10-Q 1 ibm13q3_10q.htm 10-Q FORM 10 - Q

 

 

 

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 SEPTEMBER 30, 2013

 

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 has 1,085,854,383 shares of common stock outstanding at September 30, 2013.

 


 

 

Index

 

 

 

 

Page

 

Part I - Financial Information:

 

 

 

 

 

 

 

Item 1. Consolidated Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Earnings for the three and nine months ended September 30, 2013 and 2012

 

3

 

 

 

 

 

Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012

 

4

 

 

 

 

 

Consolidated Statement of Financial Position at September 30, 2013 and December 31, 2012  

 

5

 

 

 

 

 

Consolidated Statement of Cash Flows for the nine months ended September 30, 2013 and 2012

 

7

 

 

 

 

 

Consolidated Statement of Changes in Equity for the nine months ended September 30, 2013 and 2012

 

8

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 9 

 

 

 

 

 

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

 

42

 

 

 

 

 

Item 4. Controls and Procedures  

 

83

 

 

 

 

 

Part II - Other Information:  

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

83

 

 

 

 

 

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

 

83

 

 

 

 

 

Item 6. Exhibits  

 

84

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

PART I - Financial Information 

 

Item 1. Consolidated Financial Statements: 

 

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
 

CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

(Dollars in millions except per share amounts)

 

 

2013

 

 

2012

 

 

2013

 

 

2012

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

 14,225 

 

$

 14,626 

 

$

 42,811 

 

$

 44,279 

Sales

 

 

 8,987 

 

 

 9,642 

 

 

 27,735 

 

 

 29,424 

Financing

 

 

 509 

  

 

 479 

 

 

 1,506 

  

 

 1,500 

Total revenue

 

 

 23,720 

 

 

 24,747 

 

 

 72,052 

 

 

 75,203 

Cost:

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

 

 9,098 

 

 

 9,515 

 

 

 27,950 

 

 

 29,285 

Sales

 

 

 2,975 

 

 

 3,242 

 

 

 9,108 

 

 

 10,003 

Financing

 

 

 268 

 

 

 258 

 

 

 805 

 

 

 784 

Total cost

 

 

 12,341 

 

 

 13,016 

 

 

 37,863 

 

 

 40,072 

Gross profit

 

 

 11,380 

 

 

 11,732 

 

 

 34,189 

 

 

 35,131 

Expense and other income:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

 5,255 

 

 

 5,908 

 

 

 17,512 

 

 

 17,632 

Research, development and engineering

 

 

 1,468 

  

 

 1,534 

 

 

 4,661 

  

 

 4,722 

Intellectual property and custom

 

 

 

 

 

 

 

 

 

 

 

 

 

development income

 

 

 (191) 

 

 

 (303) 

 

 

 (621) 

 

 

 (847) 

Other (income) and expense

 

 

 (62) 

 

 

 (606) 

 

 

 (214) 

 

 

 (796) 

Interest expense

 

 

 97 

 

 

 124 

 

 

 289 

 

 

 350 

Total expense and other income

 

 

 6,567 

 

 

 6,657 

 

 

 21,627 

 

 

 21,060 

Income before income taxes

 

 

 4,812 

 

 

 5,074 

 

 

 12,562 

 

 

 14,071 

Provision for income taxes

 

 

 772 

 

 

 1,251 

 

 

 2,263 

 

 

 3,300 

Net income

 

$

 4,041 

 

$

 3,824 

 

$

 10,299 

 

$

 10,771 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

Assuming dilution

 

$

 3.68 

 

$

 3.33 

 

$

 9.27 

 

$

 9.27 

 

Basic

 

$

 3.70 

 

$

 3.36 

 

$

 9.35 

 

$

 9.38 

Weighted-average number of common

 

 

 

 

 

 

 

 

 

 

 

 

 

shares outstanding: (millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Assuming dilution

 

 

 1,098.8 

 

 

 1,149.3 

 

 

 1,110.7 

 

 

 1,161.8 

 

Basic

 

 

 1,090.9 

 

 

 1,137.2 

 

 

 1,101.8 

 

 

 1,148.4 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividend per common share

 

$

 0.95 

 

$

 0.85 

 

$

 2.75 

 

$

 2.45 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 September 30,

 

Nine Months Ended September 30,

(Dollars in millions)

 

 

2013

 

 

2012

 

 

2013

 

 

2012

Net income

 

$

 4,041 

 

$

 3,824 

 

$

 10,299 

 

$

 10,771 

Other comprehensive income/(loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 382 

 

 

 501 

 

 

 (959) 

 

 

 164 

 

Net changes related to available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains/(losses) arising during the period

 

 

 3 

 

 

 11 

 

 

 0 

 

 

 13 

 

 

Reclassification of (gains)/losses to net income

 

 

 (5) 

 

 

 (27) 

 

 

 (5) 

 

 

 (43) 

 

 

Subsequent changes in previously impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  securities arising during the period

 

 

 1 

 

 

 (7) 

 

 

 3 

 

 

 20 

 

Total net changes related to available-for-sale securities

 

 

 (1) 

 

 

 (24) 

 

 

 (1) 

 

 

 (10) 

 

Unrealized gains/(losses) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains/(losses) arising during the period

 

 

 (409) 

 

 

 (54) 

 

 

 (58) 

 

 

 65 

 

 

Reclassification of (gains)/losses to net income

 

 

 (27) 

 

 

 (112) 

 

 

 (130) 

 

 

 (246) 

 

Total unrealized gains/(losses) on cash flow hedges

 

 

 (436) 

 

 

 (165) 

 

 

 (188) 

 

 

 (181) 

 

Retirement-related benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service costs/(credits)

 

 

 0 

 

 

 0 

 

 

 33 

 

 

 0 

 

 

Net (losses)/gains arising during the period

 

 

 105 

 

 

 1 

 

 

 300 

 

 

 66 

 

 

Curtailments and settlements

 

 

 0 

 

 

 (2) 

 

 

 0 

 

 

 (1) 

 

 

Amortization of prior service (credits)/costs

 

 

 (28) 

 

 

 (37) 

 

 

 (86) 

 

 

 (112) 

 

 

Amortization of net (gains)/losses

 

 

 872 

 

 

 613 

 

 

 2,623 

 

 

 1,846 

 

Total retirement-related benefit plans

 

 

 949 

 

 

 575 

 

 

 2,869 

 

 

 1,799 

Other comprehensive income/(loss), before tax

 

 

 895 

 

 

 887 

 

 

 1,721 

 

 

 1,771 

Income tax (expense)/benefit related to items of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other comprehensive income

 

 

 (91) 

 

 

 (109) 

 

 

 (933) 

 

 

 (606) 

Other comprehensive income/(loss)

 

 

 804 

 

 

 778 

 

 

 788 

 

 

 1,165 

Total comprehensive income/(loss)

 

$

 4,844 

 

$

 4,601 

 

$

 11,087 

 

$

 11,936 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 September 30,

 

At December 31,

(Dollars in millions)

 

2013

 

2012

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 10,072 

 

$

 10,412 

 

 

Marketable securities

 

 

 160 

 

 

 717 

 

 

Notes and accounts receivable - trade (net of allowances of $273

 

 

 

 

 

 

 

 

 

in 2013 and $255 in 2012)

 

 

 9,865 

 

 

 10,667 

 

 

Short-term financing receivables (net of allowances of $280 in 2013

 

 

 

 

 

 

 

 

 

and $288 in 2012)

 

 

 16,786 

 

 

 18,038 

 

 

Other accounts receivable (net of allowances of $29 in 2013 and

 

 

 

 

 

 

 

 

 

$17 in 2012)

 

 

 1,683 

 

 

 1,873 

 

 

Inventories, at lower of average cost or market:

 

 

 

 

 

 

 

 

 

Finished goods

 

 

 528 

 

 

 475 

 

 

 

Work in process and raw materials

 

 

 1,964 

 

 

 1,812 

 

 

Total inventories

 

 

 2,492 

 

 

 2,287 

 

 

Deferred taxes

 

 

 1,752 

 

 

 1,415 

 

 

Prepaid expenses and other current assets

 

 

 4,723 

 

 

 4,024 

 

Total current assets

 

 

 47,533 

 

 

 49,433 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

 40,808 

 

 

 40,501 

 

 

Less: Accumulated depreciation

 

 

 26,931 

 

 

 26,505 

 

Property, plant and equipment — net

 

 

 13,877 

 

 

 13,996 

 

Long-term financing receivables (net of allowances of $72 in 2013

 

 

 

 

 

 

 

 

and $66 in 2012)

 

 

 11,675 

 

 

 12,812 

 

Prepaid pension assets

 

 

 1,476 

 

 

 945 

 

Deferred taxes

 

 

 3,682 

 

 

 3,973 

 

Goodwill

 

 

 30,882 

 

 

 29,247 

 

Intangible assets — net

 

 

 4,003 

 

 

 3,787 

 

Investments and sundry assets

 

 

 4,718 

 

 

 5,021 

 

Total assets

 

$

 117,845 

 

$

 119,213 

 

 

 

 

 

 

 

(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 September 30,

 

At December 31,

2013

2012

Liabilities:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

       

 

Taxes

 

$

 4,746 

 

$

 4,948 

      

 

Short-term debt

 

 

 7,702 

 

 

 9,181 

       

 

Accounts payable

 

 

 6,263 

 

 

 7,952 

       

 

Compensation and benefits

 

 

 4,210 

 

 

 4,745 

       

 

Deferred income

 

 

 11,658 

 

 

 11,952 

       

 

Other accrued expenses and liabilities

 

 

 4,643 

 

 

 4,847 

 

Total current liabilities

 

 

 39,222 

 

 

 43,625 

 

Long-term debt

 

 

 28,478 

 

 

 24,088 

 

Retirement and nonpension postretirement benefit obligations

 

 

 17,994 

 

 

 20,418 

 

Deferred income

 

 

 4,087 

 

 

 4,491 

 

Other liabilities

 

 

 8,057 

 

 

 7,607 

 

Total liabilities

 

 

 97,837 

 

 

 100,229 

Equity:

 

 

 

 

 

 

IBM stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 51,203 

 

 

 50,110 

 

 

Shares authorized: 4,687,500,000

 

 

 

 

 

 

 

 

Shares issued: 2013 - 2,205,819,186

 

 

 

 

 

 

 

 

                        2012 - 2,197,561,159

 

 

 

 

 

 

 

Retained earnings

 

 

 124,885 

 

 

 117,641 

 

Treasury stock - at cost

 

 

 (131,240) 

 

 

 (123,131) 

 

 

Shares: 2013 - 1,119,964,803

 

 

 

 

 

 

 

 

             2012 - 1,080,193,483

 

 

 

 

 

 

 

Accumulated other comprehensive income/(loss)

 

 

 (24,971) 

 

 

 (25,759) 

 

Total IBM stockholders’ equity

 

 

 19,877 

 

 

 18,860 

Noncontrolling interests

 

 

 131 

 

 

 124 

Total equity

 

 

 20,008 

 

 

 18,984 

Total liabilities and equity

 

$

 117,845 

 

$

 119,213 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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)
  

 

 

 

 

 

 

Nine Months Ended September 30,

(Dollars in millions)

 

 

2013

 

 

2012

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

 10,299 

 

$

 10,771 

Adjustments to reconcile net income to cash provided by operating activities

 

 

 

 

 

 

 

Depreciation

 

 

 2,457 

 

 

 2,572 

 

Amortization of intangibles

 

 

 1,007 

 

 

 952 

 

Stock-based compensation

 

 

 455 

 

 

 510 

 

Net (gain)/loss on asset sales and other

 

 

 (139) 

 

 

 (697) 

 

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

 

 

 (3,121) 

 

 

 (868) 

Net cash provided by operating activities

 

 

 10,957 

 

 

 13,240 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments for property, plant and equipment

 

 

 (2,559) 

 

 

 (3,082) 

 

Proceeds from disposition of property, plant and equipment

 

 

 256 

 

 

 233 

 

Investment in software

 

 

 (406) 

 

 

 (476) 

 

Acquisition of businesses, net of cash acquired

 

 

 (2,562) 

 

 

 (2,266) 

 

Divestitures of businesses, net of cash transferred

 

 

 247 

 

 

 587 

 

Non-operating finance receivables — net

 

 

 284 

 

 

 718 

 

Purchases of marketable securities and other investments

 

 

 (3,718) 

 

 

 (2,596) 

 

Proceeds from disposition of marketable securities and other investments

 

 

 4,035 

 

 

 1,971 

Net cash used in investing activities

 

 

(4,423)

 

 

 (4,912) 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from new debt

 

 

 10,066 

 

 

 9,589 

 

Payments to settle debt

 

 

 (7,740) 

 

 

 (4,991) 

 

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

 

 

 1,074 

 

 

 (2,177) 

 

Common stock repurchases

 

 

 (8,062) 

 

 

 (8,988) 

 

Common stock transactions — other

 

 

 826 

 

 

 1,198 

 

Cash dividends paid

 

 

 (3,033) 

 

 

 (2,816) 

Net cash used in financing activities

 

 

 (6,870) 

 

 

 (8,185) 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 (4) 

 

 

 (156) 

Net change in cash and cash equivalents

 

 

 (340) 

 

 

 (13) 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at January 1

 

 

 10,412 

 

 

 11,922 

Cash and cash equivalents at September 30

 

$

 10,072 

 

$

 11,909 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (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, 2013

 

$

50,110

 

$

117,641

 

$

(123,131)

 

$

(25,759)

 

$

 18,860 

 

$

124

 

$

 18,984 

Net income plus other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

 

10,299

 

 

 

 

 

 

 

 

 10,299 

 

 

 

 

 

 10,299 

   Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

788

 

 

 788 

 

 

 

 

 

 788 

Total comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 11,087 

 

 

 

 

$

 11,087 

Cash dividends declared –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   common stock

 

 

 

 

 

(3,033)

 

 

 

 

 

 

 

 

 (3,033) 

 

 

 

 

 

 (3,033) 

Common stock issued under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   employee plans (8,258,027 shares)

 

 

930

 

 

 

 

 

 

 

 

 

 

 

 930 

 

 

 

 

 

 930 

Purchases (1,419,498 shares) and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   sales (1,574,179 shares) of  treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   stock under employee plans – net

 

 

 

 

 

(22)

 

 

(106)

 

 

 

 

 

 (127) 

 

 

 

 

 

 (127) 

Other treasury shares purchased,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   not retired (39,926,001 shares)

 

 

 

 

 

 

 

 

(8,003)

 

 

 

 

 

 (8,003) 

 

 

 

 

 

 (8,003) 

Changes in other equity

 

 

164

 

 

 

 

 

 

 

 

 

 

 

 164 

 

 

 

 

 

 164 

Changes in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 7 

Equity - September 30, 2013

 

$

51,203

 

$

124,885

 

$

(131,240)

 

$

(24,971)

 

$

 19,877 

 

$

131

 

$

 20,008 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2012

 

$

 48,129 

 

$

 104,857 

 

$

 (110,963) 

 

$

 (21,885) 

 

$

 20,138 

 

$

97

 

$

 20,236 

Net income plus other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

 

 10,771 

 

 

 

 

 

 

 

 

 10,771 

 

 

 

 

 

 10,771 

   Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 1,165 

 

 

 1,165 

 

 

 

 

 

 1,165 

Total comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 11,936 

 

 

 

 

$

 11,936 

Cash dividends declared –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   common stock

 

 

 

 

 

 (2,816) 

 

 

 

 

 

 

 

 

 (2,816) 

 

 

 

 

 

 (2,816) 

Common stock issued under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   employee plans (12,322,115 shares)

 

 

 1,149 

 

 

 

 

 

 

 

 

 

 

 

 1,149 

 

 

 

 

 

 1,149 

Purchases (2,092,008 shares) and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   sales (2,358,099 shares) of  treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   stock under employee plans – net

 

 

 

 

 

 (40) 

 

 

 (145) 

 

 

 

 

 

 (185) 

 

 

 

 

 

 (185) 

Other treasury shares purchased,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   not retired (45,838,313 shares)

 

 

 

 

 

 

 

 

 (9,007) 

 

 

 

 

 

 (9,007) 

 

 

 

 

 

 (9,007) 

Changes in other equity

 

 

 324 

 

 

 

 

 

 

 

 

 

 

 

 324 

 

 

 

 

 

 324 

Changes in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 29 

Equity - September 30, 2012

 

$

 49,603 

 

$

 112,773 

 

$

 (120,115) 

 

$

 (20,720) 

 

$

 21,541 

 

$

126

 

$

 21,666 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 assets, liabilities, revenue, costs, expenses and accumulated 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. See the company's 2012 Annual Report on pages 59 to 61 for a discussion of the company's critical accounting estimates.

 

      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 2012 Annual Report.

 

      Noncontrolling interest amounts in income of $1.8 million and $3.0 million, net of tax, for the three months ended September 30, 2013 and 2012, respectively, and $4.2 million and $8.6 million, net of tax, for the nine months ended September 30, 2013 and 2012, 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 July 2013, the Financial Accounting Standards Board (FASB) issued guidance allowing the use of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a benchmark interest rate for hedge accounting purposes in addition to interest rates on direct Treasury obligations of the United States government and the LIBOR. In addition, the guidance removes the restriction on using different benchmark rates for similar hedges. The guidance became effective on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013, and did not have a material impact in the consolidated financial results.

 

      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 carryforward, a similar tax loss, or a tax credit carryforward. The guidance is a change in financial statement presentation only and has no material impact in the consolidated financial results. The guidance is effective beginning January 1, 2014 on either a prospective or retrospective basis.

 

       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 is effective prospectively beginning January 1, 2014. It is not expected to 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. 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 is effective January 1, 2014 and is not expected to have a material impact in the consolidated financial results.

9


 

Notes to Consolidated Financial Statements – (continued)

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 within 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.

 

       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. See Note A,“Significant Accounting Policies,” on pages 76 to 86 in the company’s 2012 Annual Report for further information. There were no material impairments of non-financial assets for the nine months ended September 30, 2013 and 2012, 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 does not apply 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 September 30, 2013 and December 31, 2012.

10


 

Notes to Consolidated Financial Statements – (continued)

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2013

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits and certificates of deposit 

 

$

 

$

4,422

 

$

 

$

4,422

 

 

 

Commercial paper

 

 

 

 

992

 

 

 

 

992

 

 

 

Money market funds

 

 

 1,713 

 

 

 

 

 

 

1,713

 

 

 

U.S. government securities

 

 

 

 

800

 

 

 

 

800

 

 

 

Other securities

 

 

 

 

10

 

 

 

 

10

 

 

Total

 

 

 1,713 

 

 

6,225

 

 

 

 

7,938

(6)

 

Debt securities - current (2)

 

 

 

 

160

 

 

 

 

 

160

(6)

 

Debt securities - noncurrent (3)

 

 

 1 

 

 

8

 

 

 

 

9

 

 

Available-for-sale equity investments (3) 

 

 

 32 

 

 

 

 

 

 

32

 

 

Derivative assets (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

412

 

 

 

 

412

 

 

 

Foreign exchange contracts

 

 

 

 

371

 

 

 

 

371

 

 

 

Equity contracts

 

 

 

 

9

 

 

 

 

9

 

 

Total

 

 

 

 

793

 

 

 

 

793

(7)

Total assets

 

$

 1,747 

 

$

7,185

 

$

 

$

8,932

(7)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

$

575

 

$

 

$

575

 

 

 

Equity contracts

 

 

 

 

7