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Thursday, October 11, 2007

Business Administration Degree Assignments

"Business Administration Degree Assignments"

Table of Content Pages
Introduction……………………………………………………………...2
Evolution of a secretary to an office administrator……………………..3-4
3. Administration and management……………………………………….4
4. Scope of Administrative Management
Management reporting…………………………………………5
Form design and control……………………………………….5
Communication services………………………………………5-6
Office environment……………………………………………6
System procedures and methods………………………………6
Staffing the enterprise…………………………………………6
Data processing………………………………………………..7
Factors to be a good administrative manager…………………………7
Changing role of a secretary to administrative functions……………..8
Scientific management………………………………………………..8-10
Conclusion……………………………………………………………11
References……………………………………………………………11
Introduction
This assignment consists of such topics such as evolution of a secretary to an office administrator, difference between administration and management, scope of administrative management, factors for being a good administrative manager, changing role of a secretary to administrative functions and scientific management.
On completion of this assignment, we will be:
Able to explain the evolution of secretary to an office administrator.
Able to differentiate administration and management.
Able to know the scope of administrative management.
Able to know how to be a good administrative manager
Able to know changing role of a secretary to administrative functions.
Able to know briefly about scientific management.
Evolution of a secretary to an office administrator
For development of a secretary to be a good office administrator so, he/she must have some qualities. Such as:
He/She must have understanding and knowledge about business essentials including accounting, marketing, management, human resource management and critical thinking.
If secretaries have basic knowledge about these business essentials so all organizations will possess an effective office and administrative support to operate efficiently.
They must also have knowledge about the following areas, work simplification, work measurement, work standards, records management, form design, office layout, and office equipment.
They are responsible for handling most of the communications between staffs, Customers, manager and administrators who work in organizations and they are required to know everything with details.
As supervision responsibilities increase, so does the need for well developed leadership skills in order to enable one to inspire and motivate employees.
Mostly supervisors may want to motivate their employees as they work more efficiently and produce better results. Using monetary and other rewards to improve motivation is a simple idea, but doing it fairly and effectively can be challenging.
As there’s four essential ways to reward and motivate employees:
Establish an action plan
Be creative in motivating employees
Give employee reward your personal touch
Group rewards may be appropriate, but don't undermine individual initiative
A commitment of ethical behavior and the display of the ethical behavior among employees is another qualification so the secretaries must have these qualifications to be a good office administrator.Ethics can have a big influence on decision-making in the workplace and among employees. Ethical behavior in the workplace is behavior that is accepted as morally “right,” rather than “wrong.”
Employees encounter ethical decisions every day in the workplace, whether they realize it or not.
The secretaries should have the ability to delegate. Therefore effective decision making and communication skills are also essential. She must be able to accept the view point of other and exercise good judgment.
The must have interpersonal skills to communicate with their all employees and staff in the workplace.
The secretaries should have initiative and desire to continue and learn and develop professionally. So that they can administer the office and company well and promote the beneficial economic of the company.
Administration and Management
.
Management is the systematic process of performing a set of activities on a set of resources in order to achieve a set of objectives.
Administration on the other hand can be seen as the process of mobilizing and allocating public resources in order to achieve public goals.
According to my viewpoint, administration is more the management of a company as a whole - making directional decisions and creating measures for a company's success at a very high level (like the officers of an organization - CEO, COO, Prez, Sr. VP, etc). Management would make sure those directions are carried out, sometimes with their own directions, and would be the ones measured.
Scope of Administrative Management However the scope of administrative management varies from organization to organization so, the office administrator of an organization faces some challenging opportunities such as:
Management Reporting:
Management reporting is an essential component to the day-to-day life of most organizations. Mostly office administrators prepare management report for the purpose of achieving and spreading information.
Form Design and Control:
As we know form filling can be use in our everyday life which’s usage is also very important in business world.
A form is a series of movements, such as blocks, strikes and kicks, put together in a specific sequence. Most martial art systems have forms within their curriculum.
While many people believe forms were created and practiced so the martial artist could learn to fight more than one person at a time, this is not necessarily the case. Practicing forms allows the martial artist to practice specific techniques and combinations of techniques, while moving forward, backward and sideways, without the assistance from others, and without harming anyone.
Practicing and perfecting these techniques is very important, but it is not the most important reason for learning forms. The goal behind practicing forms, and all aspects of the martial arts, is the development of the three components that make up a human being; the physical, the intellectual and the spiritual.
Communication Services:
As we know communication is process by which information is exchanged between individuals through a common system of symbols, signs, or behavior.
Or communication is also explained as below:
1. The act of communicating; transmission.
a. The exchange of thoughts, messages, or information, as by speech, signals, writing, or behavior.
b. Interpersonal rapport.
c. The art and technique of using words effectively to impart information or ideas.
d. The field of study concerned with the transmission of information by various means, such as print or broadcasting.
e. Any of various professions involved with the transmission of information, such as advertising, broadcasting, or journalism.
2. Something communicated; a message.
3. A means of communicating, especially:
a. A system, such as mail, telephone, or television, for sending and receiving messages.
b. A network of routes for sending messages and transporting troops and supplies.
4. The technology employed in transmitting messages.
Mostly today, in working day the, the largest piece of time will be spend in communicating and Its important to have an effective communication ability between staffs.
Office Environment:
The office environment is a combination of lighting, temperature, humidity, air quality and decoration. The office can be a healthy and comfortable place to work in if the correct combination of these elements is maintained.
The important concern of the office environment is to provide healthy workplace for employees and it should be planned by office administrator.
Salary and wage Administration
The administration of wages and salary is the most important task in personnel administration. Mere determination of the wage structure is not enough; it must be properly implemented and administered.
The aim of a wage and salary policy is to recognize the value of each job, provide stability in earning, allow individuals to reach full earning potential and to ensure that all staff shares in the organization’s prosperity.
Wage and Salary Administration has responsibility for:
Personnel/Payroll Forms
Short-Term Disability
Temporary Summer Shutdown Stipend (Local 743 only)
Accruals
University Accrual Calculator
Employment Verifications
Staff List
New Hire Checklist Form
System Procedures and Methods
System analysis is designing computer information systems which modify systems to improve production work. The system discuss with other systems analysis can be within any field.
Staffing the Enterprise
Staffing is the practice of finding, evaluating, and establishing working relationship.
Enterprise Staffing Group is a staffing and consulting company that is focused on developing successful long-term clients and partnerships.
Data Processing
Conversion of data into a form that can be processed by computer.
The storing or processing of data by a computer.
And we also have some type of data processing such as,
• Centralized data processing
• All assets controlled and operated by single department
• Decentralized data processing
• Each department …. … has its own data processing operation
Factors to be a good administrative manager
For being a good administrator, he must have understanding of the various business functions and responsibilities as well as an excellent gasp of the various areas that involves the function of office administrator. Such As:
To increase staff productivity
To provide employees with needed information
To centralize office functions and services
To increase the use of office technology to create awareness of IT to the staff
To increase the use of office technology to speed the work
A good administrative manager
Changing role of a secretary to administrative functions
For changing role of secretary to administrative functions, the secretaries must know and follow some of responsibilities and functions of an office administrator.
Responsibilities:
To oversee overall administrative functions by ensuring that all activities/functions are carried out in a responsible and professional manner.
Formulate and implement changes to provide effective and efficient for the entire office work practice to meet corporate objectives.
Oversees the whole administration functions, inclusive of office security, telephone system, office equipment & building maintenance, landscape maintenance, office renovations, stationery, printing, and general insurance.
Sourcing, selection, negotiation, contracting and supplier development and obtain quotation for all purchases. e.g. purchase of stationeries, office equipment, pantry supplies, air ticket etc.
To perform basic accounting duties.
Functions:
Focuses on utility
Sees that the organization can do anything at all
Sees that required resources are available when needed
Establishes and implements mechanisms to support behavioral changes
Collects, summarizes, formats, and interprets data regarding progress and status
Scientific Management
As an administrator officer, I would like to recommend the scientific theory to my department.
Scientific management, also called Taylorism or the Classical Perspective, is a theory of management that analyzes and synthesizes processes, improving labor productivity. The core ideas of the theory were developed by Frederick Winslow Taylor in the 1880s and 1890s, and were first published in his monographs, Taylor believed that decisions based upon tradition and rules of thumb should be replaced by precise procedures developed after careful study of an individual at work.In management literature today, the greatest use of the concept of Taylorism is as a contrast to a new, improved way of doing business.
In 1911, Frederick Winslow Taylor published his work, The Principles of Scientific Management, in which he described how the application of the scientific method to the management of workers greatly could improve productivity. Scientific management methods called for optimizing the way that tasks were performed and simplifying the jobs enough so that workers could be trained to perform their specialized sequence of motions in the one "best" way.
Taylor became interested in improving worker productivity early in his career when he observed gross inefficiencies during his contact with steel workers.
Taylor's 4 Principles of Scientific Management
After years of various experiments to determine optimal work methods, Taylor proposed the following four principles of scientific management:
Replace rule-of-thumb work methods with methods based on a scientific study of the tasks.
Scientifically select, train, and develop each worker rather than passively leaving them to train themselves.
Cooperate with the workers to ensure that the scientifically developed methods are being followed.
Divide work nearly equally between managers and workers, so that the managers apply scientific management principles to planning the work and the workers actually perform the tasks.
These principles were implemented in many factories, often increasing productivity by a factor of three or more.
Drawbacks of Scientific Management
While scientific management principles improved productivity and had a substantial impact on industry, they also increased the monotony of work. The core job dimensions of skill variety, task identity, task significance, autonomy, and feedback all were missing from the picture of scientific management.
While in many cases the new ways of working were accepted by the workers, in some cases they were not. The use of stopwatches often was a protested issue and led to a strike at one factory where "Taylorism" was being tested. Complaints that Taylorism was dehumanizing led to an investigation by the United States Congress. Despite its controversy, scientific management changed the way that work was done, and forms of it continue to be used today.
So, I will likely choose scientific management theory for my department because now we have got some idea about scientific management which has a crucial for complete comprehension of the management process and improves productivity and have substantial impact on industry which also improves labor productivity.
Conclusion

I hope that we now have at least some understanding about such topics explained in my first assignment.

As I hope you will have seen:
By having good qualities of administrative manager in secretary so he/she can be able to control functions of administrators.
By defining both statements now we can diffrenciate both administration with management.
By explaining scope of administrative functions, we can understand the challenges of administrators.
By having such factors in ourselves we can be knows as a good administrative manager.
By having such functions and responsibilities in secretary to she can possess the position of an administrator.
By explaining scientific management now we can know about taylor’s 4 principle of scientific management.
It is my great honor and pleasure to provide such information about the topics given to us in our first assignment by one of the intellectual lecturer MISS TAMIL SELVI, which made us enable to know more about the topics as illustrated in this assignment.
Introduction………………………………………………………………2
Elements of the Office Environment that is Involved in Affecting the
Office Employees………………………………………………………..3
Ergonomics………………………………………………………………4
Organizational Principles
Definition of Objectives………………………………………….5
Span of Control…………………………………………………..6
Interrelated Functions……………………………………………7
Chain of Command………………………………………………7
Unity of Command……………………………………………….8
Authority and Responsibility…………………………………….8-9
Delegation………………………………………………………..9
Work Assignment………………………………………………..9
Employee Empowerment………………………………………...10
Conclusion………………………………………………………………..11
References………………………………………………………………..11
Introduction
This assignment consists of topics which will help us to know more about office environment and ergonomic studies such as:
Elements of the Office Environment that is Involved in Affecting the
Office Employees
The meaning, purpose and importance of Ergonomics
Organizational principles which is involved in assisting the office administrators in coordinating their daily activities.
Elements of the Office Environment that is Involved in Affecting the Office Employees
Environmental factors affecting office employees performance provides evidence of how the physical environment affects productivity in the workplace, particularly white-collar (knowledge-based) workers. The guide includes performance measures, staff costs, psychological process and motivation, and the effect of physical factors.
Some of the elements of office environment that affects employees such as, the sick building patterns manifest itself among employees in the following ways: headaches, dizziness, abnormal tiredness, sickness, breathing difficulties, sore throats, upper-respiratory infections, coughing skin rashes and so forth.
Among the pollutants in the office environment that an contribute to the sick building syndrome are the following: manufacturing glues and adhesives, pesticides sprayed in the premises, toxins emitted by carpets and carpets and furniture, mould, fungi, bacteria, carbon monoxide, formaldehyde, benzene, carbon tetrachloride, styrene, smoke and so forth.
For reducing these impacts of pollutants so we have to think of manufacturing process as well as the installation of electronic air cleaner.
Ergonomics
Ergonomics derives from two Greek words: ergon, meaning work, and nomoi, meaning natural laws. Combined they create a word that means the science of work and a person’s relationship to that work.
In application ergonomics is a discipline focused on making products and tasks comfortable and efficient for the user.
Ergonomics is sometimes defined as the science of fitting the work to the user instead of forcing the user to fit the work. However this is more a primary ergonomic principle rather than a definition. And ergonomics is also defined in below ways:
The applied science of equipment design, as for the workplace, intended to maximize productivity by reducing operator fatigue and discomfort. Also called biotechnology, human engineering; also called human factors engineering.
Ergonomics (or human factors) is the scientific discipline concerned with the understanding of interactions among humans and other elements of a system, and the profession that applies theory, principles, data and methods to design in order to optimize human well-being and overall system performance (definition adopted by the International Ergonomics Association in 2000).
Ergonomics contribute to the design and evaluation of tasks, jobs, products, environments and systems in order to make them compatible with the needs, abilities and limitations of people.
The purpose of ergonomics: The effects of your work environment on your body.
The Importance of ergonomics: It's quite beneficial to have the right tools so one can do the tasks at hand, things precede better and it also reduces frustration and maintains contentment in people.
Ergonomics Chart:
Organizational Principles
I think we can develop a more flexible sense of organization if we also look at some patterns that are more exclusively patterns or principles of organization. We should understand, though, that these broad principles have many variations, that they sometimes overlap with patterns of development or exposition, and that good writing sometimes combines different methods.
Definition of Objectives
An objective or goal is a personal or organizational desired end point in development. It is usually endeavored to be reached in finite time by setting deadlines.
An objective is broader than a goal, and one objective can be broken down into a number of specific goals.
Objectives tend to be more meaningful when they:
Are written in the context of outcomes
Are understood and accepted by employees.
Contain measurable or quantifiable elements
Contain a time reference
Are challenging but attainable
Are determined as short term or long term.
Are determined whether part of employees are involved or the entire workforce is involved.
Objectives can be failing if it missing any of characteristic mentioned above and often producing poor result if:
Employees are not convinced that objectives produce desired results
Manager did not explain the exact result expected from that employee.
Span of Control
Span of control is the term for the number of subordinate employees directly accountable to a manager. The larger the number of employees a manager controls the wider is his span of control.
Narrow span: The manager controls six or fewer employees. There is close supervision of the employees, tight control and fast communication. However, the supervision can be too close; the narrow span means that there are many levels of management, resulting in a possibly excessive distance between the top and the bottom of an organization.
Wide span: The manager controls more than six employees. Managers are forced to delegate work, and tasks may be less closely supervised. There are possible problems with the overloading of work and with loss of control. However, there are fewer levels of management.
In addition to the type of production system there are number of factors that will influence the limit of span of control. These include:
The nature of the organization, the complexity of the work and the range of responsibilities.
The ability and personal qualities of the manager including the capacity to cope with the interruptions.
The amount of time the manager has available from other activities to spend with subordinates.
The ability and training of subordinate staff, the strength of their motivation and commitment, and the extent of direction and guidance needed.
The effectiveness of coordination and the nature of communication and control systems.
Interrelated Functions
Perhaps the oldest and most common method of grouping related functions is by specialized function, such as marketing, finance, and productions (or operations) are becoming more interrelated.
Sometimes this form of departmentalization may create problems if individuals with specialized functions become more concerned with their own specialized area than with the overall business.
An example of departmentalization by function appears bellow:
System Approach is the tendency for am organization’s functional areas to be extensively interrelated and a common element of the system approach that is characteristic of today’s management theory thinking.
Chain of Command
The chain of command, sometimes called the scalar chain, is the formal line of authority, communication, and responsibility within an organization. The chain of command is usually depicted on an organizational chart, which identifies the superior and subordinate relationships in the organizational structure and who reports to whom within an organization. According to classical organization theory the organizational chart allows one to visualize the lines of authority and communication within an organizational structure and ensures clear assignment of duties and responsibilities. By utilizing the chain of command, and its visible authority relationships, the principle of unity of command is maintained. Unity of command means that each subordinate reports to one and only one superior.
Unity of Command
Unity of command means that each subordinate reports to one and only one superior or no subordinate should report to more than one boss; or, 'Two bosses are not better than one.'
Difficulties arise when both supervisors give the employee work to do all the same time, and one supervisor expects the employee to fulfill her request first. The absence of unity of command produce job related frustrations, job dissatisfaction and loss of morale.
Authority and Responsibility
A clear definition of responsibilities and the authority to accomplish them constitute the foundation of the art of delegation. Whenever possible, these responsibilities should be stated in writing. The employee should also have a good idea of how the job fits into the total picture and why it is important. The manager should also encourage questions and be completely approachable. This practice, in combination with exhibiting confidence and trust by allowing subordinates to pursue goals without undue reporting, constant checking, and other exaggerated forms of control, will create a supportive climate and help to build an effective working relationship.
From management perspective, authority is Legal or rightful power; a right to command or to act; power exercised buy a person in virtue of his office or trust; dominion; jurisdiction; authorization; as, the authority of a manager over his employees, and of parents over children; the authority of a court.
Responsibility is the state of being responsible, accountable, or answerable, as t, or obligation. When manager shares responsibility with subordinates, it does not mean he or she is abandoning responsibility.
Managers still have the responsibility to do following:
Know what’s going on
Keep abreast of important decisions
Track the progress of projects (or lack of it)
Ensure that derailed projects get back on track
Set the direction for subordinates to take.
Make the decision employee cant.
Offer a guiding hand by opening doors to clear the way an d measure performance.
Delegation
Delegation the process that makes management possible because management is the process of getting results accomplished through others. Delegation is the work a manager performs to entrust others with responsibility and authority and to create accountability for results. It is an activity of the organizing function.
Delegation is the process by which managers distribute and entrust activities and related authority to subordinates in the organization. Effective delegating is more then just passing out responsibility.
Among the reasons supervisors avoid delegating authority are that they:
Lack of confidence in their subordinates
Lack of understanding of the nature of the supervisory role
Believe that unless they do the work they cannot stay on top of the situation
Lack of technical competence
Work Assignment
It is a combination of Self-reliance Learning and assignments at the work site and it indicates the new employee’s job duties and responsibilities before he or she is hired.
Work assignments will show each employee’s strength and talent of work that how they perform and their ability and interest related to their responsibilities.
Employee Empowerment
Employee empowerment is a term used to express the ways in which non-managerial staff can make autonomous decisions without consulting a boss/manager. These self-willed decisions can be small or large depending upon the degree of power with which the company wishes to invest employees. Employee empowerment can begin with training and converting a whole company to an empowerment model. Conversely it may merely mean giving employees the ability to make some decisions on their own.
For employee empowerment to work successfully, the management team must be truly committed to allowing employees to make decisions. They may wish to define the scope of decisions made. Building decision-making teams is often one of the models used in employee empowerment, because it allows for managers and workers to contribute ideas toward directing the company.
The benefits of empowerment are:
When employees are empowered; they are motivated to participate in the process of decision making to provide their insights and suggestions.
The decision making process can be speeded up, as can reaction times.
It releases the creative innovative capacities.
Empowerment provides for greater job satisfaction, motivation and commitment.
It enables employees to gain a greater sense of achievement from their work and reduce operational cost by eliminating unnecessary layers of management and the consequent checking and re checking operations.
Conclusion

With the completion of this assignment now I have got more understanding about such topics.

As I hope you will have seen:
We have got broad information about the elements of office environment that involved in affecting the office employees physically and psychologically.
We have learned about the meaning of ergonomics and also about the purpose and importance of ergonomics.
We have also got more knowledge about Organizational Principles and learned it assists the office administrators in coordinating their daily activities.
Thanks to Madam Tamil Selvi, Who gave us great knowledge about such topics explained above and it’s my pleasure to provide a good information about these topics.
.
Table of Content Pages
Introduction………………………………………………………………2
Office Furniture
Factors that guide the selection of office equipment...........................3-4
Automated Office System
Facsimile machine…………………………………………………..5
Shredder machine…………………………………………………...6
Electronic typewriter………………………………………………..6-7
Equipment Maintenance Consideration
Service Contract……………………………………………………..7-8
Call Basis……………………………………………………………8
In House Service…………………………………………………….8-9
Inventory Control………………………………………………………..9-10
Conclusion………………………………………………………………11
References……………………………………………………………….11
Introduction
This assignment consists of few important topics such as, Office equipments, automated systems in assisting the office information, equipment maintenance consideration and inventory control.
With completion of this assignment we will be able to:
To know about the selection of office equipment and furniture for healthy office environment.
To know about automated systems that will assist us in processing the office information.
To know the methods of maintaining the office equipment efficiently.
To know about inventory control.
Answer of Question1:
Office Furniture
The selection of office furniture should receive the same careful attention as the selection office equipment receives. The effect of improperly selected office furniture may be felt for a long time because the disposal of pre owned furniture may be felt for a long time because the disposal of pre owned furniture which is typically purchased rather than leased, is often quite difficult.
Factors that guide the selection of office furniture:
Intended use of furniture
Before the selection of furniture its important to perform the tasks, the equipment the employee uses to perform the tasks, the possibility of multiple tasks performed simultaneously, as well as need for quickly accessible reference materials as the employee performs assigned tasks must be thoroughly analysed.
Appropriateness of furniture in relation to décor of office
Since most offices are redecorated several times during the life of the furniture, the coordination of the office furniture with the décor is desirable and the versatility for use in other color should also be considered.
Suitability of furniture for its users
Employees fatigue can be prevented by adjusting furniture to compensate their physical characteristics. Most chairs and some desks are adjustable to meet user requirements. These furniture components should suitable for a long term users of computer monitors and video display terminals (VDTS as they are staioned at one place compared to the other employees in the office. These employees can experience considerable discomfort unless the furniture can be adjusted to meet their special physical characteristics.
The work area on which the computer or terminal sits should be adjustable, making it possible for the employees to be able to look slightly downward at the display. The center of the terminal should be 30 to 45 inches above the floor, and the keyboard should be at a height that enables the employee to keep his or her arms nearly level. The employee’s chair should provide back support and promote upright posture, and the chair height should put the employee’s knees slightly higher than his or he hips.
Versatility of furniture
Some types of furniture have more than one function. An example is a desk that can also function as drafting table. Therefore assessing furniture versatility is advisable.
Durability of furniture
The durability of the furniture is determined by manufacturing techniques and the materials of which it is constructed. For, example, metal furniture is generally more durable than wood furniture.
Hierarchical level of furniture user
Employees at higher level are generally given more prestigious furniture with special characteristics compared to those at lower levels. The special characteristics of the furniture are the special design and the special materials used in the construction process.
Size of furniture in relation to room or area size
The size of the area or room in which the furniture is to be places must be considered when selecting new office furniture.
Fire retardant value of furniture
Upholstered office furniture must be made of materials that fire resistance.
Answer of Question2:
Automated Office Equipment Systems
There are few office equipments that assist us in processing the office information such as facsimile is used to quickly send a letter to customer in another place, a proper shredder to safeguard personal and financial records and typewriter to fill in pre-printed forms, and dictation machines or voice recognition software to speak your thoughts when processing business letters and reports.
Facsimile Machines
A facsimile machine translates copies of text and graphics documents into electronic signal, which are transmitted over telephone lines or by satellite.
Facsimile is a system for transmitting pictures or other graphic matter by wire or radio. Facsimile is used to transmit such materials as documents, telegrams, drawings, pictures taken from satellites, and even entire newspapers. The surface of the material to be sent is traversed by a light-beam and a photodiode that translates the light and dark areas of the material thus scanned into electric signals for transmission. A receiving station reproduces the transmitted material by a variety of means.
Proliferation
Businesses and institutions rely more on faxes as fax machines provide speed and convenience for transmitting of information. Concerns over product speed and quality, training and usage, and cost of containment have taken on a new urgency in the usage of the fax machines. Most offices currently lack the organization or discipline to control this powerful technology.
Security
Facsimile machines increase the possibility of spending confidential information to a wrong number. The worrisome issue here is the security of the information transmitted to a wrong person.
Shredder
A shredder is a machine that tears objects into smaller pieces. The most common types are paper shredders and garden waste shredders. A garbage disposal also employs such a device. A shredder also refers to a device used to cut cheese for cooking in some parts of the eastern United States and some of the shredders also capable of shredding optical discs.
Shredding provides the simple way to protect such data s a wealth of information-from financial data to confidential reports from falling into the wrong hands.
Most companies use shredders to destroy sensitive material to ensure that it stays confidential providing document security. Shredders help the environment by shredding documents which is easier to recycle and more biodegradable when placed in a landfill. Paper shredders, which are experiencing marked growth each year, vary greatly in productivity and price.
Electronic Typewriter
A word processing system for displaying and reproducing alphanumeric characters on a photocopy machine capable of scanning an original document, having a housing including an electronic keyboard with keys representing individual alphanumeric characters, the housing including a display for viewing a portion of the information keys, and a memory circuit coupled to said keyboard for storing and spacing the alphanumeric indicia in memory. A microprocessor circuit, having an algorithm circuit, is coupled to the memory circuit for converting the stored alphanumeric indicia from the memory to a line of dots by comparison with the algorithm circuit; and at least one elongated, solid state reflective display strip, having a single line of reflective dots defining its display screen, is disposed transversely to the scanning direction of the photocopy machine, the strip being coupled to the microprocessor, the microprocessor addressing the proper column of dots in a row to produce the top portion of a complete line of alphanumeric characters on the screen, addressing the same column of dots in the next sequential row, so that the top portion of the characters are shifted one space up to display the adjacent lower portion of the character line on the screen, so that, after a plurality of addressing cycles, the stored alphanumeric indicia, which are converted to a line of dots and reproduced on the screen, are scrolled synchronously in the same direction and at the same speed as the scanning speed of the photocopy machine.
Answer of Question3:
Equipment Maintenance Consideration
All office machinery does need servicing at some point. It obviously makes more sense to conduct regular preventative maintenance if possible – otherwise the equipment will break down when work has pilled up.
Equipment maintenance is typically provided by one or more of the following three methods. Some organizations put a portion of hteir equipment on a service contract, and the remainder is maintained on a call basis.
Service Contract
A service contract is a method of equipment maintenance that involves a manufacturer’s representative or with service agency which will be valid for one year. During the term of the contract, the manufacturer’s representative or service agency generally is responsible not only for equipment repairs but also for routine maintenance, such as cleaning and oiling.
Some service contract will specify the number of routine inspections during the year and a through cleaning and oiling once a year. Preventive maintance is a distinct characteristic of this method depending on the nature of contact, the cost of minor is replacement parts may be covered, whereas the owner of equipment maybe responsible for the cost of replacing major parts.
The most important benefit is a service contract provides as a preventive maintenance and the other advantage is the reduced amount of paperwork involved. If maintenance is provided on call basis, the paperwork involves in the preparing vouchers and check overtime can be quite extensive. When a service contract is used, the paperwork is processed only once a year. Another advantage of the service contract is the fairly quick response time that it provides.
The most significant disadvantage of the service contract is the cost which varies depending on the provisions and the type of equipment covered.
Before organizations purchase service contract, the following provisions in the contract to be carefully assessed.
Nature of the coverage of service calls, parts and labor
Minimum number of inspections during contract period
Provisions or restrictions for on site and shop work
Condition of renewing contract
Availability of loaner equipment when needed
Mileage for service technician
Nature of exclusions
Specific machines covered by the equipment
Date of the coverage
Cost of contract
Call Basis
When equipment is maintained on a call basis, the representative of the equipment manufacturer or service agency is call each time the equipment needs to be repaired.
Unless special provisions are made, equipments does not receive the yearly cleaning and oiling customarily included with service contract, the owner of equipment therefore pays only for service performed.
In comparison to a service contract, this method of equipment maintenance appears on the surface to be less costly. But when the cost of preparing payment, invoices and checks and the lack of preventive maintenance are considered, the call basis maybe more expensive over the long run then having the a service contract on the equipment. Furthermore, the call basis typically does not produce as fast a repair time as the service contract.
In House Service
Large organizations sometimes have their own in-house service departments where they employ trained individuals. These individuals have to undergo training periodically to update their knowledge to meet the frequent changes in equipment technology.
Apart from the salaries of these individuals, the organization must also consider the cost of fringe benefits and retaining. For these reasons, the maintenance method is generally feasible only for larger organization. Furthermore the number of brands of equipment is frequently kept to a minimum to avoid maintenance diversity. However this may prevent the organization from achieving the flexibility that is possible when a greater number of brands of equipment used.
Several factors must be considered when deciding which of the three methods of equipment maintenance to use:
Cost and provision of a service
Frequency of equipment repair
Impact of preventive maintenance on increasing the life of equipment.
Availability of an expense incurred in employing trained service personal.
Number of different brands of office equipment owned by the organization
Type of equipment to be maintained
Cost of paperwork associated with equipment maintenance.
Speed with which the equipment must be repaired.
Answer of Question4
Inventory Control
Inventory control monitoring the supplies, raw materials, work-in-process, and finished goods by various accounting and reporting methods. Some controls are the maintenance of detailed stock records showing receipts and issuances; inventory ledger showing quantities and dollars; and written policies regarding purchasing, receiving, inspection, and handling. Periodic inventory counts should occur to verify that the inventory amounts per books physically exist. A good system of inventory control assists in reducing inventory ordering and carrying costs.
The possible reasons for carrying inventories are: uncertainty about the size of future demands; uncertainty about the duration of lead time for deliveries; provision for greater assurance of continuing production, using work-in-process inventories as a hedge against the failure of some of the machines feeding other machines; and speculation on future prices of commodities. Some of the other important benefits of carrying inventories are: reduction of ordering costs and production setup costs (these costs are less frequently incurred as the size of the orders are made larger which in turn creates higher inventories); price discounts for ordering large quantities; shipping economies; and maintenance of stable production rates and work-force levels which otherwise could fluctuate excessively due to variations in seasonal demand.
WHAT IS IT???
Inventory control means keeping track of your stock
Knowing how much was sold and how much is left
Let’s you know when to order more fuel
Let’s you keep records of losses and gains
Gives you consumption rates of high demand and low demand
HOW DO I KEEP INVENTORY???
By using inventory data sheets
Daily Readings
Daily inventory balance record
Monthly Summary
Regular tank dipping
Regular meter reading
The information required for the inventory control as follows:
Serial number of each piece of equipment the organization own, leases, or rents.
Date of organization purchases, leased, or rented the equipment
Purchases cost of the equipment
Life of the equipment
Yearly depreciation of the equipment
Book value of the equipment
Inventory control number assigned to each device.
Costs involved in servicing the equipment.
Conclusion

With the completion of this assignment now I have got more understanding about such topics.

As I hope you will have seen:
We have got information about selection of office equipment and furniture, that these elements can affect employees physically and psychologically.
Automated system which will help us in processing the office information such as, Facsimile machine, Paper shredder machine and Electronic typewriter.
We have learned that maintenance and day-to-day operator maintenance is helpful in increasing the life span of equipment. So, there are some of the methods that we can adopt in maintaining the equipment efficiently.
We have learned about Inventory control which is important in keeping the records of equipments we purchase.
Scientific management
Scientific management, also called Taylorism or the Classical Perspective, is a theory of management that analyzes and synthesizes processes, improving labor productivity. The core ideas of the theory were developed by Frederick Winslow Taylor in the 1880s and 1890s, and were first published in his monographs, Shop Management (1905) and The Principles of Scientific Management (1911).[1] Taylor believed that decisions based upon tradition and rules of thumb should be replaced by precise procedures developed after careful study of an individual at work.
In management literature today, the greatest use of the concept of Taylorism is as a contrast to a new, improved way of doing business. In political and sociological terms, Taylorism can be seen as the division of labour pushed to its logical extreme, with a consequent de-skilling of the worker and dehumanization of the workplace
Frederick Taylor and Scientific Management
In 1911, Frederick Winslow Taylor published his work, The Principles of Scientific Management, in which he described how the application of the scientific method to the management of workers greatly could improve productivity. Scientific management methods called for optimizing the way that tasks were performed and simplifying the jobs enough so that workers could be trained to perform their specialized sequence of motions in the one "best" way.
Prior to scientific management, work was performed by skilled craftsmen who had learned their jobs in lengthy apprenticeships. They made their own decisions about how their job was to be performed. Scientific management took away much of this autonomy and converted skilled crafts into a series of simplified jobs that could be performed by unskilled workers who easily could be trained for the tasks.
Taylor became interested in improving worker productivity early in his career when he observed gross inefficiencies during his contact with steel workers.
Taylor's 4 Principles of Scientific Management
After years of various experiments to determine optimal work methods, Taylor proposed the following four principles of scientific management:
Replace rule-of-thumb work methods with methods based on a scientific study of the tasks.
Scientifically select, train, and develop each worker rather than passively leaving them to train themselves.
Cooperate with the workers to ensure that the scientifically developed methods are being followed.
Divide work nearly equally between managers and workers, so that the managers apply scientific management principles to planning the work and the workers actually perform the tasks.
These principles were implemented in many factories, often increasing productivity by a factor of three or more. Henry Ford applied Taylor's principles in his automobile factories, and families even began to perform their household tasks based on the results of time and motion studies.
Drawbacks of Scientific Management
While scientific management principles improved productivity and had a substantial impact on industry, they also increased the monotony of work. The core job dimensions of skill variety, task identity, task significance, autonomy, and feedback all were missing from the picture of scientific management.
While in many cases the new ways of working were accepted by the workers, in some cases they were not. The use of stopwatches often was a protested issue and led to a strike at one factory where "Taylorism" was being tested. Complaints that Taylorism was dehumanizing led to an investigation by the United States Congress. Despite its controversy, scientific management changed the way that work was done, and forms of it continue to be used today.
Elton Mayo and the Hawthorne Studies
Elton Mayo was the founder of the Human Relations Movement and of Industrial Sociology. He carried out research at the Hawthorne Works of the Western Electric Company in Chicago.
He and his team of researchers took a group of six women and segregated them. They then altered their conditions of work in a number of ways, over a five year period, and observed the effects on production and the morale of the group. Over the period, changes such as new payment systems, rest breaks of different sorts and lengths, varying the length of the working day, and offering food and refreshments were tried. In almost all cases, productivity improved.
At the end of the experiment, Mayo felt that he had proven his point and closed it down, returning the women to their original conditions, a six day week, with long hours and no rest breaks or refreshments. Surprisingly, productivity in the group rose to the highest levels yet and Mayo had to re think his conclusions.
In the end, he realized that firstly, the women had felt important because they had been singled out. Secondly, the women had developed good relationships amongst each other and had been allowed to set their own work patterns. Thirdly, the case of relationship had made for a much more pleasant working environment.
Mayo decided that work satisfaction must depend, to a large extent, upon the informal social relationships between workers in a group and upon the social relationships between workers and their bosses. The effects of the group should never be underestimated.
Four general conclusions were drawn from the Hawthorne studies:
The aptitudes of individuals are imperfect predictors of job performance. Although they give some indication of the physical and mental potential of the individual, the amount produced is strongly influenced by social factors.
Informal organization affects productivity. The Hawthorne researchers discovered a group life among the workers. The studies also showed that the relations that supervisors develop with workers tend to influence the manner in which the workers carry out directives.
Work-group norms affect productivity. The Hawthorne researchers were not the first to recognize that work groups tend to arrive at norms of what is "a fair day's work," however, they provided the best systematic description and interpretation of this phenomenon.
The workplace is a social system. The Hawthorne researchers came to view the workplace as a social system made up of interdependent parts.
Hawthorne effect
The Hawthorne effect describes a temporary change to behavior or performance in response to a change in the environmental conditions, with the response being typically an improvement. The term was coined in 1955 by Henry A. Landsberger[1] when analyzing older experiments from 1924-1932 at the Hawthorne Works (outside Chicago). Landsberger defined the Hawthorne effect as:
a short-term improvement caused by observing worker performance.
Earlier researchers had concluded the short-term improvement was caused by teamwork when workers saw themselves as part of a study group or team. Others have broadened the definition to mean that people's behavior and performance change following any new or increased attention. Hence, the term Hawthorne effect no longer has a specific definition.
The Hawthorne studies have had a dramatic effect on management in organizations and how people react to different situations. Although illumination research of workplace lighting formed the basis of the Hawthorne effect, other changes such as maintaining clean work stations, clearing floors of obstacles, and even relocating workstations resulted in increased productivity for short periods of time. Thus the term is used to identify any type of short-lived increase in productivity. In short, people will be more productive when appreciated or when watched.[1][2][3]
The term Hawthorne effect has been linked with numerous other terms, including: epistemic feedback, systemic bias, implicit social cognition, and continuous improvement.
Benefits of the Hawthorne Effect
Elton Mayo realized that the women, exercising a freedom they didn't have on the factory floor, had formed a social atmosphere that also included the productivity-tracking observer. They talked and joked with one another. They began to meet socially outside of work.
When these women were singled out from the rest of the factory workers, it raised their self-esteem. When they were allowed to have a friendly relationship with their supervisor, they felt happier at work. When he discussed changes in advance with them, and allowed them a form of participation, they felt like part of the team. Elton Mayo had secured the girls cooperation and loyalty. This explains why productivity rose even when he took away their rest breaks.
There's nothing wrong with intentionally using the Hawthorne Effect to reach your goals. In fact, the Hawthorne Effect has also been called the 'Somebody Upstairs Cares' syndrome. When people spend a large portion of their time at work, they require a sense of belonging, of being part of something bigger than themselves. When they do, they are more effective.
This effect has been described as the reward you reap when you pay attention to people. The mere act of showing people that you're concerned about them usually spurs them to better job performance. That's the true Hawthorne Effect.
Mayo's Hawthorne Experiments
George Elton Mayo was in charge of certain experiments on human behavior carried out at the Hawthorne Works of the General Electric Company in Chicago between 1924 and 1927. His research findings have contributed to organization development in terms of human relations and motivation theory.
Flowing from the findings of these investigations he came to certain conclusions as follows:
Work is a group activity.
The social world of the adult is primarily patterned about work activity.
The need for recognition, security and sense of belonging is more important in determining workers' morale and productivity than the physical conditions under which he works.
A complaint is not necessarily an objective recital of facts; it is commonly a symptom manifesting disturbance of an individual's status position.
The worker is a person whose attitudes and effectiveness are conditioned by social demands from both inside and outside the work plant.
Informal groups within the work plant exercise strong social controls over the work habits and attitudes of the individual worker.
The change from an established society in the home to an adaptive society in the work plant resulting from the use of new techniques tends continually to disrupt the social organization of a work plant and industry generally.
Group collaboration does not occur by accident; it must be planned and developed. If group collaboration is achieved the human relations within a work plant may reach a cohesion which resists the disrupting effects of adaptive society.
Now it’s a year later, and I want to tell you about the progress
we have made. IBM today is stronger and more focused than
it has been in years. The path we set for ourselves several
years ago is yielding results—in terms of an improved competitive
position, an enhanced capacity to innovate, and a greater
ability to deliver results to our clients and to you, our owners.
Our task now comes down to execution. At a recent
meeting with IBM’s senior leaders, I said that 2005 is the year
of “small s and big E”: less focus on strategic development,
maximum push on execution. This is the appropriate emphasis
for our company today, because most of the major strategic
pieces are now in place for IBM to become the leader of a
rapidly changing information technology industry.
A good year
I want to explain to you what we did last year to turn strategy
and vision into results. Your company turned in another good
year in 2004.We continued to execute our business plan
effectively, producing share gains in key markets, increasing
revenue and growing both earnings and earnings per share.
Our results from continuing operations saw record
revenue of $96.3 billion, an increase of 8 percent; earnings
of $8.4 billion, an increase of 11 percent; and diluted earnings
per share of $4.94, an increase of 14 percent.
One of the strengths of our business model, from a
financial point of view, is the amount of cash we generate.
After committing $5.7 billion to R&D in 2004, we had
Dear IBM Investor: Last year, I told you that IBM was in the process of
becoming a very different company. I said that we had achieved a new
degree of clarity about our business model—innovation for the enterprise—
and that this was driving change in every aspect of the corporation. And I
described the deeper level of this reexamination—our collective work to
redefine IBM’s core values.
Samuel J. Palmisano
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
$12.9 billion in cash available for investment and distribution
to shareholders. Of that, $3.7 billion went for net capital
expenditures and $1.7 billion for acquisitions that strengthened
our capabilities.
We were able to return a record $8.3 billion to investors—
$7.1 billion through share repurchase and $1.2 billion through
dividends. We ended the year in a strong cash position,
with $10.6 billion, including marketable securities. In 2004,
our return on invested capital increased to 29 percent ,
excluding our Global Financing business and a one-time
pension settlement charge.*
We were able to achieve these results because of our
performance in the marketplace.
• IBM Global Services is the leading IT services company in
the world, with more than twice the revenue of our nearest
rival.We are ranked number one in IT outsourcing, application
management and e-business hosting. In 2004, Global Services
revenue grew 8 percent to $46.2 billion, driven by continued
growth in Strategic Outsourcing, as well as revenue increases
in Integrated Technology Services and Business Consulting
Services (led by strong growth in Business Transformation
Outsourcing). Although signings and backlog declined in
2004, Global Services improved its rate of revenue growth in
every quarter, excluding the benefit of currency, due to the
improving yield of our backlog and current signings.
• Our software revenue totaled $15.1 billion, an increase
of 5 percent.We gained share in key segments and held our
leading share position in middleware overall.WebSphere
grew 14 percent, Rational 15 percent and Tivoli 15 percent.
• We continue as number one in the world in servers, with
zSeries, pSeries and xSeries each increasing its share position
in 2004. IBM is the market leader in the super-hot category of
blade servers, with revenue growing more than 150 percent
for the year. Industry analyst IDC estimates that by 2008
one of every four servers will be a blade.We had challenging
product transitions in storage systems and iSeries, which
hurt us. Personal computer revenue growth was strong for
the year. Technology OEM growth was good, and we continue
to see yield improvements in our semiconductor operation.
Overall, our hardware revenue was $31.2 billion, an increase
of 10 percent.
• Revenue in all of IBM’s industry sectors—which is the way
we serve our largest clients globally—grew for the full year,
led by the financial services, communications and distribution
sectors.We continued our strong growth in sales to small and
medium-size businesses, which grew by 8 percent.
• We grew and expanded our business in the world’s hypergrowth
markets.We have learned over many years that the
best way to pursue opportunities in emerging markets is to
make investments and build relationships for the long haul,
to become part of the local economy and to help advance
the society’s broader goals. We are doing that in China,
India, Brazil and Russia—and it’s yielding good results. IBM’s
business in these four key emerging markets grew more than
25 percent in 2004, to more than $4 billion.
The year had its share of challenges, and some parts of
the business fell short. But overall, it was a solid year for the
IBM company. The results confirm that we are in the right
businesses and the right segments of the industry.
A transaction and a transformation
Of course, just as significant as the segments we are in are
those we are not. The industry’s contraction in recent years
has forced IT companies to choose between being highvalue
innovation players or high-volume distributors of other
people’s intellectual capital. Companies that are caught
in the middle run the risk of being hammered from both
below and above.
As I described to you last year, we’ve made our choice: IBM
is an innovation company. Of course, declaring something like
that is easy. It has taken a great deal of discipline to execute.
For instance, over the past several years, while we increased
our presence in software, consulting and infrastructure services,
we exited or reduced our presence in commoditizing
businesses like hard disk drives, memory chips and networking
hardware. And most notably, this past December we
announced our agreement for Lenovo, China’s computer
leader, to acquire IBM’s Personal Computing Division.
These kinds of decisions are hard for many companies—
indeed, some won’t make them—because it means parting
with business models and technologies that were once their
crown jewels. In our own case, IBM invented the hard disk drive
and DRAM chip, and we set the standard in PCs back in 1981.
We take enormous pride in these achievements. But if you
intend to remain the innovation leader, you commit yourself
to continuous reinvention. You’ve got to do the hard work,
every day, to discover and develop new capabilities—and
new ways of working—that will keep you moving forward.
The new Lenovo will be the world’s third-largest PC business.
It will have greater global reach and greater economies
of scale, and we will continue to work together to deliver
world-class PC solutions in the marketplace. There’s no doubt
in my mind that this was the best path forward for our
personal computer business.
For IBM, our PC transaction—perhaps the most widely
commented-upon event of the year for us—was certainly
a milestone. But not, I would argue, for the reasons many
believe. We could simply have sold our PC business.
Instead, what we did was to reposition both that business
and IBM itself in ways that help each and that align with
the future trajectory of the IT market. This deal crystallizes,
as well as any single event could, the nature of our business
model, strategy and marketplace position today:
IBM is an enterprise-focused company. It is not
our strength or intention to participate directly in
consumer markets.
We are all about innovation.We are best at creating
and delivering differentiating value to our clients.
We are a global business. Much more than marketing
products and services around the world, this means
establishing deep roots locally and leveraging our
multinational presence for operational advantage.
To explain our perspective on both the IT industry and IBM’s
transformation lies beyond the scope of an annual report.
However, I do believe it is vital for anyone with an interest
in IBM to understand this long-term view and what lies
behind it—not a mere cyclical change, but a major structural
shift in our industry. That is why we created the document
“Understanding Our Company: An IBM Prospectus,” which
accompanies this year’s annual report. I encourage you
to take a look at it. I think it will help explain how we see the
world, and how that is driving our actions.
The meaning of 2004
Several major shifts—in business models, in technology
and in how they together are reshaping our industry—have
driven everything we’ve done at IBM over the past four
years. They continued to do so in 2004.
1. Because clients now demand that information technology
be intimately integrated with their business operations, we have
reshaped IBM’s business skills, assets and delivery capability.
This has involved everything from our acquisition of
PricewaterhouseCoopers Consulting in 2002, to the launch
of multiple industry- and process-specific practices and lines
of business. Some people may see this simply as IBM bulking
up in services. It is true that we needed to add a lot of deep
business expertise—and we will continue to strengthen our
hand here. But clients want more than the consultant’s strategic
advice, the systems integrator’s skills or the IT outsourcer’s
scale. They want new business designs, enabled by technology,
that give them some quantifiable competitive advantage.
They want new options and alternatives, not only in how
they manage IT, but in how they conceptualize and manage
their companies.
This is what we mean by On Demand Business. CEOs
might not use that exact term (yet), but a more responsive,
virtually integrated company is increasingly what they are
asking us to help them build. Companies like eBay, Bank
of America and METRO Group, and institutions like Miami-
Dade County and the new Museum of Modern Art are, to
one degree or another, on demand enterprises.
I want to highlight one aspect of On Demand Business,
because it represents a very large new market opportunity for
us.We call it Business Performance Transformation Services
(BPTS), and industry analyst IDC sizes it at about $1.4 trillion—
as large as the existing global IT industry.We peg the part of
BPTS that IBM is addressing at about $500 billion.
As its name suggests, BPTS involves helping clients optimize
their operations through new business designs and
processes, and, in some cases, turning over those operations
to expert partners to manage. As you can imagine, this is a
very different type of services business—one that is increasingly
“asset-based.” It requires deep knowledge of business
processes like logistics, supply chain and human resource
management, and relies heavily on automated processes
and intellectual capital, not mere labor arbitrage.
In 2004, we extended our capabilities in BPTS, making
substantial investments in four areas—Business Transformation
Outsourcing, Engineering and Technology Services, Strategy
and Change Consulting, and Business Performance Management
Software.We generated more than $3 billion in revenue
in these four areas—up about 45 percent over the previous
year. And our software and services groups are working
together to build out an infrastructure that fuses business
transformation with information technology—what is called
services-oriented architecture—to support our evolution to
an asset-based services business.
2. Because we saw that computing was undergoing a fundamental
shift, we developed the architecture and technologies for the
On Demand Operating Environment, based on open standards.
The new computing architecture is based on a truly networked
world and the emergence of open standards—for the first
time in our industry’s history—as well as some exciting new
technologies and new ways of accessing and managing IT.
It builds on our strengths in enterprise computing, core
technology and software.
One of our most important core technologies is our
Power microprocessor family.What’s significant about Power
is not just that it’s fast and packs a lot of punch (plenty of
microprocessors do). Power is highly customizable.
Consider: 32,768 Power processors are at the heart of our
Blue Gene supercomputer, which last year set a new record—
more than 70 trillion calculations per second. Yet variations
of Power chips are also the foundation for our pSeries and
iSeries, and are used in our blade servers, our storage systems
and an expanding array of devices—network routers, mobile
devices, game consoles—designed by our OEM partners.
Built on a Power core, the Cell processor—a “supercomputer
on a chip”—was developed along with Sony and Toshiba
for broadband, high-definition uses.
Increasing the uses of the Power family is important for
IBM, because it gives us the advantages of a high-performance
processor and high-volume economics. This is one reason
we’ve opened Power’s technical specifications through our
00 01 02 03 04
7.989.1
96.3
income from continuing
operations
revenue from continuing
operations
(IN BILLIONS OF DOLLARS) (IN BILLIONS OF DOLLARS)
Power Everywhere and Power.org initiatives.We are building
a broader ecosystem of innovation around Power, reflecting
the fact that innovation today is an increasingly collaborative
process—and not only in software.
And speaking of software, through steady internal
development and select acquisitions over the past several
years, IBM has become the leader in enterprise-class
middleware, which helps companies integrate and manage
their operations. An important differentiator for our
software business is that it is entirely built on open standards,
supporting a wide variety of hardware platforms and
applications. This gives our clients flexibility and choice,
and makes it easy for them to integrate their infrastructure
and business operations.
3. These two elements of on demand—new business models and
a new computing infrastructure—are now coming together in
ways that will redefine the industry and play to IBM’s strengths.
All of these changes—businesses we’ve exited, those we’ve
entered, our increased investments, the technologies
and practices we’ve invented—were undertaken not simply
to assemble a portfolio, even a portfolio of high-value businesses,
but to do something with them. Namely, we aim to
give our clients capabilities they cannot get either from
another company or even a collection of other companies.
This is why we’ve worked hard to forge connections
between our services and software businesses, our semiconductor
unit and our server and storage units, between
IBM Research and every other part of the company, and
between IBM and an increasing variety of business partners.
IBM’s strategy is less about going to market with a more
complete array of capabilities than it is about leveraging
those capabilities to create new intellectual capital for clients.
Priorities going forward
As we move ahead in 2005, we are guided by the same
priorities that have shaped our progress thus far.
we will make on demand business a fuller reality for clients.
The concept is no longer in dispute. Enterprises are achieving
tangible benefits from being on demand—and are increasingly
embracing its long-term strategic promise for competitive
advantage.We will work with a growing roster of clients who
want to become on demand enterprises, and we will
continue to build out the technologies and services for the
On Demand Operating Environment.
we will continue to deepen ibm’s capabilities as a company
built on innovation. This is our business model and has been
since the company’s inception. It has shaped our transformation
over the past several years, and it continues to shape
the evolution of our workforce strategy, management systems,
economics and client relationships.
(Dollars in millions except per share amounts)
FOR THE YEAR 2004 2003
Revenue $««96,293 $««89,131
Income from continuing operations 8,448 7,613
Loss from discontinued operations 18 30
Net income 8,430 7,583
Earnings/(loss) per share
of common stock:
Assuming dilution:
Continuing operations 4.94 4.34
Discontinued operations (0.01) (0.02)
Total 4.93 4.32
Basic:
Continuing operations 5.04 4.42
Discontinued operations (0.01) (0.02)
Total 5.03 4.40
Net cash provided by operating activities
from continuing operations 15,406 14,569
Investment in plant, rental machines
and other property 4,368 4,393
Cash dividends paid on common stock 1,174 1,085
Per share of common stock 0.70 0.63
FINANCIAL HIGHLIGHTS
AT YEAR END 2004 2003
Cash, cash equivalents and
marketable securities $««10,570 $««««7,647
Total assets 109,183 104,457
Working capital 7,172 7,039*
Total debt 22,927 23,632
Stockholders’ equity 29,747 27,864
Common shares outstanding (in millions) 1,646 1,695
Market capitalization 162,223 157,047
Stock price per common share 98.58 92.68
Number of employees in IBM/
wholly owned subsidiaries 329,001 319,273
**Reclassified to conform with 2004 presentation
we will focus in 2005 on execution. This is that “big E”
message I gave to IBM’s leaders at the beginning of this year.
All of our strategic work over the past four years has given
us considerable capabilities to seize the growth and profit
opportunities I’ve described. Now, we have to improve our
ability to integrate all of this capability for our clients.
In other words, we need to become even more of an
On Demand Business ourselves. And a big part of that is
what I call “lowering the center of gravity” of our company.
For us, this is neither conventional decentralization nor simple
delegation. It means shifting resources closer to the point of
contact with the client, creating enterprise-wide processes
that are commonly shared, and establishing truly global
operations that capitalize on the talent and scale now available
in every part of the world.
Every time we have simplified the company and pushed
authority and resources closer to where the day-to-day
action is, we’ve seen great results—with clients (because we
are easier to do business with), in our cost structure (because
we eliminate unnecessary layers), in revenue growth (because
we differentiate ourselves from the competition) and in how
individual IBMers feel about their company.
Last year, I told you about the online “jam” in which IBMers
collectively defined our values for the first time in nearly a
century. I told you what an outpouring of passion, imagination
and pride that was.
Well, even more impressive was the follow-up jam
we held last fall. This time, we asked IBMers to contribute
ideas to make our values a day-to-day reality in the company.
Participation was extraordinary—more than 57,000
IBMers contributed more than 32,000 comments and
ideas—and the ideas were concrete, practical and focused
on execution.
The top-rated ideas range from back-office integration
supporting the development and marketing of integrated
solutions; to helping first-line managers by giving them
more authority over budgets and freeing up their time to
devote to their people; to clearing away the barriers that
inhibit us from collaborating, innovating and contributing to
IBM’s growth.
These and dozens of other ideas are now in various
stages of implementation, and I am confident that they will
make a material difference to IBM. Our values are also being
turned into actions every day in countless other ways: how
we work with our clients and colleagues; the actions of IBM’s
crisis response team after the Asian tsunami disaster; or the
progress of the World Community Grid—harnessing vast,
unused computational power to help cure disease and forecast
natural disasters.
From the point of view of a CEO, perhaps the best aspect
of this entire process has been the broad platform it creates
to drive change. When your primary organizational challenge
is one of execution, there is nothing more encouraging than
the knowledge that your organization’s direction and sense
of mission come not out of some threat or crisis, but from the
aspirations of your own workforce. For 329,000 IBMers—and
you can count me among them—what drives us every day is
a determination to make IBM the great company we all want
and expect it to be.
Samuel J. Palmisano
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
FINANCIAL REPORT
08
ibm annual report 2004
REPORT OF MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 09
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. . . . . . . . . . . 10
MANAGEMENT DISCUSSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Road Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Management Discussion Snapshot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Description of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Year in Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Prior Year in Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Looking Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Employees and Related Workforce. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Global Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
CONSOLIDATED FINANCIAL STATEMENTS
Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
b Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
c Acquisitions/Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
d Financial Instruments (excluding derivatives). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
e Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
f Financing Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
g Plant, Rental Machines and Other Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
h Investments and Sundry Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
i Intangible Assets Including Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
j Sale and Securitization of Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
k Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
l Derivatives and Hedging Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
m Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
n Stockholders’ Equity Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
o Contingencies and Commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
p Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
q Advertising and Promotional Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
r Research, Development and Engineering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
s 2002 Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
t Earnings Per Share of Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
u Rental Expense and Lease Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
v Stock-Based Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
w Retirement-Related Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
x Segment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . 92
SELECTED QUARTERLY DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
BOARD OF DIRECTORS AND SENIOR EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . 95
STOCKHOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
REPORT OF MANAGEMENT
International Business Machines Corporation and Subsidiary Companies
09
ibm annual report 2004
management responsibility for financial information
Responsibility for the integrity and objectivity of the financial information presented in this
Annual Report rests with IBM management. The accompanying financial statements have
been prepared in accordance with accounting principles generally accepted in the United
States of America, applying certain estimates and judgments as required.
IBM maintains an effective internal control structure. It consists, in part, of organizational
arrangements with clearly defined lines of responsibility and delegation of authority, and
comprehensive systems and control procedures. An important element of the control
environment is an ongoing internal audit program. Our system contains self-monitoring
mechanisms, and actions are taken to correct deficiencies as they are identified.
To assure the effective administration of internal controls, we carefully select and train
our employees, develop and disseminate written policies and procedures, provide appropriate
communication channels, and foster an environment conducive to the effective
functioning of controls.We believe that it is essential for the company to conduct its business
affairs in accordance with the highest ethical standards, as set forth in the IBM Business
Conduct Guidelines. These guidelines, translated into numerous languages, are distributed
to employees throughout the world, and reemphasized through internal programs to
assure that they are understood and followed.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, is
retained to audit IBM’s consolidated financial statements and management’s assessment of
the effectiveness of the company’s internal control over financial reporting. Its accompanying
report is based on audits conducted in accordance with the standards of the Public
Company Accounting Oversight Board (United States).
The Audit Committee of the Board of Directors is composed solely of independent,
non-management directors, and is responsible for recommending to the Board the
independent registered public accounting firm to be retained for the coming year, subject
to stockholder ratification. The Audit Committee meets periodically and privately
with the independent registered public accounting firm, with the company’s internal
auditors, as well as with IBM management, to review accounting, auditing, internal control
structure and financial reporting matters.
management’s report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control
over financial reporting of the company. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
The company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with accounting principles generally accepted
in the United States of America, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Management conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management concluded that the company’s internal control over
financial reporting was effective as of December 31, 2004.Management’s assessment of the
effectiveness of the company’s internal control over financial reporting as of December 31,
2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included herein.
Mark Loughridge
SENIOR VICE PRESIDENT
CHIEF FINANCIAL OFFICER
FEBRUARY 22, 2005
Samuel J. Palmisano
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
FEBRUARY 22, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
International Business Machines Corporation and Subsidiary Companies
10
ibm annual report 2004
To the Stockholders and Board of Directors of International Business Machines Corporation:
We have completed an integrated audit of International Business Machines Corporation’s
2004 consolidated financial statements and of its internal control over financial reporting
as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements
in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits and the reports of other auditors, are
presented below.
consolidated financial statements
In our opinion, based on our audits and the report of other auditors, the accompanying
consolidated financial statements appearing on pages 40 through 91 present fairly, in all
material respects, the financial position of International Business Machines Corporation and
its subsidiary companies at December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December 31,
2004 in conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the company’s management.
Our responsibility is to express an opinion on these financial statements based on our
audits. We did not audit the financial statements of the company’s Business Consulting
Services Reporting Unit (which includes the consulting practice acquired from us as discussed
in note c) for the years ended December 31, 2004, December 31, 2003 and the
three months ended December 31, 2002, which statements reflect total revenues of 14.3
percent, 14.5 percent and 4.3 percent of the related consolidated totals in the years ended
December 31, 2004, 2003 and 2002, respectively. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for the company’s Business Consulting
Services Reporting Unit, is based solely on the report of the other auditors.We conducted
our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit of financial statements includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation.We believe that our audits and
the report of other auditors provide a reasonable basis for our opinion.
internal control over financial reporting
Also, in our opinion, based on our audit and the report of other auditors, management’s
assessment, included in Management’s Report on Internal Control over Financial Reporting
appearing on page 9, that the company maintained effective internal control over financial
reporting as of December 31, 2004 based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, based on our audit and the report of other auditors,
the company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control-
Integrated Framework issued by the COSO. The company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on management’s assessment and on the effectiveness of the company’s internal
control over financial reporting based on our audit.We did not examine the effectiveness
of the controls over the initiation and recording of revenue transactions and the recording
of direct costs at the company’s Business Consulting Services Reporting Unit as of December
31, 2004. The effectiveness of those controls was examined by other auditors whose
report has been furnished to us, and our opinions expressed herein, insofar as they relate
to the effectiveness of those controls, are based solely on the report of the other auditors.
We conducted our audit of internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we consider necessary in the circumstances.We believe
that our audit and the report of the other auditors provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles.A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
PricewaterhouseCoopers LLP
NEW YORK, NEW YORK
FEBRUARY 22, 2005
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
11
ibm annual report 2004
Road Map
The financial section of the International Business Machines Corporation (IBM and/or the
company) 2004 Annual Report, consisting of this Management Discussion, the Consolidated
Financial Statements that follow and the notes related thereto, comprises 83 pages
of information. This Road Map is designed to provide you with some perspective regarding
the information contained in the financial section and a few helpful hints for reading
the document.
ibm’s business model
The company’s business model is built to support two principal goals: helping clients succeed
in delivering business value by becoming more efficient and competitive through
the use of business insight and information technology (IT) solutions; and providing longterm
value to shareholders. In support of these objectives, the business model has been
developed over time through strategic investments in services and technologies that have
the best long-term growth and profitability prospects based on the value they deliver to
clients. In addition, the company is committed to its employees and the communities in
which it operates.
The model is designed to allow for flexibility and periodic rebalancing. In 2004,
14 acquisitions were completed, all in software and services, at an aggregate cost of over
$2 billion, and in the fourth quarter the company announced the agreement to sell its
Personal Computing Division, a unit of the Personal Systems Group.
The company’s portfolio of capabilities ranges from services that include business
performance transformation services to software, hardware, fundamental research, financing
and the component technologies used to build larger systems. These capabilities are
combined to provide business insight and solutions in the enterprise computing space.
In terms of financial performance, over the last two years, the company has increased
its participation in the high-growth areas of its industry, while at the same time maintaining
a breadth of capabilities that has allowed it to gain share in key markets during changing
economic environments. In general, this strategy results in less volatile returns overall,
because each individual capability has unique financial attributes. Some involve contractual
long-term cash and income streams while others involve cyclical transaction-based sales.
The annuity-like business delivers incremental growth with a high degree of stability and
provides substantial cash. New engagements deliver more significant revenue growth and
require a level of investment to generate success.
In terms of marketplace performance—i.e., the ability to deliver client value—it is
important to understand that the fundamental strength of this business model is not found
in the breadth of the portfolio alone, but in the way the company creates business solutions
from among its capabilities and relationships.
transparency
Transparency is a primary goal of successful financial reporting. The following are the key
elements you will find in this year’s Annual Report.
• In 2004, the company, in accordance with Section 404 of the Sarbanes-Oxley Act of
2002, conducted an evaluation of its internal control over financial reporting and
concluded that the internal control over financial reporting was effective as of
December 31, 2004.
• The Management Discussion is designed to provide readers with a view of the company’s
results and certain factors that may affect future prospects from the perspective
of the company’s management. Within the Management Discussion Snapshot, the
key messages and details will give readers the ability to quickly assess the most
important drivers of performance within this brief overview.
• The Management Discussion reflects the company’s continued and improving strength
in providing broad client solutions, as opposed to a “piece parts” conglomeration of
many hardware, software and services businesses. The Description of the Business on
page 13, Results of Continuing Operations on page 17, Financial Position on page
23, and Looking Forward on page 28 sections, all are written from the perspective
of the consolidated entity. Detailed analysis for each of the company’s segments is
also included and appears on pages 21 to 23.
• Global Financing is a business segment within the company that is managed on an
arm’s-length basis and measured as if it were a standalone entity. A separate Global
Financing section beginning on page 35 is not included in the consolidated perspective
that is referred to above. This section is separately presented given this segment’s
unique impact on the company’s financial condition and leverage.
• The selected reference to constant currency in the Management Discussion is made
so that the financial results can be viewed without the impacts of changing foreign
currency exchange rates and therefore facilitates a comparative view of business
growth. The percentages reported in the financial tables throughout the Management
Discussion are calculated from the underlying whole-dollar numbers. See “Currency
Rate Fluctuations” on page 33 for additional information.
helpful hints
Organization of Information
• This Management Discussion section provides the reader of the financial statements
with a narrative on the company’s financial results. It contains the results of operations
for each segment of the business, followed by a description of the company’s financial
position, as well as certain employee data. It is useful to read the Management
Discussion in conjunction with note x, “Segment Information,” on pages 87 through 91.
• Pages 40 through 48 include the Consolidated Financial Statements. These statements
provide an overview of the company’s income and cash flow performance and its
financial position.
• The notes follow the Consolidated Financial Statements. Among other things, the notes
contain the company’s accounting policies (pages 49 to 55), detailed information on
specific items within the financial statements, certain contingencies and commitments
(pages 69 to 71), and the results of each IBM segment (pages 87 through 91).
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
12
ibm annual report 2004
Management Discussion Snapshot
(Dollars and shares in millions except per share amounts)
Yr. to Yr.
Percent/
Margin
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Revenue $÷«96,293 $«««89,131 8.0% *
Gross profit margin 37.4% 37.0% 0.4pts.
Total expense and other income $÷«24,004 $«÷22,144 8.4%
Total expense and other income to revenue ratio 24.9% 24.8% 0.1pts.
Provision for income taxes $÷÷«3,580 $÷÷«3,261 9.8%
Income from continuing operations $÷÷«8,448 $÷÷«7,613 11.0%
Earnings per share from continuing operations:
Diluted $«««««««4.94 $«««««««4.34 13.8%
Basic $«««««««5.04 $«««««««4.42 14.0%
Weighted-average shares outstanding:
Diluted 1,708.9 1,756.1 (2.7) %
Basic 1,675.0 1,721.6 (2.7) %
Assets** $«109,183 $«104,457 4.5%
Liabilities** $«««79,436 $÷«76,593 3.7%
Equity** $«««29,747 $÷«27,864 6.8%
* 3.4 percent adjusting for currency
** At December 31
continuing operations
In 2004, the company demonstrated that it could extend its leadership in a growth environment.
The company delivered revenue growth of 8.0 percent and diluted earnings per
share growth of 13.8 percent. The increase in the company’s Income from continuing
operations and diluted earnings per share from continuing operations as compared to
2003 was primarily due to:
• Improving demand associated with the moderate expansion of the economy and
continued market share gains for zSeries and xSeries server products
• Continued operational improvements in the Microelectronics business
• Continued demand growth in emerging countries
• Favorable impact of currency translation
The increase in revenue in 2004 as compared to 2003 was primarily due to:
• Improved demand in Global Services and key industry sectors
• Improving demand associated with the moderate expansion of the economy and
continued market share gains for zSeries, xSeries and pSeries server products, as
well as increased revenue for personal computers
• Continued demand growth in emerging countries (up over 25 percent) and in Business
Performance Transformation Services (up approximately 45 percent)
• Favorable impact of currency translation
With regard to the way that management reviews the business, as-reported and constant
currency revenue trends were positive for all of the company’s segments (except Global
Financing), geographies and industry sectors. See pages 17 and 18 for the summary trend
rates on an as-reported and constant currency basis, as well as information for each segment
on pages 21 to 23.
The consolidated gross profit margin was relatively flat versus 2003, increasing 0.4
points. An improvement in Hardware margins (1.8 points) contributed 0.5 points to the
overall margin improvement. In addition, Global Financing margin improved 4.2 points
compared to 2003, however, this improvement had an immaterial impact on the company’s
overall margin due to the size of the segment. These improvements were partially
offset by Global Services and Software—while margins in these segments were generally
flat year-to-year, the mix of these segments slightly impacted the overall company margin.
Total expense and other income increased in 2004 versus 2003 due primarily to
increased retirement-related plan costs, including the $320 million charge due to the partial
settlement of certain legal claims against the company’s IBM Personal Pension Plan
(PPP), and unfavorable currency translation.
Overall, retirement-related plan costs increased $1,082 million versus 2003, impacting
both gross margin and expense. See note w, “Retirement-Related Benefits” on pages 78
through 86 for additional information.
The provision for income taxes resulted in an effective tax rate of 29.8 percent for
2004, compared with the 2003 effective tax rate of 30.0 percent. The 0.2 point decrease in
the effective tax rate in 2004 was primarily due to the tax effect of the settlement of certain
pension claims in the third quarter of 2004 (highlighted above).
subsequent event
Subsequent to the company’s press release and Form 8-K filing on January 18, 2005,
announcing 2004 fourth quarter and full year financial results, the company conducted a
review of agreements for sales of third-party hardware in Japan. As a result of this review,
the company determined that certain IBM Japan employees acted improperly and inconsistently
with the company’s policies and practices. The company is taking appropriate
disciplinary action.
Therefore, the company has reduced full year Global Services revenue and cost by
$260 million. The previously announced 2004 fourth quarter financial results included
$50 million of this adjustment. The additional $210 million adjustment is considered a
Type 1 subsequent event under generally accepted accounting principles (GAAP) and
must be reflected in the company’s 2004 financial statements. As a result, the company has
reduced Global Services revenue and cost by $75 million, $55 million, and $80 million in
the first, second and third quarters of 2004, respectively.
There was no reduction made to the company’s gross profit dollars, income from
continuing operations or cash flows.
Discontinued Operations
On December 31, 2002, the company sold its hard disk drive (HDD) business to Hitachi,
Ltd. (Hitachi). The HDD business was accounted for as a discontinued operation under
GAAP which requires that the income statement and cash flow information be reformatted
to separate the divested business from the company’s continuing operations. See pages
60 and 61 for additional information.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
13
ibm annual report 2004
With regard to Assets, approximately $3.6 billion of the increase relates to the impact
of currency translation. The remaining increase primarily consists of an increase in Cash and
cash equivalents, an increase in Goodwill associated with recent acquisitions and increased
Prepaid pension assets. The increases were partially offset by lower financing receivables
and lower deferred tax assets.
For additional information, see the Year in Review section on pages 17 to 26.
Global Financing debt decreased, but the company’s Global Financing debt-to-equity
ratio remained flat at 6.9 to 1 and within the company’s targeted range.
Global Services signings were $43 billion in 2004 as compared to $55 billion in 2003.
The Global Services backlog is estimated to be $111 billion at December 31, 2004 versus
$120 billion at December 31, 2003. For additional information, see Global Services Signings
on page 29.
Looking forward, the company’s longer-term financial model targets earnings per
share to grow at a low double-digit rate with revenue growth in the mid-to-high single
digits, continued productivity driven margin improvement, and effective capital deployment
for acquisitions and common stock repurchase. The company’s ability to meet these
objectives depends on a number of factors, including those outlined on page 17 and on
pages 69 to 71.
Description of Business
Please refer to IBM’s Annual Report on Form 10-K filed on February 24, 2005, with the
Securities and Exchange Commission (SEC) for a more detailed version of this Description
of Business, especially the detailed “Significant Factors Affecting IBM’s Business” section.
IBM is an innovation-based business serving the needs of enterprises and institutions
worldwide. It defines innovation as the intersection of business insight and technological
invention. IBM seeks to deliver client success—in whatever ways its clients define success—
by giving them differentiating capabilities that provide unique competitive advantage.
By helping its clients redesign their business processes and organizational structure,
enabled by new operating environments, IBM helps them to become on demand businesses.
IBM defines an on demand business as an enterprise whose business processes
are responsive to any demand, opportunity or threat; integrated end-to-end across the
company; and capable of integrating fluidly across extended business ecosystems of partners,
suppliers and clients.
IBM first described this new model and set of capabilities in 2002, believing they
represent the current evolution of information technology architectures and of business
and institutional models. IBM calls this architecture the On Demand Operating
Environment: an infrastructure based on industry-wide standards (commonly referred to
as “open standards”), rather than on proprietary technologies. In IBM’s view, an enterprise’s investment in such an infrastructure provides both superior returns and maximum freedom
of interoperability and action. Standards have become a core element of IBM’s overall
strategy and impact all of our unit strategies.
The shift to standards-based technologies has been bolstered significantly in recent
years by the rapid growth of the “open source” software movement, a result of large-scale
collaboration among members of the worldwide developer and business communities.
Examples include the Linux operating system, the Eclipse computing platform and the
Java programming language.
IBM’s clients include many different kinds of enterprises, from sole proprietorships to
the world’s largest organizations, governments and companies representing every major
industry and endeavor. Over the last decade, IBM has exited or greatly de-emphasized its
involvement in consumer markets and divested itself of other noncore businesses to concentrate
on the enterprise market. In IBM’s view, opportunities in the enterprise market are
superior—representing approximately two-thirds of the IT industry’s revenue. As a result,
IBM has made acquisitions and invested in emerging business opportunities important to
its enterprise clients. Many of these investments have grown into multibillion dollar businesses
in their own right, and are now contributing to IBM’s growth.
The majority of the company’s enterprise business, which excludes the company’s
original equipment manufacturer (OEM) technology business, occurs in industries that are
broadly grouped into six sectors around which the company’s go-to-market strategies,
and sales and distribution activities are organized:
• Financial Services: Banking, Financial Markets, Insurance
• Public: Education, Government, Healthcare, Life Sciences
• Industrial: Aerospace, Automotive, Defense, Chemical and Petroleum, Electronics
• Distribution: Consumer Products, Retail, Travel, Transportation
• Communications: Telecommunications, Media and Entertainment, Energy and Utilities
• Small and Medium Business: Mainly companies with less than 1,000 employees
the it industry and ibm’s strategy
IBM operates in the IT industry, which comprises three principal categories:
• Business Value
• Infrastructure Value
• Component Value
IBM has realized and continues to see a shift in revenue and profit growth from Component
Value to Infrastructure Value and Business Value, where revenue and profit potential are
thought to be greatest in the years ahead
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Business Value
The company helps its clients transform their businesses and gain competitive advantage
by applying its skills and experience to business performance challenges specific to the
client’s industry or across industries and processes. The company enters into long-term
relationships and creates solutions for clients, driving on demand business innovation, on its
own or in partnership with other companies. The company draws upon its broad product
and service offerings, including Business Consulting Services, IBM Research, industry-leading
middleware, and its deep experience in systems and technology design.
CAPABILITIES
Business Consulting Services (BCS). Delivery of value to clients through consulting services
for client relationship management, financial management, human capital, business strategy
and change, and supply chain management, as well as application innovation and the transformation
of business processes and operations. (Global Services)
Business Performance Management (BPM). Enables companies to visualize end-to-end
processes across business and IT systems, analyze execution in real time against goals, and
make adjustments as needed. IBM offers consulting, services and middleware to simulate
and monitor business processes, and provides customers with real-time analysis of the
underlying IT systems carrying out those processes. (Software)
Business Transformation Outsourcing (BTO). Delivers improved business results to clients
through the continual strategic change and the operation and transformation of the client’s
business processes, applications and infrastructure. (Global Services)
Center for Business Optimization (CBO). Helps clients continually optimize their business
performance by drawing upon massive amounts of real-time data, advanced analytical
methods, business expertise and deep computing power. (Global Services)
Customer Financing. Lease and loan financing to external and internal clients for terms generally
between two and five years. (Global Financing)
Engineering & Technology Services (E&TS). System and component design services, strategic
outsourcing of clients’ design teams, and technology and manufacturing consulting
services. (Systems and Technology Group)
On Demand Innovation Services (ODIS). IBM Research scientists work with BCS consultants
to analyze and solve clients’ most intractable business challenges. ODIS offers a number of
cross-industry micropractices with deep expertise including mobile enablement and information
mining. (Global Services and IBM Research)
Software and services to meet industry-specific needs. Solutions and applications built on an
on demand, standards-based infrastructure to transform a process that is unique to specific
industries. (Multiple IBM segments)
Business Performance Transformation Services (BPTS). Helps clients transform their spending
on business processes, namely Selling, General and Administrative and Research and
Development. BPTS requires advanced technology and deep expertise in industry and/or
specific functions like Human Resources (HR), logistics, payroll, sales, customer services and
procurement, to result in holistic improvement for the performance and success of a business,
including efficiency of individual processes and their combined effort. BPTS solutions
are delivered to clients by several of the company’s business areas: BTO, E&TS, Strategy and
Change Consulting and BPM. (Multiple IBM segments)
Infrastructure Value
Infrastructure Value includes systems, such as high-volume servers; middleware software
that can interconnect disparate operating systems and applications with data; storage
networks; and devices. It also refers to such services as infrastructure management—
whether on the client’s premises or managed remotely at IBM’s own facilities—and consulting
about how to improve and strengthen the infrastructure and realize greater return on
investment in it. Central to IBM’s approach for building value in the infrastructure category
is its support of open standards and its active promotion of Linux and other open source
platforms, which help IBM’s clients control costs and allow them to benefit from the latest
advances created by development communities around the world. IBM’s strategic objective
is to deliver open and integrated offerings and expand partnerships.
CAPABILITIES
Application Management Services. Application development, management, maintenance
and support services for packaged software, as well as custom and legacy applications.
(Global Services)
Commercial financing. Short-term inventory and accounts receivable financing to dealers
and remarketers of IT products. (Global Financing)
DB2 information management software. Advanced database and content management software
solutions that enable clients to leverage information on demand. (Software)
e-business Hosting Services. Solutions for the management of clients’ Web-based infrastructure
and business applications, as well as a growing portfolio of industry-specific independent
software vendor (ISV) solutions that are delivered as a service. (Global Services)
Integrated Technology Services (ITS). Design, implementation and maintenance of clients’
technology infrastructures. (Global Services)
Lotus software. Collaboration and messaging software that allows a company’s employees,
clients, vendors and partners to engage in real-time and asynchronous communication and
knowledge management. (Software)
Personal computers. Notebook and desktop computers featuring ThinkVantage Technologies
that provide enterprises and end users with increased productivity and cost-effectiveness.
(Personal Systems Group)
Printing Systems. Production print solutions, on demand print-related solutions, enterprise
workgroup print technologies, and print management software and services. (Personal
Systems Group)
Rational software. Integrated tools designed to improve an organization’s software development
processes and capabilities. (Software)
Remarketing. The sale and lease of used equipment (primarily sourced from the conclusion
of lease transactions) to new or existing clients. (Global Financing)
Retail Store Solutions. Point-of-sale retail checkout equipment, software and solutions.
(Personal Systems Group)
Servers. IBM eServer systems using IBM operating systems (zSeries and iSeries), as well as
AIX, the IBM UNIX operating system (pSeries) and the Microsoft Windows operating system
(xSeries). All servers can also run Linux, a key open source operating system. (Systems and
Technology Group and Software)
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ibm annual report 2004
Storage. Data storage products, including disk, tape and storage area networks. (Systems
and Technology Group)
Strategic Outsourcing Services (SO). Competitive cost advantages through the outsourcing
of processes and operations. (Global Services)
Tivoli software. Software for infrastructure management, including security, change, configuration,
job scheduling, storage capability, performance and availability. (Software)
WebSphere software. Management of a wide variety of business processes using open
standards to interconnect applications, data and operating systems. (Software)
Component Value
Component Value includes advanced semiconductor development and manufacturing for
IBM’s server and storage offerings, and services, technology and licenses provided to OEMs
that create and market products requiring advanced chips and other core technology
elements. IBM leverages components for infrastructure value, while continuing to participate
in selected markets, focusing on key industry partners.
CAPABILITIES
Application Specific Integrated Circuit (ASICs). Manufacturing of customized semiconductor
products for clients. (Systems and Technology Group)
Advanced Foundry. Integrated supply chain services and a full suite of semiconductor manufacturing
services using either a client’s or IBM’s design. (Systems and Technology Group)
Standard products and custom microprocessors. Semiconductors designed and manufactured
primarily based upon IBM’s PowerPC architecture. (Systems and Technology Group)
business segments
Organizationally, the company’s major operations comprise a Global Services segment; a
Systems and Technology Group; a Personal Systems Group; a Software segment; a Global
Financing segment; and an Enterprise Investments segment.
Global Services is a critical component of the company’s strategy of providing insight and
solutions to clients. While solutions often include industry-leading IBM software and hardware,
other suppliers’ products are also used if a client solution requires it. Global Services
outsourcing contracts as well as BCS contracts range from less than one year to ten years.
Systems and Technology Group provides IBM’s clients with business solutions requiring
advanced computing power and storage capabilities. More than half of the Systems and
Technology Group’s eServer and Storage Systems sales transactions are through business
partners; approximately 40 percent are direct to end-user clients, more than half of which
are through the Web at ibm.com. In addition, the group provides leading semiconductor
technology and products, packaging solutions and engineering technology services to
OEM clients (approximately 14 percent of Systems and Technology Group revenue) and
for IBM’s own advanced technology needs. While appropriately not reported as external
revenue, hardware is also deployed to support Global Services solutions.
Personal Systems Group includes sales of personal computers, business and computing
solutions for retail stores and advanced printing capabilities for large enterprise clients
and small and medium-sized businesses. In December 2004, it was announced that
Lenovo Group Limited, the largest information technology company in China, will acquire
IBM’s Personal Computing Division. This transaction is expected to close in the second
quarter of 2005.
Software consists primarily of middleware and operating systems software. Middleware
software enables clients to integrate systems, processes and applications across their
enterprises. Middleware is designed to be the underlying support for applications provided
by independent software vendors (ISVs), who build industry- or process-specific applications
according to open industry standards. Operating systems are the engines that run
computers. Approximately 40 percent of external Software revenue relates to one-time
charge (OTC) arrangements, whereby the client pays one up-front payment for a lifetime
license. The remaining annuity revenue consists of both maintenance revenue sold with
OTC arrangements, as well as revenue from software sold on a monthly license charge
(MLC) arrangement. Typically, arrangements for the sale of OTC software include one year
of maintenance. The client can also purchase ongoing maintenance after the first year,
which includes product upgrades and technical support.
Global Financing is described on pages 35 to 39.
Enterprise Investments develops and provides industry-specific IT solutions supporting the
Hardware, Software and Global Services segments of the company. Primary product lines
include product life cycle management software and document processing technologies.
Product life cycle management software primarily serves the Industrial sector and helps
clients manage the development and manufacturing of their products. Document
processor products service the Financial Services sector and include products that enable
electronic banking.
ibm worldwide organizations
The following three company-wide organizations play key roles in IBM’s delivery of value
to its clients:
• Sales & Distribution Organization and related sales channels
• Research, Development and Intellectual Property
• Integrated Supply Chain
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Sales & Distribution Organization
With a comprehensive knowledge of IBM’s business and infrastructure solutions, as well as the
individual products, technologies and services offered by IBM and its network of business
partners, the company’s global team of account representatives and solutions professionals
gain a deep understanding of each client’s organizational, infrastructure and industry-specific
needs to determine the best approach for addressing the client’s critical business and IT
challenges. These professionals work in integrated teams with IBM consultants and technology
representatives, combining their deep skills and expertise to deliver high-value solutions.
INTERNAL ROUTES-TO-MARKET
Global Services consultants focused on selling end-to-end solutions for large, complex
business challenges.
Hardware and software brand specialists selling IBM products as parts of discrete technology
decisions, typically to “self-integrating” IT departments.
ibm.com Online and telephone sales and assistance operations handle basic commodity
transactions for large enterprises and small-to-medium businesses.
BUSINESS PARTNERS ROUTES-TO-MARKET
Global/major independent software vendors (ISVs). ISVs deliver business process or industryspecific
applications and, in doing so, often influence the sale of IBM hardware, middleware
and services.
Global/major systems integrators (SIs). SIs identify business problems and design solutions
when Global Services is not the preferred systems integrator; they also sell computing
infrastructures from IBM and its competitors.
Regional ISVs and SIs. SIs identify the business problems, and ISVs deliver business process
or industry-specific applications to medium-sized and large businesses requiring IBM
computing infrastructure offerings.
Solutions providers, resellers and distributors. Resellers sell IBM platforms and value-added
services as part of a discrete technology platform decision to clients wanting thirdparty
assistance.
Research, Development and Intellectual Property
IBM’s research and development (R&D) operations differentiate IBM from its competitors. IBM
annually spends approximately $5– 6 billion for R&D, including capitalized software costs,
focusing its investments in high-growth opportunities. As a result of innovations in these
and other areas, IBM was once again awarded more U.S. patents in 2004 than any other
company. This marks the 12th year in a row that IBM achieved this distinction.
In addition to producing world-class hardware and software products, IBM innovations
are a major differentiator in providing solutions for the company’s clients through its
growing services activities. The company’s investments in R&D also result in intellectual
property (IP) income. Some of IBM’s technological breakthroughs are used exclusively in
IBM products, while others are used by the company’s licensees for their products when
that new technology is not strategic to IBM’s business goals. A third group is both used
internally and licensed externally.
In addition to these IP income sources, the company also generates value from its
patent portfolio through cross-licensing arrangements and IP licensed in divestiture
transactions. The value of these other two sources is not readily apparent in the financial
results and Consolidated Statement of Earnings, because income on cross-licensing
arrangements is recorded only to the extent that cash is received. The value received by
IBM for IP involving the sale of a business is included in the overall gain or loss from the
divestiture, not in the separately displayed IP income amounts in financial results and
Consolidated Statement of Earnings.
In January 2005, IBM announced that it would pledge 500 of its patents for use by the
open computing community, representing a major shift in the way IBM manages and
deploys its intellectual property portfolio. IBM’s intent is to help form an industry-wide
“patent commons,” in which patents are used to establish a platform for further innovation
in areas of broad interest to information technology developers and users. The pledge is
applicable to any individual, community or company working on or using software that
meets the Open Source Initiative (OSI) definition of open source software.
Integrated Supply Chain
Just as IBM works to transform its clients’ supply chains for greater efficiency and responsiveness
to market conditions, IBM has undertaken a large-scale initiative to recast its own
integrated supply chain as an on demand business operation, turning what had previously
been an expense to be managed into a strategic advantage for the company and, ultimately,
improved delivery and outcomes for its clients. IBM spends approximately $41 billion
annually through its supply chain, procuring materials and services around the world. The
company’s supply, manufacturing and distribution operations are integrated in one operating
unit that has reduced inventories, improved response to marketplace opportunities
and external risks and converted fixed to variable costs. Simplifying and streamlining
internal operations has improved sales force productivity and processes and thereby the
experiences of the company’s clients when working with IBM. Because some of the cost
savings this unit generates are passed along to clients, they will not always result in a visible
gross margin improvement in the company’s Consolidated Statement of Earnings.While
these efforts are largely concerned with product manufacturing and delivery, IBM is
also applying supply chain principles to service delivery across its solutions and services
lines of business. To accomplish this, IBM is creating a new labor resource management
system—based on a uniform taxonomy of skills—that will enable the organization to more
efficiently match its labor resources to the needs of IBM clients, deploy the right expertise
quickly, and create a better short-term and long-term balance of labor supply and
demand by comparing the demands of the market against the database of available skills.
In addition to its own manufacturing operations, the company uses a number of contract
manufacturing (CM) companies around the world to manufacture IBM-designed
products. The use of CM companies is intended to generate cost efficiencies and reduce
time-to-market for certain IBM products. Some of the company’s relationships with CM
companies are exclusive. The company has key relationships with Sanmina-SCI for the
manufacture of some Intel-based products and with Solectron for a significant portion of
the manufacturing operations of Global Asset Recovery Services—an operation of Global
Financing that restores end-of-lease personal computers and other IT equipment for resale.
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ibm annual report 2004
key business drivers
The following are some of the key drivers of the company’s business.
Economic Environment and Corporate IT Spending Budgets
If overall demand for hardware, software and services changes, whether due to general
economic conditions or a shift in corporate buying patterns, sales performance could be
impacted. IBM’s diverse portfolio of products and offerings is designed to gain market
share in strong and weak economic climates. The company accomplishes this by not only
having a mix of offerings with long-term cash and income streams as well as cyclical transaction-
based sales, but also by continually developing competitive products and solutions
and effectively managing a skilled resource base. IBM continues to transform itself to take
advantage of shifting demand trends, focusing on client or industry-specific solutions,
business performance and open standards.
Internal Business Transformation and Efficiency Initiatives
IBM continues to drive greater productivity and cost savings as it transforms itself into an
on demand enterprise. This includes the internal supply chain initiatives discussed above,
as well as driving collaboration across the IBM enterprise to stimulate innovation and drive
growth. Transformation efforts are improving the company’s management of its costs
worldwide: rebalancing of skills, optimizing its workforce to drive growth, keeping the company’s
compensation programs competitive, and creating a cost-efficient and cutting-edge
IT infrastructure to support its transformation. IBM is extending its supply chain initiatives
to labor costs and other internal processes. Continued success in this area will impact the
company’s cost structure improvements, as well as the amount of competitive leverage it
can apply by passing savings along to clients.
Innovation Initiatives
IBM invests for new and innovative capabilities, products and services. IBM has been moving
away from commoditized categories of the IT industry and into areas in which it can differentiate
itself through innovation and by leveraging its investments in R&D. Examples
include IBM’s leadership position in the design and fabrication of ASICs; the design of
smaller, faster and energy-efficient semiconductor devices; the design of “grid” computing
networks that allow computers to share processing power; the transformation and
integration of business processes; and the company’s efforts to advance open technology
standards and to engage with governments, academia, think tanks and nongovernmental
organizations on emerging trends in technology, society and culture. In the highly competitive
IT industry, with large diversified competitors as well as smaller and nimble singletechnology
competitors, IBM’s ability to continue its cutting-edge innovation is critical to
maintaining and increasing market share. IBM is managing this risk by more closely linking
its R&D organization to industry-specific and client-specific needs, as discussed in
Description of Business—IBM Worldwide Organizations.
Open Standards
The broad adoption of open standards is essential to the computing model for an on
demand business and is a significant driver of collaborative innovation across all industries.
Without interoperability among all manner of computing platforms, the integration of any
client’s internal systems, applications and processes remains a monumental and expensive
task. The broad-based acceptance of open standards—rather than closed, proprietary
architectures—also allows the computing infrastructure to more easily absorb (and thus
benefit from) new technical innovations. IBM is committed to fostering open standards
because they are vital to the On Demand Operating Environment, and because their
acceptance will expand growth opportunities across the entire business services and IT
industry. There are a number of competitors in the IT industry with significant resources
and investments who are committed to closed and proprietary platforms as a way to lock
customers into a particular architecture. This competition will result in increased pricing
pressure and/or IP claims and proceedings. IBM’s support of open standards is evidenced
by the enabling of its products to support open standards such as Linux, and the development
of Rational software development tools, which can be used to develop and upgrade
any other company’s software products.
Emerging Business Opportunities
The company is continuing to refocus its business on the higher value segments of enterprise
computing—providing technology and transformation services to clients’ businesses.
Consistent with that focus, the company continues to significantly invest in Emerging
Business Opportunities, as a way to drive revenue growth and market share gain. Areas of
investment include strategic acquisitions, primarily in software and services, informationbased
medicine, on demand retail, sensor and actuator solutions, Business Performance
Transformation Services, key technologies (POWER5 and POWERBlade) and emerging
growth countries such as China, Russia, India and Brazil.
Year in Review
results of continuing operations
Revenue
(Dollars in millions)
Yr. to Yr.
Percent
Yr. to Yr. Change
Percent Constant
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change Currency
Statement of Earnings
Revenue Presentation:
Global Services $«46,213 $«42,635 8.4% 3.1%
Hardware 31,154 28,239 10.3 6.5
Software 15,094 14,311 5.5 0.6
Global Financing 2,608 2,826 (7.7) (11.5)
Enterprise Investments/Other 1,224 1,120 9.3 5.2
Total $«96,293 $«89,131 8.0% 3.4%
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ibm annual report 2004
(Dollars in millions)
Yr. to Yr.
Percent
Yr. to Yr. Change
Percent Constant
FOR THE YEAR ENDED DECEMBER 31: 2004 2003* Change Currency
Industry Sector:
Financial Services $«24,339 $«22,274 9.3% 4.0%
Public 14,758 13,917 6.0 2.0
Industrial 12,582 11,850 6.2 1.1
Distribution 8,767 8,157 7.5 3.1
Communications 8,859 8,026 10.4 6.0
Small & Medium 21,162 19,537 8.3 3.2
OEM 2,885 2,634 9.6 9.3
Other 2,941 2,736 7.5 3.1
Total $«96,293 $«89,131 8.0% 3.4%
* Reclassified to conform with 2004 presentation.
(Dollars in millions)
Yr. to Yr.
Percent
Yr. to Yr. Change
Percent Constant
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change Currency
Geographies:
Americas $«40,064 $«38,078 5.2% 4.5%
Europe/Middle East/Africa 32,068 29,102 10.2 0.8
Asia Pacific 21,276 19,317 10.1 4.2
OEM 2,885 2,634 9.6 9.3
Total $«96,293 $«89,131 8.0% 3.4%
Revenue from all industry sectors increased in 2004 when compared to 2003, reflecting
the company’s broad capabilities and industry-specific solutions which combine technology
and high value services to solve a client’s business or IT problems. These solutions also
provide for a longer-term relationship with the client, rather than a transaction-oriented
sale. The Financial Services sector revenue growth was led by financial markets (15 percent),
banking (9 percent) and insurance (8 percent). The Communications sector had
strong revenue growth in Telecommunications (15 percent), while the Distribution sector
was led by the retail industry (12 percent). The Small & Medium business sector increased
as the company continued to roll out new products under the Express label that are
designed and priced specifically for customers in the 100 to 1,000 employee segment.
Revenue across all geographies increased in 2004 when compared to 2003. In the
Americas, U.S. (6 percent) and Canada (9 percent) revenue grew as did Latin America
(12 percent), notably Brazil, which grew at 15 percent.
Within Europe/Middle East /Africa, Eastern Europe, the Nordic countries, Spain (7 percent)
and France (3 percent) had revenue growth, while the U.K. (2 percent), Germany
(3 percent) and Italy (8 percent) declined after adjusting for currency. Asia Pacific had
strong growth in 2004, led by China, which grew at 25 percent, and the ASEAN region
(17 percent), while Japan, which is about 60 percent of Asia Pacific’s revenue, also had
growth of 5 percent. Collectively, as a result of the company’s targeted investments, the
emerging countries of China, Russia (75 percent), India (45 percent) and Brazil had revenue
growth over 25 percent in 2004 to over $4.0 billion in revenue.
OEM revenue increased in 2004 versus 2003 due primarily to continued strong
growth in the company’s Engineering & Technology Services business and improved
operational performance in the Microelectronics business.
The increase in Global Services revenue was driven by SO as it continued its steady
growth. BCS and ITS revenue also increased. Maintenance revenue increased due to the
favorable impact of currency movements.
In addition, significant progress was made in the company’s relatively new BPTS offerings
(see page 14) where revenue grew approximately 45 percent.
In Hardware, Systems and Technology Group, revenue increased as zSeries servers,
xSeries servers, pSeries servers and Engineering & Technology Services increased. zSeries’
strong performance resulted from clients adding new workload to the mainframe as they
build their on demand infrastructures. xSeries had strong growth, driven by its leadership
in Blades. pSeries server revenue increased as the company’s POWER5 technology was
well received by customers in 2004. Demand for the company’s Engineering & Technology
services continued to be strong. Storage Systems revenue increased due to greater
demand for external midrange disk and tape products, offset by decreases in high-end
disk products. Microelectronics revenue increased due primarily to improved yields and
increased output in the 300 millimeter factory. iSeries server revenue declined as the
transition to POWER5 technology is taking longer than previous cycles.
Personal Systems Group revenue increased in 2004, driven by strong performance
worldwide by the company’s ThinkPad mobile computers. Retail Store Solutions also
delivered strong revenue growth in 2004 due to continued demand for its products as
well as the acquisition of Productivity Solutions Inc. in November 2003.
Software revenue increased due to improved demand for Data Management products,
Tivoli software products, the WebSphere family of products and Rational products.
Operating Systems revenue increased slightly primarily due to favorable currency translation.
The decline in Global Financing revenue in 2004 versus 2003 was primarily driven by
lower used equipment sales. See pages 35 to 39 for additional information regarding
Global Financing results.
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ibm annual report 2004
The following table presents each segment’s revenue as a percentage of the company’s
total:
FOR THE YEAR ENDED DECEMBER 31: 2004 2003
Global Services 48.0% 47.8%
Hardware 32.3 31.7
Software 15.7 16.1
Global Financing 2.7 3.2
Enterprise Investments/Other 1.3 1.2
Total 100.0% 100.0%
See segment discussion on pages 21 to 23 for further details on year-to-year revenue
changes by brand.
Gross Profit
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Gross Profit Margin:
Global Services 25.1% 25.2% (0.1) pts.
Hardware 29.6 27.8 1.8
Software 87.3 86.5 0.8
Global Financing 60.0 55.8 4.2
Enterprise Investments/Other 40.3 43.4 (3.1)
Total 37.4% 37.0% 0.4pts.
The modest decline in Global Services gross profit margin was due to continued investment
in on demand infrastructure and business transformation capabilities, and less
contribution from the higher margin Maintenance business.
The increase in Hardware margins was primarily due to yield improvements in the
Microelectronics business and margin improvements in zSeries servers, xSeries servers,
storage products and personal computers, as well as the impact of certain hedging transactions
(see “Anticipated Royalties and Cost Transactions” on page 66).
The Software margin increased due to growth in software revenue, as well as productivity
improvements in the company’s support and distribution models.
The increase in the Global Financing margin was primarily driven by a mix change
towards higher margin financing revenue and away from lower margin used equipment
sales and improved margins from financing revenue.
The cost savings generated by the company’s supply chain initiatives also contributed
to the company’s overall margin improvement, but as discussed on page 16, the company
has passed a portion of the savings to clients to improve competitive leadership and gain
market share in key industry sectors. In addition, an increase in retirement-related plan
costs of approximately $490 million compared to 2003 impacted overall segment margins.
See segment discussion on pages 21 to 23 for further details on gross profit.
Expense
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Total expense and other income $«24,004 $«22,144 8.4%
Expense to Revenue (E/R) 24.9% 24.8% 0.1pts.
Total expense and other income increased 8.4 percent (5.4 percent adjusting for currency)
in 2004 versus 2003. The increase was primarily due to higher retirement-related plan
costs, Research, development and engineering expense and the effect of currency translation
on expense. For additional information regarding the increase in Total expense and
other income, see the following analyses by category:
Selling, General and Administrative (SG&A)
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003* Change
Selling, general and administrative expense:
Selling, general and administrative—base $«17,584 $«15,787 11.4%
Advertising and promotional expense 1,335 1,406 (5.1)
Workforce reductions—ongoing 332 454 (26.9)
Bad debt expense 133 205 (35.3)
Total $«19,384 $«17,852 8.6%
* Reclassified to conform with 2004 presentation.
Total SG&A expense increased 8.6 percent (5.1 percent adjusting for currency). The
increase was primarily driven by increased expense for retirement-related plan costs of
approximately $515 million, which included a one-time charge of $320 million related to
the partial settlement of certain legal claims against the company’s PPP (see pages 20 and
21 for further information on retirement-related benefits), unfavorable currency translation
of $626 million, and provisions for certain litigation-related expenses of $125 million in
2004. These increases were partially offset by lower workforce reductions and lower
Advertising and promotional expense. The amount ofWorkforce reductions—ongoing will
vary from year to year depending upon the required skills, competitive environment and
economic conditions. In addition, Bad debt expense declined primarily due to lower reserve
requirements associated with the improvement in economic conditions and improved
credit quality, as well as the lower asset base of the Global Financing receivables portfolio
(see page 37).
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
20
ibm annual report 2004
OTHER (INCOME) AND EXPENSE
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Other (income) and expense:
Foreign currency transaction losses $«381 $«411 (7.5) %
Interest income (180) (152) 18.9
Net realized gains on sales of securities and
other investments (59) (54) 9.0
Writedowns of impaired investment assets 20 50 (59.6)
Net realized (gains)/losses from certain
real estate activities (71) 16 NM
2002 actions* 42 2 NM
Other (156) (35) NM
Total $««(23) $«238 NM
* See note s, “2002 Actions” on pages 73 through 76.
NM—Not Meaningful
Other (income) and expense was income of $23 million in 2004 versus expense of $238 million
in 2003. The improvement was primarily driven by increased gains from various asset
sales including certain real estate transactions in 2004 versus 2003, additional Interest
income generated by the company in 2004 and other nonrecurring gains/settlements
increasing in 2004 when compared to 2003. The Foreign currency transaction losses relate
primarily to losses on certain hedge contracts offset by gains on the settlement of foreign
currency receivables and payables. See pages 33 and 34 for additional discussion of
currency impacts on the company’s financial results.
RESEARCH, DEVELOPMENT AND ENGINEERING
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Research, development and engineering:
Total $«5,673 $«5,077 11.7%
The increase in Research, development and engineering (RD&E) expense in 2004 versus
2003 was primarily the result of increased spending in middleware software including new
acquisitions (approximately $240 million). In addition, RD&E expense increased due to
spending related to the POWER5 technology initiatives (approximately $140 million),
increased spending on new storage products (approximately $50 million), and higher
retirement-related plan costs (approximately $77 million).
INTELLECTUAL PROPERTY AND CUSTOM DEVELOPMENT INCOME
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Intellectual property and custom
development income:
Sales and other transfers of intellectual property $÷÷466 $««««562 (17.1) %
Licensing/royalty-based fees 393 338 16.3
Custom development income 310 268 15.7
Total $«1,169 $«1,168 0.2%
Intellectual property and custom development income was flat in 2004 versus 2003. The
timing and amount of Sales and other transfers of IP may vary significantly from period to
period depending upon the timing of divestitures, industry consolidation, economic conditions
and the timing of new patents and know-how development.
INTEREST EXPENSE
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Interest expense:
Total $«139 $«145 (4.6) %
Interest expense is presented in Cost of Global Financing in the Consolidated Statement
of Earnings only if the related external borrowings are to support the Global Financing
external business. See page 38 for additional information regarding Global Financing
debt and interest expense.
Retirement-Related Benefits
The following table provides the total pre-tax cost for all retirement-related plans. Cost
amounts are included as an addition to the company’s cost and expense amounts in the
Consolidated Statement of Earnings within the caption (e.g., Cost, SG&A, RD&E) relating to
the job function of the individuals participating in the plans.
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Retirement-related plans cost:
Defined benefit and contribution pension
plans cost $«1,072 $«««27 NM
Nonpension postretirement benefits costs 372 335 11.0%
Total $«1,444 $«362 NM
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
21
ibm annual report 2004
Overall, retirement-related plan costs increased $1,082 million versus 2003. On
December 31, 2003, the company lowered its PPP discount rate from 6.75 percent to
6.0 percent which increased pre-tax cost and expense by almost $200 million in 2004. In
addition, the 2004 results include a charge of $320 million due to the partial settlement of
certain legal claims against the company’s PPP. The 2004 results were also affected by
changes in the market value of plan assets as well as similar trends in the company’s other
defined benefits pension plans that contributed to the increase in costs. See note w,
“Retirement-Related Benefits” on pages 78 through 86 for additional information. The
year-to-year increase impacted gross margin, SG&A and RD&E by approximately $490 million,
$515 million and $77 million, respectively.
Provision for Income Taxes
The provision for income taxes resulted in an effective tax rate of 29.8 percent for 2004,
compared with the 2003 effective tax rate of 30.0 percent. The 0.2 point decrease in the
effective tax rate in 2004 was primarily due to the tax effect of the settlement of certain
pension claims in the third quarter of 2004.
Weighted-Average Common Shares
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Earnings per share from continuing operations:
Assuming dilution $«««««4.94 $«««««4.34 13.8%
Basic 5.04 4.42 14.0
Weighted-average shares outstanding (in millions):
Assuming dilution 1,708.9 1,756.1 (2.7) %
Basic 1,675.0 1,721.6 (2.7)
The average number of common shares outstanding assuming dilution was lower by 47.2 million
shares in 2004 versus 2003. The decrease was primarily the result of the company’s
common share repurchase program. See note n, “Stockholders’ Equity Activity,” on page
69 for additional information regarding the common share activities. Also see note t,
“Earnings Per Share of Common Stock,” on page 77.
segment details
The following is an analysis of the 2004 versus 2003 external segment results. The analysis
of 2003 versus 2002 external segment results is on pages 26 to 28.
Global Services
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Global Services Revenue: $«46,213 $«42,635 8.4%
Strategic Outsourcing $«19,309 $«17,124 12.8%
Business Consulting Services 13,767 12,955 6.3
Integrated Technology Services 7,441 7,099 4.8
Maintenance 5,696 5,457 4.4
Global Services revenue increased 8.4 percent (3.1 percent adjusted for currency). SO
continued to demonstrate its competitive advantage in delivering on demand solutions by
leveraging its business transformational skills and its scale during 2004. Each geography
continued year-to-year growth, with seven consecutive quarters of double-digit growth in
Europe/Middle East /Africa, excluding currency benefits. Within SO, e-business Hosting
Services, an offering that provides Web infrastructure and application management as
an Internet based service, continued its pattern of revenue growth. ITS revenue, which
excludes Maintenance, increased driven by growth in Business Continuity and Recovery
Services of 29 percent, partially offset by the revenue reduction for sales of third-party
hardware in Japan. (See page 12, “Subsequent Event” for additional information.) BCS
revenue increased driven by strong growth in BTO. BCS continued to improve its revenue
growth rate at constant currency in every quarter of the year. Maintenance revenue
increased primarily driven by favorable impacts of currency movements.
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Global Services:
Gross profit $«11,576 $«10,732 7.9%
Gross profit margin 25.1% 25.2% (0.1) pts.
The Global Services gross profit dollars increased primarily due to the corresponding
increase in revenue. The gross profit margin declined due to investment in on demand infrastructure
and business transformation capabilities, as well as a lower mix of Maintenance
revenue (12 percent in 2004 versus 13 percent in 2003), which has a higher gross profit
margin than the other categories of Global Services revenue. These declines were partially
offset by improved profitability in BCS driven by improved utilization, reduced overhead
structure and an improved labor mix.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
22
ibm annual report 2004
Hardware
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Hardware Revenue: $«30,710 $«27,856 10.2%
Systems and Technology Group $«17,916 $«16,469 8.8%
zSeries 14.9
iSeries (17.2)
pSeries 7.3
xSeries 22.8
Storage Systems 1.6
Microelectronics 0.6
Engineering & Technology Services 93.4
Personal Systems Group 12,794 11,387 12.4
Personal Computers 14.4
Retail Store Solutions 17.6
Printer Systems (7.6)
Systems and Technology Group revenue increased 8.8 percent (5.2 percent adjusting for
currency). zSeries revenue increased due to clients continuing to add new workloads on the
zSeries platform as they build their on demand infrastructures, as well as taking advantage
of the capabilities of the z990 server for consolidation. Mainframes remain the platform of
choice for hosting mission-critical transactions as well as for consolidation and infrastructure
simplification. The total delivery of zSeries computing power as measured in MIPS
(millions of instructions per second) increased 33 percent in 2004 versus 2003, offsetting
price declines of 23 percent per MIPS. xSeries server revenue increased (24 percent) due
to strong growth in both high-end and 1&2 Way Servers. xSeries-related BladeCenter
revenue had strong growth, up over 150 percent, as the company is leading and shaping
the blade market. In the fourth quarter of 2004, the company saw strong demand for
the new POWERBlade, which can run Windows, Linux and AIX on different servers in the
BladeCenter. pSeries server revenue increased reflecting clients very strong acceptance of
the POWER5 systems. The new pSeries high-end system started shipping in November
2004, marking the completion of a top to bottom refresh of the pSeries server product line
in just three months. iSeries server revenue declined driven by lower sales as the transition
to POWER5 is taking longer than in previous cycles, as customers must transition their
operating environment to the new level.
Storage Systems revenue increased slightly due to increased demand for external
midrange disk (13 percent) and tape products (9 percent). These increases were partially
offset by decreases in high-end disk products (18 percent) as clients anticipated the shipment
of the company’s new POWER5 high-end storage product which will ship in the first
quarter of 2005. Engineering & Technology Services had strong revenue growth due to
increased design and technical services contracts and Microelectronics revenue increased
modestly as yields in the 300 millimeter plant improved.
Personal Systems Group revenue increased 12.4 percent (8.3 percent adjusting for
currency). The increase was driven by strong performance worldwide by the company’s
ThinkPad mobile computer (22 percent). Desktop personal computer revenue increased
(4 percent) in 2004 when compared to 2003 due primarily to favorable currency movements.
Retail Store Solutions revenue increased due to strong demand for the company’s
products and the acquisition of Productivity Solutions Inc. in November 2003. This acquisition
drove 6.9 points of the unit’s revenue growth in 2004. Printer Systems maintenance
revenue declined due to lower annuity-based revenue on a declining installed base.
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Hardware:
Gross profit $«9,552 $«8,461 12.9%
Gross profit margin 31.1% 30.4% 0.7pts.
Hardware gross profit dollars and gross profit margin increased in 2004 versus 2003. The
increase in gross profit dollars was primarily driven by the increase in Hardware revenue.
The increase in the overall hardware margin was driven by several factors. Improved yields
and lower unit costs in the Microelectronics business contributed 0.8 points of the increase.
In addition, margin improvements in zSeries, xSeries and Storage Systems contributed 0.5
points, 0.2 points and 0.1 point, respectively, to the overall margin improvement. These
improvements were partially offset by lower margins in iSeries, pSeries, Retail Store
Solutions and Printer Systems, which impacted the overall margin by 0.8 points, 0.3 points,
0.1 point and 0.1 point, respectively.
Differences between the hardware segment gross profit margin and gross profit dollar
amounts above and the amounts reported on page 19 (and derived from page 40) primarily
relate to the impact of certain hedging transactions (see “Anticipated Royalties and
Cost Transactions” on page 66). The recorded amounts for such impact are considered
unallocated corporate amounts for purposes of measuring the segment’s gross margin
performance and therefore are not included in the segment results above.
Software
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003* Change
Software Revenue: $«15,094 $«14,311 5.5%
Middleware $«11,963 $«11,240 6.4%
WebSphere family 14.2
Data Management 6.6
Lotus 2.7
Tivoli 15.0
Rational 15.5
Other middleware 1.8
Operating systems 2,474 2,452 0.9
Other 657 619 6.1
* Reclassified to conform with 2004 presentation.
Software revenue increased 5.5 percent (0.6 percent adjusted for currency). Middleware
revenue increased 6.4 percent (1.5 percent adjusted for currency). The WebSphere family
of software offerings revenue increased 14 percent with growth in business integration
software (14 percent), WebSphere Portal software (12 percent) and application servers
(20 percent). Data Management revenue increased 7 percent with growth of 12 percent in
DB2 Database software on both the host (13 percent) and distributed platforms (11 percent),
DB2 Tools (8 percent), and distributed enterprise content management software
(23 percent). Rational software revenue increased (15 percent) with growth across all product
areas. Tivoli software revenue increased (15 percent), aided by the Candle acquisition,
which was completed in the second quarter of 2004. Tivoli systems management, storage
and security software all had revenue growth in 2004 versus 2003. Lotus software revenue
increased 3 percent and Other Foundation middleware products revenue also increased
2 percent due to favorable currency movements.
Operating system software increased due to growth in xSeries and pSeries, which correlates
to the increases in the related server brands. zSeries operating system revenue
declined 1 percent despite the growth in related hardware volumes due to ongoing software
price performance delivered to enterprise clients. iSeries operating system software
declined 6 percent in line with related hardware volumes. Overall, operating systems
software revenue increased primarily as a result of favorable currency movements.
(Dollars in millions)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 Change
Software:
Gross profit $«13,175 $«12,384 6.4%
Gross profit margin 87.3% 86.5% 0.8pts.
The increase in the Software gross profit dollars and gross profit margin was primarily
driven by growth in software revenue due to favorable currency movements, as well as
productivity improvements in the company’s support and distribution models.
Global Financing
See pages 35 and 36 for a discussion of Global Financing’s revenue and gross profit.
Enterprise Investments
Revenue from Enterprise Investments increased 10.8 percent (4.2 percent adjusted for
currency). Revenue for product life-cycle management software increased primarily in the
automotive and aerospace industries, partially offset by lower hardware revenue (48 percent),
primarily for document processors. Gross profit dollars increased 12.4 percent and
gross profit margins increased 0.6 points to 44.2 percent in 2004 versus 2003. The increase
in gross profit dollars was primarily driven by the increase in revenue. The gross profit
margin increase was primarily driven by higher life-cycle management software margins
driving 0.8 points of the increase, partially offset by lower margins on document processors
due to discounting, which impacted the overall margin by 0.2 points.
financial position
Dynamics
The assets and debt associated with the company’s Global Financing business are a significant
part of the company’s financial condition. Accordingly, although the financial
position amounts appearing below and on pages 24 and 25 are the company’s consolidated
amounts including Global Financing, to the extent the Global Financing business is a major
driver of the consolidated financial position, reference in the narrative section will be made
to the separate Global Financing section in this Management Discussion on pages 35 to
39. The amounts appearing in the separate Global Financing section are supplementary
data presented to facilitate an understanding of the company’s Global Financing business.
Working Capital
(Dollars in millions)
AT DECEMBER 31: 2004 2003*
Current assets $«46,970 $«44,662
Current liabilities 39,798 37,623
Working capital $«««7,172 $«««7,039
Current ratio 1.18:1 1.19:1
* Reclassified to conform with 2004 presentation.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
23
ibm annual report 2004
Current assets increased $2,308 million driven by an increase of $2,923 million in Cash
and cash equivalents and Marketable securities. Also, Inventories increased $374 million
primarily driven by new product transitions and increased capacity in the 300 millimeter
semiconductor fab. These increases were partially offset by an overall decrease in the
company’s current receivables of $787 million. The current receivables net decrease was
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
24
ibm annual report 2004
a combination of several factors: a decline of $1,782 million in Short-term financing
receivables as collections exceeded new originations; an increase in Other accounts
receivable of $499 million as a long-term receivable related to the sale of the HDD business
is now reflected as current; and an increase in Notes and accounts receivable—trade of
$496 million as a result of favorable currency movements.
Current liabilities increased $2,175 million primarily due to a $1,453 million increase
in Short-term debt, a $984 million increase in Accounts payable, and a $683 million
increase in Deferred income driven by Global Services business growth in 2004. These
increases were partially offset by a decrease of $747 million in Taxes payable primarily due
to the Internal Revenue Service (IRS) settlement described in note p, “Taxes” on page 73,
and $331 million in Other accrued expenses and liabilities primarily due to decreases of
approximately $160 million in restructuring accruals.
Cash Flow
The company’s cash flows from operating, investing and financing activities, as reflected in
the Consolidated Statement of Cash Flows on pages 44 and 45, are summarized in the
table below. These amounts include the cash flows associated with the company’s Global
Financing business. See pages 35 to 39.
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003
Net cash provided by/(used in) continuing operations:
Operating activities $«15,406 $«14,569
Investing activities (5,346) (5,122)
Financing activities (7,619) (7,798)
Effect of exchange rate changes on cash and cash equivalents 405 421
Net cash used in discontinued operations* (83) (162)
Net change in cash and cash equivalents $«««2,763 $«««1,908
* Does not include approximately $97 million in 2003 of net proceeds from the sale of the HDD business. Such proceeds
are included in Net cash provided by Investing activities in the table above.
Net cash provided from operating activities for the year ended December 31, 2004
increased $837 million as compared to 2003. This increase was driven primarily by
increased income from continuing operations ($835 million), the cash generated by the
change in Global Financing receivables ($582 million) and lower restructuring payments
($462 million). These increases were partially offset by additional pension funding worldwide
in 2004 of $1.2 billion.
Net investing activities increased by $224 million on a year-to-year basis. Net capital
spending decreased $190 million on a year-to-year basis. The primary drivers to the reduction
in net capital spending were increased cash from equipment sales of $272 million
reflecting the cash investments of the company’s Microelectronics business strategic
partners, as well as a $25 million decrease in the company’s internal spending on plant,
rental machines and other property. This cash savings was partially offset by an increase of
$107 million in capitalized software development.
The decrease in cash used in financing activities of $179 million was attributable to
less net debt payments of $2,454 million, partially offset by higher net payments for
common stock activity of $2,186 million, and higher dividend payments of $89 million.
Within debt, on a net basis, $1,027 million of cash was used to pay off debt in 2004 versus
$3,481 million in 2003. The net cash payments of $1,027 million in 2004 were made up
of $4,538 million of cash payments to settle debt, partially offset by $2,438 million of
proceeds from new debt and $1,073 million from an increase in short-term borrowings.
The higher payments for common stock were driven by increases of approximately
$2,802 million in cash payments to repurchase stock which was partially offset by increases
of $616 million in cash received for stock issued associated with the company’s stock
option plan and employee stock purchase plan.
Non-current Assets and Liabilities
(Dollars in millions)
Yr. to Yr.
DECEMBER 31: 2004 2003* Change
Non-current assets $«62,213 $«59,795 4.0%
Long-term debt 14,828 16,986 (12.7)
Non-current liabilities (excluding debt) 24,810 21,984 12.9
* Reclassified to conform with 2004 presentation.
The increase in Non-current assets of $2,418 million was driven by several factors: an
increase of $1,968 million in Prepaid pension assets (see note w, “Retirement-Related
Benefits,” on pages 78 through 86); an increase of $1,516 million in Goodwill, driven by
acquisitions; and an increase of $486 million in Plant, rental machines and other property—
net, driven by currency. These increases were partially offset by a decrease of $1,826 million
in Investments and sundry assets due to a decrease of $1,264 million in deferred tax
assets primarily due to the IRS settlement (see note p, “Taxes” on page 73) and $647 million
in non-current derivatives due primarily to the reclassification of derivative instruments.
Long-term debt declined $2,158 million primarily due to the transfer of long-term
bonds to short-term debt as these items approach maturity.
Other non-current liabilities increased $2,826 million primarily due to a $1,632 million
increase in Retirement and nonpension postretirement benefit obligations, a $380 million
increase in Deferred income, a $317 million increase in Derivative liabilities and a $138
million increase in warranty accruals. The increase in the Retirement and nonpension
postretirement benefit obligations was primarily attributable to the required accounting
for the unfunded status of the non-U.S. pension plans as described on page 83, as well as
pension costs and approximately $544 million due to foreign currencies. The increase in
Deferred income was driven by Global Services resulting from new contracts with longterm
components. The increase in Derivative liabilities was primarily attributable to the
impact of foreign currencies in combination with extending beyond one year the hedging
of anticipated royalties and cost transactions during 2004 (see note l, “Derivatives and
Hedging Transactions” on pages 65 to 67). The increase in warranty accruals was primarily
related to personal computers resulting from increased volumes.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
25
ibm annual report 2004
Debt
The company’s funding requirements are continually monitored and strategies are executed
to manage the company’s overall asset and liability profile. Additionally, the company
maintains sufficient flexibility to access global funding sources as needed.
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Total company debt $«22,927 $«23,632
Non-Global Financing debt* ««««««607 «««368
Non-Global Financing debt/capitalization 2.2% 1.5%
* Non-Global Financing debt is the company’s total external debt less the Global Financing debt described in the Global
Financing balance sheet on page 36.
Non-Global Financing debt increased $239 million and the debt-to-capital ratio at
December 31, 2004 was well within acceptable levels at 2.2 percent.
Equity
(Dollars in millions)
Yr. to Yr.
AT DECEMBER 31: 2004 2003 Change
Stockholders’ equity:
Total $«29,747 $«27,864 6.8%
The company’s total consolidated Stockholders’ equity increased $1,883 million during
2004 primarily due to an increase in the company’s retained earnings driven by net
income, partially offset by the company’s ongoing stock repurchase program and higher
dividend payments.
Off-Balance Sheet Arrangements
The company, in the ordinary course of business, entered into off-balance sheet arrangements
as defined by the Securities and Exchange Commission (SEC) Financial Reporting
Release 67 (FRR-67), “Disclosure in Management’s Discussion and Analysis about Off-
Balance Sheet Arrangements and Aggregate Contractual Obligations,” including: certain
guarantees, indemnifications and retained interests in assets transferred to an unconsolidated
entity for securitization purposes.
None of these off-balance sheet arrangements either has, or is reasonably likely to
have, a material current or future effect on financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources. See page 31 for the company’s contractual obligations.
See note o, “Contingencies and Commitments,” on page 71, for detailed information
about the company’s guarantees on certain loans and financial commitments, indemnification
arrangements and note j, “Sale and Securitization of Receivables” on page 64 for
detailed information regarding loans receivable securitization program.
consolidated fourth quarter results
(Dollars and shares in millions except per share amounts)
Yr. to Yr.
FOR FOURTH QUARTER: 2004 2003 Change
Revenue $«27,671 $«25,913 6.8% *
Gross profit margin 39.2% 38.4% 0.8 pts.
Total expense and other income $«««6,488 $«««6,097 6.4%
Total expense and other income-to-revenue ratio 23.4% 23.5% (0.1) pts.
Provision for income taxes $«««1,309 $«««1,162 12.7%
Income from continuing operations $«««3,055 $«««2,716 12.5%
Earnings per share from continuing operations:
Assuming dilution $÷÷«1.81 $«««««1.56 16.0%
Basic $÷÷«1.84 $÷÷«1.59 15.7%
Weighted-average shares outstanding:
Assuming dilution 1,691.6 1,745.7 (3.1) %
Basic 1,659.0 1,708.5 (2.9) %
* 2.7 percent increase adjusting for currency
Continuing Operations
The increase in the company’s fourth quarter 2004 Income from continuing operations and
diluted earnings per share from continuing operations as compared to the fourth quarter
of 2003 was due to:
• The increased demand for the company’s offerings associated with moderate
expansion of the economy, as well as the company’s continued market share gains
• Favorable impact of currency translation partly offset by related hedging activity
The following is an analysis of the external segment results.
Global Services revenue increased 10.1 percent (5.7 percent adjusting for currency). SO
revenue increased 12 percent as each geography had year-to-year revenue growth. ITS
revenue increased 8 percent helped by continued growth in Business Continuity and
Recovery Services. BCS revenue increased 12 percent year-to-year, with double-digit
growth in both the Americas and Asia Pacific and high single-digit growth in EMEA.
The company achieved Global Services signings of $12.7 billion, including 13 signings
over $100 million.
The company’s Systems & Technology Group revenue grew 4.9 percent (1.3 percent
adjusting for currency). xSeries server revenue increased 25 percent year-to-year driven by
solid performance in both high-end and 1&2 Way servers. The IBM Blade servers continued
their strong growth in the fourth quarter of 2004. pSeries revenue increased 15 percent
year-to-year in the fourth quarter, reflecting very strong client acceptance of the POWER5
systems technology. OEM grew 10 percent year-to-year in the fourth quarter driven by
improved yields in the 300 millimeter line where output grew 40 percent versus the
third quarter and Engineering & Technology Services business revenue grew at 61 percent
year-to-year. These increases were partially offset by lower zSeries server revenue of
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
26
ibm annual report 2004
4 percent on MIPS growth of 6 percent in the fourth quarter of 2004. iSeries server revenue
declined 9 percent year-to-year, however, strong customer acceptance of the refreshed
POWER5 iSeries drove sequential revenue growth. Storage Products revenue declined
11 percent year-to-year. Total Disk products declined 15 percent as the company transitions
to new products.
Personal Systems Group revenue increased 1.8 percent (declined 1.7 percent adjusting
for currency) driven by increased ThinkPad mobile computers. The company experienced
some disruption due to the Lenovo agreement, which was announced in the seasonally
strongest month of the year.
Software revenue increased 7.0 percent (2.9 percent adjusting for currency). The
WebSphere family of software products grew 18 percent for the quarter. Application servers
grew 33 percent following the October announcement of a new release that provided
improved security and integration of Web Services. Business Integration products grew
17 percent. Rational revenue grew 8 percent in the quarter, with growth across all product
areas. Data Management software grew 8 percent as DB2 database software grew 15 percent,
driven by double-digit growth in both host and distributed platforms and distributed enterprise
content management software grew 31 percent. Tivoli software increased 25 percent,
as Systems Management software grew 31 percent, storage software increased 19 percent
and security software increased 9 percent. Lotus software increased 5 percent as Domino
products grew 2 percent for the quarter driven by the Notes messaging products. Other
Foundation middleware products declined 2 percent for the quarter.
Global Financing revenue declined 10.4 percent (13.5 percent adjusting for currency)
driven primarily by a decline in used equipment sales.
The company’s gross profit margin increased 0.8 percentage points to 39.2 percent.
The Hardware gross profit margin improved 2 percentage points with improving margins
in most product areas. Global Financing gross profit margin improved 7.5 percentage
points to 59.7 percent primarily driven by improved used equipment sales and financing
margins and an improvement in mix toward higher margin financing revenue. Global
Services and Software gross profit margin improved slightly year-over-year.
Total expense and other income increased 6.4 percent in the fourth quarter and revenue
increased 6.8 percent resulting in the total expense-to-revenue ratio improvement of
0.1 point to 23.4 percent. Retirement-related plan expenses increased $150 million yearto-
year and were partially offset by lower workforce rebalancing expense of $75 million.
RD&E expense increased 8.2 percent or $112 million, driven by increased spending in the
Software and the Systems and Technology Group segments. In addition, the company
recorded a provision for litigation-related expenses of $125 million in SG&A and the
effects of currency was an addition to expense of approximately $150 million in the fourth
quarter of 2004.
The company’s 2004 fourth quarter effective tax rate was 30.0 percent, the same as 2003.
Share repurchases totaled approximately $2.9 billion in the fourth quarter. The
weighted-average number of diluted common shares outstanding in the quarter was
1,691.6 million compared with 1,745.7 million in the 2003 fourth quarter, lower by 54.1
million shares. The decreased amount of shares was driven primarily by the company’s
ongoing common share repurchase program.
The company generated slightly lower cash flows from operations in the 2004 fourth
quarter as compared to the 2003 fourth quarter primarily due to higher pension funding
driven by the $700 million funding of the PPP and approximately $500 million funding of
non-U.S. plans. The company also had an increase in acquisitions (primarily the Maersk
Data/DMdata acquisition in the fourth quarter of 2004) compared to the same period of
2003. Finally, the company repurchased $2,932 million in shares during the 2004 fourth
quarter compared with $3,069 million in shares repurchased during the 2003 fourth quarter.
Prior Year in Review
(Dollars and shares in millions except per share amounts)
Yr. to Yr.
FOR THE YEAR ENDED DECEMBER 31: 2003 2002 Change
Revenue $«««89,131 $«81,186 9.8% *
Gross profit margin 37.0% 37.3% (0.3) pts.
Total expense and other income $÷«22,144 $«22,760 (2.7) %
Total expense and other income-to-revenue ratio 24.8% 28.0% (3.2) pts.
Provision for income taxes $«÷÷3,261 $«««2,190 48.9%
Income from continuing operations $÷÷«7,613 $«««5,334 42.7%
Earnings per share from continuing operations:
Assuming dilution $÷÷÷«4.34 $«««««3.07 41.4%
Basic $÷÷÷«4.42 $÷÷«3.13 41.2%
Discontinued operations:
Loss $÷÷÷÷««30 $«««1,755 NM
Diluted earnings per share $÷÷««(0.02) $««««(1.01) NM
Basic earnings per share $«÷÷«(0.02) $««««(1.03) NM
Weighted-average shares outstanding:
Assuming dilution 1,756.1 1,730.9 1.5%
Basic 1,721.6 1,703.2 1.1%
Assets** $«104,457 $«96,484 8.3%
Liabilities** $«÷76,593 $«73,702 3.9%
Equity** $«÷27,864 $«22,782 22.3%
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
27
ibm annual report 2004
continuing operations
The increase in the company’s 2003 Income from continuing operations and diluted
earnings per share from continuing operations as compared to 2002 was due to:
• The results of the company’s productivity and efficiency initiatives, including the
benefits from the 2002 Microelectronics and productivity restructuring actions
• Stronger demand associated with the improving economy (especially during the
fourth quarter) and continued market share gains
• The charges recorded in 2002 for the 2002 actions (See note s, “2002 Actions” on
pages 73 through 76 for additional information.)
• Favorable impact of currency translation, partly offset by related hedging activities
The increase in revenue in 2003 as compared to 2002 was due to:
• Stronger demand associated with the improving economy (especially during the
fourth quarter) and continued market share gains
• The impact of the fourth quarter 2002 acquisition of PricewaterhouseCoopers’ consulting
business (PwCC) and the first quarter 2003 acquisition of Rational, partially
offset by decreases in revenue due to Systems and Technology Group divestitures
• The favorable impact of currency translation, which contributed 7.0 points of the
9.8 percent revenue increase
Revenue for all industry sectors increased in 2003 on an as-reported basis, which has
been reclassified to conform with the 2004 presentation. The Financial Services sector
(12.5 percent), Public sector (14.3 percent), and Industrial sector (14.8 percent) were
among the strongest, with continued growth (12.5 percent) in the Small & Medium
Business sector. These results reflect the company’s go-to-market strategy of designing
industry-specific solutions.
Full-year geographic revenue increased across all geographies. In the Americas
revenue increased 5 percent. U.S. (3 percent) and Canada (13 percent) revenue grew as
did Latin America (6 percent), notably in Brazil (26 percent). In Europe/Middle East/Africa,
revenue increased 20 percent and was highest in the U.K. (17 percent), Central Europe and
Middle East and Africa. In Asia Pacific revenue increased 13 percent, while 2003 revenue
for Japan, which is about 60 percent of the region’s revenue, increased 7 percent compared
with 2002. Australia/New Zealand (32 percent) also achieved strong performance
within Asia Pacific.
While OEM revenue, representing three percent of the company’s revenue, declined,
the decline was smaller than the prior year decline. The year-to-year percent change in
revenue (a decline of 21.4 percent) reflects, in large part, the company’s exit from its interconnect
products business in 2002, as well as sluggish demand from certain OEM clients.
The following is an analysis of external segment results.
Global Services
Global Services revenue increased 17.3 percent (9.3 percent at constant currency) in 2003
versus 2002. SO revenue increased 14.2 percent in 2003 primarily driven by new signings.
SO continued to demonstrate its competitive advantage in delivering on demand solutions
by leveraging its business transformation skills and its scale during 2003. e-business
Hosting Services, an offering that provides Web infrastructure and application management
as an Internet-based service, continued its strong pattern of revenue growth. BCS
revenue increased 37.5 percent in 2003 due to the acquisition of PwCC in the fourth quarter
of 2002. ITS revenue increased 3.3 percent due to the favorable impact of currency movements.
During 2003, the company changed its reporting for certain OEM hardware sales
to the company’s clients from gross to net revenue treatment based upon a review of the
terms of these sales. The company determined that the agent-like characteristics of
these transactions were more appropriately recorded on a net revenue basis. Due to the
amounts involved, the prior year amounts were not adjusted. As a result of this change in
2003, revenue and costs for ITS were lower by $279 million in 2003 as compared to 2002,
partially offsetting the currency impact discussed above. This change had no impact on
the company’s gross profit dollars, net income or cash flows. The company signed $55 billion
of services contracts in 2003, an increase of $2 billion versus 2002. The estimated
services backlog at December 31, 2003, was $120 billion.
Hardware Segments
Systems and Technology Group revenue increased 1.7 percent (decreased 4.2 percent at
constant currency) in 2003 versus 2002. xSeries server products revenue increased 16.8 percent
due to growth in sales of high-volume servers supported by strong growth in blades.
The pSeries server revenues increased 12.5 percent due to strong demand for the 64-bit
POWER systems across both the low-end and high-end server offerings. Revenue from the
zSeries servers increased 7.4 percent. The total delivery of zSeries computing power as
measured in MIPS increased more than 28 percent in 2003 as compared to 2002. This
increase was offset by lower average price per MIPS in 2003 of 19 percent versus 2002.
Revenue from the iSeries servers increased in all four quarters of 2003 when compared to
2002. Storage Systems revenue increased 9.8 percent due to growth in external disk and
tape products.
Microelectronics revenue declined 31.6 percent in 2003 versus 2002 driven by actions
taken in 2002 to refocus and redirect its business to high-end foundry, ASICs and standard
products. These actions included the divestiture of multiple non-core businesses. There
was also sluggish demand from certain OEM clients that contributed to this decline.
Personal Systems Group revenue increased 3.1 percent (down 2.5 percent at constant
currency) in 2003 versus 2002. Revenue from mobile personal computers increased
(10.9 percent) due to strong demand and was offset by lower desktop personal computer
revenue (4.0 percent). The decreased desktop revenue primarily reflects the fact that
increased volume gains were not enough to offset a reduction in price due to decreasing
commodity costs.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
28
ibm annual report 2004
Software
Software revenue increased 9.4 percent (1.9 percent at constant currency) in 2003 versus
2002, driven by Middleware software products. The WebSphere family of software offerings
revenue increased 11.8 percent as clients continued to focus on the higher function
products that integrate Web-based applications, including advanced collaboration technology,
on a user’s desktop. The lower-function WebSphere application server continued
to commoditize. Improved demand was also noted for Data Management DB2 database
software. Revenue from Tivoli products increased 12.0 percent as clients continue to realize
the on demand attributes of Tivoli products, enabling businesses to securely automate
many of their processes and gain operational efficiencies. Operating system software
revenue increased 6.2 percent due to the favorable impacts of currency movements.
Offsetting these increases were lower demand for DB2 tools, Lotus advanced collaboration
software, and Other middleware software. A new Lotus messaging platform became
generally available during the 2003 fourth quarter and helped to drive momentum in the
Lotus Notes family of products towards the end of 2003. Overall, the increase in total
Software revenue was mainly due to the acquisition of Rational in the first quarter of 2003.
When compared to the separately reported 2002 external revenue amounts for Rational,
its revenue increased approximately 6 percent in 2003.
Global Financing
See pages 35 to 39 for prior year review of Global Financing.
Enterprise Investments
Revenue from Enterprise Investments increased 4.2 percent (down 5.1 percent at constant
currency) in 2003 versus 2002. The decline was attributable to demand for product lifecycle
management software in the European market, especially in the automotive and
aerospace industries.
The company’s gross profit margins remained relatively flat. Increases in margins for
Hardware of 0.7 point resulting from the ongoing benefits from the company’s integrated
supply chain initiatives and Software of 2.1 points resulting from favorable currency translation
were offset by decreases in Global Services margins of 1.1 points driven primarily
by investment costs on the early stages of an SO contract and the company’s changing mix
of revenue toward BCS.
As discussed above, there were several charges in 2002 that impacted the year-toyear
expense comparison. These items contributed 2.8 points of the improvement in the
Total expense and other income-to-revenue ratio. The remaining improvement was primarily
due to the results of productivity and efficiency initiatives offset by an increase in retirement-
related plans cost.
The company’s effective tax rate increased from 29.1 percent in 2002 to 30.0 percent
in 2003. This increase was primarily due to a less favorable mix of geographic income and
the absence of the tax benefit associated with the Microelectronics actions taken in the
second quarter of 2002.
With regard to Assets, approximately $7 billion of the increase relates to the impact of
currency translation. The remaining increase primarily consists of an increase in Goodwill
of $2.8 billion associated with recent acquisitions, increased pension assets of $2.4 billion,
as well as strong cash performance. The increase in cash during 2003 was due to the combination
of stronger operating results and lower pension funding. The company reduced
non-Global Financing debt in 2003 as a result of strong cash flows from operations. Global
Financing debt also decreased, but the company’s Global Financing debt-to-equity ratio
remained flat at 6.9 to 1 and within the company’s target range.
The ratio of unguaranteed residual value as a percentage of the related original
amount financed declined 0.3 point to 3.6 percent at December 31, 2003, as compared
to December 31, 2002, due to an increase in the percentage of leases that contain bargain
purchase options.
discontinued operations
On December 31, 2002, the company sold its HDD business to Hitachi for approximately
$2 billion. The majority of the cash was received with the remaining payment due in
December 2005. The HDD business was accounted for as a discontinued operation
whereby the results of operations and cash flows were removed from the company’s results
from continuing operations for all periods presented.
The company incurred a loss from discontinued operations of $1,755 million in 2002,
net of tax. The loss in 2002 was due to (amounts are net-of-tax):
• Loss on operational results ($620 million)
• Loss on sale ($382 million)
• Certain actions taken by the company in the second and fourth quarters of 2002
($508 million) related to the HDD business
• Inventory write-offs resulting from a strategic decision to cease reworking and selling
efforts for some of the older HDD products after the announcement of the divestiture
plans ($245 million)
Looking Forward
The following key drivers impacting the company’s business are discussed on page 17:
• Economic environment and corporate IT spending budgets
• Internal business transformation and efficiency initiatives
• Innovation initiatives
• Open standards
• Emerging business opportunities
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
29
ibm annual report 2004
With respect to the economic environment, while it is always difficult to predict future
economic trends, in 2004 the economic environment improved—shifting from a period of
recovery to moderate expansion. Going forward, we anticipate moderate growth for the
traditional IT industry. Several factors—including increasing complexity and globalization—
are driving clients to transform their businesses. The year-to-year and sequential quarterly
growth trend comparisons achieved by the company are indicators of this improvement.
With respect to business transformation and the continual conversion of the company
into an on demand business, the company’s supply chain initiatives are expected to allow
continued flexibility to drive additional competitive advantages. The company will continue
to focus on increased productivity and efficiency to accelerate the globalization and
transformation of its global business model.
Finally, with respect to technology, in 2004 the company has again been awarded
more U.S. patents than any other company for the twelfth year in a row. The company continues
to focus internal development investments on high-growth opportunities and to
broaden its ability to deliver industry- and client-specific solutions.
From a client-set perspective, the strong momentum in 2004 with respect to the Small
& Medium Business sector should continue. We anticipate continued growth in the
Communications, Distribution and Public sectors, however, the Financial Services sector
growth may moderate.
The company also will selectively pursue acquisitions, primarily in the Global Services
and Software segments, where it believes these acquisitions will expand its portfolio to
meet clients’ needs.
Global Services Signings
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Longer-term* $«22,857 $«34,608 $«33,068
Shorter-term* 20,146 20,854 20,020
Total $«43,003 $«55,462 $«53,088
* Longer-term contracts are generally 7 to 10 years in length and represent SO and longer-term business transformation
contracts as well as those BCS contracts with the U.S. federal government and its agencies. Shorter-term are contracts
generally 3 to 9 months in length and represent the remaining BCS and ITS contracts. These amounts have been
adjusted to exclude the impact of year-to-year currency changes.
Global Services signings are management’s initial estimate of the value of a client’s commitment
under a Global Services contract. Signings are used by management to assess
period performance of Global Services management. There are no third-party standards
or requirements governing the calculation of signings. The calculation used by management
involves estimates and judgments to gauge the extent of a client’s commitment,
including the type and duration of the agreement, and the presence of termination
charges or wind-down costs. For example, for longer-term contracts that require significant
up-front investment by the company, the portions of these contracts that are counted
as a signing are those periods in which there is a significant economic impact on the client
if the commitment is not achieved, usually through a termination charge or the customer
incurring significant wind-down costs as a result of the termination. For shorter-term contracts
that do not require significant up-front investments, a signing is usually equal to the
full contract value.
Signings includes SO, BCS and ITS contracts. Contract extensions and increases in
scope are treated as signings only to the extent of the incremental new value. Maintenance
is not included in signings as maintenance contracts tend to be more steady-state, where
revenues equal renewals, and therefore, the company does not think they are as useful a
predictor of future performance.
Backlog includes SO, BCS, ITS and Maintenance. Backlog is intended to be a statement
of overall work under contract and therefore does include Maintenance. Backlog estimates
are subject to change and are affected by several factors, including terminations, changes
in scope of contracts (mainly long-term contracts), periodic revalidations, and currency
assumptions used to approximate constant currency.
Contract portfolios purchased in an acquisition are treated as positive backlog adjustments
provided those contracts meet the company’s requirements for initial signings. A
new signing will be recognized if a new services agreement is signed incidental or coincident
to an acquisition.
Although signings and backlog declined in 2004, Global Services improved its yearto-
year revenue growth rate—excluding the benefit of currency—on a sequential basis in
2004. This increase in Global Services growth rate is due to the improving yield of its backlog
and current signings. The average duration of new contracts has shortened, and the
company continues to drive additional revenue from its contract base through volumes
and scope expansion.
The combination in 2004 of the company’s Systems Group and Technology Group will
continue to benefit the company’s ability to integrate key semiconductor and other core
technology innovations into solutions for clients. The company continues to leverage its
eServer zSeries mainframe technology investments across its server and storage portfolio.
The ability to share elements of this technology such as security, automation, and virtualization,
with the more commoditized platforms is a key competitive advantage for IBM.
Given the commoditized nature of the personal computer industry and the company’s
announced agreement to sell its Personal Computing Division, its first half results may be
more volatile than in the company’s other businesses. The company plans to take the necessary
actions to mitigate those impacts. The divestiture is expected to close in the second
quarter of 2005.
The key to the company’s growth in Software will be clients’ continued adoption of its
on demand solutions. The key differentiating factor for the company is the strength and
breadth of its middleware portfolio. Software is a key component of on demand solutions,
and the company will continue to invest in this strategic area and strengthen its portfolio
through acquisitions. In addition, the company will continue to build a strong partner
ecosystem to drive growth.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
30
ibm annual report 2004
Given the declining interest rate environment, the company reduced its discount rate
assumption for the PPP by 25 basis points to 5.75 percent on December 31, 2004. The
company will keep the expected long-term return on PPP assets at 8 percent. The actual
return on PPP plan assets in 2004 was 13 percent. With similar overall trends in these
assumptions worldwide, as well as the impact of the recent years’ changes in the market
value of plan assets, the year-to-year impact from retirement related plans on pre-tax
income in 2005 will be approximately $1.0 billion higher as compared to 2004, excluding
the 2004 one-time charge of $320 million related to the partial settlement of certain legal
claims against the PPP.
The amount of IP and custom development income has been declining in recent
years. Although it was flat in 2004, the overall declining trend may continue as the company
does not expect it to be a contributor to growth. The overall level of IP is dependent
on several factors: divestitures, industry consolidation, economic conditions and the timing
of new patent development.
In the normal course of business, the company expects that its effective tax rate will
approximate 30 percent. The rate will change year-to-year based on nonrecurring events
(such as the tax effect of the pension claims settlement in 2004 or a possible repatriation
charge in 2005 as described in note p, “Taxes” on page 73) as well as recurring factors
including the geographic mix of income before taxes, the timing and amount of foreign
dividends, state and local taxes, and the interaction of various global tax strategies.
american jobs creation act of 2004
In 2001, the World Trade Organization (WTO) determined that tax provisions of the FSC
Repeal and Extraterritorial Income (ETI) Exclusion Act of 2000 constituted an export subsidy
prohibited by the WTO Agreement on Subsidies and Countervailing Measures Agreement.
As a result, the U.S. enacted the American Jobs Creation Act of 2004 (the “Act”) in October
2004. The Act repeals the ETI export subsidy for transactions after 2004 with two years of
transition relief (2005–2006). The Act also provides a nine-percent deduction for income
from qualified domestic production activities which will be phased in over 2005–2010.
While the net impact of certain legislative provisions has not been fully evaluated, the
company does not expect this legislation to affect its ongoing effective tax rate for 2005
or 2006.
Also, the Act includes a temporary incentive for the company to repatriate earnings
accumulated outside the U.S. The current status of the company’s evaluation and potential
impacts are discussed in note p, “Taxes,” on page 73.
liquidity and capital resources
The company generates strong cash flow from operations, providing a source of funds
ranging between $8.8 billion and $15.4 billion per year over the past five years. The company
provides for additional liquidity through several sources—a sizable cash balance,
access to global funding sources, a committed global credit facility and in 2004, the company
converted a receivables securitization facility from an “uncommitted” to a “committed”
facility, adding an additional source of liquidity. (See note j, “Sale and Securitization
of Receivables” on page 64 for additional information.) The table below provides a summary
of these major sources of liquidity as of the end of fiscal years 2000 through 2004.
Cash Flow and Liquidity Trends
(Dollars in billions)
AT DECEMBER 31: 2004 2003 2002 2001 2000
Net cash from operating activities $«15.4 $«14.6 $«13.8 $«14.0 $«««8.8
Cash and marketable securities 10.6 7.6 6.0 6.4 3.7
Size of global credit facilities 10.0 10.0 12.0 12.0 10.0
Trade receivables securitization facility 0.5 — — — —
The major rating agencies’ ratings on the company’s debt securities at December 31, 2004
appear in the table below and remain unchanged over the past five years. The company
has no contractual arrangements that, in the event of a change in credit rating, would
result in a material adverse effect on its financial position or liquidity.
Standard Moody’s
and Investors Fitch
Poor’s Service Ratings
Senior long-term debt A+ A1 AACommercial
paper A-1 Prime-1 f-1+
The company prepares its Consolidated Statement of Cash Flows in accordance with
Statement of Financial Accounting Standards (SFAS) No. 95, “Statement of Cash Flows,” on
pages 44 and 45 and highlights causes and events underlying sources and uses of cash in
that format on page 24. For purposes of running its business, the company manages,
monitors and analyzes cash flows in a different format.
As discussed on page 35, one of the company’s two primary objectives of its Global
Financing business is to generate strong return-on-equity. Increasing receivables is the
basis for growth in a financing business. Accordingly, management considers Global
Financing receivables as a profit-generating investment —not as working capital that
should be minimized for efficiency. After classifying the Cash from/(for) Global Financing
receivables as an investment, the remaining net cash flow is viewed by the company as the
Cash available for investment and for distribution to shareholders. With respect to the
company’s cash flow analysis for internal management purposes, Global Financing
accounts receivables are combined with Global Financing debt to represent the Net
Global Financing receivables (a profit-generating investment).
Over the past five years, the company generated over $59.4 billion in Cash available
for investment and for distribution to shareholders. As a result, during the period the
company invested in $21.4 billion of net capital expenditures, invested $8.0 billion in
strategic acquisitions, received $1.4 billion from divestitures and returned $33.0 billion to
shareholders through dividends and share repurchases. The amount of prospective
Returns to shareholders in the form of dividends and share repurchases will vary based
upon several factors including affordability, namely each year’s operating results, capital
expenditures, research and development, and acquisitions, as well as the factors discussed
in the following table.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
31
ibm annual report 2004
The company’s Board of Directors meets quarterly to approve the dividend payment.
The company announced a dividend payment of $0.18 per common share, payable
March 10, 2005, which is the company’s 357th consecutive quarterly payment. The company
expects to fund the quarterly dividend payments through cash from operations.
The table below represents the way in which management reviews its cash flow as
described above.
(Dollars in billions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002 2001 2000
Net cash from operating activities
(comprised of): $«15.4 $«14.6 $«13.8 $«14.0 $««8.8
Cash from/(for) Global Financing
accounts receivable $«««2.5 $«««1.9 $«««3.3 $«««2.0 $«(2.5)
Cash available for investment and
for distribution to shareholders 12.9 12.7 10.5 12.0 11.3
Net Global Financing receivables 0.7 (0.7) 0.2 0.9 (0.6)
Net capital expenditures (3.7) (3.9) (4.6) (4.9) (4.3)
Net divestitures/(acquisitions) (1.7) (1.7) (2.0) (0.9) (0.3)
Returns to shareholders (8.3) (5.4) (5.2) (6.5) (7.6)
Other 2.9 0.9 0.2 2.2 —
Net change in cash and
cash equivalents $«««2.8 $«««1.9 $««(0.9) $«««2.8 $«(1.5)
Events that could temporarily change the historical cash flow dynamics discussed on page
30 include unexpected adverse impacts from litigation or future pension funding during
periods of severe and prolonged downturn in the capital markets. Whether any litigation
has such an adverse impact will depend on a number of variables, which are more completely
described on page 71.With respect to pension funding, on January 19, 2005 the company
contributed $1.7 billion to the qualified portion of the company’s PPP. This contribution
fulfilled a number of short-term and long-term strategic objectives. This contribution
reduces the probability of large future U.S. pension contributions by building a funding
buffer above the current liability level. In addition, it positions the company to further
reduce volatility in pension contributions and earnings over the long term. Finally, the
company will benefit from the return on these additional pension assets in 2005. The
increase in pension income produced from this funding will partially offset the impact of
year-end 2004 pension assumptions changes.
The company is not quantifying any further impact from pension funding because it is
not possible to predict future movements in the capital markets. However, for 2005, if
actual returns on plan assets for the PPP were less than 1 percent, the PPP’s accumulated
benefit obligation (ABO) would be greater than its Plan assets (assuming no other assumption
change). As discussed on page 83, such a situation may result in a further voluntary
contribution of cash or stock to the PPP or a charge to stockholders’ equity.
Contractual Obligations
(Dollars in millions)
Total
Contractual
Payment
Payments Due In
Stream 2005 2006-07 2008-09 After 2009
Long-term debt obligations $«17,664 $«3,175 $«4,396 $«2,614 $÷«7,479
Capital (Finance) lease obligations 56 46 8 1 1
Operating lease obligations 6,607 1,383 2,210 1,603 1,411
Purchase obligations 2,268 919 828 479 42
Other long-term liabilities:
Minimum pension funding
(mandated)* 2,384 361 1,175 848 —
Executive compensation 782 95 121 141 425
Environmental liabilities 246 28 25 23 170
Long-term termination benefits 2,406 344 483 334 1,245
Other 457 80 166 136 75
Total $«32,870 $«6,431 $«9,412 $«6,179 $«10,848
* These amounts represent future pension contributions that are mandated by local regulations or statute for retirees
receiving pension benefits. They are all associated with non-U.S. pension plans. The projected payments beyond 2009
are not currently determinable. See note w, “Retirement-related Benefits,” on pages 78 through 86 for additional information
on the non-U.S. plans’ investment strategies and expected contributions.
Purchase obligations include all commitments to purchase goods or services of either a fixed
or minimum quantity that meet any of the following criteria: (1) they are non-cancelable,
(2) the company would incur a penalty if the agreement was canceled, or (3) the company
must make specified minimum payments even if it does not take delivery of the contracted
products or services (“take-or-pay”). If the obligation to purchase goods or services is noncancelable,
the entire value of the contract is included in the above table. If the obligation
is cancelable, but the company would incur a penalty if canceled, the dollar amount of the
penalty is included as a purchase obligation. Contracted minimum amounts specified in
take-or-pay contracts are also included in the above table as they represent the portion of
each contract that is a firm commitment.
In the ordinary course of business, the company enters into contracts that specify
that the company will purchase all or a portion of its requirements of a specific product,
commodity, or service from a supplier or vendor. These contracts are generally entered
into in order to secure pricing or other negotiated terms. They do not specify fixed or
minimum quantities to be purchased and, therefore, the company does not consider
them to be purchase obligations.
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32
ibm annual report 2004
critical accounting estimates
The application of GAAP involves the exercise of varying degrees of judgment. While the
resulting accounting estimates will, by definition, not always precisely equal the related
actual results, eight of these estimates involve more judgment than others. Two of these
estimates are the allowance for uncollectible financing receivables and the fair value of
lease residual values. See page 39 for a discussion of these estimates. The others are discussed
below.
The sensitivity analyses used below are not meant to provide a reader with management’s
predictions of the variability of the estimates used. Rather, the sensitivity levels
selected (e.g., 5 percent, 10 percent, etc.) are included to allow users of the Annual Report
to understand a general-direction cause and effect of changes in the estimates.
Useful Lives of Microelectronics Plant and Equipment
The company determines the estimated useful lives and related depreciation charges for
its plants and equipment. For Microelectronics, this estimate is based on projected technology,
process and product life cycles that could change significantly due to technical
innovations and competitor actions in response to relatively severe industry cycles. To the
extent actual useful lives are less than previously estimated lives, the company will increase
its depreciation charge or will write-off or writedown technically obsolete or non-strategic
assets that have been abandoned or sold.
The company estimates useful lives of its Microelectronics equipment by reference to
the current and projected dynamics in the semiconductor industry, product/process life
cycles and anticipated competitor actions.
To the extent that Microelectronics actual useful lives differ from management’s estimates
by 10 percent, consolidated net income would be an estimated $62 million higher/lower
based upon 2004 results, depending upon whether the actual lives were longer/shorter,
respectively, than the estimates. To the extent that the actual lives were shorter by 10 percent,
it is estimated that there would have also been a lower-of-cost-or-market inventory
charge of less than $5 million.
Pension Assumptions
The expected long-term return on plan assets is used in calculating the net periodic pension
(income)/cost. See page 83 for information regarding the expected long-term return on
plan assets assumption. The differences between the actual return on plan assets and
expected long-term return on plan assets are recognized in the calculation of net periodic
pension (income)/cost over five years.
As described on page 83, if the fair value of the pension plan’s assets is below the
plan’s ABO, the company will be required to record a minimum liability. In some situations,
the pension asset must be partially reversed through a charge to stockholders’ equity.
The company may voluntarily make contributions or be required, by law, to make contributions
to the pension plans. Actual results that differ from the estimates may result in
more or less future company funding into the pension plans than is planned by management.
See page 31 for additional information and near-term sensitivities of actual returns
on funding decisions.
To the extent the outlook for long-term returns changes such that management
changes its expected long-term return on plan assets assumption, each 50 basis point
increase or decrease in the expected long-term return on PPP plan assets assumption will
have an estimated increase or decrease, respectively, of $229 million on the following year’s
pre-tax net periodic pension income (based upon the PPP’s plan assets at December 31,
2004 and the January 2005 contribution of $1.7 billion discussed further on page 84).
Another key management assumption is the discount rate. See page 83 for information
regarding the discount rate assumption. Changes in the discount rate assumptions
will impact the interest cost component of the net periodic pension income calculation
and due to the fact that the ABO is calculated on a net present value basis, changes in the
discount rate assumption will also impact the current ABO. An increase in the ABO caused
by a decrease in the discount rate may result in a voluntary contribution to a pension plan.
As discussed on page 30, the company reduced the discount rate assumption for the
PPP by 25 basis points to 5.75 percent on December 31, 2004. This change will increase
pre-tax cost and expense in 2005 by $90 million. Had the discount rate assumption for the
PPP increased by 25 basis points on December 31, 2004, pre-tax cost and expense would
have decreased by $91 million in 2005. As mentioned above, changes in the discount rate
assumption will impact the ABO which in turn, may impact the company’s funding decisions
if the ABO exceeds plan assets. In order to analyze the sensitivity of discount rate movements,
each 25 basis point increase or decrease in the interest rate will cause a corresponding
decrease or increase, respectively, in the PPP’s ABO of an estimated $1.1 billion based
upon December 31, 2004 data. Page 82 presents the PPP’s ABO (after the reduction in
discount rate discussed above) and plan assets as of December 31, 2004.
Impacts of these types of changes on the pension plans in other countries will vary
depending upon the status of each respective plan.
Costs to Complete Service Contracts
The company enters into numerous service contracts through its SO and BCS businesses.
SO contracts range for periods up to ten years and BCS contracts can be for several years.
During the contractual period, revenue, cost and profits may be impacted by estimates of
the ultimate profitability of each contract, especially contracts for which the company uses
the percentage-of-completion method of accounting. See page 50 for the company’s services
revenue recognition accounting policies. If at any time, these estimates indicate the
contract will be unprofitable, the entire estimated loss for the remainder of the contract is
recorded immediately.
The company performs ongoing profitability analyses of its services contracts in order
to determine whether the latest estimates require updating. Key factors reviewed by the
company to estimate the future costs to complete each contract are future labor costs and
productivity efficiencies.
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ibm annual report 2004
To the extent actual estimated completed contract margins on percentage of completion
services contracts differ from management’s quarterly estimates by 1 percentage point, the
company’s consolidated net income would have improved/declined by an estimated
$69 million using 2004 results, depending upon whether the actual results were higher/
lower, respectively, than the estimates. This amount excludes any accrual resulting from
contracts in loss positions. For all long-term services contracts that have an estimated
completed contract profit of 5 percent or less, if actual profits were 5 percentage points
less than expected, the consolidated net income would be reduced by an estimated
$85 million.
Net Realizable Value and Client Demand
The company reviews the net realizable value of and demand for its inventory on a quarterly
basis to ensure recorded inventory is stated at the lower of cost or net realizable value
and that obsolete inventory is written off. Inventories at higher risk for writedowns or writeoffs
are those in the industries that have lower relative gross margins and that are subject
to a higher likelihood of changes in industry cycles. The semiconductor and personal
computer businesses are two such industries.
Factors that could impact estimated demand and selling prices are the timing and
success of future technological innovations, competitor actions, supplier prices and
economic trends.
To the extent that semiconductor and personal computer inventory losses differ from
management estimates by 5 percent, the company’s consolidated net income in 2004
would have improved/declined by an estimated $42 million using 2004 results, depending
upon whether the actual results were better/worse, respectively, than expected.
Warranty Claims
The company generally offers three-year warranties for its personal computer products
and one-year warranties on most of its other products. The company estimates the amount
and cost of future warranty claims for its current period sales. These estimates are used to
record accrued warranty costs for current period product shipments. The company uses
historical warranty claim information as well as recent trends that might suggest that past
cost information may differ from future claims.
Factors that could impact the estimated claim information include the success of the
company’s productivity and quality initiatives, as well as parts and labor costs.
To the extent that actual claims costs differ from management’s estimates by 5 percent,
consolidated net income will have improved/declined by an estimated $32 million in
2004, depending upon whether the actual claims costs were lower/higher, respectively,
than the estimates.
Income Taxes
The company is subject to income taxes in both the U. S. and numerous foreign jurisdictions.
Significant judgment is required in determining the worldwide provision for income
taxes. During the ordinary course of business, there are many transactions and calculations
for which the ultimate tax determination is uncertain. As a result, the company recognizes
tax liabilities based on estimates of whether additional taxes and interest will be due. To
the extent that the final tax outcome of these matters is different than the amounts that
were initially recorded, such differences will impact the income tax provision in the period
in which such determination is made.
To the extent that the provision for income taxes increases/decreases by 1 percent
of income from continuing operations before income taxes, consolidated income from
continuing operations would have declined/improved by $120 million in 2004.
currency rate fluctuations
Changes in the relative values of non-U.S. currencies to the U.S. dollar affect the company’s
results. At December 31, 2004, currency changes resulted in assets and liabilities denominated
in local currencies being translated into more dollars than at year-end 2003. The
company uses a variety of financial hedging instruments to limit specific currency risks
related to financing transactions and other foreign currency-based transactions. Further
discussion of currency and hedging appears in note l, “Derivatives and Hedging Transactions,”
on pages 65 to 67.
The company earned approximately 58 percent of its net income in currencies other
than the U.S. dollar. In general, these currencies appreciated against the U.S. dollar during
2004 so net income in these countries translated into more dollars than they would have
in 2003. The company also maintains hedging programs to limit the volatility of currency
impacts on the company’s financial results. These hedging programs limit the impact of
currency changes on the company’s financial results but do not eliminate them. In addition
to the translation of earnings and the company’s hedging programs, the impact of currency
changes also may affect the company’s pricing and sourcing actions. For example, the
company may procure components and supplies in multiple functional currencies and sell
products and services in other currencies. Therefore, it is impractical to quantify the impact
of currency on these transactions and on consolidated net income. For these reasons, the
company believes that extended periods of dollar weakness are positive for net income
and extended periods of dollar strength are negative, although the precise impact is difficult
to assess.
For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic
environment is highly inflationary, translation adjustments are reflected in results of operations,
as required by SFAS No. 52, “Foreign Currency Translation.” Generally, the company
manages currency risk in these entities by linking prices and contracts to U.S. dollars and
by entering into foreign currency hedge contracts.
market risk
In the normal course of business, the financial position of the company is routinely subject
to a variety of risks. In addition to the market risk associated with interest rate and currency
movements on outstanding debt and non-U.S. dollar denominated assets and liabilities,
other examples of risk include collectibility of accounts receivable and recoverability of
residual values on leased assets.
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ibm annual report 2004
The company regularly assesses these risks and has established policies and business
practices to protect against the adverse effects of these and other potential exposures. As
a result, the company does not anticipate any material losses from these risks.
The company’s debt in support of the Global Financing business and the geographic
breadth of the company’s operations contains an element of market risk from changes in
interest and currency rates. The company manages this risk, in part, through the use of a
variety of financial instruments including derivatives, as explained in note l, “Derivatives
and Hedging Transactions,” on pages 65 to 67.
To meet disclosure requirements, the company performs a sensitivity analysis to determine
the effects that market risk exposures may have on the fair values of the company’s
debt and other financial instruments.
The financial instruments that are included in the sensitivity analysis comprise all of the
company’s cash and cash equivalents, marketable securities, long-term non-lease receivables,
investments, long-term and short-term debt and all derivative financial instruments.
The company’s portfolio of derivative financial instruments generally includes interest rate
swaps, interest rate options, foreign currency swaps, forward contracts and option contracts.
To perform the sensitivity analysis, the company assesses the risk of loss in fair values
from the effect of hypothetical changes in interest rates and foreign currency exchange
rates on market-sensitive instruments. The market values for interest and foreign currency
exchange risk are computed based on the present value of future cash flows as affected by
the changes in rates that are attributable to the market risk being measured. The discount
rates used for the present value computations were selected based on market interest and
foreign currency exchange rates in effect at December 31, 2004 and 2003. The differences
in this comparison are the hypothetical gains or losses associated with each type of risk.
Information provided by the sensitivity analysis does not necessarily represent the
actual changes in fair value that the company would incur under normal market conditions
because, due to practical limitations, all variables other than the specific market risk factor
are held constant. In addition, the results of the model are constrained by the fact that
certain items are specifically excluded from the analysis, while the financial instruments
relating to the financing or hedging of those items are included by definition. Excluded
items include leased assets, forecasted foreign currency cash flows and the company’s
net investment in foreign operations. As a consequence, reported changes in the values
of some of the financial instruments impacting the results of the sensitivity analysis are not
matched with the offsetting changes in the values of the items that those instruments are
designed to finance or hedge.
The results of the sensitivity analysis at December 31, 2004, and December 31, 2003,
are as follows:
Interest Rate Risk
At December 31, 2004, a 10 percent decrease in the levels of interest rates with all other
variables held constant would result in a decrease in the fair market value of the company’s
financial instruments of $172 million as compared with a decrease of $170 million at
December 31, 2003. A 10 percent increase in the levels of interest rates with all other variables
held constant would result in an increase in the fair value of the company’s financial
instruments of $153 million as compared to $152 million at December 31, 2003. Changes
in the relative sensitivity of the fair value of the company’s financial instrument portfolio for
these theoretical changes in the level of interest rates are primarily driven by changes in
the company’s debt maturity, interest rate profile and amount.
Foreign Currency Exchange Rate Risk
At December 31, 2004, a 10 percent weaker U.S. dollar against foreign currencies, with all
other variables held constant, would result in a decrease in the fair value of the company’s
financial instruments of $692 million as compared with a decrease of $283 million at
December 31, 2003. Conversely, a 10 percent stronger U.S. dollar against foreign currencies,
with all other variables held constant, would result in an increase in the fair value of
the company’s financial instruments of $679 million compared with $296 million at
December 31, 2003. In 2004 versus 2003, the reported increase in foreign currency
exchange rate sensitivity was primarily due to an increase in hedges of foreign cash flow.
financing risks
See the Global Financing—Description of Business on page 35 for a discussion of the
financing risks associated with the company’s Global Financing business and management’s
goals to mitigate such risks while striving for superior return on Global Financing’s equity.
Employees and Related Workforce
Percentage Changes
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002 2004-03 2003-02
IBM/wholly owned subsidiaries 329,001 319,273 315,889 3.0 1.1
Less-than-wholly owned subsidiaries 19,051 18,189 22,282 4.7 (18.4)
Complementary 21,225 17,695 17,250 19.9 2.6
Employees at IBM and its wholly owned subsidiaries in 2004 increased 9,728 from last
year. The company continues to invest in Global Services and Software, growth areas of
the business, through a combination of hiring and acquisitions. The company also continues
to rebalance its workforce to improve IBM’s competitiveness in the marketplace and to
withdraw from certain businesses, thereby offsetting some of the growth.
MANAGEMENT DISCUSSION
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35
ibm annual report 2004
In less-than-wholly owned subsidiaries, the number of employees increased from last
year. The increase is primarily in the International Information Products Company, a personal
computer-related joint venture in China, which IBM has announced an agreement to sell
to Lenovo as part of the sale of the Personal Computing Division.
The company’s complementary workforce is an approximation of equivalent full-time
employees hired under temporary, part-time and limited-term employment arrangements
to meet specific business needs in a flexible and cost-effective manner.
Global Financing
description of business
Global Financing is a business segment within IBM, that is managed on an arm’s-length basis
and measured as if it were a standalone entity. Accordingly, the information presented in
this section is consistent with this separate company view.
The mission of Global Financing is to generate a return on equity. It also facilitates the
client’s acquisition of IBM hardware, software and services.
Global Financing invests in financing assets, manages the associated risks, and leverages
with debt, all with the objective of generating consistently strong returns on equity.
The focus on IBM products and IBM clients mitigates the risks normally associated with a
financing company. Global Financing has the benefit of both a deep knowledge of its
client base and a clear insight into the products that are being leased. This combination
allows Global Financing to effectively manage two of the major risks (credit and residual
value) that are normally associated with financing.
Global Financing comprises three lines of business:
• Customer financing provides lease and loan financing to end users and internal
customers for terms generally between two and five years. Internal financing is predominantly
in support of Global Services’ long-term customer service contracts. Global
Financing also factors a selected portion of the company’s accounts receivable,
primarily for cash management purposes. All of these internal financing arrangements
are at arm’s-length rates and are based upon market conditions.
• Commercial financing provides primarily short-term inventory and accounts receivable
financing to dealers and remarketers of IT products.
• Remarketing sells and leases used equipment to new or existing customers. This
equipment is primarily sourced from the conclusion of lease transactions.
In addition to the strength of the economy and its impact on corporate IT budgets, key
drivers of Global Financing’s results are interest rates and originations. Originations, which
determine the asset base of Global Financing’s annuity-like business, are impacted by
IBM’s non-Global Financing sales volumes and Global Financing’s participation rates.
Participation rates are the propensity of IBM’s clients to finance their purchases through
Global Financing in lieu of paying IBM up-front cash or financing through a third party.
results of operations
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
External revenue $«2,607 $«2,827 $«3,203
Internal revenue 1,287 1,300 939
Total revenue 3,894 4,127 4,142
Cost 1,539 1,846 1,803
Gross profit $«2,355 $«2,281 $«2,339
Gross profit margin 60.5% 55.3% 56.5%
Pre-tax income $«1,494 $«1,182 $««««955
After-tax income* $««««937 $««««766 $««««627
Return on equity* 28.6% 22.3% 17.2%
* See page 39 for the details of the After-tax income and the Return on equity calculation.
Global Financing revenue declined 5.6 percent in 2004 as compared with 2003. External
revenue decreased 7.8 percent (11.5 percent at constant currency) in 2004 versus 2003
primarily driven by external used equipment sales of $708 million in 2004 versus $928 million
in 2003, a decrease of 23.7 percent. Global Financing remarkets used equipment,
primarily resulting from equipment that is returned at end of lease both externally and
internally. Externally remarketed equipment revenue represents sales or leases to clients
and resellers. Internally remarketed equipment revenue primarily represents used equipment
that is sold or leased internally to the Hardware and Global Services segments. The
Hardware segment will also sell the equipment that it purchases from Global Financing to
external customers. Internal revenue decreased 1.0 percent in 2004 versus 2003 driven
by remarketing revenue of $783 million in 2004 versus $828 million in 2003, a decrease
of 5.4 percent, partially offset by commercial financing revenue of $269 million in 2004
versus $240 million in 2003, an increase of 12.2 percent.
Global Financing revenue was flat in 2003 as compared with 2002. External revenue
decreased 11.7 percent (18.0 percent at constant currency) in 2003 versus 2002 driven by
financing revenue of $1,896 million in 2003 versus $2,224 million in 2002, a decrease of
14.7 percent, due to declining interest rates and a lower average asset base, and external
used equipment sales of $931 million in 2003 versus $979 million in 2002, a decrease of
4.9 percent. The lower average asset base was primarily due to lower originations in prior
years. Internal revenue increased 38.4 percent in 2003 versus 2002 driven by internal used
equipment sales, primarily z Series.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
36
ibm annual report 2004
Global Financing gross profit dollars increased 3.2 percent and gross profit margin
increased 5.2 points in 2004 versus 2003. The increase in gross profit dollars was primarily
driven by cost of sales on remarketing equipment of $931 million in 2004 versus $1,168
million in 2003, a decrease of 20.2 percent and borrowing costs of $608 million in 2004
versus $678 million in 2003, a decrease of 10.3 percent related to volumes and the interest
rate environment during the year, partially offset by the decrease in revenue discussed
above. The increase in gross profit margin was driven by improved margins in financing
and equipment sales, and a mix change toward higher margin financing income and away
from lower margin equipment sales.
Global Financing gross profit dollars decreased 2.5 percent and gross profit margin
declined 1.2 points in 2003 versus 2002. The decrease in gross profit dollars was primarily
driven by declining interest rates and lower average asset base discussed above, partially
offset by improved financing margins. The decrease in gross profit margin was driven by
a mix change toward lower margin remarketing sales and away from financing income,
partially offset by lower borrowing costs related to the interest rate environment during
the year.
Global Financing pre-tax income increased 26.4 percent in 2004 versus 2003, compared
with an increase of 23.8 percent in pre-tax income in 2003 versus 2002. The increase
in 2004 was driven by a decrease of $101 million in bad debt expense, a decrease of
$23 million in selling, general and administration expenses, a decrease of $100 million in
other charges primarily driven by income from internal sales, and the increase in gross
profit of $74 million discussed above. The decrease in bad debt expense is reflective of
the improved general economic environment, improved credit quality of the portfolio, and
the declining size of the receivables portfolio. (Also see page 37 for an additional discussion
of IBM Global Financing Allowance for Doubtful Accounts.) The increase in 2003 versus
2002 was driven by a decrease in bad debt expense partially offset by the decrease in
gross profit discussed above.The decrease in bad debt expense is reflective of the improved
general economic environment and reduced exposure in specific sectors, particularly the
Communications sector.
The increases in return on equity from 2003 to 2004 and from 2002 to 2003 were also
due to higher earnings.
financial condition
Balance Sheet
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Cash $««««««850 $««««««813
Net investment in sales-type leases 11,141 11,969
Equipment under operating leases:
External customers 1,817 1,707
Internal customers (a) (b) 1,906 1,873
Customer loans 9,889 10,413
Total customer financing assets 24,753 25,962
Commercial financing receivables 5,710 5,835
Intercompany financing receivables (a) (b) 2,172 1,999
Other receivables 223 270
Other assets 881 1,037
Total financing assets $«34,589 $«35,916
Intercompany payables (a) $«««6,394 $«««6,754
Debt (c) 22,320 23,264
Other liabilities 2,620 2,546
Total financing liabilities 31,334 32,564
Total financing equity 3,255 3,352
Total financing liabilities and equity $«34,589 $«35,916
(a) Amounts eliminated for purposes of IBM’s consolidated results and therefore do not appear on pages 42 and 43.
(b) These assets, along with all other financing assets in this table, are leveraged using Global Financing debt.
(c) Global Financing debt includes debt of the company and of the Global Financing units that support the Global
Financing business.
Sources and Uses of Funds
The primary use of funds in Global Financing is to originate customer and commercial
financing assets. Customer financing assets for end users consist primarily of IBM hardware,
software and services, but also include non-IBM equipment, software and services to meet
IBM clients’ total solutions requirements. Customer financing assets are primarily salestype,
direct financing, and operating leases for equipment as well as loans for hardware,
software and services with terms generally for two to five years. Customer financing also
includes internal activity as described on page 35.
Commercial financing originations arise primarily from inventory and accounts receivable
financing for dealers and remarketers of IBM and non-IBM products. Payment terms
for inventory financing generally range from 30 to 75 days. Payment terms for accounts
receivable financing generally range from 30 to 90 days.
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
37
ibm annual report 2004
Originations
The following are total external and internal financing originations.
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Customer finance:
External $«12,433 $«13,279 $«12,845
Internal 1,185 1,150 1,061
Commercial finance 25,566 24,291 22,546
Total $«39,184 $«38,720 $«36,452
Cash collections of both customer and commercial financing assets exceeded new financing
originations in 2004, which resulted in a net decline in financing assets from December 31,
2003. The increase in originations in 2004 and 2003 from 2003 and 2002 respectively, was
due to favorable currency movements offset by a decline in participation rates. The decline
in participation rates was in line with industry trends.
Cash generated by Global Financing in 2004 was deployed to pay the intercompany
payable and dividends to IBM as well as to reduce debt.
Financing Assets by Sector
The following are the percentage of external financing assets by industry sector.
AT DECEMBER 31: 2004 2003
Financial Services 30% 28%
Industrial 20 17
Business Partners* 19 18
Distribution 9 10
Public 9 10
Communications 9 11
Other 4 6
Total 100% 100%
* Business Partners financing assets represent a portion of commercial financing inventory and accounts receivable
financing for terms generally less than 90 days.
Financing Receivables and Allowances
The following table presents external financing receivables, excluding residual values, and
the allowance for doubtful accounts.
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Gross financing receivables $«26,836 $«28,451
Specific allowance for doubtful accounts 654 666
Unallocated allowance for doubtful accounts 127 199
Total allowance for doubtful accounts 781 865
Net financing receivables $«26,055 $«27,586
Allowance for doubtful account coverage 2.9% 3.0%
Roll-Forward of Financing Receivables Allowance for Doubtful Accounts
(Dollars in millions)
Additions:
Reserve Bad Debts Dec. 31,
Jan. 1, 2004 Used* Expense Other** 2004
$«865 $«(237) $«105 $«48 $«781
* Represents reserved receivables, net of recoveries, that were disposed of during the period.
** Primarily represents translation adjustments.
The percentage of financing receivables reserved decreased from 3.0 percent at
December 31, 2003, to 2.9 percent at December 31, 2004 primarily due to the decrease
in the unallocated allowance for doubtful accounts. Unallocated reserves decreased
36.2 percent from $199 million at December 31, 2003 to $127 million at December 31,
2004 due to the decline in gross financing receivables combined with improved economic
conditions and improved credit quality of the portfolio. Specific reserves decreased 1.8 percent
from $666 million at December 31, 2003 to $654 million at December 31, 2004. The
decrease in specific reserves was due to the disposition of reserved receivables during
the period combined with lower requirements for additional specific reserves. This
lower requirement is generally due to improving economic conditions as well as portfolio
management to reduce risk in areas of concern.
Global Financing’s bad debt expense declined to $105 million for the year ended
December 31, 2004, compared with $206 million for the year ended December 31, 2003.
The decline was primarily attributed to lower reserve requirements associated with the
improvement in economic conditions and improved credit quality of the portfolio in 2004,
as compared with 2003, as well as the lower asset base.
Residual Value
Residual value is a risk unique to the financing business, and management of this risk is
dependent upon the ability to accurately project future equipment values. Global Financing
has insight into product plans and cycles for the IBM products under lease. Based upon
this product information, Global Financing continually monitors projections of future
equipment values and compares them with the residual values reflected in the portfolio.
See note a, “Significant Accounting Policies” on page 55 for the company’s accounting
policy for residual values.
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38
ibm annual report 2004
Sales of equipment, which are primarily sourced from equipment returned at end of
lease, represented 36.6 percent of Global Financing’s revenue in 2004 and 40.5 percent
in 2003. The decrease was driven primarily by lower external used equipment sales, due
to a decline in sales to business partners. The gross margin on these sales was 34.6 percent
and 30.2 percent in 2004 and 2003, respectively. The increase in gross margin was
primarily due to the improved profitability of internal equipment sales. In addition to selling
assets sourced from end of lease, Global Financing optimizes the recovery of residual
values by leasing used equipment to new customers or extending leasing arrangements
with current customers. The following table presents the recorded amount of unguaranteed
residual value for sales-type and operating leases at December 31, 2003 and 2004.
In addition, the table presents the residual value as a percentage of the original amount
financed, and a run out of the unguaranteed residual value over the remaining lives of
these leases at December 31, 2004. In addition to the unguaranteed residual value below,
on a limited basis, Global Financing will obtain guarantees of the future value of the equipment
scheduled to be returned at end of lease. These third-party guarantees are used in
the determination of lease classifications for the covered equipment and provide protection
against risk of loss arising from declines in equipment values for these assets. The
aggregate asset value associated with the guarantees was $700 million and $615 million
for financing transactions originated during the years ended December 31, 2004 and
2003, respectively. The associated aggregate guaranteed future value at the scheduled
end of lease was $36 million and $26 million for financing transactions originated during
the same time periods, respectively. The cost of guarantees was $4.7 million for each year.
Residual Value
(Dollars in millions)
Total Amortization of 2004 Balance
2008 and
2003 2004 2005 2006 2007 Beyond
Sales-type leases $««««««845 $««««««836 $«262 $«269 $«248 $«57
Operating leases 164 164 78 46 36 4
Total unguaranteed
residual value $«««1,009 $«««1,000 $«340 $«315 $«284 $«61
Related original
amount financed $«27,820 $«25,982
Percentage 3.6% 3.8%
Debt
AT DECEMBER 31: 2004 2003
Debt to equity ratio 6.9x 6.9x
Global Financing funds its operations primarily through borrowings using a debt to equity
ratio of approximately 7 to 1. The debt is used to fund Global Financing assets. The debt
is composed of intercompany loans and external debt. The terms of the intercompany
loans are set by the company to substantially match the term and currency underlying the
receivable. The inter-company loans are based on arm’s-length pricing. The following table
illustrates the correlation between Global Financing Assets and Global Financing Debt.
Both assets and debt are presented in the Global Financing Balance Sheet on page 36.
Global Financing Assets and Debt
(Dollars in millions)
Global Financing Assets Global Financing Debt
The company’s Global Financing business provides funding predominantly for the company’s
external customers but also provides intercompany financing for the company
(internal), as described in the “Description of Business” on page 35. As previously stated,
the company manages and measures Global Financing as if it were a standalone entity
and accordingly, interest expense relating to debt supporting Global Financing’s external
customer and internal business is included in the “Global Financing Results of Operations”
on page 35 and in note x, “Segment Information,” on pages 87 through 91.
In the company’s Consolidated Statement of Earnings on pages 40 and 41, however,
the interest expense supporting Global Financing’s internal financing to the company is
reclassified from Cost of financing to Interest expense.
Liquidity and Capital Resources
Global Financing is a segment of the company and as such, is supported by the company’s
liquidity position and access to capital markets. Cash generated from operations in 2004
was deployed to reduce debt and pay dividends to the company in order to maintain an
appropriate debt to equity ratio
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
39
ibm annual report 2004
return on equity
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Numerator:
Global Financing after tax income (A)* $÷««937 $««««766
Denominator:
Average Global Financing equity (B)** $«3,272 $«3,436
Global Financing Return on Equity (A)/(B) 28.6% 22.3%
* Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as
IBM’s provision for income taxes is determined on a consolidated basis.
** Average of the ending equity for Global Financing for the last five quarters.
critical accounting estimates
As discussed in note a, “Significant Accounting Policies,” on page 49, the application of
GAAP involves the exercise of varying degrees of judgment. The following areas require
more judgment relative to the others and relate to Global Financing. Also see “Critical
Accounting Estimates” on page 32.
Financing Receivables Reserves
Global Financing reviews its financing receivables portfolio at least quarterly in order to
assess collectibility. A description of the methods used by management to estimate the
amount of uncollectible receivables is included on page 54. Factors that could result in
actual receivable losses that are materially different from the estimated reserve include
sharp changes in the economy, or a large change in the health of a particular industry segment
that represents a concentration in Global Financing’s receivables portfolio.
To the extent that actual collectibility differs from management’s estimates by 5 percent,
Global Financing net income would be higher or lower by an estimated $24 million
(using 2004 data), depending upon whether the actual collectibility was better or worse,
respectively, than the estimates.
Residual Value
Residual value represents the estimated fair value of equipment under lease as of the end
of the lease. Global Financing estimates the future fair value of residual values by using
historical models, the current market for used equipment and forward-looking product
information such as marketing plans and technological innovations. In addition, Global
Financing estimates the fair value by analyzing current market conditions for leasing and
sales of both new and used equipment. These estimates are periodically reviewed and any
other than temporary declines in estimated future residual values are recognized upon
identification. Anticipated increases in future residual value are not recognized until the
equipment is remarketed. Factors that could cause actual results to materially differ from
the estimates include severe changes in the used equipment market brought on by
unforeseen changes in technology innovations and any resulting changes in the useful
lives of used equipment.
To the extent that actual residual value recovery is lower than management’s estimates
by 5 percent, Global Financing’s net income would be lower by an estimated $16 million
(using 2004 data). If the actual residual value recovery is higher than management’s estimates,
the increase in net income will be realized at the end of lease when the equipment
is remarketed.
market risk
See pages 33 and 34 for discussion of the company’s overall market risk.
looking forward
Given Global Financing’s mission of supporting IBM’s hardware, software and services
businesses, originations for both customer and commercial finance businesses will be
dependent upon the overall demand for IT hardware, software and services, as well as the
customer participation rates.
Interest rates and the overall economy (including currency fluctuations) will have an
effect on both revenue and gross profit. The company’s interest rate risk management
policy, however, combined with the Global Financing funding strategy (see page 38),
should mitigate gross margin erosion due to changes in interest rates. The company’s
policy of matching asset and liability positions in foreign currencies will limit the impacts
of currency fluctuations.
The economy could impact the credit quality of the Global Financing receivables portfolio
and therefore the level of provision for bad debts. Global Financing will continue to
apply rigorous credit policies in both the origination of new business and the evaluation
of the existing portfolio.
As discussed above, Global Financing has historically been able to manage residual
value risk both through insight into the product cycles as well as through its remarketing
business.
Global Financing has policies in place to manage each of the key risks involved in
financing. These policies, combined with product and customer knowledge, should allow
for the prudent management of the business going forward, even during periods of
uncertainty with respect to the economy.
Forward-Looking and Cautionary Statements
Certain statements contained in this Annual Report may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements involve a number of risks, uncertainties and other factors that could cause
actual results to be materially different, as discussed more fully elsewhere in this Annual
Report and in the company’s filings with the SEC, including the company’s 2004 Form 10-K
filed on February 24, 2005.
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share amounts)
FOR THE YEAR ENDED DECEMBER 31: Notes 2004 2003 2002
Revenue:
Global Services $«46,213 $«42,635 $«36,360
Hardware 31,154 28,239 27,456
Software 15,094 14,311 13,074
Global Financing 2,608 2,826 3,232
Enterprise Investments/Other 1,224 1,120 1,064
Total Revenue 96,293 89,131 81,186
Cost:
Global Services 34,637 31,903 26,812
Hardware 21,929 20,401 20,020
Software 1,919 1,927 2,043
Global Financing 1,045 1,248 1,416
Enterprise Investments/Other 731 634 611
Total Cost 60,261 56,113 50,902
Gross Profit 36,032 33,018 30,284
Expense and Other Income:
Selling, general and administrative q 19,384 17,852 18,738
Research, development and engineering r 5,673 5,077 4,750
Intellectual property and custom development income (1,169) (1,168) (1,100)
Other (income) and expense (23) 238 227
Interest expense k & l 139 145 145
Total Expense and Other Income 24,004 22,144 22,760
Income from Continuing Operations Before Income Taxes 12,028 10,874 7,524
Provision for income taxes p 3,580 3,261 2,190
Income from Continuing Operations 8,448 7,613 5,334
Discontinued Operations:
Loss from discontinued operations c 18 30 1,755
Net Income $«««8,430 $«««7,583 $«««3,579
41
ibm annual report 2004
CONSOLIDATED STATEMENT OF EARNINGS (continued)
(Dollars in millions except per share amounts)
FOR THE YEAR ENDED DECEMBER 31: Notes 2004 2003 2002
Earnings/(Loss) per Share of Common Stock:
Assuming Dilution:
Continuing operations t $«««««4.94 $«««««4.34 $«««««3.07
Discontinued operations t (0.01) (0.02) (1.01)
Total t $«««««4.93 $«««««4.32 $«««««2.06
Basic:
Continuing operations t $«««««5.04 $«««««4.42 $«««««3.13
Discontinued operations t (0.01) (0.02) (1.03)
Total t $«««««5.03 $«««««4.40 $«««««2.10
Weighted-Average Number of Common Shares Outstanding:
Assuming dilution 1,708,872,279 1,756,090,689 1,730,941,054
Basic 1,674,959,086 1,721,588,628 1,703,244,345
The accompanying notes on pages 49 through 91 are an integral part of the financial statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in millions)
AT DECEMBER 31: Notes 2004 2003*
Assets
Current assets:
Cash and cash equivalents $«««10,053 $«««««7,290
Marketable securities d 517 357
Notes and accounts receivable—trade (net of allowances of $277 in 2004 and $352 in 2003) 10,522 10,026
Short-term financing receivables (net of allowances of $681 in 2004 and $733 in 2003) f 15,801 17,583
Other accounts receivable (net of allowances of $13 in 2004 and $16 in 2003) 1,813 1,314
Inventories e 3,316 2,942
Deferred taxes p 2,229 2,542
Prepaid expenses and other current assets 2,719 2,608
Total current assets 46,970 44,662
Plant, rental machines and other property g 36,385 36,153
Less: Accumulated depreciation g 21,210 21,464
Plant, rental machines and other property—net g 15,175 14,689
Long-term financing receivables f 10,950 10,741
Prepaid pension assets w 20,394 18,426
Investments and sundry assets h 5,468 7,294
Goodwill i 8,437 6,921
Intangible assets—net i 1,789 1,724
Total Assets $«109,183 $«104,457
Reclassified to conform with 2004 presentation.
43
ibm annual report 2004
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (continued)
(Dollars in millions)
AT DECEMBER 31: Notes 2004 2003*
Liabilities and Stockholders’ Equity
Current liabilities:
Taxes p $«««««4,728 $«««««5,475
Short-term debt k & l 8,099 6,646
Accounts payable 9,444 8,460
Compensation and benefits 3,804 3,671
Deferred income 7,175 6,492
Other accrued expenses and liabilities 6,548 6,879
Total current liabilities 39,798 37,623
Long-term debt k & l 14,828 16,986
Retirement and nonpension postretirement benefit obligations w 15,883 14,251
Other liabilities m 8,927 7,733
Total Liabilities 79,436 76,593
Contingencies and commitments o
Stockholders’ equity: n
Common stock, par value $.20 per share and additional paid-in capital 18,355 16,269
Shares authorized: 4,687,500,000
Shares issued (2004—1,962,687,087; 2003—1,937,393,604)
Retained earnings 44,525 37,525
Treasury stock, at cost (shares: 2004—317,094,633; 2003—242,884,969) (31,072) (24,034)
Accumulated gains and (losses) not affecting retained earnings (2,061) (1,896)
Total Stockholders’ Equity 29,747 27,864
Total Liabilities and Stockholders’ Equity $«109,183 $«104,457
* Reclassified to conform with 2004 presentation.
The accompanying notes on pages 49 through 91 are an integral part of the financial statements.
ibm annual report 2004
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003* 2002*
Cash Flow from Operating Activities from Continuing Operations:
Income from continuing operations $««8,448 $««7,613 $««5,334
Adjustments to reconcile income from continuing operations
to cash provided by operating activities:
Depreciation 3,959 3,961 3,691
Amortization of intangibles 956 955 802
Deferred income taxes 2,081 1,126 (67)
Net gain on assets sales and other (420) (275) (343)
Other than temporary declines in securities and other investments 20 50 58
Noncash portion of special actions — — 1,350
Change in operating assets and liabilities, net of acquisitions/divestitures:
Receivables 2,613 2,024 4,125
Inventories (291) 293 793
Pension assets (1,284) (1,409) (4,227)
Other assets (200) (567) (44)
Accounts payable 411 617 (55)
Pension liabilities (584) (286) 83
Other liabilities (303) 467 2,288
Net Cash Provided by Operating Activities from Continuing Operations 15,406 14,569 13,788
Cash Flow from Investing Activities from Continuing Operations:
Payments for plant, rental machines and other property (4,368) (4,393) (4,753)
Proceeds from disposition of plant, rental machines and other property 1,311 1,039 775
Investments in software (688) (581) (597)
Purchases of marketable securities and other investments (8,718) (6,471) (1,582)
Proceeds from disposition of marketable securities and other investments 8,830 7,023 1,185
Divestiture of businesses 25 97 1,233
Acquisition of businesses (1,738) (1,836) (3,158)
Net Cash Used in Investing Activities from Continuing Operations (5,346) (5,122) (6,897)
Reclassified to conform with 2004 presentation.
45
ibm annual report 2004
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003* 2002*
Cash Flow from Financing Activities from Continuing Operations:
Proceeds from new debt 2,438 1,573 6,726
Short-term borrowings/(repayments) less than 90 days—net 1,073 777 (4,087)
Payments to settle debt (4,538) (5,831) (5,812)
Common stock transactions—net (5,418) (3,232) (3,087)
Cash dividends paid (1,174) (1,085) (1,005)
Net Cash Used in Financing Activities from Continuing Operations (7,619) (7,798) (7,265)
Effect of exchange rate changes on cash and cash equivalents 405 421 148
Net cash used in discontinued operations (83) (162) (722)
Net change in cash and cash equivalents 2,763 1,908 (948)
Cash and cash equivalents at January 1 7,290 5,382 6,330
Cash and Cash Equivalents at December 31 $«10,053 $«7,290 $«5,382
Supplemental Data:
Cash paid during the year:
Income taxes $«««1,837 $«1,707 $«1,841
Interest $««««««705 $««««853 $««««831
Noncash Investing and Financing Activities:
In 2002, the noncash portion of the purchase price paid to PwCC is a significant noncash investing activity. This transaction is described on pages 59 and 60.
* Reclassified to conform with 2004 presentation.
The accompanying notes on pages 49 through 91 are an integral part of the financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Dollars in millions)
Common Accumulated
Stock Gains and
and (Losses) Not
Additional Affecting
Paid-in Retained Treasury Retained
Capital Earnings Stock Earnings Total
2002
Stockholders’ equity, January 1, 2002 $«14,248 $«30,142 $«(20,114) $««««(828) $«23,448
Net income plus gains and (losses) not affecting retained earnings:
Net income 3,579 $«««3,579
Gains and (losses) not affecting retained earnings (net of tax):
Net unrealized losses on SFAS No. 133 cash flow hedge derivatives during 2002
(net of tax benefit of $372) (659) (659)
Foreign currency translation adjustments (net of tax benefit of $197) 850 850
Minimum pension liability adjustment (net of tax benefit of $1,574) (2,765) (2,765)
Net unrealized losses on marketable securities (net of tax benefit of $8) (16) (16)
Total gains and (losses) not affecting retained earnings (2,590)
Subtotal: Net income plus gains and (losses) not affecting retained earnings $««««««989
Cash dividends declared—common stock (1,005) (1,005)
Common stock issued under employee plans (7,255,995 shares) 440 4 444
Purchases (189,797 shares) and sales (12,873,502 shares) of treasury stock
under employee plans—net (475) 1,311 836
Other treasury shares purchased, not retired (48,481,100 shares) (4,212) (4,212)
Treasury shares issued to fund the U.S. pension fund (24,037,354 shares) (576) 2,447 1,871
Shares issued/to be issued in the PwCC acquisition (3,677,213 shares issued) 43 (114) 355 284
Decrease in shares remaining to be issued in acquisition (9) (9)
Tax effect—stock transactions 136 136
Stockholders’ equity, December 31, 2002 $«14,858 $«31,555 $«(20,213) $«(3,418) $«22,782
The accompanying notes on pages 49 through 91 are an integral part of the financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Dollars in millions)
Common Accumulated
Stock Gains and
and (Losses) Not
Additional Affecting
Paid-in Retained Treasury Retained
Capital Earnings Stock Earnings Total
2003
Stockholders’ equity, January 1, 2003 $«14,858 $«31,555 $«(20,213) $«(3,418) $«22,782
Net income plus gains and (losses) not affecting retained earnings:
Net income 7,583 $«««7,583
Gains and (losses) not affecting retained earnings (net of tax):
Net unrealized losses on SFAS No. 133 cash flow hedge derivatives during 2003
(net of tax benefit of $51) (91) (91)
Foreign currency translation adjustments (net of tax benefit of $125) 1,768 1,768
Minimum pension liability adjustment (net of tax benefit of $124) (162) (162)
Net unrealized gains on marketable securities (net of tax expense of $3) 7 7
Total gains and (losses) not affecting retained earnings 1,522
Subtotal: Net income plus gains and (losses) not affecting retained earnings $«««9,105
Cash dividends declared—common stock (1,085) (1,085)
Common stock issued under employee plans (16,445,473 shares) 1,205 (282) 923
Purchases (291,921 shares) and sales (5,992,342 shares) of treasury stock
under employee plans—net (246) 582 336
Other treasury shares purchased, not retired (49,994,514 shares) (4,403) (4,403)
Shares to be issued in the PwCC acquisition 8 8
Decrease in shares remaining to be issued in acquisition (4) (4)
Tax effect—stock transactions 202 202
Stockholders’ equity, December 31, 2003 $«16,269 $«37,525 $«(24,034) $«(1,896) $«27,864
The accompanying notes on pages 49 through 91 are an integral part of the financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Dollars in millions)
Common Accumulated
Stock Gains and
and (Losses) Not
Additional Affecting
Paid-in Retained Treasury Retained
Capital Earnings Stock Earnings Total
2004
Stockholders’ equity, January 1, 2004 $«16,269 $«37,525 $«(24,034) $«(1,896) $«27,864
Net income plus gains and (losses) not affecting retained earnings:
Net income 8,430 $«««8,430
Gains and (losses) not affecting retained earnings (net of tax):
Net unrealized losses on SFAS No. 133 cash flow hedge derivatives during 2004
(net of tax benefit of $112) (199) (199)
Foreign currency translation adjustments (net of tax benefit of $93) 1,055 1,055
Minimum pension liability adjustment (net of tax benefit of $540) (1,066) (1,066)
Net unrealized gains on marketable securities (net of tax expense of $30) 45 45
Total gains and (losses) not affecting retained earnings (165)
Subtotal: Net income plus gains and (losses) not affecting retained earnings $«««8,265
Cash dividends declared—common stock (1,174) (1,174)
Common stock issued under employee plans (25,293,484 shares) 1,815 (129) 1,686
Purchases (422,338 shares) and sales (2,840,648 shares) of treasury stock
under employee plans—net (127) 237 110
Other treasury shares purchased, not retired (78,562,974 shares) (7,275) (7,275)
Decrease in shares remaining to be issued in acquisition (6) (6)
Tax effect—stock transactions 277 277
Stockholders’ equity, December 31, 2004 $«18,355 $«44,525 $«(31,072) $«(2,061) $«29,747
The accompanying notes on pages 49 through 91 are an integral part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
49
International Business Machines Corporation and Subsidiary Companies
a. Significant Accounting Policies
basis of presentation
On December 31, 2002, the International Business Machines Corporation (IBM and/or the
company) sold its hard disk drive (HDD) business to Hitachi, Ltd. (Hitachi). See note c,
“Acquisitions/Divestitures,” on pages 60 and 61. The HDD business was part of the company’s
Systems and Technology Group reporting segment. The HDD business was
accounted for as a discontinued operation under accounting principles generally accepted
in the United States of America (GAAP) and therefore, the HDD results of operations and
cash flows have been removed from the company’s results of continuing operations and
cash flows for all periods presented in this document. The financial results reported as
discontinued operations include the external original equipment manufacturer (OEM) HDD
business and charges related to HDDs used in the company’s eServer and Storage products
that were reported in the Systems and Technology Group segment. The discontinued
operations results do not reflect HDD shipments to the company’s internal customers.
principles of consolidation
The Consolidated Financial Statements include the accounts of IBM and its controlled
subsidiary companies, which in general are majority-owned. The accounts of variable
interest entities (VIEs) as defined by the Financial Accounting Standards Board (FASB)
Interpretation No. 46(R) (FIN 46(R)) (see note b, “Accounting Changes,” on page 56), are
included in the Consolidated Financial Statements, if applicable. Investments in business
entities in which the company does not have control, but has the ability to exercise significant
influence over operating and financial policies (generally 20-50 percent ownership),
are accounted for using the equity method. The accounting policy for other investments
in securities is described on page 54 within “Marketable Securities.” Other investments are
accounted for using the cost method.
use of estimates
The preparation of Consolidated Financial Statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts that are reported
in the Consolidated Financial Statements and accompanying disclosures. Although these
estimates are based on management’s best knowledge of current events and actions that
the company may undertake in the future, actual results may be different from the estimates.
revenue
The company recognizes revenue when it is realized or realizable and earned. The company
considers revenue realized or realizable and earned when it has persuasive evidence
of an arrangement, delivery has occurred, the sales price is fixed or determinable, and
collectibility is reasonably assured. Delivery does not occur until products have been
shipped or services have been provided to the client, risk of loss has transferred to the
client and client acceptance has been obtained, client acceptance provisions have lapsed,
or the company has objective evidence that the criteria specified in the client acceptance
provisions have been satisfied. The sales price is not considered to be fixed or determinable
until all contingencies related to the sale have been resolved.
The company reduces revenue for estimated client returns, stock rotation, price protection,
rebates and other similar allowances. (See Schedule II, ”Valuation and Qualifying
Accounts and Reserves” included in the company’s Annual Report on Form 10-K). Revenue
is recognized only if these estimates can be reliably determined and if the client has economic
substance apart from the company. The company bases its estimates on historical
results taking into consideration the type of client, the type of transaction and the specifics
of each arrangement. Payments made under cooperative marketing programs are recognized
as an expense only if the company receives from the client an identifiable benefit
sufficiently separable from the product sale whose fair value can be reasonably estimated.
If the company does not receive an identifiable benefit sufficiently separable from the
product sale whose fair value can be reasonably estimated, such payments are recorded
as a reduction of revenue.
In addition to the aforementioned general policies, the following are the specific revenue
recognition policies for multiple-element arrangements and for each major category
of revenue.
Multiple-Element Arrangements
The company enters into multiple-element revenue arrangements, which may include any
combination of services, software, hardware and/or financing. To the extent that a deliverable(
s) in a multiple-element arrangement is subject to specific guidance (like software
that is subject to the American Institute of Certified Public Accountants (AICPA) Statement
of Position (SOP) No. 97-2, “Software Revenue Recognition”—see “Software” on pages 50
and 51) on whether and/or how to separate multiple-deliverable arrangements into separate
units of accounting (separability) and how to allocate value among those separate
units of accounting (allocation), that deliverable(s) is accounted for in accordance with
such specific guidance. For all other deliverables in multiple-element arrangements, the
guidance below is applied for separability and allocation. A multiple-element arrangement
is separated into more than one unit of accounting if all of the following criteria are met.
• The delivered item(s) has value to the client on a standalone basis.
• There is objective and reliable evidence of the fair value of the undelivered item(s).
• If the arrangement includes a general right of return relative to the delivered item(s),
delivery or performance of the undelivered item(s) is considered probable and
substantially in the control of the company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
50
ibm annual report 2004
If these criteria are not met, revenue is deferred until the earlier of when such criteria
are met or when the last undelivered element is delivered. If there is objective and reliable
evidence of fair value for all units of accounting in an arrangement, the arrangement consideration
is allocated to the separate units of accounting based on each unit’s relative fair
value. There may be cases, however, in which there is objective and reliable evidence of
fair value of the undelivered item(s) but no such evidence for the delivered item(s). In
those cases, the residual method is used to allocate the arrangement consideration. Under
the residual method, the amount of consideration allocated to the delivered item(s) equals
the total arrangement consideration less the aggregate fair value of the undelivered
item(s). The revenue policies described below are then applied to each unit of accounting,
as applicable.
Services
The company’s primary services offerings include information technology (IT) datacenter
and business process transformation outsourcing, application management services,
technology infrastructure and system maintenance, Web hosting, and the design and
development of complex IT systems to a client’s specifications (Design and Build). These
services are provided on a time and material basis, as a fixed-price contract or as a fixed
price per measure of output contract, and the contract terms generally range from less
than one year to ten years.
Revenue from IT datacenter and business process outsourcing contracts is generally
recognized in the period the services are provided using either an objective measure of
output or a straight-line basis over the term of the contract. Under the output method, the
amount of revenue recognized is based on the services delivered in the period as stated
in the contract.
Revenue from application management services, technology infrastructure and system
maintenance, and Web hosting contracts is typically recognized on a straight-line basis
over the term of the contract. Revenue from time and material contracts is recognized at
the contractual rates as labor hours are delivered and direct expenses are incurred.
Revenue related to extended warranty and product maintenance contracts is deferred and
recognized on a straight-line basis over the delivery period.
Revenue from fixed-price Design and Build contracts is recognized in accordance with
SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-
Type Contracts,” generally under the percentage-of-completion (POC) method. Under the
POC method, revenue is recognized based on the costs incurred to date as a percentage
of the total estimated costs to fulfill the contract. If circumstances arise that may change
the original estimates of revenues, costs, or extent of progress toward completion, then
revisions to the estimates are made. These revisions may result in increases or decreases
in estimated revenues or costs, and such revisions are reflected in income in the period in
which the circumstances that give rise to the revision become known by management.
The company performs ongoing profitability analyses of its services contracts in order
to determine whether the latest estimates—revenue, costs, profits—require updating. If, at
any time, these estimates indicate that the contract will be unprofitable, the entire estimated
loss for the remainder of the contract is recorded immediately.
In some of the company’s services contracts, the company bills the client prior to performing
the services. Deferred income of $3.9 billion and $3.3 billion at December 31,
2004 and 2003, respectively, is included in the Consolidated Statement of Financial Position.
In other services contracts, the company performs the services prior to billing the client.
Unbilled accounts receivable of $1.9 billion and $1.8 billion at December 31, 2004 and
2003, respectively, are included in Notes and accounts receivable—trade in the
Consolidated Statement of Financial Position. Billings usually occur in the month after the
company performs the services or in accordance with specific contractual provisions.
Unbilled receivables are expected to be billed and collected generally within four months,
rarely exceeding nine months.
Hardware
Revenue from hardware sales or sales-type leases is generally recognized when the product
is shipped to the client and when there are no unfulfilled company obligations that affect
the client’s final acceptance of the arrangement. Any cost of warranties and remaining
obligations that are inconsequential or perfunctory are accrued when the corresponding
revenue is recognized. Revenue from rentals and operating leases is recognized on a
straight-line basis over the term of the rental or lease.
Software
Revenue from perpetual (one-time charge) licensed software is recognized at the inception
of the license term. Revenue from term (monthly license charge) arrangements is recognized
on a subscription basis over the period that the client is using the license. Revenue
from maintenance, unspecified upgrades and technical support is recognized over the
period such items are delivered. In multiple-element revenue arrangements that include
software that is more than incidental to the products or services as a whole (software multiple-
element arrangements), software and software-related elements are accounted for in
accordance with the following policies. Software-related elements include software products
and services as well as any non-software deliverable(s) for which a software deliverable is
essential to its functionality.
A software multiple-element arrangement is separated into more than one unit of
accounting if all of the following criteria are met:
• The functionality of the delivered element(s) is not dependent on the undelivered
element(s).
• There is vendor-specific objective evidence (VSOE) of fair value of the undelivered
element(s).
• Delivery of the delivered element(s) represents the culmination of the earnings
process for that element(s).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
51
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ibm annual report 2004
If these criteria are not met, the revenue is deferred until the earlier of when such
criteria are met or when the last undelivered element is delivered. If there is VSOE for all
units of accounting in an arrangement, the arrangement consideration is allocated to the
separate units of accounting based on each unit’s relative VSOE. There may be cases,
however, in which there is VSOE of the undelivered item(s) but no such evidence for the
delivered item(s). In these cases, the residual method is used to allocate the arrangement
consideration. Under the residual method, the amount of consideration allocated to the
delivered item(s) equals the total arrangement consideration less the aggregate VSOE of
the undelivered elements.
Financing
Finance income attributable to sales-type leases, direct financing leases and loans is recognized
at level rates of return over the terms of the leases or loans. Operating lease income
is recognized on a straight-line basis over the term of the lease.
services cost
Recurring operating costs for outsourcing contracts, including costs related to bid and
proposal activities, are expensed as incurred. Nonrecurring costs incurred in the initial
phases of outsourcing contracts are deferred and subsequently amortized. These costs
consist of transition and set-up costs related to the installation of systems and processes
and are amortized on a straight-line basis over the expected period of benefit, not to
exceed the term of the contract. Additionally, fixed assets associated with outsourcing
contracts are capitalized and depreciated on a straight-line basis over the expected useful
life of the asset. If an asset is contract-specific, then the depreciation period is the
shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess
of the fair value of acquired assets used in outsourcing arrangements are deferred and
amortized on a straight-line basis as a reduction of revenue over the expected period of
benefit not to exceed the term of the contract. The company performs periodic reviews to
assess the recoverability of deferred contract transition and set-up costs. This review is
done by comparing the estimated minimum remaining undiscounted cash flows of a contract
to the unamortized contract costs. If such minimum undiscounted cash flows are not
sufficient to recover the unamortized costs, a loss is recognized for the excess of the
unamortized costs over the minimum discounted cash flows.
Deferred services transition and set-up costs were $628 million and $556 million at
December 31, 2004 and December 31, 2003, respectively. The primary driver of the
increase year to year was the continued growth of the company’s Business Consulting
Services (BCS) business. Deferred amounts paid to clients in excess of the fair value of
acquired assets used in outsourcing arrangements and other contract origination loans
provided to clients were $353 million and $304 million at December 31, 2004 and
December 31, 2003, respectively. The primary driver of the increase year to year was the
continued growth of the company’s Strategic Outsourcing Services (SO) business.
In situations in which an outsourcing contract is terminated, the terms of the contract
may require the client to reimburse the company for the recovery of unamortized deferred
costs, to purchase specific assets utilized in the delivery of services, and to pay any additional
costs incurred by the company to transition the services.
expense and other income
Selling, General and Administrative
Selling, general and administrative (SG&A) expense is charged to income as incurred.
Expenses of promoting and selling products and services are classified as selling expense
and include such items as advertising, sales commissions and travel. General and administrative
expense includes such items as officers’ salaries, office supplies, non-income taxes,
insurance and office rental. In addition, general and administrative expense includes other
operating items such as a provision for doubtful accounts, workforce accruals for contractually
obligated payments to employees terminated in the ongoing course of business,
amortization of certain intangible assets and environmental remediation costs. Certain
special actions discussed in note s, “2002 Actions,” on pages 73 through 76 are also included
in SG&A.
Research, Development and Engineering
Research, development and engineering (RD&E) costs are expensed as incurred.
Intellectual Property and Custom Development Income
As part of the company’s business model and as a result of the company’s ongoing investment
in research and development (R&D), the company licenses and sells the rights to certain
of its intellectual property (IP) including internally developed patents, trade secrets and
technological know-how. Certain transfers of IP to third parties are licensing/royalty-based
and other transfers are transaction-based sales and other transfers. Licensing/royaltybased
fees involve transfers in which the company earns the income over time, or the
amount of income is not fixed or determinable until the licensee sells future related products
(i.e., variable royalty, based upon licensee’s revenue). Sales and other transfers typically
include transfers of IP whereby the company has fulfilled its obligations and the fee received
is fixed or determinable. The company also enters into cross-licensing arrangements of
patents, and income from these arrangements is recorded only to the extent cash is
received. Furthermore, the company earns income from certain custom development
projects for strategic technology partners and specific clients. The company records the
income from these projects when the fee is earned, is not refundable, and is not dependent
upon the success of the project.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
52
ibm annual report 2004
Other (Income) and Expense
Other (income) and expense includes interest income (other than from the company’s
Global Financing external business transactions), gains and losses from securities and
other investments, realized gains and losses from certain real estate activity, and foreign
currency transaction gains and losses, and gains and losses from the sale of businesses.
Certain special actions discussed in note s, “2002 Actions” on pages 73 through 76 are
also included in Other (income) and expense.
depreciation and amortization
Plant, rental machines and other property are carried at cost and depreciated over their
estimated useful lives using the straight-line method. Asset retirement obligations (ARO)
liabilities are legal obligations associated with the retirement of long-lived assets. These
liabilities are initially recorded at fair value and the carrying amount of the related assets
is increased by the same amount. These incremental carrying amounts are depreciated
over the useful lives of the related assets.
The estimated useful lives of depreciable properties generally are as follows: buildings,
50 years; building equipment, 20 years; land improvements, 20 years; plant, laboratory
and office equipment, 2 to 15 years; and computer equipment, 1.5 to 5 years.
Capitalized software costs incurred or acquired after technological feasibility has
been established are amortized over periods up to three years. Capitalized costs for internal-
use software are amortized on a straight-line basis over 2 years. (See “Software Costs”
on page 55 for additional information.) Other intangible assets are amortized over periods
up to 7 years.
retirement-related benefits
See note w, “Retirement-Related Benefits,” on pages 78 through 86 for the company’s
accounting policy for retirement-related benefits.
stock-based compensation
The company applies Accounting Principles Board (APB) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations in accounting for its stock-based
compensation plans. Accordingly, the company records expense for grants of employee
stock-based compensation awards equal to the excess of the market price of the underlying
IBM shares at the date of grant over the exercise price of the stock-related award, if any
(known as the intrinsic value). Generally, all employee stock options are issued with an
exercise price equal to or greater than the market price of the underlying IBM shares at the
grant date and therefore, no compensation expense is recorded. In addition, no compensation
expense is recorded for purchases under the Employees Stock Purchase Plan (ESPP)
in accordance with APB Opinion No. 25. This plan is described on page 78. The intrinsic
value of restricted stock units and certain other stock-based compensation issued to
employees as of the date of grant is amortized to compensation expense over the vesting
period of the grant. To the extent awards contain performance criteria that could result in
an employee receiving more or fewer (including zero) shares than the number of units
granted, the unamortized compensation expense is remeasured during the performance
period based upon the intrinsic value at the end of each reporting period.
The following table summarizes the pro forma operating results of the company, had
compensation expense for stock options granted and for employee stock purchases
under the ESPP (see note v, “Stock-Based Compensation Plans” on pages 77 and 78), been
determined in accordance with the fair value method prescribed by Statement of Financial
Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.”
(Dollars in millions except per share amounts)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Net income as reported $«8,430 $«7,583 $«3,579
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 129 76 112
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects 1,080 1,101 1,315
Pro forma net income $«7,479 $«6,558 $«2,376
Earnings per share of common stock:
Basic—as reported $«««5.03 $«««4.40 $«««2.10
Basic—pro forma $«««4.47 $«««3.81 $«««1.40
Assuming dilution—as reported $«««4.93 $«««4.32 $«««2.06
Assuming dilution—pro forma $«««4.38 $«««3.74 $«««1.39
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect the
portion of the estimated fair value of awards that was earned for the years ended December
31, 2004, 2003 and 2002.
The fair value of stock option grants is estimated using the Black-Scholes option-pricing
model with the following assumptions:
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Option term (years)* 5 5 5
Volatility** 37.8% 39.9% 40.4%
Risk-free interest rate (zero coupon U.S. treasury note) 3.5% 2.9% 2.8%
Dividend yield 0.8% 0.7% 0.7%
Weighted-average fair value per option granted $«««34 $«««30 $«««28
* The Option term is the number of years that the company estimates, based upon history, that options will be outstanding
prior to exercise or forfeiture.
** To determine volatility, the company measures the daily price changes of the stock over the option term.
In December 2004, the FASB issued SFAS No. 123(R), “Share-based Payment,” which will
require companies to expense costs related to share-based awards in 2005. See note b,
“Accounting Changes” on page 55 for further discussion.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
53
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ibm annual report 2004
income taxes
Income tax expense is based on reported income before income taxes. Deferred income
taxes reflect the effect of temporary differences between asset and liability amounts that
are recognized for financial reporting purposes and the amounts that are recognized for
income tax purposes. These deferred taxes are measured by applying currently enacted
tax laws. Valuation allowances are recognized to reduce deferred tax assets to the amount
that will more likely than not be realized. In assessing the likelihood of realization, management
considers estimates of future taxable income.
translation of non-u.s. currency amounts
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment
are translated to U.S. dollars at year-end exchange rates. Income and expense items are
translated at weighted-average rates of exchange prevailing during the year. Translation
adjustments are recorded in Accumulated gains and (losses) not affecting retained earnings
within Stockholders’ equity.
Inventories, Plant, rental machines and other property-net, and other non-monetary
assets and liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars, or
whose economic environment is highly inflationary, are translated at approximate exchange
rates prevailing when the company acquired the assets or liabilities. All other assets and
liabilities are translated at year-end exchange rates. Cost of sales and depreciation are
translated at historical exchange rates. All other income and expense items are translated
at the weighted-average rates of exchange prevailing during the year. Gains and losses
that result from translation are included in net income.
derivatives
All derivatives are recognized in the Consolidated Statement of Financial Position at fair
value and are reported in Prepaid expenses and other current assets, Investments and
sundry assets, Other accrued expenses and liabilities or Other liabilities. Classification of each
derivative as current or non-current is based upon whether the maturity of the instrument
is less than or greater than 12 months. To qualify for hedge accounting in accordance with
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended
by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging
Activities,” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments
and Hedging Activities,” (SFAS No. 133), the company requires that the instruments be
effective in reducing the risk exposure that they are designated to hedge. For instruments
that hedge cash flows, hedge effectiveness criteria also require that it be probable that the
underlying transaction will occur. Instruments that meet established accounting criteria are
formally designated as hedges at the inception of the contract. These criteria demonstrate
that the derivative is expected to be highly effective at offsetting changes in fair value or
cash flows of the underlying exposure both at inception of the hedging relationship
and on an ongoing basis. The assessment of hedge effectiveness and ineffectiveness is
formally documented at hedge inception and reviewed at least quarterly throughout the
designated hedge period.
The company applies hedge accounting in accordance with SFAS No. 133, whereby
the company designates each derivative as a hedge of: (1) the fair value of a recognized
asset or liability or of an unrecognized firm commitment (“fair value” hedge); (2) the variability
of anticipated cash flows of a forecasted transaction or the cash flows to be received
or paid related to a recognized asset or liability (“cash flow” hedge); or (3) a hedge of a
long-term investment (“net investment” hedge) in a foreign operation. From time to time,
however, the company may enter into derivative arrangements that economically hedge
certain of its risks, even though hedge accounting does not apply under SFAS No. 133 or
the company elects not to apply hedge accounting under SFAS No. 133. In these cases,
there generally exists a natural hedging relationship in which changes in the fair value of
the derivative, which are recognized currently in net income, act as an economic offset to
changes in the fair value of the underlying hedged item(s).
Changes in the fair value of a derivative that is designated as a fair value hedge, along
with offsetting changes in the fair value of the underlying hedged exposure, are recorded
in earnings each period. For hedges of interest rate risk, the fair value adjustments are
recorded as adjustments to Interest expense and Cost of Global Financing in the Consolidated
Statement of Earnings. For hedges of currency risk associated with recorded assets
or liabilities, derivative fair value adjustments generally are recognized in Other (income)
and expense in the Consolidated Statement of Earnings. Changes in the fair value of a
derivative that is designated as a cash flow hedge are recorded, net of applicable taxes, in
the Accumulated gains and (losses) not affecting retained earnings, a component of
Stockholders’ equity.When net income is affected by the variability of the underlying cash
flow, the applicable offsetting amount of the gain or loss from the derivative that is deferred
in Stockholders’ equity is released to net income and reported in Interest expense, Cost,
SG&A expense or Other (income) and expense in the Consolidated Statement of Earnings
based on the nature of the underlying cash flow hedged. Effectiveness for net investment
hedging derivatives is measured on a spot-to-spot basis. The effective portions of changes
in the fair value of net investment hedging derivatives and other non-derivative risk
management instruments designated as net investment hedges are recorded as foreign
currency translation adjustments, net of applicable taxes, in the Accumulated gains and
(losses) not affecting retained earnings section of Stockholders’ equity. Changes in the fair
value of the portion of a net investment hedging derivative excluded from the effectiveness
assessment are recorded in Interest expense.
When the underlying hedged item ceases to exist, all changes in the fair value of the
derivative are included in net income each period until the instrument matures. When the
derivative transaction ceases to exist, a hedged asset or liability is no longer adjusted for
changes in its fair value except as required under other relevant accounting standards.
Derivatives that are not designated as hedges, as well as changes in the fair value of derivatives
that do not effectively offset changes in the fair value of the underlying hedged item
throughout the designated hedge period (collectively, “ineffectiveness”), are recorded in
net income each period and generally are reported in Other (income) and expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
54
ibm annual report 2004
The company generally reports cash flows arising from the company’s derivative
financial instruments consistent with the classification of cash flows from the underlying
hedged items that the derivatives are hedging. Accordingly, the majority of cash flows
associated with the company’s derivative programs are classified in Cash flows from operating
activities in the Consolidated Statement of Cash Flows. For currency swaps designated
as hedges of foreign currency denominated debt (included in the company’s debt risk
management program as addressed in note l, “Derivatives and Hedging Transactions” on
pages 65 to 67), cash flows directly associated with the settlement of the principal element
of these swaps are reported in Payments to settle debt in the Cash flow from financing
activities section of the Consolidated Statement of Cash Flows.
financial instruments
In determining fair value of its financial instruments, the company uses a variety of methods
and assumptions that are based on market conditions and risks existing at each balance
sheet date. For the majority of financial instruments, including most derivatives, long-term
investments and long-term debt, standard market conventions and techniques such as
discounted cash flow analysis, option-pricing models, replacement cost and termination
cost are used to determine fair value. Dealer quotes are used for the remaining financial
instruments. All methods of assessing fair value result in a general approximation of value,
and such value may never actually be realized.
cash equivalents
All highly liquid investments with maturities of three months or less at the date of purchase
are carried at fair value and considered to be cash equivalents.
marketable securities
Marketable securities included in Current assets represent securities with a maturity of
less than one year. The company also has marketable securities, including non-equity
method alliance investments, with a maturity of more than one year. These non-current
investments are included in Investments and sundry assets. The company’s marketable
securities, including certain non-equity method alliance investments, are considered
available for sale and are reported at fair value with changes in unrealized gains and losses,
net of applicable taxes, recorded in Accumulated gains and (losses) not affecting retained
earnings within Stockholders’ equity. Realized gains and losses are calculated based on
the specific identification method. Other-than-temporary declines in market value from
original cost are charged to Other (income) and expense in the period in which the loss
occurs. In determining whether an other-than-temporary decline in the market value has
occurred, the company considers the duration that, and extent to which, market value is
below original cost. Realized gains and losses also are included in Other (income) and
expense in the Consolidated Statement of Earnings. All other investment securities not
described above or in “Principles of Consolidation” on page 49, primarily non-publicly
traded equity securities, are accounted for using the cost method.
inventories
Raw materials, work in process and finished goods are stated at the lower of average cost
or net realizable value.
allowance for uncollectible receivables
Trade
An allowance for uncollectible trade receivables is recorded based on a combination of
write-off history, aging analysis, and any specific, known troubled accounts.
Financing
Financing receivables include sales-type leases, direct financing leases, and loans. Below
are the methodologies the company uses to calculate both its specific and its unallocated
reserves, which are applied consistently to its different portfolios.
Specific. The company reviews all financing accounts receivable considered at risk on a
quarterly basis. The review primarily consists of an analysis based upon current information
available about the client, such as financial statements, news reports and published credit
ratings, as well as the current economic environment, collateral net of repossession cost
and prior history. For loans that are collateral dependent, impairment is measured using
the fair value of the collateral when foreclosure is probable. Using this information, the
company determines the expected cash flow for the receivable and calculates a recommended
estimate of the potential loss and the probability of loss. For those accounts in
which the loss is probable, the company records a specific reserve.
Unallocated. The company records an unallocated reserve that is calculated by applying a
reserve rate to its different portfolios, excluding accounts that have been specifically
reserved. This reserve rate is based upon credit rating, probability of default, term, asset
characteristics, and loss history.
Receivable losses are charged against the allowance when management believes the
uncollectibility of the receivable is confirmed. Subsequent recoveries, if any, are credited
to the allowance.
Certain receivables for which the company recorded specific reserves may also be
placed on nonaccrual status. Nonaccrual assets are those receivables (impaired loans or
nonperforming leases) with specific reserves and other accounts for which it is likely that
the company will be unable to collect all amounts due according to original terms of the
lease or loan agreement. Income recognition is discontinued on these receivables.
Receivables may be removed from nonaccrual status, if appropriate, based upon changes
in client circumstances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
55
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
estimated residual values of lease assets
The recorded residual values of the company’s lease assets are estimated at the inception
of the lease to be the expected fair value of the assets at the end of the lease term. The
company periodically reassesses the realizable value of its lease residual values. Any
anticipated increases in specific future residual values are not recognized before realization
through remarketing efforts. Anticipated decreases in specific future residual values
that are considered to be other than temporary are recognized immediately upon identification
and are recorded as an adjustment to the residual value estimate. For sales-type
and direct financing leases, this reduction lowers the recorded net investment and is recognized
as a loss charged to finance income in the period in which the estimate is changed,
as well as an adjustment to unearned income to reduce future period finance income.
software costs
Costs that are related to the conceptual formulation and design of licensed programs are
expensed as incurred to R&D expense. Also for licensed programs, the company capitalizes
costs that are incurred to produce the finished product after technological feasibility
has been established. Capitalized amounts are amortized using the straight-line method,
which is applied over periods ranging up to three years. The company performs periodic
reviews to ensure that unamortized program costs remain recoverable from future revenue.
Costs to support or service licensed programs are charged to software cost as incurred.
The company capitalizes certain costs that are incurred to purchase or to create and
implement internal-use computer software, which includes software coding, installation,
testing and certain data conversion. Capitalized costs are amortized on a straight-line
basis over two years and are recorded in SG&A expense. See note i, “Intangible Assets
including Goodwill” on page 63.
product warranties
The company offers warranties for its hardware products that range up to four years, with
the majority being either one or three years. The company estimates its warranty costs
based on historical warranty claim experience and applies this estimate to the revenue
stream for products under warranty. Future costs for warranties applicable to revenue
recognized in the current period are charged to cost of revenue. The warranty accrual is
reviewed quarterly to verify that it properly reflects the remaining obligation based on
the anticipated expenditures over the balance of the obligation period. Adjustments
are made when actual warranty claim experience differs from estimates. See note o,
“Contingencies and Commitments” on page 71.
common stock
Common stock refers to the $.20 par value capital stock as designated in the company’s
Certificate of Incorporation. Treasury stock is accounted for using the cost method.
When treasury stock is reissued, the value is computed and recorded using a weightedaverage
basis.
earnings per share of common stock
Earnings per share of common stock—basic is computed by dividing Net income by the
weighted-average number of common shares outstanding for the period. Earnings per
share of common stock—assuming dilution reflects the maximum potential dilution that
could occur if securities or other contracts to issue common stock were exercised or
converted into common stock and would then share in the net income of the company.
See note t, “Earnings Per Share of Common Stock,” on page 77 for additional information.
b. Accounting Changes
new standards to be implemented
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-based Payment”
that will require the company to expense costs related to share-based payment transactions
with employees. With limited exceptions, SFAS No. 123(R) requires that the fair
value of share-based payments to employees be expensed over the period service is
received. SFAS No. 123(R) becomes mandatorily effective for the company on July 1, 2005.
The company intends to adopt this standard using the modified retrospective method of
transition. This method requires that issued financial statements be restated based on the
amounts previously calculated and reported in the pro forma footnote disclosures
required by SFAS No. 123.
SFAS No. 123(R) allows the use of both closed form models (e.g., Black-Scholes Model)
and open form models (e.g., lattice models) to measure the fair value of the share-based
payment as long as that model is capable of incorporating all of the substantive characteristics
unique to share-based awards. In accordance with the transition provisions of
SFAS No. 123(R), the expense attributable to an award will be measured in accordance with
the company’s measurement model at that award’s date of grant.
The company believes the pro forma disclosures in note a, “Significant Accounting
Policies,” on page 52 under “Stock-Based Compensation” provide an appropriate shortterm
indicator of the level of expense that will be recognized in accordance with SFAS No.
123(R). However, the total expense recorded in future periods will depend on several variables,
including the number of shared-based awards that vest and the fair value of those
vested awards.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
56
ibm annual report 2004
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29” effective for nonmonetary asset exchanges occurring
in the fiscal year beginning January 1, 2006. SFAS No. 153 requires that exchanges of
productive assets be accounted for at fair value unless fair value cannot be reasonably
determined or the transaction lacks commercial substance. SFAS No. 153 is not expected
to have a material effect on the company’s Consolidated Financial Statements.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment
of ARB No. 43, Chapter 4.” SFAS No. 151 requires certain abnormal expenditures to be
recognized as expenses in the current period. It also requires that the amount of fixed
production overhead allocated to inventory be based on the normal capacity of the production
facilities. The standard is effective for the fiscal year beginning January 1, 2006.
It is not expected that SFAS No. 151 will have a material effect on the company’s
Consolidated Financial Statements.
standards implemented
As noted on page 30, the new U.S. tax law provides a deduction for income from qualified
domestic production activities, which will be phased in from 2005 through 2010. Under
the guidance in FASB Staff Position (FSP) No. FAS 109-1, “Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004,” issued in the fourth quarter
of 2004, the deduction will be treated as a “special deduction” as described in SFAS
No. 109. As such, the company has not adjusted its deferred tax assets and liabilities as of
December 31, 2004 to reflect the impact of this special deduction. Rather, the impact of
this deduction will be reported in the period for which the deduction is claimed on the
company’s U.S. federal income tax return.
As discussed in note p, “Taxes” on pages 72 and 73, the new U.S. tax law enacted in
October 2004 creates a temporary incentive for the company to repatriate earnings accumulated
outside the U.S. FSP No. FAS 109-2, “Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,”
issued in the fourth quarter of 2004, provides that an enterprise is allowed time beyond
the financial reporting period of enactment to evaluate the effect of the new tax law on
its plan for applying SFAS No. 109. The company has not yet completed its evaluation of
the possible effect of the new tax law on its plan for repatriation of foreign earnings for
purposes of applying SFAS No. 109. Accordingly, as provided for in FSP SFAS No. 109-2,
the company has not adjusted its income tax expense or deferred tax liability as of
December 31, 2004 to reflect the possible effect of the new repatriation provision. Income
tax expense, if any, associated with any repatriation under the Act will be provided in the
company’s financial statements in the quarter in which the required management and
board approvals have been completed.
In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about
Pensions and other Postretirement Benefits, an amendment of FASB Statements No. 87, 88
and 106.” SFAS No. 132(R) retained all of the disclosure requirements of SFAS No. 132,
however, it also required additional annual disclosures describing types of plan assets,
investment strategy, measurement date(s), expected employer contributions, plan obligations,
and expected benefit payments of defined benefit pension plans and other defined
benefit postretirement plans. In accordance with the transition provisions of SFAS No.
132(R), note w, “Retirement-Related Benefits,” on pages 78 through 86 has been expanded
to include the new disclosures required as of December 31, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation
of Variable Interest Entities,” and amended it by issuing FIN 46(R) in December 2003. FIN
46(R) addresses consolidation by business enterprises VIEs that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) have equity investors that lack an essential
characteristic of a controlling financial interest.
As of December 31, 2003 and in accordance with the transition requirements of
FIN 46(R), the company chose to apply the guidance of FIN 46 to all of its interests in
special-purpose entities (SPEs) as defined within FIN 46(R) and all non-SPE VIEs that were
created after January 31, 2003. Also in accordance with the transition provisions of
FIN 46(R), the company adopted FIN 46(R) for all VIEs and SPEs as of March 31, 2004.
These accounting pronouncements did not have a material impact on the company’s
Consolidated Financial Statements.
In 2003, the Emerging Issues Task Force (EITF) reached a consensus on two revenue
recognition issues relating to the accounting for multiple-element arrangements: Issue No.
00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” (EITF No. 00-21)
and Issue No. 03-05, “Applicability of AICPA SOP 97-2 to Non-Software Deliverables in an
Arrangement Containing More Than Incidental Software” (EITF No. 03-05). The consensus
opinion in EITF No. 03-05 clarifies the scope of both EITF No. 00-21 and SOP 97-2, and was
reached on July 31, 2003. The transition provisions allowed either prospective application
or a cumulative effect adjustment upon adoption. The company adopted the issues
prospectively as of July 1, 2003. EITF No. 00-21 and No. 03-05 did not have a material impact
on the company’s Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity.” It establishes classification and
measurement standards for three types of freestanding financial instruments that have
characteristics of both liabilities and equity. Instruments within the scope of SFAS No. 150
must be classified as liabilities within the company’s Consolidated Financial Statements
and be reported at settlement date value. The provisions of SFAS No. 150 are effective for
(1) instruments entered into or modified after May 31, 2003, and (2) pre-existing instruments
as of July 1, 2003. In November 2003, through the issuance of FSP No. FAS 150-3, the FASB
indefinitely deferred the effective date of certain provisions of SFAS No. 150, including
mandatorily redeemable instruments as they relate to minority interests in consolidated
finite-lived entities. The adoption of SFAS No. 150, as modified by FSP No. FAS 150-3, did
not have a material effect on the Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
57
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.” SFAS No. 149 clarifies under what circumstances
a contract with an initial net investment meets the characteristics of a derivative as
discussed in SFAS No. 133. It also specifies when a derivative contains a financing component
that requires special reporting in the Consolidated Statement of Cash Flows. SFAS
No. 149 amends certain other existing pronouncements in order to improve consistency in
reporting these types of transactions. The new guidance was effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. SFAS No. 149 did not have a material effect on the company’s Consolidated
Financial Statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others,” which addresses the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under guarantees.
FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain
guarantees that are entered into or modified after December 31, 2002. The company
adopted the disclosure requirements of FIN 45 (see note a, “Significant Accounting
Policies,” on page 55 under “Product Warranties,” and note o, “Contingencies and Commitments,”
on page 71) and applied the recognition and measurement provisions for all
material guarantees entered into or modified in periods beginning January 1, 2003. The
adoption of the recognition and measurement provisions of FIN 45 did not have a material
impact on the company’s Consolidated Financial Statements. The impact of FIN 45 on
the company’s future Consolidated Financial Statements will depend upon whether the
company enters into or modifies any material guarantee arrangements.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit
or Disposal Activities.” SFAS No. 146 supersedes EITF No. 94-3, “Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring),” and requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred. Such liabilities
should be recorded at fair value and updated for any changes in the fair value each
period. The company adopted this statement effective January 1, 2003, and its adoption
did not have a material effect on the Consolidated Financial Statements. Going forward,
the impact of SFAS No. 146 on the company’s Consolidated Financial Statements will
depend upon the timing of and facts underlying any future exit or disposal activity.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44
and 64,Amendment of FASB Statement No. 13, and Technical Corrections,” effective May 15,
2002. SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment
of debt be aggregated and classified as an extraordinary item, net of tax, and makes
certain other technical corrections. SFAS No. 145 did not have a material effect on the
company’s Consolidated Financial Statements.
On January 1, 2003, the company adopted SFAS No. 143, “Accounting for Asset
Retirement Obligations,” which was issued in June 2001. SFAS No. 143 provides accounting
and reporting guidance for legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction or normal operation of a long-lived
asset. SFAS No. 143 requires the recording of an asset and a liability equal to the present
value of the estimated costs associated with the retirement of long-lived assets for which
a legal or contractual obligation exists. The asset is required to be depreciated over the
life of the related equipment or facility, and the liability is required to be accreted each
year based on a present value interest rate. The adoption of the standard did not have a
material effect on the company’s Consolidated Financial Statements.
c. Acquisitions/Divestitures
acquisitions
2004
In 2004, the company completed 14 acquisitions at an aggregate cost of $2,111 million.
(Dollars in millions)
Candle
Original
Amount
Disclosed in
Amortization Second Purchase Total Other
Life (in Years) Qtr. 2004 Adjustments* Allocation Maersk Acquisitions
Current assets $«202 $««(2) $«200 $«319 $«««191
Fixed assets/non-current 82 (19) 63 123 176
Intangible assets:
Goodwill NA 256 39 295 426 711
Completed technology 2–3 23 — 23 11 29
Client relationships 3–7 65 — 65 100 50
Other identifiable
intangible assets 5 6 — 6 2 13
Total assets acquired 634 18 652 981 1,170
Current liabilities (119) (22) (141) (145) (198)
Non-current liabilities (80) — (80) (44) (84)
Total liabilities assumed (199) (22) (221) (189) (282)
Total purchase price $«435 $««(4) $«431 $«792 $«««888
Adjustments primarily relate to acquisition costs, deferred taxes and other accruals.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
58
ibm annual report 2004
Other Acquisitions. The company acquired 12 other companies that are shown as other
acquisitions in the table on page 57. Seven of the acquisitions were for services-related
companies, which were integrated into the Global Services segment and five were for
software companies, which were integrated into the Software segment. The results of
operations of the acquired businesses were included in the company’s Consolidated
Financial Statements from their respective dates of acquisition. The purchase price allocations
resulted in aggregate goodwill of $711 million, of which $329 million was assigned
to the Software segment and $382 million was assigned to the Services segment. These
assignments were based upon an analysis of the segments expected to benefit from the
acquisitions. The primary items that generated goodwill are the synergies between the
acquired businesses and the company and the premiums paid by the company for the
right to control the businesses acquired. None of the goodwill is deductible for tax purposes.
The overall weighted-average life of the intangible assets purchased is 4.8 years.
2003
In 2003, the company completed nine acquisitions at an aggregate cost of $2,536 million.
(Dollars in millions)
Rational
Original
Amount
Disclosed
Amortization in First Purchase Total Other
Life (in Years) Qtr. 2003 Adjustments* Allocation Acquisitions
Current assets $«1,179 $««51 $«1,230 $«««19
Fixed assets/non-current 83 28 111 2
Intangible assets:
Goodwill NA 1,365 40 1,405 335
Completed technology 3 229 — 229 12
Client relationships 7 180 — 180 1
Other identifiable
intangible assets 2–5 32 — 32 21
In-process R&D 9 — 9 —
Total assets acquired 3,077 119 3,196 390
Current liabilities (347) (81) (428) (28)
Non-current liabilities (638) 33 (605) 11
Total liabilities assumed (985) (48) (1,033) (17)
Total purchase price $«2,092 $««71 $«2,163 $«373
* Adjustments primarily relate to acquisition costs, deferred taxes and other accruals.
Candle Corporation. On June 7, 2004, the company acquired 100 percent of the outstanding
common shares of Candle Corporation (Candle) for cash consideration of $431 million.
Candle provides services to develop, deploy and manage enterprise infrastructure. The
acquisition will allow the company to provide its clients with an enhanced set of software
solutions for managing an on demand environment and complements the company’s
existing middleware solutions. Candle was integrated into the Software segment upon
acquisition and its results of operations from that date are included in the company’s
Consolidated Financial Statements. The purchase price allocation resulted in goodwill of
$295 million, which has been assigned to the Software segment. The primary items that
generated goodwill are the value of the synergies between Candle and the company and
the acquired assembled workforce, neither of which qualifies as an amortizable intangible
asset. None of the goodwill is deductible for tax purposes. The overall weighted-average
life of the identified amortizable intangible assets acquired in the purchase of Candle is
5.9 years. These identified intangible assets will be amortized on a straight-line basis over
their useful lives.
Maersk Data/DMdata. On December 1, 2004, the company purchased 100 percent of the
outstanding common stock of Maersk Data and 45 percent of the outstanding common
stock of DMdata for $792 million. No equity consideration was issued as part of the
purchase price. Maersk Data owned the remaining 55 percent of DMdata’s outstanding
common stock. Maersk Data and DMdata are located in Denmark. Maersk Data is a
provider of IT solutions and offers consultancy, application development, operation and
support to companies and organizations. DMdata is a provider of IT operations and its
core business areas include the operation of centralized and decentralized IT systems, network
establishment and operation as well as print and security solutions for clients in a
number of different industries. These acquisitions significantly increase the company’s
Business Performance Transformation Services (BPTS) capabilities in serving clients in the
transportation and logistics industry globally, while also enhancing its capabilities in areas
such as financial services, public sector, healthcare and the food and agriculture industries.
Both Maersk Data and DMdata were integrated into the Global Services segment upon
acquisition and their results of operations from that date are included in the company’s
Consolidated Financial Statements. The purchase price allocation resulted in goodwill of
$426 million, which has been assigned to the Global Services segment. The primary items
that generated goodwill are the value of the synergies between Maersk Data/DMdata and
the company and the acquired assembled workforce, neither of which qualify as an amortizable
intangible asset. None of the goodwill is deductible for tax purposes. The overall
weighted-average life of the identified amortizable intangible assets acquired in the purchase
is 4.7 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
59
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
Rational Software Corporation (Rational). The largest acquisition in 2003 was that of Rational.
The company purchased the outstanding stock of Rational for $2,095 million in cash. In
addition, the company issued replacement stock options with an estimated fair value of
$68 million to Rational employees. Rational provides open, industry-standard tools and
best practices and services for developing business applications and building software
products and systems. The Rational acquisition provides the company with the ability to
offer a complete development environment for clients. The transaction was completed
on February 21, 2003, from which time the results of this acquisition were included in
the company’s Consolidated Financial Statements. The company merged Rational’s business
operations and employees into the company’s Software segment as a new division
and brand.
The primary items that generated the goodwill are the value of the synergies between
Rational and the company and the acquired assembled workforce, neither of which qualify
as an amortizable intangible asset. None of the goodwill is deductible for tax purposes. The
overall weighted-average life of the identified intangible assets acquired in the purchase
of Rational that are subject to amortization is 4.7 years. With the exception of goodwill,
these identified intangible assets will be amortized on a straight-line basis over their useful
lives. Goodwill of $1,405 million has been assigned to the Software segment.
As indicated above, $2,095 million of the gross purchase price was paid in cash.
However, as part of the transaction, the company assumed cash and cash equivalents held
in Rational of $1,053 million, resulting in a net cash payment of $1,042 million. In addition,
the company assumed $500 million in outstanding convertible debt. The convertible debt
was subsequently called on March 26, 2003.
Other Acquisitions. The company paid substantially all cash for the other acquisitions in the
table on page 58. Five of the acquisitions were for software companies, two related to
Strategic Outsourcing and Business Consulting Services companies and one was a hardware
business. The primary items that generated goodwill are the synergies between the
acquired businesses and the company, and the premium paid by the company for the
right to control the businesses acquired. The company assigned approximately $74 million
of the goodwill to the Software segment: $203 million of goodwill to the Global Services
segment; and $58 million of goodwill to the Personal Systems Group segment. These
assignments were based upon an analysis of the segments that are expected to benefit
from the acquisitions. Substantially all of the goodwill is not deductible for tax purposes.
The overall weighted-average life of the intangible assets purchased is 4.3 years. The results
of operations of the acquired businesses were included in the company’s Consolidated
Financial Statements from the respective dates of acquisition.
2002
In 2002, the company completed 12 acquisitions at an aggregate cost of $3,958 million.
In addition, the company paid an additional $414 million in 2003 resulting from purchase
price adjustments.
(Dollars in millions)
PwCC
Original
Amount
Disclosed in
Amortization 2002 Annual Purchase Total Other
Life (in Years) Report Adjustments* Allocation Acquisitions
Current assets $«1,197 $«(228) $««««969 $«264
Fixed assets/non-current 199 (35) 164 102
Intangible assets:
Goodwill N/A 2,461 694 3,155 364
Completed technology 3 — — — 66
Strategic alliances 5 103 — 103 —
Non-contractual client
relationships 4–7 131 — 131 —
Client contracts/backlog 3–5 82 — 82 6
Other identifiable intangible assets 3–5 95 — 95 10
In-process R&D — — — 4
Total assets acquired 4,268 431 4,699 816
Current liabilities (560) (26) (586) (208)
Non-current liabilities (234) 9 (225) (124)
Total liabilities assumed (794) (17) (811) (332)
Total purchase price $«3,474 $««414 $«3,888 $«484
* Adjustments relate to the amount paid by the company to PricewaterhouseCoopers as a result of the review discussed
below as well as other purchase accounting adjustments primarily related to accounts receivable, prepaid assets and
other accruals.
PricewaterhouseCoopers’ Global Business Consulting and Technology Services Unit (PwCC).
On October 1, 2002, the company purchased PwCC for $3,888 million. The acquisition of
PwCC provides the company with new expertise in business strategy, industry-based consulting,
process integration and application management. The company paid $3,474 million
of the cost related to the acquisition of PwCC in 2002. The balance was paid in 2003. The
purchase price allocation disclosed in the company’s 2002 Annual Report, which was
based on the initial $3,474 million paid, included an estimated amount of net tangible
assets to be transferred of approximately $422 million. The recorded amount of net tangible
assets transferred to the company from PricewaterhouseCoopers (PwC) on October 1,
2002, was approximately $454 million higher than the estimate. The amount of recorded
net tangible assets transferred was subject to a review process between both parties
under the terms of the agreement. As a result of the review process and other adjustments,
the company paid an additional amount to PwC of $397 million in July 2003.
Substantially all of the payment was accounted for as incremental goodwill due to the fact
that the net tangible assets recorded by the company as of October 1, 2002, included the
incremental amount. The difference between the $397 million payment in July and the
total purchase price adjustment in the table above is due to transaction costs incurred by
the company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
60
ibm annual report 2004
Overall
The company’s acquisitions were accounted for as purchase transactions, and accordingly,
the assets and liabilities of the acquired entities were recorded at their estimated fair
values at the dates of acquisition. The company determines fair value through third-party
appraisals and assumptions provided by management.
The acquired tangible net assets comprise primarily cash, accounts receivable, land,
buildings and leasehold improvements. The acquired identifiable intangible assets comprise
primarily completed technology, trademarks, client lists, employee agreements and
leasehold interests. The identifiable intangible assets are amortized on a straight-line basis,
generally not to exceed seven years. Goodwill from acquisitions that were consummated
prior to July 1, 2001, was amortized over five years. The company adopted SFAS No. 142,
“Goodwill and Other Intangible Assets,” on January 1, 2002, and ceased amortizing goodwill
as of that date. The results of operations of all acquired businesses were included in
the company’s Consolidated Financial Statements from the respective dates of acquisition.
divestitures
2004
On December 7, 2004, the company signed an agreement to sell its Personal Computing
Division (a division of the Personal Systems Group segment) to Lenovo Group Limited, a
publicly traded company in China. Lenovo Group will acquire substantially all the assets
and assume certain liabilities of the Personal Computing Division. Under the terms of the
agreement, IBM will receive consideration at closing in the form of cash and equity in Lenovo
Group. IBM, as part of the agreement, retained the right and will be given a preference to
provide maintenance, warranty and financing services to Lenovo Group. In addition, IBM
will provide certain agreed to transition services to Lenovo Group. This transaction is
expected to close in the second quarter of 2005.
2002
On December 31, 2002, the company sold its HDD business to Hitachi. The total gross
proceeds of the sale were $2 billion (excluding purchase price adjustments), of which
$1,414 million was received by the company at closing. According to the terms of the
agreement, the remaining proceeds were to be received one and three years after closing.
The remaining proceeds are fixed and are not dependent or variable based upon the sold
business’ earnings or performance. The company transferred approximately $244 million
of cash as part of the HDD business, resulting in a net cash inflow in 2002 related to the
HDD transaction of $1,170 million. The company received approximately $156 million
from Hitachi on December 31, 2003 for the payment due one year after closing and paid
approximately $59 million to Hitachi for certain contractual items resulting in a net cash
inflow in 2003 of $97 million.
The company paid $3,266 million of the purchase price in cash, $294 million primarily
in the form of restricted shares of IBM common stock and $328 million in notes convertible
into restricted shares of IBM common stock.
In connection with the acquisition, the company incurred approximately $196 million
of pre-tax, one-time compensation costs for certain PwCC partners and employees. This
amount relates to restricted shares and the compensation element of the convertible notes
issued as part of the purchase consideration and was recorded in the fourth quarter of
2002. The portion of this amount recorded as part of SG&A in the Consolidated Statement
of Earnings as compensation expense for the convertible notes equals the difference
between the fair value and the face value of the notes.
As a result of its acquisition of PwCC, the company recorded a liability of approximately
$601 million in the fourth quarter of 2002 to rebalance its workforce and to vacate excess
leased space. All employees affected by this action were notified as of December 31, 2002.
The portion of the liability relating to the company’s people and space was approximately
$318 million, substantially all of which was recorded as part of SG&A in the Consolidated
Statement of Earnings. The portion of the liability relating to acquired PwCC workforce and
leased space was approximately $283 million and was included as part of the liabilities
assumed for purchase accounting and is included in the table on page 59. Also see page
76 for additional information on these initiatives.
Almost half of the goodwill was estimated to be generated by the value of the acquired
assembled workforce. The acquired assembled workforce is treated as goodwill under
SFAS No. 141, “Business Combinations.” The remaining items that generated goodwill are
synergies between PwCC and the company created by the combination, and the premium
paid by the company for the right to control PwCC. The goodwill has been assigned to the
Global Services segment. The company estimates that approximately two-thirds of the
goodwill is deductible for tax purposes. The overall weighted-average life of amortizable
intangible assets purchased from PwC is 4.8 years. The results of operations of PwCC were
included in the company’s Consolidated Financial Statements as of October 1, 2002.
Other Acquisitions. The company paid cash for the other acquisitions. Six of the acquisitions
were for software companies, including Crossworlds Software, Inc., and Access360.
The other five acquisitions were Strategic Outsourcing and Business Consulting Services
companies. The primary items that generated goodwill are the synergies between the
acquired businesses and the company, and the premium paid by the company for the right
to control the businesses acquired. Approximately $300 million of the goodwill has been
assigned to the Software segment and the balance to the Global Services segment. The
goodwill is not deductible for tax purposes. The overall weighted-average life of the
intangible assets purchased is 3.4 years. The results of operations of the acquired businesses
were included in the company’s Consolidated Financial Statements from the
respective dates of acquisition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
61
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
The company entered into an arm’s-length five-year supply agreement with Hitachi,
effective January 1, 2003, designed to provide the company with a majority of its ongoing
internal disk drive requirements for the company’s Server, Storage and Personal
Systems products.
The loss on disposal recorded in 2002 was approximately $382 million, net of tax,
and was recorded in Loss from discontinued operations in the Consolidated Statement
of Earnings.
See note a, “Significant Accounting Policies,” on page 49 for the “Basis of Presentation”
for the discontinued operations.
In the second and fourth quarters of 2002, the company announced certain asset and
workforce reduction actions, and excess leased space charges related to its discontinued
HDD business. The company recorded a charge of approximately $508 million, net of tax,
in discontinued operations associated with these announced actions.
Summarized selected financial information for the discontinued operations is as follows:
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002*
Revenue $««— $«— $«1,946
Loss before income taxes $««29 $«29 $«2,037
Income tax (benefit)/expense «(11) 1 (282)
Loss from discontinued operations $««18 $«30 $«1,755
* At closing, the company incurred a significant U.S. tax charge of approximately $248 million related to the repatriation
of divestiture proceeds from certain countries with low tax rates. This amount was included in the Income tax (benefit)/
expense line item of discontinued operations.
d. Financial Instruments (excluding derivatives)
fair value of financial instruments
Cash and cash equivalents, marketable securities, notes and other accounts receivable,
and other investments are financial assets with carrying values that approximate fair value.
Accounts payable, other accrued expenses and liabilities, short-term and long-term debt
are financial liabilities with carrying values that approximate fair value.
marketable securities*
The following table summarizes the company’s marketable securities, all of which are
considered available for sale, and alliance investments.
(Dollars in millions)
Fair Value
AT DECEMBER 31: 2004 2003
Marketable securities—current:
Time deposits and other obligations $«517 $«357
Marketable securities—non-current:**
Time deposits and other obligations $«««36 $«««36
Non-U.S. government securities and other
fixed-term obligations 22 23
Total $«««58 $«««59
Non-equity method alliance investments** $«309 $«234
* Gross unrealized gains (before taxes) on marketable securities and alliance investments were $85 million and $11 million
at December 31, 2004 and 2003, respectively. Gross unrealized losses (before taxes) on marketable securities
and alliance investments were $1 million and $2 million at December 31, 2004 and 2003, respectively. See note n,
“Stockholders’ Equity Activity,” on page 69 for net change in unrealized gains and losses on marketable securities and
certain other information regarding unrealized losses.
** Included within Investments and sundry assets in the Consolidated Statement of Financial Position. See note h,
“Investments and Sundry Assets,” on page 62.
e. Inventories
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Finished goods $«1,179 $««««992
Work in process and raw materials 2,137 1,950
Total $«3,316 $«2,942
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
62
ibm annual report 2004
f. Financing Receivables
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Short-term:
Net investment in sales-type leases $«««5,074 $«««5,940
Commercial financing receivables 5,571 5,653
Customer loans receivable 4,485 5,235
Installment payment receivables 641 657
Other non-Global Financing related 30 98
Total $«15,801 $«17,583
Long-term:
Net investment in sales-type leases $«««6,049 $«««6,010
Commercial financing receivables 139 197
Customer loans receivable 4,491 4,300
Installment payment receivables 271 217
Other non-Global Financing related — 17
Total $«10,950 $«10,741
Net investment in sales-type leases is for leases that relate principally to the company’s
equipment and are generally for terms ranging from two to five years. Net investment in
sales-type leases includes unguaranteed residual values of $836 million and $845 million
at December 31, 2004 and 2003, respectively, and is reflected net of unearned income of
$1,077 million and $1,227 million and of allowance for uncollectible accounts of $269 million
and $337 million at those dates, respectively. Scheduled maturities of minimum lease
payments outstanding at December 31, 2004, expressed as a percentage of the total,
are approximately as follows: 2005, 48 percent; 2006, 28 percent; 2007, 16 percent; 2008,
6 percent; and 2009 and beyond, 2 percent.
Customer loans receivable are provided by Global Financing to the company’s clients
to finance the purchase of the company’s software and services. Global Financing is one
of many sources of funding from which clients can choose. Separate contractual relationships
on these financing arrangements are generally for terms ranging from two to five
years requiring straight-line payments over the term. Each financing contract is priced
independently at competitive market rates. The company has a history of enforcing the
terms of these separate financing agreements.
g. Plant, Rental Machines and Other Property
(Dollars in millions)
AT DECEMBER 31: 2004 2003*
Land and land improvements $««««««840 $««««««865
Buildings and building improvements 9,100 9,261
Plant, laboratory and office equipment 22,701 22,317
32,641 32,443
Less: Accumulated depreciation 18,973 19,190
13,668 13,253
Rental machines 3,744 3,710
Less: Accumulated depreciation 2,237 2,274
1,507 1,436
Total $«15,175 $«14,689
* Reclassified to conform with 2004 presentation.
h. Investments and Sundry Assets
(Dollars in millions)
AT DECEMBER 31: 2004 2003*
Deferred taxes $«3,024 $«4,288
Alliance investments:
Equity method 550 560
Cost method 309 234
Deferred transition and set-up costs** 357 227
Other deferred arrangements** 215 161
Long-term deposits 209 143
Marketable securities—non-current 58 59
Derivatives—non-current+ 48 695
Receivable from Hitachi++ — 358
Other assets 698 569
Total $«5,468 $«7,294
* Reclassified to conform with 2004 presentation.
** Deferred transition and set-up costs and other deferred arrangements are related to Global Services client arrangements.
Also see note a, “Significant Accounting Policies” on page 51 for additional information.
+ See note l, “Derivatives and Hedging Transactions” on pages 65 to 67 for the fair value of all derivatives reported in
the Consolidated Statement of Financial Position.
++ At December 31, 2004, this balance was transferred to Other accounts receivable as amount is collectible in 2005.
Also, see note c, “Acquisitions/Divestitures” on pages 60 and 61 for additional information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
63
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
i. Intangible Assets Including Goodwill
The following schedule details the company’s intangible asset balances by major asset class:
(Dollars in millions)
At December 31, 2004
Gross Net
Carrying Accumulated Carrying
Intangible Asset Class Amount Amortization Amount
Capitalized software $«1,565 $««««(680) $««««885
Client-related 861 (335) 526
Completed technology 364 (206) 158
Strategic alliances 104 (47) 57
Patents/trademarks 33 (11) 22
Other** 247 (106) 141
Total $«3,174 $«(1,385) $«1,789
(Dollars in millions)
At December 31, 2003
Gross Net
Carrying Accumulated Carrying
Intangible Asset Class Amount Amortization Amount
Capitalized software* $«1,616 $««««(802) $««««814
Client-related 704 (254) 450
Completed technology 448 (228) 220
Strategic alliances 118 (38) 80
Patents/trademarks 98 (66) 32
Other** 165 (37) 128
Total $«3,149 $«(1,425) $«1,724
* Reclassified to conform with 2004 presentation. In prior years, capitalized software was recorded in Investments and
sundry assets.
** Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems,
and impacts from currency translation.
The company amortizes the cost of intangible assets over their estimated useful lives
unless such lives are deemed indefinite. Amortizable intangible assets are tested for
impairment based on undiscounted cash flows and, if impaired, written down to fair value
based on either discounted cash flows or appraised values. Intangible assets with indefinite
lives are tested annually for impairment and written down to fair value as required. No
impairment of intangible assets has been identified during any of the periods presented.
The net carrying amount of intangible assets increased by $65 million for the year
ended December 31, 2004, primarily due to increased investments in Software.
Total amortization was $956 million, $955 million and $802 million for the years ended
December 31, 2004, 2003 and 2002, respectively. The aggregate amortization expense for
acquired intangibles (excluding capitalized software) was $370 million, $349 million and
$181 million for the years ended December 31, 2004, 2003 and 2002, respectively.
The future amortization expense for each of the five succeeding years relating to all
intangible assets that are currently recorded in the Consolidated Statement of Financial
Position is estimated to be the following at December 31, 2004:
(Dollars in millions)
2005 $«875
2006 494
2007 200
2008 93
2009 72
goodwill
The changes in the carrying amount of goodwill, by reporting segment, for the year ended
December 31, 2004, are as follows:
(Dollars in millions)
Foreign
Currency
Balance Purchase Translation Balance
Jan. 1, Goodwill Price and Other Dec. 31,
Segment 2004 Additions Adjustments Divestitures Adjustments 2004
Global Services $«4,184 $««««808 $«««(41) $«(2) $«222 $«5,171
Systems and
Technology Group 161 — — — 8 169
Personal Systems Group 71 — — — 5 76
Software 2,505 585 (75) — 6 3,021
Global Financing — — — — — —
Enterprise Investments — — — — — —
Total $«6,921 $«1,393 $«(116) $«(2) $«241 $«8,437
Goodwill is tested annually for impairment using a fair value approach, at the “reporting
unit” level. A reporting unit is the operating segment, or a business which is one level
below that operating segment (the “component” level) if discrete financial information is
prepared and regularly reviewed by management at the component level. No impairment
of goodwill has been identified during any of the periods presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
64
ibm annual report 2004
j. Sale and Securitization of Receivables
The company periodically sells receivables through the securitization of loans, leases and
trade receivables. The company retains servicing rights in the securitized receivables for
which it receives a servicing fee. Any gain or loss incurred as a result of such sales is recognized
in the period in which the sale occurs.
During 2004, the company renewed its trade receivables securitization facility that
allows for the ongoing sale of up to $500 million of trade receivables. At the time of
renewal, the facility was changed from an uncommitted to a committed facility. This facility
was originally put in place in 2001 primarily to provide backup liquidity and can be
accessed on three days’ notice. The company did not have any amounts outstanding under
the trade receivables securitization facility in 2004 or 2003. In addition, the company has
a securitization program to sell loans receivable from state and local government clients.
This program was established in 1990 and has been used from time to time since then.
No receivables were sold under either of these programs in 2004 or 2003.
At December 31, 2004, there were no state and local receivables securitized and
under the company’s management. At December 31, 2003, $21 million was securitized
and under the company’s management. Servicing assets net of servicing liabilities were
insignificant.
The company utilizes certain of its financing receivables as collateral for nonrecourse
borrowings. Financing receivables pledged as collateral for borrowings were $249 million
and $153 million at December 31, 2004 and 2003, respectively. These borrowings are
included in note k, “Borrowings,” below.
k. Borrowings
short-term debt
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Commercial paper $«3,151 $«2,349
Short-term loans 1,340 1,124
Long-term debt—current maturities 3,608 3,173
Total $«8,099 $«6,646
The weighted-average interest rates for commercial paper at December 31, 2004 and
2003, were 2.2 percent and 1.0 percent, respectively. The weighted-average interest
rates for short-term loans were 1.5 percent and 2.5 percent at December 31, 2004 and
2003, respectively.
long-term debt
Pre-Swap Activity
(Dollars in millions)
Maturities 2004 2003
U.S. Dollars:
Debentures:
5.875% 2032 $««««««600 $««««««600
6.22% 2027 469 500
6.5% 2028 313 319
7.0% 2025 600 600
7.0% 2045 150 150
7.125% 2096 850 850
7.5% 2013 532 550
8.375% 2019 750 750
3.43% convertible notes* 2007 278 309
Notes: 5.9% average 2006–2013 2,724 3,034
Medium-term note program: 4.5% average 2005–2018 3,627 4,690
Other: 3.0% average** 2005–2010 1,555 508
12,448 12,860
Other currencies (average interest rate at
December 31, 2004, in parentheses):
Euros (5.0%) 2005–2009 1,095 1,174
Japanese yen (1.2%) 2005–2015 3,435 4,363
Canadian dollars (7.8%) 2005–2011 9 201
Swiss francs (1.5%) 2008 220 —
Other (5.5%) 2005–2014 513 770
17,720 19,368
Less: Net unamortized discount 49 15
Add: SFAS No. 133 fair value adjustment+ 765 806
18,436 20,159
Less: Current maturities 3,608 3,173
Total $«14,828 $«16,986
* On October 1, 2002, as part of the purchase price consideration for the PwCC acquisition, as addressed in note c,
“Acquisitions/Divestitures,” on pages 59 and 60, the company issued convertible notes bearing interest at a stated
rate of 3.43 percent with a face value of approximately $328 million to certain of the acquired PwCC partners. The
notes are convertible into 4,764,543 shares of IBM common stock at the option of the holders at any time after the
first anniversary of their issuance based on a fixed conversion price of $68.81 per share of the company’s common
stock. As of December 31, 2004, a total of 720,034 shares had been issued under this provision.
** Includes $249 million and $153 million of debt collateralized by financing receivables at December 31, 2004 and
2003, respectively. See note j, “Sale and Securitization of Receivables” above for further details.
+ In accordance with the requirements of SFAS No. 133, the portion of the company’s fixed rate debt obligations that
is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt’s
carrying value plus an SFAS No. 133 fair value adjustment representing changes recorded in the fair value of the hedged
debt obligations attributable to movements in market interest rates and applicable foreign currency exchange rates
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
65
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
Annual contractual maturities on long-term debt outstanding, including capital lease
obligations, at December 31, 2004, are as follows:
(Dollars in millions)
2005 $«3,221
2006 3,104
2007 1,300
2008 499
2009 2,116
2010 and beyond 7,480
interest on debt
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Cost of Global Financing $«428 $«503 $«633
Interest expense 139 145 145
Interest expense—discontinued operations — — 2
Interest capitalized 4 15 35
Total interest paid and accrued $«571 $«663 $«815
Refer to the related discussion on page 89 in note x, “Segment Information,” for total
interest expense of the Global Financing segment. See note l, “Derivatives and Hedging
Transactions,” on pages 65 to 67 for a discussion of the use of currency and interest rate
swaps in the company’s debt risk management program.
lines of credit
On May 27, 2004, the company completed the renegotiation of a new $10 billion 5-year
Credit Agreement with JP Morgan Chase Bank, as Administrative Agent, and Citibank,
N.A., as Syndication Agent, replacing credit agreements of $8 billion (5-year) and $2 billion
(364 day). The total expense recorded by the company related to these facilities was
$8.9 million, $7.8 million and $9.1 million for the years ended December 31, 2004, 2003,
and 2002, respectively. The new facility is irrevocable unless the company is in breach of
covenants, including interest coverage ratios, or if it commits an event of default, such as
failing to pay any amount due under this agreement. The company believes that circumstances
that might give rise to a breach of these covenants or an event of default, as
specified in these agreements, are remote. The company’s other lines of credit, most of
which are uncommitted, totaled $9,041 million and $8,202 million at December 31, 2004
and 2003, respectively. Interest rates and other terms of borrowing under these lines of
credit vary from country to country, depending on local market conditions.
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Unused lines:
From the committed global credit facility $«««9,804 $«««9,907
From other committed and uncommitted lines 6,477 5,976
Total unused lines of credit $«16,281 $«15,883
l. Derivatives and Hedging Transactions
The company operates in approximately 35 functional currencies and is a significant
lender and borrower in the global markets. In the normal course of business, the company
is exposed to the impact of interest rate changes and foreign currency fluctuations, and to
a lesser extent equity price changes and client credit risk. The company limits these risks
by following established risk management policies and procedures including the use of
derivatives and, where cost-effective, financing with debt in the currencies in which assets
are denominated. For interest rate exposures, derivatives are used to align rate movements
between the interest rates associated with the company’s lease and other financial assets
and the interest rates associated with its financing debt. Derivatives are also used to manage
the related cost of debt. For foreign currency exposures, derivatives are used to limit
the effects of foreign exchange rate fluctuations on financial results.
The company does not use derivatives for trading or speculative purposes, nor is it a
party to leveraged derivatives. Further, the company has a policy of only entering into
contracts with carefully selected major financial institutions based upon their credit ratings
and other factors, and maintains strict dollar and term limits that correspond to the institution’s
credit rating.
In its hedging programs, the company employs the use of forward contracts, futures
contracts, interest rate and currency swaps, options, caps, floors or a combination thereof
depending upon the underlying exposure.
A brief description of the major hedging programs follows.
debt risk management
The company issues debt in the global capital markets, principally to fund its financing
lease and loan portfolio. Access to cost-effective financing can result in interest rate and/or
currency mismatches with the underlying assets. To manage these mismatches and to
reduce overall interest cost, the company primarily uses interest-rate and currency instruments,
principally swaps, to convert specific fixed-rate debt issuances into variable-rate
debt (i.e., fair value hedges) and to convert specific variable-rate debt and anticipated
commercial paper issuances to fixed rate (i.e., cash flow hedges). The resulting cost of funds
is lower than that which would have been available if debt with matching characteristics
was issued directly. At December 31, 2004, the weighted-average remaining maturity of
all swaps in the debt risk management program was approximately three years
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
66
ibm annual report 2004
long-term investments in foreign subsidiaries (net investment)
A significant portion of the company’s foreign currency denominated debt portfolio is
designated as a hedge of net investment to reduce the volatility in stockholders’ equity
caused by changes in foreign currency exchange rates in the functional currency of major
foreign subsidiaries with respect to the U.S. dollar. The company also uses currency swaps
and foreign exchange forward contracts for this risk management purpose. The currency
effects of these hedges (approximately $156 million in 2004 and approximately $200 million
in 2003, net of tax) are reflected as a loss in the Accumulated gains and (losses) not
affecting retained earnings section of the Consolidated Statement of Stockholders’ Equity,
thereby offsetting a portion of the translation adjustment of the applicable foreign subsidiaries’
net assets.
anticipated royalties and cost transactions
The company’s operations generate significant nonfunctional currency, third-party vendor
payments and intercompany payments for royalties, and goods and services among the
company’s non-U.S. subsidiaries and with the parent company. In anticipation of these
foreign currency cash flows and in view of the volatility of the currency markets, the company
selectively employs foreign exchange forward and option contracts to manage its
currency risk. In general, these hedges have maturities of one year or less, but from time
to time extend beyond one year commensurate with the underlying hedged anticipated
cash flow. At December 31, 2004, the weighted-average remaining maturity of these
derivative instruments was approximately one year.
subsidiary cash and foreign currency asset/liability management
The company uses its Global Treasury Centers to manage the cash of its subsidiaries.
These centers principally use currency swaps to convert cash flows in a cost-effective
manner. In addition, the company uses foreign exchange forward contracts to hedge, on
a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency
assets and liabilities. The terms of these forward and swap contracts are generally
less than one year. The changes in fair value from these contracts and from the underlying
hedged exposures are generally offsetting and are recorded in Other (income) and
expense in the Consolidated Statement of Earnings.
equity risk management
The company is exposed to certain equity price changes related to certain obligations to
employees. These equity exposures are primarily related to market value movements in
certain broad equity market indices and in the company’s own stock. Changes in the overall
value of this employee compensation obligation are recorded in SG&A expense in the
Consolidated Statement of Earnings. Although not designated as accounting hedges, the
company utilizes equity derivatives, including equity swaps and futures to economically
hedge the equity exposures relating to this employee compensation obligation. To match
the exposures relating to this employee compensation obligation, these derivatives are
linked to the total return of certain broad equity market indices and/or the total return of
the company’s common stock. These derivatives are recorded at fair value with gains or
losses also reported in SG&A expense in the Consolidated Statement of Earnings.
other derivatives
The company holds warrants in connection with certain investments that, although not
designated as hedging instruments, are deemed derivatives since they contain net share
settlement clauses. During the year, the company recorded the change in the fair value of
these warrants in net income.
The company is exposed to a potential loss if a client fails to pay amounts due the
company under contractual terms (“credit risk”). The company has established policies and
procedures for mitigating credit risk on principal transactions, including reviewing and establishing
limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness
of counterparties. Master agreements with counterparties include master netting
arrangements as further mitigation of credit exposure to counterparties. These arrangements
permit the company to net amounts due from the company to a counterparty with amounts
due to the company from a counterparty reducing the maximum loss from credit risk in the
event of counterparty default. Also, in 2003, the company began utilizing credit default swaps
to economically hedge certain credit exposures. These derivatives have terms of two years.
The swaps are not designated as accounting hedges and are recorded at fair value with
gains and losses reported in SG&A expense in the Consolidated Statement of Earnings.
The following table and the table on page 67 summarize the net fair value of the
company’s derivative and other risk management instruments at December 31, 2004 and
2003 (included in the Consolidated Statement of Financial Position).
risk management program
(Dollars in millions)
Hedge Designation
Net Non-Hedge/
AT DECEMBER 31, 2004 Fair Value Cash Flow Investment Other
Derivatives—net asset/(liability):
Debt risk management $«221 $«««(53) $«««««««— $«(14)
Long-term investments in foreign
subsidiaries (net investments) — — (58) —
Anticipated royalties and
cost transactions — (939) — —
Subsidiary cash and foreign currency
asset/liability management — — — (19)
Equity risk management — — — (7)
Total derivatives 221(a) (992) (b) (58) (c) (40) (d)
Debt:
Long-term investments in foreign
subsidiaries (net investments) — — (2,490) (e) —
Total $«221 $«(992) $«(2,548) $«(40)
(a) Comprises assets of $440 million and liabilities of $219 million.
(b) Comprises assets of $12 million and liabilities of $1,004 million.
(c) Comprises liabilities of $58 million.
(d) Comprises assets of $60 million and liabilities of $100 million.
(e) Represents fair value of foreign denominated debt issuances formally designated as a hedge of net investment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
67
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
(Dollars in millions)
Hedge Designation
Net Non-Hedge/
AT DECEMBER 31, 2003 Fair Value Cash Flow Investment Other
Derivatives—net asset /(liability):
Debt risk management $«297 $«««(23) $«««««««— $«(10)
Long-term investments in foreign
subsidiaries (net investments) — — (27) —
Anticipated royalties and cost transactions — (643) — —
Subsidiary cash and foreign currency
asset/liability management — — — (31)
Equity risk management — — — 39
Other derivatives — — — 8
Total derivatives 297 (a) (666) (b) (27) (c) 6 (d)
Debt:
Long-term investments in foreign
subsidiaries (net investments) — — (2,470) (e) —
Total $«297 $«(666) $«(2,497) $«÷«6
(a) Comprises assets of $1,083 million and liabilities of $786 million.
(b) Comprises liabilities of $666 million.
(c) Comprises liabilities of $27 million.
(d) Comprises assets of $73 million and liabilities of $67 million.
(e) Represents fair value of foreign denominated debt issuances formally designated as a hedge of net investment.
accumulated derivative gains or losses
As illustrated above, the company makes extensive use of cash flow hedges, principally in
the Anticipated royalties and cost transactions risk management program. In connection with
the company’s cash flow hedges, it has recorded approximately $653 million of net losses
in Accumulated gains and (losses) not affecting retained earnings as of December 31,
2004, net of tax, of which approximately $492 million is expected to be reclassified to net
income within the next year, providing an offsetting economic impact against the underlying
anticipated cash flows hedged.
The following table summarizes activity in the Accumulated gains and (losses) not
affecting retained earnings section of the Consolidated Statement of Stockholders’ Equity
related to all derivatives classified as cash flow hedges held by the company during the
periods January 1, 2001 (the date of the company’s adoption of SFAS No. 133) through
December 31, 2004:
(Dollars in millions, net of tax) Debit/(Credit)
December 31, 2001 $«(296)
Net losses reclassified into earnings from equity during 2002 (5)
Changes in fair value of derivatives in 2002 664
December 31, 2002 $««363
Net losses reclassified into earnings from equity during 2003 (713)
Changes in fair value of derivatives in 2003 804
December 31, 2003 $««454
Net losses reclassified into earnings from equity during 2004 (463)
Changes in fair value of derivatives in 2004 662
December 31, 2004 $««653
For the years ending December 31, 2004 and 2003, respectively, there were no significant
gains or losses on derivative transactions or portions thereof that were either ineffective as
hedges, excluded from the assessment of hedge effectiveness, or associated with an
underlying exposure that did not or was not expected to occur; nor are there any anticipated
in the normal course of business.
m. Other Liabilities
(Dollars in millions)
AT DECEMBER 31: 2004 2003*
Deferred taxes $«1,879 $«1,834
Deferred income 2,222 1,842
Executive compensation accruals 1,163 1,036
Restructuring actions 787 871
Postemployment/preretirement liability 562 579
Derivatives liabilities 434 117
Non-current warranty accruals 415 277
Disability benefits 357 349
Environmental accruals 218 214
Other 890 614
Total $«8,927 $«7,733
* Reclassified to conform with 2004 presentation.
In response to changing business needs, periodically the company takes certain workforce
rebalancing actions to improve productivity and competitive position. The non-current
contractually obligated future payments associated with these ongoing activities are
reflected in the postemployment/preretirement liability caption in the table above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
68
ibm annual report 2004
In addition, the company executed certain actions prior to 1994, and in 1999 and
2002. The reconciliation of the December 31, 2003 to 2004 balances of the current and
non-current liabilities for restructuring actions is presented in the table below. The current
liabilities presented in the table are included in Other accrued expenses and liabilities in
the Consolidated Statement of Financial Position.
(Dollars in millions)
Balance at Balance at
Dec. 31, Other Dec. 31,
2003 Payments Adjustments* 2004
Current:
Workforce $««««222 $«211 $««128 $«139
Space 129 111 68 86
Other 39 32 2 9
Total $««««390 $«354 $««198 $«234
Non-current:
Workforce $««««587 $«««— $«««(44) $«543
Space 282 — (38) 244
Other 2 — (2) —
Total $««««871 $«««— $«««(84) $«787
* The other adjustments column in the table above includes the reclassification of non-current to current and foreign
currency translation adjustments. In addition, during the year ended December 31, 2004, net adjustments to increase
previously recorded liabilities for changes in the estimated cost of employee terminations and vacant space for the
2002 actions ($42 million), offset by reductions in previously recorded liabilities for the HDD-related restructuring in
2002 ($1 million) and actions prior to 1999 ($28 million) were recorded. Of the $13 million of net adjustments
recorded during the year ended December 31, 2004 in the Consolidated Statement of Earnings, $14 million (net) was
predominantly included in Other (income) and expense offset by a $1 million credit included in Discontinued
Operations (for the HDD-related restructuring actions). Additionally, adjustments of $8 million were recorded to
Goodwill during the year ended December 31, 2004 for changes to estimated vacant space and workforce reserves.
The workforce accruals primarily relate to the company’s Global Services business. The
remaining liability relates to terminated employees who are no longer working for the
company, but who were granted annual payments to supplement their incomes in certain
countries. Depending on the individual country’s legal requirements, these required payments
will continue until the former employee begins receiving pension benefits or dies.
Included in the December 31, 2004 workforce accruals above is $62 million associated
with the HDD-related restructuring discussed in note c, “Acquisitions/Divestitures,” on
pages 60 and 61.
The space accruals are for ongoing obligations to pay rent for vacant space that could
not be sublet or space that was sublet at rates lower than the committed lease arrangement.
The length of these obligations varies by lease with the longest extending through 2016.
Other accruals are primarily the remaining liabilities (other than workforce or space)
associated with the 2002 second quarter actions described in note s, “2002 Actions,”
on pages 73 through 76. In addition, there are $7 million of remaining liabilities at
December 31, 2004 associated with the HDD-related restructuring discussed in note c,
“Acquisitions/Divestitures,” on pages 60 and 61.
The company employs extensive internal environmental protection programs that
primarily are preventive in nature. The company also participates in environmental assessments
and cleanups at a number of locations, including operating facilities, previously
owned facilities and Superfund sites.
The cost of internal environmental protection programs that are preventative in nature
are expensed as incurred. When a cleanup program becomes likely, and it’s probable that
the company will incur cleanup costs and those costs can be reasonably estimated, the
company accrues remediation costs for known environmental liabilities. In addition, estimated
environmental costs that are associated with AROs (for example, the required removal
and restoration of chemical storage facilities and monitoring) are also accrued when it is
probable that the costs will be incurred and the costs are reasonably estimable. The
accounting for AROs is further discussed in note a, “Significant Accounting Policies,” and in
“Depreciation and Amortization” on page 52. Our maximum exposure for all environmental
liabilities cannot be estimated and no amounts have been recorded for environmental
liabilities that are not probable or estimable.
Estimated environmental costs are not expected to materially affect the consolidated
financial position or consolidated results of the company’s operations in future periods.
However, estimates of future costs are subject to change due to protracted cleanup periods
and changing environmental remediation regulations.
The European Commission (EC) has issued a directive that requires member states of
the European Union (EU) to meet certain targets for collection, re-use and recovery of
waste electrical and electronic equipment. In February 2003, the EU published the Waste
Electrical and Electronic Equipment directive, or WEEE (Directive 2002/96/EC, which was
amended in December 2003 by Directive 2003/108/EC). The WEEE directive regulates the
collection, reuse and recycling of waste from many electrical and electronic products. The
WEEE directive must be implemented by August 13, 2005. Under the WEEE directive,
equipment producers are required to finance the collection, recovery and disposal of
electronic scrap. The company is continuing to evaluate the impact of adopting this guidance.
As most member states have yet to issue their implementation requirements, it is not
possible to determine the full amount of accruals necessary to comply with the directive.
Another directive, the Restrictions of Hazardous Substances (RoHS) directive (2002/95/EC)
bans the use of certain hazardous materials in electric and electrical equipment, which are
put on the market in member states of the EU after July 1, 2006. As most member states
have yet to issue their implementation requirements, the company is continuing the evaluate
the full impact of adopting this guidance.
The total amounts accrued for environmental liabilities, including amounts classified
as current in the Consolidated Statement of Financial Position, that do not reflect actual or
anticipated insurance recoveries, were $246 million and $243 million at December 31,
2004 and 2003, respectively
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
69
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
n. Stockholders’ Equity Activity
In the fourth quarter of 2002, in connection with the PwCC acquisition, the company issued
3,677,213 shares of restricted stock valued at approximately $254 million and recorded an
additional $30 million for stock to be issued in future periods as part of the purchase price
consideration paid to the PwCC partners. See note c, “Acquisitions/Divestitures,” on pages
59 and 60, for further information regarding this acquisition and related payments made
by the company. Additionally, in the fourth quarter of 2002, in conjunction with the funding
of the company’s U.S. pension plan, the company issued an additional 24,037,354 shares
of common stock from treasury shares valued at $1,871 million.
stock repurchases
From time to time, the Board of Directors authorizes the company to repurchase IBM
common stock. The company repurchased 78,562,974 common shares at a cost of
$7,275 million, 49,994,514 common shares at a cost of $4,403 million and 48,481,100
common shares at a cost of $4,212 million in 2004, 2003 and 2002, respectively. The company
issued 2,840,648 treasury shares in 2004, issued 2,120,293 treasury shares in 2003
and 979,246 treasury shares in 2002, as a result of exercises of stock options by employees
of certain recently acquired businesses and by non-U.S. employees. At December 31,
2004, $3,686 million of Board-authorized repurchases remained. The company plans to
purchase shares on the open market or in private transactions from time to time, depending
on market conditions. In connection with the issuance of stock as part of the company’s
stock compensation plans, 422,338 common shares at a cost of $38 million, 291,921 common
shares at a cost of $24 million and 189,797 common shares at a cost of $18 million in
2004, 2003 and 2002, respectively, were remitted by employees to the company in order
to satisfy minimum statutory tax withholding requirements. Such amounts are included in
the Treasury stock balance in the Consolidated Statement of Financial Position and the
Consolidated Statement of Stockholders’ Equity.
accumulated gains and (losses) not affecting retained earnings*
(Dollars in millions)
Net Net Accumulated
Unrealized Foreign Minimum Unrealized Gains/(Losses)
Losses Currency Pension (Losses)/Gains Not Affecting
on Cash Flow Translation Liability on Marketable Retained
Hedge Derivatives Adjustments Adjustment Securities Earnings
December 31, 2002 $«(363) $««««238 $«(3,291) $««(2) $«(3,418)
Change for period (91) 1,768 (162) 7 1,522
December 31, 2003 (454) 2,006 (3,453) 5 (1,896)
Change for period (199) 1,055 (1,066) 45 (165)
December 31, 2004 $«(653) $«3,061 $«(4,519) $«50 $«(2,061)
* Net of tax
net change in unrealized gains/(losses) on marketable securities (net of tax)
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Net unrealized gains arising during the period $«52 $«4
Less: net gains/(losses) included in net income for the period 7 (3) *
Net change in unrealized gains on marketable securities $«45 $«7
* Includes writedowns of $0.1 million and $7 million in 2004 and 2003, respectively.
The following table shows the company’s investments’ gross unrealized losses and fair
value, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at December 31, 2004.
(Dollars in millions)
Less than 12 Months 12 Months or More Total
Unrealized Unrealized Unrealized
Description of Securities Fair Value Losses Fair Value Losses Fair Value Losses
U.S. Treasury obligations and
direct obligations of
U.S. government agencies $«— $«— $«— $«— $«— $«—
Foreign government bonds — — 22 — 22 —
Corporate bonds — — — — — —
Subtotal, debt securities — — 22 — 22 —
Common stock 3 1 — — 3 1
Total temporarily impaired
securities $«««3 $«««1 $«22 $«— $«25 $«««1
o. Contingencies and Commitments
contingencies
The company is involved in a variety of claims, suits, investigations and proceedings that
arise from time to time in the ordinary course of its business, including actions with respect
to contracts, IP, product liability, employment, securities, and environmental matters. The
following is a discussion of some of the more significant legal matters involving the company.
On July 31, 2003, the U.S. District Court for the Southern District of Illinois, in Cooper
et al. vs. The IBM Personal Pension Plan and IBM Corporation, held that the company’s pension
plan violated the age discrimination provisions of the Employee Retirement Income
Security Act of 1974 (ERISA). On September 29, 2004, the company announced that IBM
and plaintiffs agreed in principle to resolve certain claims in the litigation. Under the terms
of the agreement, plaintiffs will receive an incremental pension benefit in exchange for the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
70
ibm annual report 2004
settlement of some claims, and a stipulated remedy on remaining claims if plaintiffs prevail
on appeal. Under the terms of the settlement, the judge will issue no further rulings on
remedies. This settlement, together with a previous settlement of a claim referred to as the
partial plan termination claim resulted in the company taking a one-time charge of $320 million
in the third quarter of 2004.
This agreement ends the litigation on all claims except the two claims associated with
IBM’s cash balance formula. The company will appeal the rulings on these claims. The company
continues to believe that its pension plan formulas are fair and legal. The company
has reached this agreement in the interest of the business and the company shareholders,
and to allow for a review of its cash balance formula by the Court of Appeals. The company
continues to believe it is likely to be successful on appeal.
The agreement stipulates that if the company is not successful on appeal of the two
remaining claims, the agreed remedy will be increased by up to $1.4 billion—$780 million
for the claim that the company’s cash balance formula is age discriminatory, and $620 million
for the claim that the method used to establish opening account balances during the
1999 conversion discriminated on the basis of age (referred to as the “always cash balance”
claim).The maximum additional liability the company could face in this case if it is not successful
on appeal is therefore capped at $1.4 billion.
In the coming months, class members will receive formal notice of the settlement and
the judge will hold a fairness hearing. Once the settlement is approved, IBM will appeal
the liability rulings for the cash balance claims. As a result, the entire process could take
up to two years before reaching final conclusion.
The company is the defendant in an action brought by Compuware in the District
Court for the Eastern District of Michigan in 2002, asserting causes of action for copyright
infringement, trade secret misappropriation, Sherman Act violations, tortious interference
with contracts and unfair competition under various state statutes. The company asserted
counterclaims for copyright infringement and patent infringement in the Michigan action.
The court ruled that the company’s patent claims against Compuware will be addressed in
a separate trial, which has not yet been scheduled, and granted Compuware’s motion to
dismiss the company’s copyright infringement claims on summary judgment. The court
granted in part and denied in part the company’s motion for summary judgment dismissing
Compuware’s antitrust claims. Trial began during the week of February 14, 2005. The
company has also asserted patent infringement claims against Compuware in a separate
action that the company brought in the District Court for the Southern District of New York
in January 2004.
The company is a defendant in an action filed on March 6, 2003 in state court in Salt
Lake City, Utah by The SCO Group. The company removed the case to Federal Court in
Utah. Plaintiff is successor in interest to some of AT&T’s Unix IP rights, and alleges copyright
infringement, unfair competition, interference with contract and breach of contract with
regard to the company’s distribution of AIX and contribution of unspecified code to Linux.
The company has asserted counterclaims, including breach of contract, violation of the
Lanham Act, unfair competition, intentional torts, unfair and deceptive trade practices,
breach of the General Public License that governs open source distributions, patent
infringement, promissory estoppel and copyright infringement. Trial was scheduled for
November 1, 2005 but the scheduling order has been suspended and is under revision.
On June 2, 2003 the company announced that it received notice of a formal, nonpublic
investigation by the Securities and Exchange Commission (SEC). The SEC is seeking
information relating to revenue recognition in 2000 and 2001 primarily concerning certain
types of client transactions. The company believes that the investigation arises from a separate
investigation by the SEC of Dollar General Corporation, a client of the company’s
Retail Stores Solutions unit, which markets and sells point-of-sale products.
On January 8, 2004, the company announced that it received a “Wells Notice” from
the staff of the SEC in connection with the staff’s investigation of Dollar General
Corporation, which as noted above, is a client of the company’s Retail Stores Solutions unit.
It is the company’s understanding that an employee in the company’s Sales & Distribution
unit also received a Wells Notice from the SEC in connection with this matter. The Wells
Notice notifies the company that the SEC staff is considering recommending that the SEC
bring a civil action against the company for possible violations of the U.S. securities laws
relating to Dollar General’s accounting for a specific transaction, by participating in and
aiding and abetting Dollar General’s misstatement of its 2000 results. In that transaction,
the company paid Dollar General $11 million for certain used equipment as part of a sale
of IBM replacement equipment in Dollar General’s 2000 fourth fiscal quarter. Under the
SEC’s procedures, the company responded to the SEC staff regarding whether any action
should be brought against the company by the SEC. The separate SEC investigation noted
above, relating to the recognition of revenue by the company in 2000 and 2001 primarily
concerning certain types of client transactions, is not the subject of this Wells Notice.
In January 2004, the Seoul District Prosecutors Office in South Korea announced it had
brought criminal bid rigging charges against several companies, including IBM Korea and
LG IBM (a joint venture between IBM Korea and LG Electronics) and had also charged
employees of some of those entities with, among other things, bribery of certain officials of
government-controlled entities in Korea, and bid rigging. IBM Korea and LG IBM cooperated
fully with authorities in these matters. A number of individuals, including former IBM
Korea and LG IBM employees, were subsequently found guilty and sentenced. IBM Korea
and LG IBM were also required to pay fines. IBM Korea has been debarred from doing business
directly with certain government controlled entities in Korea. The orders, imposed at
different times, cover a period of no more than a year from the date of issuance. The
orders do not prohibit IBM Korea from selling products and services to business partners
who sell to government controlled entities in Korea. In addition, the U.S. Department of
Justice and the SEC have both contacted the company in connection with this matter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
71
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
The company is party to, or otherwise involved in, proceedings brought by U.S. federal
or state environmental agencies under the Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”), known as “Superfund,” or laws similar to CERCLA.
Such statutes require potentially responsible parties to participate in remediation activities
regardless of fault or ownership of sites. The company is also conducting environmental
investigations or remediations at or in the vicinity of several current or former operating
sites pursuant to permits, administrative orders or agreements with state environmental
agencies, and is involved in lawsuits and claims concerning certain current or former
operating sites.
In accordance with SFAS No. 5, “Accounting for Contingencies,” the company records
a provision with respect to a claim, suit, investigation or proceeding when it is probable that
a liability has been incurred and the amount of the loss can reasonably be estimated. Any
provisions are reviewed at least quarterly and are adjusted to reflect the impact and status
of settlements, rulings, advice of counsel and other information pertinent to a particular
matter. Under SFAS No. 5, provisions for litigation-related expenses increased $125 million
in 2004 versus 2003. Any other recorded liabilities for the above items, including any
changes to such liabilities for the twelve months ended December 31, 2004, were not
material to the Consolidated Financial Statements. Based on its experience, the company
believes that the damage amounts claimed in the matters referred to above are not a
meaningful indicator of the potential liability. Litigation is inherently uncertain and it is not
possible to predict the ultimate outcome of the matters previously discussed. While the
company will continue to defend itself vigorously in all such matters, it is possible that
the company’s business, financial condition, results of operations, or cash flows could be
affected in any particular period by the resolution of one or more of these matters.
Whether any losses, damages or remedies finally determined in any such claim, suit, investigation
or proceeding could reasonably have a material effect on the company’s business,
financial condition, results of operations, or cash flow will depend on a number of variables,
including the timing and amount of such losses or damages, the structure and type of any
such remedies, the significance of the impact any such losses, damages or remedies may
have on the company’s Consolidated Financial Statements, and the unique facts and
circumstances of the particular matter which may give rise to additional factors.
commitments
The company’s extended lines of credit include unused amounts of $2,714 million and
$2,208 million at December 31, 2004 and 2003, respectively. A portion of these amounts
was available to the company’s business partners to support their working capital needs.
In addition, the company committed to provide future financing to its clients in connection
with client purchase agreements for approximately $1,686 million and $763 million at
December 31, 2004 and 2003, respectively. The change over the prior year is due to
increased signings of long-term IT infrastructure arrangements in which financing is committed
by the company to fund a client’s future purchases from the company.
The company has applied the disclosure provisions of FIN 45 to its agreements that
contain guarantee or indemnification clauses. These disclosure provisions expand those
required by SFAS No. 5, by requiring a guarantor to disclose certain types of guarantees,
even if the likelihood of requiring the guarantor’s performance is remote. The following is
a description of arrangements in which the company is the guarantor.
The company is a party to a variety of agreements pursuant to which it may be obligated
to indemnify the other party with respect to certain matters. Typically, these obligations
arise in the context of contracts entered into by the company, under which the company
customarily agrees to hold the other party harmless against losses arising from a breach
of representations and covenants related to such matters as title to assets sold, certain
IP rights, specified environmental matters, and certain income taxes. In each of these
circumstances, payment by the company is conditioned on the other party making a
claim pursuant to the procedures specified in the particular contract, which procedures
typically allow the company to challenge the other party’s claims. Further, the company’s
obligations under these agreements may be limited in terms of time and/or amount, and
in some instances, the company may have recourse against third parties for certain payments
made by the company.
It is not possible to predict the maximum potential amount of future payments under
these or similar agreements due to the conditional nature of the company’s obligations
and the unique facts and circumstances involved in each particular agreement. Historically,
payments made by the company under these agreements have not had a material effect
on the company’s business, financial condition or results of operations. The company
believes that if it were to incur a loss in any of these matters, such loss should not have a
material effect on the company’s business, financial condition or results of operations.
In addition, the company guarantees certain loans and financial commitments. The
maximum potential future payment under these financial guarantees was $58 million and
$74 million at December 31, 2004 and 2003, respectively. These amounts include the limited
guarantee associated with the company’s loans receivable securitization program. See
note j, “Sale and Securitization of Receivables,” on page 64.
Changes in the company’s warranty liability balance are illustrated in the following table:
(Dollars in millions)
2004 2003
Balance at January 1 $«780 $«614
Current period accruals 924 971
Accrual adjustments to reflect actual experience 42 65
Charges incurred (802) (870)
Balance at December 31 $«944 $«780
The increase in the balance was primarily driven by increased warranty activity associated
with personal computers due to increased sales volumes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
72
ibm annual report 2004
p. Taxes
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Income from continuing operations before
income taxes:
U.S. operations $«««5,280 $«««4,611 $«3,838
Non-U.S. operations 6,748 6,263 3,686
Total income from continuing operations
before income taxes $«12,028 $«10,874 $«7,524
The continuing operations provision for income taxes by geographic operations is as follows:
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
U.S. operations $«1,765 $«1,234 $««««934
Non-U.S. operations 1,815 2,027 1,256
Total continuing operations provision for
income taxes $«3,580 $«3,261 $«2,190
The components of the continuing operations provision for income taxes by taxing jurisdiction
are as follows:
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
U.S. federal:
Current $«««(608) * $««««234 $««««287
Deferred 1,823* 339 (3)
1,215 573 284
U.S. state and local:
Current 50 46 184
Deferred 110 183 3
160 229 187
Non-U.S.:
Current 2,057 1,855 1,786
Deferred 148 604 (67)
2,205 2,459 1,719
Total continuing operations provision
for income taxes 3,580 3,261 2,190
Provision for social security, real estate,
personal property and other taxes 3,347 3,277 2,789
Total continuing operations provision for taxes $«6,927 $«6,538 $«4,979
* Included in the U.S. federal current and deferred tax provisions are a benefit of $848 million and a charge of $848 million,
respectively, due to the Internal Revenue Service settlement noted on page 73.
A reconciliation of the company’s continuing operations effective tax rate to the statutory
U.S. federal tax rate is as follows:
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Statutory rate 35% 35% 35%
Foreign tax differential (5) (5) (7)
State and local 1 1 1
Other (1) (1) —
Effective rate 30% 30% 29%
The effect of tax law changes on deferred tax assets and liabilities did not have a material
impact on the company’s effective tax rate.
The significant components of activities that gave rise to deferred tax assets and liabilities
that are recorded in the Consolidated Statement of Financial Position were as follows:
deferred tax assets
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Retirement benefits $«««3,908 $«««3,566
Capitalized research and development 1,794 1,907
Employee benefits 1,168 1,021
Bad debt, inventory and warranty reserves 1,050 1,092
Alternative minimum tax credits 1,032 1,344
Deferred income 612 598
Infrastructure reduction charges 333 440
Foreign tax loss carryforwards 298 311
Capital loss carryforwards 220 195
State and local tax loss carryforwards 95 205
General business credits — 884
Other 2,266 2,253
Gross deferred tax assets 12,776 13,816
Less: valuation allowance 603 722
Net deferred tax assets $«12,173 $«13,094
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
73
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
deferred tax liabilities
(Dollars in millions)
AT DECEMBER 31: 2004 2003
Retirement benefits $«7,057 $«6,644
Leases 622 693
Software development costs 381 285
Other 1,324 1,188
Gross deferred tax liabilities $«9,384 $«8,810
The valuation allowance at December 31, 2004, principally applies to capital loss carryforwards
and certain foreign, and state and local loss carryforwards that, in the opinion of
management, are more likely than not to expire before the company can use them.
For tax return purposes, the company has available tax credit carryforwards of approximately
$1,032 million, which have an indefinite carryforward period. The company also has
foreign, state and local, and capital loss carryforwards, the tax effect of which is $613 million.
Substantially all of these carryforwards are available for at least four years or have an
indefinite carryforward period.
During the fourth quarter of 2004, the Internal Revenue Service (IRS) and the company
resolved the tax audit of 1998-2000 which had commenced in 2003. The resolution of this
IRS audit resulted in the reduction of existing tax credit carryforwards as well as a payment
of $130 million, including tax and interest. The company was fully reserved for the matters
that were resolved.
The company anticipates that the IRS audit of 2001 through 2003 will commence early
in 2005. Although the outcome of tax audits is always uncertain, the company believes that
adequate amounts of tax and interest have been provided for any adjustments that are
expected to result for these years.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
(the “Act”). The Act creates a temporary incentive for the company to repatriate earnings
accumulated outside the U.S. by allowing the company to reduce its taxable income by 85
percent of certain eligible dividends received from non-U.S. subsidiaries by the end of
2005. In order to benefit from this incentive, the company must reinvest the qualifying
dividends in the U.S. under a domestic reinvestment plan approved by the chief executive
officer and board of directors. As discussed in note b, “Accounting Changes” on page 56,
the company has commenced an evaluation of the possible effects of the Act’s repatriation
provision and expects to complete this evaluation within a reasonable period of time
following the issuance of additional clarifying language and guidance from Congress and
the Treasury Department on key elements of the repatriation provision. It is reasonably
possible that the company may repatriate up to approximately $8 billion of the undistributed
earnings noted below under the Act and the corresponding income tax expense may
be as much as approximately $550 million. The resulting income tax expense, if any, will
be provided in the company’s financial statements in the quarter in which the evaluation
and approvals have been completed.
The company has not provided deferred taxes on $19,664 million of undistributed
earnings of non-U.S. subsidiaries at December 31, 2004, as it is the company’s policy to
indefinitely reinvest these earnings in non-U.S. operations. However, the company periodically
repatriates a portion of these earnings to the extent that it does not incur an
additional U.S. tax liability. Quantification of the deferred tax liability, if any, associated with
indefinitely reinvested earnings is not practicable. Also, the company’s intention with
respect to the indefinite reinvestment of foreign earnings at December 31, 2004 does not
consider the possible distribution of such earnings under the favorable repatriation provision
of the Act.
q. Advertising and Promotional Expense
Advertising and promotional expense, which includes media, agency and promotional
expense, was $1,335 million, $1,406 million and $1,427 million in 2004, 2003 and 2002,
respectively, and is recorded in SG&A expense in the Consolidated Statement of Earnings.
r. Research, Development and Engineering
RD&E expense was $5,673 million in 2004, $5,077 million in 2003 and $4,750 million in 2002.
The company incurred expense of $5,167 million in 2004, $4,609 million in 2003 and
$4,247 million in 2002 for scientific research and the application of scientific advances to
the development of new and improved products and their uses as well as services and their
application. Of these amounts, software-related expense was $2,546 million, $2,300 million
and $1,974 million in 2004, 2003 and 2002, respectively. Included in the expense
was a charge of $9 million and $4 million in 2003 and 2002, respectively, for acquired
in-process R&D.
Expense for product-related engineering was $506 million, $468 million and $503 million
in 2004, 2003 and 2002, respectively.
s. 2002 Actions
second quarter actions
During the second quarter of 2002, the company executed several actions in its
Microelectronics Division. The Microelectronics Division is within the company’s Systems and
Technology Group segment. These actions were the result of the company’s announced
intentions to refocus and direct its Microelectronics business to the high-end foundry,
Application Specific Integrated Circuits (ASICs) and standard products, while creating a
technology services business. A major part of the actions related to a significant reduction
in the company’s manufacturing capacity for aluminum-based semiconductor technology.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
74
ibm annual report 2004
In addition, the company rebalanced both its workforce and its leased space resources primarily in response to the decline in corporate spending on technology services in 2001
and 2002. The following table summarizes the significant components of these actions:
(Dollars in millions)
Liability Liability Liability Liability
Recorded in as of as of as of
Pre-Tax Write-off 2nd Qtr. Other Dec. 31, Other Dec. 31, Other Dec. 31,
Charges of Assets 2002 Payments Adjustments+ 2002 Payments Adjustments+ 2003 Payments Adjustments+ 2004
Microelectronics:
Machinery/equipment: $««««423 $«323 (a)
Current * $««««««67 (b) $«««38 $«13 $«««42 $«««39 $«13 $«««16 $«16 $«««2 $«««««2
Non-current** 33 (b) — (16) 17 — (15) 2 — ««(2) —
Non-cancelable purchase commitments: 60
Current* 35 (c) 15 4 24 24 15 15 15 — —
Non-current** 25 (c) — (12) 13 — (13) — — — —
Employee terminations: 45
Current * 44 (d) 35 (8) 1 1 — — — — —
Non-current** 1 (d) — — 1 — — 1 — — 1
Vacant space: 11
Current * 5 (e) 1 1 5 5 3 3 3 3 3
Non-current** 6 (e) — (1) 5 — (2) 3 — (3) —
Sale of Endicott facility* 223 221 (f ) 2 (f ) 3 11 10 6 (3) 1 1 — —
Sale of certain operations* 63 53 (g) 10 (g) 9 — 1 1 — — — — —
Global Services and other:
Employee terminations: 722
Current * 671 (h) 505 (23) 143 109 (2) 32 27 26 31
Non-current** 51 (h) — 27 78 — (3) 75 — (13) 62
Vacant space: 180 29 (i)
Current * 57 (i) 29 16 44 72 71 43 32 21 32
Non-current** 94 (i) — (8) 86 — (55) 31 — (3) 28
Total $«1,727 $«626 $«1,101 $«635 $«««4 $«470 $«257 $«««9 $«222 $«94 $«31 $«159
* Recorded in Accounts payable and accruals in the Consolidated Statement of Financial Position.
** Recorded in Other liabilities in the Consolidated Statement of Financial Position.
+ Principally represents currency translation adjustments and reclassification of non-current to current. In addition, net adjustments of $1 million, $(26) million and $(40) million were recorded in SG&A expense in 2004, 2003 and the fourth quarter
of 2002, respectively, to adjust previously recorded liabilities and $14 million, $4 million, and $10 million were recorded in Other (income) and expense to increase previously recorded liabilities in 2004, 2003 and the fourth quarter of 2002,
respectively. These adjustments, along with adjustments of $(7) million and $(19) million recorded in SG&A expense in 2003 and the fourth quarter of 2002, respectively, as well as $(2) million and $9 million recorded in Other (income) and
expense for assets previously written off, were for differences between the estimated and actual proceeds on the disposition of certain assets and changes in the estimated cost of employee terminations and vacant space accruals for the years
ended December 31, 2003 and 2002, respectively. No such adjustments were made in 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
75
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
(a) This amount was recorded in SG&A expense in 2002 and primarily represents the abandonment
and loss on sale of certain capital assets during the second quarter of 2002.
(b) These amounts comprise costs incurred to remove abandoned capital assets and the
remaining lease payments for leased equipment that was abandoned in the second
quarter of 2002. Such amounts were recorded in SG&A expense in 2002. The liability
at December 31, 2003 and 2004 relates to the remaining lease payments, which will
continue through 2005.
(c) The company was subject to certain non-cancelable purchase commitments. As a result
of the decision to significantly reduce aluminum manufacturing capacity, the company
no longer had a need for certain materials subject to these agreements. The required
future payments for materials no longer needed under these contracts were paid
through 2004. This amount was recorded in SG&A expense in 2002.
(d) The Microelectronics workforce reductions comprised 1,400 people, all of whom left
the company as of June 30, 2003. This amount was recorded in SG&A expense in 2002.
The remaining liability relates to terminated employees who were granted annual
payments to supplement their income in certain countries. Depending on individual
country legal requirements, these required payments will continue until the former
employee begins receiving pension benefits or dies.
(e) The vacant space accruals are for ongoing obligations to pay rent for vacant space that
could not be sublet or space that was sublet at rates lower than the committed lease
arrangements. The length of these obligations varies by lease with the longest extending
through 2006. These amounts were recorded in Other (income) and expense in 2002.
(f) As part of the company’s strategic realignment of its Microelectronics business to exit the
manufacture and sale of certain products and component technologies, the company
signed an agreement in the second quarter of 2002 to sell its interconnect products
operations in Endicott to Endicott Interconnect Technologies, Inc. (EIT). As a result of this
transaction, the company incurred a $223 million loss on sale, primarily relating to land,
buildings, machinery and equipment. This loss was recorded in Other (income) and
expense in 2002. This transaction closed in the fourth quarter of 2002. The company
entered into a limited supply agreement with EIT for future products, and it will also
lease back, at fair market value rental rates, approximately one-third of the Endicott
campus’ square footage for operations outside the interconnect OEM business.
(g) As part of the strategic realignment of the company’s Microelectronics business, the
company agreed to sell certain assets and liabilities comprising its Mylex storage products
business to LSI Logic Corporation and the company sold part of its wireless phone
chipset operations to TriQuint Semiconductor, Inc. in June 2002. The Mylex transaction
was completed in August 2002. The loss of $74 million for the Mylex transaction and the
realized gain of $11 million for the chipset sale were recorded in Other (income) and
expense in 2002.
(h) The majority of the workforce reductions related to the company’s Global Services business.
The workforce reductions comprised 14,213 people, all of whom left the company
as of June 30, 2003. These charges were recorded in SG&A expense in 2002. The
remaining liability relates to terminated employees who were granted annual payments
to supplement their income in certain countries. Depending on individual country legal
requirements, these required payments will continue until the former employee begins
receiving pension benefits or dies.
(i) The space accruals are for ongoing obligations to pay rent for vacant space that could
not be sublet or space that was sublet at rates lower than the committed lease arrangements.
This space relates primarily to workforce dynamics in the Global Services business
and the downturn in corporate technology spending on services. The lengths of these
obligations vary by lease with the longest extending through 2016. These amounts
were recorded in Other (income) and expense in 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
76
ibm annual report 2004
* Recorded in Accounts payable and accruals in the Consolidated Statement of Financial Position.
** Recorded in Other liabilities in the Consolidated Statement of Financial Position.
+ Principally represents currency translation adjustments and reclassifications between current and non-current. In
addition, net adjustments of $28 million were recorded predominantly in Other (income) and expense in 2004 and
$(6) million recorded in SG&A expense in 2003 to adjust previously recorded liabilities. These adjustments were for
changes in the estimated cost of employee terminations and vacant space. There were also net adjustments of $8 million
and $36 million in 2004 and 2003, respectively, to reduce goodwill and previously recorded liabilities for changes
in the estimated cost of employee terminations and vacant space relating to people and space acquired from PwCC.
(a) The majority of the workforce reductions relate to the company’s Global Services business.
The workforce reductions represent 3,541 people, all of whom left the company
as of December 31, 2003. The remaining liability relates to terminated employees in
certain countries outside the United States, for whom the company is required to make
annual payments to supplement their incomes. Depending on individual country legal
requirements, these required payments will continue until the former employee begins
receiving pension benefits or dies. These charges ($305 million in the table above) were
included in SG&A expense. The workplace reductions also affected 1,203 acquired
PwCC employees, all of whom left the company as of December 31, 2003 ($48 million
in the table above). These costs were included as part of the liabilities assumed for
purchase accounting in 2002.
(b) The majority of the space accruals are for ongoing obligations to pay rent for vacant space
of PwCC that could not be sublet or space that was sublet at rates lower than the committed
lease arrangements. The length of these obligations vary by lease with the longest
extending through 2012. The charges related to IBM space ($17 million) were included
in Other (income) and expense in 2002. The costs related to acquired PwCC space are
included as part of the liabilities assumed for purchase accounting in 2002 ($235 million
in the table above comprise $62 million current and $173 million non-current).
fourth quarter actions
During the fourth quarter of 2002, the company executed several actions related to the company’s acquisition of PwCC. Specifically, the company rebalanced both its workforce and its
leased space resources. The following table summarizes the significant components of these actions.
(Dollars in millions)
Recorded in
Purchase
Recorded in the Accounting
Consolidated Statement of Earnings (see Note C)
Total Liability
Total Sale or Liability Liability Liability as of
Pre-tax Write-off Recorded Recorded Recorded Other Dec. 31,
Charges of Assets in 4th Qtr. in 4th Qtr. in 4th Qtr. Payments Adjustments+ 2002
Workforce: $«305 (a) $«—
Current * $«248 $«««48 (a) $«296 $«16 $«(2) $«278
Non-current** 57 (a) — 57 — — 57
Vacant space: 17 (b) 4
Current * 6 62 (b) 68 1 — 67
Non-current** 7 173 (b) 180 — — 180
Total $«322 $«««4 $«318 $«283 $«601 $«17 $«(2) $«582
(Dollars in millions)
Total Liability Liability Liability
as of as of as of
Dec. 31, Other Dec, 31, Other Dec. 31,
2002 Payments Adjustments+ 2003 Payments Adjustments+ 2004
Workforce:
Current* $«278 $«246 $«««6 $«««38 $«29 $«21 $«««30
Non-current** 57 — 22 79 — (13) 66
Vacant space:
Current * 67 64 37 40 49 45 36
Non-current** 180 — (47) 133 — (14) 119
Total $«582 $«310 $«18 $«290 $«78 $«39 $«251
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
77
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
t. Earnings Per Share of Common Stock
The following table sets forth the computation of basic and diluted earnings per share of
common stock.
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Weighted-average number of shares
on which earnings per share
calculations are based:
Basic 1,674,959,086 1,721,588,628 1,703,244,345
Add—incremental shares under
stock compensation plans 28,545,624 29,399,287 24,807,025
Add—incremental shares associated
with convertible notes 4,273,541 4,695,956 1,191,136
Add—incremental shares associated
with contingently issuable shares 1,094,028 406,818 1,698,548
Assuming dilution 1,708,872,279 1,756,090,689 1,730,941,054
(Dollars in millions except per share amounts)
Income from continuing operations $«8,448 $«7,613 $«5,334
Loss from discontinued operations 18 30 1,755
Net income from total operations on which
basic earnings per share is calculated $«8,430 $«7,583 $«3,579
Income from continuing operations $«8,448 $«7,613 $«5,334
Add—income effect of contingently
issuable shares (5) 2 (18)
Income from continuing operations
on which diluted earnings
per share is calculated 8,443 7,615 5,316
Loss from discontinued operations
on which basic and diluted earnings
per share are calculated 18 30 1,755
Net income from total operations on which
diluted earnings per share is calculated $«8,425 $«7,585 $«3,561
Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations $«««4.94 $«««4.34 $«««3.07
Discontinued operations (0.01) (0.02) (1.01)
Total $«««4.93 $«««4.32 $«««2.06
Basic:
Continuing operations $«««5.04 $«««4.42 $«««3.13
Discontinued operations (0.01) (0.02) (1.03)
Total $«««5.03 $«««4.40 $«««2.10
Stock options to purchase 133,220,730 common shares in 2004, 124,840,510 common
shares in 2003 and 111,713,072 common shares in 2002 were outstanding, but were not
included in the computation of diluted earnings per share because the exercise price of
the options was greater than the average market price of the common shares for the full
year and, therefore, the effect would have been antidilutive.
u. Rental Expense and Lease Commitments
Rental expense from continuing operations, including amounts charged to inventories
and fixed assets, and excluding amounts previously reserved, was $1,442 million in 2004,
$1,419 million in 2003 and $1,377 million in 2002. The table below depicts gross minimum
rental commitments from continuing operations under noncancelable leases, amounts
related to vacant space associated with infrastructure reduction and restructuring actions
taken through 1993, and in 1999 and 2002 (previously reserved), and sublease income
commitments. These amounts reflect activities primarily related to office space as well as
manufacturing equipment.
(Dollars in millions)
Beyond
2005 2006 2007 2008 2009 2009
Gross minimum
rental commitments
(including Vacant space) $«1,383 $«1,183 $«1,027 $«907 $«696 $«1,411
Vacant space 100 68 88 32 26 18
Sublease income commitments (55) (42) (42) (34) (18) (18)
v. Stock-Based Compensation Plans
The following is a description of the terms of the company’s stock-based compensation plans:
incentive plans
Incentive awards are provided to employees and members of the company’s Board of
Directors under the terms of the company’s plans (the Plans). Employee awards are administered
by the Executive Compensation and Management Resources Committee of the
Board of Directors (the Committee). The Committee determines the type and terms of the
awards to be granted to employees, including vesting provisions.
Awards under the Plans may include at-the-money stock options, premium-priced
stock options, stock appreciation rights, restricted stock, cash or stock awards, or any
combination thereof. The amount of shares originally authorized to be issued under the
company’s existing Plans is 274.1 million at December 31, 2004. Certain incentive awards
granted under previous plans, if and when those awards are canceled, can be reissued
under the company’s existing Plans. As such, 41.9 million additional awards are considered
authorized to be issued under the company’s Plans as of December 31, 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
78
ibm annual report 2004
There were 76.2 million option awards outstanding under previous plans included in the
total number of shares under option at December 31, 2004. There were 126.3 million and
148.1 million unused shares available to be granted under the Plans as of December 31,
2004 and 2003, respectively. Awards under the Plans resulted in pre-tax compensation
expense of $219 million, $117 million and $183 million in 2004, 2003 and 2002, respectively.
Stock Option Grants
Stock options are granted to employees and directors at an exercise price equal to or
greater than the fair market value of the company’s stock at the date of grant. Generally,
options vest 25 percent per year, are fully vested four years from the grant date and have
a term of ten years. The following tables summarize option activity under the Plans during
2004, 2003 and 2002.
2004 2003 2002
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise No. of Shares Exercise No. of Shares Exercise No. of Shares
Price Under Option Price Under Option Price Under Option
Balance at Jan. 1 $««86 244,966,052 $««84 222,936,700 $««85 177,956,490
Options granted 97 26,537,055 83 41,275,832 77 59,966,106
Options exercised 47 (14,035,038) 40 (11,205,228) 33 (7,490,424)
Options canceled/
expired 93 (8,120,163) 100 (8,041,252) 103 (7,495,472)
Balance at Dec. 31 $««89 249,347,906 $««86 244,966,052 $««84 222,936,700
Exercisable at
Dec.31 $««89 159,607,886 $««85 134,735,326 $««75 108,347,895
During the year ended December 31, 2004, the company granted approximately 5 million
stock options with an exercise price greater than the stock price at the date of grant.
These stock options had a weighted-average exercise price of $105.85 and are included
in the table above.
The shares under option at December 31, 2004, were in the following exercise
price ranges:
Options Outstanding Options Currently Exercisable
Wtd. Avg.
Wtd. Avg. Number Remaining Wtd. Avg. Number
Exercise of Shares Contractual Exercise of Shares
Exercise Price Range Price Under Option Life (in years) Price Under Option
$18–$60 $««46 45,610,909 4 $««44 39,083,439
$61–$85 77 55,717,463 8 75 19,450,291
$86–$105 98 80,640,962 7 98 39,507,144
$106 and over 117 67,378,572 6 117 61,567,012
$««89 249,347,906 6 $««89 159,607,886
In connection with various acquisition transactions, there are an additional 2.9 million
options outstanding at December 31, 2004, as a result of the company’s assumption of
options granted by the acquired entities. The weighted-average exercise price of these
options is $89.
ibm employees stock purchase plan
In July 2003, the IBM 2003 ESPP became effective and 50 million additional shares of
authorized common stock were reserved and approved for issuance. The ESPP enables
substantially all regular employees to purchase full or fractional shares of IBM common
stock through payroll deductions of up to 10 percent of eligible compensation. The 2003
ESPP provides for semiannual offerings commencing July 1, 2003, and continuing as long
as shares remain available under the ESPP, unless terminated earlier at the discretion of the
Board of Directors. The share price paid by an employee equals the lesser of 85 percent
of the average market price on the first business day of each offering period or 85 percent
of the average market price on the last business day of each pay period. Individual ESPP
participants are restricted from purchasing more than $25,000 of common stock in one
calendar year or 1,000 shares in an offering period. Approximately 32.8 million, 44.2 million
and 4.6 million reserved unissued shares were available for purchase under the 2003
ESPP (or a predecessor plan) at December 31, 2004, 2003 and 2002, respectively.
pro forma disclosure
See “Stock-Based Compensation” on page 52, in note a, “Significant Accounting Policies,”
for the pro forma disclosures of net income and earnings per share required under
SFAS No. 123.
w. Retirement-Related Benefits
IBM offers defined benefit pension plans, defined contribution pension plans, as well as
nonpension postretirement plans primarily consisting of retiree medical benefits. These
benefits form an important part of the company’s total compensation and benefits program
that is designed to attract and retain highly skilled and talented employees. The
table on page 79 provides the total retirement-related benefit plans’ impact on income
before income taxes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
79
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
(Dollars in millions)
U.S. Non-U.S. Total
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002 2004 2003 2002 2004 2003 2002
Total retirement-related plans—cost/(income) $«827 $««««67 $«(154) $«617 $«295 $«(17) $«1,444 $«362 $«(171) *
Comprise:
Defined benefit and contribution pension plans—cost/(income) $«500 $«(227) $«(478) $«572 $«254 $«(46) $«1,072 $«««27 $«(524)
Nonpension postretirement benefits—cost 327 294 324 45 41 29 372 335 353
* Includes amount for discontinued operations cost of $77 million for 2002.
accounting policy
Defined Benefit Pension and Nonpension Postretirement Benefit Plans
The company accounts for its defined benefit pension plans and its nonpension postretirement
benefit plans using actuarial models required by SFAS No. 87, “Employers’
Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions,” respectively. These models use an attribution approach that
generally spreads individual events over the service lives of the employees in the plan.
Examples of “events” are plan amendments and changes in actuarial assumptions such as
discount rate, rate of compensation increases and mortality. The principle underlying this
required attribution approach is that employees render service over their service lives on
a relatively smooth basis and therefore, the income statement effects of pensions or nonpension
postretirement benefit plans are earned in, and should follow, the same pattern.
One of the principal components of the net periodic pension cost/(income) calculation
is the expected long-term rate of return on plan assets. The required use of expected
long-term rates of return on plan assets may result in recognized pension income that is
greater or less than the actual returns of those plan assets in any given year. Over time,
however, the expected long-term returns are designed to approximate the actual long-term
returns and therefore result in a pattern of income and expense recognition that more closely
matches the pattern of the services provided by the employees. Differences between actual
and expected returns are recognized in the calculation of net periodic pension cost/
(income) over five years as provided for in SFAS No. 87.
These expected returns on plan assets are developed by the company in conjunction
with external advisors, and take into account long-term expectations for future returns and
investment strategy. This assumption is tested for reasonableness against the historical
return average, usually over a ten-year period.
The discount rate assumptions used for pension and nonpension postretirement benefit
plan accounting reflect the prevailing rates available on high-quality, fixed-income debt
instruments with maturities that match the benefit obligation. The rate of compensation
increase is another significant assumption used in the actuarial model for pension
accounting and is determined by the company, based upon its long-term plans for such
increases. For retiree medical plan accounting, the company reviews external data and its
own historical trends for health care costs to determine the health care cost trend rates.
As required by SFAS No. 87, for instances in which pension plan assets are less than
the accumulated benefit obligation (ABO) as of the end of the reporting period (defined
as an unfunded ABO position), a minimum liability equal to this difference is recognized in
the Consolidated Statement of Financial Position. The ABO is the present value of the actuarially
determined company obligation for pension payments assuming no further salary
increases for the employees. The offset to the minimum liability is a charge to equity, net
of tax. In addition, any prepaid pension asset in excess of unrecognized prior service cost
must be reversed through a net-of-tax charge to equity. The charge to equity is included in
the Accumulated gains and (losses) not affecting retained earnings section of Stockholders’
equity in the Consolidated Statement of Financial Position.
The company uses a December 31 measurement date for the majority of its pension
plans and nonpension postretirement plans.
Defined Contribution Pension Plans
The company records pension expense for defined contribution plans when the employee
renders service to the company, essentially coinciding with the cash contributions to
the plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
80
ibm annual report 2004
defined benefit and defined contribution plans
The company and its subsidiaries have defined benefit and defined contribution pension
plans that cover substantially all regular employees, and supplemental retirement plans
that cover certain executives.
U.S. Plans
IBM PERSONAL PENSION PLAN
IBM provides U.S. regular, full-time and part-time employees with noncontributory defined
benefit pension benefits (the IBM Personal Pension Plan, “PPP”). The PPP comprises a tax
qualified plan and a non-qualified plan. The qualified plan is funded by company contributions
to an irrevocable trust fund, which is held for the sole benefit of participants. The
non-qualified plan, which provides benefits in excess of IRS limitations for qualified plans,
is unfunded.
The number of individuals receiving benefits from the PPP at December 31, 2004 and
2003, was 139,804 and 136,302, respectively. The net periodic pension cost/(income) for
the qualified plan for the years ended December 31, 2004, 2003 and 2002, was $30 million,
$(692) million and $(917) million, respectively. The net periodic pension cost for the
non-qualified plan was $108 million, $107 million and $106 million for the years ended
December 31, 2004, 2003 and 2002, respectively. The costs of the non-qualified plan are
reflected in Cost of other defined benefit plans on page 81.
The funded status reconciliation for the qualified plan is on page 82. The benefit obligation
of the non-qualified plan was $1,116 million and $1,068 million at December 31,
2004 and 2003, respectively, and the amounts included in Retirement and nonpension
postretirement benefit obligations in the Consolidated Statement of Financial Position at
December 31, 2004 and 2003, were liabilities of $968 million and $901 million, respectively.
Effective January 1, 2005, the company amended the PPP to provide that employees
hired on and after such date, including rehires, will not be eligible to participate in this plan.
IBM SAVINGS PLAN
U.S. regular, full-time and part-time employees are eligible to participate in the IBM
Savings Plan, which is a tax-qualified defined contribution plan under section 401(k) of
the Internal Revenue Code. For employees hired prior to January 1, 2005, the company
matches 50 percent of the employee’s contribution up to the first 6 percent of the
employee’s compensation. For employees hired or rehired after December 31, 2004
who have also completed one year of service, the company matches 100 percent of the
employee’s contribution up to the first 6 percent of compensation. All contributions,
including the company match, are made in cash, in accordance with the participants’
investment elections. There are no minimum amounts that must be invested in company
stock, and there are no restrictions on transferring amounts out of the company’s stock to
another investment choice. The total cost of all of the company’s U.S. defined contribution
plans was $338 million, $333 million and $315 million for the years ended December 31,
2004, 2003 and 2002, respectively.
IBM EXECUTIVE DEFERRED COMPENSATION PLAN
The company also maintains an unfunded, non-tax-qualified, defined contribution plan,
the IBM Executive Deferred Compensation Plan (EDCP), which allows eligible U.S. executives
to defer compensation, and to receive company matching contributions under the
applicable IBM Savings Plan formula described above, with respect to amounts in excess
of IRS limits for tax-qualified plans. The total cost of the IBM EDCP was $9 million, $9 million
and $8 million for the years ended December 31, 2004, 2003 and 2002, respectively.
These amounts are included in the total cost of all of the company’s defined contribution
plans of $338 million, $333 million and $315 million for the years ended December 31,
2004, 2003 and 2002, respectively.
U.S. SUPPLEMENTAL EXECUTIVE RETENTION PLAN
The company also has a non-qualified U.S. Supplemental Executive Retention Plan (SERP).
The SERP, which is unfunded, provides defined benefit pension benefits in addition to the
PPP to eligible executives based on average earnings, years of service and age at retirement.
Effective July 1, 1999, the company adopted the SERP (which replaced the previous
Supplemental Executive Retirement Plan). Some participants of the prior SERP will still be
eligible for benefits under that plan if those benefits are larger than benefits provided
under the new plan. Certain former partners of PwCC also participate in the SERP under
two separate benefit formulas. The total cost of this plan for the years ended December 31,
2004, 2003 and 2002, was $22 million, $25 million and $18 million, respectively. These
amounts are reflected in Cost of other defined benefit plans on page 81. At December 31,
2004 and 2003, the benefit obligation was $191 million and $181 million, respectively, and
the amounts included in Retirement and nonpension postretirement benefit obligations in
the Consolidated Statement of Financial Position at December 31, 2004 and 2003, were
liabilities of $203 million and $186 million, respectively.
Non-U.S. Plans
Most subsidiaries and branches outside the United States have defined benefit and/or
defined contribution retirement plans that cover substantially all regular employees, under
which the company deposits funds under various fiduciary-type arrangements, purchases
annuities under group contracts or provides reserves. Benefits under the defined benefit
plans are typically based either on years of service and the employee’s compensation,
generally during a fixed number of years immediately before retirement, or on annual
credits. The range of assumptions that are used for the non-U.S. defined benefit plans
reflects the different economic environments within various countries. The total non-U.S.
pension plan cost/(income) of these plans for the years ended December 31, 2004, 2003
and 2002, was $572 million, $254 million and $(46) million, respectively. The funded status
reconciliation for the principal non-U.S. pension plans is on page 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
81
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
Cost/(Income) of Pension Plans
(Dollars in millions)
U.S. Plans* Non-U.S. Plans
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002 2004 2003 2002
Service cost $««««652 $««««576 $««««650 $««««611 $««««537 $««««505
Interest cost 2,453 2,518 2,591 1,618 1,477 1,270
Expected return on plan assets (3,607) (3,703) (4,121) (2,380) (2,228) (2,132)
Amortization of transition assets (72) (144) (144) (10) (15) (12)
Amortization of prior service cost 61 61 61 5 17 28
Settlement of certain legal claims 320 — — — — —
Recognized actuarial losses 223 — — 221 101 33
Divestitures/settlement losses — — 46 — — 26
Net periodic pension cost/(income)—U.S. Plan and material non-U.S. Plans 30* (692) * (917) * 65 (111) (282)
Cost of other defined benefit plans 132 132 124 187 100 58
Total net periodic pension cost/(income) for all defined benefit plans 162 (560) (793) 252 (11) (224)
Cost of defined contribution plans 338 333 315 320 265 178
Total pension plans cost/(income) recognized in the
Consolidated Statement of Earnings $««««500 $«««(227) $«««(478) $««««572 $««««254 $«««««(46)
* Represents the qualified portion of the PPP.
See beginning of note w, “Retirement-Related Benefits,” on page 79 for the company’s total retirement-related benefits cost/(income).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
82
ibm annual report 2004
The changes in the benefit obligations and plan assets of the qualified portion of the PPP and the significant non-U.S. defined benefit plans for 2004 and 2003 were as follows:
(Dollars in millions)
PPP-Qualified Portion Non-U.S. Plans
2004 2003 2004 2003
Change in benefit obligation:
Benefit obligation at beginning of year $«42,104 $«38,357 $«31,875 $«25,699
Service cost 652 576 611 537
Interest cost 2,453 2,518 1,620 1,477
Plan participants’ contributions — — 50 43
Acquisitions/divestitures, net — — 93 75
Settlement of certain legal claims 320 — — —
Actuarial losses 1,856 3,472 3,729 1,167
Benefits paid from trust (2,748) (2,819) (1,305) (1,093)
Direct benefit payments — — (287) (253)
Foreign exchange impact — — 2,352 4,166
Plan curtailments/settlements/termination benefits — — (8) 57
Benefit obligation at end of year 44,637 42,104 38,730 31,875
Change in plan assets:
Fair value of plan assets at beginning of year 41,679 36,984 26,546 20,637
Actual return on plan assets 5,214 7,514 2,588 2,829
Employer contribution 700 — 1,085 542
Acquisitions/divestitures, net — — 59 7
Plan participants’ contributions — — 50 43
Benefits paid from trust (2,748) (2,819) (1,305) (1,093)
Foreign exchange impact — — 2,117 3,581
Fair value of plan assets at end of year 44,845 41,679 31,140 26,546
Fair value of plan assets in excess/(deficit) of benefit obligation 208 (425) (7,590) (5,329)
Unrecognized net actuarial losses 11,874 11,849 14,737 10,775
Unrecognized prior service costs 461 523 (160) (170)
Unrecognized net transition assets — (72) (3) (26)
Net prepaid pension assets recognized in the Consolidated Statement of Financial Position $«12,543 $«11,875 $«««6,984 $«««5,250
Amounts recognized in the Consolidated Statement of Financial Position captions include:
Prepaid pension assets $«12,543 $«11,875 $«««7,476 $«««6,129
Intangible assets — — 44 52
Total prepaid pension assets 12,543 11,875 7,520 6,181
Retirement and nonpension postretirement benefit obligation — — (8,429) (6,982)
Accumulated gains and (losses) not affecting retained earnings — — 5,088 3,888
Deferred tax assets (investments and sundry assets) — — 2,805 2,163
Net amount recognized $«12,543 $«11,875 $«««6,984 $«««5,250
Accumulated benefit obligation $«43,327 $«40,423 $«36,755 $«30,240
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
83
International Business Machines Corporation and Subsidiary Companies
ibm annual report 2004
Differences between the aggregate balance sheet amounts listed on page 82
(material pension plans) and on page 85 (material nonpension postretirement plan) and
the totals listed in the Consolidated Statement of Financial Position and Consolidated
Statement of Stockholders’ Equity, relate to the non-material plans. The increase in the
company’s Prepaid pension asset balance from 2003 to 2004 was primarily due to the
$700 million contribution made by the company to the PPP during 2004. The increase in
the company’s pension plan benefit obligation was primarily attributable to the required
accounting for the unfunded status of the non-U.S. pension plans as discussed below, as
well as accrued pension costs and foreign exchange impacts.
Assumptions used to determine the year-end benefit obligations for principal pension
plans follow:
U.S. Plans Non-U.S. Plans
WEIGHTED-AVERAGE ASSUMPTIONS
AT DECEMBER 31: 2004 2003 2002 2004 2003 2002
Discount rate 5.75% 6.0% 6.75% 3.0–6.0% 3.0–6.0% 4.25–6.5%
Rate of compensation increase 4.0% 4.0% 4.0% 1.9–4.6% 1.5–5.0% 2.2–5.0%
Assumptions used to determine the net periodic pension cost/(income) for principal
pension plans during the year follow:
U.S. Plans Non-U.S. Plans
WEIGHTED-AVERAGE ASSUMPTIONS
FOR YEARS ENDED DECEMBER 31: 2004 2003 2002 2004 2003 2002
Discount rate 6.0% 6.75% 7.0% 3.0–6.0% 4.25–6.5% 4.5–7.1%
Expected long-term return
on plan assets 8.0% 8.0% 9.50% 5.0–8.0% 5.0–8.0% 5.0–9.25%
Rate of compensation increase 4.0% 4.0% 6.0% 1.5–5.0% 2.2–5.0% 2.0–6.1%
The change in the discount rate assumption for the year ended December 31, 2004, for
the PPP from 6.75 percent to 6.0 percent resulted in an increase in net periodic pension
cost of $197 million for the year ended December 31, 2004, when compared with the year
ended December 31, 2003. The change in discount rate assumption for the PPP for the
year ended December 31, 2003 from 7.0 percent to 6.75 percent did not have a material
impact on net periodic pension cost.
The changes in the expected long-term return on plan assets assumptions for the year
ended December 31, 2004 for certain non-U.S. plans when compared with the year ended
December 31, 2003 resulted in an increase net periodic pension cost of $54 million.
For the year ending December 31, 2005, the company expects net periodic pension
cost to be approximately $1.7 billion, an increase of approximately $700 million when
compared with the year ended December 31, 2004. This increase however, is lower as
a result of the inclusion of a $320 million one-time pension settlement in the 2004
results. The increase in the 2005 net periodic pension cost is driven by several factors
including December 31, 2004 changes in the U.S. and non-U.S. discount rate assumptions
(approximately $300 million) and changes in the non-U.S. expected long-term return on
assets assumptions (approximately $100 million). In addition to changes in assumptions,
the net periodic pension cost will increase due to the recognition of previously deferred
pension costs as a result of changes in the market value of plan assets in accordance with
SFAS No. 87. The increases in net periodic pension cost will be offset partially by the company’s
contributions in December 2004 ($700 million) and January 2005 ($1.7 billion) to
the PPP. These contributions are expected to yield approximately $200 million of income
from invested assets during 2005.
Funded Status of Defined Benefit Pension Plans
It is the company’s general practice to fund amounts for pensions sufficient to meet the
minimum requirements set forth in applicable employee benefits laws and local tax laws.
The company may also voluntarily make contributions up to the ABO level. From time to
time, the company contributes additional amounts as it deems appropriate.
In the fourth quarter of 2004, the company contributed $700 million to the qualified
portion of the PPP in cash. There were no contributions to the PPP during the year ended
December 31, 2003. There were contributions of $1,085 million and $542 million to the
material non-U.S. plans during the years ended December 31, 2004 and 2003, respectively.
The company decided not to fund certain of the company’s non-U.S. plans that had
unfunded positions to the ABO level. As a result and consistent with the accounting rules
required by SFAS No. 87 for these “unfunded” positions as described on page 79, the company
recorded an additional minimum liability adjustment of $1,827 million and a reduction
to stockholders’ equity of $1,008 million as of December 31, 2004. The differences between
these amounts and the amounts included in the Consolidated Statement of Financial
Position and Consolidated Statement of Stockholders’ Equity relate to the non-material
plans. This accounting transaction did not impact 2004 retirement-related plans cost.
The company’s Benefit Obligation (BO) for its significant plans is disclosed at the top
of page 82. BO is calculated similarly to ABO except for the fact that BO includes an
estimate for future salary increases. SFAS No. 132 (revised 2003), “Employers’ Disclosures
about Pensions and Other Postretirement Benefits—an amendment of FASB Statements
No. 87, 88 and 106,” requires that companies disclose the aggregate BO and plan assets
of all plans in which the BO exceeds plan assets. Similar disclosure is required for all plans
in which the ABO exceeds plan assets. The aggregate BO and plan assets are also disclosed
for plans in which the plan assets exceed the BO. The following table excludes the
U.S. plans due to the fact that these plans’ BO and plan assets, if any, appear in either the
narrative on pages 79 and 80 or the table on page 82.
(Dollars in millions)
2004 2003
Benefit Plan Benefit Plan
Obligation Assets Obligation Assets
Plans with BO in excess of plan assets $«29,949 $«19,921 $«21,101 $«12,985
Plans with ABO in excess of plan assets $«23,813 $«15,428 $«19,902 $«12,985
Plans with assets in excess of BO $«««8,781 $«11,219 $«10,774 $«13,561
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
84
ibm annual report 2004
plan assets
The company’s pension plan weighted-average asset allocations at December 31, 2004
and 2003 and target allocation for 2005, by asset category, are as follows:
U.S. Plans
Plan Assets
at December 31: 2005
Target
Asset Category 2004 2003 Allocation
Equity securities* 65.4% 67.5% 64.0%
Debt securities 31.6% 29.2% 32.0%
Real estate 3.0% 3.3% 4.0%
Total 100.0% 100.0% 100.0%
Non-U.S. Plans
Plan Assets
at December 31: 2005
Target
Asset Category 2004 2003 Allocation
Equity securities 58.4% 59.1% 58.5%
Debt securities 38.8% 38.5% 39.2%
Real estate 2.0% 1.9% 1.9%
Other 0.8% 0.5% 0.4%
Total 100.0% 100.0% 100.0%
* See discussion below regarding certain private market assets, and future funding commitments thereof, that are not
as liquid as the rest of the publicly traded securities.
The investment objectives of the PPP portfolio of assets (the Fund) are designed to generate
returns that will enable the Fund to meet its future obligations. The precise amount
for which these obligations will be settled depends on future events, including the life
expectancy of the Plan’s members and salary inflation. The obligations are estimated using
actuarial assumptions, based on the current economic environment. The Fund’s investment
strategy balances the requirement to generate return, using higher-returning assets such
as equity securities, with the need to control risk in the Fund with less volatile assets, such
as fixed income securities. Risks include, among others, inflation, volatility in equity values
and changes in interest rates that could cause the Plans to become underfunded, thereby
increasing their dependence on contributions from the company.Within each asset class,
careful consideration is given to balancing the portfolio among industry sectors, geographies,
interest rate sensitivity, dependence on economic growth, currency and other factors
that affect investment returns.
The assets are managed by professional investment firms as well as by investment
professionals who are employees of the company. They are bound by precise mandates
and are measured against specific benchmarks. Among managers, consideration is given,
among others, to balancing security concentration, issuer concentration, investment style
and reliance on particular active investment strategies. Market liquidity risks are tightly
controlled, with only a small percentage of the PPP portfolio invested in private market
assets consisting of private equities and private real estate investments, which are less liquid
than publicly traded securities. The PPP included private market assets comprising
approximately 10.1 percent and 10.5 percent of total assets at December 31, 2004 and
2003, respectively. The target allocation for private market assets in 2005 is 10.1 percent.
The Fund has $2,628 million in commitments for future private market investments to be
made over a number of years. These commitments are expected to be fulfilled from plan
assets. Derivatives are primarily used to hedge currency, adjust portfolio duration, and
reduce specific market risks.
Outside the U.S., the investment objectives are similar, subject to local regulations. In
some countries, a higher percentage allocation to fixed income securities is required. In
others, the responsibility for managing the investments typically lies with a board that may
include up to 50 percent of members elected by employees and retirees. This can result
in slight differences compared with the strategies described above. Generally, these non-
U.S. funds are not permitted to invest in illiquid assets, such as private equities, and their
use of derivatives is usually limited to passive currency hedging. During 2004, there was
no significant change in the investment strategies of these plans.
Equity securities include IBM common stock in the amounts of $1,376 million (3.1 percent
of total PPP plan assets at December 31, 2004) and $2,144 million (5.1 percent of total
PPP plan assets at December 31, 2003).
expected contributions
In 2005, the company estimates contributions to its non-U.S. plans to be an amount that is
equivalent to such contributions in 2004 ($1,085 million). The company could elect to contribute
more or less than the amount based on market conditions. The legally mandated
minimum contributions to the company’s non-U.S. plans is expected to be $361 million.
On January 19, 2005, the company elected to make a $1.7 billion contribution to the qualified
portion of PPP. Depending upon market conditions, the company may elect to further
contribute to the qualified portion of the PPP during 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
85
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expected benefit payments
The following table reflects the total expected benefit payments to plan participants.
These payments have been estimated based on the same assumptions used to measure
the company’s BO at year-end and include benefits attributable to estimated future compensation
increases.
(Dollars in millions)
Total
U.S. Plans U.S. Plans Non-U.S. Plans Non-U.S. Plans Expected
Qualified Non-qualified Qualified Non-qualified Benefit
Payments Payments Payments Payments Payments
2005 $««2,907 $««68 $«1,532 $«««301 $««4,808
2006 2,914 70 1,577 304 4,865
2007 2,952 73 1,655 307 4,987
2008 2,999 76 1,698 305 5,078
2009 3,053 80 1,757 290 5,180
2010–2014 16,315 473 9,520 1,449 27,757
nonpension postretirement benefits
The total cost of the company’s nonpension postretirement benefits for the years ended
December 31, 2004, 2003 and 2002, was $372 million, $335 million and $353 million,
respectively. The company has a defined benefit postretirement plan that provides medical
and dental benefits as well as life insurance for U.S. retirees and eligible dependents.
The total cost of this plan for the years ended December 31, 2004, 2003 and 2002, was
$327 million, $294 million and $324 million, respectively. The changes in the benefit obligation
and plan assets for this plan are presented in the following table. Effective July 1,
1999, the company established a “Future Health Account” (FHA) for employees who were
more than five years away from retirement eligibility. Employees who were within five years
of retirement eligibility are covered under the company’s prior retiree health benefits
arrangements. Under either the FHA or the prior retiree health benefit arrangements, there
is a maximum cost to the company for retiree health benefits. For employees who retired
before January 1, 1992, that maximum became effective in 2001. For all other employees,
the maximum is effective upon retirement. Effective January 1, 2004, the company amended
its postretirement plan to provide that new hires will no longer be eligible for companysubsidized
benefits.
Certain of the company’s non-U.S. subsidiaries have similar plans for retirees. However,
most of the retirees outside the United States are covered by government-sponsored
and administered programs. The total cost of these plans for the years ended December 31,
2004, 2003 and 2002, was $45 million, $41 million and $29 million, respectively. At
December 31, 2004 and 2003, Retirement and nonpension postretirement benefit obligations
in the Consolidated Statement of Financial Position include non-U.S. postretirement
benefit liabilities of $322 million and $270 million, respectively.
The net periodic postretirement benefit cost for the U.S. plan for the years ended
December 31 includes the following components:
(Dollars in millions)
2004 2003 2002
Service cost $«««40 $«««36 $«««49
Interest cost 337 382 421
Amortization of prior service costs (62) (130) (147)
Recognized actuarial losses 12 6 30
Divestiture — — (29)
Net periodic postretirement benefit cost $«327 $«294 $«324
The changes in the benefit obligation and plan assets of the U.S. plan for 2004 and 2003
are as follows:
(Dollars in millions)
2004 2003
Change in benefit obligation:
Benefit obligation at beginning of year $««6,181 $««5,882
Service cost 40 36
Interest cost 337 382
Actuarial losses/(gains) (146) 419
Direct benefit payments (518) (538)
Benefit obligation at end of year 5,894 6,181
Change in plan assets:
Fair value of plan assets at beginning of year 14 10
Actual return on plan assets — —
Employer contributions 35 —
Participant contributions 187 153
Benefits paid from trust (186) (149)
Fair value of plan assets at end of year 50 14
Benefit obligation in excess of plan assets (5,844) (6,167)
Unrecognized net actuarial losses 846 1,004
Unrecognized prior service costs (301) (363)
Accrued postretirement benefit liability recognized
in the Consolidated Statement of Financial Position $«(5,299) $«(5,526)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
86
ibm annual report 2004
The benefit obligation was determined by applying the terms of medical, dental and
life insurance plans, including the effects of established maximums on covered costs,
together with relevant actuarial assumption.
WEIGHTED-AVERAGE DISCOUNT RATE
ASSUMPTIONS USED TO DETERMINE: 2004 2003 2002
The year-end benefit obligation at December 31 «««5.75% «««6.0% «««6.75%
The net periodic post-retirement benefit costs
for years ended December 31 6.0% 6.75% 7.0%
For the years ended December 31, 2004, 2003 and 2002, the plan assets of $50 million,
$14 million and $10 million, respectively, were invested in short-term highly liquid fixed
income securities, and as a result, the expected long-term return on plan assets and the
actual return on those assets were not material for those years.
The company evaluates its actuarial assumptions on an annual basis and considers
changes in these long-term factors based upon market conditions and the requirements
of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.”
The discount rate changes did not have a material effect on net postretirement benefit
cost for the years ended December 31, 2004, 2003 and 2002.
ASSUMED HEALTH CARE COST TREND RATES AT DECEMBER 31: 2004 2003
Health care cost trend rate assumed for next year 10.0% 8.9%
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate) 5.0% 4.5%
Number of years to ultimate trend rate 5 4
The health care cost trend rate has an insignificant effect on plan costs and obligations.
A one-percentage-point change in the assumed health care cost trend rate would
have the following effects as of December 31, 2004:
(Dollars in millions)
One-Percentage- One-Percentage-
Point Increase Point Decrease
Effect on total service and interest cost NM NM
Effect on postretirement benefit obligation $«3 $«(5)
NM—Not Meaningful as the impact would be less than $1 million.
plan assets
The company’s nonpension postretirement benefit plan assets at December 31, 2004 and
2003 are comprised of short-term fixed-income investments.
This plan is not funded. The company makes payments from company funds as they
become due and also maintains a nominal, highly liquid fund balance to ensure payments
are made timely.
recently enacted legislation
The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the
Medicare Act) was signed into law on December 8, 2003. The Act introduces a prescription
drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a prescription drug benefit that is at least
actuarially equivalent to Medicare Part D.
The method of determining whether a sponsor’s plan will qualify for actuarial equivalency
was issued in January 2005 by the U.S. Department of Health and Human Services
(HHS). While the company is currently evaluating the guidance provided by HHS, based on
the current interpretation of the guidance and in relation to the company’s current plan
design, any savings to the company are expected to be immaterial.
FSP No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003,” issued in the second
quarter of 2004, provides guidance on the accounting for the effects of the Medicare Act,
including the accounting for and disclosure of any federal subsidy provided by the
Medicare Act.
The enactment of the Medicare Act was not a “significant event” as defined by SFAS
No. 106 for the company’s nonpension postretirement benefit plans (the Plans) and therefore,
the company did not remeasure plan assets and obligations. As discussed above, any
federal subsidy related to prescription drug benefits provided under the Plans is expected
to be immaterial, based on the current interpretation of the Medicare Act. As a result, the
company’s accumulated postretirement benefit obligations as of December 31, 2004 and
the net periodic postretirement benefit costs for the year ended December 31, 2004, were
not impacted by the Medicare Act. The company will be required to reflect any changes
to participation rates and other health care cost assumptions, as a result of the Medicare
Act, at the company’s next measurement date in 2005. The impact of any such change is not
expected to have a material impact on the company’s Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
87
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ibm annual report 2004
x. Segment Information
The company uses business insight and its portfolio of IT capabilities to create client
solutions. The company operates primarily in a single industry using several segments that
create value by offering solutions that include, either singularly or in some combination,
services, software, hardware and financing.
Organizationally, the company’s major operations comprise a Global Services segment;
a Software segment; two hardware product segments—Systems and Technology Group
and Personal Systems Group; a Global Financing segment; and an Enterprise Investments
segment. The segments represent components of the company for which separate financial
information is available that is utilized on a regular basis by the chief executive officer
in determining how to allocate the company’s resources and evaluate performance. The
segments are determined based on several factors, including client base, homogeneity of
products, technology, delivery channels and similar economic characteristics.
Information about each segment’s business and the products and services that generate
each segment’s revenue is located in the “Description of Business” section of the
Management Discussion on pages 15 and pages 21 to 23.
In 2003, the company renamed all of its hardware segments without changing the
organization of these segments. The Enterprise Systems segment was renamed the
Systems Group segment, the Personal and Printing Systems segment was renamed the
Personal Systems Group segment and the Technology segment was renamed the Technology
Group segment.
Over recent years, the company has been developing and enhancing a “one team”
approach to the collaboration between the Systems Group and the Technology Group.
This relationship is crucial given the core technology of the Systems Group products is a
key competitive differentiator for the company. The degree of this collaboration has
increased whereby in 2004, the company is managing these groups as one. Accordingly,
in the first quarter of 2004, the company combined the two segments into one reporting
segment. The new Systems and Technology Group segment generates one consolidated
set of financial results, which senior management uses for joint strategy, budgets, and
resource allocation decisions, as well as performance and compensation scoring.
Segment revenue and pre-tax income include transactions between the segments
that are intended to reflect an arm’s-length transfer price. Specifically, semiconductors
are sourced internally from the Systems and Technology Group segment for use in the
manufacture of the Personal Systems Group segment products. In addition, hardware
and software that are used by the Global Services segment in outsourcing engagements
are mostly sourced internally from the Systems and Technology Group, Personal Systems
Group and Software segments. For the internal use of IT services, the Global Services
segment recovers cost, as well as a reasonable fee, reflecting the arm’s-length value of
providing the services. The Global Services segment enters into arm’s-length leases at
prices equivalent to market rates with the Global Financing segment to facilitate the acquisition
of equipment used in services engagements. Generally, all internal transaction
prices are reviewed and reset annually, if appropriate.
The company uses shared-resources concepts to realize economies of scale and
efficient use of resources. Thus, a considerable amount of expense is shared by all of the
company’s segments. This expense represents sales coverage, marketing and support functions
such as Accounting, Treasury, Procurement, Legal, Human Resources, and Billing and
Collections. Where practical, shared expenses are allocated based on measurable drivers
of expense, e.g., headcount. When a clear and measurable driver cannot be identified,
shared expenses are allocated on a financial basis that is consistent with the company’s
management system; e.g., image advertising is allocated based on the gross profits of the
segments. The unallocated corporate amounts arising from certain acquisitions, indirect
infrastructure reductions, certain IP income, miscellaneous tax items and the unallocated
corporate expense pool are recorded in net income but are not allocated to the segments.
The following tables reflect the results of continuing operations of the segments consistent
with the company’s management system. These results are not necessarily a depiction
that is in conformity with GAAP; e.g., employee retirement plan costs are developed
using actuarial assumptions on a country-by-country basis and allocated to the segments
based on headcount. Different amounts could result if actuarial assumptions that are
unique to the segment were used. Performance measurement is based on income before
income taxes (pre-tax income). These results are used, in part, by management, both in
evaluating the performance of, and in allocating resources to, each of the segments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
88
ibm annual report 2004
management system segment view
(Dollars in millions)
Hardware
Systems and Personal
Global Technology Systems Global Enterprise Total
FOR THE YEAR ENDED DECEMBER 31: Services Group Group Software Financing Investments Segments
2004:
External revenue $«46,213 $«17,916 $«12,794 $«15,094 $«2,607 $«1,180 $«««95,804
Internal revenue 3,131 1,051 173 1,805 1,287 8 7,455
Total revenue $«49,344 $«18,967 $«12,967 $«16,899 $«3,894 $«1,188 $«103,259
Pre-tax income/(loss) $«««4,657 $«««2,265 $««««««162 $«««4,541 $«1,494 $«««(187) $«««12,932
Revenue year-to-year change 8.5% 9.4% 12.2% 6.1% (5.6) % 11.0% 8.1%
Pre-tax income year-to-year change 3.5% 23.9% NM 19.2% 26.4% 25.8% 18.1%
Pre-tax income margin 9.4% 11.9% 1.2% 26.9% 38.4% (15.7) % 12.5%
2003:
External revenue $«42,635 $«16,469 $«11,387 $«14,311 $«2,827 $«1,065 $«««88,694
Internal revenue 2,837 865 171 1,613 1,300 5 6,791
Total revenue $«45,472 $«17,334 $«11,558 $«15,924 $«4,127 $«1,070 $«««95,485
Pre-tax income/(loss) $«««4,499 $«««1,828 $«««««(118) $«««3,808 $«1,182 $«««(252) $«««10,947
Revenue year-to-year change 16.0% 2.5% 3.3% 11.4% (0.4) % 4.3% 10.0%
Pre-tax income year-to-year change 23.0% NM NM 7.1% 23.8% 14.0% 29.2%
Pre-tax income margin 9.9% 10.5% (1.0) % 23.9% 28.6% (23.6) % 11.5%
2002:
External revenue $«36,360 $«16,195 $«11,049 $«13,074 $«3,203 $«1,022 $«««80,903
Internal revenue 2,854 711 139 1,225 939 4 5,872
Total revenue $«39,214 $«16,906 $«11,188 $«14,299 $«4,142 $«1,026 $«««86,775
Pre-tax income/(loss) $«««3,657 $««««««538 $««««««««57 $«««3,556 $««««955 $«««(293) $«««««8,470
Revenue year-to-year change 4.3% (10.8) % (7.2) % 2.7% (2.4) % (8.6) % (1.3) %
Pre-tax income year-to-year change (29.1) % (74.1) % 137.3% 12.2% (16.4) % 7.6% (23.6) %
Pre-tax income margin 9.3% 3.2% 0.5% 24.9% 23.1% (28.6) % 9.8%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
89
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ibm annual report 2004
Reconciliations to IBM as Reported
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Revenue:
Total reportable segments $«103,259 $«95,485 $«86,775
Other revenue and adjustments 489 437 283
Elimination of internal revenue (7,455) (6,791) (5,872)
Total IBM consolidated $«««96,293 $«89,131 $«81,186
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Pre-Tax Income:
Total reportable segments $«12,932 $«10,947 $«8,470
Elimination of internal transactions (152) (89) (198)
Unallocated corporate amounts (752) 16 (748)
Total IBM consolidated $«12,028 $«10,874 $«7,524
immaterial items
Investment in Equity Alliances and Equity Alliances Gains /(Losses)
The investments in equity alliances and the resulting gains and (losses) from these investments
that are attributable to the segments do not have a material effect on the financial
position or the financial results of the segments.
segment assets and other items
The Global Services assets are primarily accounts receivable, goodwill, maintenance
inventory, and plant, property and equipment including those associated with the segment’s
outsourcing business. The Software segment assets are mainly goodwill, plant,
property and equipment, and investment in capitalized software. The assets of the
Hardware segments are primarily inventory and plant, property and equipment. The assets
of the Global Financing segment are primarily financing receivables and fixed assets under
operating leases.
To accomplish the efficient use of the company’s space and equipment, it usually is
necessary for several segments to share plant, property and equipment assets. Where
assets are shared, landlord ownership of the assets is assigned to one segment and is not
allocated to each user segment. This is consistent with the company’s management system
and is reflected accordingly in the schedule on page 90. In those cases, there will not be
a precise correlation between segment pre-tax income and segment assets.
Similarly, the depreciation amounts reported by each segment are based on the
assigned landlord ownership and may not be consistent with the amounts that are
included in the segments’ pre-tax income. The amounts that are included in pre-tax
income reflect occupancy charges from the landlord segment and are not specifically
identified by the management reporting system. Capital expenditures that are reported by
each segment also are in line with the landlord ownership basis of asset assignment.
The Global Financing segment amounts on page 90 for Interest income and Cost of
Global Financing interest expense reflect the interest income and interest expense associated
with the Global Financing business, including the intercompany financing activities
discussed on page 35 as well as the income from the investment in cash and marketable
securities. The explanation of the difference between Cost of Global Financing and Interest
expense for segment presentation versus presentation in the Consolidated Statement of
Earnings is included on page 38 of the Management Discussion
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
90
ibm annual report 2004
management system segment view
(Dollars in millions)
Hardware
Systems and Personal
Global Technology Systems Global Enterprise Total
FOR THE YEAR ENDED DECEMBER 31: Services Group Group Software Financing Investments Segments
2004:
Assets $«19,123 $«8,669 $«1,940 $«5,278 $«34,589 $««68 $«69,667
Depreciation/amortization of intangibles:
Continuing operations 1,713 1,175 87 658 2,013 6 5,652
Discontinued operations — — — — — — —
Capital expenditures/investment in intangibles:
Continuing operations 1,953 968 71 434 2,229 6 5,661
Discontinued operations — — — — — — —
Interest income — — — — 2,355 — 2,355
Interest expense — — — — 584 — 584
2003:
Assets* $«16,683 $«8,751 $«1,894 $«4,682 $«35,916 $««69 $«67,995
Depreciation/amortization of intangibles:*
Continuing operations 1,581 1,141 95 641 2,160 7 5,625
Discontinued operations — 10 — — — — 10
Capital expenditures/investment in intangibles:*
Continuing operations 1,753 1,241 109 393 2,318 6 5,820
Discontinued operations — 5 — — — — 5
Interest income — — — — 2,349 — 2,349
Interest expense — — — — 653 — 653
2002:
Assets* $«14,462 $«8,827 $«1,776 $«2,992 $«35,242 $««88 $«63,387
Depreciation/amortization of intangibles:*
Continuing operations 1,236 1,541 116 508 2,413 8 5,822
Discontinued operations — 617 — — — — 617
Capital expenditures/investment in intangibles:*
Continuing operations 1,294 1,672 96 385 2,561 9 6,017
Discontinued operations — 323 — — — — 323
Interest income — — — — 2,703 — 2,703
Interest expense — — — — 825 — 825
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
91
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ibm annual report 2004
Reconciliations to IBM as Reported
(Dollars in millions)
AT DECEMBER 31: 2004 2003* 2002*
Assets:
Total reportable segments $«««69,667 $«««67,995 $«63,387
Elimination of internal transactions (5,814) (5,596) (4,993)
Unallocated amounts:
Cash and marketable securities 9,421 6,523 4,568
Notes and accounts receivable 3,872 3,334 3,553
Deferred tax assets 4,899 6,486 6,631
Plant, other property and equipment 3,522 3,380 3,239
Pension assets 20,381 18,416 15,996
Other 3,235 3,919 4,103
Total IBM consolidated $«109,183 $«104,457 $«96,484
* Reclassified to conform with 2004 presentation.
revenue by classes of similar products or services
For the Personal Systems Group, Software and Global Financing segments, the segment
data on page 88 represents the revenue contributions from the products that are contained
in the segments and that are basically similar in nature. The following table provides
external revenue for similar classes of products within the Systems and Technology Group,
Global Services and Enterprise Investments segments. The Systems and Technology Group
segment’s OEM hardware comprises revenue primarily from the sale of semiconductors
and display devices. Technology services comprise the Systems and Technology Group’s
circuit design business for its OEM clients as well as the component design services,
strategic outsourcing of clients’ design team work, and technology and manufacturing
consulting services associated with the Engineering & Technology Services Division. The
Systems and Technology Group segment’s storage comprises revenue from TotalStorage
disk storage systems, tape subsystems and networking hardware. Enterprise Investments
software revenue is primarily from product life-cycle management products. The following
table is presented on a continuing operations basis.
(Dollars in millions)
Consolidated
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002
Global Services:
Services $«40,517 $«37,178 $«31,290
Maintenance 5,696 5,457 5,070
Systems and Technology Group:
Servers $«12,460 $«11,148 $«10,047
Storage 2,898 2,849 2,581
Microelectronics OEM «««2,131 «««2,142 «««3,226
Technology services 424 325 323
Networking products 3 5 18
Enterprise Investments:
Software $«««1,131 $««««««981 $««««««916
Hardware 37 72 95
Others 12 12 11
major clients
No single client represents 10 percent or more of the company’s total revenue.
geographic information
(Dollars in millions)
Revenue* Long-Lived Assets**+
FOR THE YEAR ENDED DECEMBER 31: 2004 2003 2002 2004 2003++ 2002++
United States $«35,637 $«33,762 $«32,759 $«29,780 $«29,929 $«28,064
Japan 12,295 11,694 10,939 2,701 2,738 2,814
Other countries 48,361 43,675 37,488 20,600 16,373 13,027
Total $«96,293 $«89,131 $«81,186 $«53,081 $«49,040 $«43,905
Five-Year Comparison of Selected Financial Data
(Dollars in millions except per share amounts)
FOR THE YEAR: 2004 2003 2002 2001 2000
Revenue $«««96,293 $«89,131 $«81,186 $«83,067 $«85,089
Income from continuing operations 8,448 7,613 5,334 8,146 7,874
(Loss)/income from discontinued operations (18) (30) (1,755) (423) 219
Net income 8,430 7,583 3,579 7,723 8,093
Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations 4.94 4.34 3.07 4.59 4.32
Discontinued operations (0.01) (0.02) (1.01) (0.24) 0.12
Total 4.93 4.32 2.06 4.35 4.44
Basic:
Continuing operations 5.04 4.42 3.13 4.69 4.45
Discontinued operations (0.01) (0.02) (1.03) (0.24) 0.12
Total 5.03 4.40 2.10 4.45 4.58*
Cash dividends paid on common stock 1,174 1,085 1,005 956 909
Per share of common stock 0.70 0.63 0.59 0.55 0.51
Investment in plant, rental machines and other property 4,368 4,398 5,022 5,660 5,616
Return on stockholders’ equity 29.3% 29.9% 15.5% 35.3% 40.0%
AT END OF YEAR: 2004 2003 2002 2001 2000
Total assets $«109,183 $«104,457 $«96,484 $«90,303 $«90,412
Net investment in plant, rental machines and other property 15,175 14,689 14,440 16,504 16,714
Working capital ** 7,172 7,039 7,257 7,483 7,474
Total debt 22,927 23,632 26,017 27,151 28,576
Stockholders’ equity 29,747 27,864 22,782 23,448 20,550
Selected Quarterly Data
(Dollars in millions
except per share amounts and stock prices)
First Second Third Fourth Full
2004: Quarter Quarter Quarter Quarter Year
Revenue $«22,175* $«23,098* $«23,349* $«27,671 $«96,293*
Gross profit 8,009 8,525 8,646 10,852 36,032
Income from continuing
operations 1,603 1,990 1,800 3,055 8,448
Loss from discontinued
operations (1) (2) — (15) (18)
Net income 1,602 1,988 1,800 3,040 8,430
Earnings/(loss) per share of
common stock:
Assuming dilution:
Continuing operations 0.93 1.16 1.06 1.81 4.94**
Discontinued operations — — — (0.01) (0.01)
Total 0.93 1.16 1.06 1.80 4.93**
Basic:
Continuing operations 0.95 1.18 1.08 1.84 5.04**
Discontinued operations — — — (0.01) (0.01)
Total 0.95 1.18 1.08 1.83 5.03**
Dividends per share of
common stock 0.16 0.18 0.18 0.18 0.70
Stock prices++:
High $«100.43 $«««94.55 $«««88.44 $«««99.00
Low 89.01 85.12 81.90 84.29
(Dollars in millions
except per share amounts and stock prices)
First Second Third Fourth Full
2003: Quarter Quarter Quarter Quarter Year
Revenue $«20,065 $«21,631 $«21,522 $«25,913 $«89,131
Gross profit 7,233 7,998 7,812 9,975 33,018
Income from continuing
operations 1,387 1,725 1,785 2,716 7,613
Loss from discontinued
operations (3) (20) — (7) (30)
Net income 1,384 1,705 1,785 2,709 7,583
Earnings/(loss) per share of
common stock:
Assuming dilution:
Continuing operations 0.79 0.98 1.02 1.56 4.34**
Discontinued operations — (0.01) — — (0.02) **
Total 0.79 0.97 1.02 1.55+ 4.32**
Basic:
Continuing operations 0.80 1.00 1.04 1.59 4.42**
Discontinued operations — (0.01) — — (0.02) **
Total 0.80 0.99 1.04 1.59 4.40**
Dividends per share of
common stock 0.15 0.16 0.16 0.16 0.63
Stock prices++:
High $«««88.95 $«««90.40 $«««93.47 $«««94.54
Low 73.17 78.12 78.73 87.53
* See page12, “Subsequent Event” for additional information regarding 2004 quarterly revenue.
** Earnings Per Share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during
that quarter while EPS for the full year is computed using the weighted-average number of shares outstanding
during the year. Thus, the sum of the four quarters’ EPS does not equal the full-year EPS.
+ Does not total due to rounding.
++ The stock prices reflect the high and low prices for IBM’s common stock on the New York Stock Exchange composite
tape for the last two years.
Table of Content Pages
Introduction……………………………………………………...……...3
Financial Accounting and Management Accounting
Financial Accounting…………………………………………...4
Management Accounting....…………………………………….4
Comparison of Financial Accounting and Management Accounting…..4
Users of Financial Report and the Information…………………………4
IBM Annual Report 2004……………………………………………….5-8
Conclusion………………………………………………………………9
References……………………………………………………………….9
Introduction
This assignment includes two important topics which consist of comparison of Financial Accounting and Management Accounting, Users of Financial Reports and Information about Annual Report.
On completion of this assignment, we will be:
Able to know about financial and management accounting, as well about comparison between financial and management accounting and about users of financial report which is clearly illustrated in next page.
Able to know about the annual report of ……………company that as an employee enabled us to know more about company’s status.
Financial Accounting and Management Accounting
Financial Accounting: Process of designing and operating and information system for {Collecting, measuring and recording} an enterprise’s transactions and summarizing users for facilities making financial/economic decisions.
Management Accounting: The purpose to do management accounting is to expertise functional management and develops from various disciplines.
It includes: Planning, control, coordination, communication and motivation.
Comparison of Financial Accounting and Management Accounting
Financial Accounting Management Accounting
1. Data Historic Future and Historic Date
2. Users External Internal Users
3. Decision-Making External Users Internal Users
4. Cost Base Historic Future Cost Base
5. Legislation/Standards Yes No
6. Objectivity Profit/Asset Aids management in decision making and
Measurement control.
Users of Financial Reports and the Information
Users Information
1. Equity investor group To assist in reaching decision.
2. Loan creditor group Present and likely future cash position.
3. Employee Assess security of employment in prospect
for promotion.
4. Analyze Advisor Obtained information that can give about company.
5. Business Contact
Customers Existence of company
Suppliers Ability to pay debts
Competitors Benchmark
Government Tax purposes, economic measure and etc.
Public Costodial role
Users of Financial Reports
Annual Report:
Understanding Our Company
IBM Annual Report 2004
Chairman’s letter Financial report Directors and officers Stockholder information
a) As an employee of IBM Company I will try to enhance the reputation and value of the company and the information that is useful as an employee of the company is to achieve these results because of the performance in the marketplace.
1. IBM Global Services is the leading IT services company in the world, with more than twice the revenue of our nearest IBM rival. ranked number one in IT outsourcing, application management and e-business hosting.
2. We continue as number one in the world in servers, with zSeries, pSeries and xSeries each increasing its share position in 2004.
3. Revenue in all of IBM’s industry sectors—which is the way we serve our largest clients globally—grew for the full year, led by the financial services, communications and distribution sectors. We continued our strong growth in sales to small and medium-size businesses.
4. Employees of IBM grew and expanded their business in the world’s hyper growth markets. We have learned over many years that the best way to pursue opportunities in emerging markets is to make investments and build relationships for the long haul, to become part of the local economy and to help advance the society’s broader goals.
And mostly as an employee of company we will always hope to have a good year as financially status. Such as, considering about Profit/Loss of company.
b) As an employee the useful information that I want to add for IBM Company is that:
IBM is an enterprise-focused company. They must participate directly in consumer markets.IBM Company must be quick at creating and delivering differentiating value to their clients.
They must establish deep roots locally and leveraging their multinational presence for operational advantage to have greater profit year by year.
Conclusion

I hope that you now have at least some understanding of Financial Accounting and Management Accounting, Users of Financial Reports and information about Annual Report of IBM Company.
As I hope you will have seen:
By illustrating and explaining distinguish between Financial Accounting and Management Accounting, now we are able to differentiate both Accounting issues.
I have published an annual report of IBM company and I was able to find an information useful as an employee of company and provided also additional information as an employee for the company and hope for the best financial status of the company then previous year.
It is my great honor and pleasure to provide such information about the topics given to us in assignment of Management Financial Resources by one of the intellectual lecturer ZANARIAH ZAKARIA, which made us enable to know more about the topics as illustrated in this assignment.
Table of Content Pages
Introduction……………………………………………………………...3
Working Relationship and Role of a secretary in the working environment
Definition of working relationship……………………………...4
The overall role of secretary…………………………………….4-5
3. The key people in organization
The Shareholders………………………………………………..6
The Chairman…………………………………………………...7
The Directors……………………………………………………7
The Managing director………………………………………….7
The Company secretary…………………………………………7
The Department manager……………………………………….8
The Section Supervisor or Executive…………………………...8
4. Benefits of using an electronic diary in scheduling appointments and meetings
Definition of electronic diary……………………………………9
Benefits of using electronic diary in scheduling appointments…9
Scheduling appointments in electronic diary…………………...9-10
Conclusion……………………………………………………………...11
6. Reference……………………………………………………………….11
Introduction
This assignment consists of three important topics such as: working relationship and the role of the secretary in the working environment, duties and responsibilities of the key people of an organization and usage and benefits of electronic diary in scheduling appointment and meetings.
On completion of this assignment, we will be:
Able to know about working relationship and overall role of secretary in working environment that how the secretary communicate and get along with all levels of staff in working environment.
Able to know about duties and responsibilities of key people in organization such as: The Shareholders, The Chairman, The Directors, The Managing Director, The Company Secretary, The Department Manager and The Section Supervisor or Executive.
Able to know about electronic diary, usage and benefits of electronic diary in scheduling appointments and meetings.
Working Relationship and Role of a secretary in the working environment
Working Relationship is defined as the qualities required of a secretary to be able to communicate and get along with all levels of staff in the office. By establishing a good working relationship with all staff the secretary would be able to carry out her work successful in the working environment.
The Overall Role of a Secretary
The secretarial role is interesting, challenging and undergoing many changes...and the changes have made the secretarial working environment even more appealing.
The biggest change of all has been to the name, 'Secretary'. Did you know that Secretaries are now becoming more known as 'Office Professionals'?
Of course as the title indicates, a Secretary's role can now be expected to include some managerial duties. This could include supervising other office secretaries or administration staff or even training staff.
So just what role DOES the Secretary and Office Professional play within an organization? Do you possess the qualities to become a secretary or office professional if the role is changing? These are the questions we will give you some guidance with. You also might like to have a look at the following selection which gives you an insight into the role and some training you need right from the start of your career.
Major Role
The major role of a Secretary or Office Professional is to provide assistance to a Manager or Managers.
As the new generation of Managers are doing more and more of their own typing, a Secretary's role can expect to be more of an organizer, supervisor and trainer rather than the bulk of the duties being typing. But of course this can and does differ from company to company.
The other factors affecting secretarial responsibilities are the size of t firm (the smaller it is, usually the more varied the work) and the extent to which a manager is prepared to delegate his or her duties and responsibilities.
An important element of the private secretary’s success and value to the manager lies in skill in dealing with people, and in creating and impression which will enhance the organization’s reputation. The responsibilities are enormous, for the secretary is the manager’s personal organizer, generally deciding whom the manager should see and to whom they speak, what mattes receive their urgent personal attention,, and what can be redirected to other managers.
The secretary should provide a vital link between the manager and their various contacts, ensuring that communication is effective and that the required actions are taken. Secretaries cannot play a full par unless they are given a full and clear understandings of their manager’s role and objectives in organization. In addition secretaries need to know clearly what is expected of them in assisting the manager to achieve his or her objectives in the organization.
As a result a secretary is either an administrative assistant in working environment of business office administration, or a certain type of mid- or high-level governmental position, such as a Secretary of State.
The office title refers to a person who performs administrative or personal tasks for a superior. The executive secretary (sometimes called administrative associate) is responsible for a myriad of responsibilities. Originally when there were only typewriters the secretary spent much of the time typing handwritten documents into typed form. Today with computers the amount of time doing word processing has been significantly reduced.
The key people in an organization
The following key people are found in private and public limited companies:
The Shareholders
Shareholders buy shares to help finance Private and public limited companies.
Shareholders may be individual members
of the public or other companies with cash
to invest.
Public company shares may be purchased
by anyone through a stock exchange, where
as private company shares can only be
bought from the shareholder, and are usually
held by the company’s directors.
Shareholders attend annual general meetings and extraordinary general meetings of the company.
Shareholders have legal rights of access to information from the company. The shareholders vote to elect the directions and they may acquire sufficient shares to control or take over the company.
The Chairman
The chairman ‘sits’ at the top of the
organizational pyramid and is elected by the
Board of Directors.
The chairman chairs meetings of the Board
of Directors and he may have executive status
or may leave day to day running of the
company the managing director.
The Directors
The Directors decide on important matters at
board meetings and they have legal obligations
and responsibilities under the Companies Act
1985.
The Directors may exert influence on company
activities by having extensive shareholdings in
the company.
The Board of Directors presents its annual
report to shareholders for, approval at the end
of each trading year.
The Managing Director
The Managing Director is the executive head
of most organizations, with authority over all
the staff.
The Managing Director is a member of the
Board of Directors.
The Company Secretary
The Company Secretary is responsible to the
Managing Director and Board of Directors to
ensure that all the company’s affairs are
conducted according to legal requirements.
The Company Secretary services and attends
meetings of the Board of Directors. He attends
to all correspondence involving shareholders
and the calling of shareholders’ meetings.
The Company Secretary is usually responsible for fire, health and safety regulations, company contracts, and trade mark registrations.
The Company Secretary acts as legal advisor to the company.
The Department Manager
The Department Manager is responsible to the
managing director for the work of one
department in the organization.
The Department Manager directs the work
carried out by the members of staff in the
department.
The Department Manager ensures targets are
met for example the projected annual sales
turnover is achieved at the desired level of
gross profit.
The Department Manager is provided by the company wit the human, equipment and financial resources to reach the pre-set targets.
The Section Supervisor or Executive
The Section Supervisor is responsible to the
head of department for the work of a section
or unit in the department. Example – A large
accounts department may have sections for the
sales ledger, purchase ledger, payroll, credit
control, etc.
The Section Supervisor reviews the work in
progress with the head of department to
ensure targets are met and he is responsible
for the section staff.
Benefits of using an electronic diary in scheduling appointments and meetings
Electronic Diaries
Electronic Diaries are a way of keeping a copy of a diary on a computer. This allows the user to browse their appointments, and mark appointment on electronic “diary pages”.
Since the computer holds the details of each appointment users can be reminded in advance of meetings and appointments. The use of computer also introduces flexibility into the format of diaries, presenting different views, such as by year, month or week.
Unlike a paper diary, the computer automatically adds new pages when needed, extra room for each day, and retains copies of diaries for year gone past.
Benefits of using electronic diary in scheduling appointments
Electronic diaries held on desktop computers, then, make booking meetings much easier
An electronic diaries allows meetings time to be found, arranged, and confirmed, all from the computer, saving time and bother.
Scheduling appointments in electronic diary
Administration Officer:
Check the availability of the employee in the electronic diary system.
Negotiate a time convenient for both the visitor and the employee to meet.
Include the following details in the appointment entry:
who will be going to the meeting
where the meeting will be held
purpose of the meeting
what time the meeting will be held
How long the meeting is planned for.
Employees:
Enter all appointments into the electronic diary.
The appointment entry should include the following details:
names of person/s who will be present
appointment venue
nature of appointment or reason for appointment
Approximate time needed for appointment.
Conclusion

I hope that you now have at least some understanding of what the working relationship, role of the secretary in working environment, the duties and responsibilities of the key people of an organizations and using of an electronic diary in scheduling appointment about and how we might go about achieving it.

As I hope you will have seen:
By establishing good working relationship with all staff the secretary would be able to carry out her work successful in the working environment.
The role of a secretary in working environment which providing assistance to a Manager or Managers. Secretary's role can expect to be more of an organizer, supervisor and trainer rather than the bulk of the duties being typing. But of course this can and does differ from company to company.
The most important duties and responsibilities of key people in an organization that can be found in private and public companies.
Benefits of using electronic diaries such as makes booking meetings much easier, allows meetings time to be found, arranged, and confirmed, all from the computer, saving time and bother.
Table of Content Pages
Introduction……………………………………………………………...3
Taking telephone messages form………………………………………..4
3. Things to do list for junior staff…………………………………………5
4. Benefits and usage of an electronic diary in recording appointments…..6
Conclusion……………………………………………………………....7
6. Reference………………………………………………………………..7
Introduction
In this assignment three important topics are defined such as: telephone message form, Checklist of things to do for the junior staff, and Benefits and usage of electronic diary in recording appointments.
On completion of this assignment, we will be able:
To design a telephone message form that can be used within the company for all personal taking messages.
To know about “Things to do list” of junior staff so that they can know exactly what to do from the start of the working day till she finishes work in the evening.
To know about the usage and benefits of electronic diary in scheduling and recording appointments.
Taking Telephone Messages
The secretary should understand that calls and messages should never be entrusted solely to memory, which may well prove unreliable, and the important facts should be written down in a telephone message for while they are being received.
The important points that should be noted in the message form are:
Date and time of the call
The name of the person for whom the telephone call was made
Caller’s name, address and telephone number
Precise details of the message received
TELEPHONE MESSAGE
TO ______AK Zubair________________________________________
FROM ___Qaisar Khan_______________________________________
OF ______Khan Manufacturing Co Ltd______Phone_0323333988____
Please phone Please return call Will call back
Message: Mr. Qaisar expects to be in Kuala Lumpur next week and
he would like to call on you to discuss the matter referred
to in your letter dated 7 September. Please call him today.
Time: 2.30 PM Date: 23/10/07 Taken by: Mary
This message should be repeated back to the caller to make sure the information has been taken down correctly. The telephone message should either be typed or written with a pen.
As soon as the message has been recorded the secretary should place the message on the manager’s desk so that it can be seen by him immediately on his return to the office.
Things to Do List For Junior Staffs
As we know secretaries have Interpersonal skills to supervise and support their junior staff so, they can prepare “Things to do list” for their junior staff that upon the absence of secretaries they also perform main duties of secretaries and some other task as listed below:
Receiving dictation, typing it and composing correspondence and summarizing reports, etc.
Helping secretaries in preparing incoming mails and outgoing mails.
Reception duties, including the receiving and entertaining of visitors and handling of telephone calls.
Arranging appointments and engagements.
Assisting secretary in making travel arrangements and preparing the manager’s itinerary.
Filling and indexing the manager’s personal and business correspondence.
Organizing and attending the meetings.
Supplying information
Taking care of the office petty cash and bank transactions.
Controlling stationary and office materials.
In absence of secretary, the junior staffs also have to schedule appointments for their manager.
Also receiving the visitors with appointment, without appointment and unwelcome visitors.
They should also assist the secretaries on receiving and transferring calls and taking of telephone messages.
Benefits and usage of electronic diary in recording appointments
Electronic diaries held on desktop computers, then, make booking meetings much easier
An electronic diaries allows meetings time to be found, arranged, and confirmed, all from the computer, saving time and bother.
Allows users to browse their appointments and record appointments on electronic “diary pages”.
An electronic diary can help one to be more conscientious about time management.
Electronic diary programs also allow one to keep track of tasks outstanding with an electronic “to do” list.
Electronic diaries offer the ability to share diaries between other diary users.
Can record and check the availability of the employee in the electronic diary system.
Negotiate a time convenient for both the visitor and the employees to meet.
Conclusion

With the completion of this assignment now we can understand about designing a telephone message form that can take telephone messages accurately and with complete information.
We can understand about the duties that should be done by junior staff from start of the working day until end and also some other tasks that should be done by junior staff on absence of their secretaries.
We can understand about planning and recording of appointments within time schedules, including the use of an electronic diary.
Table of Content Pages
Introduction……………………………………………………………...2
Short talk to junior employees about time-keeping……………………..3
Guidance for junior staff about signing correspondence by employer….4
Guidance for junior staff in making appointments……………………...5
Guidance for junior staff in maintaining confidentiality in the office…..6
Conclusion………………………………………………………………7
Reference………………………………………………………………..7
Introductions
This assignment will help us to understand about time management, that how to keep and maintain effective time in organization and avoid wasting valuable time of office that enable us to gain our personal goals and organization’s objectives.
This assignment also consist of short information about preparing correspondence for signature by employer, information in making appointments and maintaining confidentiality in the office that help us to know more about dealing appointments and dealing office works efficiently.
Short talk to junior employees about time-keeping
As a personal officer we have the responsibility to give a short talk or advice to our new junior employees about time management to achieve their personal goals and the organization’s objectives. As it’s mentioned below:
Good Morning Dear Employees,
About managing your time I would like to give you a short briefing that will make you to maintain a good time management in office.
Your peak is when you are most productive; therefore, use your peak time to your best advantages. When ever possible plan your work so you do the difficult jobs which require problem-solving skills during your peak time and the routine jobs such as filling, during your off peak or low times.
Time is something none of us ever has enough and consequently the way in which we manage our time is important if we want to be effective in achieving the things we set out to do. Managing time involves prioritizing and this ability to priorities is something which managers set high standards.
If you want to manage your time effectively so, the first step is to plan and you must organize the things need to be done and you must estimate the time for the tasks to do, your desk must be always organize, put the most frequently used items in accessible locations. Don’t make yourself busy with others in unnecessary talks or interruptions.
Always make daily to do list and set priorities for items that can keep you manage your time. Always write down your short term and long term goals and learn how to keep phone conversations as brief as possible and chair a meeting effectively.
As we have said managing time is about managing priorities. So, we have to priorities our task, such as tasks that must be done, tasks that should be done, tasks that could be postponed and tasks that can be delegated.
And we also have to avoid wasting our valuable office time to keep and maintain effective time management in the office and organization.
So, these steps can make you to manage your time effectively in the office and show’s ability on you to set your personal goals and organization’s objectives.
Guidance for junior staff in preparing correspondence for signature by your employer
As secretary we have the responsibility to guide our junior staff for preparing correspondence for our employer for signature as below:
You must know the responsibility of dealing with letters and mails and forwarding them to your employees for signature.
You must know how efficiently distribute the letters or correspondence so that the proper person quickly receives it for signature.
Correspondence regarding a specific project may be directed to the person responsible for that project.
Depending on the size and layout of the office, the correspondence should be first sorted according to department, floor, section, office or similar division should be forwarded to their proper employees for signature.
If there are any enclosures with our letters so, we have to attach the enclosures and forward it to the executives for signature.
If there’s various departments a circulation slip could be attach to the letter and executive of each department will sign against their name on the circulation slip after noting the contents of letter.
If the letter is confidential, you have to see the executive of t department concerned and hand over a copy of the letter personally to him/her. The executive will sign on the original letter.
Guidance for Junior Staffs in Making Appointments
As secretary we can supervise and support our junior staff and can give them guidance for making appointments as below:
In making appointments you should meet your client and customers. When scheduling appointment it’s important to take into consideration of your manager’s personal work habits and preferences.
You must know about arranging appointments and engagements.
You must know the use of electronic diary programs that allow you in scheduling appointment and other tasks outstanding with an electronic “to do” list.
In making appointments using of electronic diaries that allow the user to browser their appointments and mark appointments easily.
You must allow meeting and appointments time to be found, arranged and confirmed with saving time and bother by using electronic diaries.
You must know how to make and browse the appointments and record them in “Electronic diary pages”
After scheduling appointment you can record and check the availability of the employee in the electronic diary system.
You must know about what points to be considered when making appointments.
You must know about what factors to be avoided when making appointments.
An electronic diary for scheduling and recording appointments
Guidance for Junior Staff in Maintaining Confidentiality in the office
Guidance for junior staff how to maintain confidentiality and keep privacy in the office is listed as below:
You must have self-confident and keep privacy in your all office works.
You must know how to handle office situations confidentially and efficiently.
You must know how to establish and maintain effective working relationship in the office.
You must be influenced and negotiate successfully in your all office works and work place.
You must show enthusiasm about your career and office works.
You must show discretion in difficult situations of office.
You must know how to handle crisis manners of office in a logical manner.
You must know how to identify and solve problem using judgment and initiatives in the office.
A secretary is supervising and guiding his junior staffs
Conclusion
On completion of this assignment now we can get some idea about maintaining our time effectively in organization as mentioned above that time management is very important in order to meet deadlines in your office work and knowing and establishing priorities will help you to manage your time more effectively.
We have also got some idea how to prepare the correspondence or letter for signature to our employer.
We also got knowledge in making appointments and how to deal the appointments upon the absence of the secretary.
We also got knowledge in maintaining confidentiality in the office.
So, above knowledge will give us some skills and personal traits to succeed in today’s turbulent organization environment.
Table of Content Pages
Introduction……………………………………………………………...2
Diary layout for the month of April……………………………………..3
Preparation for a Business Trip
Preparation by Air…………………………………………...4
General Preparation…………………………………...…….4
Travel Documents…………………………………………………….…5
Preparation of Travel by Car……………………………………………6
General Preparation……………………………………………………..6
Travel Documents………………………………………………………7
Preparation of Travel by Air……………………………………………7
General Preparation…………………………………………………….8
Travel Documents..…………………………………………………….9
Introduction
This assignment consists of two important topics:
Designing diary layout
Travel preparation
On completion of this assignment, we will be:
Able design suitable diary layouts for the activities to be done and we will be able to record the activities inside diary.
Able to know about preparation of traveling by car and air and we will be able to prepare such information included for traveling such as Preparing documents, bookings, accommodation and other essential information needed for traveling overseas and also traveling inside the country.
Preparation for a Business Trip
One of the staff of the company is going to USA for a three week lecture tour. He is traveling by air. So, the travel arrangement is made as below:
Preparation of Travel by Air
We have to know the duration of the journey, time of his departure and time of his arrival to USA.
We have to know the desirability of the flight whether its direct or stopover flight.
We have to book the return ticket (both way) for three weeks.
The baggage should be weighted.
We have to verify the terminal, from which the staff is leaving and the actual take-off time.
We have to inform the other party to meet our staff in airport or air terminal for his pick up.
General Preparations
We have to book the hotel for three weeks for accommodation.
We should prepare the itinerary.
All the documents and files must collect and passed to the staff.
There must be ticket confirmation with hotel reservation.
There must be valid passport, visa, health certificate, insurance policies and International license for driving in overseas.
We have to arrange USA currency which can be in need for the staff.
There must be medical certificate for our staff, if required.
The luggage must have labels.
For visiting overseas the following travel documents also required, which is mentioned as below:
Travel Documents
Passport: For traveling abroad the passport validation should be active else we have to renew the passport of our staff before leaving to USA.
Visa: Some countries require a visa as well for access. So, here its important to issue the visa of USA before departure.
Driving License: The staff must have the international driving license for the purpose of driving in USA.
Health Certificate: For traveling to USA, it is necessary to have a health certificate for evidence of vaccination against certain diseases, before he will be allowed to the country.
Insurance Certificate: Unforeseen problems and disasters can happen when traveling and difficulties may be much greater in a foreign country. Therefore, insurance certificate is important to have
Passport for traveling purpose Ticket require for passport
Second staff of the organization is going to visit two of the organization’s subsidiary companies, one in Kedah, the other in Georgetown - and later his wife will join him in Penang for two week holidays.. He is traveling by car. So, the travel arrangement is made as below:
Preparation of Travel by Car
We have to arrange the appropriate road map and route plans for traveling Kedah and Georgetown.
We have to verify the weather conditions for both cities, Kedah and Georgetown.
We have to prepare the company car for travel, else we have to book or rent.
If the staff is a member of the Automobile Association so, we should ensure that he has with him Association Handbook.
We must ensure that our staff has a valid driving license for driving overseas.
We must aware our staff of driving and insurance restrictions and also about regulation of country.
General Preparations
We have to book the hotel for other accommodation until his visit of both organizations.
We should prepare the itinerary for our staff.
All the documents and files must collect and passed to the staff.
International license for driving in overseas.
Travel Documents
As our second staff is traveling inside the country so, the following travel documents are required except passport and visa. But, must have IC for his identification purpose.
Driving License: The staff must have the international driving license for the purpose of driving in USA.
Health Certificate: For traveling to USA, it is necessary to have a health certificate for evidence of vaccination against certain diseases, before he will be allowed to the country.
Insurance Certificate: Unforeseen problems and disasters can happen when traveling and difficulties may be much greater in a foreign country. Therefore, insurance certificate is important to keep.
The third staff of the organizations is attending a four-day sales convention at Gleneagles Hotel in Scotland, where he is scheduled to give a presentation on the third day of the company’s latest promotional item. So, he is also traveling by air and the preparation is made below:
Preparation of Travel by Air
We have to know the duration of the journey, time of his departure and time of his arrival to Scotland.
We have to know the desirability of the flight whether it’s direct or stopover flight.
We have to book the return ticket (both way) for four days.
The baggage should be weighted.
We have to verify the terminal, from which the staff is leaving and the actual take-off time.
We have to inform the other party to meet our staff in airport or air terminal for his pick up.
General Preparations
We have to book the hotel for three weeks for accommodation.
We should prepare the itinerary.
All the documents and files must collect and passed to the staff.
There must be ticket confirmation with hotel reservation.
There must be valid passport, visa, health certificate, insurance policies and International license for driving in overseas.
We have to arrange USA currency which can be in need for the staff.
There must be medical certificate for our staff, if required.
The luggage must have labels.
Gleneagles Hotel in Scotland for Accommodation purpose
For visiting overseas the following travel documents also required, which is mentioned as below:
Travel Documents
Passport: For traveling abroad the passport validation should be active else we have to renew the passport of our staff before leaving to Scotland.
Visa: Some countries require a visa as well for access. So, here its important to issue the visa of Scotland before departure.
Driving License: The staff must have the international driving license for the purpose of driving in Scotland.
Health Certificate: For traveling to Scotland, it is necessary to have a health certificate for evidence of vaccination against certain diseases, before he will be allowed to the country.
Insurance Certificate: Unforeseen problems and disasters can happen when traveling and difficulties may be much greater in a foreign country. Therefore, insurance certificate is important to have.
Conclusion

I hope that you now have at least some understanding of designing diary layout and preparing travel arrangement.

As I hope we have learned:
About preparing an itinerary that enables a user to meet his commitments and know about his priorities on time.
Travel is an integral part of today’s business world. Business trips planned at the last minute aer often the norm. If the company has a trvel department, our only responsibility mey be too notify that department of the impending trip, including location, date, and trael preference. So, we should know completely to make a proper travel arrangement if any of our staff or manger is traveling overseas or inside the country.
Table of Content Pages
Introduction……………………………………………………………...2
Arrangement for a business trip
Travel arrangement by train…………………………………………3
General Preparation………………………………………………….3
Confirmation letter for hotel booking…………………………………...4
Checklists for arranging meeting
Before meeting………………………………………………………5
During meeting……………………………………………………...5
After meeting………………………………………………………..6
Special preparation for other members of meeting……………………...6
Conclusion and References……………………………………………...7
Introduction
This assignment consists of two important topics:
Traveling Arrangements
Meeting Arrangement
On completion of this assignment, we will be:
Able to do arrangement for business trip by train.
Able to prepare a letter for confirming hotel booking
Able to make a checklist for ourselves in considering points before meeting, during meeting and after meeting.
Able to do special arrangements for large number of staffs.
Section A
Arrangement for a Business Trip
Mr. Jeremy Khoo, Production manager of Systems Furniture plz is going to travel by train to Johor Bahru for the purpose of visiting a factory which is situated three miles outside of the town. He wishes to stay the night at a hotel, so there’s below the travel arrangement for Mr. Jeremy Khoo:
Travel Arrangements by Train
We must know the duration of the journey.
Know if there are services available on the train e.g. meal, else we have to do food arrangement.
We have to confirm the time, station, platform of departure/arrival, time of departure/arrival.
We should obtain the tickets for the journey and sleeping berth if necessary.
We have to make arrangement for the manager to be met in Johor Bahru with ant of the factory member.
General Preparations
We have to book the hotel for a night.
We should prepare the itinerary for the manager.
All the documents and files must collect and passed to the manager.
We have to prepare a trip folder with all necessary office stationery, documents, transportation tickets, hotel confirmation letters, reservation cards, invitation cards or any other necessary documents.
There must be train ticket confirmation with hotel reservation.
We have to remind our manager to bring along medical supplies as well as medication if he so requires.
We have to discuss outstanding matters with the manager just before the depart on a trip.
As Mr Jeremy Khoo as also traveling to Miri Sarawak for visiting the production plant situated at North Yu Seng Road. He prefers to stay in a Dynasty Hotel so, here’s below the letter for confirmation of hotel Booking.
To: Dynasty Hotel, Miri Sarawak
To Whom It May Concern:
Respectfully I like to mention that my name is Mr. Jeremy Khoo that I would like to do booking for one night in your hotel. It will be my pleasure to receive confirmation letter from you hotel side.
Upon receiving confirmation letter I will be gladly doing payment by my visa card or banking.
Hope to hear positive response and receive my confirmation letter soon.
Best Wishes!
Dynasty Hotel, Miri Sarawak
Section B
As I have asked to arrange a Board Meeting so, following is the checklist before, during and after the meeting:
Before the meeting
We have to check the meeting room for ventilation, lighting and seating.
We should confirm the refreshments and ensure that they will be served at a convenient time.
We should contact reception if guests are expected.
Liaise with reception to reroute calls for the duration of the meeting.
We have to prepare the attendance register which all member will sign on arrival
Either arrange the name plates around the table or have the individual collect their name tags on arrival.
Have available spare copies of the agenda and other relevant papers.
Place paper, pens and pencils on the table.
Have drinking water and glasses available.
Finalize the chairperson’s agenda.
Collect all necessary files and documents which may be called upon during the meeting.
Have the minute book ready for the chairperson’s signature.
Place a ‘meeting’ in progress sign outside the room.
During the meeting
To assist the chairperson
Ensure that the members have signed the attendance register.
Nothing and authorized changed in the order of the agenda items.
Dealing with any crisis or emergency that arises, e.g. leaving the room to seek information where requested to do by the chairperson.
Answer the telephone should it ring.
Helping to serve refreshments where necessary.
Helping the chairperson to time discussions, particularly where there may be a lengthy agenda with a number of items to get through.
To read the minutes of meeting
To ensure that chairperson signs the previous minutes and initials any alternations.
To take down the minutes of the meeting unless a minute secretary has been appointed.
After the Meeting
Remove the notice of meeting.
Notify the switchboard that the meeting has finished.
Notify the catering staff that they may collect the refreshments trolley.
Clear away and destroy any surplus papers.
Escort guests off the premises, if required.
Return minute book, all files and documents to the office for safekeeping until the next meeting.
As some members the company came from different countries to attend the meeting so, there’s below arrangement for them:
We should book the venue for the meeting or check the booking if it is a fixed one.
Send out the notice convening the meeting together with the agenda, previous minutes and other supporting papers.
We should organize refreshments.
Prepare name plates or name tags where it is a new committee or where a number of guests are expected and representatives may be unknown to one another.
Carefully note and apologies for absence as they are received.
Gather any necessary information and reports which may be required.
Have available spar copies of the agenda and other relevant papers.
Place paper, pens and pencils on the table.
Have drinking water and other refreshments.
We also have to prepare foods after the meeting.
Conclusion
With the completion of this assignment, now I hope that we got some Idea about arrangement of business travel and arrangement of meeting.
So these topics made us know:
To do travel arrangements in the absence of our company secretary for our manager or other staffs of company who traveling abroad or inside the country.
To do meeting arrangements for our directors and also other members of company who plan to attend the meeting.
Name: Mohammad Yousuf ID No. 01-200708-00008 Exercise Assignment
Revision Questions
Supply brief answers to the following questions:
A telephone answering machine gives a pre-recorded announcement. List three items that the announcement should include:
Your name, including correct spelling if necessary
Your department and telephone number
Date and Time
Provide three tips for a good telephone answering technique:
Person called available, “May I tell her who is calling”.
Personal called is not available, “Would you care to hold”.
Leaving the line, “Would you mind waiting while I check please”.
Give three ways in which to deal with a telephone caller when the person he or she wishes to speak is engaged on another line:
The person you called is busy, “Can you please hold for a while.”
We can ask caller, “May I or someone else can help you about your matter.”
May I take a message? Or would you like to leave her voice mail.
You receive an incoming call. In the process of transferring it, the caller is disconnected. Who should make the call to re-establish the contact?
As a secretary if we have the number of a person so, we have to re-establish the contact and we have to transfer it to the person he/she want to talk or if we don’t have the person’s number so, we should wait for his call back.
Fill in the blanks with suitable answers:
When making a telephone call checks the number before dialing.
By the side of the telephone should always be list of frequently used numbers.
If a telephone caller is unwilling to leave a message, he should be asked to leave his number to call him back.
Before letting a caller ring off, the following details should be asked for. Date and time of call, the name of person to whom the call was made, caller’s name, address and telephone number, Message.
Multiple Choice Questions
When listening to a message:
Interrupt the speaker at any time of the conversation in order to clarify a point.
Be prepared to give the speaker a reaction verbally or non-verbally.
Write everything down to aid your memory
Avoid looking at the speaker
Which of the following will be suitable for communicating information to a large number of people?
Intercom
Voice bank
Tannoy/public Address System
Loud speaking telephone/ Speakerphone
Modern telephone switchboards may be referred to as:
Liquid crystal display brands
7
Telephone answering machines
Call connect systems
You have dialed a telephone number and hear a single note repeated a regular
intervals. This sound indicates that:
The number you require is engaged.
The number you require is unobtainable.
The receiver has a mobile telephone.
The receiver’s telephone is ringing.
When making an International Direct Dialing telephone call, which of the following
groups of digits would you dial first?
Subscriber’s number
Area code
Country code
International code
When receiving an external telephone call which has been routed to your extension
by your switchboard operator you would:
Say ‘hello’ to ensure that the caller is on the line
State the name of your organization plus a greetings such as ‘good morning’
Ask t caller for his or her name in order to establish immediate communication
State your name and your position/ department in the organization
Which of the following information would you expect to hear on a telephone
answering machine announcement?
Firm’s name
Time
Date
Receptionist’s name
In the freefone service the caller:
Makes telephone calls at specially reduced rates
Makes telephone calls without payment
Is credited with the cost of telephone calls
Is charged at the cheap rate for telephone calls made at any time of the da
Essay Questions
Answer or Question1: Main Advantages and Disadvantages of video conferencing
A video conference allows participants in various locations to see and speak with each other.
The advantages of video conferencing are that allow participants to see and speak with each other. Often one-way video conferencing is used, so the main speaker is seen bye the participants and the participants can respond t the speaker via voice-only telephone.
High quality video conferencing has video cameras, camera operators and costly video channels or satellite communications.
In addition to business meetings, video conferencing is now being used to answer customer questions and solve technical problems. With advance in computer technology and the increasing availability of broadband, video conferencing is also available on a desktop computer connected to the internet.
By using video conferencing over the Internet, small businesses can conduct meetings across the country while saving the time and cost of staff travel.
Some disadvantages of video conferencing are It is usually more expensive than audio teleconferencing as it requires costly video cameras and costly video channels or satellite communications. It’s usually expensive to set up a video conference and arrangements must be made for both sending and receiving the video signal.
Answer or Question2: Three barriers which a speaker might encounter in attempting to communicate effectively with a large, unfamiliar audience.
One barrier of speaker is when communicating large audience in noisy areas such as factories and buildings it will be difficult to communicate effectively because it will be difficult to reach the voice to all over audience except if there are high volume speakers.
Speakers have usually lack of courtesy if a person speak abruptly or raise his voice so, it will affect the communication among large audience and people.
As speakers are usually audio calls so, we can not see a person to see his reaction and behave according to speech.
Table of Contents Pages
Introduction………………………………………………………..2
The Corporation and Its Stakeholders……………………………..3-4
Public Issues……………………………………………………….4-5
Corporate Social Responsibility…………………………………..5
Corporate Citizenship……………………………………………..6
Ethical Issues in Business…………………………………………6-7
Ethical Reasoning and Corporate Program………………………..7
Business and Government in a Global Society………………..…..8
Business-Government Relations…………………………………..8-9
Managing Environmental Issues………………………………..…9
Technology: A Global Economic-Social Force…………………...9-10
Managing Technological Challenges...…………………………...10-11
Consumer Protection………………………………………………11-12
The Community and the Corporation……………………………..12
Employees and the Corporation…………………………………...13
How to apply concepts on ethics and society to the business environment……………………………………………………….14
Conclusion………………………………………………………...15
References…………………………………………………………15
Introduction
On completion of this subject, now we able to:
Demonstrate knowledge and understanding of the relationship between business and society, and in what ways is the part of an interactive system.
Discussion on the competing theories of the purpose of the modern firm and understanding relationship between business and society.
Description of a strategic approach to managing public issues and engaging with stakeholders.
Understanding the doctrine of corporate social responsibility and its historical evolution.
Demonstration of how socially responsible firms manage relations with stakeholders. Working with corporate citizenship concept and a model of stages of how first institutionalize corporate citizenship commitments, including conducting social performance auditing.
Understanding the concept of business ethics. Discourse on why business should act ethically and identifies ethical issues in a variety of business functions accounting, finance, marketing, and IT..
Demonstration of proactive business efforts to promote ethical business environment in the workplace. Working with several models for understanding managerial values and ethical climates in organizations.
Exploring the impact of scientific and technological change on business and society. Understanding how the complex relationship between science, technology, business and society and creating various ethical and political issues, and how managers can address these complicated decision. Understanding the impacts and risks technology exerts on business and its stakeholders including protecting privacy and intellectual property.
Express the issues relating to globalization, and examining the major types of economic and political systems in which companies operate around the world.
Addressing the ecological and natural resources issues impacting on industries.
Examination of the relationship between the corporation and external stakeholders.
Examination of the relationship between the corporation and its internal stakeholders.
Briefing on the evolving employee-employer relationship and the government’s influence on the relationship.
The Corporation and Its Stakeholders
Business corporations have complex relationships with many individuals and organizations in society. The term stakeholder refers to all those that affect, or are affected by, the actions of the firm. How corporations manage their interactions with stakeholders powerfully contributes to business success or failure. Building positive and mutually beneficial relationships across organizational boundaries is a growing part of management’s role. In a world of fast-paced globalization, shifting public expectations and government polices, growing ecological concerns, and new technologies, managers face the challenge of achieving economic results while simultaneously creating value for all of heir diverse stakeholders.
Business firms are organizations that are engaged in making a product or providing a service for a profit. Society, in its broadest sense, refers to human beings and to the social structures they collectively create. Business is a part of society and engaged in ongoing exchange with its external environment. Together, business and society for an interactive social system in which the actions of each profoundly influence the other.
According to the stakeholder theory of the firm, the purpose of the moderation is to create value for all of its stakeholders.
Every business firm has economic and social relationships with others in society are intended, some unintended; some are positive, others negative. Stakeholders are those who affect, or are affected by, the actions of the firm.
Stakeholder can exercise their economic, political, and other powers in ways of benefit or challenge the organization. Stakeholders may also act independently coalitions to influence the company. Managers must learn how to engage with stakeholders to create mutually beneficial outcomes.
A number of broad forces shape the relationship between business and society including changing societal and ethical expectations; redefinition of the role of employment; a dynamic global economy; ecological and natural resource concerns of transformational role of technology. To deal effectively with these changes or strategy must address the expectations of all of the company’s stakeholders.
Public Issues
Every society faces many public issues; each involves a particular combination of businesses, governments, and social groups, creating a unique set of stakeholder relationships. Such public issues often evolve through a series of predictable phases, called the public issue life cycle. Senior executives often spend significant amounts of time identifying public issues and engaging with stakeholders concerned about them. Many organizations designate specific public affairs managers; others believe that managing public issues is a job that all managers must perform. In either event, their roles involve scanning the environment, identifying issues, interacting with stakeholders, gathering intelligence, and managing crises.
With the completion of this lesson we have got a brief concept about public issues and the summary is mentioned as below:
A public issue is an issue that is of concern to an organization’s stakeholders. The public issue life cycle describes the evolution of a social concern through four stages-Changing stakeholder expectations, political action, formal government action, and implementation of legally mandated change.
An organization’s public affairs function or manager is charged with the active management of the organization’s external relations. This function encompasses many and often is international in scope.
The eight strategic radar screens (the customer, competitor, economic, technological, social, political, legal, and geophysical environments) enable public affairs managers to assess and acquire information regarding their business environments. Managers must learn to look outward to understand key developments and anticipate their impact on the business.
The issue management process includes identification and analysis of issues, development of policy options, program design, and evaluation of the results of such activities.
Competitive intelligence is the systematic and continuous process of gathering, analyzing, and managing, information about an organization’s competitors; this information is often important, but care must be taken to gather it ethically.
Crisis prevention often is the best crisis management strategy. When crises do occur, the organization’s actions should be honest and proactive when dealing with its stakeholders.
Corporate Social Responsibility
Corporate social responsibility challenges businesses to attend to and interact with the firm’s stakeholders while they pursue traditional economic goals. The firm’s stakeholders expect businesses to be socially responsible and many companies have responded by making social goals a part of their overall business operations. What it means to at in socially responsible ways is not always clear, thus producing controversy about what constitutes such behavior, how extensive it should be and what it costs to be socially responsible.
With the completion of this lesson we have got a brief concept about Corporate Social Responsibility and the summary is mentioned as below:
Corporate social responsibility means that a corporation should be held accountable for any of its actions that affect people, their communities, and their environment. Business must recognize their vast power and wield it to better society.
The idea of corporate social responsibility in the United States was adopted by business leaders in the early 20th century. The central themes of social responsibility have been charity-which means giving aid to the needy-and-stewardship-acting as a public trustee and considering all corporate stakeholders when making business decisions.
Corporate social responsibility is a highly debatable notion. Some argue that its benefits include discouraging government regulation, promoting long-term profitability for the firm, and enhancing the company’s reputation. Others believe that it lowers efficiency, imposes undue costs, and shifts unnecessary obligations to business.
Social responsible business should attempt to balance economic, legal, and social obligations. Following an enlightened self-interest approach, a firm may be economically rewarded while society benefits from the firm’s actions. Abiding by legal requirements can also guide businesses in serving various groups in society.
Managers should consider all of the company’s stakeholders and their interests, not only their shareholders.
Corporate Citizenship
All organizations should carefully seek to foster mutually beneficial relationships with their stakeholders to become good corporate citizens. Organizations should identify emerging issues emanating from the organization’s social climate and transform these issues into policies and programs that will demonstrate to others that the organization is a good citizen. This chapter identifies the process, practices, and evaluation criteria relevant to corporate citizenship.
With the completion of this lesson we have got a brief concept about corporate citizenship and the summary is mentioned as below:
In response to the numerous social challenges facing organizations, managers have recognized the need to develop formal social strategies and programs and aggressively address the notion of corporate citizenship.
Corporate social responsibility is grounded in the principles of charity and stewardship, and corporate citizenship seeks to build collaborative partnerships with its stakeholders.
The model of corporate citizenship strategies includes the policy stage, the learning stage, and the organizational commitment stage.
Corporate citizenship inn practice often takes the forms of corporate philanthropy, employee volunteerism, and partnership building with stakeholder groups.
Corporate social performance auditing and triple bottom line reporting can be used to measure and assess an organization’s citizenship toward society.
Ethical Issues in Business
People who work in business-managers and employees alike-frequently encounter and must deal with on the-job ethical issues. Learning how to recognize ethical dilemmas and knowing why they occur are important business skills. Ethical issues also arise when business operate in other countries, where social customs and business practices may clash. The costs to business and to society of unethical illegal behaviors are very large. A firm is more likely to gain public approval and social legitimacy if it adheres to basic ethical principles and society’s laws.
With the completion of this lesson we have got a brief concept about ethical issues in business and the summary is mentioned as below:
Ethics is a conception of right and wrong behavior, defining for us when our actions ar moral and when they are immoral. Business ethics is the application of general ethical ideas to business behavior.
Ethical business behavior is demanded by business stakeholders, enhances business performance, complies with legal requirements, prevents or minimizes harm, and promotes personal morality.
Ethics problems occur in business for many reasons, including the selfishness of a few, competitive pressures on profits, the clash of personal values and business goals, and cross-cultural contradictions in global business operations.
Similar ethical issues, such as bribery, are evident throughout the world, and many international agencies and national governments are actively attempting to minimize such actions through economic sanctions and international codes
Although laws and ethics are closely related, they are not the same; ethical principles tend to be broader than legal principles. Illegal behavior by business and its employees imposes great costs on business and the general public.
Ethical Reasoning and Corporate Programs
Business can take tangible steps to improve their ethical performance. The most important elements of ethical character are managerial values and virtues, and the personal character and spirituality of employees. Creating or revising various organizational safeguards, such as ethics policies, ethics officers or ombudspersons, and employee ethics training, can improve corporate ethical action. These programs enable employees to improve their ethical reasoning by emphasizing a concern for achieving the greatest good for all those affected by an action while respecting people’s rights and striving for a just and fair solution.
Managers’ on-the-job values tend to be company-oriented, assigning high priority to company goals. Managers often value being competent and place importance on having a comfortable or exciting life, among other values.
Personal character and spirituality can greatly assist managers when coping with ethical dilemmas. Personal spirituality has emerged as a more common topic for discussion at work and has influenced company-sponsored activities during work hours and after work.
A company’s culture and ethical climate tend to shape the attitudes and actions of al l who work there, sometimes resulting in high levels of ethical behavior and at other times contributing to less desirable ethical performance.
People in business can analyze ethics dilemmas by using three major types of ethical reasoning: utilitarian reasoning, and justice reasoning.
Companies can improve their ethical performance by creating a value-based ethics program that relies on top management leadership and organizational safeguards, such as ethics policies or codes, ethics officers or ombudspersons, ethics training programs, and ethics audits.
Business and Government in a Global Society
The world economy is becoming increasingly integrated, and many businesses have extended their reach beyond national borders. Yet, the process of globalization is controversial, and the involvement of corporations in other nations is not always welcome. Doing business in diverse political and economic systems poses difficult challenges. When a transitional corporation buys resources, manufactures products, or sells goods and services in multiple countries, it is inevitably drawn into a web of global social and ethical issues. Understanding what these issues are and how to manage them through collaborative action with government and civil society organizations is a vital skill for today’s managers.
With the completion of this lesson we have got a brief concept about ethical issues in business and the summary is mentioned as below:
The process of globalizations presents today’s business leaders with both great promise and great challenge. Despite the ever-present threat of war and terrorism, the world’s economy continues to grow more integrated and interdependent. Transitional corporations, with their financial assets and technical managerial skills, have a great contribution to make to human betterment. Yet, they must operate in a world of great diversity, and in which their presence is often distrusted or feared. Often, they must confront situations in which political and economic freedoms are lacking and human rights are routinely violated. The challenge facing forward-looking companies today is how to work collaboratively with stakeholders to promote social and economic justice, while still achieving strong bottom-line results.
Business-Government Relations
Governments establish the rules under which business operates in society. Therefore, a government’s influence on business through public policy and regulations is a vital concern for managers. Government’s relationship with business can be either cooperative or adversarial. Various economic or social assistance policies significantly affect society, in which businesses must operate. Many government regulations, both at home and broad, in order to conduct business in an ethical and legal manner.
With the completion of this lesson we have got a brief concept about ethical issues in business and the summary is mentioned as below:
Governament’s relationship with business ranges from cooperative to adversarial This relationship often is tenuous, and managers must be vivgilant ot anticipate any change that may affect business and its operations.
A public policy is an action undertaken by government to achieve a broad public purpose. The public policy process involves inputs, goals tools or instruments, and effects.
Regulation can take the form of laws affecting an organization’s economic operations (e.g. trade and labor practices, allocation of scarce resources, price controls) or focus on social good (e.g. consumer protection, employee health and safety, environmental protection)
Regulation is needed to correct for market failure, overcome natural monopoly, and protect stakeholders who might otherwise be hurt by the unrestricted action of business.
Although regulations are often very costly, many believe that these costs are worth the benefits they bring. The ongoing debate over the need foor and effectiveness of regulation leads to alternating periods of deregulation and regulation.
Regulation is a global context affects business because nations recognize their need to cooperate in controlling business activities that cross national borders. International regulations focus on imports, exports, and business practices.
Managing Environmental Issues
Growing public interest in protecting the environment has promoted political and corporate leaders to become increasingly responsive to environment issues. In the United States and other nations, government policy makers have moved toward greater reliance on market-based mechanisms, rather than command and control regulations, to achieve environment goals. At the same time, many business have become increasingly proactive and have pioneered new approaches to effective environmental management, often conferring a competitive advantage.
With the completion of this lesson we have got a brief concept about ethical issues in business and the summary is mentioned as below:
Government generally regulates in three major areas of environment protection: air pollution, water pollution, and land pollution. Environmental laws have traditionally been of the command and control type, specifying standards and results. New laws, in both of the United States and Europe, have added market incentives to induce environmentally sound behavior and have encouraged companies to reduce pollution at the source.
Technology: A Global Economic-Social Force
Technology is an unmistakable economic and social force in our world. Global communications, business exchanges, and the simple tasks that make up our daily lives are all significantly influence by technology. Whether wee are at home, in school, or in the workplace, the emergence of technological innovations have dramatically changed how we live, play, learn, work, and interact with others. These dramatic changed in our global community result in a profound effect on humankind and the world in which we live, raising important social and ethical questions.
With the completion of this lesson we have got a brief concept about ethical issues in business and the summary is mentioned as below:
Technological change, which tends to be self-reinforcing, has widespread effects throughout business and society. Some of these effects are beneficial, and some are not. Technological growth is fueled by economic expansion, worker productivity, and research and development investment.
E-commerce, or online business, has changed how businesses offer, sell, and account for their goods and services in the global marketplace and their interactions with their stakeholders. Individuals are investing and buyihg goods and services online at an astonishing rate.
Technology superpowers have built an infrastructure for the information society, enabling people and businesses around the world to communicate and conduct business with each other, spawning the system of e-commerece.
Business from developing countries is quickly becoming active participants in the telecommunication revolution, spurred by government support and direct foreign investments.
The current phase of technology-the information society-has provided society with the Internet, an information superhighway that has changed our lifestyle, education, and health by providing more information with easier access at a quicker pace through broadband access.
Differences in age, income, and ethnicity appear to contribute most to the existence of a digital divide. With collaborative initiatives by business, governments and non profit organizations addressing Internet access around the world, it appears that the digital divide may be narrowing.
Managing Technological Challenges
Technology fosters change and more change. Technological change has raised ethical and social questions of privacy, security, ownership, health, and safety. What are the implications of this fast-paced change for our society and those who live in it? Moreover, who is responsible for determining how much technological change should occur or how fast things should change? Should technology be controlled, and if so, who should be in charge of managing technology and the challenges it poses for humans and cultures in our global community? Bill Joy, Sun Microsystems’ chief scientist, warned of the dangers of rapid advances in technology: “The experiences of the atomic scientists clearly show the need to take personal responsibility, the danger that things will move too fast, and the way in which a process can take on a life of its own. We can, as they did, create insurmountable problems in almost no time flat. We must do more thinking up front if we are not to be similarly surprised and shocked by the consequences of our inventions.
With the completion of this lesson we have got a brief concept about ethical issues in business and the summary is mentioned as below:
Businesses have addressed many privacy issues at work and in e-commerce by developing privacy policies and by sharing information and technology through voluntary industry initiatives.
Acts of Sabotage by computer hackers threaten company’s control of information, causing businesses to develop numerous information security measures.
Businesses have entrusted the management of technology to their chief information or privacy officers. For issues that go beyond the business organizations and affect society in general, it is unclear whether businesses, social groups, or governments or some combination of these groups should manage technology and its change.
Consumer Protection
Safeguarding consumers while continuing to supply them with the goods and services they want, t the prices they want, is a prime social responsibility of business. Manu companies recognize that providing customers with excellent service and product quality is an effective, as well as ethical, business strategy. Consumers, for their part, have become aware of their rights to safety, to be informed, to choose, and to the heard-and, increasingly, of their right to privacy. Government agencies serve as watchdogs for consumers, supplementing the actions taken by consumers to protect themselves and the actions of socially responsible corporations.
With the completion of this lesson we have got a brief concept about ethical issues in business and the summary is mentioned as below:
The consumer movement represents an attempt to promote the interest of consumers by balancing the amount of market power held by selter and buyers.
The four key consumer rights are the rights to safety, to be informed, to choose, and to be heard. Recent discussion has focused on consumer’s right to privacy.
Consumer protection laws and regulatory agencies attempt to assure that consumers are treated fairly, receive adequate information, are protected against potential hazards, have free choices in the market, and have legal resource when problem develop. They also protect children’s privacy online.
Rapidly evolving information technologies have given new urgency to the issue of consumer privacy. Three approaches to safeguarding online privacy are consumer self-help-industry self-regulation, and protective legislation.
Business has complained about the number of product liability lawsuits and the high cost of insuring against them. Although consume groups and trial attorneys have opposed efforts to change product liability laws, modest tort reforms have recently been legislated.
Socially responsible companies have responded to the consumer movement by giving serious consideration to consume problems, increasing channels of communication with customer, instituting arbitration procedures to resolve complaints, and recalling defective products.
The Community and the Corporation
A strong relationship benefits both business and its community. Communities look to businesses for civic leadership and for help in coping with local problems, while businesses exact to be treated in fair and supportive ways by the community. As companies expand their operations, they develop a wider et of community relationships. Community relations programs, including corporate giving, are an important way for a business to express its commitment to corporate citizenship.
With the completion of this lesson we have got a brief concept about ethical issues in business and the summary is mentioned as below:
The community refers to an organization’s area of local influence, as well as more broadly to other groups that are affected by its actions. Businesses and their communities are mutually dependent. Business relies on that community for services and infrastructure, and the community relies on business for support of various civic activities.
Addressing a community’s needs in a positive way helps business by enhancing its reputation, building trust, and winning support for company actions. Like other forms of corporate social responsibility, community involvement helps cement the loyalty of employees, customers, and the public.
Corporate giving comprises gifts of cash, property, and employee time. Donations currently average about 1.8 percent of pretax profits.
Many companies have adopted a strategic approach to philanthropy, linking their giving to business goals.
Employees and the Corporation
Employees and employers are engaged in a critical relationship affecting the corporation’s performance. There is a basic economic aspect to their associations. Employees provide labor for the firm, and employers compensate workers for their contributions of skill and productivity. Yet, also present in the employee-employer exchange are numerous social, ethical, legal, and public policy issues. Attention to their rights and duties of both parties in this relationship can benefit the firm, it was workers, and society.
With the completion of this lesson we have got a brief concept about ethical issues in business and the summary is mentioned as below:
U.S labor laws give most workers the right to organize unions and to bargain collectively with their employers. Some believe that unions are poised for resurgence after many years decline.
Job safety and health concerns have increased as a result of rapidly changing technology in the workplace. Employers must comply with expanding OSHA regulations and respond to the growing trend toward violence at work.
Employers’ right to discharge “at will” has been limited, and employees now have a number of bases for sing for wrongful discharge. The expectations of both sides in the employment relationship have been altered over time by globalization, business cycles, and other factors.
Employees’ privacy rights are frequently challenged by employers’ need to have information about their health, their work activities, and even their off-the-job lifestyles. When these issues arise, amanagement has a responsibility to act ethically toward employees while continuing to work for ahigh level of economic performance.
Blowing the whistle on one’s employer is often a last resort to protest company actions considered harmful to others. In recent years, legislation has extended new protections to whistle-blowers
Ho to apply concepts on ethics and society to the business environment?
As we have learned briefly about business, society and ethics. So, we can plan to apply concept on ethics and society to the business environment to achieve the following goals and objectives.
To explore the increasingly complex set of interrelationships among business, government and society.
To study methods of formulating and implementing corporate social policy.
To encourage the student to examine and articulate his or her own values, and to understand how these values shape and are shaped by the workplace.
To develop the ability to think clearly about complex ethical situations and to report conclusions in oral and written form.
To develop a sensitivity to differing value perspectives of the various constituencies of business and government.
To develop a sensitivity to the moral and economic values at issue in a situation.
Conclusion

I hope that you now have at least some understanding of relationship between Business, Society and Ethics and the concepts about this subject. All the topics summarized to have a brief knowledge about this subject
Table of Content Pages
Introduction……………………………………………………………...3
Business and society
Definition of Business…………...……………………………...4
Definition of Society……...…………………………………….4
3. A System Perspective
General system theory…………………………………………..4
Interactive social system………………………………………..4
4. The stakeholder concept
Who is stakeholder?....................................................................5
Market and non-market stakeholders
Market stakeholders……………………………………………..6-7
Non-market stakeholders………………………………………..8-9
Conclusion……………………………………………………………..10
References……………………………………………………………..10
Introduction
This assignment consists of two important topics, business and society and the way that they are part of an interactive system and concepts of stakeholders such as corporation’s market and non-market stakeholder.
On completion of this assignment, we will be:
Able to know about the relationship between business and society and their interactive social system which has shown closely intertwined relationships between business and society.
Able to know about stakeholder’s concepts that how they are useful to companies and organizations and concept with detailed information about market and non-market stakeholders.
Business and Society
Business: Any organization that is engaged in making a product or providing a service for a profit is call business.
Society: Human beings and the social structures they collectively create.
Segments of humankind, such as members of a particular community, nation, or interest group.
A System Perspective
General system theory: all organisms are open to, and interact with their external environments.
Business must adapt to changed in the environment
Business is part of society and society penetrates far and often into business decision.
Interactive social system: the closely intertwined relationships between business and society.
The Stakeholder Concept
Stakeholder: Persons and groups that affect or are affected by an organization’s decisions, policies and operations.
Managers make good decisions when they pay attention to the effects of their decisions on stakeholders, as well as stakeholders’ effect on the company.
Market and Non-market Stakeholders
Market stakeholders: Those that engage in economic transactions with the company as it carries out its primary purpose of providing society with goods and services.
(a.k.a primary stakeholders)
Market Stakeholders
Stakeholder
Nature of Interest-Stakeholder wishes to
Nature of power: Stakeholder Influences
Company by:
Market Stakeholder
Employees
Maintain stable employment in firm
Receive fair pay for work
Work in safe, comfortable environment
Union bargaining power
Work actions or strikes
Publicity
Stockholders
Receive a satisfactory return on investment (dividends)
Realize appreciation in stock value over time
Exercising voting rights based on share ownership
Exercising rights to inspect company books and record
Customers
Receive fair exchange: value and quality for money spent
Receive safe, reliable products
Purchasing goods from competitors
Boycotting companies whose policies are unsatisfactory or whose policies are unacceptable
Suppliers
Receive regular orders for goods
Be paid promptly for supplies delivered
Refusing to meet orders if conditions of contract are breached
Supplying to competitors
Retailers/Wholesalers
Receive quality goods in timely fashion at reasonable cost
Differ reliable products that consumers trust and value
Buying from other suppliers if terms contract are unsatisfactory
Boycotting companies whose goods or policies are unsatisfactory
Creditors
Receive repayment of loans
Collect debts and interest
Calling in loans if payments are not made
Utilizing legal authorities to reposes or take over property if loan payments are severely delinquent
Non-market Stakeholders: People and groups who although they do not engage in direct economic exchange with the firm, are affected by or can affect its actions.
Non-market Stakeholders
Stakeholder
Nature of Interest-Stakeholder wishes to
Nature of power: Stakeholder Influences
Company by:
Non-market Stakeholder
Communities
Employ local residents in the company
Ensure that the local environment is protected
Ensure that the local area is developed
Refusing to extend additional credit
Issuing or restricting operating licenses and premises
Lobbying government for regulation of the company’s policy or methods of land use and waste disposal
Activist Groups
Monitor company actions and policies
to ensure that they conform to legal
ethical standards, and that they
protect the public’s safety
Gaining broad public support through publicizing the issue
Lobbying government for the regulation of the company
Media
Keep the public informed on all issues relevant to their health, well-being and economic status
Monitor company actions
Publicizing events that affect the public, especially those that have negative effects
Business Support Groups (e.g. Trade association)
Provide research and information which will help the company or industry perform in a changing environment
Using its staff and resources to assist company in business endeavors and development efforts
Government
Promote economic development
Encourage social improvements
Raise revenues through taxes
Adopting regulations and laws
Issuing licenses and permits
Allowing and disallowing industrial activities
The General Public
Protect social values
Minimize risks
Achieve prosperity for society
Supporting activists
Pressing government to act
Conclusion

I hope that you now have at least some understanding of relationship between business and society, and in what ways are they part of an interactive system, Concept of stakeholders and corporation’s market and non-market stakeholders.
As I hope you will have seen:
By making a product or providing a service for a profit in organizations is call business.
About society that they create collectively human beings and the social structures.
The ways that they are part of an interactive system.
Concept about stakeholders and about corporation’s market and non-market stakeholders.
Introduction
This assignment is referred to Public Affairs Management topic which give us the information about public issues, duties of a company’s public affairs manager or office, Techniques to public affairs managers to asses an organization’s multiple environments, Steps in the issue management process and how public affairs manager effectively respond to an organizational crisis.
On completion of this assignment, we will be able:
To know about public issue that is concern to an organization’s stakeholders. The public issue life cycle describes the evolution of social concern through four states changing, stakeholder expectations, political action, formal government action, and implementation of legally mandated change.
An organization’s public affairs function or manager is charged with the active management of the organization’s external relations.
The eight strategic radar screens(the customer, competitor, economic, technological, social, political, legal, and geophysical environments) that enable public affairs managers to asses and acquire information regarding their businesses environments.
Steps in the issue management Process.
Crisis prevention often is the best crisis management strategy. When crises do occur, the organization’s actions should be honest and proactive when dealing with its stakeholders.
To know about the usage and benefits of electronic diary in scheduling and recording appointments.
What are public Issues, and what is the life cycle through which they evolve?
Public Issues
A public issue is an issue that is of concern to an organization’s stakeholders. The emergence of a new public issue like the safety and environmental impact of SUVs usually indicates that a gap has developed between what stakeholders expect and what an organization is actually doing. Scholars have called this the performance-expectations gap.
Stakeholder expectations are a mixture of people’s opinions, attitudes, and beliefs about what constitutes reasonable business behavior. Managers and organizations have good reason to identify emergent expectations as early as possible. Failure to understand stakeholder concerns and to respond appropriately will permit the performance expectations gaps to grow the larger the gap, the greater the risk of stakeholder backlash.
As public issues emerge, concerned people and organizations come together in a stakeholder network defined by their shared focus on a particular issue, problem, or opportunity as shown below in a figure.
Public Issue Life Cycle
Social concerns: like the public’s concerns about SUVs generally evolve through a series of phases that, because of their natural evolution, can be thought of as a life cycle. By recognizing the pattern through which issues evolve and spotting the ear warning signs, manager can anticipate problems and work to resolve them before they reach crisis proportions.
Although most issues do not necessarily progress in the exact orderly manner depicted in the figure, the model illustrates the basic phases through which most public issues pass.
Phase1: Challenging Stakeholder Expectations
Pubic issues begin in phase one, when stakeholder expectations are not met that is, when performance expectation gap emerges. Once a gap emerges, the seed of a public issue have been sown.
Phase2: Political Action
What does it take to put a problem on the agenda for government actions? The agenda of public issues on which officials are asked to act is enormous, and not allpublic issues warrant government action. Of the many issues a state or federal government is asked to respond to each year, most fail to draw needed support. Strong and effective actions is needed to capture enough public attention to lead to change.
Phase3: Formal Government Action
As more people are drawn into a political conflict, ideas may emerge about how to use laws or regulations to solve the problem. When legislative proposals or draft regulations emerge, the public issue moves to a new level of action.
Phase4: Legal implementation
Making a public policy decision does not mean that the policy will be carried out automatically. The validity of new laws and regulations often is challenged through legal actions. Once the legal issues are settled, however, companies must comply with the law stakeholder interest in an issue tends to plateau or even decline as a new law or regulations is implemented. If the law is violated or ignored, however, the issue may reemerge as a new performance expectations gap develops.
What are the duties of a company’s public affairs manager or office?
Public Affair managers develop intercultural competencies understanding cultural disparities as well as similarities. The impact of the organization’s policies or practices could have markedly different impacts given the culture, social or political systems, or history a country where the organization operates. The public affairs manager must understand local public policy institutions and processes an role that non government entities play in the public policy process. Language skills are critical for a public affairs manager seeking to be effective in an international media environment. The ability to communicate with local media and other stakeholder groups in their native language and avoid embarrassing or misleading communication due to poor translations must be assured. All of these basic public affairs tasks are more complex in an international business environment but must be mastered to be an effective public affairs manager.
One primary function of the public affairs office, in the United States and in other nations, is to manage public issues as they emerge.
What tools are available to public affairs managers to assess an organization’s multiple environments?
Scanning the Environment
To identify those public issues that require attention and action, a firm needs framework of environmental information.
Environmental analysis provides managers with the information about external issues and trends that enables an organization to develop a strategy that minimizes threats and takes advantage of new opportunities.
Environmental intelligence is the acquisition of information gained from analyzing the multiple environments affecting organizations. Acquiring this information may be done informally or as a formal management process. If done well, this environmental intelligence can help an organization avoid crises and spot opportunities. The eight environment identified by Albrecht are shown in below figure.
Customer environment includes the demographic factors, such as gender, age, marital status, and other factors, of the organization’s customers as well as their social values or preferences.
Competitor environment includes information on the number and strength of the organization’s competitors, whether they are potential or actual allies, patter of aggressive growth versus static maintenance of market share, and the potential for customer to become competitors if they “in-source”: products or services previously purchase from the organization.
Economic environment includes information about costs, prices, international trading and any other features of the economic environment that affect customers or competitor behavior.
Technological environment includes the development of new technologies and the applications affecting the organization, its customers, and other stakeholder groups.
Social environment includes cultural patterns, values, beliefs, trends, and conflict among the people in the societies where the organization conducts business or might conduct business. Issues of civil or human rights, family values, and the roles of special interest groups are important elements in acquiring intelligence form the social environment.
Political environment includes t structure, processes, and actions of all level of government local, stat, national, and international. The stability or instability of government or the inclination or disinclination to pass laws and regulations are essential environmental intelligence for the organization.
Legal environment includes legal consideration of patents, copyrights, trademark and intellectual property, as well as antitrust considerations, trade protectionism, an organizational liability.
Geophysical environment includes an awareness of physical surroundings of the organization’s facilities and operations, whether it is the organization’s headquarters or its field offices and distribution centers, and the organization’s dependency and impact on natural resources such as minerals, water, land or air.
What are the steps in the issues management process?
The issue management process is comprised of fives steps. Each of there steps are discussed below:
Issue Identification
Issue identification involves the active scanning of newspapers, other media, expert’s views, and community concerns to identify issues of concern to the public. Organizations often use electronic databases, including the internet, to track ideas, themes, and issues that may be relevant to their public policy interest. They also rely on ongoing interactions with stakeholders.
Issue Analysis
Once an issue has been identified, its implications must be analyzed. Organizations must understand how the issue is likely to eolve, and how it is likely to affect them.
Policy Options
An issue’s impact and probability of occurrence tell managers how significant the issue is for the organization, but they do not tell management what to do. Developing policy options involves creating choices. It requires complex judgments that incorporate ethical considerations, the organization’s reputation and good name, and other non quantifiable factors.
Program Design
Once a policy options has been chose, the organization must design and implement a response. Early issue identification enables an organization to build political capital, that is, to form political alliances and build strong arguments to sway important stakeholders.
Evaluation of Results
Once an organization has implemented the issue management program, it must study the results and make adjustments if necessary. Because political issues may take considerable time to evolve, it is important that the manager entrusted with a particular issue regularly update senior managers as to the actions and effectiveness of other stakeholders. The organization may reposition or even rethink its approach to the issue.
How can a public affairs manager effectively respond to an organizational crisis?
Every organization is likely to face a crisis at some time that forces its employees to act on a difficult issue quickly and without perfect information.
An effective crisis management plan would involve these steps.
Prepare for action by creating an internal communication system that can be activated the moment the crisis occurs. Key employees must be identified in advance so that they are ready to address the issue.
Communicate quickly, but accurately. The media have excellent resources and will offensive and are the first to comment on a situation affecting the organization, placing the organization in greater control.
Use the internet to convey the public affairs message. As noted in the Ford Motor Company crisis, using the internet to communicate eth stakeholders, to minimize their fears and provide assistance, can be an excellent public affairs strategy.
Do the right thing. Often the true test of an organization is in a time of crisis. Public affairs managers should not try to minimize the seriousness of a problem nor exaggerate minor incidents. It is possible for the organization to accept responsibility without accepting liability. The organization can express regret over consumers’ injury and advise the public that it is doing everything possible to investigate.
Follow up and, where appropriate, make amends those affected. Seek to restore the organization’s reputation. With proper planning and effective implementation of a crisis management program, an organization could emerge from a crisis in a stronger condition.
Conclusion

With the completion of this assignment now we can understand about the public affairs management.
We can understand about the public issues and life cycle through they evolve.
We can understand duties of a company’s public affairs manager or office.
We can understand about tools available to public affairs managers to assess an organization’s multiple environments.
We can know about steps in the issues of management process.
We can know about crisis management.
Table of Content Pages
Introduction……………………………………………………………...2
Meaning of ethics………………………………………………………..3
What is business ethics………………………………………………….4
Why should business be ethical………………………………………....4
Role of a personal character and spirituality in business ethics………...5
Corporate culture and ethical climate…………………………………..6
Ethical climates………………………………………………………....7
Conclusion……………………………………………………………...8
References………………………………………………………………8
Introduction
This assignment includes briefly information about ethics, business ethics and why should business be ethical.
It also include information about personal character and role of spirituality in ethics and also got information about company’s culture and work climate that influence ethical views of managers and employees.
So, with understanding concepts of this assignment we will be able to recognize ethical dilemmas and knowing why they occur are important business skills.
Ethical issue also arise when business operate in other countries, where social customs and business practices may clash.
Meaning of Ethics
Ethics is a conception of right and wrong conduct. It tells us whether our behavior is moral or immoral and deals with fundamental human relationships, how we think and behave toward others and how we want them to think and behave toward us.
Ethical Principles are guides to moral behavior. For example, in most societies lying, stealing, deceiving and harming others are considered to be unethical and immoral. Honesty, keeping promises, helping others and respecting the rights of others are considered to be ethically and morally desirable behavior. Such basic rules of behavior are essential for preservation and continuation of organized life everywhere.
These notions of right and wrong come from many sources. Religious beliefs are a major source of ethical guidance for many. The family institution, whether two parents, a single parent, or a large family with brothers and sisters, grandparents, aunts, cousins, and other kin, imparts a sense of right and wrong to children as they grow up. Schools and school teachers, neighbors and neighborhoods, friends, admired role models, ethnic groups, and the ever-present electronic media influence what we believe to be right and wrong in life. The totality of these learning experiences creates in each person a concept of ethics, morality and socially acceptable behavior. This core of ethical beliefs then acts as a moral compass that helps to guide a person when ethical puzzles arise.
Ethical ideas are present in all societies, organizations and individual persons, although they may vary greatly from one to another. Your ethics may not be the same as your neighbor’s; one particular religion’s notion of morality may not be identical to another’s; or what is considered ethical in one society may be forbidden in another society. These differences raise the important and controversial issue of ethical relativism, which holds that ethical principles should be defined by various periods of time in history, a society’s traditions, the special circumstances of the moment, or personal opinion. In this view, the meaning given to ethics would be relative to time, place, circumstance, and the person involved. In that case, there would be no universal ethical standards on which people around the globe could agree. For companies conducting business in several societies at one time, whether or not ethics is relevant can be vitally important.
For the moment, however, we can say that despite the diverse systems of ethics that exist within our own society and throughout the world, all people everywhere do depend on ethical systems to tell them whether their actions are right or wrong, moral or immoral, approved or disapproved ethics, in this sense, is a universal human trait, found everywhere.
Business Ethics
Business ethics is the application of general ethical ideas to business behavior. Business ethics is not a special set of ethical ideas different from ethics in general and applicable only to business. If dishonesty is considered to be unethical and immoral, then anyone in business who is dishonest with stakeholders, employees, customers, stockholders or competitors is acting unethically and immorally. If protecting others from harm is considered to be ethical, then a company that recalls a dangerously defective product is acting in an ethical way. To be considered ethical, business must draw its ideas about what is proper behavior from the same sources as everyone else. Business should not try to make up its own definitions are permitted or even encouraged to apply special or weaker ethical rules to business situations, but society does not condone or permit such an exception.
Why should business be ethical?
What prevents a business firm from pilling up as much profit as it can, in any way it can, regardless of ethical considerations?
There are few major reasons that business firm should promote a high level of ethical behavior.
Meet Demands of Business Stakeholders
We mentioned one reason business should be ethical when discussing social responsibility. Organizational stakeholders demand business to exhibit high levels of ethical performance and social responsibility.
Enhance Business Performance
Some people argue that another reason for business to be ethical is that it enhances the firm’s performance, or simple: ethics pays.
Being ethical imparts a sense of trust, which promotes positive alliance among business partners. If this trust is broken, the unethical party may be shunned and ignored. This situation occurred when Malaysian government officials gave the cold should to executives of a French company. When asked why they were being unfriendly, a Malaysian dignitary replied, “Your chairman is in jail!”
Comply with Legal Requirements
Doing business ethically is also often a legal requirement. Two recent laws, in particular, provide direction for companies interested in being more ethical in their business operations. Although they apply only to U.S. Corporate Sentencing Guidelines, which provide a strong incentive for businesses to promote ethics at work. The sentencing guidelines come into play when an employee of a firm has been found guilty of criminal wrongdoing and the firm is facing sentencing for the criminal act. To determine sentencing, a federal judge computes a culpability (degree of blame) score using the equations contained in the guidelines.
The second legal requirement imposed upon U.S. business is the Sarbanes-Oxley Act of 2002. Born out of the ethics scandals at Enron, WorldCom, Tyco, and others, this legal requirement sought to ensure that firms maintained high ethical standards issues in how they conducted and monitored business operations.
Prevent or Minimize Harm
Another reason businesses and their employees should act ethically is to prevent harm to the general public and the corporation’s many stakeholders. One of the strongest ethical principles is stated very simply; Do no harm. A company that is careless in disposing of toxic chemical wastes that cause disease an death is breaking this ethical injunction. Many ethical rules operate to protect society against various types of harm, and businesses are expected to observe these commonsensical ethical principles.
Preventing harm also relates to protecting business firms from abuse by unethical employees and unethical competitors. Employee theft has reached epidemic proportions for business throughout the world.
Promote Personal Morality
A final reason for promoting ethics in business is a personal one. Most people want to act in ways that are consistent with their own sense of right and wrong. Being pressured to contradict their personal values creates emotional stress. Knowing that one works in a supportive ethical climate contributes to one’s sense of psychological security. According to an Ethics Resource Center report, 79 percent of employees said that “their organization’s concern for ethics and doing the right thing” was an important reason they continued to work there.
Role of personal character and spirituality in business ethics
Personal spirituality, that is, a personal belief in a supreme being, religious organization, or the power of nature or some other external, life-guiding force, has always been a part of the human makeup. In 1953 Fortune published an article titled “Businessmen on Their Knees” and claimed that American businessmen (women generally were excluded from the executive suite in those days) were taking more notice of God. In the past 10 years, cover stories in Fortune, Business Week, and other business publications have documented a resurgence of spirituality or religion at work.
Forty-eight percent of Americans in a 1999 poll responded that they have had an occasion to talk about their religious faith in the workplace on a daily basis. And 78 percent admitted that they felt a need in their life for spiritual growth , up from only 20 percent in 1994. Recently, efforts appear to be on the rise to integrate people’s work with their spirituality.
Research conducted by the McKinsey and Company in Australia reported that when companies engaged in spiritual techniques for their employees, productivity improved and turnover was reduced. Employees who worked for organizations they considered to be spiritual were less fearful on the job, less likely to compromise their values and act unethically, and more able to become committed to their work.
Beyond the philosophical opposition to bringing spirituality into the business environment there are procedural challenges. Numerous question arise: Whose spirituality should be promoted? The CEO’s? With greater workplace diversity comes greater spiritual diversity, so which organized religion’s prayers should be cited or ceremonies enacted? How should businesses handle employees who are agnostics (those who do not follow any religion)? Opponents of spirituality at work point to the myriad of implementation issues as grounds for keeping spirituality out of the workplace.
Just as personal values and character are strong influences on employee decision making and behavior in the workplace, personal spirituality and religious values, from all points of the value spectrum, are having an impact on how businesses are operated and where corporate revenues are spent.
Corporate Culture and Ethical Climates
Personal values and moral character play key roles in improving a company’s ethical performance. However, they do not stand alone, because personal values and character can be affected by a company’s culture.
Corporate culture is a blend of ideas, customs, traditional practices, company values, and shared meanings that help difne normal behavior for everyone who works in a company. Culture is “the way we do things around here.”
The emphasis on ethics and value-based leadership is at the core of the Holt Company’s culture, a four-generation, family-owned Catepillar equipment dealership in San Antonio, Texas. How did the Holt Company adopt this ethical culture? The company’s executives point to a day in the late 1980s when peter Holt, the company’s CEO, changed his mind.
Ethical Climates
In most companies, a moral atmosphere can be detected. People can feel the way the ethical winds are blowing. They pick up subtle hints and clues that tell them what behavior is approved and what is forbidden.
The unspoken understanding among employees of what is and is not acceptable behavior is called an ethical climate. It is the part of corporate culture that sets the ethical tone in a company. One way to view ethical climates is diagrammed in figure 6.2. Three different types of ethical yardsticks are egoism (self-centeredness), benevolence (concern for others), andn principle (respect for one’s own integrity, fo group norms, and for society’s laws). These ethical yardsticks can be applied to dilemmas concerning individuals, a company, or society at large.
For example, if a manager approaches ethics issues with benevolence in mind, he or she would emphasize friendly relations with an employee, emphasize the importance of team play and cooperation for the company’s benefits and recommend socially responsible courses of action. However, a manager using egoism to think about ethical problems would be more likely to think first of self-interest, promoting the company’s profit, and striving for efficient operations at all costs.
Researchers have found that multiple climates, or sub climates, may exist within one organization. For example, if employees interacted with the public or government regulators, a society focus coupled with a principle or integrity approach (law and professional code climate) may be found. However, if employees were isolated form these influences and their work was geared toward routine proce3sss tasks with a concern toward higher personal pay or company profits, the climate may be self-interest or company interest.
Corporate cultures can also signal to employees that ethical transgressions are acceptable. By signaling what is considered to be right and wrong, corporate cultures and ethical climates can pressure people to channel their actions in certain directions desired by the company. This kind of pressure can work both for and against good ethical practices. In a benevolence ethical climate, the interest of the company’s employees and external stakeholders most likely would be given high priority. But in an egoism ethical climate, employees and managers might be encouraged to disregard any interest other than their own.
Figure 6.2 the components of Ethical Climates
Ethical Criteria Focus of Ethical Company Concern Society
Individual person
Egoism Self-interest Company interest Economic efficiency
(Self-centered approach)
Benevolence (concern-for Friendship Team Interest Social responsiblity
Others approach)
Principle Personal morality Company rules and Laws and Professional
(Integrity approach) procedures codes
Conclusion
With the completion of this assignment, now I hope that we got some Idea about the meaning of ethics, business ethics and why business should be ethical.
We also got some concept about personal character and spirituality role in business ethics, that how we can keep on our personal character and spirituality and what it affects on our company.
We also understood that how do a company’s culture and work climate influence the ethical views of managers and employees.
So, these concepts can make us know more about ethical issues and learned us about personal character and spirituality in company.
Table of Content Pages
Introduction……………………………………………………………...2
Major rights of consumer………………………………………………..3
Consumer privacy in Internet Age………………………………………3-4
Consumer Self-Help………………………………………....3
Industry Self Regulation……………………………………..3
Privacy Legislation…………………………………………..4
What’s the Interest of business to response to respond to community
problems and needs?.................................................................................4-5
As government regulation of employee safety and health issues
increases, what are the obligations of business to protect workers?........5-6
Do employers have a duty to provide job security to their workers?......6-7
Do employees have a duty to blow the whistle on corporate
misconduct, or should employees always be loyal to their employer?....8
8.. Conclusion and References……………………………………………..
Introduction
This assignment consist from some of the important topics of consumer protection such major rights of consumers and how can consumer privacy online best be protected?
It also consist of The community and the Corporation Which include a topic about Interest of business to respond to community problems and needs.
It also has such topics from the lessons of Employees and the Corporation, that give us the idea about topics such as: The right to a safe and healthy workplace, The right job to secure, and Whistle-Blowing and Free speech in the workplace.
So, above topics will help us to know more about these lessons that contains a brief information that will enable us to increase our knowledge about above topics.
Major rights of Consumers
The right to safety: to be protected against the marketing of goods that is hazardous to health or life.
The right to be informed: to be protected against fraudulent, deceitful, or grossly misleading information, advertising, labeling, or other practices and to be give the facts to make an informed choice.
The right to choose: to be assured, wherever possible, access to a variety of products and services at competitive prices, and in those industries in which competition is not workable and government regulations is substituted, to be assured satisfactory quality and service at fair prices.
The right to be heard: to be assured that consumer interests will receive full and sympathetic consideration in the formulation of government policy, and fair and expeditious treatment in its administrative tribunals.
Consumer Privacy in the Internet Age
In the early 21st century, rapidly evolving information technologies have given new urgency to the broad issue of consumer privacy.
The dilemma of how best to protect consumer privacy, while still fostering legitimate Internet commerce, has generated a wide-ranging debate. Three major solutions have been proposed: consumer self-help, industry self-regulation and privacy legislation.
Consumer Self-Help
In this view, the best solution is for Internet users to use technologies that enable them to protect their own privacy. For example, special software can help manage cookies, encryption can protect messages, and surfing through intermediary sites can provide user anonymity.
“We have to develop mechanisms that allow consumers to control information about them” commented a representative of the Center for Democracy and Technology, a civil liberties group. Critics of this approach argue that many unsophisticated Web surfers, like Sandra, age unaware of these technologies, or even of the need for them. Moreover, tools for protecting privacy can always be defeated by even more powerful technologies.
Industry Self Regulation
Many Internet-related businesses have argued that they should be allowed to regulate themselves. One group of companies, organized as the Online Privacy Alliance, advocated adoption of voluntary policies for protecting the privacy of individual’ information disclosed during electronic transactions. The alliance published guidelines for the essential elements such policies should cover. One advantage of the self-regulation approach is that companies, presumably sophisticated about their own technology, might do the best job of defining technical standards. Critics of this approach feel, however, that industry rules would inevitably be too weak. By 2003, 90 percent of large companies operating online had some kind of voluntary privacy policy. But, data .also showed that most Internet users remained suspicious of business and almost 9 out of 10 wanted a law standardizing privacy protect.
Privacy Legislation
Some favor new government regulations protecting consumer online. The Federal Trade Commission in 2000 announced its support for new laws that would establish “basic standards of practice for the collection of information online.” Such laws would require businesses, for example, to notify consumers whenever information was collected, ask them to opt on (or allow them to op out), and give them access to their files and a means of correcting errors.
Why is it in interest of business to respond to community problems and needs?
The term civic engagement describes the active involvement of business and individuals in changing and improving communities. Civic means pertaining to cities or communities, and engagement means being committed to or involved with something. Why should businesses be involved with the community? What is the business case for civic engagement?
The idea of corporate citizenship refers broadly to businesses acting as citizens of society by behaving responsibly toward all their stakeholders. Civic engagement is a major way in which companies carry out their corporate citizenship mission. Business organizations that act in a socially responsible way reap many benefits. These include an enhanced reputation and ability to respond quickly to changing stakeholder demands. By acting responsibly, companies can also avoid or correct problems caused by their operations, a basic duty that comes with their significant power and influence. They can win the loyalty of employees, customers, and neighbors. And, by doing the right thing, businesses can often avoid, or at least correctly anticipate, government regulations. All these reasons for social responsibility operate at the level of the community as well.
Another specific reason for community involvement is to win local support for business activity. Communities do not have to accept a business. They sometimes object to the presence of companies that will create too much traffic, pollute the air or water, or engage in activities that are viewed as offensive or inappropriate. A company must earn its informal license to operate or right to do business from society, In communities where democratic principles, apply, citizens have the right to exercise their voice in determining whether a company will or will not be welcome, and the result is not always positive for business.
Through positive interactions with the communities in which its stores are located, Walmart is more likely to avoid this kind of local opposition.
Community involvement by business also helps build social capita. Social capital, a relatively new theoretical concept, has been defined as the norms and networks that enable collective action. Scholars have also described it as “the goodwill that is engendered by the fabric of social relations.” When companies such as Whole Foods Markets, described before, work to address community problems such as blood shortages, hunger, and dilapidated housing, their actions help build social capital.
The company and groups in the community develop closer relationships, and their people become more committed to each other’s welfare. Many experts believe that high levels of social capital enhance a community’s quality of life. Dense social networks increase productivity by reducing the costs of doing business, because firms and people are more likely to trust one another. The development of social capital produces win-win outcomes because it enables everyone to be better off.
As government regulation of employee safety and health issues increases, what are the obligations of business to protect workers?
One issue that unions and other have been concerned with is worker safety and health.
Many jobs are potentially hazardous. In some industries, the use of high-speed and noisy machinery, high-voltage electricity, high temperatures, or sophisticated chemical compounds poses risks. Some occupations, such as construction, underground and undersea tunneling, drilling, and mining are particularly dangerous. Extensive training and careful precautions are necessary to avoid accidents, injuries, and illness.
Over the past few decades, new categories of accidents or illnesses have emerged, including the fast-growing job safety problem of repetitive motion disorders, such as wrist pain sometimes experienced by supermarket checkers, meat cutters, or keyboard operators. The number of health problem attributed to the use of video display terminals and computer keyboards has increased tenfold in the past decade. In response, many businesses have given greater attention to ergonomics, adapting the job to the worker, rather than forcing the worker to adapt to the job. For example, ergonomically designed office chairs that conform to the shape of the worker’s spine may help prevent low productivity and lost time due to back injuries.
Occupational Safety and Health Administration (OSHA) has had considerable success in improving worker safety and health. Since 1970, when the agency was created, the overall workplace death rate has been halved.
Very serious occupational illness, such as brown lung (caused when textile workers inhale cotton dust) and black lung (caused when coal miners inhale coal dust), have been significantly reduced. The rate of lead poisoning suffered by workers in smelters and battery plants, among other workplaces has been cut by two-thirds. Deaths from trench cave-ins have been reduced by 35 percent, to cite several examples.
Although many businesses have credited OSHA with helping reduce lost workdays and worker compensation costs, others have criticized the agency’s rules as being too costly to implement and administer. For example, in 2002 OSHA proposed new rules designed to prevent worker injuries in nursing homes by eliminating the manual lifting of residents. Many nursing home operators immediately attacked the proposal, charging that it was based on “junk science.”
In part in response to employer criticisms, OSHA has entered into cooperative partnerships with employers, aimed at improving occupational safety and health for the benefit of both companies and their workers.
Some businesses have developed their own systems to reduce the threats of workplace injuries. One of the more popular and widespread methods is workplace safety teams. Safety teams are generally made up of equal numbers of workers and managers. In operation, these teams not only reduce employee accidents, but also lower ‘workers’ compensation costs. The effect is particularly dramatic at small companies that typically do not have the financial or human resources to develop the more elaborate and costly safety programs and committees found in large corporations.
Do employers have a duty to provide job security to their workers?
Once someone is hired, under what circumstances is it legal or fair to let him or her go?
In recent years, the expectations underlying this most basic aspect of the employment relationship have changed, both in the United states and in other countries around the globe.
In the United States, since the late 1800s, the legal basis for the employment relationship has been employment-at-will. Employment-at-will is a legal doctrine that means that employees are hired and retain their jobs “at the will of” that is, at the sole discretion of the employer. However, over time, this doctrine has been eroded by a number of laws and court decisions that have dramatically curtailed U.S. employers’ freedom to terminate workers. Some of the restriction on employees includes the following:
An employer may not fire a worker because of race, gender, religion, national origin, age or disability.
An employer may not fire a worker if this would constitute a violation of public policy, as determined by the courts. For example, if a company fired and employee just because he or she cooperated with authorities in the investigation of a crime, this would be illegal.
Any employer may not fire a worker if, in doing so, it would violate the worker Adjustment Retaining Notification Act (WARN). This law, passed in 1998, requires most big employers to provide 60 days advance notice whenever they lay off a third or more (or 500 or more, whichever is less) of their workers at a work site.
An employer may not fire a worker simply because the individual was involved in a union organizing drive of other union activity.
An employer may not fire a worker if this would violate an implied contract, such as a verbal promise, or basic rules of “fair dealing.” For example, an employer could not legally fire a salesperson just because he or she had earned a bigger, bonus under an incentive program than the employer wanted to pay.
Beginning in the late 1980s, fierce global competition and greater attention to improving the bottom line resulted in significant corporate restructuring and downsizing (termination) of employees in many countries. With this trend came a new way of thinking about the employee-employer relationship that some researchers called a new social contract. Bonds between employer’s and employees weakened. Companies aimed to attract and retain employees not by offering long-term job security, but rather by emphasizing interesting and challenging work, performance-based compensation, and ongoing professional training. For their part, employees were expected to contribute by making a strong commitment to the job task and work team and to assume a share of responsibility for the company’s success.
Should companies have strong or weak bonds with their employees? When businesses invest in their employees by providing a well-structured career, benefits, and job security they reap the rewards of enhance loyalty, productivity and commitment. But such investments are expensive and long-term commitments make it hard for companies to adjust to the ups and downs of the business cycle.
In general, during periods of economic expansion, employers are usually more willing to offer long-term commitments to workers and during periods of economic downturn are less likely to do so. However, this is not always the case.
Do employees have a duty to blow the whistle on corporate misconduct, or should employees always be loyal to their employer?
Another area where employer and employee rights and duties frequently conflict involves free speech.
The U.S. constitution protects the right to free speech. This means the government cannot take away this right. For example, the legislature cannot shut down a newspaper that editorializes against its actions, or those of its members. However, the Constitution does not explicitly protect freedom of expression in the workplace. Generally, employees are not free to speak out against their employers, since companies have a legitimate interest in operating without harassment from insiders. Company information is generally considered to be proprietary and private. If employees, on the basis of their personal points of view, were freely allowed to expose issues to the public and allege misconduct, a company might be thrown into turmoil and be unable to operate effectively.
On the other hand, there may be situations in which society’s interest override those of the company, so an employee may feel an obligation to speak out. When an employee believes his or her employer hs done something that is wrong or harmful to public, and he or she reports alleged organization misconduct to the media, government, or high-level company officials, whistle-blowing has occurred.
Speaking out against an employer can be risky; many whistle-blowers find their charges ignored or, worse, find themselves ostracized, demoted, or even fired for daring to go public with their criticisms. Whistle-blowers in the United States have some legal protection against relation by their employers, though.
Moreover, whistle-blowers sometimes benefit from their actions. The U.S. False Claims Act, as amended in 1986, allows individuals who sue federal contractors for fraud to receive up to 30 percent of any amount recovered by the government. In the past decade, the number of whistle-blower lawsuits perhaps spurred by this incentive increased significantly, exposing fraud in the country’s defense, municipal bond, and pharmaceutical industries. Whistle-blowers suits against one health care firm, Columbia/HCA.
When is it morally justified for an employee to blow the whistle on his or her employer? According to one expert, three main conditions must be satisfied to justify informing the media or government officials about a corporation’s actions. These are:
The unreported act would do serious and considerable harm to the public.
Once such an act has been identified, the employee has reported the act to his or her immediate supervisor and has made his or her moral concern known.
If the immediate supervisor does nothing, the employee has tried other internal pathways for reporting the problem
Only after each of these conditions has been met should the whistle-blower go public.
Conclusion

I hope that you now have at least some understanding about Major rights of consumers, Consumer privacy in Internet Age, Interest of business to respond to community problems and needs, The right to a safe and healthy workplace, the right to secure a job and whistle-blowing and free speech in the workplace.
Table of Content Pages
Introduction……………………………………………………………..........2
Definition of Public Relation………………………………………………...3
Definition of Advertising…………………………………………………….3
Distinguish between Public Relation and Advertising………………………3
Explanation of (British) Institute of Public Relations (IPR) (1998)………...4
Explanation of Mexican Statement (1998)…………………………….........4
Difference between (British) Institute of Public Relations (IPR) 1998 and Mexican Statement (1998)………………………………………………….5
Conclusion………………………………………………………………….6
Reference…………………………………………………………………...6
Introduction
This assignment comprise of some particular topics: such as, definition of Public Relations, definition of Advertising, difference between Public Relations and Advertising, definition of public relation according to (British) Institute of Public Relations (IPR) (1998), definition of public relation according to Mexican Statement (1998) and the difference between both statements.
On completion of this assignment, we will be:
Able to know about public relations
Able to know about advertising
Able to differentiate public relation and advertising
Able to know about the definition of public relation according to (British) Institute of Public Relations (1998)
Able to know about the definition of public relation according to Mexican Statement (1998)
Able to distinguish both IPR Statement with Mexican Statement
Answer1
Public relations
Public relations include ongoing activities to ensure the overall company has a strong public image.
Public relations activities include helping the public to understand the company and its products. Often, public relations are conducted through the media that is, newspapers, television, magazines, etc. As noted above, public relations are often considered as one of the primary activities included in promotions.
Advertising
Advertising is bringing a product (or service) to the attention of potential and current customers. Advertising is focused on one particular product or service. Thus, an advertising plan for one product might be very different than that for another product. Advertising is typically done with signs, brochures, commercials, direct mailings or e-mail messages, personal contact, etc.
And we can also distinguish public relation with advertising as below:
Public Relation
Informing, educating and creating understanding through knowledge.
PR uses different communication tools such as brochures, slide presentations, special events speeches and etc.
Advertising
Selling message through the creative skills such as copywriting, illustration, layout, typography and other characteristics
Advertising works almost exclusively through mass media outlets. Through the use of banners, radio and television advertisement.
Answer2
According to my own understanding both statements are explained as below:
According to (British) Institute of Public Relations (IPR) (1998)
"Deliberate, planned and sustained effort to establish and maintain mutual understanding between an organization and its public."
According to IPR it indicates that IPR is the managing of outside communication of an organization to create and maintain mutual understanding and a positive image with its public. Public relations involve popularizing successes, downplaying failures, announcing changes, and many other activities.
According to the Mexican Statement (1998)
"It is the art & social science of analyzing trends, predicting their consequences, counseling organizational leaders & implementing programmer of action which will serve both the organization's and the public interest."
According to Mexican Statement Its an art of & social science of examining tendency along with forecasting their consequences, counseling organizational leaders and executing programmer of action which will dish up both the organization’s and public interest.
Answer3
The difference between both statements is explained as below:
According to statement of (British) Institute of Public Relations (IPR) (1998), as explained above is mostly concentrated on the following issues:
Deliberate, planned and sustained: Organized as a campaign or programmed and therefore not haphazard. A continuous effort.
Mutual understanding: Make an organization understood to others. By being understood, it is hoped that goodwill is built up.
Establish and maintain: Create and retain the goodwill. Important concept as this is the main objective of PR.
According to Mexican Statement (1998), as also explained above is mostly focused on the following issues:
Predicting consequences
Counseling organizational leaders
Implementing programmers
And then Mexican statement only provides programs to establish and maintain mutual understanding between organization and public interest.
Conclusion

As I hope with completion of this assignment now we will be able to know more about public relation, advertising, distinguish between public relation and advertising, public relation according to (British), public relation according to Mexican Statement and distinguish between IPR statement and Mexican Statement.
Table of Content Pages
Introduction………………………………………………………………….2
Reasons for planning PR Program…………………………………………..3
The six point of planning Mode
Appreciation of situation……………………………………………4
Definition of objectives……………………………………………..4-5
Definition of publics………………………………………………..5
Selection of media and techniques………………………………….5-6
Planning of budget………………………………………………….6
Assessment of result………………………………………………..6-7
Definition of Objectives……………………………………………………7
Uses and types of exhibition PR……………………………………………7-8
Conclusion………………………………………………………………….9
References………………………………………………………………….9
Introduction
This assignment consist of Planning PR Program which consist of selecting strategies from among alternatives courses of action, both for the enterprise as a whole and for every department or section in it. Planning is, in effect, deciding in advance what to do, how to do it, when to do it and who is to do it. Planning assumes that rational processes can be used to nominate resources and define appropriate future action which will produce the desired outcome.
A proper PR compaign is usually customized to meet the specific needs of the clients. A PR firm must know precisely how to capitalize upon the media, customers, investors, and the general public. A company’s image is shaped by such ongoing programs.
A PR program introduces the company to key editors, writers, reporters and broadcasters, representing a vast range of media outlets, locally and nationally. To some extent, PR programs and communication efforts must be integrated for maximum benefits and exposure.
The PR program must identify and package a client’s story and second, have the channels to distribute that story to audiences.
Reasons for Planning PR Program
Reasons For Planning PR Program:
To set targets or objectives for PR operation
To estimate how many working hours needed and other cost involved in the PR activity
To select priorities that will control the number and the timing of different operations in the program
To decide and identify feasibility of carrying out the declared objectives according to the availability of sufficient staff of the right skilled, physical equipment such as office machines, cameras or vehicles and adequate budget.
The Six-Point Planning Model
Planning is one of the most important project management and time management techniques. Planning is preparing a sequence of action steps to achieve some specific goal. If you do it effectively, you can reduce much of the necessary time and effort of achieving the goal.
Planning is also crucial for meeting your needs during each action step with your time, money, or other resources.
The simple six point planning model which is widely accepted by PR professionals and PR practitioners are as follows:
Appreciation of the situation
Definition of objectives
Definition of publics
Selection of media and techniques
planning of a budget
Assessment of results
Appreciation of the situation: This refers to the planning by objective procedures, but it depends on the skills and efficiency with 2which it is applied. Before a PR program can be devised, it is necessary to have clear understanding about its starting point.
For example what are the public’s opinions and image that our public have on our subject? This information can be obtained by conducting a communication audit, which examines flow from an internal as well as external perspective.
Definition of Objectives: The first step in developing a PR program is to determine goals. Several company objectives may be reached through publicity. The possible objectives for a business company are as follows:
The first step is developing PR program is to determine goals. Several company objectives may be reached through publicity.
To make the company known and understood in new export markets
To tell the little-known story of the company and gain credit achievement
Private company going public or to prepare the stock market for a new share issue
To educate installers, consumers and users about product
To improve relationship between organization and community. This to avoid misunderstanding of the company’s intentions.
To regain public confidence after a disaster which reflects the company’s sufficiency and reputation
To establish and create a new corporate identify
To make known the company’s research activities
To convey the company’s message to the community
To establish, maintain and constantly reinforce the company’s relationship with all segments of the media
Definition of Publics: The public needs to be defined in order to identify which public needs to be targeted. Since the public is wide, it needs to aply constraints and decide exactly which publics can be reached effectively, within the allocation of a budget which is important in choosing a correct and suitable media. Suppliers, staff, distributors, customers, investors, and opinion leaders are aware and may all see television coverage. So, the suitable media here is television.
Selection of Media and Techniques: Public relations include ongoing activities to ensure the organization has a strong public image. Public relations activities include helping the public to understand the organization and its products or services. Similar to effective advertising and promotions, effective PR pftem de[emds pm designing and implementing a well-designed PR plan. Similar to advertising and promotions, a media plan and calendar can be very useful, which specifies what media methods are used and when.
Often PR is conducted through the media such as newspaper, television, magazines, etc.
Publicity is mentioned in the media and reporters and writers decide what will be said. Public Relation should consider two pints: firstly, what groups of stakeholders do we want to appeal to and how? Secondly, what communication media do they see or prefer the most? One should also consider advertising by looking into collaborations, annual reports, networking, televisions, radios, newsletter, classified, posters and etc. PR practitioners also should ask what media is most practical to be used in terms of accessibility and affordability, and what message are most appealing to each stakeholder. Media is a medium that helps PR practitioners to reach publics. The media may be the press and a technique may be a press receptions.
Planning of budget: Budgeting involves understanding how much money you earn and spend over a period of time. When you create a budget, you are creating a plan for spending and saving money.
PR is labor intensive and the biggest cost is usually working hours. Besides, other major cost can be the printing of house journals and the making of videos. The cost of videos, may be more than one budget if, for instance a construction job is being filmed from start to finish. When the video is ready, it will be shown for several years, so future budgets are needed for maintenance, distributions and updating sequences.
Assessment of Result: There are several techniques which can be used in order to assess the results of PR activity. Three points that need to be considered are:
The research techniques in the process of appreciation of situation can be repeatedly used to evaluate the result and the opinion poll. Using the attitude test is another good example.
Methods and techniques to be used in evaluation and assessment should be decided in the planning stage.
Since there are schemes that set out objectives, there are declared targets against which the result can be tested. Even if they are qualitative rather then quantitative.
Definition of objectives
(The six point planning model)
The first step is developing PR program is to determine goals. Several company objectives may be reached through publicity.
Possibility objectives for a company are as follows:
To improve the caliber of job applicants
To change the image because the company has introduced new activities, e.g. the company which once made shoes now makes cloths.
To make the company known and understood in new export markets
To tell the little-known story of the company and gain credit achievement
Private company going public or to prepare the stock market for a new share issue
To educate installers, consumers and users about product
To improve relationship between organization and community. This to avoid misunderstanding of the company’s intentions.
To regain public confidence after a disaster which reflects the company’s sufficiency and reputation
To establish and create a new corporate identify
To make known the company’s research activities
To convey the company’s message to the community
To establish, maintain and constantly reinforce the company’s relationship with all segments of the media
Uses and Types of Exhibition Public Relations
Planning for an exhibition and press event for public relations:
Exhibition promoters use PR on behalf of their shows to inform potential exhibitors and visitors and to support participants in the show and the press office is an important service to both exhibitors and the media.
By involving in the exhibitions, exhibitors can extend the value of their stand or booth by taking advantage of the press officer’s services. Some stands may be used for PR purposes, the opportunity being taken to create knowledge and understanding rather than to advertise
Types of exhibition for public relations:
Public exhibitions such as JOM HEBOH conducted by Media Prima
Trade exhibitions usually limited to ticket holders and bona fide business people, e.g. The Toy Fair, Furniture exhibition and Motor Show.
Private exhibitions, held on own or hired premises, to which guests are invited
Overseas trade fairs, to promote the products of a country, attract importers, or provide an international showplace with national pavilions and stands. The International Motor Show is a typical example.
Mobile shows, the exhibitions being transported by trailer, train, special vehicle or aircraft. Ships have also been converted into floating exhibitions which have toured ports, numerous firms displaying their goods o board.
Portable exhibitions which can be taken for place to place and set up in public halls, foyers of various buildings, libraries, hotel rooms, station forecourts and so on. They may be either public or private.
Small exhibitions for show windows, hotel foyers, railway station and airport concourses. They may be housed in glass cases or mounted on display panels or specially set up in a n allotted area, They may include samples. Models, photographs, charts and lettered panels.
Conclusion

As I hope now we have got a good knowledge about Planning PR Program which consist of such topics:
Reasons for planning PR program
The Six-Point PR planning model
Definition of objectives
Uses and types of exhibition PR

2 comments:

Abass said...

Often we forget the little guy, the SMB, in our discussions of the comings and goings of the Internet marketing industry. Sure there are times like this when a report surfaces talking about their issues and concerns but, for the most part, we like to talk about big brands and how they do the Internet marketing thing well or not so well.

www.onlineuniversalwork.com

Davidjohn said...

Great survey, I'm sure you're getting a great response.
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