10-Q 1 ibm14q1_10q.htm 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 MARCH 31, 2014

 

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 1,012,183,432 shares of common stock outstanding at March 31, 2014.

 


 

 

Index

 

 

 

 

Page

 

Part I - Financial Information:

 

 

 

 

 

 

 

Item 1. Consolidated Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Earnings for the three months ended March 31, 2014 and 2013

 

3

 

 

 

 

 

Consolidated Statement of Comprehensive Income for the three months ended March 31, 2014 and 2013

 

4

 

 

 

 

 

Consolidated Statement of Financial Position at March 31, 2014 and December 31, 2013  

 

5

 

 

 

 

 

Consolidated Statement of Cash Flows for the three months ended March 31, 2014 and 2013

 

7

 

 

 

 

 

Consolidated Statement of Changes in Equity for the three months ended March 31, 2014 and 2013

 

8

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 9 

 

 

 

 

 

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

 

38

 

 

 

 

 

Item 4. Controls and Procedures  

 

67

 

 

 

 

 

Part II - Other Information:  

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

67

 

 

 

 

 

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

 

67

 

 

 

 

 

Item 6. Exhibits  

 

68

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

2014

 

 

2013

Revenue:

 

 

 

 

 

 

 

Services

 

$

 13,982 

 

$

 14,274 

 

Sales

 

 

 7,984 

 

 

 8,629 

 

Financing

 

 

 517 

  

 

 505 

Total revenue

 

 

 22,484 

 

 

 23,408 

Cost:

 

 

 

 

 

 

 

Services

 

 

 9,101 

 

 

 9,526 

 

Sales

 

 

 2,561 

 

 

 2,931 

 

Financing

 

 

 278 

 

 

 273 

Total cost

 

 

 11,941 

 

 

 12,730 

Gross profit

 

 

 10,543 

 

 

 10,678 

Expense and other (income):

 

 

 

 

 

 

 

Selling, general and administrative

 

 

 6,289 

 

 

 5,577 

 

Research, development and engineering

 

 

 1,501 

  

 

 1,644 

 

Intellectual property and custom development income

 

 

 (207) 

 

 

 (183) 

 

Other (income) and expense

 

 

 (126) 

 

 

 (60) 

 

Interest expense

 

 

 105 

 

 

 94 

Total expense and other (income)

 

 

 7,563 

 

 

 7,072 

Income before income taxes

 

 

 2,980 

 

 

 3,606 

Provision for income taxes

 

 

 596 

 

 

 574 

Net income

 

$

 2,384 

 

$

 3,032 

 

 

 

 

 

 

 

 

Earnings per share of common stock:

 

 

 

 

 

 

 

Assuming dilution

 

$

 2.29 

 

$

 2.70 

 

Basic

 

$

 2.30 

 

$

 2.72 

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

 

 

 

 

 

 

 

Assuming dilution

 

 

 1,041.8 

 

 

 1,124.0 

 

Basic

 

 

 1,035.2 

 

 

 1,113.7 

 

 

 

 

 

 

 

 

Cash dividend per common share

 

$

 0.95 

 

$

 0.85 

 

 

 

 

 

 

 

 

(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)

 

 

2014

 

 

2013

Net income

 

$

 2,384 

 

$

 3,032 

Other comprehensive income/(loss), before tax:

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 (61) 

 

 

 (405) 

 

Net changes related to available-for-sale securities:

 

 

 

 

 

 

 

 

Unrealized gains/(losses) arising during the period

 

 

0

 

 

 (3) 

 

 

Reclassification of (gains)/losses to net income

 

 

 4 

 

 

 1 

 

 

Subsequent changes in previously impaired securities arising during the period

 

 

 

 

 1 

 

Total net changes related to available-for-sale securities

 

 

 4 

 

 

 (1) 

 

Unrealized gains/(losses) on cash flow hedges:

 

 

 

 

 

 

 

 

Unrealized gains/(losses) arising during the period

 

 

 88 

 

 

 360 

 

 

Reclassification of (gains)/losses to net income

 

 

 (1) 

 

 

 (56) 

 

Total unrealized gains/(losses) on cash flow hedges

 

 

 87 

 

 

 305 

 

Retirement-related benefit plans:

 

 

 

 

 

 

 

 

Prior service costs/(credits)

 

 

 1 

 

 

 33 

 

 

Net (losses)/gains arising during the period

 

 

 32 

 

 

 (15) 

 

 

Curtailments and settlements

 

 

 4 

 

 

 

 

Amortization of prior service (credits)/cost

 

 

 (29) 

 

 

 (30) 

 

 

Amortization of net (gains)/losses

 

 

 649 

 

 

 886 

 

Total retirement-related benefit plans

 

 

 656 

 

 

 875 

Other comprehensive income/(loss), before tax

 

 

 687 

 

 

 773 

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

 

 

 (241) 

 

 

 (480) 

Other comprehensive income/(loss)

 

 

 446 

 

 

 293 

Total comprehensive income/(loss)

 

$

 2,830 

 

$

 3,325 

 

 

 

 

 

 

 

 

 

(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)

 

2014

 

2013

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 9,409 

 

$

 10,716 

 

 

Marketable securities

 

 

 295 

 

 

 350 

 

 

Notes and accounts receivable - trade (net of allowances of $305

 

 

 

 

 

 

 

 

 

in 2014 and $291 in 2013)

 

 

 9,682 

 

 

 10,465 

 

 

Short-term financing receivables (net of allowances of $317 in 2014

 

 

 

 

 

 

 

 

 

and $308 in 2013)

 

 

 18,329 

 

 

 19,787 

 

 

Other accounts receivable (net of allowances of $36 in 2014 and

 

 

 

 

 

 

 

 

 

$36 in 2013)

 

 

 1,650 

 

 

 1,584 

 

 

Inventories, at lower of average cost or market:

 

 

 

 

 

 

 

 

 

Finished goods

 

 

 472 

 

 

 444 

 

 

 

Work in process and raw materials

 

 

 1,984 

 

 

 1,866 

 

 

Total inventories

 

 

 2,456 

 

 

 2,310 

 

 

Deferred taxes

 

 

 1,708 

 

 

 1,651 

 

 

Prepaid expenses and other current assets

 

 

 4,430 

 

 

 4,488 

 

Total current assets

 

 

 47,959 

 

 

 51,350 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

 40,478 

 

 

 40,475 

 

 

Less: Accumulated depreciation

 

 

 26,795 

 

 

 26,654 

 

Property, plant and equipment — net

 

 

 13,683 

 

 

 13,821 

 

Long-term financing receivables (net of allowances of $93 in 2014

 

 

 

 

 

 

 

 

and $80 in 2013)

 

 

 11,918 

 

 

 12,755 

 

Prepaid pension assets

 

 

 6,110 

 

 

 5,551 

 

Deferred taxes

 

 

 3,034 

 

 

 3,051 

 

Goodwill

 

 

 31,214 

 

 

 31,184 

 

Intangible assets — net

 

 

 3,698 

 

 

 3,871 

 

Investments and sundry assets

 

 

 5,030 

 

 

 4,639 

 

Total assets

 

$

 122,646 

 

$

 126,223 

 

 

 

 

 

 

 

(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,

2014

2013

Liabilities:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

       

 

Taxes

 

$

 2,245 

 

$

 4,633 

      

 

Short-term debt

 

 

 9,312 

 

 

 6,862 

       

 

Accounts payable

 

 

 6,865 

 

 

 7,461 

       

 

Compensation and benefits

 

 

 3,664 

 

 

 3,893 

       

 

Deferred income

 

 

 13,681 

 

 

 12,557 

       

 

Other accrued expenses and liabilities

 

 

 5,292 

 

 

 4,748 

 

Total current liabilities

 

 

 41,058 

 

 

 40,154 

 

Long-term debt

 

 

 34,668 

 

 

 32,856 

 

Retirement and nonpension postretirement benefit obligations

 

 

 16,031 

 

 

 16,242 

 

Deferred income

 

 

 4,042 

 

 

 4,108 

 

Other liabilities

 

 

 10,106 

 

 

 9,934 

 

Total liabilities

 

 

 105,906 

 

 

 103,294 

Equity:

 

 

 

 

 

 

IBM stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 51,943 

 

 

 51,594 

 

 

Shares authorized: 4,687,500,000

 

 

 

 

 

 

 

 

Shares issued: 2014 - 2,210,627,775

 

 

 

 

 

 

 

 

                        2013 - 2,207,522,548

 

 

 

 

 

 

 

Retained earnings

 

 

 131,431 

 

 

 130,042 

 

Treasury stock - at cost

 

 

 (145,612) 

 

 

 (137,242) 

 

 

Shares: 2014 - 1,198,444,343

 

 

 

 

 

 

 

 

             2013 - 1,153,131,611

 

 

 

 

 

 

 

Accumulated other comprehensive income/(loss)

 

 

 (21,156) 

 

 

 (21,602) 

 

Total IBM stockholders’ equity

 

 

 16,607 

 

 

 22,792 

Noncontrolling interests

 

 

 133 

 

 

 137 

Total equity

 

 

 16,740 

 

 

 22,929 

Total liabilities and equity

 

$

 122,646 

 

$

 126,223 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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)

 

 

2014

 

 

2013

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

 2,384 

 

$

 3,032 

Adjustments to reconcile net income to cash provided by operating activities

 

 

 

 

 

 

 

Depreciation

 

 

 802 

 

 

 822 

 

Amortization of intangibles

 

 

 339 

 

 

 331 

 

Stock-based compensation

 

 

 124 

 

 

 144 

 

Net (gain)/loss on asset sales and other

 

 

 (161) 

 

 

 (62) 

 

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

 

 

 (162) 

 

 

 (244) 

Net cash provided by operating activities

 

 

 3,326 

 

 

 4,023 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments for property, plant and equipment

 

 

 (849) 

 

 

 (714) 

 

Proceeds from disposition of property, plant and equipment

 

 

 74 

 

 

 123 

 

Investment in software

 

 

 (112) 

 

 

 (139) 

 

Acquisition of businesses, net of cash acquired

 

 

 (264) 

 

 

 (58) 

 

Divestitures of businesses, net of cash transferred

 

 

 391 

 

 

 10 

 

Non-operating finance receivables — net

 

 

 665 

 

 

 732 

 

Purchases of marketable securities and other investments

 

 

 (477) 

 

 

 (2,136) 

 

Proceeds from disposition of marketable securities and other investments

 

 

 608 

 

 

 1,169 

Net cash provided by/(used in) investing activities

 

 

35

 

 

 (1,012) 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from new debt

 

 

 4,875 

 

 

 2,685 

 

Payments to settle debt

 

 

 (1,507) 

 

 

 (857) 

 

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

 

 

 845 

 

 

 (1,359) 

 

Common stock repurchases

 

 

 (8,166) 

 

 

 (2,593) 

 

Common stock transactions — other

 

 

 270 

 

 

 356 

 

Cash dividends paid

 

 

 (990) 

 

 

 (948) 

Net cash used in financing activities

 

 

 (4,673) 

 

 

 (2,716) 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 5 

 

 

 (121) 

Net change in cash and cash equivalents

 

 

 (1,307) 

 

 

 173 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at January 1

 

 

 10,716 

 

 

 10,412 

Cash and cash equivalents at March 31

 

$

 9,409 

 

$

 10,585 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (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, 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 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 3,032 

 

 

 

 

 

 

 

 

 3,032 

 

 

 

 

 

 3,032 

   Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 293 

 

 

 293 

 

 

 

 

 

 293 

Total comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 3,325 

 

 

 

 

$

 3,325 

Cash dividends paid –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   common stock

 

 

 

 

 

 (948) 

 

 

 

 

 

 

 

 

 (948) 

 

 

 

 

 

 (948) 

Common stock issued under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   employee plans (3,726,163 shares)

 

 

 361 

 

 

 

 

 

 

 

 

 

 

 

 361 

 

 

 

 

 

 361 

Purchases (629,550 shares) and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   sales (648,990 shares) of  treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   stock under employee plans – net

 

 

 

 

 

 (12) 

 

 

 (53) 

 

 

 

 

 

 (65) 

 

 

 

 

 

 (65) 

Other treasury shares purchased,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   not retired (12,318,883 shares)

 

 

 

 

 

 

 

 

 (2,493) 

 

 

 

 

 

 (2,493) 

 

 

 

 

 

 (2,493) 

Changes in other equity

 

 

 52 

 

 

 

 

 

 

 

 

 

 

 

 52 

 

 

 

 

 

 52 

Changes in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

 

 (1) 

Equity - March 31, 2013

 

$

 50,522 

 

$

 119,713 

 

$

 (125,677) 

 

$

 (25,466) 

 

$

 19,092 

 

$

122

 

$

 19,214 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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. See the company's 2013 Annual Report on pages 67 to 70 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 2013 Annual Report.

 

      Noncontrolling interest amounts in income of $(0.5) million and $1.4 million, net of tax, for the three months ended March 31, 2014 and 2013, 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 2014, the Financial Accounting Standards Board (FASB) issued guidance that changes the criteria for reporting a discontinued operation. According to the new guidance, 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 new 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 is effective beginning January 1, 2015 with early adoption permitted, but only for disposals (or classifications as held for sale) that have not been reported in previously-issued financial statements. 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 carryforward, a similar tax loss, or a tax credit carryforward. The guidance was effective January 1, 2014, and was adopted by the company in the first quarter. The guidance is a change in financial statement presentation only and had no 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 Statement of Financial Position.  

     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.

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 - Impairment,” on page 88 in the company’s 2013 Annual Report for additional information. There were no material impairments of non-financial assets for the three months ended March 31, 2014 and 2013, 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, 2014 and December 31, 2013.

10


 

Notes to Consolidated Financial Statements – (continued)

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits and certificates of deposit 

 

$

 

$

4,619

 

$

 

$

4,619

 

 

 

Commercial paper

 

 

 

 

559

 

 

 

 

559

 

 

 

Money market funds

 

 

 988 

 

 

 

 

 

 

988

 

 

 

U.S. government securities

 

 

 

 

599

 

 

 

 

599

 

 

 

Canadian government securities

 

 

 

 

226

 

 

 

 

226

 

 

 

Other securities

 

 

 

 

40

 

 

 

 

40

 

 

Total

 

 

 988 

 

 

6,044

 

 

 

 

7,032

(6)

 

Debt securities - current (2)

 

 

 

 

295

 

 

 

 

295

(6)

 

Debt securities - noncurrent (3)

 

 

 1 

 

 

8

 

 

 

 

9

 

 

Trading securities investments (3)

 

 

 

 

77

 

 

 

 

77

 

 

Available-for-sale equity investments (3) 

 

 

 4 

 

 

 

 

 

 

4

 

 

Derivative assets (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

363

 

 

 

 

363

 

 

 

Foreign exchange contracts

 

 

 

 

297

 

 

 

 

297

 

 

 

Equity contracts

 

 

 

 

17

 

 

 

 

17

 

 

Total

 

 

 

 

678

 

 

 

 

678

(7)

Total assets

 

$

 993 

 

$

7,102

 

$

 

$

8,095

(7)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

$

427

 

$

 

$

427

 

 

 

Equity contracts

 

 

 

 

2

 

 

 

 

2

 

 

 

Interest rate contracts

 

 

 

 

12

 

 

 

 

12

 

Total liabilities

 

$

 

$

441

 

$

 

$

441

(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, 2014 were $202 million and       

      $476 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, 2014 were $370 million and $71         

      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 $221

      million each.

  

11


 

Notes to Consolidated Financial Statements – (continued)

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits and certificates of deposit 

 

$

 

$

4,754

 

$

 

$

4,754

 

 

 

Commercial paper 

 

 

 

 

1,507

 

 

 

 

1,507

 

 

 

Money market funds

 

 

1,728

 

 

 

 

 

 

1,728

 

 

 

Other securities

 

 

 

 

8

 

 

 

 

8

 

 

Total

 

 

1,728

 

 

6,269

 

 

 

 

7,997

(6)

 

Debt securities - current (2)

 

 

 

 

350

 

 

 

 

350

(6)

 

Debt securities - noncurrent (3)

 

 

1

 

 

7

 

 

 

 

9

 

 

Available-for-sale equity investments (3) 

 

 

18

 

 

 

 

 

 

18

 

 

Derivative assets (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

308

 

 

 

 

308

 

 

 

Foreign exchange contracts

 

 

 

 

375

 

 

 

 

375

 

 

 

Equity contracts

 

 

 

 

36

 

 

 

 

36

 

 

Total

 

 

 

 

719

 

 

 

 

719

(7)

Total assets

 

$

1,747

 

$

7,345

 

$

 

$

9,092

(7)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

 

$

13

 

$

 

$

13

 

 

 

Foreign exchange contracts

 

 

 

 

484

 

 

 

 

484