87,157
Internal revenue 3,777 45 565 2,636 767 835 19 8,644
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 13,609 $ 16,163 $ 12,068 $ 34,808 $ 13,429 $ 4,054 $ 1,670 $ 95,801
===============================================================================================================================
Pre-tax income/(loss) $ 586 $ (360) $ 1,832 $ 4,464 $ 3,099 $ 1,047 $ (697) $ 9,971
===============================================================================================================================
Revenue year-to-year change 2.8% 20.2% (16.9)% 9.9% 6.5% 7.5% (9.6)% 5.1%
Pre-tax income year-
to-year change (41.3)% 63.5% (37.4)% 23.9% 13.0% 12.3% (5.8)% 4.3%
Pre-tax income margin 4.3% (2.2)% 15.2% 12.8% 23.1% 25.8% (41.7)% 10.4%
1998*:
External revenue $ 8,701 $ 13,419 $ 13,847 $ 28,916 $ 11,863 $ 2,979 $ 1,791 $ 81,516
Internal revenue 4,543 29 683 2,747 749 792 56 9,599
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 13,244 $ 13,448 $ 14,530 $ 31,663 $ 12,612 $ 3,771 $ 1,847 $ 91,115
===============================================================================================================================
Pre-tax income/(loss) $ 998 $ (986) $ 2,928 $ 3,603 $ 2,742 $ 932 $ (659) $ 9,558
===============================================================================================================================
Pre-tax income margin 7.5% (7.3)% 20.2% 11.4% 21.7% 24.7% (35.7)% 10.5%
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
RECONCILIATIONS TO IBM AS REPORTED
(DOLLARS IN MILLIONS) 2000 1999* 1998*
================================================================================
Revenue:
Total reportable segments $ 96,370 $ 95,801 $ 91,115
Other revenue and
adjustments (34) 391 151
Elimination of internal
revenue (7,940) (8,644) (9,599)
- --------------------------------------------------------------------------------
Total IBM Consolidated $ 88,396 $ 87,548 $ 81,667
================================================================================
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
(DOLLARS IN MILLIONS) 2000 1999* 1998*
================================================================================
Pre-tax income:
Total reportable segments $ 10,891 $ 9,971 $ 9,558
Elimination of internal
transactions 62 (47) (162)
Sale of Global Network -- 4,057 --
1999 actions -- (2,205) --
Unallocated corporate
amounts 581 (19) (356)
- --------------------------------------------------------------------------------
Total IBM Consolidated $ 11,534 $ 11,757 $ 9,040
================================================================================
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
PAGE NO.
NINETY-ONE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
IMMATERIAL ITEMS
INVESTMENT IN EQUITY ALLIANCES AND EQUITY
ALLIANCES GAINS/LOSSES
The investments in equity alliances and the resulting gains and losses from
these investments that are attributable to the segments do not have a
significant effect on the financial results of the segments.
SEGMENT ASSETS AND OTHER ITEMS
The assets of the hardware segments primarily are inventory and plant, property
and equipment. The software segment assets mainly are plant, property and
equipment, and investment in capitalized software. In the past, many of the
assets utilized in the Global Services segment were shared and under ownership
of the company's geographic marketing and distribution organizations and
therefore were not included in any of the segment asset amounts below. In 2000,
the assets discretely identifiable to and managed by the Global Services segment
have been allocated to the segment and are reflected in the following table.
Previously, these assets had not been allocated to any of the segments. This
change was made in order to increase the level of focus and ownership on
services-managed assets and to provide a more appropriate basis for business and
competitive analysis. The assets primarily are accounts receivable, maintenance
inventory, and plant, property and equipment including those associated with the
segment's outsourcing business.
To accomplish the efficient use of the company's space and equipment, it
usually is necessary for several segments to share plant, property and equipment
assets. Where assets are shared, landlord ownership of the assets is assigned to
one segment and is not allocated to each user segment. This is consistent with
the company's management system and is reflected accordingly in the schedule
below. In those cases, there will not be a precise correlation between segment
pre-tax income and segment assets.
Similarly, the depreciation amounts reported by each segment are based on
the assigned landlord ownership and may not be consistent with the amounts that
are included in the segments' pre-tax income. The amounts that are included in
pre-tax income reflect occupancy charges from the landlord segment and are not
specifically identified by the management reporting system.
Capital expenditures that are reported by each segment also are in line
with the landlord ownership basis of asset assignment.
The Global Financing segment amounts below for interest income and
interest expense reflect the interest income and interest expense associated
with the financing business, as well as the income from the investment in cash
and marketable securities. Such Global Financing interest expense consists of
interest expense on external debt of the Global Financing business, as well as
interest expense on intercompany borrowings from other units of the company. The
remaining amounts of interest income and interest expense under the caption
"Total Segments" are not discretely identified to the other segments, but are
included as part of an indirect expense allocation.
The segment information for 1999 and 1998 has been reclassified to reflect
the organizational changes, product transfers between the segments and the
aforementioned Global Services asset reclassifications.
MANAGEMENT SYSTEM SEGMENT VIEW
HARDWARE
-------------------------------
PERSONAL ENTERPRISE GLOBAL GLOBAL ENTERPRISE TOTAL
(DOLLARS IN MILLIONS) TECHNOLOGY SYSTEMS SYSTEMS SERVICES SOFTWARE FINANCING INVESTMENTS SEGMENTS
==============================================================================================================
2000:
Assets $ 9,632 $ 2,442 $ 3,141 $10,492 $ 2,488 $40,822 $ 246 $69,263
Depreciation/amortization 1,074 156 409 1,243 665 2,696 12 6,255
Capital expenditures/
investment in software 1,754 193 302 1,311 770 2,898 9 7,237
Interest income -- -- -- -- -- 3,051 -- 3,051
Interest expense -- -- -- -- -- 1,318 -- 1,318
1999*:
Assets $ 9,459 $ 1,611 $ 3,596 $ 9,312 $ 2,527 $39,686 $ 369 $66,560
Depreciation/amortization 2,088 147 225 1,259 576 2,976 15 7,286
Capital expenditures/
investment in software 1,803 177 338 1,292 656 3,217 12 7,495
Interest income -- -- -- -- -- 2,961 -- 2,961
Interest expense -- -- -- -- -- 1,232 -- 1,232
1998*:
Assets $10,191 $ 1,729 $ 2,957 $ 9,882 $ 2,577 $40,109 $ 307 $67,752
Depreciation/amortization 1,163 137 206 1,331 681 2,768 15 6,301
Capital expenditures/
investment in software 2,006 173 309 1,528 424 3,438 19 7,897
Interest income -- -- -- -- -- 2,725 -- 2,725
Interest expense -- -- -- -- -- 1,252 -- 1,252
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
PAGE NO.
NINETY-TWO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
RECONCILIATIONS TO IBM AS REPORTED
(DOLLARS IN MILLIONS) 2000 1999* 1998*
================================================================================
Assets:
Total reportable segments $ 69,263 $ 66,560 $ 67,752
Elimination of internal
transactions (5,300) (5,776) (7,519)
Unallocated amounts:
Cash and marketable
securities 2,268 4,563 4,295
Notes and accounts
receivable 3,145 2,658 3,085
Deferred tax assets 5,498 5,428 5,376
Plant, other property
and equipment 3,798 4,161 5,720
Pension assets 6,809 5,636 4,836
Other 2,868 4,265 2,555
- --------------------------------------------------------------------------------
Total IBM Consolidated $ 88,349 $ 87,495 $ 86,100
================================================================================
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
REVENUE BY CLASSES OF SIMILAR PRODUCTS OR SERVICES
For the Personal Systems, Software and Global Financing segments, the segment
data on page 91 represents the revenue contributions from the products that are
contained in the segments and that are basically similar in nature. The
following table provides external revenue for similar classes of products within
the Technology, Enterprise Systems and Global Services segments. The Technology
segment's OEM hardware comprises revenue primarily from the sale of HDD storage
files, semiconductors and display devices. Other technology comprises advanced
function printers and networking components. The Enterprise Systems segment's
storage comprises revenue from the Enterprise Storage Server ("Shark"), other
disk storage products and tape subsystems.
CONSOLIDATED
------------------------------------
(DOLLARS IN MILLIONS) 2000 1999* 1998*
================================================================================
Technology:
OEM $ 8,305 $ 7,794 $ 6,742
Other technology 1,916 2,038 1,959
Enterprise Systems:
Servers $ 8,692 $ 8,718 $10,624
Storage 2,490 2,356 2,439
Networking products 158 429 784
Global Services:
Services $28,036 $27,035 $23,730
Maintenance 5,116 5,137 5,186
* RECLASSIFIED TO CONFORM WITH 2000 PRESENTATION.
MAJOR CUSTOMERS
No single customer represents 10 percent or more of the company's total revenue.
GEOGRAPHIC INFORMATION
REVENUE* LONG-LIVED ASSETS**
--------------------------- ---------------------------
(DOLLARS IN MILLIONS) 2000 1999 1998 2000 1999 1998
================================================================================
United States $37,216 $37,171 $35,303 $21,449 $19,309 $18,450
Japan 12,128 10,411 8,567 4,319 4,710 4,310
Other countries 39,052 39,966 37,797 10,029 10,259 12,343
- --------------------------------------------------------------------------------
Total $88,396 $87,548 $81,667 $35,797 $34,278 $35,103
================================================================================
* REVENUES ARE ATTRIBUTED TO COUNTRIES BASED ON LOCATION OF CUSTOMER.
** INCLUDES ALL NON-CURRENT ASSETS EXCEPT NON-CURRENT FINANCIAL INSTRUMENTS
AND DEFERRED TAX ASSETS.
PAGE NO.
NINETY-THREE
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR: 2000 1999 1998 1997 1996
==============================================================================================
Revenue $88,396 $87,548 $81,667 $78,508 $75,947
Net income 8,093 7,712 6,328 6,093 5,429
Per share of common stock:
Assuming dilution 4.44 4.12 3.29 3.00 2.50
Basic 4.58 4.25 3.38 3.09 2.56
Cash dividends paid on common stock 909 859 814 763 686
Per share of common stock .51 .47 .43 .3875 .325
Investment in plant, rental machines
and other property 5,616 5,959 6,520 6,793 5,883
Return on stockholders' equity 39.7% 39.0% 32.6% 29.7% 24.8%
AT END OF YEAR:
==============================================================================================
Total assets $88,349 $87,495 $86,100 $81,499 $81,132
Net investment in plant, rental machines
and other property 16,714 17,590 19,631 18,347 17,407
Working capital 7,474 3,577 5,533 6,911 6,695
Total debt 28,576 28,354 29,413 26,926 22,829
Stockholders' equity 20,624 20,511 19,433 19,816 21,628
SELECTED QUARTERLY DATA
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS AND STOCK PRICES)
PER SHARE OF COMMON STOCK
-------------------------------
EARNINGS STOCK PRICES**
-------------------- -------------------
GROSS NET ASSUMING
REVENUE PROFIT INCOME DILUTION BASIC DIVIDENDS HIGH LOW
====================================================================================================
2000
First quarter $19,348 $ 7,011 $ 1,519 $ .83 $ .85 $ .12 $ 128.25 $ 99.50
Second quarter 21,651 7,943 1,941 1.06 1.10 .13 126.94 101.25
Third quarter 21,781 7,801 1,963 1.08 1.11 .13 134.94 100.00
Fourth quarter 25,616 9,669 2,670 1.48 1.52 .13 119.63 80.06
- ------------------------------------------------------------------------------ -------------------
Total $88,396 $32,424 $ 8,093 $ 4.44* $ 4.58 $ .51
==============================================================================
1999
First quarter $20,317 $ 7,258 $ 1,470 $ .78 $ .80 $ .11 $ 99.63 $ 80.88
Second quarter 21,905 8,224 2,391 1.28 1.32 .12 132.00 81.50
Third quarter 21,144 7,564 1,762 .93 .97 .12 139.19 117.56
Fourth quarter 24,182 8,883 2,089 1.12 1.16 .12 123.25 89.00
- ------------------------------------------------------------------------------ -------------------
Total $87,548 $31,929 $ 7,712 $ 4.12* $ 4.25 $ .47
==============================================================================
* EARNINGS PER SHARE (EPS) IN EACH QUARTER IS COMPUTED USING THE
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING DURING THAT QUARTER WHILE
EPS FOR 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 THE LAST TWO YEARS.
PAGE NO.
NINETY-FOUR
STOCKHOLDER INFORMATION
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
IBM STOCKHOLDER SERVICES
Stockholders with questions about their accounts should contact:
EquiServe, First Chicago Trust Division
Mail Suite 4688
P.O. Box 2530
Jersey City, New Jersey 07303-2530
(888) IBM-6700
Investors residing outside the United States, Canada and Puerto Rico should call
(201) 324-0405.
Stockholders can also reach EquiServe, First Chicago Trust Division, via the
Internet at: ibm@equiserve.com
Hearing-impaired stockholders with access to a tele- communications device (TDD)
can communicate directly with EquiServe, First Chicago Trust Division by calling
(800) 490-1493. Stockholders residing outside the United States, Canada and
Puerto Rico should call (201) 222-4489.
IBM ON THE INTERNET
Topics featured in this Annual Report can be found via the IBM home page on the
Internet (http://www.ibm.com). Financial results, news on IBM products, services
and other activities can also be found via that address. Stockholders of record
can receive online account information and answers to frequently asked questions
regarding stockholder accounts via the internet (http://www.ibm.com/investor).
Stockholders of record can also consent to receive future IBM Annual Reports and
Proxy Statements online through the Internet at this site.
IBM INVESTOR SERVICES PROGRAM
The Investor Services Program brochure outlines a number of services provided
for IBM stockholders and potential IBM investors, including the reinvestment of
dividends, direct purchase and the deposit of IBM stock certificates for
safekeeping. Call (888) 421-8860 for a copy of the brochure. Investors residing
outside the United States, Canada and Puerto Rico should call (201) 324-0405.
Investors with other requests may write to:
IBM Stockholder Relations
IBM Corporation
New Orchard Road
Armonk, New York 10504
IBM STOCK
IBM common stock is listed on the New York Stock Exchange, on other exchanges in
the United States and around the world.
ANNUAL MEETING
The IBM Annual Meeting of Stockholders will be held on Tuesday, April 24, 2001,
at 10 a.m. (EST) in the Savannah International Trade and Convention Center, One
International Drive, Savannah, Georgia.
STOCKHOLDER COMMUNICATIONS
Stockholders in the United States and Canada can get quarterly financial
results, listen to a summary of Mr. Gerstner's Annual Meeting remarks and hear
voting results from the meeting by calling (800) IBM-7800. Callers can also
request printed copies of the information via mail or fax. Stockholders residing
outside the United States, Canada and Puerto Rico should call (402) 573-9861.
LITERATURE FOR IBM STOCKHOLDERS
The following literature on IBM is available without charge from:
EquiServe, First Chicago Trust Division
Mail Suite 4688
P.O. Box 2530
Jersey City, New Jersey 07303-2530
(888) IBM-6700
Investors residing outside the United States, Canada and Puerto Rico should call
(201) 324-0405.
The Form 10-K Annual Report and Form 10-Q Quarterly Reports to the SEC provide
additional information on IBM's business. The 10-K is issued in March; 10-Q
reports are released in May, August and November.
An audio cassette recording of the 2000 Annual Report will be available for
sight-impaired stockholders in June.
IBM Credit Corporation's Annual Report is available in April.
"IBM Environment and Well-Being: Progress Report " reports on IBM's
environmental, safety and energy programs.
"Valuing Diversity: An Ongoing Commitment" communicates to the company's entire
community of employees, customers, stockholders, vendors, suppliers, business
partners and employment applicants the importance IBM places on the diversity of
the company's workplace and marketplace.
GENERAL INFORMATION
For answers to general questions about IBM from within the continental United
States, call (800) IBM-4YOU. From outside the United States, call (404)
238-1234.
CORPORATE OFFICES
International Business Machines Corporation
New Orchard Road
Armonk, New York 10504
(914) 499-1900
(recycle logo) The IBM Annual Report is printed on recycled paper and is
recyclable.
*AIX, Aptiva, AS/400, DB2, IBM, IntelliStation, MiCRUS, MQSeries, Netfinity,
NetVista, RS/6000, S/390, Shark, ThinkPad and WebSphere are trademarks of
International Business Machines Corporation or its wholly owned subsidiaries.
CATIA is a trademark of Dassault Systemes SA. Intel is a trademark of Intel
Corporation. Linux is a trademark of Linus Torvalds. Lotus and Lotus Notes are
trademarks of Lotus Development Corporation. Tivoli is a trademark of Tivoli
Systems, Inc. Windows NT is a trademark of Microsoft Corporation. UNIX is a
trademark in the United States and other countries licensed exclusively through
The Open Group. Other company product and serve names may be trademarks or
service marks of others.
Printed in U.S.
G507-0501-06
PAGE NO.
NINETY-FIVE
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
BOARD OF DIRECTORS
CATHLEEN BLACK
President
Hearst Magazines
KENNETH I. CHENAULT
President and
Chief Executive Officer
American Express Company
JUERGEN DORMANN
Chairman of the
Board of Management
Aventis S.A.
LOUIS V. GERSTNER, JR.
Chairman of the Board and
Chief Executive Officer, IBM
NANNERL O. KEOHANE
President
Duke University
CHARLES F. KNIGHT
Chairman of the Board
Emerson Electric Co.
MINORU MAKIHARA
Chairman of the Board
Mitsubishi Corporation
LUCIO A. NOTO
Retired Vice Chairman
of the Board
Exxon Mobil Corporation
SAMUEL J. PALMISANO
President and
Chief Operating Officer, IBM
JOHN B. SLAUGHTER
President and
Chief Executive Officer
National Action Council for
Minorities in Engineering, Inc.
SIDNEY TAUREL
Chairman of the Board, President
and Chief Executive Officer
Eli Lilly and Company
JOHN M. THOMPSON
Vice Chairman of the Board, IBM
ALEX TROTMAN
Retired Chairman of the Board
and Chief Executive Officer
Ford Motor Company
LODEWIJK C. VAN WACHEM
Chairman of the
Supervisory Board
Royal Dutch Petroleum
Company
CHARLES M. VEST
President
Massachusetts Institute
of Technology
----------------------
SENIOR MANAGEMENT
LOUIS V. GERSTNER, JR.
Chairman of the Board and
Chief Executive Officer
SAMUEL J. PALMISANO
President and
Chief Operating Officer
JOHN M. THOMPSON
Vice Chairman of the Board
CORPORATE HEADQUARTERS
JOHN R. JOYCE
Senior Vice President and
Chief Financial Officer
MARK LOUGHRIDGE
Vice President and Controller
ROBERT F. WOODS
Vice President and Treasurer
DAVID B. KALIS
Senior Vice President
Communications
JON C. IWATA
Vice President
Corporate Communications
ABBY F. KOHNSTAMM
Senior Vice President
Marketing
J. RANDALL MACDONALD
Senior Vice President
Human Resources
LAWRENCE R. RICCIARDI
Senior Vice President and
General Counsel
ROBERT G. ANDEREGG
Vice President and
Assistant General Counsel
CHRISTOPHER G. CAINE
Vice President
Governmental Programs
DANIEL E. O'DONNELL
Vice President
Assistant General Counsel
and Secretary
J. BRUCE HARRELD
Senior Vice President
Strategy
PHILIP S. THOMPSON
Vice President
Business Transformation and
Chief Information Officer
TECHNOLOGY AND
MANUFACTURING
NICHOLAS M. DONOFRIO
Senior Vice President
PAUL M. HORN
Senior Vice President
Research
IBM GLOBAL SERVICES
DOUGLAS T. ELIX
Senior Vice President and
Group Executive
MICHAEL E. DANIELS
General Manager
IBM Global Services
Asia Pacific
MARK W. ELLIOT
General Manager
IBM Global Services
Americas
HANS-ULRICH MAERKI
General Manager
IBM Global Services
Europe/Middle East/Africa
FRANK KERN
General Manager
Professional Services
VIRGINIA M. ROMETTY
General Manager
Strategy and Marketing
FRANK J. RONEY
General Manager
Business Innovation Services
PERSONAL AND PRINTING
SYSTEMS GROUP
ROBERT W. MOFFAT, JR.
General Manager
JONATHAN J. JUDGE
General Manager
Personal Computing Division
RALPH F. MARTINO
Vice President
Marketing, Sales Operations
and Strategy
SALES AND
DISTRIBUTION GROUP
WILLIAM A. ETHERINGTON
Senior Vice President and
Group Executive
KHALIL BARSOUM
General Manager
Global Communications Sector
DAVID R. CARLUCCI
General Manager
IBM Americas
JERRY COLE
General Manager
Global Financial Services Sector
KAKUTARO KITASHIRO
General Manager
IBM Asia Pacific
HENRY W. K. CHOW
General Manager
IBM Greater China
J. MICHAEL LAWRIE
General Manager
IBM Europe/
Middle East/Africa
DOUGLAS L. MAINE
General Manager
ibm.com
CHRISTIAN NIVOIX
General Manager
Global Distribution Sector
PETER T. ROWLEY
General Manager
Global Business Partners
CURTIS H. TEARTE
General Manager
Global Public Sector
STEPHEN M. WARD, JR.
General Manager
Global Industrial Sector
TECHNOLOGY GROUP
JOHN E. KELLY, III
Senior Vice President and
Group Executive
IBM GLOBAL FINANCING
JOSEPH C. LANE
General Manager, and President
IBM Credit Corporation
SOFTWARE GROUP
STEVEN A. MILLS
Senior Vice President and
Group Executive
LOUIS J. D'AMBROSIO
Vice President
Worldwide Marketing
DAVID J. MURPHY
President
Tivoli Systems, Inc.
JANET PERNA
General Manager
Database Management
JOHN A. SWAINSON
General Manager
Application and
Integration Middleware
AL W. ZOLLAR
President and
Chief Operating Officer
Lotus Development
Corporation
STORAGE SYSTEMS GROUP
LINDA S. SANFORD
Senior Vice President and
Group Executive
SERVER GROUP
WILLIAM M. ZEITLER
Senior Vice President and
Group Executive
RODNEY C. ADKINS
General Manager
Web Servers
DANIEL R. COLBY
General Manager
Enterprise Servers
SUSAN M. WHITNEY
Vice President
Server Marketing
IRVING WLADAWSKY-BERGER
Vice President
Technology and Strategy