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EXCEL - IDEA: XBRL DOCUMENT - INTERNATIONAL BUSINESS MACHINES CORPFinancial_Report.xls
EX-12 - EX-12 - INTERNATIONAL BUSINESS MACHINES CORPibm15q1_ex12.htm
EX-11 - EX-11 - INTERNATIONAL BUSINESS MACHINES CORPibm15q1_ex11.htm
EX-32.2 - EX-32.2 - INTERNATIONAL BUSINESS MACHINES CORPibm15q1_ex32d2.htm
EX-31.1 - EX-31.1 - INTERNATIONAL BUSINESS MACHINES CORPibm15q1_ex31d1.htm
EX-31.2 - EX-31.2 - INTERNATIONAL BUSINESS MACHINES CORPibm15q1_ex31d2.htm
EX-10.1 - EX-10.1 - INTERNATIONAL BUSINESS MACHINES CORPibm15q1_ex10d1.htm
EX-32.1 - EX-32.1 - INTERNATIONAL BUSINESS MACHINES CORPibm15q1_ex32d1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10 - Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

 OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTER ENDED MARCH 31, 2015

 

1-2360

(Commission file number)

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

 

New York

 

13-0871985

(State of incorporation)

 

(IRS employer identification number)

 

Armonk , New York

 

10504

 

(Address of principal executive offices)

 

(Zip Code)

 

 

914-499-1900

(Registrant’s telephone number)

 

               Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes  ý        No

 

               Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes ý        No     

 

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ý 

 

 

 

Accelerated filer  ☐ 

 

 

 

 

 

Non-accelerated filer  ☐ 

 

 

 

Smaller reporting company ☐ 

(Do not check if a smaller reporting company)

 

 

 

 

 

              Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No ý 

 

        The registrant had 984,734,067 shares of common stock outstanding at March 31, 2015.

 


 

Index

 

 

 

 

Page

 

Part I - Financial Information:

 

 

 

 

 

 

 

Item 1. Consolidated Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Earnings for the three months ended March 31, 2015 and 2014

 

3

 

 

 

 

 

Consolidated Statement of Comprehensive Income for the three months ended March 31, 2015 and 2014

 

4

 

 

 

 

 

Consolidated Statement of Financial Position at March 31, 2015 and December 31, 2014  

 

5

 

 

 

 

 

Consolidated Statement of Cash Flows for the three months ended March 31, 2015 and 2014

 

7

 

 

 

 

 

Consolidated Statement of Changes in Equity for the three months ended March 31, 2015 and 2014

 

8

 

 

 

 

 

Notes to Consolidated Financial Statements

 

9

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

41

 

 

 

 

 

Item 4. Controls and Procedures  

 

71

 

 

 

 

 

Part II - Other Information:  

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

71

 

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of  Equity Securities                                                                                                                                                                                                                                                                                                                                                              

 

71

 

 

 

 

 

Item 6. Exhibits  

 

72

 

 

 

 

 

 

 

 

 

 

 

 

 

  

2


Part I - Financial Information 

 

Item 1. Consolidated Financial Statements: 

 

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
 

CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
 

 

 

 

 

Three Months Ended March 31,

(Dollars in millions except per share amounts)

 

 

2015

 

 

2014*

Revenue:

 

 

 

 

 

 

 

Services

 

$

12,366

 

$

13,982

 

Sales

 

 

6,757

 

 

7,736

 

Financing

 

 

467

  

 

517

Total revenue

 

 

19,590

 

 

22,236

Cost:

 

 

 

 

 

 

 

Services

 

 

8,278

 

 

9,101

 

Sales

 

 

1,625

 

 

2,229

 

Financing

 

 

235

 

 

278

Total cost

 

 

10,138

 

 

11,608

Gross profit

 

 

9,452

 

 

10,627

Expense and other (income):

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,362

 

 

6,272

 

Research, development and engineering

 

 

1,298

  

 

1,402

 

Intellectual property and custom development income

 

 

(173)

 

 

(207)

 

Other (income) and expense

 

 

(143)

 

 

(127)

 

Interest expense

 

 

108

 

 

105

Total expense and other (income)

 

 

6,451

 

 

7,444

Income from continuing operations before income taxes

 

 

3,001

 

 

3,183

Provision for income taxes

 

 

585

 

 

653

Income from continuing operations

 

$

2,415

 

$

2,530

Loss from discontinued operations, net of tax

 

 

(88)

 

 

(146)

Net income

 

$

2,328

 

$

2,384

 

 

 

 

 

 

 

 

Earnings/(loss) per share of common stock:

 

 

 

 

 

 

 

Assuming dilution:

 

 

 

 

 

 

 

   Continuing operations

 

$

2.44

 

$

2.43

 

   Discontinued operations

 

 

(0.09)

 

 

(0.14)

 

Total

 

$

2.35

 

$

2.29

 

Basic:

 

 

 

 

 

 

 

   Continuing operations

 

$

2.45

 

$

2.44

 

   Discontinued operations

 

 

(0.09)

 

 

(0.14)

 

Total

 

$

2.36

 

$

2.30

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding: (millions)

 

 

 

 

 

 

 

Assuming dilution

 

 

992.3

 

 

1,041.8

 

Basic

 

 

988.1

 

 

1,035.2

 

 

 

 

 

 

 

 

Cash dividend per common share

 

$

1.10

 

$

0.95

 

 

 

 

 

 

 

 

* Reclassified to reflect discontinued operation presentation.

 

 

 

 

 

 

 

 

(Amounts may not add due to rounding.)

 

 

 

 

 

 

(The accompanying notes are an integral part of the financial statements.)

 

 

 

 

 

 

 

3


INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(Dollars in millions)

 

 

2015

 

 

2014

Net income

 

$

2,328

 

$

2,384

Other comprehensive income/(loss), before tax:

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(452)

 

 

(61)

 

Net changes related to available-for-sale securities:

 

 

 

 

 

 

 

 

Unrealized gains/(losses) arising during the period

 

 

32

 

 

0

 

 

Reclassification of (gains)/losses to net income

 

 

0

 

 

4

 

Total net changes related to available-for-sale securities

 

 

32

 

 

4

 

Unrealized gains/(losses) on cash flow hedges:

 

 

 

 

 

 

 

 

Unrealized gains/(losses) arising during the period

 

 

619

 

 

88

 

 

Reclassification of (gains)/losses to net income

 

 

(249)

 

 

(1)

 

Total unrealized gains/(losses) on cash flow hedges

 

 

370

 

 

87

 

Retirement-related benefit plans:

 

 

 

 

 

 

 

 

Prior service costs/(credits)

 

 

5

 

 

1

 

 

Net (losses)/gains arising during the period

 

 

(77)

 

 

32

 

 

Curtailments and settlements

 

 

4

 

 

4

 

 

Amortization of prior service (credits)/costs

 

 

(26)

 

 

(29)

 

 

Amortization of net (gains)/losses

 

 

835

 

 

649

 

Total retirement-related benefit plans

 

 

740

 

 

656

Other comprehensive income/(loss), before tax

 

 

690

 

 

687

Income tax (expense)/benefit related to items of other comprehensive income

 

 

(657)

 

 

(241)

Other comprehensive income/(loss)

 

 

33

 

 

446

Total comprehensive income/(loss)

 

$

2,361

 

$

2,830

 

 

 

 

 

 

 

 

 

(Amounts may not add due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(The accompanying notes are an integral part of the financial statements.)

 

 

 

 

 

 

 

4


INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
  

 

ASSETS 

 

 

 

 

 

 

At March 31,

 

At December 31,

(Dollars in millions)

 

2015

 

2014

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,796

 

$

8,476

 

 

Marketable securities

 

 

8

 

 

0

 

 

Notes and accounts receivable - trade (net of allowances of $354

 

 

 

 

 

 

 

 

 

in 2015 and $336 in 2014)

 

 

8,806

 

 

9,090

 

 

Short-term financing receivables (net of allowances of $484 in 2015

 

 

 

 

 

 

 

 

 

and $452 in 2014)

 

 

16,303

 

 

19,835

 

 

Other accounts receivable (net of allowances of $41 in 2015 and

 

 

 

 

 

 

 

 

 

$40 in 2014)

 

 

2,740

 

 

2,906

 

 

Inventories, at lower of average cost or market:

 

 

 

 

 

 

 

 

 

Finished goods

 

 

371

 

 

430

 

 

 

Work in process and raw materials

 

 

1,599

 

 

1,674

 

 

Total inventories

 

 

1,970

 

 

2,103

 

 

Deferred taxes

 

 

1,805

 

 

2,044

 

 

Prepaid expenses and other current assets

 

 

5,890

 

 

4,967

 

Total current assets

 

 

46,316

 

 

49,422

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

38,303

 

 

39,034

 

 

Less: Accumulated depreciation

 

 

27,793

 

 

28,263

 

Property, plant and equipment — net

 

 

10,509

 

 

10,771

 

Long-term financing receivables (net of allowances of $125 in 2015

 

 

 

 

 

 

 

 

and $126 in 2014)

 

 

9,820

 

 

11,109

 

Prepaid pension assets

 

 

2,690

 

 

2,160

 

Deferred taxes

 

 

4,374

 

 

4,808

 

Goodwill

 

 

29,871

 

 

30,556

 

Intangible assets — net

 

 

2,991

 

 

3,104

 

Investments and sundry assets

 

 

5,466

 

 

5,603

 

Total assets

 

$

112,037

 

$

117,532

 

 

 

 

 

 

 

(Amounts may not add due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

(The accompanying notes are an integral part of the financial statements.)

 

 

 

 

 

 

 

5


INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION – (CONTINUED)
(UNAUDITED)
 

 

LIABILITIES AND EQUITY

 

(Dollars in millions)

 

At March 31,

 

At December 31,

2015

 

2014

Liabilities:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

       

 

Taxes

 

$

3,539

 

$

5,084

      

 

Short-term debt

 

 

4,532

 

 

5,731

       

 

Accounts payable

 

 

6,314

 

 

6,864

       

 

Compensation and benefits

 

 

3,328

 

 

4,031

       

 

Deferred income

 

 

12,162

 

 

11,877

       

 

Other accrued expenses and liabilities

 

 

5,765

 

 

6,013

 

Total current liabilities

 

 

35,640

 

 

39,600

 

Long-term debt

 

 

34,295

 

 

35,073

 

Retirement and nonpension postretirement benefit obligations

 

 

17,211

 

 

18,261

 

Deferred income

 

 

3,811

 

 

3,691

 

Other liabilities

 

 

8,791

 

 

8,892

 

Total liabilities

 

 

99,747

 

 

105,518

Equity:

 

 

 

 

 

 

IBM stockholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $0.20 per share, and additional paid-in capital

 

 

52,928

 

 

52,666

 

 

Shares authorized: 4,687,500,000

 

 

 

 

 

 

 

 

Shares issued: 2015 - 2,217,335,134

 

 

 

 

 

 

 

 

 

2014 - 2,215,209,574

 

 

 

 

 

 

 

Retained earnings

 

 

139,030

 

 

137,793

 

Treasury stock - at cost

 

 

(151,975)

 

 

(150,715)

 

 

Shares: 2015 - 1,232,601,067

 

 

 

 

 

 

 

 

 

2014 - 1,224,685,815

 

 

 

 

 

 

 

Accumulated other comprehensive income/(loss)

 

 

(27,842)

 

 

(27,875)

 

Total IBM stockholders’ equity

 

 

12,141

 

 

11,868

Noncontrolling interests

 

 

148

 

 

146

Total equity

 

 

12,289

 

 

12,014

Total liabilities and equity

 

$

112,037

 

$

117,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts may not add due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(The accompanying notes are an integral part of the financial statements.)

 

 

 

 

 

 

 

6


INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
 

CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
  

 

 

 

 

Three Months Ended March 31,

(Dollars in millions)

 

 

2015

 

 

2014

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

2,328

 

$

2,384

Adjustments to reconcile net income to cash provided by operating activities

 

 

 

 

 

 

 

Depreciation

 

 

670

 

 

802

 

Amortization of intangibles

 

 

298

 

 

339

 

Stock-based compensation

 

 

127

 

 

124

 

Net (gain)/loss on asset sales and other

 

 

352

 

 

(161)

 

Changes in operating assets and liabilities, net of acquisitions/divestitures

 

 

(165)

 

 

(162)

Net cash provided by operating activities

 

 

3,610

 

 

3,326

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments for property, plant and equipment

 

 

(857)

 

 

(849)

 

Proceeds from disposition of property, plant and equipment

 

 

47

 

 

74

 

Investment in software

 

 

(113)

 

 

(112)

 

Acquisition of businesses, net of cash acquired

 

 

(148)

 

 

(264)

 

Divestitures of businesses, net of cash transferred

 

 

19

 

 

391

 

Non-operating finance receivables — net

 

 

1,615

 

 

665

 

Purchases of marketable securities and other investments

 

 

(819)

 

 

(477)

 

Proceeds from disposition of marketable securities and other investments

 

 

816

 

 

608

Net cash provided by investing activities

 

 

560

 

 

35

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from new debt

 

 

2,290

 

 

4,875

 

Payments to settle debt

 

 

(2,824)

 

 

(1,507)

 

Short-term borrowings/(repayments) less than 90 days — net

 

 

(776)

 

 

845

 

Common stock repurchases

 

 

(1,165)

 

 

(8,166)

 

Common stock transactions — other

 

 

161

 

 

270

 

Cash dividends paid

 

 

(1,088)

 

 

(990)

Net cash used in financing activities

 

 

(3,402)

 

 

(4,673)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(449)

 

 

5

Net change in cash and cash equivalents

 

 

319

 

 

(1,307)

 

 

 

 

 

 

 

 

Cash and cash equivalents at January 1

 

 

8,476

 

 

10,716

Cash and cash equivalents at March 31

 

$

8,796

 

$

9,409

 

 

 

 

 

 

 

 

(Amounts may not add due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(The accompanying notes are an integral part of the financial statements.)

 

 

 

 

 

 

 

7


INTERNATIONAL BUSINESS MACHINES CORPORATION
  AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total IBM

 

Non-

 

 

 

 

Paid-in

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders'

 

Controlling

Total

(Dollars in millions)

 

Capital

 

Earnings

 

Stock

 

Income/(Loss)

 

Equity

 

   Interests

 

Equity

Equity - January 1, 2015

 

$

52,666

 

$

137,793

 

$

(150,715)

 

$

(27,875)

 

$

11,868

 

$

146

 

$

12,014

Net income plus other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

 

2,328

 

 

 

 

 

 

 

 

2,328

 

 

 

 

 

2,328

   Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

33

 

 

33

 

 

 

 

 

33

Total comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,361

 

 

 

 

$

2,361

Cash dividends paid –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   common stock

 

 

 

 

 

(1,088)

 

 

 

 

 

 

 

 

(1,088)

 

 

 

 

 

(1,088)

Common stock issued under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   employee plans (2,125,560 shares)

 

 

259

 

 

 

 

 

 

 

 

 

 

 

259

 

 

 

 

 

259

Purchases (363,779 shares) and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   sales (187,271 shares) of  treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   stock under employee plans – net

 

 

 

 

 

(3)

 

 

(33)

 

 

 

 

 

(35)

 

 

 

 

 

(35)

Other treasury shares purchased,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   not retired (7,738,744 shares)

 

 

 

 

 

 

 

 

(1,227)

 

 

 

 

 

(1,227)

 

 

 

 

 

(1,227)

Changes in other equity

 

 

3

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

3

Changes in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

3

Equity - March 31, 2015

 

$

52,928

 

$

139,030

 

$

(151,975)

 

$

(27,842)

 

$

12,141

 

$

148

 

$

12,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total IBM

 

Non-

 

 

 

 

Paid-in

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders'

 

Controlling

Total

(Dollars in millions)

 

Capital

 

Earnings

 

Stock

 

Income/(Loss)

 

Equity

 

Interests

Equity

Equity - January 1, 2014

 

$

51,594

 

$

130,042

 

$

(137,242)

 

$

(21,602)

 

$

22,792

 

$

137

 

$

22,929

Net income plus other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

 

2,384

 

 

 

 

 

 

 

 

2,384

 

 

 

 

 

2,384

   Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

446

 

 

446

 

 

 

 

 

446

Total comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,830

 

 

 

 

$

2,830

Cash dividends paid –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   common stock

 

 

 

 

 

(990)

 

 

 

 

 

 

 

 

(990)

 

 

 

 

 

(990)

Common stock issued under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   employee plans (3,105,227 shares)

 

 

333

 

 

 

 

 

 

 

 

 

 

 

333

 

 

 

 

 

333

Purchases (488,203 shares) and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   sales (328,673 shares) of  treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   stock under employee plans – net

 

 

 

 

 

(5)

 

 

(46)

 

 

 

 

 

(51)

 

 

 

 

 

(51)

Other treasury shares purchased,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   not retired (45,153,202 shares)

 

 

 

 

 

 

 

 

(8,324)

 

 

 

 

 

(8,324)

 

 

 

 

 

(8,324)

Changes in other equity

 

 

16

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

 

 

16

Changes in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4)

 

 

(4)

Equity - March 31, 2014

 

$

51,943

 

$

131,431

 

$

(145,612)

 

$

(21,156)

 

$

16,607

 

$

133

 

$

16,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts may not add due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(The accompanying notes are an integral part of the financial statements.)

 

 

 

 

 

 

 

 

 

 

 

 

 

8


Notes to Consolidated Financial Statements:  

1. Basis of Presentation: The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company's management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company's results of operations, financial position and cash flows.

 

       The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. Refer to the company's 2014 Annual Report on pages 68 to 71 for a discussion of the company's critical accounting estimates.

 

       On October 20, 2014, the company announced a definitive agreement to divest its Microelectronics business and manufacturing operations to GLOBALFOUNDRIES. The assets and liabilities of the Microelectronics business are reported as held for sale at March 31, 2015. The operating results of the Microelectronics business have been reported as discontinued operations. Prior periods have been reclassified to conform to this presentation to allow for a meaningful comparison of continuing operations. Refer to Note 9, “Acquisitions/Divestitures,” for additional information on the transaction. In addition, in the first quarter of 2015, the company renamed its Systems & Technology segment to Systems Hardware.

 

       Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company's 2014 Annual Report.

 

       Noncontrolling interest amounts in income of $1.2 million and $(0.5) million, net of tax, for the three months ended March 31, 2015 and 2014, respectively, are included in the Consolidated Statement of Earnings within the other (income) and expense line item.

 

       Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.

  

 

2. Accounting Changes:  In April 2015, the Financial Accounting Standards Board (FASB) issued guidance which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective January 1, 2016 with early adoption permitted. The guidance is a change in financial statement presentation only and will not have a material impact in the consolidated financial results. At March 31, 2015, the company had approximately $80 million in debt issuance costs included in investments and sundry assets in the Consolidated Statement of Financial Position.

     In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2017 and early adoption is not permitted. The company is currently evaluating the impact of the new guidance and the method of adoption.

       In April 2014, the FASB issued guidance that changed the criteria for reporting a discontinued operation. Only disposals of a component that represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results is a discontinued operation. The guidance also requires expanded disclosures about discontinued operations and disposals of a significant part of an entity that does not qualify for discontinued operations reporting. The guidance was effective January 1, 2015. The impact to the company will be dependent on any transaction that is within the scope of the new guidance.

       In July 2013, the FASB issued guidance regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss

9


Notes to Consolidated Financial Statements – (continued)

carryforward, a similar tax loss, or a tax credit carryforward. The guidance was effective January 1, 2014. The guidance was a change in financial statement presentation only and did not have a material impact in the consolidated financial results.

  In March 2013, the FASB issued guidance on when foreign currency translation adjustments should be released to net income. When a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance was effective January 1, 2014 and did not have a material impact in the consolidated financial results.  

     In February 2013, the FASB issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples include debt arrangements, other contractual obligations and settled litigation matters. The guidance requires an entity to measure such obligations as the sum of the amount that the reporting entity agreed to pay on the basis of its arrangement among its co-obligors plus additional amounts the reporting entity expects to pay on behalf of its co-obligors. The guidance was effective January 1, 2014 and did not have a material impact in the consolidated financial results.

 

3. Financial Instruments:  

 

Fair Value Measurements

 

       Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

 

·         Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

·         Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

·          Level 3—Unobservable inputs for the asset or liability.

 

       The guidance requires the use of observable market data if such data is available without undue cost and effort.

 

       When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

 

       The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

 

       In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

 

·         Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

·         Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

 

        As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

 

10


Notes to Consolidated Financial Statements – (continued)

       Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial investment, fair value is measured using a model described above.

 

       Non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. In the third quarter of 2014, the company recorded an impairment on certain assets that were initially reported as held for sale at September 30, 2014. See note 9, “Acquisitions/Divestitures,” for additional information. There were no material impairments of non-financial assets for the three months ended March 31, 2015 and 2014, respectively.

 

       Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

 

       The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014.

11


Notes to Consolidated Financial Statements – (continued)

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2015

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits and certificates of deposit 

 

$

 

$

4,503

 

$

 

$

4,503

 

 

 

Commercial paper

 

 

 

 

500

 

 

 

 

500

 

 

 

Money market funds

 

 

1,311

 

 

 

 

 

 

1,311

 

 

 

U.S. government securities

 

 

 

 

530

 

 

 

 

530

 

 

 

Canadian government securities

 

 

 

 

237

 

 

 

 

237

 

 

 

Other securities

 

 

 

 

6

 

 

 

 

6

 

 

Total

 

 

1,311

 

 

5,775

 

 

 

 

7,086

(6)

 

Debt securities - current (2)

 

 

 

 

8

 

 

 

 

8

(6)

 

Debt securities - noncurrent (3)

 

 

1

 

 

8

 

 

 

 

9

 

 

Trading security investments (3)

 

 

49

 

 

 

 

 

 

49

 

 

Available-for-sale equity investments (3) 

 

 

281

 

 

 

 

 

 

281

 

 

Derivative assets (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

743

 

 

 

 

743

 

 

 

Foreign exchange contracts

 

 

 

 

1,230

 

 

 

 

1,230

 

 

 

Equity contracts

 

 

 

 

18

 

 

 

 

18

 

 

Total

 

 

 

 

1,991

 

 

 

 

1,991

(7)

Total assets

 

$

1,642

 

$

7,782

 

$

 

$

9,424

(7)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

$

172

 

$

 

$

172

 

 

 

Equity contracts

 

 

 

 

10

 

 

 

 

10

 

 

 

Interest rate contracts

 

 

 

 

0

 

 

 

 

0

 

Total liabilities

 

$

 

$

181

 

$

 

$

181

(7)

 

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of   

      Financial Position.   

(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments        

      and sundry assets in the Consolidated Statement of Financial Position at March 31, 2015 were $1,204 million

      and $787 million respectively.    

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other        

      liabilities in the Consolidated Statement of Financial Position at March 31, 2015 were $164 million and $18

      million, respectively.

(6) Available-for-sale securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated

      Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $141

      million each.

  

12


Notes to Consolidated Financial Statements – (continued)

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits and certificates of deposit 

 

$

 

$

3,517

 

$

 

$

3,517

 

 

 

Commercial paper 

 

 

 

 

764

 

 

 

 

764

 

 

 

Money market funds

 

 

662

 

 

 

 

 

 

662

 

 

 

U.S government securities

 

 

 

 

410

 

 

 

 

410

 

 

 

Other securities

 

 

 

 

6

 

 

 

 

6

 

 

Total

 

 

662

 

 

4,697

 

 

 

 

5,359

(5)

 

Debt securities - noncurrent (2)

 

 

1

 

 

8

 

 

 

 

9

 

 

Trading security investments (2)

 

 

74

 

 

 

 

 

 

74

 

 

Available-for-sale equity investments (2) 

 

 

243

 

 

 

 

 

 

243

 

 

Derivative assets (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

633

 

 

 

 

633

 

 

 

Foreign exchange contracts

 

 

 

 

775