10-Q 1 ibm14q3_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, 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 989,660,472 shares of common stock outstanding at September 30, 2014.

 


 

Index

 

 

 

 

Page

 

Part I - Financial Information:

 

 

 

 

 

 

 

Item 1. Consolidated Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Earnings for the three and nine months ended September 30, 2014 and 2013

 

3

 

 

 

 

 

Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013

 

4

 

 

 

 

 

Consolidated Statement of Financial Position at September 30, 2014 and December 31, 2013  

 

5

 

 

 

 

 

Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 and 2013

 

7

 

 

 

 

 

Consolidated Statement of Changes in Equity for the nine months ended September 30, 2014 and 2013

 

8

 

 

 

 

 

Notes to Consolidated Financial Statements

 

9

 

 

 

 

 

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

 

48

 

 

 

 

 

Item 4. Controls and Procedures  

 

88

 

 

 

 

 

Part II - Other Information:  

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

89

 

 

 

 

 

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

 

89

 

 

 

 

 

Item 6. Exhibits  

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

  

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 September 30,

 

 

Nine Months Ended September 30,

(Dollars in millions except per share amounts)

 

 

2014

 

 

2013*

 

 

2014

 

 

2013*

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

13,869

 

$

14,225

 

$

41,979

 

$

42,811

Sales

 

 

8,034

 

 

8,604

 

 

25,180

 

 

26,665

Financing

 

 

494

  

 

509

 

 

1,521

  

 

1,506

Total revenue

 

 

22,397

 

 

23,338

 

 

68,680

 

 

70,982

Cost:

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

 

8,868

 

 

9,098

 

 

27,100

 

 

27,950

Sales

 

 

2,398

 

 

2,542

 

 

7,269

 

 

7,881

Financing

 

 

257

 

 

268

 

 

765

 

 

805

Total cost

 

 

11,523

 

 

11,908

 

 

35,135

 

 

36,635

Gross profit

 

 

10,874

 

 

11,429

 

 

33,545

 

 

34,347

Expense and other (income):

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,281

 

 

5,260

 

 

17,146

 

 

17,463

Research, development and engineering

 

 

1,354

  

 

1,356

 

 

4,117

  

 

4,291

Intellectual property and custom

 

 

 

 

 

 

 

 

 

 

 

 

 

development income

 

 

(145)

 

 

(191)

 

 

(543)

 

 

(621)

Other (income) and expense

 

 

(103)

 

 

(63)

 

 

(433)

 

 

(217)

Interest expense

 

 

126

 

 

97

 

 

367

 

 

289

Total expense and other (income)

 

 

6,513

 

 

6,458

 

 

20,654

 

 

21,205

Income from continuing operations before

 

 

 

 

 

 

 

 

 

 

 

 

 

income taxes

 

 

4,361

 

 

4,972

 

 

12,891

 

 

13,142

Provision for income taxes

 

 

906

 

 

832

 

 

2,655

 

 

2,478

Income from continuing operations

 

$

3,455

 

$

4,139

 

$

10,237

 

$

10,665

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(3,437)

 

 

(98)

 

 

(3,698)

 

 

(366)

Net income

 

$

18

 

$

4,041

 

$

6,539

 

$

10,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

Assuming dilution:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

3.46

 

$

3.77

 

$

10.09

 

$

9.60

 

 

Discontinued operations

 

 

(3.44)

 

 

(0.09)

 

 

(3.65)

 

 

(0.33)

 

Total

 

$

0.02

 

$

3.68

 

$

6.44

 

$

9.27

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

3.48

 

$

3.79

 

$

10.15

 

$

9.68

 

 

Discontinued operations

 

 

(3.46)

 

 

(0.09)

 

 

(3.67)

 

 

(0.33)

 

Total

 

$

0.02

 

$

3.70

 

$

6.48

 

$

9.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common

 

 

 

 

 

 

 

 

 

 

 

 

 

shares outstanding: (millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Assuming dilution

 

 

997.7

 

 

1,098.8

 

 

1,014.9

 

 

1,110.7

 

Basic

 

 

991.8

 

 

1,090.9

 

 

1,008.9

 

 

1,101.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividend per common share

 

$

1.10

 

$

0.95

 

$

3.15

 

$

2.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Reclassified to reflect discontinued operations presentation. See note 1 on page 9 for additional information.

(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)

 

 

2014

 

 

2013

 

 

2014

 

 

2013

Net income

 

$

18

 

$

4,041

 

$

6,539

 

$

10,299

Other comprehensive income/(loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,126)

 

 

382

 

 

(848)

 

 

(959)

 

Net changes related to available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains/(losses) arising during the period

 

 

0

 

 

3

 

 

1

 

 

0

 

 

Reclassification of (gains)/losses to net income

 

 

0

 

 

(5)

 

 

5

 

 

(5)

 

 

Subsequent changes in previously impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  securities arising during the period

 

 

 

 

1

 

 

 

 

3

 

Total net changes related to available-for-sale securities

 

 

0

 

 

(1)

 

 

6

 

 

(1)

 

Unrealized gains/(losses) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains/(losses) arising during the period

 

 

524

 

 

(409)

 

 

596

 

 

(58)

 

 

Reclassification of (gains)/losses to net income

 

 

58

 

 

(27)

 

 

91

 

 

(130)

 

Total unrealized gains/(losses) on cash flow hedges

 

 

582

 

 

(436)

 

 

687

 

 

(188)

 

Retirement-related benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service costs/(credits)

 

 

0

 

 

0

 

 

1

 

 

33

 

 

Net (losses)/gains arising during the period

 

 

1

 

 

105

 

 

48

 

 

300

 

 

Curtailments and settlements

 

 

7

 

 

0

 

 

20

 

 

0

 

 

Amortization of prior service (credits)/costs

 

 

(29)

 

 

(28)

 

 

(88)

 

 

(86)

 

 

Amortization of net (gains)/losses

 

 

635

 

 

872

 

 

1,923

 

 

2,623

 

Total retirement-related benefit plans

 

 

615

 

 

949

 

 

1,905

 

 

2,869

Other comprehensive income/(loss), before tax

 

 

71

 

 

895

 

 

1,749

 

 

1,721

Income tax (expense)/benefit related to items of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other comprehensive income

 

 

(680)

 

 

(91)

 

 

(1,126)

 

 

(933)

Other comprehensive income/(loss)

 

 

(609)

 

 

804

 

 

623

 

 

788

Total comprehensive income/(loss)

 

$

(591)

 

$

4,844

 

$

7,162

 

$

11,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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)

 

2014

 

2013

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,561

 

$

10,716

 

 

Marketable securities

 

 

4

 

 

350

 

 

Notes and accounts receivable - trade (net of allowances of $316

 

 

 

 

 

 

 

 

 

in 2014 and $291 in 2013)

 

 

9,122

 

 

10,465

 

 

Short-term financing receivables (net of allowances of $432 in 2014

 

 

 

 

 

 

 

 

 

and $308 in 2013)

 

 

17,411

 

 

19,787

 

 

Other accounts receivable (net of allowances of $46 in 2014 and

 

 

 

 

 

 

 

 

 

$36 in 2013)

 

 

1,469

 

 

1,584

 

 

Inventories, at lower of average cost or market:

 

 

 

 

 

 

 

 

 

Finished goods

 

 

508

 

 

444

 

 

 

Work in process and raw materials

 

 

1,848

 

 

1,866

 

 

Total inventories

 

 

2,356

 

 

2,310

 

 

Deferred taxes

 

 

2,219

 

 

1,651

 

 

Prepaid expenses and other current assets

 

 

5,022

 

 

4,488

 

Total current assets

 

 

47,163

 

 

51,350

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

39,950

 

 

40,475

 

 

Less: Accumulated depreciation

 

 

28,882

 

 

26,654

 

Property, plant and equipment — net

 

 

11,068

 

 

13,821

 

Long-term financing receivables (net of allowances of $87 in 2014

 

 

 

 

 

 

 

 

and $80 in 2013)

 

 

10,993

 

 

12,755

 

Prepaid pension assets

 

 

7,443

 

 

5,551

 

Deferred taxes

 

 

2,697

 

 

3,051

 

Goodwill

 

 

31,045

 

 

31,184

 

Intangible assets — net

 

 

3,373

 

 

3,871

 

Investments and sundry assets

 

 

5,126

 

 

4,639

 

Total assets

 

$

118,911

 

$

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 September 30,

 

At December 31,

2014

 

2013

Liabilities:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

       

 

Taxes

 

$

2,475

 

$

4,633

      

 

Short-term debt

 

 

12,876

 

 

6,862

       

 

Accounts payable

 

 

5,855

 

 

7,461

       

 

Compensation and benefits

 

 

3,965

 

 

3,893

       

 

Deferred income

 

 

11,346

 

 

12,557

       

 

Other accrued expenses and liabilities

 

 

5,788

 

 

4,748

 

Total current liabilities

 

 

42,306

 

 

40,154

 

Long-term debt

 

 

32,821

 

 

32,856

 

Retirement and nonpension postretirement benefit obligations

 

 

15,093

 

 

16,242

 

Deferred income

 

 

3,683

 

 

4,108

 

Other liabilities

 

 

10,613

 

 

9,934

 

Total liabilities

 

 

104,515

 

 

103,294

Equity:

 

 

 

 

 

 

IBM stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

52,446

 

 

51,594

 

 

Shares authorized: 4,687,500,000

 

 

 

 

 

 

 

 

Shares issued: 2014 - 2,213,876,635

 

 

 

 

 

 

 

 

                        2013 - 2,207,522,548

 

 

 

 

 

 

 

Retained earnings

 

 

133,403

 

 

130,042

 

Treasury stock - at cost

 

 

(150,616)

 

 

(137,242)

 

 

Shares: 2014 - 1,224,216,164

 

 

 

 

 

 

 

 

             2013 - 1,153,131,611

 

 

 

 

 

 

 

Accumulated other comprehensive income/(loss)

 

 

(20,978)

 

 

(21,602)

 

Total IBM stockholders’ equity

 

 

14,255

 

 

22,792

Noncontrolling interests

 

 

140

 

 

137

Total equity

 

 

14,395

 

 

22,929

Total liabilities and equity

 

$

118,911

 

$

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)
  

 

 

 

 

 

Nine Months Ended September 30,

(Dollars in millions)

 

 

2014

 

 

2013

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

6,539

 

$

10,299

Adjustments to reconcile net income to cash provided by operating activities

 

 

 

 

 

 

 

Depreciation

 

 

2,428

 

 

2,457

 

Amortization of intangibles

 

 

1,018

 

 

1,007

 

Stock-based compensation

 

 

416

 

 

455

 

Net (gain)/loss on asset sales and other

 

 

(262)

 

 

(139)

 

Loss on microelectronics business disposal

 

 

3,346

 

 

 

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

 

 

(2,675)

 

 

(3,121)

Net cash provided by operating activities

 

 

10,809

 

 

10,957

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments for property, plant and equipment

 

 

(2,793)

 

 

(2,559)

 

Proceeds from disposition of property, plant and equipment

 

 

325

 

 

256

 

Investment in software

 

 

(336)

 

 

(406)

 

Acquisition of businesses, net of cash acquired

 

 

(650)

 

 

(2,562)

 

Divestitures of businesses, net of cash transferred

 

 

489

 

 

247

 

Non-operating finance receivables — net

 

 

948

 

 

284

 

Purchases of marketable securities and other investments

 

 

(1,513)

 

 

(3,718)

 

Proceeds from disposition of marketable securities and other investments

 

 

1,765

 

 

4,035

Net cash used in investing activities

 

 

(1,765)

 

 

(4,423)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from new debt

 

 

5,642

 

 

10,066

 

Payments to settle debt

 

 

(3,108)

 

 

(7,740)

 

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

 

 

3,888

 

 

1,074

 

Common stock repurchases

 

 

(13,547)

 

 

(8,062)

 

Common stock transactions — other

 

 

549

 

 

826

 

Cash dividends paid

 

 

(3,176)

 

 

(3,033)

Net cash used in financing activities

 

 

(9,753)

 

 

(6,870)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(447)

 

 

(4)

Net change in cash and cash equivalents

 

 

(1,155)

 

 

(340)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at January 1

 

 

10,716

 

 

10,412

Cash and cash equivalents at September 30

 

$

9,561

 

$

10,072

 

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

6,539

 

 

 

 

 

 

 

 

6,539

 

 

 

 

 

6,539

   Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

623

 

 

623

 

 

 

 

 

623

Total comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,162

 

 

 

 

$

7,162

Cash dividends paid –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   common stock

 

 

 

 

 

(3,176)

 

 

 

 

 

 

 

 

(3,176)

 

 

 

 

 

(3,176)

Common stock issued under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   employee plans (6,354,088 shares)

 

 

792

 

 

 

 

 

 

 

 

 

 

 

792

 

 

 

 

 

792

Purchases (1,124,077 shares) and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   sales (894,291 shares) of  treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   stock under employee plans – net

 

 

 

 

 

(1)

 

 

(95)

 

 

 

 

 

(96)

 

 

 

 

 

(96)

Other treasury shares purchased,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   not retired (70,854,767 shares)

 

 

 

 

 

 

 

 

(13,280)

 

 

 

 

 

(13,280)

 

 

 

 

 

(13,280)

Changes in other equity

 

 

60

 

 

 

 

 

 

 

 

 

 

 

60

 

 

 

 

 

60

Changes in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

3

Equity - September 30, 2014

 

$

52,446

 

$

133,403

 

$

(150,616)

 

$

(20,978)

 

$

14,255

 

$

140

 

$

14,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 paid –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 2013 Annual Report on pages 67 to 70 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 Microelectronics business was part of the Systems and Technology reportable segment. In the third quarter of 2014, the company recorded a pre-tax charge reflecting the fair value less estimated costs to sell the Microelectronics business, which included an impairment of the semiconductor-related long-lived assets, cash consideration and related disposal costs. The assets and liabilities of the Microelectronics business are reported as held for sale at September 30, 2014. The operating results of the Microelectronics business, including the noted charge, 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.

 

       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 $2.4 million and $1.8 million, net of tax, for the three months ended September 30, 2014 and 2013, respectively, and $4.2 million and $4.2 million, net of tax, for the nine months ended September 30, 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 May 2014, the Financial Accounting Standards Board (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 the consolidated financial results.

       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 is effective 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 company will adopt the new guidance on 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 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.

 

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. See note A, “Significant Accounting Policies - Impairment,” on page 88 in the company’s 2013 Annual Report for additional information. In the third quarter of 2014, the company recorded an impairment on certain assets that were 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 nine months ended September 30, 2013.

 

       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 September 30, 2014 and December 31, 2013.

11


Notes to Consolidated Financial Statements – (continued)

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits and certificates of deposit 

 

$

 

$

5,518

 

$

 

$

5,518

 

 

 

Commercial paper

 

 

 

 

382

 

 

 

 

382

 

 

 

Money market funds

 

 

1,266

 

 

 

 

 

 

1,266

 

 

 

U.S. government securities

 

 

 

 

250

 

 

 

 

250

 

 

 

Other securities

 

 

 

 

7

 

 

 

 

7

 

 

Total

 

 

1,266

 

 

6,157

 

 

 

 

7,423

(6)

 

Debt securities - current (2)

 

 

 

 

4

 

 

 

 

4

(6)

 

Debt securities - noncurrent (3)

 

 

1

 

 

8

 

 

 

 

9

 

 

Trading securities investments (3)

 

 

61

 

 

 

 

 

 

61

 

 

Available-for-sale equity investments (3) 

 

 

7

 

 

 

 

 

 

7

 

 

Derivative assets (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

465

 

 

 

 

465

 

 

 

Foreign exchange contracts

 

 

 

 

684