IBM Annual Report 2009

A LETTER FROM THE CHAIRMAN

Dear IBM Investor:
When I wrote to you a year ago, the global economy was experiencing
profound disruption. The financial system was freezing up. Many companies
and entire industries were pulling in their horns, hoping simply to ride out
the storm. IBM’s own industry was no different.
Nonetheless, I said that we felt confident heading into 2009. We were
entering the year strong, and we expected to exit it stronger.
A year later, despite an environment that remains very challenging,
I am happy to report that your company has continued to outperform our
industry and the market at large. We delivered strong results in 2009,
once again achieving record pre-tax earnings, record earnings per share and
record free cash flow— despite reduced revenues. At the same time, we
continued to deliver superior returns to you, our owners. Most importantly,
we are well positioned to grow as the economy begins to recover.

Samuel J. Palmisano
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER

2


The explanation for this performance — and for Our strong 2009 continued this record of
our optimism about both the near-term and the superior performance:
longer-term future — is threefold. It rests, first,
margins: IBM’s gross profit margin rose for
on the ongoing transformation of our company;
the sixth consecutive year — to 45.7 percent, up
second, on our focused strategy to capture the large
9.2 points since 2003. Our pre-tax income margin
opportunity of a globally integrating world; and
rose to 18.9 percent. Both margins are at their
third, on a business model that reliably generates
highest in more than a decade. We achieved this by
strong profits and cash, giving us the financial
driving productivity and continuing to shift our
flexibility to invest for future growth.
business mix to more profitable segments. Once
I will talk about each of these factors in detail
again, more than 90 percent of our segment profit
in this letter. It is important for you to understand
in 2009 was from software, services and financing.
the ways in which IBM today is a very different
company than it was just a few years ago. This earnings per share: We have continued to
repositioning explains why we have demonstrated achieve strong EPS growth. Last year was another
such stability and strong results during this record, with diluted earnings per share of $10.01,
downturn and why we believe we will benefit as up 13 percent. This marked seven straight years in
the economy recovers and growth returns. which we have grown EPS by double digits.
cash flow: IBM has consistently generated

A Strong Year strong cash flow, a key indicator of real business
performance. In 2009 our free cash flow, excluding
Capping a the year-to-year change in Global Financing
receivables, was $15.1 billion, an increase of
Strong Decade $800 million from 2008. IBM ended 2009 with
$14 billion of cash and marketable securities.
Two thousand nine was a tough year by any mea-
sure, but IBM’s performance was indicative both of revenue and income: Our revenue was
our high-value market position and of the discipline $ 95.8 billion, down 5 percent at constant currency.
we apply to our strategy and operations. Since the Nonetheless, in 2009 we grew pre-tax income from
dot-com crash in 2002, we have added $12 billion continuing operations by 9 percent, to $18.1 billion,
to IBM’s pre-tax profit base, increased our pre-tax our highest ever.
margin 2.5 times, quadrupled our earnings per
share and more than doubled our free cash flow.
Cumulatively, we have generated about $80 billion
of free cash flow.

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investment and return to shareholders:
Our superior cash flow has enabled us to invest Leading Our
in the business and to generate substantial returns
to investors. Our 2009 cash investment was
Industry and
$1.2 billion for six acquisitions — five of them
in key areas of software. And after investing
the Market
As we enter a new decade, it’s interesting to reflect
$ 5.8 billion in R&D and $ 3.7 billion in net capital
upon how the last one began. The conventional
expenditures, we were able to return more than
wisdom back then was that the robust IT growth of
$10 billion to you — $7.4 billion through share
the go-go ’90 s would continue — and even after the
repurchase and $ 2.9 billion through dividends.
dot-com bust, most believed it would resume. It was
Last year’s dividend increase was 10 percent,
thought that buyers of IT would continue to
marking the 14th year in a row in which we have
self-integrate — which would mean that our industry
raised our dividend.
would remain highly disaggregated — and that
In sum, with our excellent financial position, strong client/server computing would become the pre-
balance sheet, solid recurring revenue, strong dominant enterprise model.
profit streams and unmatched global reach, we are It wasn’t unreasonable to hold these views.
confident about the year ahead, and beyond. However, as we looked out, we saw a different
Indeed, we achieved our 2010 objective of $10 to picture — an undercurrent of fundamental change.
$11 in earnings per share one year early. We believe As we worked to understand the deeper meaning
that we will again grow EPS by double digits this of events, to separate the cyclical from the secular
year, reaching at least $11. and to apply lessons from our own past, we came
The information on pages 10 through 15 — to believe that major shifts were underway
“A Decade of Generating Higher Value at IBM”— that would reshape our industry and, indeed,
summarizes the story of our transformation, the global economy:
and describes the opportunities it has opened up
1. Changes in the World: The lowering of trade
for growth in the coming era.
barriers, the rise of the developing world and the
emergence of the World Wide Web were unleash-
Since the dot-com crash in 2002, ing the flow of work on a global scale. We believed
these changes were powerful and irreversible, and
we have added $12 billion to that they would lead to new business models and a
IBM’s pre-tax profit base, increased new form of the corporation itself — what we came
our pre-tax margin 2.5 times, to call the globally integrated enterprise.
quadrupled our earnings per share
and more than doubled our free
cash flow.

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2. Changes in Technology: At the same time, a new our teams and capabilities in emerging markets
model of computing was replacing the PC -based, around the world, and we accelerated the global
client/server approach. Computational capability integration of IBM’s operations.
was being put into things no one would recognize At the same time, we transformed our vast
as computers: phones, cameras, cars, appliances, services delivery capability, applying automation,
roadways, power lines, clothes — and even natural standardization and advanced engineering and
systems, such as agriculture and rivers. All of this management principles of the sort that prior
was being connected through the Internet. And we generations had applied to manufacturing. We also
now had the computing power, advanced analytics rebalanced our internal R&D. Today, IBM’s portfo-
and new models (now known as “clouds”) to turn lio is built around networked, modularized and
mountains of data into insight. As a result, the embedded technologies, such as service-oriented
economic, societal and physical systems of the world architecture (SOA), business intelligence and
were becoming instrumented, interconnected and analytics. Of the more than 4,900 U.S. patents IBM
intelligent. Our planet was becoming smarter. received in 2009 (our 17th straight year of patent
leadership, and a record for any company), more
3. Changes in Client Demand: Compelled by the
than 70 percent were for software and services.
new opportunities and competitive demands of
That’s how the last decade played out — for our
these first two shifts, enterprises and institutions
industry and for your company.
were no longer content with cost savings from
off-the-shelf technologies and solutions. They now
sought to innovate — not just in their products and
services, but also their business processes, manage- The Landscape
ment systems, policies and core business models. To
accomplish that, they needed to integrate advanced
for Growth
technology far deeper into their operations. Today, many of our competitors are emulating
our moves. For instance, several have gone on an
Because we believed that these shifts would change
acquisition binge to get into new spaces. However,
our industry, creating winners and losers, we made
there is a vast difference between what your
some important decisions and got to work. We
company has done — amassing truly differentiating
transformed IBM’s mix of products, services, skills
technology and skills, and focusing on the needs
and technologies — exiting commoditizing busi-
of enterprise clients — and what others are doing,
nesses like PC s and hard disk drives, and making
largely to compensate for rapidly commoditizing
108 strategic acquisitions over the course of the
business models.
decade. We amassed substantial industry expertise,
and also re-invented the way we deploy it, shifting
skills and decision making closer to the marketplace
and the client. We invested significantly more in

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As the new decade begins, some in our industry earmarked by governments around the world.
still seem to believe that history will repeat itself — We are uniquely positioned to benefit from these
for example, that clients will invest in IT simply large business and technology opportunities, and
because of product upgrade cycles. Once again, we we are pursuing them aggressively in 2010.
have a different view. We believe that clients will
only invest in what delivers compelling, quantifiable 2. Analytics
business value. We believe that the fundamental Data is being captured today as never before —
shifts I described earlier will continue to play out, both from the so-called Internet of Things (head-
and that they create a unique opportunity for IBM. ing toward trillions of connected objects) and from
And because of the way we have managed the hundreds of millions of individuals using social
company during the economic downturn, we have media. In just three years, IP traffic is expected to
the flexibility to take advantage of this opportunity, total more than half a zettabyte. (That’s a trillion
and to invest for growth. gigabytes — or 1 followed by 21 zeroes.) And this
Our investments in 2010 are focused on four data no longer consists merely of text and numbers.
high-potential opportunities. It includes rich media of all kinds, from video and
audio, to images, avatars, simulations and applica-
1. Growth Markets tions. Thirty percent of the data in the world today
IBM has among the broadest global footprints of consists of medical images alone.
any corporation or institution. We serve clients All this information — the knowledge of the
in more than 170 countries around the world, and world, the flow of markets, the pulse of societies —
we have been deeply established within myriad can now be turned into insight through sophisticated
local economies and cultures for decades. mathematical models, also known as analytics.
Our Growth Markets unit, established in 2008, is Where once we inferred, now we know. Where once
helping to capture the highest-growth opportunities we interpolated and extrapolated, now we can
of the world’s emerging economies. Since 2005, determine. The historical is giving way to the real-
these markets have expanded their contribution time, and even the predictive.
to IBM’s geographic revenue by a point a year, IBM is moving quickly to capitalize on this
growing at least 8 points faster than major markets promise. We have built the industry’s premier
over the last three years. analytics practice, with 4,000 consultants, mathema-
Going forward, both mature and emerging ticians and researchers, as well as leading-edge
markets are building out and integrating their software capabilities — bolstered by key acquisitions
physical and digital infrastructures, and infusing such as Cognos and SPSS. Our new Business
the resulting systems with intelligence. More Analytics and Optimization service line targets
than $ 2 trillion in fiscal stimulus has already been the highest-growth opportunities by delivering
integrated analytics solutions based on the needs
of specific industries.

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3. Cloud and Next-Generation Data Center
As our planet becomes instrumented, interconnected We are seeing smarter systems

and intelligent, the computing model is evolving being implemented in every
to support it. Think of it as the industrialization of
IT. Over the past generation, our digital infrastruc-
major industry and across every
tures have become very complex and inefficient, region of both the developed and
so now we’re optimizing them through automation, developing worlds. And they are
creating systems that are highly tuned to the creating measurable economic
specific workloads they run and to new consump- and societal value.
tion and delivery models, such as clouds.
Thus, the data center is shifting from being
a single physical place to something more like the software and optimized systems. We have also
Internet, a diverse set of services fueled by IT. established a portfolio of cloud services that clients
This provides far more choice and flexibility, of can access externally from IBM or offer internally
particular interest to the many businesses and to users on their own premises. And because of
governments that want simply to consume some IBM’s track record of integrating new technology
services they once built, maintained and provided paradigms like open source and the Internet into
themselves. It also makes possible things that the enterprise, we have earned the trust of clients
were not previously so, such as modeling systemic and the industry to bring reliability and security
risk or creating integrated healthcare records. to what is new.
However, with these new possibilities come new
4. Smarter Planet
challenges, in areas such as security. As a result, our
All of these growth strategies come together in the
clients are seeking help in architecting and building
opportunity we call “smarter planet. This is not
”
a new kind of highly efficient infrastructure that
a metaphor. It describes the infusion of intelligence
is reliable and secure, even as it integrates services
into the way the world actually works, the way that
from a variety of external sources.
almost anything — any person, any object, any
We have invested billions of dollars in R&D and
process or any service, for any organization, large
acquisitions to build leadership in two key dimen-
or small — can now become digitally aware, net-
sions of this new IT model: service management
worked and intelligent. This means that industries,
infrastructures, processes, cities and entire societies
can be more productive, efficient and responsive.

7

We developed this agenda and strategic initiative • Four leading retailers have reduced supply
in the summer of 2008, and we launched it that chain costs by up to 30 percent, reduced
autumn — at the peak of the economic crisis. We did inventory levels by up to 25 percent, and
so because we believed it represented a pragmatic increased sales up to 10 percent. They’ve done
way to address the very problems that were transfix- so by analyzing customer buying behaviors,
ing the world. aligning merchandising assortments with
After just a year, it is clear that our belief was demand and building end-to-end visibility
correct. The idea of “smarter systems” is resonating across their entire supply chain.
with decision-makers in both the private and
This list could go on. We are quantifying the
public sectors. We are seeing these systems being
outcomes of hundreds and hundreds of smarter
implemented in every major industry and across
systems, and this measurable value gives leaders
every region of both the developed and developing
everywhere the confidence to try something new.
worlds. And they are creating measurable economic
So the questions we are hearing are no longer
and societal value.
about whether a smarter planet is a real possibility.
• In a study of 439 cities, those that employ Now, there is an enormous hunger to learn how.
smarter transportation solutions — including CEOs, CIOs, governors and mayors are asking
ramp metering, signal coordination and questions like: How do I infuse intelligence into
incident management — reduced travel delays on a system for which no one enterprise or agency
average by more than 700,000 hours annually. is responsible? How do I bring all the necessary
• Eight hospitals and 470 primary care clinics in
Spain implemented smarter healthcare systems
across their facilities — and improved clinical
The opportunity to make our planet
results and operational efficiency by up to smarter is both real and inspiring.
10 percent. It has excited forward-thinking
• Banks and other financial services organizations leaders in industry, government and
around the world are achieving new levels across civil society. Encouragingly,
of risk control, efficiency and customer service. but not surprisingly, it has also
For instance, payment processing costs at
the Bank of Russia have been reduced by
energized IBMers.
95 percent. And CLS Bank now handles most
of the world’s currency exchange transactions,
securely eliminating the risk from trades worth
$3.5 trillion per day, and growing.

8


constituents together? How do I make the case for and transformational opportunity. Everywhere
budget? How do I coalesce support with citizens? around the world, people are eager for change.
Where should I start? And every day, more and more forward-thinking
In 2010, we are focusing our efforts on helping leaders are creating tangible outcomes and benefits,
clients answer those questions in nine high-growth making their parts of our planet smarter. Like
industries: healthcare; oil and gas; energy and IBMers, they recognize that we cannot wait, cannot
utilities; transportation; telecommunications; retail; let this moment pass. They know the time to act
banking; government; and electronics. is now. And the way to act is together.
At the same time, we are continuing to push Let me close by expressing my pride in the
the scientific frontiers at the core of smarter 400,000 women and men of the global IBM team
technologies. Today, more than 25 percent of IBM who have brought us to this point. And let me
Research’s work is on smarter planet projects, and express my gratitude to you, our shareholders, for
we are in the process of doubling that to more than your unwavering support. I hope that you are
50 percent, in areas such as mobile Web, nanotech- pleased with how your company is performing and
nology, stream computing, analytics and cloud. evolving. And I trust that you share our excitement
about the role we can play in what promises to
be a new epoch for our industry, for business and
Seizing for our planet.

the Opportunity
Before Us
The opportunity to make our planet smarter
Samuel J. Palmisano
is both real and inspiring. It has excited forward- CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
thinking leaders in industry, government and
across civil society in both mature and growth
markets. Encouragingly, but not surprisingly, it has
also energized IBMers. Over nearly a century,
IBM’s greatest achievements have arisen from our
distinctive culture and values.
This is why, despite the current economic
climate, I am optimistic about IBM’s prospects
to lead the era we are now entering. Underneath
the surface turmoil, this moment presents a rich

The selected references in this letter to the company’s financial results related to (i) free cash flow excluding Global Financing receivables and (ii) revenue at constant currency
are, in each case, non-GAAP financial measures. These references are made to facilitate a comparative view of the company’s ongoing operational performance. Information
about these references is provided in the company’s Form 8-K submitted to the SEC on January 19, 2010 (Attachment II — Non-GAAP Supplementary Materials).

9

A Decade of Generating
Higher Value at IBM

1 A decade ago, we
saw change coming.
The IT industry and the broader
economy were being transformed by the
rising tide of global integration, by a
new computing model and by new client
needs for integration and innovation.

2 In response, we changed the mix
The global economy was integrating.
The rapidly growing nations of the
developing world were making historic of our businesses . . .
investments in fundamental business
infrastructure. And enterprises everywhere To capture the emerging higher-value From 2000 to 2009 we made 108
were seeking access to global skills opportunities, IBM divested com- strategic acquisitions to strengthen
and growth markets. moditizing businesses like personal our portfolio of products and offerings.
A new computing architecture was computers and hard disk drives, and This has changed our business mix
taking shape. It was built on pervasive strengthened its position through toward higher-value, more profitable
instrumentation and interconnectivity, strategic investments and acquisitions in segments of the industry.
open standards, unprecedented areas such as analytics, next-generation
computing power and advanced data centers, cloud computing and
analytics. This model could transform green solutions.
oceans of data into intelligence.

Clients were shifting their focus from Segment Pre-tax Income*
productivity to innovation. By integrating ( $ in billions )
advanced technology far deeper into
their business operations, they sought to 2000**
unlock innovation and drive growth. 2.7 1.2 4.5 2.8

24% 11% 40% 25%

2009

1.4 1.7 8.1 8.1

7% 9% 42% 42%

Hardware Financing Services Software

* Sum of external segment pre-tax income not equal to IBM pre-tax income
** Excludes Enterprise Investments and stock-based compensation

10

3 enterprise, leveraging our scale to capture
. . . and became a globally integrated

new growth.
International Since 2005, global integration has During this period, IBM has pioneered
(mid-19th to early 20th century ) enabled IBM to cut expenses by $ 5 billion a new operating model, changing from a
Most operations are centered in and improve service quality, speed and classic “multinational,” with smaller versions
the home country, with overseas risk management in very dynamic of the parent company replicated in
sales and distribution. environments. We have shifted resources countries around the world, to a global
toward building client relationships and model with one set of processes, shared
employee skills, while positioning services and broadly distributed decision
IBM for new market opportunities, such making, carried out by a highly skilled
as business analytics, smarter cities global workforce managed by a common
and the large-scale infrastructure build- set of values.
outs underway in emerging markets.

Multinational
(mid-20th century )
Creates smaller versions of itself
in countries around the world and
makes heavy local investments.

Major Markets Growth Markets

Legal HR Finance

Supply Chain Procurement Marketing
Client-facing Operations Client-facing Operations
Globally Integrated Enterprise
(21st century )
Locates operations and functions
anywhere in the world based on Globally Integrated Operations
the right cost, skills and business IBM’s shift to a globally integrated model allowed the company
environment. to refocus our country organizations on generating growth
and serving clients. Currently, nine out of every ten employees
in our country organizations are focused on providing our
clients with high-value, high-margin solutions.
In the globally integrated model, even the smallest of our
emerging country teams can leverage IBM’s global scale and
expertise to deliver value of a depth and breadth unattainable
in a multinational construct.

2009
19% Growth Markets Share
of Geographic Revenue

18%
In 2009, Growth Markets—
defined as those countries
with the potential to grow at

17% above-average rates over the
coming decade—represented
19 percent of IBM’s geographic

16% revenue and grew 8 points
faster than Major Markets.

2005 15%

11

4 As a result, IBM today is a
higher-performing enterprise.
Our business model is more aligned with our clients’ needs and generates better financial results.
We have achieved record earnings per share … … and record cash performance.
Diluted earnings per share in 2009 were $10.01, marking In 2009 our free cash flow, excluding the year-to-year change
seven consecutive years of double-digit growth. Pre-tax in Global Financing receivables, was $15.1 billion—an increase
earnings from continuing operations were $18.1 billion, an of $800 million from 2008.
increase of 9 percent.

Earnings Per Share Financial Performance History
( $ in billions )

104
99
10.01 96 96
$10 $20 91 91
89
8.89 85
83 81 $18.1

8 16
7.15 $15.1

6.05
6 12
4.91
4.39
3.88 3.94 3.76
4 8

2.43

2 4

0 0
00 01 02 03 04 05 06 07 08 09 00 01 02 03 04 05 06 07 08 09

Note: 2005–2008 EPS reflects the adoption of amendments Revenue Pre-tax Income
to ASC 260, “Earnings Per Share” Divested Revenue Free Cash Flow

5 We have therefore been able to invest
in future sources of growth and provide
record return to shareholders . . .
Primary Uses of Cash

$161
From 2000 to 2009

billion $96 illion
b $65 illion
b
Returned to Shareholders Reinvested
Share Repurchases & Dividends Acquisitions & Capital Expenditures

. . . while continuing to invest in R&D—more
than $56 billion from 2000 to 2009.

12

A DECADE OF GENERATING HIGHER VALUE AT IBM

6 This has resulted in strong, steady performance in
the current economic environment . . .
The transformation of our company has allowed us to achieve consistently strong results since 2002.
And despite a challenging economy over the last two years, we reached the target of our 2010 EPS
road map of $10 to $11 one year ahead of schedule.

Earnings Per Share Road Map to 2010

$12

$11.00

$10.00
$10.01
10
10%

$ 8.89

13%

8

$7.15

24%

$ 6.05
6
18%

4

2

0
2006 2007 2008 2009 2010

Key Drivers for 2010
Historical revenue Margin Share Growth initiatives and Retirement-related
growth expansion repurchases future acquisitions costs
We maintain historical We focus on delivering Our strong cash generation We invest in key growth Retirement-related costs
revenue growth through higher value to clients and lets us return value initiatives and strategic vary based on market
annuity businesses, global on increasing productivity, to shareholders by reducing acquisitions to complement performance and plan
presence and a balanced to improve profitability. shares outstanding while and scale our product redesigns.
business mix. reinvesting for future growth. portfolio.

Note: 2006 –2008 EPS reflects the adoption of amendments to ASC 260, “Earnings Per Share”

13

7 in the next decade—the Decade of Smart.
. . . and our investments position us for growth

We are focusing on four major growth opportunities in 2010 :
Growth markets: IBM serves clients in more than Cloud and next-generation data center: These new models
170 countries around the world. In both mature and growth are enabling efficient consumption and delivery of IT-based
economies, infrastructure represents a major technology services. More than 18 million people use LotusLive, IBM’s cloud-
and business opportunity, with more than $ 2 trillion in fiscal based collaboration suite. More than 200 IBM researchers are
stimulus earmarked by governments. working on breakthroughs in areas like cloud security and privacy.

Analytics: Enabling clients to get far more value from their Smarter planet: We estimate that smarter planet increases
information, IBM’s new analytics service line draws on IBM’s addressable opportunity by 40 percent over the decade
4,000 dedicated consultants, plus 200 mathematicians and ahead. The sampling on this map of recent partnerships with
advanced analytics experts in IBM Research. We have more than 300 clients illustrates the reach of smarter solutions
invested $10 billion in 14 acquisitions since 2005, creating across industries and markets.
seven analytics solution centers around the world.

Smarter luggage
Industry: Transportation (Netherlands)
An integrated baggage-control and passenger-check-in
system at Amsterdam’s airport streamlines luggage
tracking, offloading and redirection of bags on alternative
flights, and fully automated security screening for all
transfer baggage travelling through the airport.

Canada

United States
Smarter medical research
Industry: Healthcare (United States)
The University of North Carolina’s smart healthcare system
Mexico allows researchers, clinicians and administrators to analyze
and correlate data in new ways, leading to improved patient
outcomes and compliance, and advances in research on
diseases such as diabetes and cancer—shortening query
times from weeks to seconds.
Venezuela

Smarter oil and gas imaging
Industry: Chemicals & Petroleum (Venezuela)
3-D seismic imaging technology helped Tricon Brazil
Peru
Geophysics cut processing time by 50 percent and
realize a 40-percent savings in power and cooling
infrastructure, and operational costs.

Smarter microfinance
Industry: Banking & Financial Markets (India)
Microfinance bank Grameen Koota uses an open-source
Argentina banking platform for accurate, near-real-time information,
enabling them to predict capital requirements; to expand their
microloans, insurance accounts and other banking functions;
and to grow from 70,000 to 350,000 low-income clients.

14

A DECADE OF GENERATING HIGHER VALUE AT IBM

Finland
Norway

Sweden

Smarter Planet
Engagements
Denmark By industry
Ireland Netherlands
U.K. Poland Aerospace & Defense

Germany Automotive
Belgium Czech Republic
Banking &
Switzerland Financial Markets
France Slovenia
Chemicals & Petroleum

Bulgaria Consumer Products
Italy
Education

Spain Electronics
Malta
Energy & Utilities

Government

Healthcare

Industrial Products

Insurance

Life Sciences

Media & Entertainment
Smarter patient care Retail
Russia
Industry: Healthcare (People’s Republic of China)
An intelligent medical records system at the Guang Dong Telecommunications
Hospital of Traditional Chinese Medicine enables sharing
between local facilities and large hospitals and across multiple Transportation
departments. The result? Better patient care, improved
diagnosis and treatment—with the promise of using deep
analytics to drive cutting-edge research in global healthcare.
Japan
Turkey
South Korea
People’s Republic of China

Saudi Arabia Taiwan
U.A.E. India Vietnam

Thailand
Philippines
Smarter global financial systems
Industry: Electronics (Japan)
Singapore Panasonic’s Global Treasury System integrates financial
management for 600+ subsidiaries around the world.
By managing cash flow, currency exchange and settlements
as a global, in-house bank, the company has significantly
reduced financial costs, while giving it daily financial visibility.
Smarter mobile phone promotions
Industry: Telecommunications (Philippines)
To hold onto existing mobile phone customers and win
new ones, Philippine telcos must micro-target promotions for
new services, in real time. Globe Telecom’s smart Toolbox Australia
has cut the preparation time for launching service promotions
from 40 weeks to three weeks, increasing Globe’s sales by
600 percent.
South Africa

New Zealand

15

Financial Highlights

($ in millions except per share amounts)
For the year ended December 31: 2009 2008

Revenue $ 95,758 $103,630
Net income $ 13,425 $ 12,334

Earnings per share of common stock:
Assuming dilution $ 10.01 $ 8.89*
Basic $ 10.12 $ 9.02*

Net cash provided by operating activities $ 20,773 $ 18,812
Capital expenditures, net 3,747 4,536
Share repurchase 7,429 10,578
Cash dividends paid on common stock 2,860 2,585
Per share of common stock 2.15 1.90

At December 31: 2009 2008

Cash, cash equivalents and marketable securities $ 13,973 $ 12,907
Total assets 109,022 109,524
Working capital 12,933 6,568
Total debt 26,099 33,926
Total equity 22,755 13,584**
Common shares outstanding (in millions) 1,305 1,339
Market capitalization $170,869 $112,698
Stock price per common share $ 130.90 $ 84.16

Number of employees in IBM/wholly owned subsidiaries 399,409 398,455

* Reflects the adoption of the Financial Accounting Standards Board (FASB) guidance in determining whether instruments granted in share-based payment transactions
are participating securities. See note B, “Accounting Changes,” on pages 79 to 82 for additional information.

** Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, “Accounting Changes,” on pages 79 to 82 for
additional information.

16

Report of Financials
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES

Management Discussion Notes to Consolidated Financial Statements
Overview 18 A Significant Accounting Policies 70
Forward-Looking and Cautionary Statements 18 B Accounting Changes 79
Management Discussion Snapshot 19 C Acquisitions/Divestitures 82
Description of Business 20 D Fair Value 86
Year in Review 25 E Financial Instruments (Excluding Derivatives) 87
Prior Year in Review 40 F Inventories 88
Discontinued Operations 47 G Financing Receivables 88
Other Information 47 H Plant, Rental Machines and Other Property 89
Looking Forward 47 I Investments and Sundry Assets 89
Liquidity and Capital Resources 49 J Intangible Assets Including Goodwill 89
Critical Accounting Estimates 52 K Borrowings 90
Currency Rate Fluctuations 54 L Derivatives and Hedging Transactions 92
Market Risk 55 M Other Liabilities 97
Financing Risks 56 N Equity Activity 98
Employees and Related Workforce 56 O Contingencies and Commitments 99
Global Financing 57 P Taxes 101
Q Research, Development and Engineering 103
REPORT OF MANAGEMENT 62 R Earnings Per Share of Common Stock 104
REPORT OF INDEPENDENT REGISTERED S Rental Expense and Lease Commitments 104
PUBLIC ACCOUNTING FIRM 63 T Stock-Based Compensation 105
U Retirement-Related Benefits 109
Consolidated Financial Statements V Segment Information 122
Earnings 64 W Subsequent Events 126
Financial Position 65
Cash Flows 66 FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA 127
Changes in Equity 67 SELECTED QUARTERLY DATA 128
PERFORMANCE GRAPHS 129
BOARD OF DIRECTORS AND SENIOR LEADERSHIP 131
STOCKHOLDER INFORMATION 132

17

Overview • The references to “adjusted for currency” or “at constant
currency” in the Management Discussion are made so that
The financial section of the International Business Machines Cor- certain financial results can be viewed without the impact
poration (IBM or the company) 2009 Annual Report includes the of fluctuations in foreign currency exchange rates, thereby
Management Discussion, the Consolidated Financial Statements facilitating period-to-period comparisons of business perfor-
and the Notes to the Consolidated Financial Statements. This mance. Financial results adjusted for currency are calculated
Overview is designed to provide the reader with some perspec- by translating current period activity in local currency using
tive regarding the information contained in the financial section. the comparable prior year period’s currency conversion rate.
This approach is used for all countries where the functional
Organization of Information currency is the local country currency. See “Currency Rate
• The Management Discussion is designed to provide readers Fluctuations” on page 54 for additional information.
with an overview of the business and a narrative on the com- • Within the financial tables in this Annual Report, certain
pany’s financial results and certain factors that may affect columns and rows may not add due to the use of rounded
its future prospects from the perspective of the company’s numbers for disclosure purposes. Percentages reported are
management. The “Management Discussion Snapshot” on calculated from the underlying whole-dollar numbers.
pages 19 and 20 presents an overview of the key perfor-
mance drivers in 2009. Discontinued Operations
• Beginning with the “Year in Review” on page 25, the Manage- On December 31, 2002, the company sold its hard disk drive
ment Discussion contains the results of operations for each (HDD) business to Hitachi, Ltd. (Hitachi). The HDD business
reportable segment of the business and a discussion of the was accounted for as a discontinued operation under generally
company’s financial position and cash flows. Other key sections accepted accounting principles in the United States (GAAP) and
within the Management Discussion include: “Looking Forward” therefore, the HDD results of operations and cash flows have
on pages 47 to 49 and “Liquidity and Capital Resources” on been removed from the company’s results of continuing opera-
pages 49 to 52. It is useful to read the Management Dis- tions and cash flows for the year 2007. There was no activity in
cussion in conjunction with note V, “Segment Information,” on 2008 or 2009. See page 47 for additional information.
pages 122 to 126.
• Global Financing is a reportable segment that is measured as
if it were a standalone entity. A separate “Global Financing” Forward-Looking
section is included beginning on page 57. The information and Cautionary Statements
presented in this section is consistent with this separate
Certain statements contained in this Annual Report may consti-
company view.
tute forward-looking statements within the meaning of the Private
• The Consolidated Financial Statements are presented on
Securities Litigation Reform Act of 1995. These statements involve
pages 64 through 69. These statements provide an overview
a number of risks, uncertainties and other factors that could cause
of the company’s income and cash flow performance and its
actual results to be materially different, as discussed more fully
financial position.
elsewhere in this Annual Report and in the company’s filings with
• The notes follow the Consolidated Financial Statements.
the Securities and Exchange Commission (SEC), including the
Among other items, the notes contain the company’s account-
company’s 2009 Form 10-K filed on February 23, 2010.
ing policies (pages 70 to 79), acquisitions and divestitures
(pages 82 to 86), detailed information on specific items within
the financial statements, certain contingencies and commit-
ments (pages 99 to 101), and retirement-related benefits
information (pages 109 through 121).

18

Management Discussion Snapshot initiatives have reduced the fixed cost base and improved the
operational balance point—generating more profit for each dol-
($ and shares in millions except per share amounts) lar of revenue. The strong profit and cash base has enabled the
Yr.-to-Yr. company to make significant investments for growth and return
Percent/
Margin capital to shareholders. Key areas of investment include Smarter
For the year ended December 31: 2009 2008 Change Planet solutions, business analytics, growth market opportuni-
Revenue $ 95,758 $103,630 (7.6)%* ties and new computing models such as cloud computing.
Gross profit margin 45.7% 44.1% 1.7 pts. The strategic transformation of the company has enabled the
Total expense and other income $ 25,647 $ 28,945 (11.4)% company to deliver strong financial performance since the last
Total expense and other recession in 2002, including the difficult environment in 2008
income-to-revenue ratio 26.8% 27.9% (1.1) pts. and 2009, and has positioned the business for the future.
Income before income taxes $ 18,138 $ 16,715 8.5% For the year, the company delivered $10.01 in diluted earn-
Provision for income taxes 4,713 4,381 7.6% ings per share, an increase of 12.6 percent year to year. This
Net income $ 13,425 $ 12,334 8.8%
was the seventh consecutive year of double-digit earnings per
share growth. In 2007, the company developed a road map for
Net income margin 14.0% 11.9% 2.1 pts.
growth with an earnings per share objective for 2010 of $10
Earnings per share of
common stock:
to $11 per share. With its performance in 2009, the company
achieved this objective one year early.
Assuming dilution $ 10.01 $ 8.89+ 12.6%
Total revenue decreased 7.6 percent (5 percent adjusted for
Weighted-average shares
outstanding:
currency) compared to 2008. Revenue from the growth markets
declined 3.5 percent, but increased 1 percent at constant cur-
Assuming dilution 1,341.4 1,387.8+ (3.3)%
rency. Performance was led by the BRIC countries of Brazil,
Assets** $109,022 $109,524 (0.5)%
Russia, India and China which increased 4 percent, adjusted for
Liabilities** $ 86,267 $ 95,939++ (10.1)%
currency. Segment performance was driven by Software which
Equity** $ 22,755 $ 13,584++ 67.5% decreased 3.1 percent year to year (1 percent adjusted for
* (5.3) percent adjusted for currency. currency) and Global Technology Services which declined 4.9
** At December 31. percent (2 percent adjusted for currency). Within Software per-
+ Reflects the adoption of the Financial Accounting Standards Board (FASB) formance was led by key branded middleware which increased
guidance in determining whether instruments granted in share-based payment revenue 1.1 percent (3 percent adjusted for currency) compared
transactions are participating securities. See note B, “Accounting Changes,”
on pages 79 to 82 for additional information. to the prior year.
++ Reflects the adoption of the FASB guidance on noncontrolling interests in Gross profit margins improved reflecting the shift to higher
consolidated financial statements. See note B, “Accounting Changes,” on value businesses and the continued focus on productivity
pages 79 to 82 for additional information.
and cost management. The consolidated gross profit margin
increased 1.7 points versus 2008 to 45.7 percent. This was the
In 2009, in a difficult global economic environment, the com-
sixth consecutive year of improvement in the gross profit margin.
pany continued to deliver value to its clients and strong financial
Gross profit margin performance by segment and the impact to
results to its investors—with profit growth driven by continued
the consolidated gross margin was as follows:
margin expansion, expense productivity, market share gains in
software and systems and a continuing strong cash position.
Gross Yr.-to-Yr. Consolidated
The company again achieved record levels of pre-tax profit, Margin Change Impact
earnings per share and cash flow from operations—despite Global Technology Services 35.0% 2.4 pts. 0.8 pts.
a decline in revenue. The financial performance reflected the
Global Business Services 28.2% 1.5 pts. 0.4 pts.
strength of the company’s global model and the results of the
Software 86.0% 0.6 pts. 0.6 pts.
strategic transformation of the business.
Systems & Technology 37.8% (0.2) pts. 0.1 pts.
The company’s transformation, which started at the begin-
ning of the decade, is driven by a combination of shifting the Global Financing 47.5% (3.8) pts. (0.1) pts.

business mix, improving operating leverage through productivity
and investing to capture growth opportunities. Total expense and other income decreased 11.4 percent in 2009
The company has exited commoditizing businesses and versus 2008. The year-to-year drivers were approximately:
remixed its portfolio to higher value areas through organic invest-
ments and acquisitions. This shift to higher value areas drives a • Operational expense, (9) points
more profitable mix and enables the company to better meet • Currency, (4) points
clients’ needs. In addition, the focus on global integration has • Acquisitions, 1 point
improved productivity and efficiency. The company’s ongoing

19

Pre-tax income grew 8.5 percent and the pre-tax margin was • Increase in foreign currency translation adjustments ($1,732
18.9 percent, the highest level in more than a decade. Net income million);
increased 8.8 percent reflecting a slight improvement in the tax • Increase in retirement-related items ($1,727 million) and com-
rate. The effective tax rate for 2009 was 26.0 percent, compared mon stock ($2,682 million), partially offset by;
with 26.2 percent in 2008. • Increased treasury stock ($7,072 million); and
Diluted earnings per share improved 12.6 percent reflecting • Increased net unrealized losses on cash flow derivatives
the strong growth in net income and the benefits of the common ($556 million).
stock repurchase program. In 2009, the company repurchased
approximately 69 million shares of its common stock. Diluted The company generated $20,773 million in cash flow provided
earnings per share of $10.01 increased $1.12 from the prior year by operating activities, an increase of $1,961 million, compared
driven by the following factors: to 2008, primarily driven by a decrease in receivables ($1,857
million). Net cash used in investing activities of $6,729 million
• Revenue decrease at actual rates: $(0.68) was $2,556 million lower than 2008, primarily due to the prior
• Gross margin increase of 1.7 points: $0.85 year Cognos acquisition and the core logistics operations dives-
• Expense productivity: $0.58 titure in 2009, partially offset by the year-to-year impacts related
• Tax rate decrease of 0.2 points: $0.03 to marketable securities and other investments.
• Common stock repurchases: $0.34 Net cash used in financing activities of $14,700 million was
$2,866 million higher, primarily due to debt repayments ($5,019
At December 31, 2009, the company’s balance sheet and million), partially offset by lower common stock repurchases
liquidity positions remained strong. Cash on hand was $12,183 ($3,150 million) in 2009 versus 2008.
million. Total debt decreased $7,826 million year to year, and Total Global Services signings were $57,094 million, flat (up 2
the company generated $20,773 million in operating cash flow percent adjusted for currency) versus 2008. The estimated Global
in 2009. The company has consistently generated strong cash Services backlog was $137 billion at December 31, 2009, up
flow from operations and also continues to have access to $7 billion ($1 billion adjusted for currency) versus the prior year-
additional sources of liquidity through the capital markets and end balance.
its global credit facility. In January 2010, the company disclosed that it is expecting
Key drivers in the company’s balance sheet and total cash earnings of at least $11.00 per diluted share for the full year 2010.
flows are highlighted below. For additional information and details, see the “Year in Review”
Total assets decreased $502 million (decreased $3,885 mil- section on pages 25 through 39.
lion adjusted for currency) from December 31, 2008, driven by:

• Decreases in cash and cash equivalents ($558 million) and Description of Business
total receivables ($1,301 million); and
Please refer to IBM’s Annual Report on Form 10-K filed with the
• Lower deferred taxes ($2,888 million) and intangible assets
SEC on February 23, 2010 for a more detailed version of this Des-
($365 million), partially offset by;
cription of Business, especially Item 1A. entitled “Risk Factors.”
• Increased goodwill ($1,964 million) and prepaid pension
The company creates business value for clients and solves
assets ($1,401 million); and
business problems through integrated solutions that leverage
• Higher level of marketable securities ($1,625 million).
information technology and deep knowledge of business pro-
cesses. IBM solutions typically create value by reducing a client’s
The company had $13,973 million in cash and marketable secu-
operational costs or by enabling new capabilities that generate
rities at December 31, 2009.
revenue. These solutions draw from an industry leading portfolio
Total liabilities decreased $9,672 million (decreased $11,213
of consulting, delivery and implementation services, enterprise
million adjusted for currency) from December 31, 2008 driven by:
software, systems and financing.
• Lower total debt ($7,826 million);
• Decrease in retirement-related benefit obligations ($3,500 Strategy
million), partially offset by; Despite the volatility of the information technology (IT) industry
• Higher tax liabilities ($1,083 million); and over the past decade, IBM has consistently delivered superior
• Increased deferred income ($997 million). performance, with a steady track record of sustained earnings
per share growth. The company has shifted its business mix,
Total equity of $22,755 million increased $9,170 million from the
exiting commoditized segments while increasing its presence
prior year-end balance as a result of:
in higher-value areas such as services, software and integrated
solutions. As part of this shift, the company has acquired over
• Higher retained earnings ($10,546 million);
100 companies this past decade, complementing and scaling its
portfolio of products and offerings.

20

IBM’s clear strategy has enabled steady results in core busi- In order to support this growth, IBM is continuing to invest
ness areas, while expanding its offerings and addressable markets. significantly in these markets to expand capacity and develop
The key tenets of this strategy are: talent. At the same time, IBM is expanding and benefiting from
large teams of talent with global missions of delivery. The com-
• Deliver value to enterprise clients through integrated busi- pany continues to deepen its research and development (R&D)
ness and IT innovation teams to design for the unique challenges and rapid growth
• Build/expand strong positions in growth initiatives facing these markets.
• Shift the business mix to higher-value software and services
• Become the premier globally integrated enterprise Business Analytics and Optimization
Business optimization through the application of advanced ana-
These priorities reflect a broad shift in client spending away from
lytics is emerging as another major category of business value.
“point products” and toward integrated solutions, as companies
It succeeds earlier generations of back-office automation, basic
seek higher levels of business value from their IT investments.
enterprise resource planning and traditional business intelligence.
IBM has been able to deliver this enhanced client value thanks to
Advanced analytics allow clients to see patterns in data they
its industry expertise, understanding of clients’ businesses and
could not see before, understand their exposure to risk and pre-
the breadth and depth of the company’s capabilities.
dict the outcomes of business decisions with greater certainty.
IBM’s growth initiatives, like its strengthened capabilities, align
IBM’s approach is end-to-end, providing cross-enterprise as
with these client priorities. These initiatives include Smarter Planet
well as industry-based analytics solutions. IBM has established
and Industry Frameworks, Growth Markets, Business Analytics
the Business Analytics and Optimization practice, leveraging IBM
and Cloud Computing. Each initiative represents a significant
consulting capabilities and software products, along with sys-
growth opportunity with attractive profit margins for IBM.
tems and research assets. IBM’s breadth of expertise uniquely
positions the company for revenue and profit growth.
Smarter Planet and Industry Frameworks
Smarter Planet is an overarching strategy that highlights IBM’s
Cloud Computing
differentiated capabilities and generates broad-based demand
“Cloud” is an emerging consumption and delivery model for many
for the company’s products and services. Smarter Planet
IT-related services. Clients are attracted to its improved econom-
encapsulates IBM’s view of enterprise IT’s next major revolution:
ics, flexibility and user experience. Traditional enterprise IT will
the instrumentation and integration of the world’s processes
increasingly integrate with these new cloud deployments, deliv-
and infrastructures—from energy grids and pipelines to supply
ered as services via the Internet (also known as public clouds) or
chains and traffic systems. The massive amount of data these
behind a firewall (private clouds). In discussions with enterprise
systems are generating can now be captured and analyzed.
clients, most are initially focused on private cloud implementa-
This infusion of intelligence enables more efficiency, productivity
tions, the middle ground between the traditional enterprise IT and
and responsiveness.
public clouds.
Clients seeking these “smart” solutions value IBM’s deep
IBM is helping clients determine how to leverage cloud com-
industry and process expertise, powerful back-end systems and
puting to achieve business advantage. The company provides a
data analytics, complex systems integration capability and unique
full set of capabilities, from support in designing and implement-
research capacity.
ing cloud solutions, to services for running and managing them
IBM’s Industry Frameworks create a flexible software foun-
if desired. IBM is applying its deep experience in critical areas
dation for developing, acquiring and deploying smart industry
such as security, reliability and innovation to deliver differentiated
solutions. Each framework supports multiple solutions, enabling
value. The company is also investing in new cloud initiatives tai-
fast, efficient and tailored capabilities in support of clients’ busi-
lored to particular industries, in conjunction with its partners and
ness needs. These frameworks represent a proven technique for
clients, to deliver cloud business services directly to the market.
the company to engage with its clients, driving sustained growth
By providing deployment choice, optimizing solutions based
and high business value. They cover a wide variety of industries
on workload characteristics and delivering complete service
and domains, most of which are directly tied to Smarter Planet.
management capabilities, IBM is positioned as the leading cloud
service and infrastructure provider for enterprises.
Growth Markets
The company has benefited from its investments over the past
several years in growth markets. The focus now is on geographic
expansion of IBM’s presence; on specific industry verticals of the
highest impact and opportunity; on countries’ build-out of infra-
structure aligned with their national agendas; and on creating
markets and new business models to serve the different require-
ments that exist in these emerging countries.

21

Business Model GTS CAPABILITIES

The company’s business model is built to support two principal Strategic Outsourcing Services. Comprehensive IT outsourcing
goals: helping clients succeed in delivering business value by services dedicated to transforming clients’ existing infrastruc-
becoming more innovative, efficient and competitive through the tures to ensure better quality, cost control, adaptability, security
use of business insight and IT solutions; and providing long-term and compliance. IBM integrates long-standing experience in
value to shareholders. The business model has been developed service management, technology and industry applications with
over time through strategic investments in capabilities and tech- new technologies, such as cloud computing and virtualization,
nologies that have the best long-term growth and profitability to enable new capabilities for clients.
prospects based on the value they deliver to clients.
Business Transformation Outsourcing. A range of offerings from
The company’s global capabilities include services, software,
standardized processing platforms and Business Process Out-
systems, fundamental research and related financing. The broad
sourcing through transformational offerings that deliver improved
mix of businesses and capabilities are combined to provide busi-
business results to clients through the strategic change and/or
ness insight and solutions for the company’s clients.
operation of the client’s business processes, applications and
The business model is flexible, adapting to the continuously
infrastructure.
changing market and economic environment. The company con-
tinues to divest commoditizing businesses and strengthen its Integrated Technology Services. Project-based portfolio of ser-
position through strategic investments and acquisitions in higher vices that enable clients to optimize their IT environments by
value segments like business analytics, smarter planet and cloud driving efficiency, flexibility and productivity, while reducing costs.
computing. In addition, the company has transformed itself into The standardized portfolio is built around key assets and pat-
a globally integrated enterprise which has improved overall pro- ented software, and incorporates best practices and proven
ductivity and is driving investment and participation in the world’s methodologies that ensure predictive quality of delivery, security
fastest growing markets. As a result, the company is a higher and compliance.
performing enterprise today than it was several years ago.
The business model, supported by the company’s long-term Maintenance. A complete line of support services from product
financial model, has enabled the company to deliver consistently maintenance through solution support to maintain and improve
strong earnings, cash flows and returns to shareholders in chang- the availability of clients’ IT infrastructure.
ing economic environments.
The GTS outsourcing businesses are supported by integrated
worldwide delivery organizations:
Business Segments and Capabilities
The company’s major operations comprise: a Global Technology Integrated Technology Delivery (ITD) is responsible for worldwide
Services segment; a Global Business Services segment; a Soft- service delivery supporting the Strategic Outsourcing business.
ware segment; a Systems and Technology segment; and a Global It manages the world’s largest privately-owned IT infrastructure
Financing segment. with employees in over 40 countries, supporting over 450 data
centers. ITD operates a globally integrated delivery model which
Global Services is a critical component of the company’s strategy
supports regional client-facing teams by utilizing a global net-
of providing IT infrastructure and business insight and solutions
work of competencies and centers. Each competency provides
to clients. While solutions often include industry-leading IBM
industry-leading, standardized, integrated tools and processes.
software and systems, other suppliers’ products are also used if
By leveraging IBM’s global scale, skills and technology which is
a client solution requires it. Approximately 60 percent of external
combined with the innovation from IBM research, clients gain
Global Services segment revenue is annuity-based, coming
access to leading edge, high-quality services with improved pro-
primarily from outsourcing, maintenance and custom application
ductivity, flexibility and cost.
management services arrangements. The Global Services back-
log provides a solid revenue base entering each year. Within Business Process Delivery (BPD) provides highly efficient, world-
Global Services, there are two reportable segments: Global Tech- class delivery capabilities in IBM’s business process delivery
nology Services and Global Business Services. operations, which include Business Transformation Outsourcing,
Business Process Outsourcing and Business Process Services.
Global Technology Services (GTS) primarily provides IT infra-
BPD has employees and delivery centers in over 40 countries
structure services and business process services, delivering
worldwide.
business value through the company’s global scale, standard-
ization and automation. Global Business Services (GBS) primarily provides professional
services and application outsourcing services, delivering busi-
ness value and innovation to clients through solutions which
leverage industry- and business-process expertise.

22

GBS CAPABILITIES Lotus Software. Enables businesses to connect people and
Consulting and Systems Integration. Delivery of value to clients processes for more effective communication and increased pro-
through consulting services for client-relationship management, ductivity through collaboration, messaging and social networking
financial management, human-capital management, business software. By remaining at the forefront of collaboration tools,
strategy and change, and supply-chain management. In 2009, Lotus helps organizations reap the benefits of social networking
the company announced the creation of a new consulting service and other Web 2.0 modalities.
line dedicated to the market for advanced business analytics and
business optimization. Rational Software. Supports software development for both IT
and embedded system solutions with a suite of Application
Application Management Services. Application development, Lifecycle Management products. Jazz, Rational’s technology
management, maintenance and support services for packaged platform, transforms the way people work together to build
software, as well as custom and legacy applications. Value is software, making software delivery more collaborative, produc-
delivered through the company’s global resource capabilities, tive and transparent.
industry knowledge and the standardization and automation of
application development. Operating Systems. Software that manages the fundamental
processes that make computers run.
Software consists primarily of middleware and operating sys-
tems software. Middleware software enables clients to integrate Systems and Technology provides clients with business solu-
systems, processes and applications across a standard soft- tions requiring advanced computing power and storage capa-
ware platform. IBM middleware is designed on open standards, bilities. Approximately 55 percent of Systems and Technology’s
making it easier to integrate disparate business applications, server and storage sales transactions are through the company’s
developed by different methods and implemented at different business partners; approximately 45 percent are direct to end-
times. Operating systems are the software engines that run user clients. In addition, Systems and Technology provides leading
computers. Approximately two-thirds of external software seg- semiconductor technology, products and packaging solutions to
ment revenue is annuity-based, coming from recurring license clients and for IBM’s own advanced technology needs.
charges and ongoing subscription and support from one-time
charge (OTC) arrangements. The remaining one-third relates to SYSTEMS AND TECHNOLOGY CAPABILITIES
OTC arrangements in which clients pay one, up-front payment Systems. A range of general purpose and integrated systems
for a perpetual license. Typically, arrangements for the sale of OTC designed and optimized for specific business, public and sci-
software include one year of subscription and support. Clients entific computing needs. These systems—System z, converged
can also purchase ongoing subscription and support after the System p and System x—are typically the core technology in
first year, which includes product upgrades and technical support. data centers that provide required infrastructure for business and
institutions. Also, these systems form the foundation for IBM’s
SOFTWARE CAPABILITIES integrated offerings, such as IBM Smart Business Storage Cloud,
WebSphere Software. Delivers capabilities that enable clients to IBM Smart Analytics Cloud, IBM Smart Analytics System and
integrate and manage business processes across their organiza- IBM CloudBurst. IBM servers use both IBM and non-IBM micro-
tions with the flexibility and agility they need to respond to changing processor technology and operating systems. All IBM servers
conditions quickly. With a services-oriented architecture (SOA), run Linux, a key open-source operating system.
businesses can more easily link together their fragmented data and
business processes to extract value from their existing technology. Storage. IBM provides data storage products and solutions that
allow clients to retain and manage rapidly growing, complex
Information Management Software. Enables clients to integrate, volumes of digital information. These solutions address critical
manage and use their information to gain business value and client requirements for information retention and archiving, data
improve their outcomes. Solutions include advanced database deduplication, availability and virtualization, and security and com-
management, enterprise content management, information inte- pliance. The portfolio consists of a broad range of disk and tape
gration, data warehousing, business analytics and intelligence, storage systems and software, including the next-generation,
performance management and predictive analytics. ultra-scalable disk storage system XIV.

Tivoli Software. Helps clients manage their technology and busi- Retail Store Solutions. Point-of-sale retail systems (network con-
ness assets by providing visibility, control and automation across nected cash registers) as well as solutions which connect them
their organizations. With solutions for identity management, data to other store systems.
security, storage management and the ability to provide automa-
tion and provisioning of the datacenter, Tivoli helps build the
infrastructure needed to make the world’s systems—from trans-
portation to water, energy and telecommunications—run smarter.

23

Microelectronics. Semiconductor design and manufacturing integrated teams of consultants, product specialists and deliv-
primarily for use in IBM systems and storage products and for ery fulfillment teams to improve clients’ business performance.
sale to external clients. These teams deliver value by understanding the clients’ busi-
nesses and needs, and then bring together capabilities from
Global Financing facilitates clients’ acquisition of IBM systems, across IBM and an extensive network of Business Partners to
software and services. Global Financing invests in financing develop and implement solutions.
assets, leverages with debt and manages the associated risks By combining global expertise with local experience, IBM’s
with the objective of generating consistently strong returns on geographic structure enables dedicated management focus for
equity. The primary focus on the company’s offerings and clients local clients, speed in addressing new market opportunities and
mitigates many of the risks normally associated with a financing timely investments in emerging opportunities. The geographic
company. Global Financing has the benefit of both a deep knowl- units align industry-skilled resources to serve clients’ agendas.
edge of its client base and a clear insight into the products and IBM extends capabilities to mid-market client segments by lever-
services that are being financed. This combination allows Global aging industry skills with marketing, ibm.com and local Business
Financing to effectively manage two of the major risks (credit and Partner resources.
residual value) that are normally associated with financing. In 2008, the company implemented a new growth markets
organization to increase its focus on the emerging markets
GLOBAL FINANCING CAPABILITIES around the world that have market growth rates greater than
Client Financing. Lease and loan financing to end users and the global average—countries within Southeast Asia, Eastern
internal clients for terms generally between two and seven years. Europe, the Middle East and Latin America. The company’s
Internal financing is predominantly in support of Global Services’ major markets include the United States (U.S.), Canada, the
long-term client service contracts. Global Financing also fac- United Kingdom (U.K.), France, Germany, Italy, Japan, Denmark,
tors a selected portion of the company’s accounts receivable, Sweden, Switzerland, Austria, Belgium, Finland, Greece, Ireland,
primarily for cash management purposes. All internal financing the Netherlands, Portugal, Cyprus, Norway, Israel, Spain, the
arrangements are at arm’s-length rates and are based upon Bahamas and the Caribbean region.
market conditions. The majority of IBM’s revenue, excluding the company’s
original equipment manufacturer (OEM) technology business,
Commercial Financing. Short-term inventory and accounts receiv- occurs in industries that are broadly grouped into six sectors:
able financing to dealers and remarketers of IT products.
• Financial Services: Banking, Financial Markets, Insurance
Remarketing. The sale and lease of used equipment to new or • Public: Education, Government, Healthcare, Life Sciences
existing clients both externally and internally. This equipment is • Industrial: Aerospace and Defense, Automotive, Chemical
primarily sourced from the conclusion of lease transactions. Exter- and Petroleum, Electronics
nally remarketed equipment revenue represents sales or leases to • Distribution: Consumer Products, Retail, Travel and Trans-
clients and resellers. Internally remarketed equipment revenue pri- portation
marily represents used equipment that is sold or leased internally • Communications: Telecommunications, Media and Entertain-
to the Systems and Technology and Global Services segments. ment, Energy and Utilities
The Systems and Technology segment may also sell the equip- • General Business: Mainly companies with fewer than 1,000
ment that it purchases from Global Financing to external clients. employees

IBM Worldwide Organizations Research, Development and Intellectual Property
The following worldwide organizations play key roles in IBM’s IBM’s R&D operations differentiate the company from its com-
delivery of value to its clients: petitors. IBM annually invests approximately $6 billion for R&D,
focusing on high-growth, high-value opportunities. As a result
• Sales and Distribution of innovations in these and other areas, IBM was once again
• Research, Development and Intellectual Property awarded more U.S. patents in 2009 than any other company,
• Integrated Supply Chain the 17th consecutive year IBM has been the patent leader.
IBM’s 4,914 patents in 2009 were the most U.S. patents ever
Sales and Distribution awarded to one company in a single year. Consistent with the
IBM has a significant global presence, operating in more than shift in the company’s business mix, approximately 70 percent
170 countries, with an increasingly broad-based geographic of these patents were for software and services. The company
distribution of revenue. The company’s Sales and Distribution will continue to actively seek intellectual property protection for
organization manages a strong global footprint, with dedicated its innovations, while increasing emphasis on other initiatives
country-based operating units focused on delivering client value. designed to leverage its intellectual property leadership and
Within these units, client relationship professionals work with promote innovation.

24

In addition to producing world-class systems, software and Integrated Supply Chain
technology products, IBM innovations are also a major differen- Consistent with the company’s work with clients to transform
tiator in providing solutions for the company’s clients through its their supply chains for greater efficiency and responsiveness to
services businesses. The company’s investments in R&D also global market conditions, the company continues to derive busi-
result in intellectual property (IP) income of approximately $1 ness value from its own globally integrated supply chain, thereby
billion annually. Some of IBM’s technological breakthroughs are providing a strategic advantage for the company to create value
used exclusively in IBM products, while others are licensed and for clients. IBM leverages its supply-chain expertise for clients
may be used in either/both IBM products and/or the products through its supply-chain business transformation outsourcing
of the licensee. While the company’s various proprietary intel- service to optimize and help operate clients’ end-to-end supply-
lectual property rights are important to its success, IBM believes chain processes, from procurement to logistics.
its business as a whole is not materially dependent on any IBM spends approximately $35 billion annually through its
particular patent or license, or any particular group of patents or supply chain, procuring materials and services globally. The
licenses. IBM owns or is licensed under a number of patents, supply, manufacturing and logistics and customer fulfillment
which vary in duration, relating to its products. Licenses under operations are integrated in one operating unit that has opti-
patents owned by IBM have been and are being granted to oth- mized inventories over time, improved response to marketplace
ers under reasonable terms and conditions. opportunities and external risks and converted fixed costs to
variable costs. Simplifying and streamlining internal processes
has improved operations, sales force productivity and processes.

Year in Review
Segment Details
The following is an analysis of the 2009 versus 2008 reportable segment results. The analysis of 2008 versus 2007 reportable segment
results is on pages 40 to 45.
The following table presents each reportable segment’s external revenue and gross margin results.

($ in millions)
Yr.-to-Yr. Yr.-to-Yr.
Percent/ Change
Margin Adjusted
For the year ended December 31: 2009 2008 Change for Currency

Revenue:
Global Technology Services $37,347 $ 39,264 (4.9)% (2.0)%
Gross margin 35.0% 32.6% 2.4 pts.
Global Business Services 17,653 19,628 (10.1)% (8.1)%
Software 21,396 22,089 (3.1)% (0.8)%
Systems and Technology 16,190 19,287 (16.1)% (14.9)%
Gross margin 37.8% 38.1% (0.2) pts.
Global Financing 2,302 2,559 (10.0)% (7.3)%
Other 869 803 8.3% 11.7%
Total revenue $95,758 $103,630 (7.6)% (5.3)%

Gross profit $43,785 $ 45,661 (4.1)%

25

The following table presents each reportable segment’s external revenue as a percentage of total segment external revenue and each
reportable segment’s pre-tax income as a percentage of total segment pre-tax income.

Revenue Pre-tax Income*
For the year ended December 31: 2009 2008 2009 2008

Global Technology Services 39.4% 38.2% 28.6% 26.3%
Global Business Services 18.6 19.1 13.2 15.3
Total Global Services 58.0 57.3 41.9 41.6
Software 22.5 21.5 41.9 40.4
Systems and Technology 17.1 18.8 7.3 8.8
Global Financing 2.4 2.5 8.9 9.2
Total 100.0% 100.0% 100.0% 100.0%

* Segment pre-tax income includes transactions between segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate
items; see note V, “Segment Information” for additional information.

In 2009, Global Services and Software increased as a per- based across all the major geographies and in each business area:
centage of total segment revenue and total segment pre-tax Strategic Outsourcing, Business Transformation Outsourcing and
income, with Global Services and Software each contributing Application Outsourcing. Consulting and Systems Integration and
42 percent of segment pre-tax income. These changes reflect Integrated Technology Services signings were $24,081 million,
the company’s continuing transformation and the remix of its a decrease of 10.2 percent (8 percent adjusted for currency).
business—both aimed at market segments that present the The estimated Global Services backlog at actual currency rates
best long-term opportunities. was $137 billion at December 31, 2009, an increase of $7 billion
($1 billion adjusted for currency) from December 31, 2008 and
Global Services an increase of $2 billion ($3 billion adjusted for currency) from
The Global Services segments, GTS and GBS, had combined September 30, 2009.
revenue of $55,000 million, a decrease of 6.6 percent (4 per- The Global Services segments delivered a combined pre-tax
cent adjusted for currency) in 2009 when compared to 2008. profit of $8,092 million in 2009, a growth of 11.0 percent versus
Services revenue performance was supported by its annuity 2008, and expanded pre-tax margin 2.3 points to 14.1 percent.
revenue base, but also reflected the challenges in the more The improved margin was a result of the structural changes made
economically sensitive consulting business. to services delivery over the past several years. The services
Total Global Services signings of $57,094 million decreased 0.2 global delivery capabilities have proven to be dynamic and flexible
percent (increased 2 percent adjusted for currency). Outsourcing enough to deal with very tough market conditions. Overall, the
signings of $33,014 million increased 8.8 percent (11 percent Global Services business delivered strong margin and signings
adjusted for currency). Outsourcing signings growth was broad performance in a difficult economic climate.

( $ in millions)
Yr.-to-Yr.
Yr.-to-Yr. Change Adjusted

Global Services external revenue: $55,000 $58,891 (6.6)% (4.0)%
Global Technology Services $37,347 $39,264 (4.9)% (2.0)%
Strategic Outsourcing 19,340 20,183 (4.2) (1.5)
Integrated Technology Services 8,771 9,283 (5.5) (2.9)
Business Transformation Outsourcing 2,280 2,550 (10.6) (6.1)
Maintenance 6,956 7,250 (4.1) (1.1)
Global Business Services $17,653 $19,628 (10.1)% (8.1)%

26

Global Technology Services revenue of $37,347 million ($ in millions)

decreased 4.9 percent (2 percent adjusted for currency) in 2009 Yr.-to-Yr.
For the year ended December 31: 2009 2008 Change
versus 2008. Total GTS signings of $34,703 million in 2009 were
Global Services:
flat (increased 3 percent adjusted for currency) versus 2008.
Global Technology Services:
Outsourcing signings of $25,507 million increased 4.3 percent
External gross profit $13,081 $12,802 2.2%
(8 percent adjusted for currency) with growth of 7 percent in the
External gross profit margin 35.0% 32.6% 2.4 pts.
major markets and 14 percent in the growth markets, adjusted
for currency. Integrated Technology Services signings of $9,196 Pre-tax income $ 5,537 $ 4,607 20.2%

million decreased 10.3 percent (8 percent adjusted for currency). Pre-tax margin 14.3% 11.3% 3.0 pts.
Strategic Outsourcing (SO) revenue decreased 4.2 percent (1 Global Business Services:
percent adjusted for currency). SO revenue performance, adjusted External gross profit $ 4,979 $ 5,238 (4.9)%
for currency, was consistent throughout the year, although impac- External gross profit margin 28.2% 26.7% 1.5 pts.
ted by reduced volumes in the existing client base. SO signings Pre-tax income $ 2,555 $ 2,681 (4.7)%
increased 1.8 percent (6 percent adjusted for currency) when Pre-tax margin 13.8% 13.0% 0.8 pts.
compared to 2008. Revenue trends in outsourcing should
improve in 2010 as a result of the 2009 signings performance.
GTS gross profit margin improved 2.4 points to 35.0 percent in
Integrated Technology Services (ITS) revenue decreased
2009 and expanded in all lines of business when compared to
5.5 percent (3 percent adjusted for currency) in 2009 versus
2008. Strategic Outsourcing gross margin improved for the fifth
2008. Revenue performance largely reflects recent signings
consecutive year, while also improving overall service delivery
performance which continued to be impacted by declines in
quality. This has been accomplished through a disciplined and
OEM offerings, as the ITS portfolio shifts to higher value, higher
innovative approach to delivery focused on both labor and non-
margin offerings.
labor productivity actions. GTS has been executing a strategy to
Business Transformation Outsourcing (BTO) revenue decreased
deliver services out of key global delivery centers using consis-
10.6 percent (6 percent adjusted for currency) year to year and
tent global delivery methods and processes. The delivery centers
reflects declines in client business volumes in a slower economic
are also improving labor utilization with analytics and by applying
environment and an increased focus on deal selectivity. BTO
supply chain tools and techniques to the labor base. Integrated
signings increased 21.9 percent (26 percent adjusted for cur-
Technology Services gross margin improved as the result of mix-
rency) in 2009 compared to 2008.
ing the portfolio to more profitable labor-based services. Business
Global Business Services revenue decreased 10.1 percent
Transformation Outsourcing gross margin expanded as a result of
(8 percent adjusted for currency) in 2009 driven primarily by a
improved deal selectivity and delivery performance. Segment pre-
double-digit decline in Consulting and Systems Integration rev-
tax profit increased 20.2 percent to $5,537 million with a pre-tax
enue. Total signings in GBS decreased 0.4 percent (increased 1
margin of 14.3 percent, an increase of 3.0 points versus 2008.
percent adjusted for currency). Application Outsourcing signings
GBS gross profit margin improved 1.5 points to 28.2 percent
increased 27.1 percent (25 percent adjusted for currency), illus-
in 2009 with an improving margin trend throughout the year.
trating the strong value proposition Application Outsourcing can
Segment pre-tax profit was down 4.7 percent to $2,555 million,
provide to clients with compelling cost savings. Consulting and
however, margin improved 0.8 points year over year. Throughout
Systems Integration signings decreased 10.2 percent (8 percent
the year, the dynamic GBS delivery model enabled solid profit
adjusted for currency).
performance in a tough economic climate. The pre-tax margin
expansion also included improving trends throughout the year
and was driven primarily by improved delivery center utiliza-
tion, reduced subcontractor spending and improved cost and
expense management.

GLOBAL SERVICES SIGNINGS
The table on page 28 presents Global Services signings as
reported. Signings at actual currency rates provide investors
with a better view of how these signings will convert to services
revenue and also provides better comparability to other compa-
nies in the industry who report signings using actual rates.

27

($ in millions)
Yr.-to-Yr.

Global Technology Services Signings:
Outsourcing $25,507 $24,446 4.3% 8.1%
ITS 9,196 10,247 (10.3) (8.2)
Total $34,703 $34,693 0.0% 3.3%
Global Business Services Signings:
Application Outsourcing $ 7,506 $ 5,905 27.1% 25.1%
Consulting & Systems Integration 14,885 16,584 (10.2) (7.9)
Total $22,391 $22,488 (0.4)% 0.8%

Global Services signings are management’s initial estimate of the Backlog includes SO, BTO, ITS, GBS and Maintenance.
revenue value of a client’s commitment under a Global Services Backlog is intended to be a statement of overall work under
contract. Signings are used by management to assess period contract and therefore does include Maintenance. Backlog esti-
performance of Global Services management. There are no third- mates are subject to change and are affected by several factors,
party standards or requirements governing the calculation of including terminations, changes in the scope of contracts, peri-
signings. The calculation used by management involves estimates odic revalidations and adjustments for revenue not materialized.
and judgments to gauge the extent of a client’s commitment, Contract portfolios purchased in an acquisition are treated as
including the type and duration of the agreement, and the pres- positive backlog adjustments provided those contracts meet the
ence of termination charges or wind-down costs. company’s requirements for initial signings. A new signing will be
Signings include SO, BTO, ITS and GBS contracts. Contract recognized if a new services agreement is signed incidental or
extensions and increases in scope are treated as signings only coincidental to an acquisition or divestiture.
to the extent of the incremental new revenue value. Maintenance
is not included in signings as maintenance contracts tend to be
more steady state, where revenues equal renewals.

Software
($ in millions)
Yr.-to-Yr.
For the year ended December 31: 2009 2008* Change for Currency

Software external revenue: $21,396 $22,089 (3.1)% (0.8)%
Middleware $17,125 $17,305 (1.0)% 1.4%
Key Branded Middleware 12,524 12,392 1.1 3.4
WebSphere Family 10.5 12.7
Information Management (0.5) 1.9
Lotus (10.0) (7.9)
Tivoli 2.9 5.1
Rational 0.2 2.7
Other middleware 4,602 4,912 (6.3) (3.5)
Operating systems 2,163 2,337 (7.4) (4.9)
Product Lifecycle Management 739 960 (23.0) (21.7)
Other 1,369 1,488 (8.0) (5.8)

* Reclassified to conform with 2009 presentation.

28

Software revenue of $21,396 million decreased 3.1 percent Rational revenue increased 0.2 percent in 2009 as reported
(1 percent adjusted for currency) in 2009 compared to 2008. and increased 3 percent adjusted for currency versus 2008.
Adjusted for currency, growth in the Key Branded Middleware Rational’s integrated software tools improve the speed, qual-
products was offset by decreased revenue in other compo- ity and efficiency for customers with software development
nents of the software portfolio. Overall, the software business projects. Telelogic contributed strong revenue growth in 2009
has continued to perform well in an uncertain environment. The and extended the brand’s reach into the systems development
company’s recent acquisitions increased revenue and the com- market opportunity.
pany is continuing to invest in capabilities that accelerate the Revenue from Other middleware products decreased 6.3
development of new market opportunities like business analytics percent (3 percent adjusted for currency) in 2009 versus the
and smarter planet. prior year. This software product set includes more mature prod-
Key Branded Middleware revenue increased 1.1 percent (3 ucts which provide a more stable flow of revenue.
percent adjusted for currency) and represented 59 percent of Operating systems product revenue decreased 7.4 percent
total Software revenue, an increase of 2 points from 2008. The (5 percent adjusted for currency) in 2009 compared to 2008,
company continued to solidify its lead in the middleware market, reflecting declining sales in all system brands.
gaining share for nine consecutive quarters. Organic invest- Product Lifecycle Management revenue decreased 23.0
ments and acquisitions in middleware capabilities continue to percent (22 percent adjusted for currency). The company and
result in it becoming a larger portion of the software portfolio and Dassault Systemes (DS) signed an agreement in October 2009
improving the overall software revenue growth rate. Growth in under which DS intends to acquire the company’s sales and
2009, adjusted for currency, was led by WebSphere and Tivoli. client support operations encompassing DS’s Product Lifecycle
WebSphere Family revenue increased 10.5 percent (13 Management software application portfolio, as well as customer
percent adjusted for currency) in 2009 with strong performance contracts and related assets. The company expects to record a
throughout the year. Application Servers, which provide custom- gain when this transaction is completed, which is anticipated in
ers with a secure and resilient infrastructure for mission-critical the first quarter of 2010.
business applications, grew 5 percent adjusted for currency.
Business Integration software had double-digit revenue growth ($ in millions)
in 2009, including strong contribution from ILOG, a company Yr.-to-Yr.
acquired in the fourth quarter of 2008.
Information Management revenue decreased 0.5 percent Software:
External gross profit $18,405 $18,859 (2.4)%
(increased 2 percent adjusted for currency) in 2009 versus the
prior year, with revenue growth, adjusted for currency, in both External gross profit margin 86.0% 85.4% 0.6 pts.

Information Management solutions and infrastructure offerings. Pre-tax income $ 8,095 $ 7,075 14.4%
Cognos and InfoSphere software, two key components of the Pre-tax margin 33.6% 28.5% 5.2 pts.
business analytics area, both had double-digit revenue growth
adjusted for currency. The acquisition of SPSS, which was com- Software gross profit of $18,405 million in 2009 decreased 2.4
pleted in early October, 2009, further expands the company’s percent versus 2008, driven primarily by declining revenue.
business analytics capabilities. Gross profit margin expanded 0.6 points to 86.0 percent in
Lotus revenue decreased 10.0 percent (8 percent adjusted 2009. The Software segment delivered $8,095 million of pre-tax
for currency) in 2009. Demand for Lotus software was impacted profit in 2009, an increase of 14.4 percent versus 2008. The
by customer consolidations and downsizing throughout 2009. segment pre-tax profit margin expanded 5.2 points to 33.6 per-
Tivoli revenue increased 2.9 percent (5 percent adjusted for cent. The breadth of the software portfolio, the strong recurring
currency) in 2009 when compared to 2008, driven by growth revenue stream and the actions taken to improve efficiency and
in storage software. Tivoli storage revenue grew consistently productivity combined to deliver strong profit results.
throughout the year as customers managed their rapidly grow-
ing storage data.

29

Systems and Technology
($ in millions)
Yr.-to-Yr.

Systems and Technology external revenue: $16,190 $19,287 (16.1)% (14.9)%
System z (28.7)% (27.5)%
Converged System p (10.7) (9.2)
System x (4.6) (3.3)
System Storage (12.0) (11.0)
Retail Store Solutions (25.6) (23.6)
Total Systems (15.9) (14.6)
Microelectronics OEM (15.1) (15.2)

Systems and Technology revenue decreased 16.1 percent (15 System x revenue decreased 4.6 percent (3 percent adjusted
percent adjusted for currency) in 2009 versus 2008 reflecting for currency) in 2009 versus 2008. Revenue performance in the
the challenges that transactional-based businesses are facing in second half of the year was strong with third quarter revenue
the current environment. While revenue performance declined in increasing 0.6 percent (2 percent adjusted for currency) and
2009, the rate of decline improved sequentially in the third and fourth quarter revenue increasing 36.8 percent (30 percent
fourth quarters. The company gained share in System p, System adjusted for currency) compared to the prior year periods.
x, blades, and in System Storage external disk and tape storage System x server revenue declined 4 percent, primarily driven by
during 2009. decreased low-end server revenue (10 percent) in 2009 versus
System z revenue decreased 28.7 percent (28 percent 2008. Blades revenue increased 11 percent in 2009 versus
adjusted for currency) in 2009 versus 2008. MIPS (millions of 2008. System x server has gained share in four consecutive
instructions per second) shipments decreased 13 percent in quarters. The company’s improved sales model and enhanced
2009 versus the prior year. MIPS increased 4 percent in 2009 product offerings were the key contributors to this performance.
on a two year compounded growth rate and this performance is System Storage revenue decreased 12.0 percent (11 percent
consistent with what the company would expect at this point in adjusted for currency) in 2009 versus 2008. Total disk revenue
the product cycle. In the third quarter, the company introduced decreased 9 percent versus 2008. These decreases were driven
System z offerings called System z Solution Editions, which by declines in midrange disk revenue of 18 percent and decreased
expanded the platform’s value proposition to both new and Enterprise Disk revenue of 6 percent. In the fourth quarter, the
existing clients. In 2010 the company will be releasing the next company introduced the DS8700 product, the latest addition to
generation System z mainframe product. the DS8000 line of high-end disk systems. The company’s stor-
Converged System p revenue decreased 10.7 percent (9 age acquisitions, XIV and Diligent, had strong performance. XIV
percent adjusted for currency) in 2009 versus 2008. Low-end has added over 400 new customers since the acquisition. Tape
server revenue declined 43 percent, midrange server revenue revenue declined 20 percent in 2009 versus 2008.
decreased 2 percent and high-end server revenue decreased Retail Stores Solutions revenue decreased 25.6 percent (24
10 percent versus 2008. Although revenue declined, the com- percent adjusted for currency) in 2009 versus 2008, reflecting
pany continued to gain market share in the midrange and high continued weakness in the retail sector.
end of the product line by helping clients increase efficiency in Microelectronics OEM revenue decreased 15.1 percent (15
their data centers by leveraging consolidation and virtualization percent adjusted for currency), in 2009 versus 2008. Although
results. This has led to seven consecutive quarters of share 2009 revenue declined, second half revenue improved signifi-
gains. In addition, in 2009, the company increased sales gener- cantly over first half performance with performance essentially
ated by UNIX competitive displacements to over $600 million. In flat compared to the prior year. The company’s 45 nanometer
February 2010, the company introduced several new models of technology is in production and on track to drive the launch of
the next generation POWER systems, which will deliver 2 to 3 the POWER7 systems in 2010.
times the performance, within the same energy envelope.

30

($ in millions) Systems and Technology’s pre-tax income decreased 8.5
Yr.-to-Yr. percent in 2009 when compared to 2008 driven by lower reve-
nue. Pre-tax margin increased 0.6 points in 2009 versus the prior
Systems and Technology:
year, reflecting the focus on cost and expense management and
improving productivity.
External gross profit margin 37.8% 38.1% (0.2) pts.
Pre-tax income $1,419 $1,550 (8.5)%
Global Financing
Pre-tax margin 8.3% 7.7% 0.6 pts.
See page 57 for an analysis of Global Financing’s segment results.

The decrease in external gross profit for 2009 versus 2008 was Geographic Revenue
primarily driven by lower revenue. In addition to the revenue presentation by reportable segment, the
Overall, gross margin decreased 0.2 points versus the prior company also measures revenue performance on a geographic
year. Margin improvements in System x, converged System p basis. The following geographic, regional and country-specific
and System z were offset by impacts due to product mix and a revenue performance excludes OEM revenue, which is discussed
margin decline in Microelectronics. separately below.

($ in millions)
Yr.-to-Yr.

Total revenue: $95,758 $103,630 (7.6)% (5.3)%
Geographies: $93,477 $100,939 (7.4)% (5.1)%
Americas 40,184 42,807 (6.1) (5.1)
Europe/Middle East/Africa 32,583 37,020 (12.0) (5.7)
Asia Pacific 20,710 21,111 (1.9) (3.7)

Major markets (8.2)% (6.4)%
Growth markets (3.5)% 1.2%
BRIC countries 0.7% 4.3%

Geographic revenue decreased 7.4 percent (5 percent adjusted Americas revenue decreased 6.1 percent (5 percent adjusted
for currency) to $93,477 million in 2009 when compared to for currency) in 2009. Within the major market countries, the
2008, with relatively consistent performance, adjusted for cur- U.S. declined 6.5 percent and Canada decreased 7.1 percent
rency, across the geographies. Revenue from the growth markets (1 percent adjusted for currency). Revenue in the Latin America
decreased 3.5 percent (increased 1 percent adjusted for currency) growth markets decreased 3.4 percent (increased 1 percent
and revenue from the major markets decreased 8.2 percent adjusted for currency) led by growth in Brazil (increased 3 per-
(6 percent adjusted for currency). While the economic environment cent adjusted for currency).
slowed globally in 2009, revenue growth, adjusted for currency, in Europe/Middle East/Africa (EMEA) revenue decreased 12.0
the growth markets remained approximately 8 points higher than percent (6 percent adjusted for currency) in 2009 when compared
the major markets. The company has been investing to capture to 2008. Revenue decreased in the major market countries with
the opportunity in the emerging markets as these countries build year-to-year declines in the U.K. of 13.6 percent (increased 1
out their public and private infrastructures. The growth markets percent adjusted for currency), Germany 10.3 percent (6 percent
contributed 19 percent of the geographic revenue in 2009, 1 point adjusted for currency), France 11.6 percent (7 percent adjusted
higher versus 2008. Within the BRIC countries, revenue increased for currency), Italy 11.3 percent (7 percent adjusted for currency)
0.7 percent (4 percent adjusted for currency) led by growth in and Spain 12.6 percent (8 percent adjusted for currency).
China, India and Brazil, adjusted for currency.

31

Asia Pacific revenue decreased 1.9 percent (4 percent adjus- SELLING, GENERAL AND ADMINISTRATIVE
ted for currency) year over year. Revenue in the Asia Pacific ($ in millions)
growth markets decreased 2.4 percent (increased 3 percent Yr.-to-Yr.
adjusted for currency), led by growth in China and India. China For the year ended December 31: 2009 2008* Change

revenue increased 10 percent, adjusted for currency, as the Selling, general and
company leveraged its broad portfolio to provide comprehensive administrative — base $18,056 $19,967 (9.6)%

solutions to clients. India revenue increased 6 percent, adjusted Advertising and promotional expense 1,252 1,259 (0.6)
for currency. Japan revenue decreased 1.4 percent (10 percent Workforce reductions 474 737 (35.7)
adjusted for currency). Amortization expense —
The company continues to see growing opportunity glob- acquired intangibles 285 306 (6.9)
ally—much of which is outside the traditional IT opportunity—to Retirement-related expense 322 326 (1.2)
help its clients drive efficiency in their physical infrastructures. Stock-based compensation 417 484 (13.9)
OEM revenue of $2,281 million in 2009 declined 15.2 Bad debt expense 147 306 (52.0)
percent (15 percent adjusted for currency) compared to 2008 Total $20,952 $23,386 (10.4)%
driven by reduced demand year over year in the technology
OEM business. Year-to-year revenue performance improved in
this business across the second half of 2009.
Total Selling, general and administrative (SG&A) expense decreased
10.4 percent (8 percent adjusted for currency) in 2009 versus
Total Expense and Other Income
2008. Overall, the decrease was driven by reductions in opera-
($ in millions) tional expense (down 9 points) as the company continues to
Yr.-to-Yr. focus on disciplined expense management, while investing
for future growth. Currency impacts also drove a year-to-year
Total expense and other income $25,647 $28,945 (11.4)%
decline (down 3 points), partially offset by acquisition-related
Expense to Revenue 26.8% 27.9% (1.1) pts.
spending (up 1 point). Workforce reductions expense decreased
$264 million, primarily due to actions taken in the fourth quarter
The key drivers year to year in total expense and other income of 2008, reflecting workforce actions in Japan ($120 million) and
were approximately: other ongoing skills rebalancing that is a regular element of the
company’s business model. Bad debt expense decreased $159
• Operational expense, (9) points million primarily driven by reductions in specific reserve require-
• Currency, (4) points ments and lower accounts receivable balances in 2009 versus
• Acquisitions, 1 point 2008. The company’s accounts receivable provision coverage is
2.0 percent, flat from a year ago.
In 2009, the company continued to execute its operational plan
to increase process efficiency and productivity; leveraging the
OTHER (INCOME) AND EXPENSE
company’s scale and global presence. The company’s efforts
have been focused on all areas of the business—from sales ($ in millions)
Yr.-to-Yr.
efficiency, supply chain management and service delivery to For the year ended December 31: 2009 2008* Change
the global support functions. The company’s cost and expense
Foreign currency transaction
base (approximately $80 billion) provides ample opportunity for (gains)/losses $ (1) $ 328 NM
savings and the company yielded approximately $3.7 billion in Gains on derivative instruments (12) (26) (53.4)%
cost and expense savings in 2009. The company’s initiatives
Interest income (94) (343) (72.6)
have contributed to an improved operational balance point and
Net losses/(gains) from securities
the improvements in margins and profit. As a result, the com- and investment assets 112 (52) NM
pany is able to continue to invest in capabilities that will differen-
Net realized gains from certain
tiate the company in the future and accelerate the development real estate activities (5) (26) (82.6)
of new market opportunities. Other (352) (179) 96.8
For additional information regarding total expense and other
Total $(351) $(298) 17.7%
income, see the following analyses by category.
NM—Not meaningful

32

Other (income) and expense was income of $351 million in INTEREST EXPENSE
2009, an increase in income of $53 million year to year. The ($ in millions)
increase was driven by several key factors: the $298 million gain, Yr.-to-Yr.
reflected in Other, from the core logistics operations divestiture;
increased foreign currency transaction gains of $329 million; Interest expense
offset by less interest income of $249 million due to lower rates; Total $402 $673 (40.3)%
less gains from securities transactions of $162 million due to
Lenovo equity sales in 2008; and a 2009 loss provision related to The decrease in interest expense was primarily due to lower debt
a joint venture investment of $119 million, also reflected in Other. balances in 2009 versus 2008. Total debt at December 31, 2009
was $26.1 billion; a decline of $7.8 billion of primarily non-Global
RESEARCH, DEVELOPMENT AND ENGINEERING Financing debt. Interest expense is presented in cost of financ-
($ in millions) ing in the Consolidated Statement of Earnings if the related
Yr.-to-Yr. external borrowings are to support the Global Financing external
business. Overall interest expense for 2009 was $1,109 million,
Research, development a decrease of $353 million versus 2008.
and engineering
Total $5,820 $6,337 (8.2)%
Stock-Based Compensation
Total pre-tax stock-based compensation cost of $558 million
The company continues to invest in research and development, decreased $101 million compared to 2008. The decrease was
focusing its investments on high-value, high-growth opportunities. principally the result of a reduction in the level of stock option
Total Research, development and engineering (RD&E) expense grants ($159 million), offset by an increase related to restricted
decreased 8.2 percent in 2009 versus 2008; adjusted for cur- and performance-based share units ($58 million). The year-to-
rency, expense decreased 6 percent in 2009. The decrease in year change was reflected in the following categories: reductions
spending, adjusted for currency, was driven by continued process in cost ($22 million), RD&E expense ($12 million), and SG&A
efficiencies and reductions in discretionary spending, partially off- expense ($67 million).
set by the impact of acquisitions. RD&E investments represented See note T, “Stock-Based Compensation,” on pages 105 to
6.1 percent of total revenue in 2009, flat compared to 2008. 109 for additional information on stock-based incentive awards.

INTELLECTUAL PROPERTY AND CUSTOM DEVELOPMENT INCOME Retirement-Related Benefits
($ in millions) The following table presents the total pre-tax cost for all retirement-
Yr.-to-Yr. related plans. These amounts are included in the Consolidated
Statement of Earnings within the category (e.g., cost, SG&A,
Sales and other transfers
RD&E) relating to the job function of the plan participants.
of intellectual property $ 228 $ 138 65.5%
Licensing/royalty-based fees 370 514 (28.0)
($ in millions)
Custom development income 579 501 15.5
Yr.-to-Yr.
Total $1,177 $1,153 2.1% For the year ended December 31: 2009 2008* Change

Defined benefit and contribution
pension plans cost $1,065 $1,076 (1.1)%
The timing and amount of sales and other transfers of IP may
Nonpension postretirement plans costs 350 363 (3.6)
vary significantly from period to period depending upon timing
of divestitures, industry consolidation, economic conditions and Total $1,415 $1,439 (1.7)%

the timing of new patents and know-how development. There * Reclassified to conform with 2009 presentation.
were no significant individual IP transactions in 2009 or 2008.

33

Overall retirement-related benefit costs decreased $24 million Earnings Per Share
versus 2008. Total plan costs decreased $142 millon year-to- Basic earnings per share is computed on the basis of the weighted-
year, driven by lower defined contribution plans cost of $160 average number of shares of common stock outstanding during
million compared to 2008. This decrease was offset by higher the period. Diluted earnings per share is computed on the basis
costs for mandatory pension insolvency insurance coverage. of the weighted-average number of shares of common stock
During the year ended December 31, 2009, the company paid outstanding plus the effect of dilutive potential common shares
$140 million for mandatory pension insolvency insurance cover- outstanding during the period using the treasury stock method.
age in certain non-U.S. countries, an increase year to year of Dilutive potential common shares include outstanding stock
$117 million driven primarily by premiums paid in Germany. While options, share awards and convertible notes.
not related to the IBM Plans, all companies with plans in Germany
and several other countries are subject to these charges.
Retirement-related plan costs decreased approximately $16 Yr.-to-Yr.
million in cost, $4 million in SG&A expense and $3 million in
RD&E expense. Earnings per share of common stock:

See note U, “Retirement-Related Benefits,” on pages 109 Assuming dilution $10.01 $ 8.89* 12.6%
through 121 for additional information on these plans and the Basic $10.12 $ 9.02* 12.2%
factors driving the year-to-year change in total cost. Weighted-average shares
outstanding (in millions):

Acquired Intangible Asset Amortization Assuming dilution 1,341.4 1,387.8* (3.3)%
The company has been investing in targeted acquisitions to Basic 1,327.2 1,369.4* (3.1)%
increase its capabilities in higher value businesses. The following * Reflects the adoption of the FASB guidance in determining whether instruments
table presents the total acquired intangible asset amortization granted in share-based payment transactions are participating securities. See
note B, “Accounting Changes,” on pages 79 to 82 for additional information.
included in the Consolidated Statement of Earnings. See note
J, “Intangible Assets Including Goodwill,” on pages 89 and 90
Actual shares outstanding at December 31, 2009 and December
for additional information.
31, 2008 were 1,305.3 million and 1,339.1 million, respectively.
The average number of common shares outstanding assuming
($ in millions)
dilution was 46.4 million shares lower in 2009 versus 2008. The
Yr.-to-Yr.
For the year ended December 31: 2009 2008 Change decrease was primarily the result of the common stock repur-
Cost: chase program. See note N, “Equity Activity,” on pages 98 and
Software (Sales) $160 $173 (7.5)% 99 for additional information regarding common stock activities.
Global Technology Services (Services) 33 32 2.2
Also see note R, “Earnings Per Share of Common Stock,” on
page 104.
Systems and Technology (Sales) 11 8 27.0
Selling, general and
administrative expense 285 306 (6.9) Financial Position
Total $489 $520 (6.0)% Dynamics
At December 31, 2009, the company’s balance sheet and liquidity
Income Taxes position remain strong. Cash on hand at year end was $12,183
The effective tax rate for 2009 was 26.0 percent, compared million. Total debt of $26,099 million decreased $7,826 million
with 26.2 percent in 2008. The 0.2 point decrease was primarily from prior year-end levels, primarily as a result of the repayment
driven by a more favorable geographic mix of pre-tax income, of debt issued in support of the 2007 accelerated share repur-
the absence of the 2008 tax cost impacts associated with the chase program. The commercial paper balance at December
intercompany transfer of certain intellectual property and the 31, 2009 was $235 million, down $233 million from December
agreements reached regarding the completion of the U.S. federal 31, 2008. In 2009, the company generated $20,773 million in
income tax examination for the years 2004 and 2005, includ- cash from operations, an increase of $1,961 million compared
ing the associated income tax reserve redeterminations. These to 2008. The company has consistently generated strong cash
benefits were offset by a decrease in 2009 in the utilization of flow from operations and continues to have access to additional
foreign tax credits. sources of liquidity through the capital markets and its $10 billion
global credit facility.

34

Consistent with accounting standards, the company remea- • A decrease of $1,541 million in short-term receivables, offset
sures the funded status of its retirement and postretirement by a currency benefit of $779 million, driven by short-term
plans at December 31. The funded status is measured as the financing receivables due to lower volumes;
difference between the fair value of the plan assets and the ben- • A decrease of $353 million in prepaid expenses and other
efit obligation and is recognized in the Consolidated Statement current assets primarily resulting from:
of Financial Position. At December 31, 2009, primarily as a result – a decrease of $500 million in derivative assets as a result of
of improved returns on plan assets, the overall net underfunded changes in foreign currency rates primarily driven by instru-
position decreased $4,667 million from December 31, 2008, to ments in cash flow hedging relationships; partially offset by;
a net underfunded position of $13,818 million. This change is – an increase of approximately $236 million in services pre-
primarily reflected in prepaid pension assets and retirement and paid and deferred transition costs; and
nonpension postretirement benefit obligations which increased – a currency benefit of $135 million.
$1,401 million and decreased $3,500 million, respectively, from
year-end 2008 levels. Due to the improvement in the equity Current liabilities decreased $6,433 million as a result of:
markets in 2009, the return on the U.S. Personal Pension Plan
• A decrease in short-term debt of $7,068 million primarily
assets was 11 percent, compared to a negative 15 percent in
driven by:
2008. The company’s asset return in the non-U.S. plans was
– $12,123 million in payments; partially offset by;
approximately 14 percent compared to a negative 21 percent in
– reclasses of $2,282 million from long-term to short-term
2008. At December 31, 2009, the company’s qualified defined
debt to reflect maturity dates; and
benefit plans worldwide were 99 percent funded with the U.S.
– $3,502 million in new debt issuances.
qualified Personal Pension Plan 101 percent funded.
• A decrease of $1,357 million in other accrued expenses and
In addition, total equity increased $9,170 million, net of tax,
liabilities primarily due to:
primarily as a result of an improvement in retained earnings of
– a decrease of $508 million in derivative liabilities as a result
$10,546 million driven by current year net income, partially offset
of changes in foreign currency rates primarily for certain
by net stock transactions which declined $4,390 million primarily
economic hedges;
due to common stock repurchases.
– a decrease of $349 million in workforce reduction accru-
The assets and debt associated with the Global Financing
als; and
business are a significant part of the company’s financial posi-
– a decrease of $218 million in deferred tax liabilities; partially
tion. The financial position amounts appearing on page 65
offset by;
are the consolidated amounts including Global Financing. The
• An increase of $1,083 million in taxes payable as a result of
amounts appearing in the separate Global Financing section
a reclass from noncurrent liabilities related to uncertain tax
on pages 57 through 61 are supplementary data presented to
benefits and higher pre-tax income;
facilitate an understanding of the Global Financing business.
• An increase of $606 million in deferred income mainly driven
by a currency impact of approximately $329 million; and
Working Capital
• An increase of $423 million in accounts payable including a
($ in millions) currency impact of $131 million.

Current assets $48,935 $49,004
Cash Flow
Current liabilities 36,002 42,435 The company’s cash flow from operating, investing and financ-
Working capital $12,933 $ 6,568 ing activities, as reflected in the Consolidated Statement of Cash
Current ratio 1.36 1.15 Flows on page 66, is summarized in the following table. These
amounts include the cash flows associated with the Global
Working capital increased $6,365 million compared to the prior Financing business.
year primarily as a result of a net decrease in current liabilities.
The key drivers are described below:
Current assets decreased $68 million due to:

• An increase of $1,066 million in cash and cash equivalents
and marketable securities (see Cash Flow analysis below
and on page 36); partially offset by;

35

($ in millions) Within total debt, on a net basis, the company utilized $7,463
For the year ended December 31: 2009 2008 million in net cash to retire debt versus $2,444 million in net
Net cash provided by/(used in): cash used in 2008. The net cash used to retire debt in 2009
Operating activities $ 20,773 $ 18,812 was comprised of: $13,495 million in cash payments to settle
Investing activities (6,729) (9,285) debt and net payments of $651 million in short-term borrow-
Financing activities (14,700) (11,834) ings, partially offset by $6,683 million of new debt issuances.
Effect of exchange rate changes See note K, “Borrowings,” on pages 90 to 92 for a listing of the
on cash and cash equivalents 98 58 company’s debt securities.
Net change in cash and cash equivalents $ (558) $ (2,250)
Noncurrent Assets and Liabilities
Net cash from operating activities for 2009 increased $1,961 ($ in millions)
million as compared to 2008 driven by the following key factors: At December 31: 2009 2008

Noncurrent assets $60,087 $60,520
• An increase in cash provided by accounts receivable of Long-term debt $21,932 $22,689
$1,857 million, driven by Global Financing receivables due to Noncurrent liabilities (excluding debt) $28,334 $30,815*
lower volumes in 2009;
* Reflects the adoption of the FASB guidance on noncontrolling interests in con-
• Lower payments resulted in a benefit in accounts payable of solidated financial statements. See note B, “Accounting Changes,” on pages 79
$1,030 million year to year; to 82 for additional information.
• Tax refunds of approximately $710 million; partially offset by:
• Higher retirement-related funding of $875 million; The decrease in noncurrent assets of $433 million compared to
• Derivative instruments in cash flow hedging relationships rep- the prior year-end balance was primarily driven by:
resenting a use of cash of $247 million in the current year in
comparison to a source of cash of $176 million in 2008; and • A decrease of $3,075 million in deferred taxes primarily driven
• Higher payments for workforce rebalancing actions of $377 by pension related activity;
million. • A decrease of $904 million in long-term financing receiv-
ables, offset by a currency benefit of $365 million, driven by
Net cash used in investing activities decreased $2,556 million on maturities exceeding originations; and
a year-to-year basis driven by: • A decrease of $365 million in intangible assets driven by
amortization; partially offset by:
• A decrease of $5,119 million in cash used for acquisitions • An increase of $1,964 million in goodwill primarily driven by
primarily driven by the acquisition of Cognos in 2008; a currency impact of $1,035 million and the acquisition of
• A decrease in cash used in net capital spending of $704 SPSS; and
million driven by a decline in rental additions and lower • An increase of $1,401 million in pension assets mainly driven
investment requirements in the Strategic Outsourcing and by plan contributions and pension remeasurements.
Microelectronics businesses; and
• An increase in cash from divestitures of $329 million as a Long-term debt decreased $758 million primarily due to reclasses
result of the Geodis transaction in 2009; partially offset by: to short-term debt as certain instruments approached maturity
• The net impact of purchases and sales of marketable securi- ($2,282 million); offset by new net debt issuances ($1,885 million).
ties and other investments that resulted in a use of cash of Other noncurrent liabilities, excluding debt, decreased $2,481
$2,005 million in the current year in comparison to a source million primarily driven by:
of cash in 2008 of $1,510 million.
• A decrease of $3,500 million in retirement and nonpension
Net cash used in financing activities increased $2,866 million postretirement benefit obligations primarily driven by pension
compared to 2008 as a result of: remeasurements and plan contributions; partially offset by:

• An increase of $5,019 million in net cash payments used to
retire debt;
• A decrease of $721 million in cash generated by other com-
mon stock transactions primarily due to lower stock option
exercises; partially offset by:
• Lower common stock repurchases of $3,150 million.

36

• An increase in deferred income of $392 million including a Equity
currency impact of $117 million; ($ in millions)
• An increase in executive compensation plan accruals of $300 At December 31: 2009 2008*
million primarily due to improvement in market returns; and Equity
• An increase of $200 million in deferred tax liabilities. Total $22,755 $13,584

* Reflects the adoption of the FASB guidance on noncontrolling interests in con-
Debt solidated financial statements. See note B, “Accounting Changes,” on pages 79
The company’s funding requirements are continually monitored to 82 for additional information.
and strategies are executed to manage the overall asset and
liability profile. Total equity increased $9,170 million in 2009 as a result of several
key factors:
($ in millions)
At December 31: 2009 2008 • An increase of $10,546 million in retained earnings primarily
Total company debt $26,099 $33,926
driven by net income of $13,425 million, partially offset by
dividends ($2,860 million); and
Total Global Financing segment debt: $22,383 $24,360
• An increase of $3,015 million as a result of lower accumu-
Debt to support external clients 19,091 20,892
lated other comprehensive income/(loss), primarily from a
Debt to support internal clients 3,292 3,468
positive impact from foreign currency translation adjustments
of $1,732 million, in addition to pension remeasurements and
The Global Financing business provides funding predominantly other retirement-related activities of $1,727 million; partially
for the company’s external client assets as well as for certain offset by deferred losses from hedging programs in the cur-
assets under contract by other IBM units. These assets, pri- rent year of $481 million in comparison to deferred gains of
marily for Global Services, generate long-term, stable revenue $74 million in 2008; partially offset by:
streams similar to the Global Financing asset portfolio. Based • A decrease related to net stock transactions of $4,390 million,
on their nature, these Global Services assets are leveraged con- driven by less common stock repurchases in 2009 versus 2008.
sistent with the balance of the Global Financing asset base. The
debt analysis above is further detailed in the Global Financing
Consolidated Fourth-Quarter Results
section on page 60.
Total debt decreased $7,826 million in 2009 versus 2008, ($ and shares in millions except per share amounts)
Yr.-to-Yr.
primarily as a result of the repayment of debt issued in support Percent/
of the 2007 accelerated share repurchase program. Margin
For the fourth quarter: 2009 2008 Change
Given the significant leverage, the company presents a debt-
Revenue $27,230 $27,006 0.8%*
to-capitalization ratio which excludes Global Financing debt and
equity as management believes this is more representative of the Gross profit margin 48.3% 47.9% 0.4 pts.
company’s core business operations. This ratio can vary from Total expense and other income $ 6,765 $ 7,127 (5.1)%
period to period as the company manages its global cash and Total expense and other
debt positions. income-to-revenue ratio 24.8% 26.4% (1.5) pts.
“Core” debt-to-capitalization ratio (excluding Global Financing Income before income taxes $ 6,381 $ 5,808 9.9%
debt and equity) was 16.0 percent at December 31, 2009 com- Provision for income taxes 1,568 1,382 13.5%
pared to 48.7 percent at December 31, 2008. The reduction Net income $ 4,813 $ 4,427 8.7%
was primarily driven by the decrease in non-Global Financing Net income margin 17.7% 16.4% 1.3 pts.
debt of $5,849 million and growth in non-Global Financing Earnings per share of common stock:
equity of $9,493 million from December 31, 2008 balances. Assuming dilution $ 3.59 $ 3.27+ 9.8%
Consolidated debt-to-capitalization ratio at December 31, 2009
Weighted-average shares outstanding:
was 53.4 percent versus 71.4 percent at December 31, 2008.
Assuming dilution 1,340.7 1,353.7+ (1.0)%

* (5.5) percent adjusted for currency.
+ Reflects the adoption of the FASB guidance in determining whether instruments
granted in share-based payment transactions are participating securities. See
note B, “Accounting Changes,” on pages 79 to 82 for additional information.

37

The fourth quarter capped off a great year for the company in GTS gross profit margin improved 0.9 points to 35.8 percent
an uncertain economic environment with financial performance with margin expansion in all lines of business. The GTS segment
driven by continued margin expansion, profit growth and cash fourth-quarter pre-tax profit was up 8.3 percent and the pre-tax
generation. Total revenue increased 0.8 percent as reported and margin improved 60 basis points to 15.0 percent from fourth-
decreased 5.5 percent, adjusted for currency, versus the fourth quarter 2008.
quarter of 2008. Systems and Technology year-to-year revenue GBS revenue of $4,579 million decreased 2.8 percent (9
growth improved sequentially in the quarter with share gains in percent adjusted for currency) compared to the fourth-quarter
System p, System x and Storage. Software had share gains in 2008. GBS signings of $7,413 million, increased 20.3 percent (13
WebSphere, Tivoli and Key Branded Middleware. Global Services percent adjusted for currency), driven by a 65.4 percent increase
revenue, adjusted for currency, was consistent with third-quarter (55 percent adjusted for currency) in Application Outsourcing
performance while signings and backlog both increased year to signings. Consulting and Systems Integration signings increased
year. Gross profit margin expanded 40 basis points primarily due 3.4 percent (decreased 3 percent adjusted for currency) in the
to improved margins in services and systems as the company’s quarter, a significant improvement compared to third-quarter
productivity initiatives continued to yield improvements in gross 2009. In the fourth quarter, small deal performance improved as
margin. The company has improved gross margin in 21 of the the quarter progressed, general business and distribution sec-
last 22 quarters. Total expense and other income decreased 5.1 tors grew and the growth markets were up 34 percent, adjusted
percent driven by operational expense management. Pre-tax for currency.
income increased 9.9 percent and pre-tax margin improved 1.9 GBS gross profit increased 2.9 percent in the quarter with
points versus the fourth-quarter 2008. Pre-tax profit increased the gross margin improving 1.7 points to 30.3 percent. The GBS
and margins expanded in every segment. Net income increased segment pre-tax profit increased 3.5 percent in the fourth quar-
8.7 percent and diluted earnings per share of $3.59 increased ter and the pre-tax margin expanded 1.1 points to 16.0 percent,
9.8 percent year to year. a record margin performance for the segment. Pre-tax margin
The Global Services segments combined had $14,630 mil- was driven by strong utilization in the delivery centers, good sub-
lion of revenue in the fourth quarter, an increase of 2.1 percent contractor resource management and spending management.
(decrease of 5 percent adjusted for currency) and delivered pre- Software revenue of $6,577 million increased 2.4 percent
tax profit of $2,322 million, an increase of 6.7 percent year to (decreased 4 percent adjusted for currency). Revenue perfor-
year. Total signings for Global Services in the fourth quarter were mance highlighted continued strength in demand in the growth
$18,763 million, an increase of 9.0 percent (2 percent adjusted markets, strong contributions from recent acquisitions and an
for currency) versus 2008. Signings in the quarter included 22 increase in the volume of small deal activity in North America.
deals larger than $100 million. Outsourcing signings of $11,385 Key Branded Middleware increased 6.1 percent (flat adjusted for
million increased 15.0 percent (8 percent adjusted for currency). currency) and represented 63 percent of total software revenue,
Consulting and Systems Integration and Integrated Technology an increase of 2 points year to year. WebSphere Family revenue
Services signings increased 1.0 percent (decreased 6 percent increased 12.9 percent (6 percent adjusted for currency) in
adjusted for currency) to $7,378 million. the quarter. Business Process Management, Commerce and
GTS revenue of $10,051 million increased 4.4 percent DataPower products all had double-digit revenue growth. ILOG
(decreased 3 percent adjusted for currency) versus the fourth performed well again this quarter and contributed to the overall
quarter of 2008. GTS signings of $11,350 million increased WebSphere growth. Information Management increased 7.1
2.8 percent (decreased 4 percent adjusted for currency) with percent (1 percent adjusted for currency). Business Analytics
outsourcing signings increasing 4.7 percent (decreased 1 per- continues to be a key growth area and Cognos posted
cent adjusted for currency), partially offset by a 2.9 percent strong double-digit revenue growth in the quarter. InfoSphere
decrease (10 percent adjusted for currency) in Integrated Tech- Warehouse, which helps customers turn information into a stra-
nology Services signings. SO revenue increased 5.6 percent tegic asset, also grew double digits in the quarter. Tivoli software
(decreased 2 percent adjusted for currency). SO signings revenue increased 7.2 percent (1 percent adjusted for currency).
decreased 9.9 percent (16 percent adjusted for currency). ITS Enterprise Asset Management, which is part of the Smarter
revenue increased 0.2 percent (decreased 7 percent adjusted Planet strategy, grew over 40 percent in the growth markets,
for currency). Revenue performance largely reflects signings adjusted for currency. Tivoli storage continued its strong growth
performance which continued to be impacted by declines in as customers manage their rapidly growing storage data. Data
OEM as the portfolio shifts to higher value offerings. ITS signings Protection and Storage Management had double-digit rev-
continued to be impacted by client deferrals and capital con- enue growth, with broad-based geography and sector growth.
straints. BTO revenue increased 7.0 percent (1 percent adjusted Rational revenue decreased 4.5 percent (10 percent adjusted for
for currency) and signings increased 132.9 percent (124 percent currency) and Lotus revenue decreased 5.3 percent (11 percent
adjusted for currency). adjusted for currency).

38

Software gross profit increased 2.4 percent with a flat mar- weaker than third quarter performance, adjusted for currency.
gin year to year. The Software segment delivered pre-tax profit The U.K. had solid growth and revenue performance improved
of $3,058 million, an increase of 9.6 percent. The pre-tax margin sequentially in Canada and Japan (adjusted for currency).
of 41.5 percent increased 2.4 points compared to fourth-quar- Revenue in the growth markets increased 14.3 percent (2
ter 2008. percent adjusted for currency), 9 points higher than the major
Systems and Technology revenue of $5,190 million decreased markets, adjusted for currency. The growth markets contributed
4.3 percent (9 percent adjusted for currency). The rate of year- 20 percent of the geographic revenue in the fourth quarter. The
to-year decline improved sequentially for the second consecutive BRIC countries were up 18.4 percent (7 percent adjusted for
quarter. System z revenue decreased 26.8 percent (31 percent currency) driven by India, Brazil and China. Americas revenue
adjusted for currency). System z MIPS shipments decreased was $11,106 million, a decrease of 3.0 percent (6 percent
19 percent year to year. Volume performance was consistent adjusted for currency). Adjusted for currency, revenue increased
with expectations for this point in the product cycle. Converged 2 percent in Latin America, while the U.S. declined 8 percent
System p revenue declined 13.8 percent (18 percent adjusted and Canada declined 1 percent. EMEA revenue increased 2.4
for currency). Although revenue has declined, the brand has percent (decreased 7 percent adjusted for currency) to $9,694
continued to gain market share, up 4 points in the quarter. In million. In the major market countries, when adjusted for cur-
the fourth quarter, sales generated by UNIX competitive dis- rency, revenue in Germany declined 8 percent, France declined
placements was approximately $200 million. System x revenue 12 percent, Italy declined 11 percent and Spain declined 11
increased 36.8 percent (30 percent adjusted for currency), percent while the U.K. was up 4 percent. Asia Pacific revenue
with share gains in server (3 points) and blades (6 points). The increased 5.7 percent (decreased 3 percent adjusted for cur-
improved sales model and enhanced product offerings were the rency) to $5,782 million, with the growth markets up 14.3
key contributors to the fourth quarter performance. Systems percent (3 percent adjusted for currency) and Japan down 2.8
Storage revenue increased 1.4 percent (decreased 4 percent percent (9 percent adjusted for currency).
adjusted for currency). Total disk revenue increased 6.1 percent Total expense and other income decreased 5.1 percent
(1 percent adjusted for currency) driven by strong growth in compared to the fourth quarter of 2008 and the expense-to-
midrange and XIV. Tape revenue declined 9.8 percent (15 per- revenue-ratio improved 1.5 points. The decrease was driven by
cent adjusted for currency) versus the fourth quarter of 2008. lower operational expenses (approximately 15 points), partially
Microelectronics OEM revenue increased 1.9 percent in the offset by 9 points due to the impact of currency and 1 point due
fourth quarter. The company’s 300 millimeter fabrication facility is to the impact of acquisitions. The company continues to execute
nearing full utilization and the 45 nanometer process output was its operational plan to increase efficiency and drive productiv-
sold out again this quarter. ity by leveraging its scale and global presence. Initiatives such
Systems and Technology gross margin of 42.5 percent, as globalization of support functions and services delivery and
increased 2.6 points versus the fourth quarter of 2008 with workforce balancing have yielded significant expense and cost
margin improvement in all brands. This was the highest gross savings. Within selling, general and administrative expense,
profit margin since the fourth quarter of 2007 and was driven by workforce reduction charges decreased approximately $340 mil-
improvements in System x server and converged System p. The lion in the fourth quarter.
Systems and Technology segment pre-tax profit increased 15.3 The company’s effective tax rate in the fourth-quarter 2009
percent to $832 million. Pre-tax margin increased 2.6 points to was 24.6 percent compared with 23.8 percent in the fourth
15.4 percent compared to the fourth quarter of 2008. quarter of 2008. The higher rate was primarily driven by higher
Global Financing external revenue of $621 million decreased utilization of tax credits in the prior year.
5.9 percent (12 percent adjusted for currency), driven by decreased Share repurchases totaled $3,128 million in the fourth quar-
financing revenue. The Global Financing segment delivered 2.0 ter. The weighted-average number of diluted common shares
points of external gross margin improvement and 5.5 points of outstanding in the fourth quarter of 2009 was 1,340.7 million
total pre-tax margin expansion in the fourth quarter of 2009. compared with 1,353.7 million in the fourth quarter of 2008.
Geographic revenue increased 0.7 percent (decreased 6 The company ended the quarter with $12,183 million of cash
percent adjusted for currency) with declines in all geographies, and cash equivalents and generated $6,448 million in cash flow
adjusted for currency. Revenue in the major markets decreased provided by operating activities driven primarily by net income.
2.2 percent (7 percent adjusted for currency) and was 1 point Net cash from investing activities was a use of cash of $2,495
million in fourth quarter of 2009 and Net cash from financing
activities was a use of cash of $1,206 million.

39

Prior Year in Review Continuing Operations
In 2008, the company performed extremely well in a difficult
The Prior Year in Review section provides a summary of the
economic environment, delivering record levels of revenue, pre-
company’s financial performance in 2008 as compared to 2007.
tax profit, earnings per share and cash flow from operations. The
For a detailed discussion of 2008 performance, see the 2008
financial performance reflected the continuing strength of the
Annual Report.
company’s global model and the results of the ongoing trans-
formation of the business. The key elements of the company’s
($ and shares in millions except per share amounts)
transformation include:
Yr.-to-Yr.
Percent/
Margin • A continuing shift to higher value businesses;
• Investing for growth in the emerging markets;
Revenue $103,630 $ 98,786 4.9%* • Global integration;
Gross profit margin 44.1% 42.2% 1.8 pts. • Investing in innovation; and
Total expense and other income $ 28,945 $ 27,240 6.3% • Ongoing productivity resulting in higher profit margins.
Total expense and other
income-to-revenue ratio 27.9% 27.6% 0.4 pts. Overall, the company capitalized on the opportunities in the global
Income from continuing economies, generating approximately 65 percent of its revenue
operations before income taxes $ 16,715 $ 14,489 15.4% outside the U.S., in delivering full-year growth of 4.9 percent (2
Provision for income taxes 4,381 4,071 7.6% percent adjusted for currency). Revenue increased in all geogra-
Income from continuing phies, both on an as reported basis and adjusted for currency—
operations $ 12,334 $ 10,418 18.4% the revenue performance, adjusted for currency, was stable
Net income $ 12,334 $ 10,418 18.4% throughout the year as the company focused on solutions that
Net income margin 11.9% 10.5% 1.4 pts. meet clients’ needs. Revenue from the growth markets organiza-
Earnings per share of tion increased 9.8 percent (10 percent adjusted for currency). In
common stock: these markets, where the growth was driven by the infrastructure
Assuming dilution: build-out, the company invested aggressively to capture these
Continuing operations $ 8.89+ $ 7.15+ 24.3% opportunities. For the full year, growth in these markets, adjusted
Discontinued operations — (0.00) NM
for currency, was 8 points greater than the major markets.
Gross profit margins improved, reflecting the shift to higher
Total $ 8.89+ $ 7.15+ 24.3%
value businesses, pricing for value and the continued focus on
Weighted-average shares
outstanding:
productivity and cost management. Pre-tax income from continu-
ing operations grew 15.4 percent and net income from continuing
Assuming dilution 1,387.8+ 1,456.9+ (4.7)%
operations increased 18.4 percent reflecting an improvement in
Assets** $109,524 $120,431 (9.1)%
the tax rate. Diluted earnings per share improved 24.3 percent
Liabilities** $ 95,939++ $ 91,816++ 4.5%
reflecting the strong growth in net income and the benefits of the
Equity** $ 13,584++ $ 28,615++ (52.5)% common stock repurchase program. In 2008, the company repur-
* 2.3 percent adjusted for currency. chased approximately 90 million shares of its common stock.
** At December 31. The increase in 2008 revenue was primarily due to:
+ Reflects the adoption of the FASB guidance in determining whether instruments
granted in share-based payment transactions are participating securities. • Continued strong performance from Global Technology Ser-
See note B, “Accounting Changes,” on pages 79 to 82 for additional information.
vices and Global Business Services with growth in all business
++ Reflects the adoption of the FASB guidance on noncontrolling interests in
lines and geographic units;
consolidated financial statements. See note B, “Accounting Changes,” on
pages 79 to 82 for additional information • Continued strong demand in the Software business, driven
NM—Not meaningful by Key Branded Middleware products, with strong contribu-
tions from strategic acquisitions; and
• Continued strength in the growth markets.

The increase in income from continuing operations before
income taxes in 2008 was primarily due to the revenue growth
and gross profit margin improvements in the Global Services
and Software segments.

40

The following is an analysis of the 2008 versus 2007 reportable segment results for Global Services, Systems and Technology and
Software. The Global Financing segment analysis is included in the Global Financing section on pages 57 through 61.

Global Services
($ in millions)
Yr.-to-Yr.

Global Services external revenue: $58,891 $54,144 8.8% 5.6%
Global Technology Services: $39,264 $36,103 8.8% 5.8%
Strategic Outsourcing 20,183 18,701 7.9 4.7
Integrated Technology Services 9,283 8,438 10.0 7.5
Business Transformation Outsourcing 2,550 2,294 11.2 11.9
Maintenance 7,250 6,670 8.7 5.1
Global Business Services $19,628 $18,041 8.8% 5.2%

Global Technology Services revenue increased 8.8 percent (6 Business Transformation Outsourcing (BTO) revenue increased
percent adjusted for currency) in 2008 versus 2007 with strong 11.2 percent (12 percent adjusted for currency) with growth in
performance across all lines of business. Total signings in GTS of all geographies, led by Asia Pacific. The Daksh business, which
$34,693 million increased 1 percent (flat adjusted for currency) is focused on business process outsourcing, delivered strong
led by Integrated Technology Services (ITS) signings growth of 5 growth. BTO signings decreased 18 percent (14 percent adjusted
percent (4 percent adjusted for currency). Outsourcing signings for currency) in 2008 compared to 2007.
decreased 1 percent (2 percent adjusted for currency). Maintenance revenue increased 8.7 percent (5 percent
Strategic Outsourcing (SO) revenue was up 7.9 percent (5 adjusted for currency) with growth in availability services on both
percent adjusted for currency) with growth in all geographies, IBM and non-IBM IT equipment.
driven by prior year’s signings and continued growth in the base Global Business Services (GBS) revenue increased 8.8 per-
accounts. SO signings in 2008 increased 3 percent (1 percent cent (5 percent adjusted for currency) in 2008, with balanced
adjusted for currency) when compared to 2007. Signings were growth across all three geographies. Revenue performance was
very strong in the fourth quarter (up 20 percent), as clients led by growth in Application Management Services (12.5 percent)
focused on the value of the SO offerings in the current environ- and Core Consulting (6.1 percent). Total signings of $22,488
ment. The initiatives around standardization, global integration million increased 2 percent (decreased 1 percent adjusted for
and improved efficiency are driving improvements in quality and currency), led by a 10 percent (6 percent adjusted for currency)
customer satisfaction which are reflected in the signings perfor- growth in Consulting and Systems Integration signings. Growth
mance and in improved profitability. was driven by offerings that enable clients to reduce cost and
ITS revenue increased 10.0 percent (7 percent adjusted for conserve capital. In the second half of the year, signings for trans-
currency) in 2008 versus 2007 led by growth in key infrastructure formational and compliance offerings also increased. Application
offerings such as Green Data Center and Converged Commu- Outsourcing signings decreased 14 percent (16 percent adjusted
nications. ITS infrastructure offerings deliver high-value, standard- for currency) year over year.
ized, asset-based services that leverage the company’s services,
systems and software capabilities, providing clients end-to-end
solutions and processes that transform their businesses.

41

($ in millions) percent to $4,607 million with a pre-tax margin of 11.3 percent,
Yr.-to-Yr. an increase of 1.9 points versus 2007. At year-end 2008, GTS
had delivered six consecutive quarters of double-digit pre-tax
Global Services:
profit growth. The margin improvement was driven primarily by
Global Technology Services:
a delivery structure that maximizes utilization and flexibility, a
mix to higher value offerings, lower retirement-related costs and
External gross profit margin 32.6% 29.9% 2.7 pts.
improved productivity.
Pre-tax income $ 4,607 $ 3,557 29.5% GBS gross profit increased 23.5 percent to $5,238 million
Pre-tax margin 11.3% 9.4% 1.9 pts. in 2008 when compared to 2007, and the gross profit margin
Global Business Services: improved 3.2 points. Segment pre-tax profit increased 29.9
External gross profit $ 5,238 $ 4,240 23.5% percent to $2,681 million with a pre-tax margin of 13.0 percent,
External gross profit margin 26.7% 23.5% 3.2 pts. an improvement of 2.2 points year over year. This was the third
Pre-tax income $ 2,681 $ 2,064 29.9% straight year of profit growth greater than 20 percent in GBS and
Pre-tax margin 13.0% 10.7% 2.2 pts. demonstrates the results of a strong operating discipline and the
benefits of a globally integrated operating model. The margin
expansion was driven by improved utilization, cost and expense
GTS gross profit increased 18.5 percent compared to 2007,
management, stable pricing and lower retirement-related costs.
with gross profit margin improving 2.7 points. All lines of busi-
At December 31, 2008, the estimated Global Services back-
ness delivered gross margin expansion year over year driven
log at actual currency rates was $130 billion ($117 billion adjusted
by a combination of a mix to higher value offerings and an
for currency), a decrease of $6 billion ($2 billion adjusted for cur-
improved cost structure. Segment pre-tax profit increased 29.5
rency) from prior year-end levels.

Software
($ in millions)
Yr.-to-Yr.

Software external revenue: $22,089 $19,982 10.5% 8.1%
Middleware $17,305 $15,505 11.6% 9.5%
Key Branded Middleware 12,383 10,827 14.4 12.5
WebSphere Family 6.2 4.5
Information Management 24.5 22.0
Lotus 10.4 7.8
Tivoli 2.9 2.1
Rational 13.2 11.6
Other middleware 4,922 4,678 5.2 2.6
Operating systems 2,337 2,319 0.8 (1.9)
Product Lifecycle Management 960 1,051 (8.6) (14.4)
Other 1,488 1,107 34.4 31.3

42

Software revenue of $22,089 million increased 10.5 percent (8 Rational revenue increased 13.2 percent (12 percent adjusted
percent adjusted for currency) in 2008 led by growth in the Key for currency) in 2008 driven primarily by Telelogic contributions.
Branded Middleware products and strong contributions from Telelogic’s suite of system programming tools complements
the annuity base and acquisitions. Clients continue to embed Rational’s IT tool set, providing a common framework for soft-
the company’s software in the fabric of their IT infrastructures. ware and systems delivery across a clients enterprise.
Key Branded Middleware revenue increased 14.4 percent Revenue from Other middleware products increased 5.2 per-
(12 percent adjusted for currency) and represented 56 percent cent (3 percent adjusted for currency) in 2008 versus the prior
of total Software segment revenue, an increase of 2 points from year. This software product set includes more mature products
2007. When adjusted for currency, growth in 2008 was led which provide a more stable flow of revenue.
by Information Management, Rational and Lotus. Strategic Other software segment revenue increased 34.4 percent (31
acquisitions, including Cognos and Telelogic, have extended the percent adjusted for currency) versus 2007 reflecting continued
segment’s middleware capabilities. growth in software-related services.
WebSphere Family revenue increased 6.2 percent (5 per-
cent adjusted for currency) in 2008 and was led by growth ($ in millions)
in WebSphere Application Servers and WebSphere Business Yr.-to-Yr.
For the Year Ended December 31: 2008 2007 Change
Integration software. In December 2008, the company com-
pleted the acquisition of ILOG, whose products help customers Software:
improve business decisions with optimization, visualization and
business rules software. The WebSphere products provide the External gross profit margin 85.4% 85.2% 0.2 pts.

foundation for Web-enabled applications and are a key product Pre-tax income $ 7,075 $ 6,002 17.9%
set in deploying a client’s SOA. Information Management reve- Pre-tax margin 28.5% 26.8% 1.7 pts.
nue increased 24.5 percent (22 percent adjusted for currency) in
2008 versus the prior year, reflecting contribution from Cognos Software segment gross profit increased 10.8 percent to $18,859
and strong demand for the distributed relational database million in 2008, driven primarily by the strong revenue growth.
products. Cognos’ performance management solution helps The large annuity base of this business continues to provide a
customers improve decision-making across the enterprise to predictable and growing profit stream. Gross profit margin was
optimize business performance. 85.4 percent in 2008, an increase of 0.2 points versus 2007.
Lotus revenue increased 10.4 percent (8 percent adjusted The company has been investing significantly in the software
for currency) in 2008 led by growth in Lotus Notes products business with good results. The Software segment contributed
as customers continue to invest to improve their workforce effi- $7,075 million of pre-tax profit in 2008, an increase of 17.9 per-
ciency. Lotus software is well established as a tool for providing cent versus 2007 while successfully integrating Cognos and
improved workplace collaboration and productivity. Telelogic. Software contributed approximately 40 percent of the
Tivoli revenue increased 2.9 percent (2 percent adjusted company’s segment pre-tax profit in 2008. The segment pre-tax
for currency) in 2008 when compared to 2007. Revenue per- profit margin increased 1.7 points to 28.5 percent. The pre-tax
formance was led by growth in Tivoli Security and Storage income and margin improvements have been driven primarily by
Management products. Tivoli software provides the advanced revenue growth and increasing operational efficiencies.
capabilities required to run large mission-critical environments.
This includes security and storage software which helps cus-
tomers improve utilization and reduce costs.

43

Systems and Technology
($ in millions)
Yr.-to-Yr.

Systems and Technology external revenue: $19,287 $21,317 (9.5)% (10.8)%
System z 12.5% 10.6%
Legacy System i (66.1) (67.5)
Converged System p 11.2 10.7
System x (16.9) (18.9)
System Storage (3.4) (4.7)
Retail Store Solutions (15.0) (15.8)
Total Systems (4.9) (6.3)
Microelectronics OEM (25.1) (25.4)
Printing Systems NM NM

NM—Not meaningful

Systems and Technology revenue decreased 9.5 percent (down Converged System p revenue increased 11.2 percent (11
11 percent adjusted for currency) in 2008 versus 2007. In June percent adjusted for currency) in 2008 versus 2007, reflecting
2007, the company divested its printing business. Systems and solid demand for the energy efficiencies and multi-operating
Technology revenue, excluding the divested printing business, system capabilities of POWER6 technology. Clients concluded
decreased 7.8 percent (9 percent adjusted for currency) in 2008 that POWER6 technology is the right solution for a multitude of
versus 2007. Total Systems revenue decreased 4.9 percent (6 workloads. The revenue growth was primarily driven by mid-
percent adjusted for currency) in 2008 versus 2007. range servers which increased 32 percent and high-end servers
In the current economic environment, clients are focused on which increased 3 percent in 2008 versus 2007.
reducing the cost of running their IT infrastructure. Virtualization, Legacy System i revenue decreased 66.1 percent (67 per-
which provides the capability to run multiple workloads on a cent adjusted for currency) in 2008 versus 2007, as the company
single server, is a key enabler of efficiency. System z is the lead- continues to transition the System i customer base to the con-
ing platform for virtualization as it is able to support thousands verged POWER platform within System p.
of images and operate fully utilized. The company’s POWER System x revenue decreased 16.9 percent (19 percent adjusted
architecture supports hundreds of partitions, often driving utiliza- for currency) in 2008 versus 2007. System x server revenue
tion rates of over 60 percent. Both of these platforms leverage declined 15 percent and blades revenue decreased 3 percent,
the entire system, from the company’s custom semiconductors in 2008 versus 2007, respectively. The decline in server revenue
through the software stack, to achieve these high levels of effi- reflects a significant slowdown in the x86 market, especially in
ciency and lower cost of ownership. The distributed computing the second half of 2008, as clients are virtualizing and consoli-
model, which utilizes many small servers, cannot offer the same dating workloads onto more efficient platforms such as POWER
level of efficiency and value. and mainframe.
System z revenue increased 12.5 percent (11 percent adjusted System Storage revenue decreased 3.4 percent (5 percent
for currency) in 2008 versus 2007. System z revenue growth was adjusted for currency) in 2008 versus 2007. Total disk revenue
particularly strong in the Americas (up 19 percent), as well as was essentially flat in 2008 versus 2007. Enterprise Disk revenue
in the Financial Services and Industrial sectors globally. Clients increased 2 percent primarily due to increased demand for the
in emerging markets also leveraged this platform’s stability and DS8000 product, while mid-range disk revenue declined 15 per-
efficiency during 2008. MIPS (millions of instructions per second) cent. Tape revenue declined 10 percent in 2008 primarily due
shipments increased 25 percent in 2008 versus 2007, posting to reduced demand and clients deciding to purchase additional
double-digit growth in each quarter, reflecting strength in both media to expand the utilization of their existing devices.
traditional and specialty workloads. Specialty MIPS increased 68 Microelectronics OEM revenue decreased 25.1 percent (25
percent in 2008, as clients exploit the capabilities of System z to percent adjusted for currency) in 2008 versus 2007. The primary
bring new Linux and Java applications to this highly efficient and mission of this business is to provide leadership technology for
cost effective platform. the systems business, as demonstrated during 2008 in the new
System z10 mainframe and POWER6 systems.

44

Retail Stores Solutions revenue decreased 15.0 percent (16 Gross margin decreased by 1.7 points versus the prior year. This
percent adjusted for currency) in 2008 versus 2007, reflecting decrease was primarily driven by margin declines in System z,
weakness in the retail sector and a compare to a strong 2007, System x and Microelectronics OEM which impacted the overall
when a new programmable point-of-sale solution was being margin by 1.6 points, 1.3 points and 1.2 points, respectively.
delivered to large clients. Partially offsetting these margin declines was a revenue mix
benefit of 2.7 points due to the increased revenue in System z
($ in millions) and converged System p.
Yr.-to-Yr. Systems and Technology segment pre-tax margin declined
2.0 points to 7.7 percent in 2008 reflecting the lower revenue
Systems and Technology: and gross profit margin in 2008 versus 2007.
External gross profit margin 38.1% 39.7% (1.7) pts.
Global Financing
Pre-tax income $1,550 $2,153 (28.0)% See page 57 for an analysis of Global Financing’s segment results.
Pre-tax margin 7.7% 9.6% (2.0) pts.

Geographic Revenue
($ in millions)
Yr.-to-Yr.

Total revenue: $103,630 $98,786 4.9% 2.3%
Geographies: $100,939 $95,320 5.9% 3.3%
Americas 42,807 41,122 4.1 3.9
Europe/Middle East/Africa 37,020 34,699 6.7 3.2
Asia Pacific 21,111 19,501 8.3 2.1

Major markets 5.1% 1.9%
Growth markets 9.8% 9.9%
BRIC countries 17.6% 14.5%

Geographic revenue increased 5.9 percent (3 percent adjusted currency) and France increased 9.0 percent (2 percent adjusted
for currency) to $100,939 million in 2008 when compared to 2007. for currency). Italy increased 5.8 percent (decreased 1 percent
Revenue increased in all geographies in 2008, and adjusted for adjusted for currency) while the U.K. decreased 4.9 percent
currency, revenue growth was strongest in the Americas followed (increased 4 percent adjusted for currency).
by Europe and Asia Pacific. Revenue from the growth markets Asia Pacific revenue increased 8.3 percent (2 percent adjusted
organization increased 9.8 percent (10 percent adjusted for cur- for currency) year over year. Revenue increased in the India, South
rency) while growth in the more established major markets was Korea, ASEAN, Australia/New Zealand and China regions with
5.1 percent (2 percent adjusted for currency). combined growth of 8.1 percent (9 percent adjusted for currency).
Americas revenue increased 4.1 percent (4 percent adjusted Japan revenue, which represented 49 percent of the Asia Pacific
for currency) in 2008. Revenue increased in all regions with the revenue base, increased 8.5 percent as reported, but decreased
U.S. up 2.9 percent, Canada 5.6 percent (6 percent adjusted for 5 percent adjusted for currency in 2008 when compared to 2007.
currency) and Latin America 13.9 percent (11 percent adjusted Across the geographies, aggregate revenue from the countries
for currency). comprising the growth markets organization increased 9.8 per-
Europe/Middle East/Africa (EMEA) revenue increased 6.7 percent (10 percent adjusted for currency) in 2008 and represented
cent (3 percent adjusted for currency) in 2008 when compared to approximately 18 percent of the company’s total geographic
2007. The majority of major market countries performed well led revenue. The company has continued to invest to capture new
by Spain which grew 12.0 percent (5 percent adjusted for cur- infrastructure spending in the growth markets. Adjusted for
rency), Germany increased 10.8 percent (4 percent adjusted for currency, growth in these markets was 8 points higher than in
the major markets. The BRIC countries, a subset of the growth

45

markets, together grew 17.6 percent (15 percent adjusted for reserves reflecting the current economic environment in many
currency), with growth in India of 25.8 percent (33 percent industries. The company’s accounts receivable provision cover-
adjusted for currency), Brazil 18.3 percent (13 percent adjusted age at December 31, 2008 was 2.0 percent, an increase of 50
for currency), China 14.7 percent (8 percent adjusted for cur- basis points from year-end 2007. These increases were partially
rency) and Russia 11.0 percent (11 percent adjusted for currency). offset by lower retirement-related expense of $287 million.
OEM revenue decreased 22.4 percent (23 percent adjusted Other (income) and expense was income of $298 million
for currency) in 2008 when compared to 2007, driven by and $626 million in 2008 and 2007, respectively. The decrease
reduced demand in the Microelectronics OEM business. in income was primarily driven by higher foreign currency trans-
action losses ($285 million) and lower interest income reflecting
Total Expense and Other Income lower cash balances and the current interest rate environment
($222 million). These decreases were partially offset by a gain
($ in millions)
Yr.-to-Yr.
on derivative instruments which primarily hedge foreign currency
For the year ended December 31: 2008 2007 Change risks ($221 million). Included within the foreign currency hedging
Total expense and other income $28,945 $27,240 6.3% activity, the company hedges its major cross-border cash flows
Expense to Revenue 27.9% 27.6% 0.4 pts. to mitigate the effect of currency volatility in its global cash plan-
ning, which also reduces volatility in the year-over-year results.
The impact of these hedging programs is primarily reflected in
The key drivers year to year in total expense and other income
other (income) and expense, as well as cost of goods sold. The
were approximately:
impact of losses from these cash flow hedges reflected in other
• Operational expense, (1) point (income) and expense was $186 million, a decrease of $24 mil-
• Acquisitions, 5 points lion year to year.
• Currency, 2 points The increase in RD&E expense of $184 million was primarily
driven by acquisitions and investments to maintain technology
In 2008, the company continued to focus on productivity leadership across the company’s offerings. Software spending
improvements in its more established markets and increased increased $262 million, partially offset by lower spending in
its investments in the growth markets. Within selling, general Systems and Technology ($54 million) and other unit spending
and administrative expense (SG&A), total sales and marketing ($74 million).
expense increased 4 percent year to year (2 percent adjusted IP income of $1,153 million increased 20.4 percent in 2008,
for currency). Sales and marketing expense in the growth mar- however, there were no significant individual IP transactions
kets increased 13 percent (13 percent adjusted for currency), in 2008 or 2007. The improvement year to year was primarily
as compared to major markets where sales and marketing driven by the Systems and Technology business.
expense increased 3 percent (1 percent adjusted for currency) The increase in interest expense of $63 million to $673
year to year. On a consolidated basis, general and administrative million was primarily due to the increase in debt in 2007 asso-
expenses, which are indirect expenses incurred in the business, ciated with the financing of the accelerated share repurchase
increased 2 percent (flat at constant currency) year to year. agreements, partially offset by lower interest rates in 2008. See
Total SG&A expense increased 6.0 percent (4 percent note N, “Equity Activity,” on page 98 for additional information
adjusted for currency) in 2008 versus 2007. The increase in SG&A regarding the accelerated share repurchase. Overall interest
was primarily due to acquisition-related spending, predominantly expense, including amounts reflected in cost of financing, for
for Cognos and Telelogic, which accounted for 5 points of the 2008 was $1,462 million, an increase of $40 million versus 2007.
increase, while the effects of currency accounted for 2 points.
Workforce reductions—ongoing expense increased $387 million
primarily due to charges recorded in the fourth quarter reflect-
ing workforce actions in Japan ($120 million) and other ongoing
skills rebalancing that is a regular element of the company’s
business model. In addition, bad debt expense increased $206
million primarily driven by additional specific accounts receivable

46

Income Taxes Discontinued Operations
The effective tax rate for 2008 was 26.2 percent, compared
with 28.1 percent in 2007. The 1.9 point decrease was primarily On December 31, 2002, the company sold its HDD business to
driven by the 2008 net increase in the utilization of foreign and Hitachi for approximately $2 billion. The final cash payment of
state tax credits (2.9 points), the benefit associated with the $399 million was received on December 30, 2005.
second quarter 2008 agreement reached with the U.S. Internal In 2007, the company reported a net loss of less than $1 mil-
Revenue Service (IRS) regarding claims for certain tax incentives lion, net of tax. There was no activity in 2008.
(1.7 points) and the benefit related to certain issues associated
with newly published U.S. tax regulations (1.2 points). These
Other Information
benefits were partially offset by several items including the net
impact related to the completion of the U.S. federal income tax
Looking Forward
examination for the years 2004 and 2005 including the asso-
Looking forward, the company enters 2010 in excellent opera-
ciated income tax reserve redeterminations (0.5 points), the
tional and financial position. Since the last recession in 2002,
second quarter 2008 tax cost associated with the intercompany
the company has consistently generated strong profit and cash
transfer of certain intellectual property (2.8 points) and lower
growth. In that timeframe (2003–2009), the company has added
capital loss utilization in 2008 (0.7 points). The remaining items
$12 billion to its pre-tax income base; pre-tax income margin
were individually insignificant.
has expanded more than 2.5 times; earnings per diluted share
is up 4 times, and cumulatively, the company has generated
Financial Position
approximately $115 billion in cash flow from operating activities.
Total assets decreased $10,907 million ($5,854 million adjusted
This financial performance is the result of the transformation of
for currency) primarily due to decreases in cash and cash equiv-
the business that started at the beginning of the decade. Its
alents ($2,250 million), prepaid pension assets ($15,816 million),
driven by a combination of shifting the company’s business mix,
short-term marketable securities ($989 million) and total financ-
improving leverage through productivity and investing to capture
ing receivables ($1,233 million). These decreases were partially
growth opportunities.
offset by increases in long-term deferred taxes ($5,757 million),
The company has remixed its business to move into higher
goodwill ($3,941 million) and intangible assets ($771 million).
value areas—exiting commoditizing businesses, while acquiring
Total liabilities increased $4,123 million ($5,301 million
108 companies since 2000 for a total of approximately $22 billion
adjusted for currency) driven primarily by increases in retirement
in net cash. These portfolio actions have contributed to a signifi-
and nonpension postretirement benefit obligations ($5,871 mil-
cant change in the company’s business profile. In 2000, Global
lion) and total deferred income ($547 million), partially offset by
Services segment pre-tax income was $4.5 billion; in 2009, it
decreases in total debt ($1,349 million) and accounts payable
was over $8 billion. The Software growth is even more dynamic.
($1,041 million).
In 2000, Software segment pre-tax income was $2.8 billion; in
Total equity of $13,584 million decreased $15,030 million
2009, it also was over $8 billion. In 2009, over 90 percent of
versus 2007. Net income of $12,334 million was offset by the
segment pre-tax income came from Software, Global Services
effects of pension remeasurements and other retirement-related
and Global Financing, with Software and Global Services each
items ($14,856 million), common/treasury stock activity ($6,323
contributing 42 percent of segment pre-tax income. The portfolio
million), dividends ($2,585 million) and equity translation adjust-
generates high profitability and the company will continue to remix
ments ($3,552 million).
to higher value through organic investments and acquisitions.
The company generated $18,812 million in cash flow pro-
The company has had an ongoing focus on driving operating
vided by operating activities, an increase of $2,718 million,
leverage through productivity. The company has leveraged its
compared to 2007, primarily driven by increased net income
scale and global presence to improve processes and productiv-
($1,916 million). Net cash used in investing activities of $9,285
ity in a number of areas, including support functions and service
million was $4,611 million higher than 2007, primarily due to
delivery. In 2009, the company yielded $3.7 billion of cost and
increased spending for acquisitions ($5,304 million). Net cash
expense savings from the structural actions it has taken, driving
used in financing activities of $11,834 million increased $7,095
gross margin improvement and reductions in operational expense.
million primarily due to debt transactions ($14,556 million), par-
These actions have reduced the fixed cost base and improved
tially offset by lower common stock repurchases ($8,249 million)
the operational balance point. Going forward, this will provide an
in 2008 versus 2007.
advantage as the spending environment improves—with solid
operating leverage off of the company’s leaner cost base.

47

Another key element of the company’s transformation is the in its year-to-year revenue growth rate compared to the fourth
significant investments it has made for growth—investments quarter of 2009, at both actual currency rates and at constant
enabled by the strong margins, profitability and cash base. The currency. This would represent a mid-single-digit revenue
company continues to invest to capture the opportunity in the growth at actual rates compared to the 0.8 percent growth in
emerging markets. In 2009, the revenue growth in the growth the fourth quarter of 2009. The company is confident in its ability
markets remained 8 points greater than the major markets. to continue to leverage its business model to expand margins,
The company is also investing in capabilities that differentiate grow profit, generate cash, return value to shareholders and
IBM and accelerate the development of new market oppor- return to revenue growth in 2010.
tunities—areas like business analytics, cloud computing and The continued investments in Software have led to this seg-
smarter planet. The company remains committed to technology ment’s emergence as a strong source of revenue and the largest
leadership, and in 2009, the company invested approximately contributor to the company’s pre-tax profit. The Software busi-
$6 billion in research and development. The company’s organic ness is differentiated in the industry by both the strength of its
investments have been complemented with acquisitions, with a individual products and the breadth of the software offerings.
key focus on business analytics which provide a solid platform Clients continue to rely on the extensive middleware portfolio to
for the Smarter Planet initiatives. Since 2005, the company has help them transform their business, streamline costs and seek
invested approximately $8.5 billion in net cash for 14 strategic new business opportunities. The key to continued Software
acquisitions to build its business analytics capabilities. growth stems from the ability to maintain and grow this industry-
The last decade has seen a significant transformation of IBM. leading software business. Investments will be aligned to advance
The company will continue to shift to higher value areas, improve the company’s growth strategy through new client acquisition,
the efficiency of the business and invest where management with specific focus on key industries and local businesses. The
sees the best long-term opportunities. This transformation and company will also continue to focus on expanding its software
the focus going forward positions the company for growth mov- capabilities through a combination of internal development and
ing into 2010. strategic acquisitions. In January 2010, the company disclosed
In May 2007, the company met with investors and analysts that it expects Software to deliver a double-digit revenue growth
and discussed a road map to deliver earnings per share in 2010 rate, at actual rates, in the first quarter of 2010.
in the range of $10 to $11 per share, or 14 to 16 percent com- Within the Global Services business, profit margins improved
pound growth rate from 2006. The company’s 2010 road map and the company continues to yield significant results from the
is comprised of two key components. First, the 2010 road map targeted actions and investments it has made in the last few years.
includes generating earnings per share in the range of $9 to The business has been transformed into one that is more flexible
$10 per share, or 10 to 14 percent growth from 2006 through a and more focused on higher-value segments of the market. The
combination of operational elements including revenue growth, two services segments are well-positioned heading into 2010
margin improvement, growth initiatives, acquisitions and effective driven by: an 11 percent growth (at constant currency) in out-
capital deployment to fund growth and provide returns to share- sourcing signings in 2009; a backlog of $137 billion at December
holders through dividends and common stock repurchases. 31, 2009; improving trends in Global Business Services; and,
In addition to these operational elements, the company’s road a global delivery structure that has enabled the company to
map to the $10 to $11 per share range includes the projected perform well in a tough environment. In addition, the portfolio
benefit of retirement-related costs based on December 31, 2006 is strong with a complement of offerings and capabilities that
assumptions. Actual retirement-related costs will depend on deliver both high value and productivity to clients. Going for-
several factors including financial market performance, the inter- ward the Global Services business will look to build upon its
est rate environment and actuarial assumptions. In March 2008 momentum by continuing to deliver value and by focusing on
and May 2009, the company met with investors and analysts further enhancements to its offerings/integrated solutions port-
and discussed the progress the company is making on its 2010 folio and continuing to improve both the skills and structure of
road map. the business.
The company’s performance in 2009 highlighted the benefits In the Systems and Technology business, the company will
of its global reach and the strength of its business model. The continue to focus its investments on differentiating technologies
financial results reflected solid progress on major elements of the with leadership and high-growth potential including POWER,
long-term goals. Despite a challenging economy, with diluted high-performance computing, virtualization, nanotechnology and
earnings per share of $10.01 in 2009, the company achieved its energy efficiency. In this market, the value has shifted to the high
road map objective one year early. end to address clients’ needs to consolidate and virtualize their
In January 2010, the company disclosed that it is expecting environments. The company will focus on providing clients with a
earnings of at least $11.00 per diluted share for the full year 2010, clear path to a fully dynamic infrastructure that not only reduces
with consistent earnings per share growth throughout the year.
Also in January 2010, the company disclosed that, for the first
quarter of 2010, the company expects a 4–5 point improvement

48

cost, but is both intelligent and secure. The systems product Cash Flow and Liquidity Trends
line will be significantly refreshed in 2010 with the release of the ($ in billions)
next generation System z mainframe in the second half and the 2009 2008 2007 2006 2005
next generation POWER systems in System p beginning in the Net cash from
first quarter of 2010. operating activities $20.8 $18.8 $16.1 $15.0 $14.9
In 2010, Global Financing will continue to focus on expand- Cash and short-term
ing its core business by accelerating growth in the participation marketable securities $14.0 $12.9 $16.1 $10.7 $13.7
rates for IBM products and services transactions. In addition, Committed global credit
the business will drive increased operational efficiency and facilities $10.0 $10.0 $10.0 $10.0 $10.0
sales productivity through the deployment of its single operating Trade receivables
model initiative. This global initiative is focused on simplifying securitization facility $ — $ — $ — $ — $ 0.5
processes, standardizing operations and optimizing business
performance. The major rating agencies’ ratings on the company’s debt
The company expects 2010 pre-tax retirement-related plan securities at December 31, 2009 appear in the table below and
cost to be approximately $1.5 billion, an increase of approximately remain unchanged from December 31, 2008. The company’s
$100 million compared to 2009. This estimate reflects current debt securities do not contain any acceleration clauses which
pension plan assumptions and the impacts of recent non-U.S. could change the scheduled maturities of the obligation. In addi-
pension plan redesign efforts. See note U, “Retirement-Related tion, the company does not have “ratings trigger” provisions in
Benefits,” on pages 109 through 121 for additional information. its debt covenants or documentation, which would allow the
The company expects in the normal course of business that holders to declare an event of default and seek to accelerate
its effective tax rate in 2010 will be approximately 26.0–26.5 payments thereunder in the event of a change in credit rating.
percent. The rate will change year to year based on non-recur- The company’s contractual agreements governing derivative
ring events, such as the settlement of income tax audits and instruments contain standard market clauses which can trigger
changes in tax laws, as well as recurring factors including the the termination of the agreement if the company’s credit rating
geographic mix of income before taxes, the timing and amount were to fall below investment grade. At December 31, 2009, the
of foreign dividend repatriation, state and local taxes and the fair value of those instruments that were in a liability position was
effects of various global income tax strategies. $1,555 million, before any applicable netting, and this position
Effective January 1, 2010, the company will implement sev- is subject to fluctuations in fair value period to period based on
eral new accounting standards that have been issued by the level of the company’s outstanding instruments and market
the Financial Accounting Standards Board. These standards conditions. The company has no other contractual arrange-
include: amended guidance for revenue recognition for arrangements that, in the event of a change in credit rating, would result
ments with multiple deliverables; guidance that revises the scope in a material adverse effect on its financial position or liquidity.
of existing software revenue recognition accounting; amend-
ments to the accounting rules for variable interest entities and Moody’s
transfers of financial assets; and, additional disclosure require- Standard Investors Fitch
& Poor’s Service Ratings
ments for fair value measurements. The company has evaluated
Senior long-term debt A+ A1 A+
the new guidance and does not expect a material impact on the
Commercial paper A-1 Prime-1 F1
Consolidated Financial Statements. See note B, “Accounting
Changes”, on pages 79 to 82 for additional information.
The company prepares its Consolidated Statement of Cash
Flows in accordance with applicable accounting standards for
Liquidity and Capital Resources
cash flow presentation on page 66 and highlights causes and
The company has consistently generated strong cash flow
events underlying sources and uses of cash in that format on
from operations, improving results year to year and providing
pages 35 and 36. For purposes of running its business, the
a source of funds ranging between $14.9 billion and $20.8 bil-
company manages, monitors and analyzes cash flows in a dif-
lion per year over the past five years. The company provides
ferent format.
for additional liquidity through several sources: maintaining an
Management uses a free cash flow measure to evaluate the
adequate cash balance, access to global funding sources,
company’s operating results, plan share repurchase levels, evalu-
a committed global credit facility and other committed and
ate strategic investments and assess the company’s ability and
uncommitted lines of credit worldwide. At December 31, 2009,
need to incur and service debt. Free cash flow is not a defined
the company had total unused lines of credit of $17,314 million.
term under U.S. GAAP and it should not be inferred that the entire
The following table provides a summary of the major sources of
free cash flow amount is available for discretionary expenditures.
liquidity for the years ended December 31, 2005 through 2009.
The company defines free cash flow as net cash from operating
activities less the change in Global Financing receivables and net

49

capital expenditures. As discussed on page 24, a key objective Over the past five years, the company generated over $61
of the Global Financing business is to generate strong returns on billion in free cash flow. During that period, the company invested
equity. Increasing receivables is the basis for growth in a financing $13.8 billion in strategic acquisitions and returned over $63 bil-
business. Accordingly, management considers Global Financing lion to shareholders through dividends and share repurchases.
receivables as a profit-generating investment, not as working The amount of prospective returns to shareholders in the form
capital that should be minimized for efficiency. After considering of dividends and share repurchases will vary based upon several
Global Financing receivables as an investment, the remaining net factors including each year’s operating results, capital expendi-
operational cash flow less net capital expenditures is viewed by ture requirements, research and development investments and
the company as free cash flow. acquisitions, as well as the factors discussed below.
From the perspective of how management views cash flow, in The company’s Board of Directors meets quarterly to consider
2009, free cash flow was $15.1 billion, an increase of $0.8 billion the dividend payment. The company expects to fund dividend
compared to 2008. This cash performance was driven primarily payments through cash from operations. In the second quarter
by the growth in net income of $1.1 billion, lower capital spending of 2009, the Board of Directors increased the company’s quar-
of $0.8 billion and higher cash from sales cycle working capital terly common stock dividend from $0.50 to $0.55 per share.
($1.2 billion), partially offset by higher retirement-related funding The table below represents the way in which management
($0.9 billion) and workforce rebalancing payments ($0.6 billion). reviews cash flow as described above.

($ in billions)
For the year ended December 31: 2009 2008 2007 2006 2005

Net cash from operating activities per GAAP (Continuing Operations) $20.8 $ 18.8 $16.1 $15.0 $14.9
Less: Global Financing receivables (1.9) (0.0) (1.3) (0.3) 1.8
Net cash from operating activities (Continuing Operations),
excluding Global Financing receivables 18.9 18.8 17.4 15.3 13.1
Capital expenditures, net (3.7) (4.5) (5.0) (4.7) (3.5)
Free cash flow (excluding Global Financing receivables) 15.1 14.3 12.4 10.5 9.6
Acquisitions (1.2) (6.3) (1.0) (3.8) (1.5)
Divestitures 0.4 0.1 0.3 — 0.9
Share repurchase (7.4) (10.6) (18.8) (8.1) (7.7)
Dividends (2.9) (2.6) (2.1) (1.7) (1.2)
Non-Global Financing debt (4.7) (3.2) 10.9 (1.1) 1.2
Other (includes Global Financing receivables
and Global Financing debt) 1.7 5.0 3.8 1.1 1.9
Change in cash, cash equivalents
and short-term marketable securities $ 1.1 $ (3.2) $ 5.5 $ (3.0) $ 3.1

Events that could temporarily change the historical cash flow The 2010 contributions are currently expected to be approxi-
dynamics discussed above include significant changes in oper- mately $0.8 billion. Financial market performance in 2010 could
ating results, material changes in geographic sources of cash, increase the legally mandated minimum contributions in certain
unexpected adverse impacts from litigation or future pension non-U.S. countries that require more frequent remeasurement
funding requirements during periods of severe downturn in the of the funded status. The company is not quantifying any fur-
capital markets. Whether any litigation has such an adverse ther impact from pension funding because it is not possible to
impact will depend on a number of variables, which are more com- predict future movements in the capital markets or pension plan
pletely described in note O, “Contingencies and Commitments” funding regulations.
on pages 99 and 100. With respect to pension funding, in 2009, The Pension Protection Act of 2006 was enacted into law in
the company contributed $1,252 million to its non-U.S. defined 2006, and, among other things, increases the funding require-
benefit plans, versus $917 million in 2008. As highlighted in the ments for certain U.S. defined benefit plans beginning after
Contractual Obligations table on page 51, the company expects December 31, 2007. No mandatory contribution is required for
to make legally mandated pension plan contributions to certain the U.S. defined benefit plan in 2010 as of December 31, 2009.
non-U.S. plans of approximately $3.6 billion in the next five years.

50

Contractual Obligations
($ in millions)
Total
Payments due in
Contractual
Payment Stream 2010 2011–12 2013–14 After 2014

Long-term debt obligations $23,842 $2,186 $ 6,992 $ 5,250 $ 9,414
Interest on long-term debt obligations 12,381 1,166 2,073 1,507 7,635
Capital (finance) lease obligations 165 64 57 44 —
Operating lease obligations 5,938 1,504 2,263 1,395 776
Purchase obligations 2,314 771 851 423 269
Other long-term liabilities:
Minimum pension funding (mandated)* 3,936 803 1,535 1,261 337
Executive compensation 1,207 71 152 166 817
Long-term termination benefits 1,789 223 245 213 1,109
Tax reserves** 4,371 1,083 — — —
Other 879 66 93 67 653
Total $56,822 $7,937 $14,261 $10,326 $21,011

* Represents future pension contributions that are mandated by local regulations or statute, all associated with non-U.S. pension plans. See note U, “Retirement-Related
Benefits,” on pages 109 through 121 for additional information on the non-U.S. plans’ investment strategies and expected contributions and for information regarding the
company’s unfunded pension plans of $16,819 million at December 31, 2009.
** These amounts represent the liability for unrecognized tax benefits. The company estimates that approximately $1,083 million of the liability is expected to be settled
within the next 12 months. The settlement period for the noncurrent portion of the income tax liability cannot be reasonably estimated as the timing of the payments will
depend on the progress of tax examinations with the various tax authorities; however, it is not expected to be due within the next 12 months.

Total contractual obligations are reported in the table above terms. They do not specify fixed or minimum quantities to be
excluding the effects of time value and therefore, may not equal purchased and, therefore, the company does not consider them
the amounts reported in the Consolidated Statement of Financial to be purchase obligations.
Position. Total contractual obligations decreased $10.4 billion Interest on floating rate debt obligations is calculated using
from the amount reported in the 2008 Annual Report primarily the effective interest rate at December 31, 2009, plus the inter-
due to the paydown of debt and the removal of the associ- est rate spread associated with that debt, if any.
ated interest expense obligations. Long-term debt obligations
decreased $6.4 billion and interest expense related to long-term Off-Balance Sheet Arrangements
debt obligations decreased $4.1 billion. From time to time, the company may enter into off-balance
Purchase obligations include all commitments to purchase sheet arrangements as defined by the SEC Financial Reporting
goods or services of either a fixed or minimum quantity that Release 67 (FRR-67), “Disclosure in Management’s Discussion
meet any of the following criteria: (1) they are noncancelable, and Analysis about Off-Balance Sheet Arrangements and
(2) the company would incur a penalty if the agreement was Aggregate Contractual Obligations.”
canceled, or (3) the company must make specified minimum At December 31, 2009, the company has no off-balance
payments even if it does not take delivery of the contracted sheet arrangements that have, or are reasonably likely to have,
products or services (take-or-pay). If the obligation to pur- a material current or future effect on financial condition, changes
chase goods or services is noncancelable, the entire value of in financial condition, revenues or expenses, results of opera-
the contract is included in the table above. If the obligation is tions, liquidity, capital expenditures or capital resources. See
cancelable, but the company would incur a penalty if canceled, the table above for the company’s contractual obligations and
the dollar amount of the penalty is included as a purchase obli- note O, “Contingencies and Commitments,” on pages 99 to
gation. Contracted minimum amounts specified in take-or-pay 101, for detailed information about the company’s guarantees,
contracts are also included in the table as they represent the financial commitments and indemnification arrangements. The
portion of each contract that is a firm commitment. company does not have retained interests in assets transferred
In the ordinary course of business, the company enters into to unconsolidated entities or other material off-balance sheet
contracts that specify that the company will purchase all or a interests or instruments.
portion of its requirements of a specific product, commodity or
service from a supplier or vendor. These contracts are gener-
ally entered into in order to secure pricing or other negotiated

51

Critical Accounting Estimates decreased by an estimated $41 million. Changes in the dis-
The application of GAAP requires the company to make esti- count rate assumptions will impact the PBO which, in turn, may
mates and assumptions about future events that directly affect impact the company’s funding decisions if the PBO exceeds plan
its reported financial condition and operating performance. The assets. Each 25 basis point increase or decrease in the discount
accounting estimates and assumptions discussed in this section rate will cause a corresponding decrease or increase, respec-
are those that the company considers to be the most critical to tively, in the PPP’s PBO of an estimated $1.2 billion based upon
its financial statements. An accounting estimate is considered December 31, 2009 data. The PPP’s PBO (after the decrease
critical if both (a) the nature of the estimate or assumption is in discount rate presented on page 115) and plan assets as of
material due to the levels of subjectivity and judgment involved, December 31, 2009 is presented on page 113.
and (b) the impact within a reasonable range of outcomes of the The expected long-term return on plan assets is used in cal-
estimate and assumption is material to the company’s financial culating the net periodic pension cost/(income). See page 115
condition or operating performance. Senior management has for information regarding the expected long-term return on plan
discussed the development, selection and disclosure of these assets assumption. The differences between the actual return on
estimates with the Audit Committee of the company’s Board plan assets and expected long-term return on plan assets are
of Directors. The company’s significant accounting policies are recognized over five years in the expected return on plan assets
described in note A, “Significant Accounting Policies,” on pages line in net periodic pension cost/(income) and also as a com-
70 to 79. ponent of actuarial gains/losses, which are recognized over the
A quantitative sensitivity analysis is provided where that infor- service lives or life expectancy of the plan participants, depending
mation is reasonably available, can be reliably estimated and on the plan, provided such amounts exceed thresholds which are
provides material information to investors. The amounts used to based upon the obligation or the value of plan assets.
assess sensitivity (e.g., 1 percent, 10 percent, etc.) are included To the extent the outlook for long-term returns changes such
to allow users of the Annual Report to understand a general that management changes its expected long-term return on plan
direction cause and effect of changes in the estimates and do assets assumption, each 50 basis point increase or decrease in
not represent management’s predictions of variability. For all the expected long-term return on PPP plan assets assumption
of these estimates, it should be noted that future events rarely will have an estimated increase or decrease, respectively, of
develop exactly as forecasted, and estimates require regular $252 million on the following year’s pre-tax net periodic pension
review and adjustment. cost/(income) (based upon the PPP’s plan assets at December
31, 2009 and assuming no contributions are made in 2010).
Pension Assumptions The company may voluntarily make contributions or be
The measurement of the company’s benefit obligation to its required, by law, to make contributions to its pension plans.
employees and net periodic pension cost/(income) requires the Actual results that differ from the estimates may result in more
use of certain assumptions, including, among others, estimates or less future company funding into the pension plans than is
of discount rates and expected return on plan assets. planned by management.
Changes in the discount rate assumptions will impact the Impacts of these types of changes on the company’s defined
(gain)/loss amortization and interest cost components of the net benefit pension plans in other countries worldwide will vary
periodic pension cost/(income) calculation (see page 115 for depending upon the status of each respective plan.
information regarding the discount rate assumptions) and the
projected benefit obligation (PBO). As presented on page 115, Revenue Recognition
the company decreased the discount rate assumption for the Application of the various accounting principles in GAAP related
IBM Personal Pension Plan (PPP), a U.S.-based defined benefit to the measurement and recognition of revenue requires the
plan, by 15 basis points to 5.60 percent on December 31, 2009. company to make judgments and estimates. Specifically, com-
This change will increase pre-tax cost and expense recognized plex arrangements with nonstandard terms and conditions may
in 2010 by an estimated $40 million. If the discount rate assump- require significant contract interpretation to determine the appro-
tion for the PPP increased by 15 basis points on December 31, priate accounting, including whether the deliverables specified in
2009, pre-tax cost and expense recognized in 2010 would have a multiple element arrangement should be treated as separate
units of accounting. Other significant judgments include deter-
mining whether IBM or a reseller is acting as the principal in a
transaction and whether separate contracts are considered part
of one arrangement.

52

Revenue recognition is also impacted by the company’s new information becomes available which causes the company
ability to estimate sales incentives, expected returns and allow- to change its judgment regarding the adequacy of existing tax
ances for uncollectible receivables. The company considers liabilities, such changes to tax liabilities will impact income tax
various factors, including a review of specific transactions, the expense in the period in which such determination is made.
credit-worthiness of the customers, historical experience and Significant judgment is also required in determining any
market and economic conditions when calculating these provi- valuation allowance recorded against deferred tax assets. In
sions and allowances. Estimates are evaluated each quarter to assessing the need for a valuation allowance, management
assess the adequacy of the estimates. If these estimates were considers all available evidence for each jurisdiction including
changed by 10 percent in 2009, net income would be impacted past operating results, estimates of future taxable income and
by $74 million (excluding Global Financing receivables reserves the feasibility of ongoing tax planning strategies. In the event
discussed on page 59). that the company changes its determination as to the amount of
deferred tax assets that can be realized, the company will adjust
Costs to Complete Service Contracts its valuation allowance with a corresponding impact to income
The company enters into numerous service contracts through tax expense in the period in which such determination is made.
its GTS and GBS businesses. During the contractual period, To the extent that the provision for income taxes increases/
revenue, cost and profits may be impacted by estimates of the decreases by 1 percent of income from continuing operations
ultimate profitability of each contract, especially contracts for before income taxes, consolidated income from continuing oper-
which the company uses the percentage-of-completion (POC) ations would have decreased/improved by $181 million in 2009.
method of accounting. If at any time these estimates indicate
the POC contract will be unprofitable, the entire estimated loss Valuation of Assets
for the remainder of the contract is recorded immediately in The application of business combination and impairment account-
cost. The company performs ongoing profitability analyses of ing requires the use of significant estimates and assumptions.
its services contracts in order to determine whether the latest The acquisition method of accounting for business combina-
estimates require updating. Key factors reviewed by the com- tions requires the company to estimate the fair value of assets
pany to estimate the future costs to complete each contract acquired, liabilities assumed, and any noncontrolling interest
are future labor costs, future product costs and productivity in the acquiree to properly allocate purchase price consider-
efficiencies. Contract loss provisions recorded as a component ation between assets that are depreciated and amortized from
of other accrued expenses and liabilities are approximately $37 goodwill. Impairment testing for assets, other than goodwill,
million and $24 million at December 31, 2009 and December requires the allocation of cash flows to those assets or group
31, 2008, respectively. of assets and if required, an estimate of fair value for the assets
or group of assets. The company’s estimates are based upon
Income Taxes assumptions believed to be reasonable, but which are inherently
The company is subject to income taxes in the U.S. and numer- uncertain and unpredictable. These valuations require the use of
ous foreign jurisdictions. Significant judgments are required in management’s assumptions, which would not reflect unantici-
determining the consolidated provision for income taxes. pated events and circumstances that may occur.
During the ordinary course of business, there are many
transactions and calculations for which the ultimate tax deter- Valuation of Goodwill
mination is uncertain. As a result, the company recognizes tax The company reviews goodwill for impairment annually and
liabilities based on estimates of whether additional taxes and whenever events or changes in circumstances indicate the car-
interest will be due. These tax liabilities are recognized when, rying value of goodwill may not be recoverable. The guidance
despite the company’s belief that its tax return positions are sup- on goodwill impairment requires the company to perform a two-
portable, the company believes that certain positions may not step impairment test. In the first step, the company compares
be fully sustained upon review by tax authorities. The company the fair value of each reporting unit to its carrying value. The
believes that its accruals for tax liabilities are adequate for all open company determines the fair value of its reporting units based on
audit years based on its assessment of many factors including the income approach. Under the income approach, the company
past experience and interpretations of tax law. This assessment calculates the fair value of a reporting unit based on the present
relies on estimates and assumptions and may involve a series value of estimated future cash flows. If the fair value of the report-
of complex judgments about future events. To the extent that ing unit exceeds the carrying value of the net assets assigned

53

to that unit, goodwill is not impaired. If the carrying value of the and 79. Factors that could result in actual receivable losses that
net assets assigned to the reporting unit exceeds the fair value are materially different from the estimated reserve include sharp
of the reporting unit, then the second step of the impairment changes in the economy, or a significant change in the economic
test is performed in order to determine the implied fair value of health of a particular client or industry segment that represents a
the reporting unit’s goodwill. If the carrying value of a reporting concentration in Global Financing’s receivables portfolio.
unit’s goodwill exceeds its implied fair value, then the company To the extent that actual collectibility differs from manage-
records an impairment loss equal to the difference. ment’s estimates currently provided for by 10 percent, Global
Determining the fair value of a reporting unit is judgmental Financing’s segment pre-tax income and the company’s consol-
in nature and involves the use of significant estimates and idated income from continuing operations before income taxes
assumptions. These estimates and assumptions include rev- would be higher or lower by an estimated $54 million (using
enue growth rates and operating margins used to calculate 2009 data), depending upon whether the actual collectibility was
projected future cash flows, discount rates and future economic better or worse, respectively, than the estimates.
and market conditions. The company’s estimates are based
upon assumptions believed to be reasonable, but which are Residual Value
inherently uncertain and unpredictable. These valuations require Residual value represents the estimated fair value of equipment
the use of management’s assumptions, which would not reflect under lease as of the end of the lease. Residual value estimates
unanticipated events and circumstances that may occur. impact the determination of whether a lease is classified as
The annual goodwill impairment analysis, which the company operating or capital. Global Financing estimates the future fair
performed during the fourth quarter of 2009, did not result in an value of leased equipment by using historical models, analyzing
impairment charge. Utilizing the balances as of September 30, the current market for new and used equipment and obtaining
2009, the excess of fair value over carrying value for each of the forward-looking product information such as marketing plans
company’s reporting units ranged from approximately $0.4 billion and technological innovations. Residual value estimates are
to approximately $74.7 billion. In order to evaluate the sensitivity periodically reviewed and “other than temporary” declines in
of the fair value calculations on the goodwill impairment test, estimated future residual values are recognized upon identifi-
the company applied a hypothetical 10 percent decrease to the cation. Anticipated increases in future residual values are not
fair values of each reporting unit. This hypothetical 10 percent recognized until the equipment is remarketed. Factors that
decrease would result in excess fair value over carrying value could cause actual results to materially differ from the estimates
ranging from approximately $0.4 billion to approximately $66.3 include significant changes in the used-equipment market
billion for each of the company’s reporting units. brought on by unforeseen changes in technology innovations
and any resulting changes in the useful lives of used equipment.
Loss Contingencies To the extent that actual residual value recovery is lower than
The company is currently involved in various claims and legal management’s estimates by 10 percent, Global Financing’s seg-
proceedings. Quarterly, the company reviews the status of each ment pre-tax income and the company’s consolidated income
significant matter and assesses its potential financial exposure. from continuing operations before income taxes would be lower
If the potential loss from any claim or legal proceeding is con- by an estimated $120 million (using 2009 data). If the actual
sidered probable and the amount can be reasonably estimated, residual value recovery is higher than management’s estimates,
the company accrues a liability for the estimated loss. Significant the increase in income will be realized at the end of lease when
judgment is required in both the determination of probability the equipment is remarketed.
and the determination as to whether an exposure is reasonably
estimable. Because of uncertainties related to these matters, Currency Rate Fluctuations
accruals are based only on the best information available at the
Changes in the relative values of non-U.S. currencies to the
time. As additional information becomes available, the company
U.S. dollar affect the company’s results. At December 31, 2009,
reassesses the potential liability related to its pending claims
currency changes resulted in assets and liabilities denominated
and litigation and may revise its estimates. These revisions in the
in local currencies being translated into more U.S. dollars
estimates of the potential liabilities could have a material impact
than at year-end 2008. The company uses financial hedging
on the company’s results of operations and financial position.
instruments to limit specific currency risks related to financing
transactions and other foreign currency-based transactions.
Financing Receivables Reserves
Further discussion of currency and hedging appears in note L,
The Global Financing business reviews its financing receivables “Derivatives and Hedging Transactions,” on pages 92 through 96.
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 pages 78

54

In 2009, the company’s revenue decreased 7.6 percent as In addition, due to the fact that the blended CPI/NCPI three-
reported and 5.3 percent adjusted for currency. In the first nine year cumulative inflation rate in Venezuela has reached 100
months of 2009, revenue decreased 10.6 percent as reported percent, the country will be considered highly inflationary, con-
and 5.3 percent adjusted for currency. This currency impact sistent with accounting standards, effective January 1, 2010. The
reversed in the fourth quarter, as revenue increased 0.8 percent company’s operations in Venezuela are not significant (less than
as reported and declined 5.5 percent adjusted for currency, 1 percent of total 2008 and 2009 revenue), therefore, the com-
driven from the company’s operations in currencies other than pany does not expect a material impact from the shift to highly
the U.S. dollar. The company maintains currency hedging pro- inflationary. On January 8, 2010, a devaluation of the Venezuelan
grams for cash planning purposes which mitigate, but do not currency was announced. There will be a two-tiered official rate,
eliminate, the volatility of currency impacts on the company’s for “essentials” and “non-essentials”. This is not expected to have
financial results. In addition to the translation of earnings, the a material impact to future operating results.
impact of currency changes also may affect the company’s
pricing and sourcing actions. For example, the company may Market Risk
procure components and supplies in multiple functional cur-
In the normal course of business, the financial position of the
rencies and sell products and services in other currencies. The
company is routinely subject to a variety of risks. In addition to
company believes that some of these currency-based changes in
the market risk associated with interest rate and currency move-
cost impact the price charged to clients. However, the company
ments on outstanding debt and non-U.S. dollar denominated
estimates that the effect of currency, before taking pricing or
assets and liabilities, other examples of risk include collectibility
sourcing actions into account, and net of hedging activity, had no
of accounts receivable and recoverability of residual values on
more than a $0.09 impact on earnings per share growth in 2009.
leased assets.
For non-U.S. subsidiaries and branches that operate in U.S.
The company regularly assesses these risks and has estab-
dollars or whose economic environment is highly inflationary,
lished policies and business practices to protect against the
translation adjustments are reflected in results of operations.
adverse effects of these and other potential exposures. As a
Generally, the company manages currency risk in these entities
result, the company does not anticipate any material losses from
by linking prices and contracts to U.S. dollars.
these risks.
The company is continuing to monitor the current economic
The company’s debt, in support of the Global Financing busi-
conditions in Venezuela. In Venezuela, there is an official cur-
ness and the geographic breadth of the company’s operations,
rency rate that is fixed by the government, and a parallel market
contains an element of market risk from changes in interest and
of currency exchange that enables companies to obtain foreign
currency rates. The company manages this risk, in part, through
currency, including dollars. The parallel rate is variable and may
the use of a variety of financial instruments including derivatives,
differ significantly from the official rate. Accounting guidance
as explained in note L, “Derivatives and Hedging Transactions, ”
requires that the translation of a non-U.S. entity’s financial state-
on pages 92 through 96.
ments into the company’s consolidated financial statements be
To meet disclosure requirements, the company performs
at the rate applicable to dividend remittances. Through the first
a sensitivity analysis to determine the effects that market risk
11 months of 2009, the company used the official rate for trans-
exposures may have on the fair values of the company’s debt
lation of its Venezuela financial statements as this was the rate
and other financial instruments.
applicable to prior dividend remittances. Due to the significant
The financial instruments that are included in the sensitivity
reduction of currency approvals by the Venezuela government,
analysis comprise all of the company’s cash and cash equiva-
in December the company determined that the rate for transla-
lents, marketable securities, short-term and long-term loans,
tion should be changed to the parallel rate at December 31,
commercial financing and installment payment receivables,
2009. This resulted in an immaterial charge to the income state-
investments, long-term and short-term debt and all derivative
ment and a decrease of IBM stockholders’ equity of $93 million.
financial instruments. The company’s portfolio of derivative finan-
Future results are not expected to be materially impacted as a
cial instruments generally includes interest rate swaps, foreign
result of translation at the parallel rate.
currency swaps and forward 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.

55

The discount rates used for the present value computations in a decrease in the fair market value of the company’s financial
were selected based on market interest and foreign currency instruments of $274 million as compared with a decrease of
exchange rates in effect at December 31, 2009 and 2008. The $353 million at December 31, 2008. A 10 percent increase in
differences in this comparison are the hypothetical gains or the levels of interest rates with all other variables held constant
losses associated with each type of risk. would result in an increase in the fair value of the company’s
Information provided by the sensitivity analysis does not financial instruments of $251 million as compared to an increase
necessarily represent the actual changes in fair value that the of $327 million at December 31, 2008. Changes in the relative
company would incur under normal market conditions because, sensitivity of the fair value of the company’s financial instrument
due to practical limitations, all variables other than the specific portfolio for these theoretical changes in the level of interest
market risk factor are held constant. In addition, the results rates are primarily driven by changes in the company’s debt
of the model are constrained by the fact that certain items maturities, interest rate profile and amount.
are specifically excluded from the analysis, while the financial
instruments relating to the financing or hedging of those items Foreign Currency Exchange Rate Risk
are included by definition. Excluded items include short-term At December 31, 2009, a 10 percent weaker U.S. dollar against
and long-term receivables from sales-type and direct financing foreign currencies, with all other variables held constant, would
leases, forecasted foreign currency cash flows and the com- result in a decrease in the fair value of the company’s financial
pany’s net investment in foreign operations. As a consequence, instruments of $609 million as compared with a decrease of
reported changes in the values of some of the financial instru- $1,007 million at December 31, 2008. Conversely, a 10 percent
ments impacting the results of the sensitivity analysis are not stronger U.S. dollar against foreign currencies, with all other vari-
matched with the offsetting changes in the values of the items ables held constant, would result in an increase in the fair value
that those instruments are designed to finance or hedge. of the company’s financial instruments of $609 million compared
The results of the sensitivity analysis at December 31, 2009, with an increase of $1,007 million at December 31, 2008.
and December 31, 2008, are as follows:

Financing Risks
Interest Rate Risk
See the “Description of Business” on page 24 for a discussion
At December 31, 2009, a 10 percent decrease in the levels of
of the financing risks associated with the Global Financing busi-
interest rates with all other variables held constant would result
ness and management’s actions to mitigate such risks.

Employees and Related Workforce

Yr.-to-Yr. Change
For the year ended December 31: 2009 2008 2007 2009-08 2008-07

IBM/wholly owned subsidiaries 399,409 398,455 386,558 0.2% 3.1%
Less-than-wholly owned subsidiaries 11,421 11,642 11,769 (1.9) (1.1)
Complementary 26,946 27,983 28,642 (3.7) (2.3)

As a globally integrated enterprise, the company operates in and its wholly owned subsidiaries increased slightly compared
over 170 countries and is continuing to shift its business to the to the prior year.
higher value segments of enterprise computing. The company The complementary workforce is an approximation of
continually assesses its resource needs with the objective of equivalent full-time employees hired under temporary, part-time
balancing its workforce globally to improve the company’s global and limited-term employment arrangements to meet specific
reach and competitiveness. In 2009, total employees at IBM business needs in a flexible and cost-effective manner.

56

Global Financing • A decline in internal revenue of 6.3 percent driven by a
decrease in financing revenue (down 22.0 percent to $580
Global Financing is a reportable segment that is measured as if it million), partially offset by an increase in used equipment
were a standalone entity. Accordingly, the information presented sales (up 3.9 percent to $1,194 million).
in this section is consistent with this separate company view.
In 2009, as the global economy emerged from a challeng- The decrease in external and internal financing revenue was due
ing credit environment, the Global Financing business delivered to lower average asset balances and lower asset yields.
strong financial results. The Global Financing business remained Global Financing gross profit decreased 1.7 percent com-
focused on its core competencies—providing IT financing to the pared to 2008 due to the lower revenue. Gross margin increased
company’s clients and business partners. For the year, Global 4.2 points due to higher margins on financing and used equip-
Financing improved gross margin by 4.2 points and pre-tax ment sales.
income margin by 6.1 points, while total revenue declined 8.4 The increase in 2008 revenue, as compared to 2007, was
percent. Total pre-tax income of $1,730 million increased 7.0 primarily due to:
percent compared to 2008.
In addition to the overall health of the economy and its impact on • An increase in external revenue of 2.3 percent (flat adjusted
corporate IT budgets, key drivers of Global Financing’s results are for currency), due to growth in financing revenue (up 7.9 per-
interest rates and originations. Interest rates directly impact Global cent to $1,939 million), partially offset by a decrease in used
Financing’s business by increasing or decreasing both financing equipment sales (down 12.0 percent to $620 million); and
revenue and the associated borrowing costs. Originations, which • Growth in internal revenue of 27.7 percent primarily driven
determine the asset base of Global Financing’s annuity-like busi- by an increase in used equipment sales (up 47.2 percent to
ness, are impacted by IBM’s non-Global Financing sales volumes $1,148 million) and an increase in financing revenue (up 6.0
and Global Financing’s participation rates. Participation rates are percent to $744 million).
the propensity of IBM’s clients to finance their purchases through
Global Financing in lieu of paying IBM up-front cash or financing The increase in external and internal financing revenue was due
through a third party. to higher average asset balances and higher asset yields.
Global Financing gross profit increased 18.4 percent in 2008
versus 2007, with gross margin increasing 3.3 points. This was
Results of Operations due to higher margins on financing and used equipment sales.
($ in millions) Global Financing pre-tax income increased 7.0 percent in
For the year ended December 31: 2009 2008 2007 2009 versus 2008, following an increase of 16.7 percent in
External revenue $2,302 $2,559 $2,502 2008 versus 2007. The increase in 2009 was primarily driven by
Internal revenue 1,774 1,892 1,482 decreases in financing receivables provisions of $86 million and
Total revenue 4,076 4,451 3,984 other selling, general and administrative expenses of $67 million,
Cost 1,555 1,887 1,819
partially offset by the decrease in gross profit of $44 million. The
increase in 2008 was driven by the increase in gross profit of
Gross profit $2,520 $2,564 $2,165
$399 million, partially offset by an increase in financing receivables
Gross profit margin 61.8% 57.6% 54.4%
provisions of $159 million. The decrease in financing receivables
Pre-tax income $1,730 $1,617 $1,386
provisions in 2009 was primarily due to lower specific reserve
After-tax income* $1,138 $1,049 $ 877 requirements. Overall allowance for doubtful accounts coverage
Return on equity* 34.4% 29.4% 26.1% rate is 2.1 percent, an increase of 0.1 points versus 2008.
* See page 61 for the details of the after-tax income and return on equity The increase in return on equity from 2008 to 2009 was
calculation. driven by higher after-tax income and a lower average equity
balance, while the increase from 2007 to 2008 was primarily due
The decrease in 2009 revenue, as compared to 2008, was to higher after-tax income.
primarily due to:

• A decline in external revenue of 10.0 percent (7 percent
adjusted for currency), due to decreases in financing revenue
(down 11.6 percent to $1,715 million) and in used equipment
sales (down 5.2 percent to $588 million); and

57

Financial Condition software and services with terms generally from two to seven
years. Global Financing’s client loans are primarily for software
Balance Sheet
and services and are unsecured. These loans are subjected to
($ in millions) additional credit analysis to evaluate the associated risk and,
when deemed necessary, actions are taken to mitigate risks in
Cash and cash equivalents $ 1,285 $ 1,269 the loan agreements which include covenants to protect against
Net investment in sales-type and credit deterioration during the life of the obligation. Client financ-
direct financing leases 9,482 10,203
ing also includes internal activity as described on page 24.
Equipment under operating leases: Commercial financing receivables arise primarily from inventory
External clients(a) 1,863 2,139 and accounts receivable financing for dealers and remarketers of
Internal clients(b)(c) 994 1,709 IBM and non-IBM products. Payment terms for inventory financ-
Client loans 10,413 10,615 ing and accounts receivable financing generally range from 30 to
Total client financing assets 22,752 24,667 90 days. These short-term receivables are primarily unsecured
Commercial financing receivables 5,662 5,875 and are also subjected to additional credit analysis in order to
Intercompany financing receivables(b)(c) 3,660 2,957 evaluate the associated risk.
At December 31, 2009, approximately 98 percent of Global
Other receivables 370 396
Financing’s external financing assets are in the segment’s core
Other assets 877 956
competency of technology equipment and solutions financing,
Total assets $34,605 $36,119
and approximately 59 percent of the external portfolio is with
Intercompany payables(b) $ 5,879 $ 5,391
investment grade clients with no direct exposure to consumers
Debt (d) 22,383 24,360 or mortgage assets.
Other liabilities 3,174 2,875
Total liabilities 31,435 32,626 Originations
Total equity 3,170 3,493 The following are total external and internal financing originations.
Total liabilities and equity $34,605 $36,119
(a)
Includes intercompany mark-up, priced on an arms-length basis, on products ($ in millions)
purchased from the company’s product divisions, which is eliminated in IBM’s For the year ended December 31: 2009 2008 2007
consolidated results.
Client financing:
(b)
Entire amount eliminated for purposes of IBM’s consolidated results and there-
fore does not appear on page 65. External $11,760 $14,790 $14,171
(c)
These assets, along with all other financing assets in this table, are leveraged at Internal 755 1,039 1,040
the value in the table using Global Financing debt. Commercial financing 27,126 32,078 30,541
(d)
Global Financing debt is comprised of intercompany loans and external debt. Total $39,641 $47,907 $45,752
A portion of Global Financing debt is in support of the company’s internal busi-
ness, or related to intercompany mark-up embedded in the Global Financing
assets. See table on page 60.
Cash collections exceeded new financing originations for both
client and commercial financing in 2009 which resulted in a
Sources and Uses of Funds net decline in financing assets from December 31, 2008. The
The primary use of funds in Global Financing is to originate client decrease in originations in 2009 from 2008 was primarily due to
and commercial financing assets. Client financing assets for end lower demand for IT equipment associated with the economic
users consist primarily of IBM systems, software and services, environment. The increase in originations in 2008 versus 2007
but also include non-IBM equipment, software and services to was due to improving external volumes in both client and com-
meet IBM clients’ total solutions requirements. Client financing mercial financing.
assets are primarily sales-type, direct financing and operating Cash generated by Global Financing in 2009 was primarily
leases for systems products, as well as loans for systems, deployed to pay the intercompany payables and dividends to IBM.

58

Global Financing Receivables and Allowances Global Financing optimizes the recovery of residual values
The following table presents external financing receivables exclud- by selling assets sourced from end of lease, leasing used equip-
ing residual values and the allowance for doubtful accounts. ment to new clients, or extending lease arrangements with
current clients. Sales of equipment, which are primarily sourced
($ in millions) from equipment returned at the end of a lease, represented 43.7
At December 31: 2009 2008 percent of Global Financing’s revenue in 2009 and 39.7 percent
Gross financing receivables $25,508 $26,599 in 2008. The percentage increase was driven primarily by the
Specific allowance for doubtful accounts 416 386 decrease in financing revenue. The gross margin on these sales
Unallocated allowance for doubtful accounts 120 144 was 51.3 percent and 50.0 percent in 2009 and 2008, respec-
Total allowance for doubtful accounts 536 530
tively. The increase is primarily driven by a shift in mix toward
higher margin internal used equipment sales.
Net financing receivables $24,972 $26,069
The table on page 60 presents the recorded amount of
Allowance for doubtful accounts coverage 2.1% 2.0%
unguaranteed residual value for sales-type, direct financing and
operating leases at December 31, 2008 and 2009. In addition,
Roll Forward of Financing Receivables Allowance the table presents the residual value as a percentage of the
for Doubtful Accounts related original amount financed and a run out of when the
($ in millions) unguaranteed residual value assigned to equipment on leases
Allowance Additions/ Dec. 31, at December 31, 2009 is expected to be returned to the com-
Jan. 1, 2009 Used* (Reductions) Other** 2009 pany. In addition to the unguaranteed residual value, on a limited
$530 $(153) $143 $16 $536 basis, Global Financing will obtain guarantees of the future value
* Represents reserved receivables, net of recoveries, that were disposed of of the equipment to be returned at end of lease. These third-
during the period. party guarantees are included in minimum lease payments as
** Primarily represents translation adjustments. provided for by accounting standards in the determination of
lease classifications for the covered equipment and provide
The percentage of Global Financing receivables reserved increased protection against risk of loss arising from declines in equipment
from 2.0 percent at December 31, 2008 to 2.1 percent at values for these assets. The residual value guarantee increases
December 31, 2009 primarily due to the decline in the gross the minimum lease payments that are utilized in determining the
financing receivables balance from December 31, 2008. Specific classification of a lease as a sales-type lease or operating lease.
reserves increased 7.8 percent from $386 million at December 31, The aggregate asset values associated with the guarantees
2008 to $416 million at December 31, 2009. Unallocated reserves were $569 million and $1,083 million for the financing transac-
decreased 16.6 percent from $144 million at December 31, tions originated during the years ended December 31, 2009 and
2008, to $120 million at December 31, 2009. Global Financing’s 2008, respectively. In 2009, the residual value guarantee pro-
bad debt expense was an increase of $143 million for 2009, gram resulted in the company recognizing approximately $400
compared to an increase of $229 million for 2008. The year-to- million of revenue that would otherwise have been recognized in
year decrease was primarily attributed to the decline of required future periods as operating lease revenue. If the company had
specific reserve additions. chosen to not participate in a residual value program in 2009
and prior years, the 2009 impact would be substantially miti-
Residual Value gated by the effect of prior year asset values being recognized
Residual value is a risk unique to the financing business and as operating lease revenue in the current year. The associated
management of this risk is dependent upon the ability to accu- aggregate guaranteed future values at the scheduled end of
rately project future equipment values at lease inception. Global lease were $30 million and $56 million for the financing transac-
Financing has insight into product plans and cycles for the tions originated during 2009 and 2008, respectively. The cost
IBM products under lease. Based upon this product information, of guarantees was $4 million for the year ended December 31,
Global Financing continually monitors projections of future equip- 2009 and $7 million for the year ended December 31, 2008.
ment values and compares them with the residual values reflected
in the portfolio. See note A, “Significant Accounting Policies,” on
page 79 for the company’s accounting policy for residual values.

59

Unguaranteed Residual Value
($ in millions)
Total Estimated Run Out of 2009 Balance
2008 2009 2010 2011 2012 2013 and Beyond

Sales-type and direct financing leases $ 916 $ 849 $203 $271 $271 $104
Operating leases 378 351 166 112 62 11
Total unguaranteed residual value $ 1,294 $ 1,200 $369 $383 $333 $115
Related original amount financed $21,000 $20,687
Percentage 6.2% 5.8%

Debt Financing as if it were a standalone entity, interest expense relat-
ing to debt supporting Global Financing’s external client and
internal business is included in the “Global Financing Results of
Debt-to-equity ratio 7.1x 7.0x Operations” on page 57 and in note V, “Segment Information,”
on pages 122 to 126.
The company funds Global Financing through borrowings using In the company’s Consolidated Statement of Earnings on
a debt-to-equity ratio target of approximately 7 to 1. The debt page 64, however, the external debt-related interest expense
used to fund Global Financing assets is composed of intercom- supporting Global Financing’s internal financing to the company
pany loans and external debt. The terms of the intercompany is reclassified from cost of financing to interest expense.
loans are set by the company to substantially match the term The following table provides additional information on total
and currency underlying the financing receivable and are based company debt. In this table, intercompany activity includes
on arm’s-length pricing. Both assets and debt are presented in internal loans and leases at arm’s-length pricing in support of
the Global Financing Balance Sheet on page 58. Global Services’ long-term contracts and other internal activity.
The Global Financing business provides funding predominantly The company believes these assets should be appropriately lev-
for the company’s external clients but also provides intercompany eraged in line with the overall Global Financing business model.
financing for the company. Since the company measures Global

($ in millions)
December 31, 2009 December 31, 2008

Global Financing Segment: $22,383 $24,360
Debt to support external clients $19,091 $20,892
Debt to support internal clients 3,292 3,468
Non-Global Financing Segments: 3,717 9,566
Debt supporting operations 7,008 13,034
Intercompany activity (3,292) (3,468)
Total company debt $26,099 $33,926

60

Liquidity and Capital Resources IBM continues to access both the short-term commercial
Global Financing is a segment of the company and therefore, is paper market and the medium- and long-term debt markets.
supported by the company’s overall liquidity position and access A protracted period where IBM could not access the capital
to capital markets. Cash generated by Global Financing was markets would likely lead to a slowdown in originations.
primarily deployed to pay intercompany payables and dividends Interest rates and the overall economy (including currency
to the company in order to maintain an appropriate debt-to- fluctuations) will have an effect on both revenue and gross profit.
equity ratio. The company’s interest rate risk management policy, however,
combined with the Global Financing pricing strategy should
Return on Equity mitigate gross margin erosion due to changes in interest rates.
The economy could impact the credit quality of the Global
($ in millions)
Financing receivables portfolio and therefore the level of provi-
sion for bad debts. Global Financing will continue to apply rigor-
Numerator: ous credit policies in both the origination of new business and
Global Financing after-tax income(a)* $1,138 $1,049 the evaluation of the existing portfolio.
Denominator: As discussed on page 59, Global Financing has historically
Average Global Financing equity (b)** $3,312 $3,572 been able to manage residual value risk both through insight into
Global Financing return on equity (a)/(b) 34.4% 29.4% the company’s product cycles, as well as through its remarket-
ing business.
* 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 Global Financing has policies in place to manage each of
determined on a consolidated basis. the key risks involved in financing. These policies, combined
** Average of the ending equity for Global Financing for the last five quarters. with product and client knowledge, should allow for the prudent
management of the business going forward, even during peri-
Looking Forward ods of uncertainty with respect to the economy.
Global Financing’s financial position provides flexibility and fund-
ing capacity which enables the company to be well positioned
in the current environment. Global Financing’s assets and new
financing volumes are primarily IBM products and services
financed to the company’s clients and business partners, and
substantially all financing assets are IT related assets which
provide a stable base of business for future growth. Global
Financing’s offerings are competitive and available to clients
as a result of the company’s borrowing cost and access to the
capital markets. Overall, Global Financing’s originations will be
dependent upon the demand for IT products and services as
well as client participation rates.

61

Report of Management

Management Responsibility for Management’s Report on Internal Control
Financial Information Over Financial Reporting
Responsibility for the integrity and objectivity of the financial Management is responsible for establishing and maintaining
information presented in this Annual Report rests with IBM man- adequate internal control over financial reporting of the company.
agement. The accompanying financial statements have been Internal control over financial reporting is a process designed to
prepared in accordance with accounting principles generally provide reasonable assurance regarding the reliability of financial
accepted in the United States of America, applying certain esti- reporting and the preparation of financial statements for external
mates and judgments as required. purposes in accordance with accounting principles generally
IBM maintains an effective internal control structure. It con- accepted in the United States of America.
sists, in part, of organizational arrangements with clearly defined The company’s internal control over financial reporting
lines of responsibility and delegation of authority, and compre- includes those policies and procedures that (i) pertain to the
hensive systems and control procedures. An important element maintenance of records that, in reasonable detail, accurately
of the control environment is an ongoing internal audit program. and fairly reflect the transactions and dispositions of the assets
Our system also contains self-monitoring mechanisms, and of the company; (ii) provide reasonable assurance that trans-
actions are taken to correct deficiencies as they are identified. actions are recorded as necessary to permit preparation of
To assure the effective administration of internal controls, financial statements in accordance with accounting principles
we carefully select and train our employees, develop and dis- generally accepted in the United States of America, and that
seminate written policies and procedures, provide appropriate receipts and expenditures of the company are being made only
communication channels and foster an environment conducive in accordance with authorizations of management and directors
to the effective functioning of controls. We believe that it is of the company; and (iii) provide reasonable assurance regarding
essential for the company to conduct its business affairs in prevention or timely detection of unauthorized acquisition, use,
accordance with the highest ethical standards, as set forth in the or disposition of the company’s assets that could have a mate-
IBM Business Conduct Guidelines. These guidelines, translated rial effect on the financial statements.
into numerous languages, are distributed to employees through- Because of its inherent limitations, internal control over finan-
out the world, and re-emphasized through internal programs to cial reporting may not prevent or detect misstatements. Also,
assure that they are understood and followed. projections of any evaluation of effectiveness to future periods
PricewaterhouseCoopers LLP, an independent registered are subject to the risk that controls may become inadequate
public accounting firm, is retained to audit IBM’s Consolidated because of changes in conditions, or that the degree of compli-
Financial Statements and the effectiveness of the internal control ance with the policies or procedures may deteriorate.
over financial reporting. Its accompanying report is based on Management conducted an evaluation of the effective-
audits conducted in accordance with the standards of the Public ness of internal control over financial reporting based on the
Company Accounting Oversight Board (United States). framework in Internal Control—Integrated Framework issued by
The Audit Committee of the Board of Directors is com- the Committee of Sponsoring Organizations of the Treadway
posed solely of independent, non-management directors, and Commission (COSO). Based on this evaluation, management
is responsible for recommending to the Board the independent concluded that the company’s internal control over financial
registered public accounting firm to be retained for the coming reporting was effective as of December 31, 2009.
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. Samuel J. Palmisano
Chairman of the Board,
President and Chief Executive Officer
February 23, 2010

Mark Loughridge
Senior Vice President,
Chief Financial Officer
February 23, 2010

62

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of assessing the risk that a material weakness exists, and testing
Directors of International Business and evaluating the design and operating effectiveness of internal
Machines Corporation: control based on the assessed risk. Our audits also included
In our opinion, the accompanying Consolidated Financial State- performing such other procedures as we considered necessary
ments appearing on pages 64 through 126 present fairly, in all in the circumstances. We believe that our audits provide a rea-
material respects, the financial position of International Business sonable basis for our opinions.
Machines Corporation and its subsidiaries at December 31, A company’s internal control over financial reporting is a
2009 and 2008 and the results of their operations and their cash process designed to provide reasonable assurance regarding
flows for each of the three years in the period ended December the reliability of financial reporting and the preparation of financial
31, 2009 in conformity with accounting principles generally statements for external purposes in accordance with generally
accepted in the United States of America. Also in our opinion, accepted accounting principles. A company’s internal control
the Company maintained, in all material respects, effective inter- over financial reporting includes those policies and procedures
nal control over financial reporting as of December 31, 2009, that (i) pertain to the maintenance of records that, in reasonable
based on criteria established in Internal Control—Integrated detail, accurately and fairly reflect the transactions and dispo-
Framework issued by the Committee of Sponsoring Organ- sitions of the assets of the company; (ii) provide reasonable
izations of the Treadway Commission (COSO). The Company’s assurance that transactions are recorded as necessary to permit
management is responsible for these financial statements, for preparation of financial statements in accordance with generally
maintaining effective internal control over financial reporting and accepted accounting principles, and that receipts and expendi-
for its assessment of the effectiveness of internal control over tures of the company are being made only in accordance with
financial reporting, included in the accompanying Management’s authorizations of management and directors of the company;
Report on Internal Control over Financial Reporting appearing and (iii) provide reasonable assurance regarding prevention or
on page 62. Our responsibility is to express opinions on these timely detection of unauthorized acquisition, use, or disposition
financial statements and on the Company’s internal control over of the company’s assets that could have a material effect on the
financial reporting based on our integrated audits. We con- financial statements.
ducted our audits in accordance with the standards of the Public Because of its inherent limitations, internal control over finan-
Company Accounting Oversight Board (United States). Those cial reporting may not prevent or detect misstatements. Also,
standards require that we plan and perform the audits to obtain projections of any evaluation of effectiveness to future periods
reasonable assurance about whether the financial statements are subject to the risk that controls may become inadequate
are free of material misstatement and whether effective internal because of changes in conditions, or that the degree of compli-
control over financial reporting was maintained in all material ance with the policies or procedures may deteriorate.
respects. Our audits of the financial statements included exam-
ining, 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. Our PricewaterhouseCoopers LLP
audit of internal control over financial reporting included obtain- New York, New York
ing an understanding of internal control over financial reporting, February 23, 2010

63

Consolidated Statement of Earnings

For the year ended December 31: Notes 2009 2008 2007

Revenue:
Services $55,128 $ 58,892 $54,057
Sales 38,300 42,156 42,202
Financing 2,331 2,582 2,526
Total revenue 95,758 103,630 98,786
Cost:
Services 37,146 40,937 39,160
Sales 13,606 15,776 16,552
Financing 1,220 1,256 1,345
Total cost 51,973 57,969 57,057
Gross profit 43,785 45,661 41,729
Expense and other income:
Selling, general and administrative 20,952 23,386 22,060
Research, development and engineering Q 5,820 6,337 6,153
Intellectual property and custom development income (1,177) (1,153) (958)
Other (income) and expense (351) (298) (626)
Interest expense K&L 402 673 611
Total expense and other income 25,647 28,945 27,240
Income from continuing operations before income taxes 18,138 16,715 14,489
Provision for income taxes P 4,713 4,381 4,071
Income from continuing operations 13,425 12,334 10,418
Discontinued operations:
Income/(loss) from discontinued operations, net of tax — — (00)
Net income $13,425 $ 12,334 $10,418
Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations R $ 10.01 $ 8.89* $ 7.15*
Discontinued operations R — — (0.00)
Total R $ 10.01 $ 8.89* $ 7.15*
Basic:
Continuing operations R $ 10.12 $ 9.02* $ 7.27*
Discontinued operations R — — (0.00)
Total R $ 10.12 $ 9.02* $ 7.27*
Weighted-average number of common shares outstanding:
Assuming dilution 1,341,352,754 1,387,797,198* 1,456,880,751*
Basic 1,327,157,410 1,369,367,069* 1,433,935,221*

* Reflects the adoption of the Financial Accounting Standards Board (FASB) guidance in determining whether instruments granted in share-based payment transactions
are participating securities. See note B, “Accounting Changes,” on pages 79 to 82 for additional information.
The accompanying notes on pages 70 through 126 are an integral part of the financial statements.

64

Consolidated Statement of Financial Position

At December 31: Notes 2009 2008
Assets
Current assets:
Cash and cash equivalents $ 12,183 $ 12,741
Marketable securities E 1,791 166
Notes and accounts receivable — trade (net of allowances of $217 in 2009 and $226 in 2008) 10,736 10,906
Short-term financing receivables (net of allowances of $438 in 2009 and $351 in 2008) G 14,914 15,477
Other accounts receivable (net of allowances of $15 in 2009 and $55 in 2008) 1,143 1,172
Inventories F 2,494 2,701
Deferred taxes P 1,730 1,542
Prepaid expenses and other current assets 3,946 4,299
Total current assets 48,935 49,004
Plant, rental machines and other property H 39,596 38,445
Less: Accumulated depreciation H 25,431 24,140
Plant, rental machines and other property — net H 14,165 14,305
Long-term financing receivables (net of allowances of $97 in 2009 and $179 in 2008) G 10,644 11,183
Prepaid pension assets U 3,001 1,601
Deferred taxes P 4,195 7,270
Goodwill J 20,190 18,226
Intangible assets — net J 2,513 2,878
Investments and sundry assets I 5,379 5,058
Total assets $109,022 $109,524

Liabilities and equity
Current liabilities:
Taxes P $ 3,826 $ 2,743
Short-term debt K&L 4,168 11,236
Accounts payable 7,436 7,014
Compensation and benefits 4,505 4,623
Deferred income 10,845 10,239
Other accrued expenses and liabilities 5,223 6,580
Total current liabilities 36,002 42,435
Long-term debt K&L 21,932 22,689
Retirement and nonpension postretirement benefit obligations U 15,953 19,452
Deferred income 3,562 3,171
Other liabilities M 8,819 8,192*
Total liabilities 86,267 95,939*
Contingencies and Commitments O
Equity: N
IBM Stockholders’ equity:
Common stock, par value $.20 per share and additional paid-in capital 41,810 39,129
Shares authorized: 4,687,500,000
Shares issued (2009 — 2,127,016,668; 2008— 2,096,981,860)
Retained earnings 80,900 70,353
Treasury stock, at cost (shares: 2009 — 821,679,245; 2008 — 757,885,937) (81,243) (74,171)
Accumulated other comprehensive income/(loss) (18,830) (21,845)
Total IBM stockholders’ equity 22,637 13,465*
Noncontrolling interests* 118 119*
Total equity 22,755 13,584*
Total liabilities and equity $109,022 $109,524

* Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, “Accounting Changes,” on pages 79 to 82 for
65

Consolidated Statement of Cash Flows

($ in millions)
For the year ended December 31: 2009 2008 2007

Cash flow from operating activities from continuing operations:
Net income $ 13,425 $ 12,334 $ 10,418
(Income)/loss from discontinued operations — — 00
Adjustments to reconcile income from continuing operations
to cash provided by operating activities:
Depreciation 3,773 4,140 4,038
Amortization of intangibles 1,221 1,310 1,163
Stock-based compensation 558 659 713
Deferred taxes 1,773 1,900 740
Net gain on asset sales and other (395) (338) (89)
Change in operating assets and liabilities, net of acquisitions/divestitures:
Receivables (including financing receivables) 2,131 274 (1,408)
Retirement related (2,465) (1,773) (228)
Inventories 263 (102) 182
Other assets/other liabilities 319 1,268 706
Accounts payable 170 (860) (142)
Net cash provided by operating activities from continuing operations 20,773 18,812 16,094
Cash flow from investing activities from continuing operations:
Payments for plant, rental machines and other property (3,447) (4,171) (4,630)
Proceeds from disposition of plant, rental machines and other property 330 350 537
Investment in software (630) (716) (875)
Purchases of marketable securities and other investments (5,604) (4,590) (24,117)
Proceeds from disposition of marketable securities and other investments 3,599 6,100 24,984
Non-operating finance receivables — net (184) (16) 125
Divestiture of businesses, net of cash transferred 400 71 310
Acquisition of businesses, net of cash acquired (1,194) (6,313) (1,009)
Net cash used in investing activities from continuing operations (6,729) (9,285) (4,675)
Cash flow from financing activities from continuing operations:
Proceeds from new debt 6,683 13,829 21,744
Payments to settle debt (13,495) (10,248) (11,306)
Short-term (repayments)/borrowings less than 90 days — net (651) (6,025) 1,674
Common stock repurchases (7,429) (10,578) (18,828)
Common stock transactions — other 3,052 3,774 4,123
Cash dividends paid (2,860) (2,585) (2,147)
Net cash used in financing activities from continuing operations (14,700) (11,834) (4,740)
Effect of exchange rate changes on cash and cash equivalents 98 58 294
Net cash used in discontinued operations from: operating activities — — (5)
Net change in cash and cash equivalents (558) (2,250) 6,969
Cash and cash equivalents at January 1 12,741 14,991 8,022
Cash and cash equivalents at December 31 $ 12,183 $ 12,741 $ 14,991
Supplemental data:
Income taxes paid — net of refunds received $ 1,567 $ 2,111 $ 2,608
Interest paid on debt $ 1,240 $ 1,460 $ 1,485
Capital lease obligations $ 15 $ 41 $ 57


66

Consolidated Statement of Changes in Equity

($ in millions)
Common Accumulated
Stock and Other
Additional Comprehensive Total IBM Non-
Paid-in Retained Treasury Income/ Stockholders’ controlling Total
Capital Earnings Stock (Loss) Equity* Interests* Equity*

2007**
Equity, January 1, 2007 $31,271 $52,432 $(46,296) $(8,901) $ 28,506 $129 $ 28,635
Cumulative effect of change in accounting
principle+ 117 117 117
Net income plus other comprehensive
income/(loss):
Net income 10,418 $ 10,418 $ 10,418
Other comprehensive
income/(loss), net of tax:
Net unrealized gains/(losses) on cash flow
hedge derivatives (net of tax benefit of $32) (123) (123) (123)
Foreign currency translation adjustments
(net of tax benefit of $553++) 726 726 726
Retirement-related benefit plans:
Prior service costs/(credits) (net of tax expense
of $31) 44 44 44
Net gains/(losses) (net of tax expense
of $1,913) 3,611 3,611 3,611
Amortization of prior service costs/(credits)
(net of tax benefit of $50) (85) (85) (85)
Amortization of net gains/(losses)
(net of tax expense of $654) 1,110 1,110 1,110
Amortization of transition assets
Net unrealized gains/(losses) on marketable
securities (net of tax expense of $132) 206 206 206
Total other comprehensive
income/(loss) 5,487 5,487
Subtotal: Net income plus other
comprehensive income/(loss) $ 15,905 $ 15,905
Cash dividends declared—common stock (2,147) (2,147) (2,147)
Common stock issued under employee plans
(49,137,038 shares) 4,332 4,332 4,332
Purchases (1,282,131 shares) and sales
(9,282,055 shares) of treasury stock under
employee plans — net (179) 729 550 550
Other treasury shares purchased, not retired
(178,385,436 shares) (405) (18,378) (18,783) (18,783)
Changes in other equity (10) (10) (10)
Changes in noncontrolling interests 16 16
Equity, December 31, 2007 $35,188 $60,640 $(63,945) $(3,414) $ 28,470 $145 $ 28,615

** Reclassified to conform with 2009 presentation.
+ Reflects the adoption of the FASB guidance for uncertain tax positions. See note B, “Accounting Changes,” on pages 79 to 82 for additional information.
++Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.


67


($ in millions)
Common Accumulated
Stock and Other

2008**
Equity, January 1, 2008 $ 35,188 $ 60,640 $(63,945) $ (3,414) $ 28,470 $ 145 $ 28,615
income/(loss):
Net income 12,334 $ 12,334 $ 12,334
Other comprehensive
hedge derivatives (net of tax expense of $79) 301 301 301
(net of tax benefit of $153+) (3,552) (3,552) (3,552)
Prior service (credits)/costs (net of
tax benefit of $86) (136) (136) (136)
Net (losses)/gains (net of tax benefit of $8,436) (15,245) (15,245) (15,245)
Curtailments and settlements
(net of tax expense of $9) 16 16 16
Amortization of prior service (credits)/costs
securities (net of tax benefit of $207) (324) (324) (324)
income/(loss) (18,431) (18,431)
comprehensive income/(loss) $ (6,097) $ (6,097)
(39,374,439 shares) 3,919 3,919 3,919
Other treasury shares purchased,
not retired (89,890,347 shares) 54 (10,618) (10,563) (10,563)
Changes in noncontrolling interests (26) (26)
Equity, December 31, 2008 $ 39,129 $ 70,353 $(74,171) $(21,845) $ 13,465 $ 119 $ 13,584

** Reclassified to conform with 2009 presentation.
+ Foreign currency translation adjustments are presented gross except for associated hedges which are presented net of tax.


68


($ in millions)
Common Accumulated
Stock and Other

2009
Equity, January 1, 2009 $ 39,129 $ 70,353 $(74,171) $(21,845) $ 13,465 $119 $ 13,584
income/(loss):
Net income 13,425 $ 13,425 $ 13,425
Other comprehensive
hedge derivatives (net of tax benefit of $256) (556) (556) (556)
(net of tax benefit of $57**) 1,732 1,732 1,732
Prior service costs/(credits) (net of
tax expense of $146) 229 229 229
Net (losses)/gains (net of tax expense of $439) 994 994 994
Curtailments and settlements
Amortization of prior service (credits)/costs
securities (net of tax expense of $71) 111 111 111
income/(loss) 3,015 3,015
comprehensive income/(loss) $ 16,440 $ 16,440
(30,034,808 shares) 3,011 3,011 3,011
Other treasury shares purchased,
not retired (68,650,727 shares) (7,534) (7,534) (7,534)
Changes in noncontrolling interests (1) (1)
Equity, December 31, 2009 $ 41,810 $ 80,900 $(81,243) $(18,830) $ 22,637 $118 $ 22,755

** Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

69

Notes to Consolidated Financial Statements

Note A. Revenue
Significant Accounting Policies The company recognizes revenue when it is realized or realiz-
able and earned. The company considers revenue realized or
Basis of Presentation realizable and earned when it has persuasive evidence of an
arrangement, delivery has occurred, the sales price is fixed or
The accompanying Consolidated Financial Statements and foot-
determinable and collectibility is reasonably assured. Delivery
notes thereto of the International Business Machines Corporation
does not occur until products have been shipped or services
(IBM and/or the company) have been prepared in accordance
have been provided to the client, risk of loss has transferred to
with accounting principles generally accepted in the United States
the client, and either client acceptance has been obtained, client
of America (GAAP).
acceptance provisions have lapsed, or the company has objec-
On December 31, 2002, the company sold its hard disk drive
tive evidence that the criteria specified in the client acceptance
(HDD) business to Hitachi, Ltd. (Hitachi). The HDD business was
provisions have been satisfied. The sales price is not considered
accounted for as a discontinued operation and therefore, the
to be fixed or determinable until all contingencies related to the
HDD results of operations and cash flows have been removed
sale have been resolved.
from the company’s results of continuing operations and cash
The company recognizes revenue on sales to solution provid-
flows for 2007. There was no activity in 2008 or 2009.
ers, resellers and distributors (herein referred to as “resellers”)
The company evaluated subsequent events through February
when the reseller has economic substance apart from the com-
23, 2010, which is the date the financial statements were issued.
pany, credit risk, title and risk of loss to the inventory, the fee to
Within the financial tables presented, certain columns and
the company is not contingent upon resale or payment by the end
rows may not add due to the use of rounded numbers for dis-
user, the company has no further obligations related to bringing
closure purposes. Percentages presented are calculated from
about resale or delivery and all other revenue recognition criteria
the underlying whole-dollar amounts. Certain prior year amounts
have been met.
have been reclassified to conform to the current year presenta-
The company reduces revenue for estimated client returns,
tion. This is annotated where applicable.
stock rotation, price protection, rebates and other similar allow-
ances. (See Schedule II, “Valuation and Qualifying Accounts and
Principles of Consolidation Reserves” included in the company’s Annual Report on Form
The Consolidated Financial Statements include the accounts of 10-K). Revenue is recognized only if these estimates can be
IBM and its controlled subsidiaries, which are generally major- reasonably and reliably determined. The company bases its esti-
ity owned. The accounts of variable interest entities (VIEs) are mates on historical results taking into consideration the type of
included in the Consolidated Financial Statements, if required. client, the type of transaction and the specifics of each arrange-
Investments in business entities in which the company does not ment. Payments made under cooperative marketing programs
have control, but has the ability to exercise significant influence are recognized as an expense only if the company receives from
over operating and financial policies, are accounted for using the client an identifiable benefit sufficiently separable from the
the equity method and the company’s proportionate share product sale whose fair value can be reasonably and reliably
of income or loss is recorded in other (income) and expense. estimated. If the company does not receive an identifiable ben-
The accounting policy for other investments in equity securi- efit sufficiently separable from the product sale whose fair value
ties is described on page 78 within “Marketable Securities. ” can be reasonably estimated, such payments are recorded as a
Equity investments in non-publicly traded entities are primarily reduction of revenue.
accounted for using the cost method. All intercompany transac- Revenue from sales of third-party vendor products or ser-
tions and accounts have been eliminated in consolidation. vices is recorded net of costs when the company is acting as
an agent between the client and vendor and gross when the
Use of Estimates company is a principal to the transaction. Several factors are
The preparation of financial statements in conformity with GAAP considered to determine whether the company is an agent or
requires management to make estimates and assumptions that principal, most notably whether the company is the primary
affect the amounts of assets, liabilities, revenue, costs, expenses obligor to the client, or has inventory risk. Consideration is also
and other comprehensive income/(loss) that are reported in given to whether the company adds meaningful value to the
the Consolidated Financial Statements and accompanying vendor’s product or service, was involved in the selection of the
disclosures. These estimates are based on management’s best vendor’s product or service, has latitude in establishing the sales
knowledge of current events, historical experience, actions that price or has credit risk.
the company may undertake in the future and on various other
assumptions that are believed to be reasonable under the cir-
cumstances. As a result, actual results may be different from
these estimates. See pages 52 to 54 for a discussion of the
company’s critical accounting estimates.

70


The company reports revenue net of any revenue-based Services
taxes assessed by governmental authorities that are imposed on The company’s primary services offerings include information
and concurrent with specific revenue-producing transactions. In technology (IT) datacenter and business process outsourcing,
addition to the aforementioned general policies, the following application management services, consulting and systems inte-
are the specific revenue recognition policies for multiple-element gration, technology infrastructure and system maintenance, Web
arrangements and for each major category of revenue. hosting and the design and development of complex IT systems
to a client’s specifications (design and build). These services are
Multiple-Element Arrangements provided on a time-and-material basis, as a fixed-price contract
The company enters into multiple-element revenue arrange- or as a fixed-price per measure of output contract and the
ments, which may include any combination of services, software, contract terms range from less than one year to over 10 years.
hardware and/or financing. To the extent that a deliverable in a Revenue from IT datacenter and business process outsourc-
multiple-element arrangement is subject to specific guidance, ing contracts is recognized in the period the services are provided
such as, leased hardware which is subject to specific leas- using either an objective measure of output or a straight-line basis
ing guidance or software which is subject to specific software over the term of the contract. Under the output method, the
revenue recognition guidance (see “Software” on page 72) on amount of revenue recognized is based on the services delivered
whether and/or how to separate multiple deliverable arrange- in the period.
ments into separate units of accounting (separability) and how to Revenue from application management services, technol-
allocate the arrangement consideration among those separate ogy infrastructure and system maintenance and Web hosting
units of accounting (allocation), that deliverable is accounted for contracts is recognized on a straight-line basis over the terms
in accordance with such specific guidance. For all other deliv- of the contracts. Revenue from time-and-material contracts is
erables in multiple-element arrangements, the guidance below recognized as labor hours are delivered and direct expenses are
is applied to determine separability and allocation. A multiple- incurred. Revenue related to extended warranty and product
element arrangement is separated into more than one unit of maintenance contracts is recognized on a straight-line basis
accounting if all of the following criteria are met: over the delivery period.
Revenue from fixed-price design and build contracts is
• The delivered item(s) has value to the client on a stand-alone recognized under the percentage-of-completion (POC) method.
basis; Under the POC method, revenue is recognized based on the
• There is objective and reliable evidence of the fair value of the labor costs incurred to date as a percentage of the total esti-
undelivered item(s); and mated labor costs to fulfill the contract. If circumstances arise
• If the arrangement includes a general right of return relative that change the original estimates of revenues, costs, or extent
to the delivered item(s), delivery or performance of the unde- of progress toward completion, revisions to the estimates are
livered item(s) is considered probable and substantially in the made. These revisions may result in increases or decreases in
control of the company. estimated revenues or costs, and such revisions are reflected in
income in the period in which the circumstances that gave rise
If these criteria are not met, the arrangement is accounted for to the revision become known by management.
as one unit of accounting which would result in revenue being The company performs ongoing profitability analyses of its
recognized on a straight-line basis or being deferred until the services contracts accounted for under the POC method in
earlier of when such criteria are met or when the last undelivered order to determine whether the latest estimates of revenue,
element is delivered. If these criteria are met for each element costs and profits require updating. If at any time these esti-
and there is objective and reliable evidence of fair value for all mates indicate that the contract will be unprofitable, the entire
units of accounting in an arrangement, the arrangement consid- estimated loss for the remainder of the contract is recorded
eration is allocated to the separate units of accounting based immediately. For non-POC method service contracts, losses are
on each unit’s relative fair value. There may be cases, however, recorded as incurred.
in which there is objective and reliable evidence of fair value of In some services contracts, the company bills the client prior
the undelivered item(s) but no such evidence for the delivered to recognizing revenue from performing the services. Deferred
item(s). In those cases, the residual method is used to allocate income of $7,066 million and $6,403 million at December 31,
the arrangement consideration. Under the residual method, the 2009 and 2008, respectively, is included in the Consolidated
amount of consideration allocated to the delivered item(s) equals Statement of Financial Position. The year-to-year increase was
the total arrangement consideration less the aggregate fair value driven by growth in the Global Services business and the impacts
of the undelivered item(s). The revenue policies described below of currency. In other services contracts, the company performs
are then applied to each unit of accounting, as applicable. the services prior to billing the client. Unbilled accounts receivable
of $2,020 million and $2,090 million at December 31, 2009 and
2008, respectively, are included in notes and accounts receiv-
able-trade in the Consolidated Statement of Financial Position.

71


Billings usually occur in the month after the company performs in which there is VSOE of fair value of the undelivered item(s) but
the services or in accordance with specific contractual provisions. no such evidence for the delivered item(s). In these cases, the
Unbilled receivables are expected to be billed within four months. residual method is used to allocate the arrangement consider-
ation. Under the residual method, the amount of consideration
Hardware allocated to the delivered item(s) equals the total arrangement
Revenue from hardware sales and sales-type leases is recog- consideration less the aggregate VSOE of fair value of the unde-
nized when risk of loss has transferred to the client and there livered elements.
are no unfulfilled company obligations that affect the client’s final
acceptance of the arrangement. Any cost of standard warranties Financing
and remaining obligations that are inconsequential or perfunc- Financing income attributable to sales-type leases, direct financ-
tory are accrued when the corresponding revenue is recognized. ing leases and loans is recognized on the accrual basis using the
Revenue from rentals and operating leases is recognized on a effective interest method. Operating lease income is recognized
straight-line basis over the term of the rental or lease. on a straight-line basis over the term of the lease.

Software Services Costs
Revenue from perpetual (one-time charge) license software is Recurring operating costs for services contracts, including costs
recognized at the inception of the license term if all revenue related to bid and proposal activities, are recognized as incurred.
recognition criteria have been met. Revenue from term (recurring For fixed-price design and build contracts, the costs of external
license charge) license software is recognized on a subscrip- hardware and software accounted for under the POC method
tion basis over the period that the client is entitled to use the are deferred and recognized based on the labor costs incurred
license. Revenue from subscription and support, which includes to date, as a percentage of the total estimated labor costs to
unspecified upgrades on a when-and-if-available basis and fulfill the contract. Certain eligible, nonrecurring costs incurred in
technical support, is recognized on a straight-line basis over the initial phases of outsourcing contracts are deferred and sub-
the period such items are delivered. In multiple-element revenue sequently amortized. These costs consist of transition and setup
arrangements that include software that is more than incidental costs related to the installation of systems and processes and
to the products or services as a whole (software multiple- are amortized on a straight-line basis over the expected period
element arrangements), software and software-related elements of benefit, not to exceed the term of the contract. Additionally,
are accounted for in accordance with guidance on software fixed assets associated with outsourcing contracts are capital-
revenue recognition. Software-related elements include software ized and depreciated on a straight-line basis over the expected
products and services, as well as any non-software deliverable useful life of the asset. If an asset is contract specific, then the
for which a software deliverable is essential to its functionality. depreciation period is the shorter of the useful life of the asset or
A software multiple-element arrangement is separated into the contract term. Amounts paid to clients in excess of the fair
more than one unit of accounting if all of the following criteria value of acquired assets used in outsourcing arrangements are
are met: deferred and amortized on a straight-line basis as a reduction of
revenue over the expected period of benefit not to exceed the
• The functionality of the delivered element(s) is not dependent
term of the contract. The company performs periodic reviews
on the undelivered element(s);
to assess the recoverability of deferred contract transition and
• There is vendor-specific objective evidence (VSOE) of fair
setup costs. This review is done by comparing the estimated
value of the undelivered element(s). VSOE of fair value is
minimum remaining undiscounted cash flows of a contract to
based on the price charged when the deliverable is sold
the unamortized contract costs. If such minimum undiscounted
separately by the company on a regular basis and not as
cash flows are not sufficient to recover the unamortized costs,
part of the multiple-element arrangement; and
a loss is recognized.
• Delivery of the delivered element(s) represents the culmina-
Deferred services transition and setup costs were $2,432
tion of the earnings process for that element(s).
million and $2,023 million at December 31, 2009 and December
If any one of these criteria are not met, the arrangement is 31, 2008, respectively. The primary driver of the increase
accounted for as one unit of accounting which would result was the continued growth of the Global Services business.
in revenue being recognized on a straight-line basis or being Amortization expense of deferred services transition and setup
deferred until the earlier of when such criteria are met or when costs is estimated at December 31, 2009 to be $689 million in
the last undelivered element is delivered. If these criteria are met 2010, $562 million in 2011, $464 million in 2012, $430 million in
for each element and there is VSOE of fair value for all units of 2013 and $287 million thereafter.
accounting in an arrangement, the arrangement consideration Deferred amounts paid to clients in excess of the fair value
is allocated to the separate units of accounting based on each of acquired assets used in outsourcing arrangements were $72
unit’s relative VSOE of fair value. There may be cases, however, million and $119 million at December 31, 2009 and December
31, 2008, respectively. Amortization of deferred amounts paid to

72


clients in excess of the fair value of acquired assets is recorded Changes in the company’s deferred income for extended
as an offset of revenue and is estimated at December 31, 2009 warranty contracts and warranty liability for standard warran-
to be $39 million in 2010, $23 million in 2011, $7 million in 2012, ties, which are included in other accrued expenses and liabilities
$2 million in 2013 and $1 million thereafter. and other liabilities on the Consolidated Statement of Financial
In situations in which an outsourcing contract is terminated, Position, are presented in the following tables:
the terms of the contract may require the client to reimburse
the company for the recovery of unbilled accounts receivable, Standard Warranty Liability
unamortized deferred costs incurred to purchase specific assets ($ in millions)
utilized in the delivery of services and to pay any additional costs 2009 2008
incurred by the company to transition the services. Balance at January 1 $ 358 $ 412
Current period accruals 374 390
Software Costs Accrual adjustments to reflect actual experience (11) 16
Costs that are related to the conceptual formulation and design Charges incurred (406) (460)
of licensed programs are expensed as incurred to research, Balance at December 31 $ 316 $ 358
development and engineering expense; costs that are incurred
to produce the finished product after technological feasibility
has been established are capitalized as an intangible asset.
Extended Warranty Liability
Capitalized amounts are amortized using the straight-line
method, which is applied over periods ranging up to three years. ($ in millions)

The company performs periodic reviews to ensure that unam- 2009 2008

ortized program costs remain recoverable from future revenue. Aggregate deferred revenue at January 1 $ 589 $ 409
Costs to support or service licensed programs are charged to Revenue deferred for new extended
software cost as incurred. warranty contracts 283 335
The company capitalizes certain costs that are incurred to Amortization of deferred revenue (226) (134)
purchase or to create and implement internal-use computer Other* 18 (21)
software, which includes software coding, installation, testing Balance at December 31 $ 665 $ 589
and certain data conversions. These capitalized costs are amor- Current portion $ 310 $ 234
tized on a straight-line basis over two years and are recorded Noncurrent portion 355 355
in selling, general and administrative expense. See note J, Balance at December 31 $ 665 $ 589
“Intangible Assets Including Goodwill,” on pages 89 to 90.
* Other consists primarily of foreign currency translation adjustments.

Product Warranties
The company offers warranties for its hardware products that Shipping and Handling
range up to three years, with the majority being either one or Costs related to shipping and handling are recognized as
three years. Estimated costs for warranty terms standard to incurred and included in cost in the Consolidated Statement
the deliverable are recognized when revenue is recorded for the of Earnings.
related deliverable. The company estimates its warranty costs
standard to the deliverable based on historical warranty claim Expense and Other Income
experience and applies this estimate to the revenue stream for
Selling, General and Administrative
products under warranty. Estimated future costs for warran-
Selling, general and administrative (SG&A) expense is charged to
ties applicable to revenue recognized in the current period are
income as incurred. Expenses of promoting and selling products
charged to cost of revenue. The warranty accrual is reviewed
and services are classified as selling expense and include such
quarterly to verify that it properly reflects the remaining obligation
items as compensation, advertising, sales commissions and
based on the anticipated expenditures over the balance of the
travel. General and administrative expense includes such items
obligation period. Adjustments are made when actual warranty
as compensation, office supplies, non-income taxes, insurance
claim experience differs from estimates. Costs from fixed-price
and office rental. In addition, general and administrative expense
support or maintenance contracts, including extended warranty
includes other operating items such as a provision for doubtful
contracts, are recognized as incurred.
accounts, workforce accruals for contractually obligated pay-
Revenue from extended warranty contracts, for which the
ments to employees terminated in the ongoing course of business,
company is obligated to perform, is recorded as deferred income
acquisition costs related to business combinations, amortization
and subsequently recognized on a straight-line basis over the
of certain intangible assets and environmental remediation costs.
delivery period.

73


Advertising and Promotional Expense in the acquiree are recorded at their acquisition date fair values.
The company expenses advertising and promotional costs Goodwill represents the excess of the purchase price over
when incurred. Cooperative advertising reimbursements from the fair value of net assets, including the amount assigned to
vendors are recorded net of advertising and promotional identifiable intangible assets. The primary drivers that generate
expense in the period the related advertising and promotional goodwill are the value of synergies between the acquired enti-
expense is incurred. Advertising and promotional expense, ties and the company and the acquired assembled workforce,
which includes media, agency and promotional expense, was neither of which qualifies as an identifiable intangible asset.
$1,252 million, $1,259 million and $1,242 million in 2009, 2008 Identifiable intangible assets with finite lives are amortized
and 2007, respectively, and is recorded in SG&A expense in the over their useful lives. Amortization of completed technology is
Consolidated Statement of Earnings. recorded in cost and amortization of all other intangible assets
is recorded in selling, general and administrative expense. See
Research, Development and Engineering note C, “Acquisitions/Divestitures,” on pages 82 to 86 and note
Research, development and engineering (RD&E) costs are J, “Intangible Assets Including Goodwill,” on pages 89 to 90, for
expensed as incurred. Software costs that are incurred to pro- additional information. Acquisition-related costs, including advi-
duce the finished product after technological feasibility has been sory, legal, accounting, valuation and other costs, are expensed
established are capitalized as an intangible asset. See “Software in the periods in which the costs are incurred. The results of
Costs” on page 73. operations of acquired businesses are included in the Consoli-
dated Financial Statements from the acquisition date.
Intellectual Property and Custom Development Income
The company licenses and sells the rights to certain of its intel- Impairment
lectual property (IP) including internally developed patents, trade Long-lived assets, other than goodwill, are tested for impairment
secrets and technological know-how. Certain transfers of IP based on undiscounted cash flows and, if impaired, written down
to third parties are licensing/royalty-based and other transfers to fair value based on either discounted cash flows or appraised
are transaction-based sales and other transfers. Licensing/ values. Goodwill is tested annually, in the fourth quarter, for
royalty-based fees involve transfers in which the company earns impairment, or sooner when circumstances indicate an impair-
the income over time, or the amount of income is not fixed ment may exist, using a fair-value approach at the reporting
or determinable until the licensee sells future related products unit level. A reporting unit is the operating segment, or a busi-
(i.e., variable royalty, based upon licensee’s revenue). Sales and ness, which is one level below that operating segment (the
other transfers typically include transfers of IP whereby the com- “component” level) if discrete financial information is prepared
pany has fulfilled its obligations and the fee received is fixed or and regularly reviewed by management at the segment level.
determinable at the transfer date. The company also enters into Components are aggregated as a single reporting unit if they
cross-licensing arrangements of patents, and income from these have similar economic characteristics.
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 Depreciation and Amortization
specific clients. The company records the income from these Plant, rental machines and other property are carried at cost
projects when the fee is realized or realizable and earned, is not and depreciated over their estimated useful lives using the
refundable and is not dependent upon the success of the project. straight-line method. The estimated useful lives of certain depre-
ciable assets are as follows: buildings, 30 to 50 years; building
Other (Income) and Expense equipment, 10 to 20 years; land improvements, 20 years; plant,
Other (income) and expense includes interest income (other laboratory and office equipment, 2 to 20 years; and computer
than from Global Financing external business transactions), equipment, 1.5 to 5 years. Leasehold improvements are amor-
gains and losses on certain derivative instruments, gains and tized over the shorter of their estimated useful lives or the related
losses from securities and other investments, gains and losses lease term, rarely exceeding 25 years.
from certain real estate transactions, foreign currency transaction Capitalized software costs incurred or acquired after tech-
gains and losses, gains and losses from the sale of businesses nological feasibility has been established are amortized over
and amounts related to accretion of asset retirement obligations. periods ranging up to 3 years. Capitalized costs for internal-use
software are amortized on a straight-line basis over periods up
to 2 years. (See “Software Costs” on page 73 for additional
Business Combinations and information). Other intangible assets are amortized over periods
Intangible Assets Including Goodwill between 2 and 7 years.
The company accounts for business combinations using the
acquisition method and accordingly, the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest

74


Environmental fair value of plan assets, measured on a plan-by-plan basis.
The cost of internal environmental protection programs that are This obligation is recorded in compensation and benefits in the
preventative in nature are expensed as incurred. When a cleanup Consolidated Statement of Financial Position.
program becomes likely, and it is probable that the company Net periodic pension and nonpension postretirement ben-
will incur cleanup costs and those costs can be reasonably efit cost/(income) is recorded in the Consolidated Statement
estimated, the company accrues remediation costs for known of Earnings and includes service cost, interest cost, expected
environmental liabilities. The company’s maximum exposure for return on plan assets, amortization of prior service costs/(cred-
all environmental liabilities cannot be estimated and no amounts its) and (gains)/losses previously recognized as a component
are recorded for environmental liabilities that are not probable of other comprehensive income/(loss) and amortization of the
or estimable. net transition asset remaining in accumulated other compre-
hensive income/(loss). Service cost represents the actuarial
present value of participant benefits earned in the current year.
Asset Retirement Obligations
Interest cost represents the time value of money cost associ-
Asset retirement obligations (ARO) are legal obligations associated with the passage of time. Certain events, such as changes
ated with the retirement of long-lived assets. These liabilities in employee base, plan amendments and changes in actuarial
are initially recorded at fair value and the related asset retire- assumptions, result in a change in the benefit obligation and the
ment costs are capitalized by increasing the carrying amount corresponding change in other comprehensive income/(loss).
of the related assets by the same amount as the liability. Asset The result of these events is amortized as a component of net
retirement costs are subsequently depreciated over the useful periodic cost/(income) over the service lives or life expectancy of
lives of the related assets. Subsequent to initial recognition, the the participants, depending on the plan, provided such amounts
company records period-to-period changes in the ARO liability exceed thresholds which are based upon the benefit obligation or
resulting from the passage of time in interest expense and revi- the value of plan assets. Net periodic cost/(income) is recorded
sions to either the timing or the amount of the original expected in cost, SG&A and RD&E in the Consolidated Statement of
cash flows to the related assets. Earnings based on the employees’ respective function.
(Gains)/losses and prior service costs/(credits) not recognized
Defined Benefit Pension and as a component of net periodic cost/(income) in the Consolidated
Nonpension Postretirement Benefit Plans Statement of Earnings as they arise are recognized as a compo-
The funded status of the company’s defined benefit pension plans nent of other comprehensive income/(loss) in the Consolidated
and nonpension postretirement benefit plans (retirement-related Statement of Changes in Equity, net of tax. Those (gains)/losses
benefit plans) is recognized in the Consolidated Statement of and prior service costs/(credits) are subsequently recognized
Financial Position. The funded status is measured as the dif- as a component of net periodic cost/(income) pursuant to the
ference between the fair value of plan assets and the benefit recognition and amortization provisions of applicable accounting
obligation at December 31, the measurement date. For defined guidance. (Gains)/losses arise as a result of differences between
benefit pension plans, the benefit obligation is the projected actual experience and assumptions or as a result of changes
benefit obligation (PBO), which represents the actuarial present in actuarial assumptions. Prior service costs/(credits) represent
value of benefits expected to be paid upon retirement based on the cost of benefit improvements attributable to prior service
estimated future compensation levels. For the nonpension post- granted in plan amendments.
retirement benefit plans, the benefit obligation is the accumulated The measurement of benefit obligations and net periodic
postretirement benefit obligation (APBO), which represents the cost/(income) is based on estimates and assumptions approved
actuarial present value of postretirement benefits attributed to by the company’s management. These valuations reflect the
employee services already rendered. The fair value of plan assets terms of the plans and use participant-specific information such
represents the current market value of cumulative company and as compensation, age and years of service, as well as certain
participant contributions made to an irrevocable trust fund, held assumptions, including estimates of discount rates, expected
for the sole benefit of participants, which are invested by the return on plan assets, rate of compensation increases, interest
trust fund. Overfunded plans, with the fair value of plan assets crediting rates and mortality rates.
exceeding the benefit obligation, are aggregated and recorded as
a prepaid pension asset equal to this excess. Underfunded plans, Defined Contribution Plans
with the benefit obligation exceeding the fair value of plan assets, The company records expense for defined contribution plans for
are aggregated and recorded as a retirement and nonpension the company’s contribution when the employee renders service
postretirement benefit obligation equal to this excess. to the company, essentially coinciding with the cash contribu-
The current portion of the retirement and nonpension post- tions to the plans. The expense is recorded in cost, SG&A and
retirement benefit obligations represents the actuarial present RD&E in the Consolidated Statement of Earnings based on the
value of benefits payable in the next 12 months exceeding the employees’ respective function.

75


Stock-Based Compensation tax expense in the period in which such determination is made.
Stock-based compensation represents the cost related to stock- Interest and penalties, if any, related to accrued liabilities for
based awards granted to employees. The company measures potential tax assessments are included in income tax expense.
stock-based compensation cost at grant date, based on the
estimated fair value of the award and recognizes the cost on a Translation of Non-U.S. Currency Amounts
straight-line basis (net of estimated forfeitures) over the employee Assets and liabilities of non-U.S. subsidiaries that have a local
requisite service period. The company estimates the fair value of functional currency are translated to United States (U.S.) dol-
stock options using a Black-Scholes valuation model. The cost lars at year-end exchange rates. Translation adjustments are
is recorded in cost, SG&A, and RD&E in the Consolidated State- recorded in accumulated other comprehensive income/(loss)
ment of Earnings based on the employees’ respective function. in the Consolidated Statement of Changes in Equity. Income
The company records deferred tax assets for awards that and expense items are translated at weighted-average rates of
result in deductions on the company’s income tax returns, based exchange prevailing during the year.
on the amount of compensation cost recognized and the statu- Inventories, plant, rental machines and other property—net
tory tax rate in the jurisdiction in which it will receive a deduction. and other non-monetary assets and liabilities of non-U.S. subsid-
Differences between the deferred tax assets recognized for finan- iaries and branches that operate in U.S. dollars are translated at
cial reporting purposes and the actual tax deduction reported on the approximate exchange rates prevailing when the company
the income tax return are recorded in additional paid-in capital acquired the assets or liabilities. All other assets and liabilities
(if the tax deduction exceeds the deferred tax asset) or in the denominated in a currency other than U.S. dollars are trans-
Consolidated Statement of Earnings (if the deferred tax asset lated at year-end exchange rates with the transaction gain or
exceeds the tax deduction and no additional paid-in capital loss recognized in other (income) and expense. Cost of sales
exists from previous awards). and depreciation are translated at historical exchange rates. All
See note T, “Stock-Based Compensation, on pages 105 to
” other income and expense items are translated at the weighted-
109 for additional information. average rates of exchange prevailing during the year. These
translation gains and losses are included in net income for the
Income Taxes period in which exchange rates change.
Income tax expense is based on reported income before income
taxes. Deferred income taxes reflect the tax effect of temporary Derivatives
differences between asset and liability amounts that are rec- All derivatives are recognized in the Consolidated Statement
ognized for financial reporting purposes and the amounts that of Financial Position at fair value and are reported in prepaid
are recognized for income tax purposes. These deferred taxes expenses and other current assets, investments and sundry
are measured by applying currently enacted tax laws. Valuation assets, other accrued expenses and liabilities or other liabilities.
allowances are recognized to reduce deferred tax assets to the Classification of each derivative as current or noncurrent is based
amount that will more likely than not be realized. In assessing upon whether the maturity of the instrument is less than or greater
the need for a valuation allowance, management considers all than 12 months. To qualify for hedge accounting, the company
available evidence for each jurisdiction including past operating requires that the instruments be effective in reducing the risk
results, estimates of future taxable income and the feasibility of exposure that they are designated to hedge. For instruments that
ongoing tax planning strategies. When the company changes hedge cash flows, hedge effectiveness criteria also require that it
its determination as to the amount of deferred tax assets that be probable that the underlying transaction will occur. Instruments
can be realized, the valuation allowance is adjusted with a cor- that meet established accounting criteria are formally designated
responding impact to income tax expense in the period in which as hedges. These criteria demonstrate that the derivative is
such determination is made. expected to be highly effective at offsetting changes in fair value
The company recognizes tax liabilities when, despite the or cash flows of the underlying exposure both at inception of the
company’s belief that its tax return positions are supportable, hedging relationship and on an ongoing basis. The method of
the company believes that certain positions may not be fully assessing hedge effectiveness and measuring hedge ineffective-
sustained upon review by tax authorities. Benefits from tax ness is formally documented at hedge inception. The company
positions are measured at the largest amount of benefit that is assesses hedge effectiveness and measures hedge ineffective-
greater than 50 percent likely of being realized upon settlement. ness at least quarterly throughout the designated hedge period.
The current portion of tax liabilities is included in taxes and the Where the company applies hedge accounting, the company
noncurrent portion of tax liabilities is included in other liabilities in designates each derivative as a hedge of: (1) the fair value of a
the Consolidated Statement of Financial Position. To the extent recognized financial asset or liability or of an unrecognized firm
that new information becomes available which causes the com- commitment (fair value hedge); (2) the variability of anticipated
pany to change its judgment regarding the adequacy of existing cash flows of a forecasted transaction or the cash flows to be
tax liabilities, such changes to tax liabilities will impact income received or paid related to a recognized financial asset or liability
(cash flow hedge); or (3) a hedge of a long-term investment
76


(net investment hedge) in a foreign operation. In addition, the of Cash Flows. Cash flows from derivatives designated as net
company may enter into derivative contracts that economically investment hedges and derivatives that do not qualify as hedges
hedge certain of its risks, even though hedge accounting does are reported in investing activities. For currency swaps desig-
not apply or the company elects not to apply hedge account- nated as hedges of foreign currency denominated debt (included
ing. In these cases, there exists a natural hedging relationship in the company’s debt risk management program as addressed
in which changes in the fair value of the derivative, which are in note L, “Derivatives and Hedging Transactions,” on pages 92
recognized currently in net income, act as an economic offset to through 96), cash flows directly associated with the settlement
changes in the fair value of the underlying hedged item(s). of the principal element of these swaps are reported in payments
Changes in the fair value of a derivative that is designated as a to settle debt in the cash flow from financing activities section of
fair value hedge, along with offsetting changes in the fair value of the Consolidated Statement of Cash Flows.
the underlying hedged exposure, are recorded in earnings each
period. For hedges of interest rate risk, the fair value adjustments
Financial Instruments
are recorded as adjustments to interest expense and cost of
In determining the fair value of its financial instruments, the
financing in the Consolidated Statement of Earnings. For hedges
company uses a variety of methods and assumptions that are
of currency risk associated with recorded financial assets or
based on market conditions and risks existing at each balance
liabilities, derivative fair value adjustments are recognized in other
sheet date. Refer to note E, “Financial Instruments (Excluding
(income) and expense in the Consolidated Statement of Earnings.
Derivatives),” on pages 87 and 88 for further information. All
Changes in the fair value of a derivative that is designated as a
methods of assessing fair value result in a general approximation
cash flow hedge are recorded, net of applicable taxes, in accu-
of value, and such value may never actually be realized.
mulated other comprehensive income/(loss), a component of
equity. When net income is affected by the variability of the under-
lying cash flow, the applicable offsetting amount of the gain or Fair Value Measurement
loss from the derivative that is deferred in equity is released to net Exit prices are used to measure assets and liabilities that fall
income and reported in interest expense, cost, SG&A expense within the scope of the fair value measurements guidance.
or other (income) and expense in the Consolidated Statement of Under this guidance, the company is required to classify certain
Earnings based on the nature of the underlying cash flow hedged. assets and liabilities based on the following fair value hierarchy:
Effectiveness for net investment hedging derivatives is measured
on a spot-to-spot basis. The effective portion of changes in the • Level 1—Quoted prices in active markets that are unad-
fair value of net investment hedging derivatives and other non- justed and accessible at the measurement date for identical,
derivative financial instruments designated as net investment unrestricted assets or liabilities;
hedges are recorded as foreign currency translation adjustments, • Level 2—Quoted prices for identical assets and liabilities in
net of applicable taxes, in accumulated other comprehensive markets that are not active, quoted prices for similar assets
income/(loss) in the Consolidated Statement of Changes in and liabilities in active markets or financial instruments for
Equity. Changes in the fair value of the portion of a net investment which significant inputs are observable, either directly or
hedging derivative excluded from the effectiveness assessment indirectly; and
are recorded in interest expense. • Level 3—Prices or valuations that require inputs that are both
When the underlying hedged item ceases to exist, all changes significant to the fair value measurement and unobservable.
in the fair value of the derivative are included in net income each
This guidance requires the use of observable market data if such
period until the instrument matures. When the derivative trans-
data is available without undue cost and effort.
action ceases to exist, a hedged asset or liability is no longer
When available, the company uses unadjusted quoted mar-
adjusted for changes in its fair value except as required under
ket prices to measure the fair value and classifies such items
other relevant accounting standards. Derivatives that are not
within Level 1. If quoted market prices are not available, fair
designated as hedges, as well as changes in the fair value of
value is based upon internally developed models that use cur-
derivatives that do not effectively offset changes in the fair value
rent market-based or independently sourced market parameters
of the underlying hedged item throughout the designated hedge
such as interest rates and currency rates. Items valued using
period (collectively, “ineffectiveness”), are recorded in net income
internally generated models are classified according to the low-
each period and are reported in other (income) and expense.
est level input or value driver that is significant to the valuation.
The company reports cash flows arising from derivative
The determination of fair value considers various factors
financial instruments designated as fair value or cash flow
including interest rate yield curves and time value underlying the
hedges consistent with the classification of cash flows from the
financial instruments. For derivatives and debt securities, the
underlying hedged items that these derivatives are hedging.
company uses a discounted cash flow analysis using discount
Accordingly, the cash flows associated with derivatives desig-
rates commensurate with the duration of the instrument. In the
nated as fair value or cash flow hedges are classified in cash
event of an other-than-temporary impairment of a nonpublic
flows from operating activities in the Consolidated Statement
equity method investment, the company uses the net asset

77


value of its investment in the investee adjusted using discounted anticipated recovery in fair value. Other-than-temporary declines
cash flows for the company’s estimate of the price that it would in fair value from amortized cost for available for sale equity and
receive to sell the investment to a market participant that would debt securities that the company intends to sell or would more-
consider all factors that would impact the investment’s fair value. likely-than-not be required to sell before the expected recovery
In determining the fair value of financial instruments, the of the amortized cost basis are charged to other (income) and
company considers certain market valuation adjustments to the expense in the period in which the loss occurs. For debt securi-
‘base valuations’ calculated using the methodologies described ties that the company has no intent to sell and believes that it
below for several parameters that market participants would more-likely-than-not will not be required to sell prior to recovery,
consider in determining fair value. only the credit loss component of the impairment is recognized
in other (income) and expense, while the remaining loss is rec-
• Counterparty credit risk adjustments are applied to financial ognized in other comprehensive income/(loss). The credit loss
instruments, taking into account the actual credit risk of a component recognized in other (income) and expense is identi-
counterparty as observed in the credit default swap market fied as the amount of the principal cash flows not expected to be
to determine the true fair value of such an instrument. received over the remaining term of the debt security as projected
• Credit risk adjustments are applied to reflect the company’s using the company’s cash flow projections.
own credit risk when valuing all liabilities measured at fair
value. The methodology is consistent with that applied in
Inventories
developing counterparty credit risk adjustments, but incor-
Raw materials, work in process and finished goods are stated at
porates the company’s own credit risk as observed in the
the lower of average cost or market. Cash flows related to the
credit default swap market.
sale of inventories are reflected in net cash from operating activi-
Certain assets are measured at fair value on a nonrecurring ties from continuing operations in the Consolidated Statement
basis. These assets include equity method investments that are of Cash Flows.
recognized at fair value at the end of the period to the extent that
they are deemed to be other-than-temporarily impaired. Certain Allowance for Uncollectible Receivables
assets that are measured at fair value on a recurring basis can be
Trade
subject to nonrecurring fair value measurements. These assets
An allowance for uncollectible trade receivables is estimated
include public cost method investments that are deemed to be
based on a combination of write-off history, aging analysis and
other-than-temporarily impaired.
any specific, known troubled accounts.

Cash Equivalents Financing
All highly liquid investments with maturities of three months or less Financing receivables include sales-type leases, direct financing
at the date of purchase are considered to be cash equivalents. leases and loans. The methodologies that the company uses to
calculate both its specific and its unallocated reserves, which
Marketable Securities are applied consistently to its different portfolios are as follows:
Debt securities included in current assets represent securities that
SPECIFIC—The company reviews all financing receivables con-
are expected to be realized in cash within one year of the balance
sidered at risk on a quarterly basis. The review primarily consists
sheet date. Long-term debt securities that are not expected to
of an analysis based upon current information available about
be realized in cash within one year and alliance equity securi-
the client, such as financial statements, news reports, published
ties are included in investments and sundry assets. Debt and
credit ratings, current market-implied credit analysis, as well as
marketable equity securities are considered available for sale and
the current economic environment, collateral net of reposses-
are reported at fair value with unrealized gains and losses, net of
sion cost and prior collection history. For loans that are collateral
applicable taxes, recorded in other comprehensive income/(loss),
dependent, impairment is measured using the fair value of the
a component of equity. The realized gains and losses for available
collateral when foreclosure is probable. Using this information,
for sale securities are included in other (income) and expense
the company determines the expected cash flow for the receiv-
in the Consolidated Statement of Earnings. Realized gains and
able and calculates a recommended estimate of the potential
losses are calculated based on the specific identification method.
loss and the probability of loss. For those accounts in which the
In determining whether an other-than-temporary decline in
loss is probable, the company records a specific reserve.
market value has occurred, the company considers the duration
that, and extent to which, the fair value of the investment is below UNALLOCATED—The company records an unallocated reserve
its cost, the financial condition and near-term prospects of the that is calculated by applying a reserve rate to its different port-
issuer or underlying collateral of a security; and the company’s folios, excluding accounts that have been specifically reserved.
intent and ability to retain the security in order to allow for an This reserve rate is based upon credit rating, probability of default,
term, asset characteristics and loss history.
78


Receivable losses are charged against the allowance when Note B.
management believes the uncollectibility of the receivable is con-
Accounting Changes
firmed. Subsequent recoveries, if any, are credited to the allowance.
Certain receivables for which the company recorded specific
New Standards to be Implemented
reserves may also be placed on non-accrual status. Non-accrual
In January 2010, the Financial Accounting Standards Board
assets are those receivables (impaired loans or non-performing
(FASB) issued additional disclosure requirements for fair value
leases) with specific reserves and other accounts for which it
measurements. According to the guidance, the fair value hierar-
is likely that the company will be unable to collect all amounts
chy disclosures are to be further disaggregated by class of assets
due according to original terms of the lease or loan agreement.
and liabilities. A class is often a subset of assets or liabilities within
Income recognition is discontinued on these receivables. Cash
a line item in the statement of financial position. In addition, signif-
collections are first applied as a reduction to principal out-
icant transfers between Levels 1 and 2 of the fair value hierarchy
standing. Any cash received in excess of principal payments
will be required to be disclosed. These additional requirements are
outstanding is recognized as interest income. Receivables may
effective January 1, 2010 for quarterly and annual reporting. These
be removed from non-accrual status, if appropriate, based upon
amendments will not have an impact on the consolidated finan-
changes in client circumstances.
cial results as this guidance relates only to additional disclosures.
In addition, the guidance requires more detailed disclosures of the
Estimated Residual Values of Lease Assets changes in Level 3 instruments. These changes will be effective
The recorded residual values of the company’s lease assets are January 1, 2011 and are not expected to have a material impact
estimated at the inception of the lease to be the expected fair on the Consolidated Financial Statements.
value of the assets at the end of the lease term. The company In October 2009, the FASB issued amended revenue rec-
periodically reassesses the realizable value of its lease residual ognition guidance for arrangements with multiple deliverables.
values. Any anticipated increases in specific future residual values The new guidance eliminates the residual method of revenue
are not recognized before realization through remarketing efforts. recognition and allows the use of management’s best estimate
Anticipated decreases in specific future residual values that are of selling price for individual elements of an arrangement when
considered to be other-than-temporary are recognized immedi- vendor-specific objective evidence (VSOE), vendor objective
ately upon identification and are recorded as an adjustment to evidence (VOE) or third-party evidence (TPE) is unavailable. In
the residual-value estimate. For sales-type and direct financing accordance with the guidance, the company has elected to early
leases, this reduction lowers the recorded net investment and is adopt its provisions as of January 1, 2010 on a prospective basis
recognized as a loss charged to financing income in the period for all new or materially modified arrangements entered into on or
in which the estimate is changed, as well as an adjustment to after that date. The company does not expect a material impact
unearned income to reduce future-period financing income. on the Consolidated Financial Statements.
In October 2009, the FASB issued guidance which amends
Common Stock the scope of existing software revenue recognition account-
Common stock refers to the $.20 par value per share capital ing. Tangible products containing software components and
stock as designated in the company’s Certificate of Incorporation. non-software components that function together to deliver the
Treasury stock is accounted for using the cost method. When product’s essential functionality would be scoped out of the
treasury stock is reissued, the value is computed and recorded accounting guidance on software and accounted for based on
using a weighted-average basis. other appropriate revenue recognition guidance. This guidance
must be adopted in the same period that the company adopts
the amended accounting for arrangements with multiple deliv-
Earnings Per Share of Common Stock erables described in the preceding paragraph. Therefore, the
Basic earnings per share of common stock is computed by company will also early adopt this guidance as of January 1,
dividing net income by the weighted-average number of common 2010 on a prospective basis for all new or materially modified
shares outstanding for the period. Diluted earnings per share of arrangements entered into on or after that date. The com-
common stock is computed on the basis of the weighted-aver- pany does not expect a material impact on the Consolidated
age number of shares of common stock plus the effect of dilutive Financial Statements.
potential common shares outstanding during the period using In June 2009, the FASB issued amendments to the account-
the treasury stock method. Dilutive potential common shares ing rules for variable interest entities (VIEs) and for transfers of
include outstanding stock options, stock awards and convertible financial assets. The new guidance for VIEs eliminates the quan-
notes. See note R, “Earnings Per Share of Common Stock,” on titative approach previously required for determining the primary
page 104 for additional information. beneficiary of a variable interest entity and requires ongoing
qualitative reassessments of whether an enterprise is the primary
beneficiary. In addition, qualifying special purpose entities (QSPEs)

79


are no longer exempt from consolidation under the amended In April 2009, the FASB issued additional requirements regard-
guidance. The amendments also limit the circumstances in which ing interim disclosures about the fair value of financial instruments
a financial asset, or a portion of a financial asset, should be derec- which were previously only disclosed on an annual basis. Entities
ognized when the transferor has not transferred the entire original are now required to disclose the fair value of financial instruments
financial asset to an entity that is not consolidated with the trans- which are not recorded at fair value in the financial statements in
feror in the financial statements being presented, and/or when both interim and annual financial statements. The new require-
the transferor has continuing involvement with the transferred ments were effective for interim and annual periods ending after
financial asset. The company will adopt these amendments June 15, 2009 on a prospective basis. The company adopted
for interim and annual reporting periods beginning on January these requirements in the quarter ended June 30, 2009. There
1, 2010. The company does not expect the adoption of these was no impact on the consolidated financial results as this relates
amendments to have a material impact on the Consolidated only to additional disclosures in the quarterly financial statements.
Financial Statements. See note E, “Financial Instruments (Excluding Derivatives)”, on
pages 87 and 88.
On January 1, 2009, the company adopted the revised FASB
Standards Implemented
guidance regarding business combinations which was required
In September 2009, the FASB issued amended guidance con-
to be applied to business combinations on a prospective basis.
cerning fair value measurements of investments in certain entities
The revised guidance requires that the acquisition method of
that calculate net asset value per share (or its equivalent). If fair
accounting be applied to a broader set of business combina-
value is not readily determinable, the amended guidance permits,
tions, amends the definition of a business combination, provides
as a practical expedient, a reporting entity to measure the fair
a definition of a business, requires an acquirer to recognize
value of an investment using the net asset value per share (or its
an acquired business at its fair value at the acquisition date
equivalent) provided by the investee without further adjustment.
and requires the assets and liabilities assumed in a business
In accordance with the guidance, the company adopted these
combination to be measured and recognized at their fair values
amendments for the year ended December 31, 2009. There was
as of the acquisition date (with limited exceptions). There was
no material impact on the Consolidated Financial Statements.
no impact upon adoption and the effects of this guidance will
On July 1, 2009, the FASB issued the FASB Accounting
depend on the nature and significance of business combinations
Standards Codification (the Codification). The Codification became
occurring after the effective date. See note C, “Acquisitions/
the single source of authoritative nongovernmental U.S. GAAP,
Divestitures”, on pages 82 to 86 for further information regarding
superseding existing FASB, American Institute of Certified Public
2009 business combinations.
Accountants (AICPA), Emerging Issues Task Force (EITF) and
In April 2009, the FASB issued an amendment to the revised
related literature. The Codification eliminates the previous U.S.
business combination guidance regarding the accounting for
GAAP hierarchy and establishes one level of authoritative GAAP.
assets acquired and liabilities assumed in a business combi-
All other literature is considered non-authoritative. The Codifica-
nation that arise from contingencies. The requirements of this
tion was effective for interim and annual periods ending after
amended guidance carry forward without significant revision
September 15, 2009. The company adopted the Codification for
the guidance on contingencies which existed prior to January
the quarter ending September 30, 2009. There was no impact
1, 2009. Assets acquired and liabilities assumed in a business
to the consolidated financial results.
combination that arise from contingencies are recognized at fair
In May 2009, the FASB issued guidelines on subsequent
value if fair value can be reasonably estimated. If fair value can-
event accounting which sets forth: 1) the period after the bal-
not be reasonably estimated, the asset or liability would generally
ance sheet date during which management of a reporting entity
be recognized in accordance with the Accounting Standards
should evaluate events or transactions that may occur for poten-
Codification (ASC) Topic 450 on contingencies. There was no
tial recognition or disclosure in the financial statements; 2) the
impact upon adoption. See note C, “Acquisitions/Divestitures”,
circumstances under which an entity should recognize events
on pages 82 to 86 for further information regarding 2009 busi-
or transactions occurring after the balance sheet date in its
ness combinations.
financial statements; and 3) the disclosures that an entity should
In April 2008, the FASB issued new requirements regard-
make about events or transactions that occurred after the bal-
ing the determination of the useful lives of intangible assets. In
ance sheet date. These guidelines were effective for interim and
developing assumptions about renewal or extension options
annual periods ending after June 15, 2009, and the company
used to determine the useful life of an intangible asset, an entity
adopted them in the quarter ended June 30, 2009. There was
needs to consider its own historical experience adjusted for
no impact on the consolidated financial results.
entity-specific factors. In the absence of that experience, an
entity shall consider the assumptions that market participants
would use about renewal or extension options. The new require-
ments apply to intangible assets acquired after January 1, 2009.
The adoption of these new rules did not have a material impact
on the Consolidated Financial Statements.
80


In December 2007, the FASB issued new guidance on non- after December 31, 2007 do not receive dividend equivalents
controlling interests in consolidated financial statements. This and are not considered participating securities. The company
guidance requires that the noncontrolling interest in the equity of retrospectively adopted this guidance on January 1, 2009. The
a subsidiary be accounted for and reported as equity, provides impact of adoption decreased previously reported diluted EPS
revised guidance on the treatment of net income and losses by $0.04 for the year ended December 31, 2008 and by $0.03
attributable to the noncontrolling interest and changes in owner- for the year ended December 31, 2007. Previously reported
ship interests in a subsidiary and requires additional disclosures basic EPS decreased by $0.05 for the year ended December
that identify and distinguish between the interests of the con- 31, 2008 and by $0.05 for the year ended December 31, 2007.
trolling and noncontrolling owners. Pursuant to the transition In November 2008, the FASB issued guidance on accounting
provisions, the company adopted this new guidance on January for defensive intangible assets. A defensive intangible asset is an
1, 2009 via retrospective application of the presentation and asset acquired in a business combination or in an asset acquisi-
disclosure requirements. Noncontrolling interests of $119 million tion that an entity does not intend to actively use. According to
at January 1, 2009, $145 million at January 1, 2008 and $129 the guidance, defensive intangible assets are considered to be a
million at January 1, 2007 were reclassified from the Liabilities separate unit of account and valued based on their highest and
section to the Equity section in the Consolidated Statement of best use from the perspective of an external market participant.
Financial Position. The company adopted this guidance on January 1, 2009, and
Noncontrolling interest amounts in income of $5 million, $14 there was no impact upon adoption.
million and $17 million, net of tax, for the years ended December In December 2008, the FASB issued guidance regard-
31, 2009, December 31, 2008 and December 31, 2007, respec- ing employers’ disclosures about postretirement benefit plan
tively, are not presented separately in the Consolidated Statement assets. This guidance requires more detailed disclosures about
of Earnings due to immateriality, but are reflected within the other the fair value measurements of employers’ plan assets includ-
(income) and expense line item. Additionally, changes to noncon- ing: (a) investment policies and strategies; (b) major categories
trolling interests in the Consolidated Statement of Changes in of plan assets; (c) information about valuation techniques and
Equity were $(1) million, $(26) million and $16 million for the years inputs to those techniques, including the fair value hierarchy
ended December 31, 2009, December 31, 2008 and December classifications (as defined in the Codification) of the major cat-
31, 2007, respectively. A separate roll forward is not presented egories of plan assets; (d) the effects of fair value measurements
due to immateriality. using significant unobservable inputs (Level 3) on changes in
In March 2008, the FASB issued new disclosure requirements plan assets; and (e) significant concentrations of risk within plan
regarding derivative instruments and hedging activities. Entities assets. The disclosures are required annually and have been
must now provide enhanced disclosures on an interim and included in the December 31, 2009 Consolidated Financial State-
annual basis regarding how and why the entity uses derivatives; ments. See note U “Retirement-Related Benefits” on pages 109
how derivatives and related hedged items are accounted for, through 121 for further information. There was no impact on
and how derivatives and related hedged items affect the entity’s the consolidated financial results as the guidance relates only to
financial position, financial results and cash flow. Pursuant to additional disclosures.
the transition provisions, the company adopted these new In September 2006, the FASB issued guidance that defines
requirements on January 1, 2009. The required disclosures are fair value, establishes a framework for measuring fair value and
presented in note L, “Derivatives and Hedging Transactions,” on expands disclosures about fair value measurements; however,
pages 92 through 96 on a prospective basis. These new require- it does not require any new fair value measurements. This
ments did not impact the consolidated financial results as they guidance became effective January 1, 2008 and was applied
relate only to additional disclosures. prospectively to fair value measurements and disclosures of (a)
In June 2008, the FASB issued guidance in determining financial assets and financial liabilities and (b) nonfinancial assets
whether instruments granted in share-based payment transac- and nonfinancial liabilities which are recognized or disclosed at
tions are participating securities. The guidance became effective fair value in the financial statements on a recurring basis (at least
on January 1, 2009 via retrospective application. According to annually). The application of this guidance did not have a mate-
the new guidance, unvested share-based payment awards that rial effect on the Consolidated Financial Statements. See note D,
contain non-forfeitable rights to dividends or dividend equiva- “Fair Value,” on pages 86 and 87 for additional information.
lents are participating securities and, therefore, are included in In February 2008, the FASB issued two amendments to
computing earnings per share (EPS) pursuant to the two-class the fair value guidance described above. The first amendment
method. The two-class method determines EPS for each class removed leasing from the scope of the fair value guidance. The
of common stock and participating securities according to divi- second amendment delayed the effective date regarding fair
dends or dividend equivalents and their respective participation value measurements and disclosures of nonfinancial assets
rights in undistributed earnings. Restricted Stock Units (RSUs) and nonfinancial liabilities, except those that are recognized or
granted to employees prior to December 31, 2007 are considered disclosed at fair value in the financial statements on a recurring
participating securities as they receive non-forfeitable dividend
equivalents at the same rate as common stock. RSUs granted
81


basis (at least annually), to January 1, 2009. The application Note C.
of these amendments did not have a material impact on the
Acquisitions/Divestitures
Consolidated Financial Statements.
In February 2007, the FASB issued guidance that permits
Acquisitions
entities to measure eligible financial assets, financial liabilities
and firm commitments at fair value, on an instrument-by-instru- 2009
ment basis, that are otherwise not permitted to be accounted In 2009, the company completed six acquisitions at an aggre-
for at fair value under other generally accepted accounting prin- gate cost of $1,471 million. The SPSS, Inc. acquisition is shown
ciples. The fair value measurement election is irrevocable and separately given its significant purchase price.
subsequent changes in fair value must be recorded in earnings.
The company adopted this guidance as of January 1, 2008 but SPSS, INC. (SPSS)—On October 2, 2009, the company acquired
has not applied the fair value option to any eligible assets or 100 percent of the outstanding common shares of SPSS for
liabilities. Thus, the adoption of this guidance did not affect the cash consideration of $1,177 million. SPSS is a leading global
Consolidated Financial Statements. provider of predictive analytics software and solutions and this
In the first quarter of 2007, the company adopted the guid- acquisition will strengthen the company’s business analytics and
ance on accounting for separately recognized servicing assets optimization capabilities. SPSS was integrated into the Software
and servicing liabilities. Separately recognized servicing assets segment upon acquisition, and goodwill, as reflected in the table
and servicing liabilities must be initially measured at fair value, below, has been entirely assigned to the Software segment.
if practicable. Subsequent to initial recognition, the company Substantially all of the goodwill is not deductible for tax pur-
may use either the amortization method or the fair value mea- poses. The overall weighted average useful life of the intangible
surement method to account for servicing assets and servicing assets acquired, excluding goodwill, is 7.0 years.
liabilities within the scope of this Statement. The adoption of
OTHER ACQUISITIONS—The Software segment also completed
this guidance did not have a material effect on the Consolidated
acquisitions of four privately held companies: in the second quar-
Financial Statements.
ter, Outblaze Limited, a messaging software provider, and Exeros,
On January 1, 2007, the company adopted the guidance
Inc., a data discovery firm; in the third quarter, security provider
on the accounting and reporting of uncertainties in income tax
Ounce Labs, Inc.; and in the fourth quarter, Guardium, Inc., a
law. The guidance prescribes a comprehensive model for the
database security company. Global Technology Services com-
financial statement recognition, measurement, presentation and
pleted one acquisition in the fourth quarter: RedPill Solutions PTE
disclosure of uncertain tax positions taken or expected to be
Limited, a privately held company focused on business analytics.
taken in income tax returns. See note P, “Taxes”, on pages 101
Purchase price consideration for the “Other Acquisitions,” as
to 103 for further information. The cumulative effect of adopting
reflected in the table below, was paid all in cash. All acquisitions
this guidance was a decrease in tax reserves and an increase of
are reported in the Consolidated Statement of Cash Flows net
$117 million to the January 1, 2007 retained earnings balance.
of acquired cash and cash equivalents.

2009 ACQUISITIONS

($ in millions)
Amortization Other
Life (in Years) SPSS Acquisitions

Current assets $ 397 $ 13
Fixed assets/noncurrent 20 1
Intangible assets:
Goodwill N/A 748 255
Completed technology 4 to 7 105 39
Client relationships 5 to 7 30 20
In-process R&D N/A — —
Other identifiable assets 1 to 7 36 1
Total assets acquired 1,336 330
Current liabilities (157) (34)
Noncurrent liabilities (2) (0)
Total liabilities assumed (160) (35)
Total purchase price $1,177 $295

N/A—Not applicable

82


The acquisitions were accounted for as business combina- TELELOGIC, AB (TELELOGIC)—On April 3, 2008, IBM acquired 100
tions, and accordingly, the assets and liabilities of the acquired percent of the outstanding common shares of Telelogic for cash
entities were recorded at their estimated fair values at the date of consideration of $885 million. Telelogic is a leading global pro-
acquisition. The primary items that generated the goodwill are the vider of solutions that enable organizations to align the develop-
value of the synergies between the acquired companies and IBM ment of products, complex systems and software with business
and the acquired assembled workforce, neither of which qualify objectives and customer needs. This results in improved quality
as an amortizable intangible asset. For the “Other Acquisitions”, and predictability, while reducing time-to-market and overall
the overall weighted-average life of the identified amortizable costs. Clients will benefit from the combined technologies and
intangible assets acquired is 6.5 years. With the exception of services of both companies, providing them a wider range of
goodwill, these identified intangible assets will be amortized on software and system development capabilities used to build
a straight-line basis over their useful lives. Goodwill of $255 mil- complex systems. Telelogic was integrated into the Software
lion has been assigned to the Software ($246 million) and Global segment upon acquisition, and goodwill, as reflected in the table
Technology Services ($10 million) segments. Substantially all of on page 84 has been entirely assigned to the Software segment.
the goodwill is not deductible for tax purposes. Substantially all of the goodwill is not deductible for tax pur-
On October 5, 2009, the company announced that it had poses. The overall weighted-average useful life of the intangible
signed an agreement with Bank of America Corporation to assets acquired, excluding goodwill, is 7.0 years.
acquire the core operating assets of Wilshire Credit Corporation,
including the Wilshire mortgage servicing platform. This acquisi- OTHER ACQUISITIONS—The company acquired 13 additional
tion continues the company’s strategic focus on the mortgage companies at an aggregate cost of $889 million that are pre-
services industry and strengthens its commitment to deliver sented in the table on page 84 as “Other Acquisitions.”
mortgage business process outsourcing solutions. The agree- The Software segment completed eight other acquisitions,
ment is subject to customary closing conditions and is not seven of which were privately held companies: in the first quarter;
expected to close until the first quarter of 2010. AptSoft Corporation, Solid Information Technology, Net Integration
Technologies Inc., and Encentuate, Inc; in the second quarter;
2008 Infodyne, Beijing Super Info and FilesX. In the fourth quarter,
In 2008, the company completed 15 acquisitions at an aggre- ILOG S.A. (ILOG), a publicly held company, was acquired for
gate cost of $6,796 million. The Cognos, Inc. and Telelogic, AB $295 million. ILOG adds significant capability across the com-
acquisitions are shown separately given their significant pur- pany’s entire software platform and bolsters its existing rules
chase prices. management offerings.
Global Technology Services completed one acquisition in the
COGNOS, INC. (COGNOS)—On January 31, 2008, the company first quarter: Arsenal Digital Solutions, a privately held company.
acquired 100 percent of the outstanding common shares Arsenal provides global clients with security rich information
of Cognos for consideration of $5,021 million consisting of protection services designed to handle increasing data retention
$4,998 million of cash and $24 million of equity instruments. requirements.
Through this acquisition, IBM and Cognos will become a lead- Global Business Services completed one acquisition in the first
ing provider of technology and services for business intelligence quarter: u9consult, a privately held company. u9consult comple-
and performance management, delivering the industry’s most ments the company’s existing capabilities in value chain consulting.
complete, open standards-based platform with the broadest Systems and Technology completed three acquisitions:
range of expertise to help companies expand the value of their in the second quarter; Diligent Technologies Corporation and
information, optimize their business processes and maximize Platform Solutions, Inc (PSI), both privately held companies.
performance across their enterprises. The company acquired Diligent will be an important component of IBM’s New Enterprise
Cognos to accelerate its Information on Demand strategy, a Data Center model, which helps clients improve IT efficiency
cross-company initiative that combines the company’s strength and facilitates the rapid deployment of new IT services for
in information integration, content and data management and future business growth. PSI’s technologies and skills, along
business consulting services to unlock the business value of with its intellectual capital, will be integrated into the company’s
information. Cognos was integrated into the Software segment mainframe product engineering cycles and future product
upon acquisition, and goodwill, as reflected in the table on plans. In the second quarter, $24 million of the purchase price
page 84, has been entirely assigned to the Software segment. of PSI was attributed to the settlement of a preexisting lawsuit
Approximately 25–30 percent of the goodwill was deductible
for tax purposes. The overall weighted-average useful life of
the intangible assets acquired, excluding goodwill, is 6.5 years.

83


between IBM and PSI and recorded in SG&A expense. See technology will allow clients to consolidate their Linux-based
note O, “Contingencies and Commitments,” on pages 99 to applications onto the IBM systems that make the most sense
101 for additional information regarding this litigation. Also, the for their business needs.
company recorded a $24 million in-process research and devel- Purchase price consideration for the “Other Acquisitions”
opment (IPR&D) charge related to this acquisition in the second was paid all in cash. All acquisitions are reported in the Consol-
quarter. The acquisition of Transitive Corporation (Transitive) idated Statement of Cash Flows net of acquired cash and cash
was completed in the fourth quarter. Transitive’s cross-platform equivalents.

2008 ACQUISITIONS

($ in millions)
Amortization Other
Life (in Years) Cognos Telelogic Acquisitions

Current assets $ 504 $ 242 $ 185
Fixed assets/noncurrent 126 7 75
Intangible assets:
Goodwill N/A 4,207 690 676
Completed technology 3 to 7 534 108 94
Client relationships 3 to 7 512 127 39
In-process R&D N/A — — 24
Other 3 to 7 78 15 19
Total assets acquired 5,960 1,189 1,112
Current liabilities (798) (141) (233)
Noncurrent liabilities (141) (163) (14)
Total liabilities assumed (939) (304) (247)
Settlement of prexisting litigation — — 24
Total purchase price $5,021 $ 885 $ 889


The table above reflects the purchase price related to these 2007
acquisitions and the resulting purchase price allocations as of In 2007, the company completed 12 acquisitions at an aggre-
December 31, 2008. gate cost of $1,144 million.
The acquisitions were accounted for as purchase transac- The Software segment completed six acquisitions: in the first
tions, and accordingly, the assets and liabilities of the acquired quarter, Consul Risk Management International BV and Vallent
entities were recorded at their estimated fair values at the date Corporation, both privately held companies. Four acquisitions
of acquisition. The primary items that generated the goodwill were completed in the third quarter: Watchfire Corporation,
are the value of the synergies between the acquired companies WebDialogs Inc. and Princeton Softech Inc., all privately held
and IBM and the acquired assembled workforce, neither of companies, and DataMirror Corporation, a publicly held com-
which qualify as an amortizable intangible asset. For the “Other pany. Each acquisition further complemented and enhanced the
Acquisitions,” the overall weighted-average life of the identified software product portfolio.
amortizable intangible assets acquired is 4.3 years. With the Global Technology Services completed four acquisitions: in
exception of goodwill, these identified intangible assets will the first quarter, Softek Storage Solutions Corporation (Softek)
be amortized on a straight-line basis over their useful lives. and DM Information Systems, Ltd. (DMIS), both privately held
Goodwill of $676 million has been assigned to the Software companies. Two acquisitions were completed in the fourth
($328 million), Global Technology Services ($68 million) and quarter: Novus Consulting Group, Inc. and Serbian Business
Systems and Technology ($280 million) segments. Substantially, Systems, both privately held companies. Softek augments the
all of the goodwill related to “Other Acquisitions” is not deduct- company’s unified data mobility offerings and worldwide delivery
ible for tax purposes. expertise for managing data in storage array, host and virtual-
ized IT environments. DMIS will enhance and complement the
Technology Service offerings. Novus CG, a storage solution
company, will provide improved access to business information,

84


enable stronger regulatory and corporate compliance and improve The acquisitions were accounted for as purchase transac-
overall information technology performance. Serbian Business tions, and accordingly, the assets and liabilities of the acquired
Systems establishes the company’s maintenance and technical entities were recorded at their estimated fair values at the date
support services business in Serbia. of acquisition. The primary items that generated the goodwill
Global Business Services completed one acquisition in the are the value of the synergies between the acquired companies
fourth quarter: IT Gruppen AS, which will add to the company’s and IBM and the acquired assembled workforce, neither of
presence in the retail and media sectors. which qualify as an amortizable intangible asset. Substantially
Systems and Technology completed one acquisition in the all of the goodwill is not deductible for tax purposes. The overall
fourth quarter: XIV, Ltd., a privately held company focused on weighted-average life of the identified amortizable intangible
storage systems technology. assets acquired is 5.4 years. With the exception of goodwill,
Purchase price consideration was paid in cash. These these identified intangible assets will be amortized over their
acquisitions are reported in the Consolidated Statement of Cash useful lives. Goodwill of $999 million was assigned to the
Flows net of acquired cash and cash equivalents. Software ($639 million), Global Business Services ($14 million),
The table below reflects the purchase price related to these Global Technology Services ($76 million) and Systems and
acquisitions and the resulting purchase price allocations as of Technology ($269 million) segments.
December 31, 2007.

2007 ACQUISITIONS

($ in millions)
Amortization
Life (in Years) Acquisitions

Current assets $ 184
Fixed assets/noncurrent 31
Intangible assets:
Goodwill N/A 999
Completed technology 3 to 7 93
Client relationships 3 to 7 91
Other 2 to 5 17
Total assets acquired 1,415
Current liabilities (136)
Noncurrent liabilities (135)
Total liabilities assumed (271)
Total purchase price $1,144


Divestitures On March 16, 2009, the company completed the sale of cer-
tain processes, resources, assets and third-party contracts related
2009
to its core logistics operations to Geodis. The company received
On October 26, 2009, the company announced that it had
proceeds of $365 million and recognized a net gain of $298
signed an agreement with Dassault Systemes (DS) under which
million on the transaction in the first quarter of 2009. The gain
DS would acquire the company’s activities associated with sales
was net of the fair value of certain contractual terms, certain
and support of DS’s product lifecycle management (PLM) soft-
transaction costs and related real estate charges. As part of this
ware solutions, including customer contracts and related assets.
transaction, the company outsourced its logistics operations to
This transaction is subject to customary closing conditions and
Geodis which enables the company to leverage industry-leading
is expected to close in the first quarter of 2010. The company
skills and scale and improve the productivity of the company’s
expects to record a gain when this transaction is completed.
supply chain.
On October 1, 2009, the company completed the divestiture
of its UniData and UniVerse software products and related tools
2007
to Rocket Software, a privately held global software develop-
In January 2007, the company announced an agreement with
ment firm. The company recognized a gain on the transaction in
Ricoh Company Limited (Ricoh), a publicly traded company,
the fourth quarter.
to form a joint venture company based on the Printing System
Division (a division of the Systems and Technology segment).

85


The company initially created a wholly owned subsidiary, The company will provide maintenance services for one year,
InfoPrint Solutions Company, LLC (InfoPrint), by contributing spe- certain hardware products for three years and other information
cific assets and liabilities from its printer business. The Printing technology and business process services to InfoPrint for up to
Systems Division generated approximately $1 billion of revenue five years. The company assessed the fair value of these arrange-
in 2006. The InfoPrint portfolio includes solutions for production ments, and, as a result, deferred $274 million of the proceeds.
printing for enterprises and commercial printers as well as solu- This amount will be recorded as revenue, primarily in the com-
tions for office workgroup environments and industrial segments. pany’s services segments, as services are provided to InfoPrint.
On June 1, 2007 (closing date), the company divested 51 per- The royalty agreements are related to the use of certain of
cent of its interest in InfoPrint to Ricoh. The company will divest the company’s trademarks for up to 10 years. The company
its remaining 49 percent ownership to Ricoh quarterly over the assessed the fair value of these royalty agreements, and, as a
next three years from the closing date. At December 31, 2009, result, deferred $116 million of the proceeds. This amount will
the company’s ownership in InfoPrint was 8.0 percent. be recognized as intellectual property and custom development
The total consideration the company agreed to on January income as it is earned in subsequent periods.
24, 2007 (the date the definitive agreement was signed) was Net assets contributed, transaction-related expenses and
$725 million which was paid in cash to the company on the clos- provisions were $90 million, resulting in an expected total pre-tax
ing date. The cash received was consideration for the initial 51 gain of $245 million, of which $81 million was recorded in other
percent acquisition of InfoPrint by Ricoh as well as a prepayment (income) and expense in the Consolidated Statement of Earnings
for the remaining 49 percent to be acquired and certain royalties in the second quarter of 2007.
and services to be provided by the company to InfoPrint. Final The deferred pre-tax gain of $164 million at the closing date
consideration for this transaction will be determined at the end was primarily related to: (1) the transfer of the company’s remain-
of the three-year period based upon the participation in the ing 49 percent interest in InfoPrint to Ricoh, and, (2) the transfer of
profits and losses recorded by the equity partners. The com- certain maintenance services employees to InfoPrint. The com-
pany concluded that InfoPrint met the requirements of a variable pany will recognize this amount over a three-year period as the
interest entity, the company is not the primary beneficiary of the remaining ownership interest is divested and the employees are
entity and that deconsolidation of the applicable net assets was transferred. The pre-tax gain will be recorded in other (income)
appropriate. The company’s investment in InfoPrint is accounted and expense in the Consolidated Statement of Earnings.
for under the equity method of accounting.

Note D.
Fair Value
Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis
at December 31, 2009 and 2008.

($ in millions)
At December 31, 2009: Level 1 Level 2 Level 3 Netting(1) Total

Assets:
Cash and cash equivalents $2,780 $6,497 $ — $ — $ 9,277
Marketable securities — 1,791 — — 1,791
Derivative assets(2) — 838 — (573) 265
Investments and sundry assets 369 14 — — 383
Total assets $3,149 $9,140 $ — $(573) $11,716
Liabilities:
Derivative liabilities(3) $ — $1,555 $ — $(573) $ 982
Total liabilities $ — $1,555 $ — $(573) $ 982
(1)
Represents netting of derivative exposures covered by a qualifying master netting agreement.
(2)
The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement
of Financial Position at December 31, 2009 are $273 million and $565 million, respectively.
(3)
The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position
at December 31, 2009 are $906 million and $649 million, respectively.

86


($ in millions)
At December 31, 2008: Level 1 Level 2 Level 3 Netting(1) Total

Assets:
Cash and cash equivalents $1,950 $ 8,059 $ — $ — $10,009
Marketable securities — 166 — — 166
Derivative assets(2) 56 1,834 — (875) 1,015
Investments and sundry assets 165 6 — — 171
Total assets $2,171 $10,065 $ — $(875) $11,361
Liabilities:
Derivative liabilities(3) $ — $ 2,116 $ — $(875) $ 1,241
Total liabilities $ — $ 2,116 $ — $(875) $ 1,241
(1)
Represents netting of derivative exposures covered by a qualifying master netting agreement.
(2)
The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement
of Financial Position at December 31, 2008 are $773 million and $1,117 million, respectively.
(3)
The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position
at December 31, 2008 are $1,414 million and $702 million, respectively.

Items Measured at Fair Value on are financial liabilities with carrying values that approximate fair
a Nonrecurring Basis value. In the absence of quoted prices in active markets, consid-
In the fourth quarter of 2008, the company recorded an other- erable judgment is required in developing estimates of fair value.
than-temporary impairment of $81 million for an equity method Estimates are not necessarily indicative of the amounts the com-
investment. The resulting investment which was classified as pany could realize in a current market transaction. The following
Level 3 in the fair value hierarchy was valued using a discounted methods and assumptions are used to estimate fair values:
cash flow model. The valuation inputs included an estimate of
future cash flows, expectations about possible variations in the Loans and Long-term Receivables
amount and timing of cash flows and a discount rate based on Estimates of fair value are based on discounted future cash
the risk-adjusted cost of capital. Potential results were assigned flows using current interest rates offered for similar loans to cli-
probabilities that resulted in a weighted average or most-likely ents with similar credit ratings for the same remaining maturities.
discounted cash flow fair value as of December 31, 2008. The
fair value of the investment after impairment was $7 million at Long-term Debt
December 31, 2008. During 2009, the balance of this invest- Fair value of publicly traded long-term debt is based on quoted
ment was further reduced by an additional impairment of $5 market prices for the identical liability when traded as an asset
million and other adjustments primarily related to dividends. The in an active market. For other long-term debt for which a
balance of this investment was zero at December 31, 2009. quoted market price is not available, an expected present value
technique that uses rates currently available to the company
for debt with similar terms and remaining maturies is used to
Note E. estimate fair value. The carrying amount of long-term debt is
Financial Instruments $21,932 million and $22,689 million and the estimated fair value
(Excluding Derivatives) is $23,748 million and $23,351 million at December 31, 2009
and 2008, respectively.
Fair Value of Financial Instruments
Cash and cash equivalents, debt and marketable equity securi-
ties and derivative financial instruments are recognized and
measured at fair value in the company’s financial statements.
Notes and other accounts receivable and other investments are
financial assets with carrying values that approximate fair value.
Accounts payable, other accrued expenses and short-term debt

87


Debt and Marketable Equity Securities The contractual maturities of substantially all available-for-sale
The following table summarizes the company’s debt and market- debt securities are due in less than one year at December 31, 2009.
able equity securities all of which are considered available-for-sale
and recorded at fair value in the Consolidated Statement of Finan- Note F.
cial Position.
Inventories
($ in millions) ($ in millions)
Fair Value At December 31: 2009 2008
Finished goods $ 533 $ 524
Cash and cash equivalents:*
Work in process and raw materials 1,960 2,176
Time deposits and certificates of deposit $4,324 $ 4,805
Total $2,494 $2,701
Commercial paper 2,099 3,194
Money market funds 2,780 1,950
Other securities 74 60 Note G.
Total $9,277 $10,009 Financing Receivables
Debt securities—current:**
Commercial paper $1,491 $ 166 ( $ in millions)
Securities of U.S. Federal government
and its agencies 300 — Current:
Total $1,791 $ 166 Net investment in sales-type and
Debt securities—noncurrent:*** direct financing leases $ 4,105 $ 4,226

Other securities $ 9 $ 6 Commercial financing receivables 5,604 5,781

Total $ 9 $ 6 Client loan receivables 4,475 4,861

Non-equity method alliance investments*** $ 374 $ 165 Installment payment receivables 730 608
Total $14,914 $15,477
* Included within cash and cash equivalents in the Consolidated Statement of
Financial Position. Noncurrent:
** Reported as marketable securities within the Consolidated Statement of Net investment in sales-type and
Financial Position. direct financing leases $ 5,331 $ 5,938
***Included within investments and sundry assets in the Consolidated Statement Commercial financing receivables 58 94
of Financial Position. See note I, “Investments and Sundry Assets,” on page 89.
Client loan receivables 4,759 4,718
Installment payment receivables 496 433
Gross unrealized gains (before taxes) on debt securities were
less than $1 million and $1 million at December 31, 2009 and Total $10,644 $11,183

2008, respectively. Gross unrealized gains (before taxes) on
marketable equity securities were $201 million and $31 million Net investment in sales-type and direct financing leases is for
at December 31, 2009 and 2008, respectively. Gross unrealized leases that relate principally to the company’s systems products
losses (before taxes) on debt securities were less than $1 mil- and are for terms ranging generally from two to six years. Net
lion at December 31, 2009 and 2008. Gross unrealized losses investment in sales-type and direct financing leases includes
(before taxes) on marketable equity securities were $10 million unguaranteed residual values of $849 million and $916 million
and $27 million at December 31, 2009 and 2008, respectively. at December 31, 2009 and 2008, respectively, and is reflected
Based on an evaluation of available evidence as of December net of unearned income of $905 million and $1,049 million and
31, 2009, the company believes that unrealized losses on mar- of allowance for doubtful accounts receivable of $159 million
ketable equity securities are temporary and do not represent and $217 million at those dates, respectively. Scheduled maturi-
a need for an other-than-temporary impairment. See note N, ties of minimum lease payments outstanding at December 31,
“Equity Activity,” on pages 98 and 99 for net change in unreal- 2009, expressed as a percentage of the total, are approximately:
ized gains and losses on debt and marketable equity securities. 2010, 49 percent; 2011, 27 percent; 2012, 15 percent; 2013, 6
Proceeds from sales of debt securities and marketable percent; and 2014 and beyond, 2 percent.
equity securities were approximately $24 million and $787 Commercial financing receivables relate primarily to inventory
million during 2009 and 2008, respectively. The gross realized and accounts receivable financing for dealers and remarketers
gains and losses (before taxes) on these sales totaled $3 million of IBM and non-IBM products. Payment terms for inventory and
and $40 million, respectively in 2009. The gross realized gains accounts receivable financing generally range from 30 to 90 days.
and losses (before taxes) on these sales totaled $182 million and Client loan receivables are loans that are provided by Global
$13 million, respectively, in 2008. Financing primarily to clients to finance the purchase of soft-
ware and services. Separate contractual relationships on these

88


financing arrangements are for terms ranging generally from two Note J.
to seven years. Each financing contract is priced independently at
Intangible Assets Including Goodwill
competitive market rates. The company has a history of enforcing
the terms of these separate financing agreements.
Intangible Assets
The company utilizes certain of its financing receivables as
The following table details the company’s intangible asset bal-
collateral for non-recourse borrowings. Financing receivables
ances by major asset class.
pledged as collateral for borrowings were $271 million and $373
million at December 31, 2009 and 2008, respectively. These bor-
($ in millions)
rowings are included in note K, “Borrowings,” on pages 90 to 92.
At December 31, 2009
The company did not have any financing receivables held for
Gross Net
sale as of December 31, 2009 and 2008. Carrying Accumulated Carrying
Intangible Asset Class Amount Amortization Amount
Capitalized software $1,765 $ (846) $ 919
Note H.
Client-related 1,367 (677) 690
Plant, Rental Machines and Completed technology 1,222 (452) 770
Other Property Patents/trademarks 174 (59) 115
($ in millions) Other* 94 (75) 19
At December 31: 2009 2008 Total $4,622 $(2,109) $2,513
Land and land improvements $ 737 $ 729 * Other intangibles are primarily acquired proprietary and nonproprietary business
Buildings and building improvements 9,314 8,819 processes, methodologies and systems, and impacts from currency translation.

Plant, laboratory and office equipment 25,888 24,950
35,940 34,499 ($ in millions)

Less: Accumulated depreciation 23,485 22,178 At December 31, 2008
Gross Net
Plant and other property — net 12,455 12,321 Carrying Accumulated Carrying
Rental machines 3,656 3,946 Intangible Asset Class Amount Amortization Amount

Less: Accumulated depreciation 1,946 1,962 Capitalized software $1,861 $ (839) $1,022

Rental machines — net 1,710 1,984 Client-related 1,532 (663) 869

Total—net $14,165 $14,305 Completed technology 1,167 (327) 840
Patents/trademarks 188 (76) 112
Other* 154 (121) 35
Note I. Total $4,901 $(2,023) $2,878
Investments and Sundry Assets * Other intangibles are primarily acquired proprietary and nonproprietary business
processes, methodologies and systems, and impacts from currency translation.
($ in millions)
At December 31: 2009 2008*
The net carrying amount of intangible assets decreased $365
Deferred transition and setup costs million for the year ended December 31, 2009, primarily due to
and other deferred arrangements** $1,772 $1,548
amortization of acquired intangibles. No impairment of intangible
Derivatives — noncurrent + 565 1,117
assets was recorded in any of the periods presented.
Alliance investments: Total amortization was $1,221 million and $1,310 million for
Equity method 115 167 the years ended December 31, 2009 and 2008, respectively.
Non-equity method 477 285 The aggregate intangible amortization expense for acquired
Prepaid software 312 370 intangibles (excluding capitalized software) was $489 million and
Long-term deposits 310 277 $520 million for the years ended December 31, 2009 and 2008,
Other receivables 617 238
Employee benefit-related 427 372
Other assets 783 685
Total $5,379 $5,058

** Deferred transition and setup costs and other deferred arrangements are related
to Global Services client arrangements. Also see note A, “Significant Accounting
Policies,” on pages 70 to 79 for additional information.
+ See note L, “Derivatives and Hedging Transactions,” on pages 92 through 96
for the fair value of all derivatives reported in the Consolidated Statement of
Financial Position.

89


respectively. In addition, in 2009 the company retired $1,147 mil- ($ in millions)

lion of fully amortized intangible assets, impacting both the gross Capitalized Acquired
Software Intangibles Total
carrying amount and accumulated amortization for this amount.
2010 $570 $422 $992
The amortization expense for each of the five succeeding
2011 277 373 650
years relating to intangible assets currently recorded in the
Consolidated Statement of Financial Position is estimated to be 2012 72 306 377

the following at December 31, 2009: 2013 — 277 277
2014 — 149 149

Goodwill
The changes in the goodwill balances by reportable segment, for the years ended December 31, 2009 and 2008, are as follows:

($ in millions)
Foreign
Currency
Balance Purchase Translation Balance
January 1, Goodwill Price and Other December 31,
Segment 2009 Additions Adjustments Divestitures Adjustments 2009

Global Business Services $ 3,870 $ — $— $— $ 172 $ 4,042
Global Technology Services 2,616 10 1 — 150 2,777
Software 10,966 994 (50) (13) 708 12,605
Systems and Technology 772 — (7) — 1 766
Total $18,226 $1,004 $(56) $(13) $1,031 $20,190

Foreign
Currency
Balance Purchase Translation Balance
January 1, Goodwill Price and Other December 31,
Segment 2008 Additions Adjustments Divestitures Adjustments 2008

Global Business Services $ 4,041 $ — $ (4) $(16) $ (151) $ 3,870
Global Technology Services 2,914 68 (5) — (361) 2,616
Software 6,846 5,225 (85) — (1,018) 10,966
Systems and Technology 484 280 9 — (1) 772
Total $14,285 $5,573 $(85) $(16) $(1,531) $18,226

Purchase price adjustments recorded in 2009 were related to Note K.
acquisitions that were completed on or prior to December 31,
Borrowings
2008 and were still subject to the measurement period that ends
at the earlier of 12 months from the acquisition date or when
Short-Term Debt
information becomes available. There were no goodwill impair-
ment losses recorded in 2009 or 2008, and the company has ($ in millions)

no accumulated impairment losses. At December 31: 2009 2008

Commercial paper $ 235 $ 468
Short-term loans 1,711 1,827
Long-term debt — current maturities 2,222 8,942
Total $4,168 $11,236

The weighted-average interest rates for commercial paper at
December 31, 2009 and 2008, were 0.1 percent and 3.1 percent,
respectively. The weighted-average interest rates for short-term
loans were 1.8 percent and 4.5 percent at December 31, 2009
and 2008, respectively.

90


Long-Term Debt
Pre-Swap Borrowing
($ in millions)
At December 31: Maturities 2009 2008

U.S. Dollar Notes and Debentures (average interest rate at December 31, 2009):
3.33% 2010 – 2012 $ 5,456* $10,496
4.99% 2013 – 2014 3,332 5,053
6.63% 2015 –2019 5,396 5,511
7.00% 2025 600 600
6.22% 2027 469 469
6.50% 2028 313 313
5.875% 2032 600 600
8.00% 2038 187 1,000
5.60% 2039 1,518 —
7.00% 2045 27 150
7.125% 2096 350 850
18,247 25,041
Other currencies (average interest rate at December 31, 2009, in parentheses):
Euros (4.4%) 2010 – 2014 3,427 3,330
Japanese yen (1.5%) 2010 – 2014 1,565 1,457
Swiss francs (3.4%) 2011 – 2015 484 470
Other (5.5%) 2010 – 2013 285 203
24,008 30,502
Less: Net unamortized discount 527 81
Add: Fair value adjustment** 673 1,210
24,154 31,631
Less: Current maturities 2,222 8,942
Total $21,932 $22,689

* $1.6 billion in debt securities issued by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of the company, is included in
2010–2012. Debt securities issued by IBM International Group Capital LLC are fully and unconditionally guaranteed by the company.
** The portion of the 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 a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

Post-Swap Borrowing (Long-term Debt, Including Current Portion)
($ in millions)
2009 2008
At December 31: Amount Average Rate Amount Average Rate

Fixed-rate debt* $11,939 6.13% $16,608 6.16%
Floating-rate debt** 12,215 1.22% 15,023 3.35%
Total $24,154 $31,631

* Includes $0 in 2009 and $1,700 million in 2008 of notional interest rate swaps that effectively convert floating-rate long-term debt into fixed-rate debt. (See note L,
“Derivatives and Hedging Transactions,” on pages 92 through 96).
** Includes $9,054 million in 2009 and $7,435 million in 2008 of notional interest rate swaps that effectively convert the fixed-rate long-term debt into floating-rate debt.
(See note L, “Derivatives and Hedging Transactions,” on pages 92 through 96).

91


Pre-swap annual contractual maturities of long-term debt out- in 2007. The amended Credit Agreement permits the company
standing at December 31, 2009, are as follows: and its Subsidiary Borrowers to borrow up to $10 billion on a
revolving basis. Borrowings of the Subsidiary Borrowers will be
($ in millions) unconditionally backed by the company. The company may also,
2010 $ 2,251 upon the agreement of either existing lenders, or of the additional
2011 3,953 banks not currently party to the Credit Agreement, increase the
2012 3,096 commitments under the Credit Agreement up to an additional
$2.0 billion. Subject to certain terms of the Credit Agreement,
2013 3,778
the company and Subsidiary Borrowers may borrow, prepay
2014 1,516
and reborrow amounts under the Credit Agreement at any time
2015 and beyond 9,414
during the Credit Agreement. Interest rates on borrowings under
Total $24,008
the Credit Agreement will be based on prevailing market interest
rates, as further described in the Credit Agreement. The Credit
Agreement contains customary representations and warranties,
Debt Exchange
covenants, events of default, and indemnification provisions.
During the fourth quarter of 2009, the company completed an
The company believes that circumstances that might give rise
exchange of approximately $500 million principal amount of
to breach of these covenants or an event of default, as specified
its 7.125 percent debentures due 2096, $123 million principal
in the Credit Agreement are remote. The company’s other lines
amount of its 7 percent debentures due 2045 and $813 million
of credit, most of which are uncommitted, totaled approximately
principal amount of its 8 percent notes due 2038, for approxi-
$9,790 million and $11,031 million at December 31, 2009 and
mately $1.5 billion of 5.60 percent senior notes due 2039 and
2008, respectively. Interest rates and other terms of borrowing
cash of approximately $376 million. The exchange was con-
under these lines of credit vary from country to country, depend-
ducted to retire high coupon long-dated debt in a favorable
ing on local market conditions.
interest rate environment.
The debt exchange was accounted for as a non-revolving
($ in millions)
debt modification in accordance with U.S. GAAP and therefore
it did not result in any gain or loss recorded in the Consolidated
Unused lines:
Statement of Earnings. Cash payments made will be amortized
From the committed global credit facility $ 9,910 $ 9,888
over the life of the new debt. Upfront fees with third parties in
relation to the exchange were expensed as incurred. From other committed and uncommitted lines 7,405 8,376
Total unused lines of credit $17,314 $18,264

Interest on Debt
($ in millions) Note L.
Derivatives and Hedging Transactions
Cost of financing $ 706 $ 788 $ 811
Interest expense 404 687 753 The company operates in multiple functional currencies and is
a significant lender and borrower in the global markets. In the
Net investment derivative activity (1) (13) (142)
normal course of business, the company is exposed to the
Interest capitalized 13 15 9
impact of interest rate changes and foreign currency fluctua-
Total interest paid and accrued $1,122 $1,477 $1,431
tions, and to a lesser extent equity changes and client credit
risk. The company limits these risks by following established
Refer to the related discussion on page 124 in note V, “Segment risk management policies and procedures, including the use of
Information,” for total interest expense of the Global Financing derivatives, and, where cost effective, financing with debt in the
segment. See note L, “Derivatives and Hedging Transactions,” currencies in which assets are denominated. For interest rate
on pages 92 through 96 for a discussion of the use of currency exposures, derivatives are used to better align rate movements
and interest rate swaps in the company’s debt risk manage- between the interest rates associated with the company’s lease
ment program. and other financial assets and the interest rates associated
with its financing debt. Derivatives are also used to manage the
Lines of Credit related cost of debt. For foreign currency exposures, derivatives
The company maintains a five-year, $10 billion Credit Agreement are used to better manage the cash flow volatility arising from
(the “Credit Agreement”), which expires on June 28, 2012. The foreign exchange rate fluctuations.
total expense recorded by the company related to this facility
was $6.3 million in 2009, $6.2 million in 2008 and $6.2 million

92


As a result of the use of derivative instruments, the company derivative instrument to manage this liquidity risk. Although not
is exposed to the risk that counterparties to derivative contracts designated as accounting hedges, the company may utilize
will fail to meet their contractual obligations. To mitigate the coun- derivatives to offset the changes in fair value of the de-designated
terparty credit risk, the company has a policy of only entering instruments from the date of de-designation until maturity. The
into contracts with carefully selected major financial institutions company expended $533 million related to maturities of deriva-
based upon their credit ratings and other factors. The company’s tive instruments that existed in qualifying net investment hedge
established policies and procedures for mitigating credit risk on relationships in the 12 months ending December 31, 2009. At
principal transactions include reviewing and establishing limits for December 31, 2009, the company had assets of $84 million,
credit exposure and continually assessing the creditworthiness representing the fair value of derivative instruments in qualify-
of counterparties. The right of set-off that exists under certain of ing net investment hedge relationships. The weighted-average
these arrangements enables the legal entities of the company remaining maturity of these instruments at December 31, 2009
subject to the arrangement to net amounts due to and from was 1.6 years. In addition, at December 31, 2009, the company
the counterparty reducing the maximum loss from credit risk in had liabilities of $318 million representing the fair value of deriva-
the event of counterparty default. The company is also a party tive instruments that were previously designated in qualifying net
to collateral security arrangements with certain counterparties. investment hedging relationships but were de-designated prior
These arrangements require the company to hold or post col- to December 31, 2009; of this amount $94 million is expected to
lateral (cash or U.S. Treasury securities) when the derivative fair mature over the next 12 months. The notional amount of these
values exceed contractually established thresholds. Posting instruments at December 31, 2009 was $2.3 billion including
thresholds can be fixed or can vary based on credit default original and offsetting transactions.
swap pricing or credit ratings received from the major credit In its hedging programs, the company uses forward con-
agencies. The aggregate fair value of all derivative instruments tracts, futures contracts, interest-rate swaps and cross-currency
under these collateralized arrangements that were in a liability swaps, depending upon the underlying exposure. The company
position at December 31, 2009 was $779 million for which the is not a party to leveraged derivative instruments.
company has posted collateral of $37 million. Full overnight col- A brief description of the major hedging programs, catego-
lateralization of these agreements would be required in the event rized by underlying risk, follows.
that the company’s credit rating falls below investment grade
or if its credit default swap spread exceeds 250 basis points, Interest Rate Risk
as applicable, pursuant to the terms of the collateral security
arrangements. The aggregate fair value of derivative instruments Fixed and Variable Rate Borrowings
in net asset positions as of December 31, 2009 was $838 mil- The company issues debt in the global capital markets, prin-
lion. This amount represents the maximum exposure to loss cipally to fund its financing lease and loan portfolio. Access to
at the reporting date as a result of the counterparties failing to cost-effective financing can result in interest rate mismatches
perform as contracted. This exposure is reduced by $573 million with the underlying assets. To manage these mismatches and
of liabilities included in master netting arrangements with those to reduce overall interest cost, the company uses interest-
counterparties. The company does not offset derivative assets rate swaps to convert specific fixed-rate debt issuances into
against liabilities in master netting arrangements nor does it off- variable-rate debt (i.e., fair value hedges) and to convert specific
set receivables or payables recognized upon payment or receipt variable-rate debt issuances into fixed-rate debt (i.e., cash flow
of cash collateral against the fair values of the related derivative hedges). At December 31, 2009, the total notional amount of the
instruments. At December 31, 2009, the company recorded company’s interest rate swaps was $9.1 billion.
$37 million in cash collateral related to all applicable derivative
instruments in prepaid expenses and other current assets in the Forecasted Debt Issuance
Consolidated Statement of Financial Position. The company is exposed to interest rate volatility on forecasted
The company may employ derivative instruments to hedge debt issuances. To manage this risk, the company may use for-
the volatility in equity resulting from changes in currency exchange ward starting interest-rate swaps to lock in the rate on the interest
rates of significant foreign subsidiaries of the company with payments related to the forecasted debt issuance. These swaps
respect to the U.S. dollar. These instruments, designated as are accounted for as cash flow hedges. The company did not
net investment hedges, expose the company to liquidity risk have any derivative instruments relating to this program outstand-
as the derivatives have an immediate cash flow impact upon ing at December 31, 2009.
maturity which is not offset by a cash flow from the translation
of the underlying hedged equity. The company monitors the
cash loss potential on an ongoing basis and may discontinue
some of these hedging relationships by de-designating the

93


Foreign Exchange Risk and liabilities. The terms of these forward and swap contracts
are generally less than two years. The changes in the fair values
Long-Term Investments in Foreign Subsidiaries
of these contracts and of the underlying exposures are generally
(Net Investment)
offsetting and are recorded in other (income) and expense in the
A significant portion of the company’s foreign currency denomi-
Consolidated Statement of Earnings. At December 31, 2009,
nated debt portfolio is designated as a hedge of net investment
the total notional amount of derivative instruments in economic
to reduce the volatility in equity caused by changes in foreign
hedges of foreign currency exposure was $13.1 billion.
currency exchange rates in the functional currency of major
foreign subsidiaries with respect to the U.S. dollar. The company
also uses cross-currency swaps and foreign exchange forward Equity Risk Management
contracts for this risk management purpose. At December 31, The company is exposed to market price changes primarily
2009, the total notional amount of derivative instruments desig- related to certain obligations to employees. These exposures are
nated as net investment hedges was $1.0 billion. primarily related to market price movements in certain broad
equity market indices and in the company’s own common stock.
Anticipated Royalties and Cost Transactions Changes in the overall value of these employee compensation
The company’s operations generate significant nonfunctional cur- obligations are recorded in SG&A expense in the Consolidated
rency, third-party vendor payments and intercompany payments Statement of Earnings. Although not designated as accounting
for royalties and goods and services among the company’s non- hedges, the company utilizes derivatives, including equity swaps
U.S. subsidiaries and with the parent company. In anticipation of and futures, to economically hedge the exposures related to its
these foreign currency cash flows and in view of the volatility of employee compensation obligations. The derivatives are linked
the currency markets, the company selectively employs foreign to the total return on certain broad market indices or the total
exchange forward contracts to manage its currency risk. These return on the company’s common stock. They are recorded at
forward contracts are accounted for as cash flow hedges. The fair value with gains or losses also reported in SG&A expense in
maximum length of time over which the company is hedging its the Consolidated Statement of Earnings. At December 31, 2009,
exposure to the variability in future cash flows is approximately the total notional amount of derivative instruments in economic
four years. At December 31, 2009, the total notional amount of hedges of these compensation obligations was $0.8 billion.
forward contracts designated as cash flow hedges of forecasted
royalty and cost transactions was $18.7 billion with a weighted- Other Risks
average remaining maturity of 1.3 years.
The company holds warrants to purchase shares of common
stock in connection with various investments that are deemed
Foreign Currency Denominated Borrowings
derivatives because they contain net share or net cash settle-
The company is exposed to exchange rate volatility on foreign ment provisions. The amount of shares to be purchased under
currency denominated debt. To manage this risk, the company these agreements was immaterial at December 31, 2009. The
employs cross-currency swaps to convert fixed-rate foreign company records the changes in the fair value of these warrants
currency denominated debt to fixed-rate debt denominated in in other (income) and expense in the Consolidated Statement
the functional currency of the borrowing entity. These swaps of Earnings.
are accounted for as cash flow hedges. The maximum length The company is exposed to a potential loss if a client fails to
of time over which the company is hedging its exposure to the pay amounts due under contractual terms. The company utilizes
variability in future cash flows is approximately five years. At credit default swaps to economically hedge its credit exposures.
December 31, 2009, the total notional amount of cross-currency These derivatives have terms of one year or less. The swaps are
swaps designated as cash flow hedges of foreign currency recorded at fair value with gains and losses reported in other
denominated debt was $0.3 billion. (income) and expense in the Consolidated Statement of Earnings.
The company did not have any derivative instruments relating to
Subsidiary Cash and Foreign Currency this program outstanding at December 31, 2009.
Asset/Liability Management
The following tables provide a quantitative summary of the
The company uses its Global Treasury Centers to manage the derivative and non-derivative instrument related risk management
cash of its subsidiaries. These centers principally use currency activity as of and for the 12 months ended December 31, 2009:
swaps to convert cash flows in a cost-effective manner. In addi-
tion, the company uses foreign exchange forward contracts to
economically hedge, on a net basis, the foreign currency expo-
sure of a portion of the company’s nonfunctional currency assets

94


Fair Values of Derivative Instruments on the Consolidated Statement of Financial Position
($ in millions)
Fair value of derivative assets Fair value of derivative liabilities
Designated Not designated Designated Not designated
as hedging as hedging as hedging as hedging
At December 31, 2009: instruments instruments Total instruments instruments Total

Interest rate contracts:
Prepaid expenses and other current assets $ 43 $ — $ 43 $ — $ — $ —
Investments and sundry assets 383 — 383 — — —
Other liabilities — — — 2 — 2

Foreign exchange contracts:
Prepaid expenses and other current assets 74 151 225 — — —
Investments and sundry assets 156 26 182 — — —
Other accrued expenses and liabilities — — — 602 304 906
Other liabilities — — — 423 224 647

Equity contracts:
Prepaid expenses and other current assets — 5 5 — — —
Other accrued expenses and liabilities — — — — 0 0

Fair value of derivative assets and liabilities $656 $182 $838 $1,027 $528 $1,555
Total debt designated as hedging instruments:
Short-term debt NA NA NA $1,440 — $1,440
Long-term debt NA NA NA 2,618 — 2,618
Total $838 $5,613

95


The Effect of Derivative Instruments on the Consolidated Statement of Earnings
($ in millions)
For the year ended December 31, 2009:
Gain (loss) recognized in earnings
Derivative instruments in Consolidated Statement of Recognized on Attributable to risk
fair value hedges Earnings line item derivatives(2) being hedged(3)

Interest rate contracts Cost of financing $(172) $344
Interest expense (97) 193
Total $(269) $537

Gain (loss) recognized in earnings and other comprehensive income
Effective portion Ineffectiveness and
Derivative instruments in Effective portion Consolidated Statement reclassified from amounts excluded from
cash flow hedges recognized in AOCI of Earnings line item AOCI to earnings effectiveness testing(4)

Interest rate contracts $ (0) Interest income $ (13) $—
Foreign exchange contracts (718) Other (income)
and expense 143 (3)
Cost of sales (49)
SG&A expense 14
Total $(718) $ 94 $(3)

Gain (loss) recognized in earnings and other comprehensive income
Effective portion Ineffectiveness and
Derivative instruments in Effective portion Consolidated Statement reclassified from amounts excluded from
net investment hedges recognized in AOCI of Earnings line item AOCI to earnings effectiveness testing(5)

Foreign exchange contracts $234 Interest income $— $ 1
Other (income)
and expense $— $—

Derivative instruments not Consolidated Statement Gain (loss) recognized
designated as hedging instruments(1) of Earnings line item in earnings

Foreign exchange contracts Other (income)
and expense $(128)
Equity contracts SG&A expense 177
Total $ 50

Note: AOCI represents Accumulated other comprehensive income/(loss) in Consolidated Statement of Changes in Equity.
(1)
See pages 76 and 77 for additional information on the purpose for entering into derivatives not designated as hedging instruments.
(2)
Includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these
derivative contracts.
(3)
Includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated
hedging relationships during the period.
(4)
Amount of gain (loss) recognized in income represents ineffectiveness on hedge relationships.
(5)
Amount of gain (loss) recognized in income represents amounts excluded from effectiveness assessment.

At December 31, 2009, in connection with cash flow hedges within the next 12 months, providing an offsetting economic
of anticipated royalties and cost transactions, the company impact against the underlying transactions.
recorded net losses of $718 million (before taxes), in accumu- For the 12 months ending December 31, 2009, there were
lated other comprehensive income/(loss); $427 million of losses no significant gains or losses recognized in earnings represent-
are expected to be reclassified to net income within the next 12 ing hedge ineffectiveness or excluded from the assessment of
months, providing an offsetting economic impact against the hedge effectiveness (for fair value hedges), or associated with an
underlying anticipated transactions. At December 31, 2009, net underlying exposure that did not or was not expected to occur
losses of approximately $18 million (before taxes), were recorded (for cash flow hedges); nor are there any anticipated in the nor-
in accumulated other comprehensive income/(loss) in connec- mal course of business.
tion with cash flow hedges of the company’s borrowings; $10 Refer to note A, “Significant Accounting Policies”, on pages
million of losses are expected to be reclassified to net income 76 and 77 for additional information.

96


Note M. In response to changing business needs, the company periodi-
cally takes workforce reduction actions to improve productivity,
Other Liabilities
cost competitiveness and to rebalance skills. The noncurrent
($ in millions) contractually obligated future payments associated with these
At December 31: 2009 2008* activities are reflected in the workforce reductions caption in the
Income tax reserves $3,627 $3,557 previous table.
Executive compensation accruals 1,160 860
In addition, the company executed certain special actions as
follows: (1) the second quarter of 2005 associated with Global
Disability benefits 795 743
Services segments, primarily in Europe, (2) the fourth quarter of
Derivative liabilities 649 702
2002 associated with the acquisition of the Pricewaterhouse-
Restructuring actions 441 476
Coopers consulting business, (3) the second quarter of 2002
Workforce reductions 409 415 associated with the Microelectronics Division and the rebalancing
Deferred taxes 470 270 of both the company’s workforce and leased space resources, (4)
Environmental accruals 245 246 the 2002 actions associated with the HDD business for reductions
Noncurrent warranty accruals 126 189 in workforce, manufacturing capacity and space, (5) the actions
Asset retirement obligations 116 119 taken in 1999, and (6) the actions that were executed prior to 1994.
Other* 781 615 The table below provides a roll forward of the current and
Total $8,819 $8,192 noncurrent liabilities associated with these special actions. The
current liabilities presented in the table are included in other
* Reflects the adoption of the FASB guidance on noncontrolling interests in
consolidated financial statements. See note B, “Accounting Changes”, on pages accrued expenses and liabilities in the Consolidated Statement
79 to 82 for additional information. of Financial Position.

($ in millions)
Liability Liability
as of Other as of
Dec. 31, 2008 Payments Adjustments* Dec. 31, 2009

Current:
Workforce $ 95 $ (95) $ 71 $ 71
Space 23 (21) 13 16
Other 7 — (7) —
Total Current $125 $(116) $ 77 $ 87
Noncurrent:
Workforce $453 $ — $(26) $427
Space 23 — (10) 14
Total Noncurrent $476 $ — $(36) $441

* The other adjustments column in the table above principally includes the reclassification of noncurrent to current, foreign currency translation adjustments and
interest accretion.

The workforce accruals primarily relate to terminated employees maximum exposure for all environmental liabilities cannot be
who are no longer working for the company who were granted estimated and no amounts have been recorded for non-ARO
annual payments to supplement their incomes in certain coun- environmental liabilities that are not probable or estimable. The
tries. Depending on the individual country’s legal requirements, total amounts accrued for non-ARO environmental liabilities,
these required payments will continue until the former employee including amounts classified as current in the Consolidated
begins receiving pension benefits or passes away. The space Statement of Financial Position, that do not reflect actual or
accruals are for ongoing obligations to pay rent for vacant space anticipated insurance recoveries, were $258 million and $267
that could not be sublet or space that was sublet at rates lower million at December 31, 2009 and 2008, respectively. Estimated
than the committed lease arrangement. The length of these obli- environmental costs are not expected to materially affect the
gations varies by lease with the longest extending through 2016. consolidated financial position or consolidated results of the
The company employs extensive internal environmental company’s operations in future periods. However, estimates of
protection programs that primarily are preventive in nature. The future costs are subject to change due to protracted cleanup
company also participates in environmental assessments and periods and changing environmental remediation regulations.
cleanups at a number of locations, including operating facilities, As of December 31, 2009, the company was unable to esti-
previously owned facilities and Superfund sites. The company’s mate the range of settlement dates and the related probabilities

97


for certain asbestos remediation AROs. These conditional AROs repurchase. The initial purchase price was subject to adjustment
are primarily related to the encapsulated structural fireproof- based on the volume weighted-average price of IBM common
ing that is not subject to abatement unless the buildings are stock over a settlement period of three months for each of the
demolished and non-encapsulated asbestos that the company banks. The adjustment also reflected certain other amounts
would remediate only if it performed major renovations of certain including the banks’ carrying costs, compensation for ordinary
existing buildings. Because these conditional obligations have dividends declared by the company during the settlement period
indeterminate settlement dates, the company could not develop a and interest benefits for receiving the $12.5 billion payment in
reasonable estimate of their fair values. The company will continue advance of the anticipated purchases by each bank of shares in
to assess its ability to estimate fair values at each future reporting the open market during the respective settlement periods. The
date. The related liability will be recognized once sufficient addi- adjustment amount could be settled in cash, registered shares
tional information becomes available. The total amounts accrued or unregistered shares at IIG’s option. Under the ASR agreements,
for ARO liabilities, including amounts classified as current in the IIG had a separate settlement with each of the three banks. The
Consolidated Statement of Financial Position were $126 million first settlement occurred on September 6, 2007, resulting in a
and $127 million at December 31, 2009 and 2008, respectively. settlement payment to the bank of $151.8 million. The second
settlement occurred on December 5, 2007, resulting in a settle-
ment payment to the bank of $253.1 million. The third settlement
Note N. occurred on March 4, 2008, resulting in a settlement payment to
Equity Activity the company of $54.2 million. The adjusted average price paid per
The authorized capital stock of IBM consists of 4,687,500,000 share during the ASR was $108.13, resulting in a total purchase
shares of common stock with a $.20 per share par value, of which price of $12,581 million. The $351 million difference was settled
1,305,337,423 shares were outstanding at December 31, 2009 in cash. The settlement amounts were paid in cash at the election
and 150,000,000 shares of preferred stock with a $.01 per share of IIG in accordance with the provisions of the ASR agreements
par value, none of which were outstanding at December 31, 2009. and were recorded as adjustments to equity in the Consolidated
Statement of Financial Position on the settlement dates.
The company issued 6,408,265 treasury shares in 2009,
Stock Repurchases 5,882,800 treasury shares in 2008 and 9,282,055 treasury shares
The Board of Directors authorizes the company to repurchase IBM in 2007, as a result of exercises of stock options by employees of
common stock. The company repurchased 68,650,727 common certain recently acquired businesses and by non-U.S. employees.
shares at a cost of $7,534 million, 89,890,347 common shares at a At December 31, 2009, $6,113 million of Board common stock
cost of $10,563 million and 178,385,436 common shares at a cost repurchase authorization was still available. The company plans
of $18,783 million in 2009, 2008 and 2007, respectively. These to purchase shares on the open market or in private transactions
amounts reflect transactions executed through December 31 of from time to time, depending on market conditions. In connection
each year. Actual cash disbursements for repurchased shares with the issuance of stock as part of the company’s stock-based
may differ due to varying settlement dates for these transactions. compensation plans, 1,550,846 common shares at a cost of
Included in the 2007 repurchases highlighted above, in May $161 million, 1,505,107 common shares at a cost of $166 million
2007, IBM International Group (IIG), a wholly owned foreign and 1,282,131 common shares at a cost of $134 million in 2009,
subsidiary of the company, repurchased 118.8 million shares of 2008 and 2007, respectively, were remitted by employees to the
common stock for $12.5 billion under accelerated share repur- company in order to satisfy minimum statutory tax withholding
chase (ASR) agreements with three banks. requirements. These amounts are included in the treasury stock
Pursuant to the ASR agreements, executed on May 25, 2007, balance in the Consolidated Statement of Financial Position and
IIG paid an initial purchase price of $105.18 per share for the the Consolidated Statement of Changes in Equity.

Accumulated Other Comprehensive Income/(Loss) (net of tax)
($ in millions)
Net Unrealized Net Change Net Unrealized Accumulated
Gains/(Losses) Foreign Currency Retirement- Gains/(Losses) Other
on Cash Flow Translation related on Marketable Comprehensive
Hedge Derivatives Adjustments* Benefit Plans Securities Income/(Loss)

December 31, 2007 $(227) $ 3,655 $ (7,168) $ 325 $ (3,414)
Change for period 301 (3,552) (14,856) (324) (18,431)
December 31, 2008 74 103 (22,025) 2 (21,845)
Change for period (556) 1,732 1,727 111 3,015
December 31, 2009 $(481) $ 1,836 $(20,297) $ 113 $(18,830)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

98


Net Change in Unrealized Gains/(Losses) on Marketable Securities (net of tax)
($ in millions)
For the period ended December 31: 2009 2008

Net unrealized gains/(losses) arising during the period $ 72 $(224)
Less: Net (losses)/gains included in net income for the period* (39) 100
Net change in unrealized gains/(losses) on marketable securities $111 $(324)

* Includes writedowns of $16.2 million and $3.0 million in 2009 and 2008, respectively.

Note O. filed for bankruptcy protection, and all proceedings in this case
were stayed. In the SCO v. Novell case, on November 25, 2008,
Contingencies and Commitments
SCO filed its notice of appeal to the U.S. Court of Appeals for
the Tenth Circuit, which included an appeal of the August 10,
Contingencies
2007 ruling; on August 24, 2009, the U.S. Court of Appeals
The company is involved in a variety of claims, demands, suits,
reversed the August 10, 2007 ruling and remanded the SCO v.
investigations, tax matters and proceedings that arise from time
Novell case for trial. On August 25, 2009, the U.S. Bankruptcy
to time in the ordinary course of its business, including actions
Court for the District of Delaware approved the appointment of
with respect to contracts, intellectual property (IP), product lia-
a Chapter 11 Trustee of SCO.
bility, employment, benefits, securities, foreign operations and
On November 29, 2006, the company filed a lawsuit against
environmental matters. These actions may be commenced by a
Platform Solutions, Inc. (PSI) in the United States District Court
number of different parties, including competitors, partners, cli-
for the Southern District of New York, alleging that PSI vio-
ents, current or former employees, government and regulatory
lated certain intellectual property rights of IBM. PSI asserted
agencies, stockholders and representatives of the locations in
counterclaims against IBM. On January 11, 2008, the court
which the company does business.
permitted T3 Technologies, a reseller of PSI computer systems,
The following is a summary of the more significant legal mat-
to intervene as a counterclaim-plaintiff. T3 claimed that IBM
ters involving the company.
violated certain antitrust laws by refusing to license its patents
The company is a defendant in an action filed on March 6,
and trade secrets to PSI and by tying the sales of its mainframe
2003 in state court in Salt Lake City, Utah by The SCO Group
computers to its mainframe operating systems. On June 30,
(SCO v. IBM). The company removed the case to Federal Court
2008, IBM acquired PSI. As a result of this transaction, IBM and
in Utah. Plaintiff is an alleged successor in interest to some of
PSI dismissed all claims against each other, and PSI withdrew a
AT&T’s UNIX IP rights, and alleges copyright infringement, unfair
complaint it had filed with the European Commission in October
competition, interference with contract and breach of contract
2007 with regard to IBM. On September 30, 2009, the court
with regard to the company’s distribution of AIX and Dynix and
granted IBM’s motion for summary judgment and dismissed
contribution of code to Linux. The company has asserted coun-
T3’s claims against IBM. This decision is subject to appeal by
terclaims, including breach of contract, violation of the Lanham
T3. In January 2009, T3 filed a complaint with the European
Act, unfair competition, intentional torts, unfair and deceptive
Commission alleging that IBM violated European Commission
trade practices, breach of the General Public License that
competition law based on the facts alleged in the above-
governs open source distributions, promissory estoppel and
referenced U.S. litigation. IBM has been notified that the U.S.
copyright infringement. In October 2005, the company withdrew
Department of Justice (DOJ) is investigating possible antitrust
its patent counterclaims in an effort to simplify and focus the
violations by IBM. The DOJ has requested certain information,
issues in the case and to expedite their resolution. Motions for
including the production of materials from the litigation between
summary judgment were heard in March 2007, and the court
T3 and IBM.
has not yet issued its decision. On August 10, 2007, the court
The company is a defendant in an action filed on December
in another suit, The SCO Group, Inc. v. Novell, Inc., issued a
14, 2009 in the United States District Court for the Western
decision and order determining, among other things, that Novell
District of Texas by Neon Enterprise Software, LLC. Neon alleges
is the owner of UNIX and UnixWare copyrights, and obligating
that the company has interfered with Neon’s efforts to license
SCO to recognize Novell’s waiver of SCO’s claims against IBM
its zPrime software. They seek damages and injunctive relief. In
and Sequent for breach of UNIX license agreements. At the
late January 2010, IBM filed its answer to Neon’s complaint and
request of the court in SCO v. IBM, on August 31, 2007, each
asserted counterclaims against Neon.
of the parties filed a status report with the court concerning the
effect of the August 10th Novell ruling on the SCO v. IBM case,
including the pending motions. On September 14, 2007, plaintiff

99


In January 2004, the Seoul District Prosecutors Office in investigations, assessments or remediations at or in the vicinity
South Korea announced it had brought criminal bid-rigging of several current or former operating sites globally pursuant to
charges against several companies, including IBM Korea and permits, administrative orders or agreements with country, state
LG IBM (a joint venture between IBM Korea and LG Electronics, or local environmental agencies, and is involved in lawsuits and
which has since been dissolved, effective January, 2005) and claims concerning certain current or former operating sites.
had also charged employees of some of those entities with, The company is also subject to ongoing tax examinations
among other things, bribery of certain officials of government- and governmental assessments in various jurisdictions. Along
controlled entities in Korea and bid rigging. IBM Korea and with many other U.S. companies doing business in Brazil, the
LG IBM cooperated fully with authorities in these matters. A company is involved in various challenges with Brazilian authori-
number of individuals, including former IBM Korea and LG IBM ties regarding non-income tax assessments and non-income
employees, were subsequently found guilty and sentenced. tax litigation matters. These matters include claims for taxes on
IBM Korea and LG IBM were also required to pay fines. the importation of computer software. In November 2008, the
Debarment orders were imposed at different times, covering a company won a significant case in the Superior Chamber of the
period of no more than a year from the date of issuance, which federal administrative tax court in Brazil, and in late July 2009, the
barred IBM Korea from doing business directly with certain company received written confirmation regarding this decision.
government-controlled entities in Korea. All debarment orders The total potential amount related to the remaining matters for
have since expired and when they were in force did not pro- all applicable years is approximately $600 million. The company
hibit IBM Korea from selling products and services to business believes it will prevail on these matters and that this amount is
partners who sold to government-controlled entities in Korea. not a meaningful indicator of liability.
In addition, the U.S. Department of Justice and the SEC have The company records a provision with respect to a claim,
both contacted the company in connection with this matter. In suit, investigation or proceeding when it is probable that a
March 2008, the company received a request from the SEC for liability has been incurred and the amount of the loss can be
additional information. reasonably estimated. Claims and proceedings are reviewed at
The company was a defendant in a civil lawsuit brought in least quarterly and provisions are taken or adjusted to reflect
Tokyo District Court by Tokyo Leasing Co., Ltd., which sought the impact and status of settlements, rulings, advice of coun-
to recover losses that it allegedly suffered after IXI Co., Ltd. initi- sel and other information pertinent to a particular matter. Any
ated civil rehabilitation (bankruptcy) proceedings in Japan and recorded liabilities, including any changes to such liabilities for
apparently failed to pay Tokyo Leasing amounts for which Tokyo the year ended December 31, 2009, were not material to the
Leasing sought to hold IBM and others liable. The claims in this Consolidated Financial Statements. Based on its experience,
suit included tort and breach of contract. The action against IBM the company believes that the damage amounts claimed in the
was resolved in December 2009 and is no longer pending. matters previously referred to are not a meaningful indicator of
The company is a defendant in numerous actions filed after the potential liability. Claims, suits, investigations and proceed-
January 1, 2008 in the Supreme Court for the State of New ings are inherently uncertain and it is not possible to predict the
York, county of Broome, on behalf of hundreds of plaintiffs. ultimate outcome of the matters previously discussed. While
The complaints allege numerous and different causes of action, the company will continue to defend itself vigorously, it is pos-
including for negligence and recklessness, private nuisance and sible that the company’s business, financial condition, results
trespass. Plaintiffs in these cases seek medical monitoring of operations or cash flows could be affected in any particular
and claim damages in unspecified amounts for a variety of period by the resolution of one or more of these matters.
personal injuries and property damages allegedly arising out of Whether any losses, damages or remedies finally determined
the presence of groundwater contamination and vapor intrusion in any such claim, suit, investigation or proceeding could reason-
of groundwater contaminants into certain structures in which ably have a material effect on the company’s business, financial
plaintiffs reside or resided, or conducted business, allegedly condition, results of operations or cash flows will depend on a
resulting from the release of chemicals into the environment by number of variables, including the timing and amount of such
the company at its former manufacturing and development facil- losses or damages; the structure and type of any such reme-
ity in Endicott. These complaints also seek punitive damages in dies; the significance of the impact any such losses, damages or
an unspecified amount. remedies may have on the Consolidated Financial Statements;
The company is party to, or otherwise involved in, proceedings and the unique facts and circumstances of the particular matter
brought by U.S. federal or state environmental agencies under which may give rise to additional factors.
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 own-
ership of sites. The company is also conducting environmental

100


Commitments Note P.
The company’s extended lines of credit to third-party entities Taxes
include unused amounts of $3,576 million and $3,857 million at
December 31, 2009 and 2008, respectively. A portion of these ($ in millions)
amounts was available to the company’s business partners to For the year ended December 31: 2009 2008 2007
support their working capital needs. In addition, the company Income from continuing operations
has committed to provide future financing to its clients in con- before income taxes:
nection with client purchase agreements for approximately U.S. operations $ 9,524 $ 8,424 $ 7,667
$2,788 million and $3,342 million at December 31, 2009 and Non-U.S. operations 8,614 8,291 6,822
2008, respectively. The change over the prior year was due to Total income from continuing
decreased signings of long-term IT infrastructure arrangements operations before income taxes $18,138 $16,715 $14,489
in which financing is committed by the company to fund a cli-
ent’s future purchases from the company. The continuing operations provision for income taxes by geo-
The company has applied the guidance requiring a guaran- graphic operations is as follows:
tor to disclose certain types of guarantees, even if the likelihood
of requiring the guarantor’s performance is remote. The follow- ( $ in millions)
ing is a description of arrangements in which the company is For the year ended December 31: 2009 2008 2007
the guarantor. U.S. operations $2,427 $2,348 $2,280
The company is a party to a variety of agreements pursuant Non-U.S. operations 2,286 2,033 1,791
to which it may be obligated to indemnify the other party with
Total continuing operations
respect to certain matters. Typically, these obligations arise in provision for income taxes $4,713 $4,381 $4,071
the context of contracts entered into by the company, under
which the company customarily agrees to hold the other party
The components of the continuing operations provision for
harmless against losses arising from a breach of representations
income taxes by taxing jurisdiction are as follows:
and covenants related to such matters as title to assets sold,
certain IP rights, specified environmental matters, third-party
($ in millions)
performance of nonfinancial contractual obligations and certain
income taxes. In each of these circumstances, payment by
U.S. federal:
the company is conditioned on the other party making a claim
pursuant to the procedures specified in the particular contract, Current $ 473 $ 338 $1,085

which procedures typically allow the company to challenge the Deferred 1,341 1,263 683
other party’s claims. While typically indemnification provisions 1,814 1,601 1,768
do not include a contractual maximum on the company’s pay- U.S. state and local:
ment, the company’s obligations under these agreements may Current 120 216 141
be limited in terms of time and/or nature of claim, and in some Deferred 185 205 (19)
instances, the company may have recourse against third parties 305 421 122
for certain payments made by the company. Non-U.S.:
It is not possible to predict the maximum potential amount of
Current 2,347 1,927 2,105
future payments under these or similar agreements due to the
Deferred 247 432 76
conditional nature of the company’s obligations and the unique
2,594 2,359 2,181
facts and circumstances involved in each particular agreement.
Historically, payments made by the company under these agree- Total continuing operations
provision for income taxes 4,713 4,381 4,071
ments have not had a material effect on the company’s business,
Provision for social security, real estate,
financial condition or results of operations.
personal property and other taxes 3,986 4,076 3,832
In addition, the company guarantees certain loans and finan-
Total taxes included in income
cial commitments. The maximum potential future payment under from continuing operations $8,699 $8,457 $7,903
these financial guarantees was $85 million and $50 million at
December 31, 2009 and 2008, respectively. The fair value of the
guarantees recognized in the Consolidated Statement of Financial
Position is not material.

101


A reconciliation of the statutory U.S. federal tax rate to the For income tax return purposes, the company has foreign and
company’s continuing operations effective tax rate is as follows: domestic loss carryforwards, the tax effect of which is $860 mil-
lion as well as domestic and foreign credit carryforwards of $679
million. Substantially all of these carryforwards are available for at
Statutory rate 35% 35% 35%
least two years or are available for ten years or more.
Foreign tax differential (9) (8) (6) The company has certain foreign tax loss carryforwards that
State and local 1 1 1 have not been reflected in the gross deferred tax asset balance
Other (1) (2) (2) due to the level of uncertainty associated with the sustainability
Effective rate 26% 26% 28% of the losses which are under examination by the local taxing
authority. The tax benefit of these losses approximated $930
The effect of tax law changes on deferred tax assets and liabilities million at December 31, 2009. In addition, during the second
did not have a material impact on the company’s effective tax rate. quarter of 2009, foreign tax losses were utilized against a prior
The significant components of deferred tax assets and liabili- year tax liability resulting in a cash benefit of approximately $360
ties that are recorded in the Consolidated Statement of Financial million. However, the company has recorded an unrecognized
Position were as follows: tax benefit for the entire amount received given the degree of
uncertainty in sustaining the associated tax benefit. The com-
pany expects that the local taxing authority will complete its field
Deferred Tax Assets examination in early 2010.
($ in millions) The valuation allowance at December 31, 2009, principally
At December 31: 2009 2008* applies to certain foreign, state and local loss carryforwards
Retirement benefits $ 3,921 $ 5,215 that, in the opinion of management, are more likely than not to
Share-based and other compensation 1,853 2,579 expire unutilized. However, to the extent that tax benefits related
Domestic tax loss/credit carryforwards 859 862 to these carryforwards are realized in the future, the reduction
Deferred income 847 739 in the valuation allowance will reduce income tax expense. The
year-to-year change in the allowance balance was an increase
Foreign tax loss/credit carryforwards 680 642
of $92 million.
Bad debt, inventory and warranty reserves 605 561
The amount of unrecognized tax benefits at December 31,
Capitalized research and development 539 795
2009 increased by $892 million in 2009 to $4,790 million. A rec-
Depreciation 485 388
onciliation of the beginning and ending amount of unrecognized
Other 1,999 1,863 tax benefits is as follows:
Gross deferred tax assets 11,788 13,644
Less: valuation allowance 812 720 ($ in millions)
Net deferred tax assets $10,976 $12,924 2009 2008 2007

* Reclassified to conform with 2009 presentation. Balance at January 1 $3,898 $ 3,094 $2,414
Additions based on tax positions
related to the current year 554 1,481 745
Deferred Tax Liabilities Additions for tax positions of prior years 634 747 195
($ in millions) Reductions for tax positions
At December 31: 2009 2008* of prior years (including impacts
due to a lapse in statute) (277) (1,209) (144)
Leases $2,129 $1,913
Settlements (19) (215) (116)
Depreciation 1,138 941
Balance at December 31 $4,790 $ 3,898 $3,094
Goodwill and intangible assets 639 552
Software development costs 409 449
Retirement benefits 389 104 The additions to the unrecognized tax benefits related to the
current and prior years are primarily attributable to non-U.S.
Other 874 697
issues, certain tax incentives and credits, acquisition-related
Gross deferred tax liabilities $5,578 $4,656
matters and other non-U.S. and state matters.

102


The settlements and reductions to the unrecognized tax During the fourth quarter of 2008, the U.S. Internal Revenue
benefits for tax positions of prior years are primarily attributable to Service (IRS) concluded its examination of the company’s income
the conclusion of the company’s various U.S., state and non-U.S. tax returns for 2004 and 2005 and issued a final Revenue Agent’s
income tax examinations and various non-U.S. matters including Report (RAR). The company has agreed with all of the adjust-
impacts due to lapses in statutes of limitation. ments contained in the RAR, with the exception of a proposed
The liability at December 31, 2009 of $4,790 million can be adjustment, with a pre-tax amount in excess of $2 billion, relating
reduced by $577 million of offsetting tax benefits associated with to valuation matters associated with the intercompany transfer
the correlative effects of potential transfer pricing adjustments, of certain intellectual property in 2005 and computational issues
state income taxes and timing adjustments. The net amount of related to certain tax credits. The company disagrees with the
$4,213 million, if recognized, would favorably affect the com- IRS position on these specific matters and in March 2009 filed a
pany’s effective tax rate. The net amounts at December 31, protest with the IRS Appeals Office.
2008 and December 31, 2007 were $3,366 million and $2,598 The audit of the company’s 2006 and 2007 U.S. income tax
million, respectively. returns commenced in the first quarter of 2009. The company
Interest and penalties related to income tax liabilities are anticipates that this audit will be completed by the end of 2010.
included in income tax expense. During the year ended December The company has not provided deferred taxes on $26.0
31, 2009, the company recognized $193 million in interest and billion of undistributed earnings of non-U.S. subsidiaries at
penalties; in 2008, the company recognized $96 million in inter- December 31, 2009, as it is the company’s policy to indefinitely
est and penalties and in 2007, the company recognized $85 reinvest these earnings in non-U.S. operations. However, the
million in interest and penalties. The company has $479 million company periodically repatriates a portion of these earnings to
for the payment of interest and penalties accrued at December the extent that it does not incur an additional U.S. tax liability.
31, 2009 and had $286 million accrued at December 31, 2008. Quantification of the deferred tax liability, if any, associated with
Within the next 12 months, the company believes it is reason- indefinitely reinvested earnings is not practicable.
ably possible that the total amount of unrecognized tax benefits For additional information on the company’s effective tax
associated with certain positions may be significantly reduced. rate refer to the “Looking Forward” section of the Management
The potential decrease in the amount of unrecognized tax ben- Discussion on pages 47 to 49.
efits is primarily associated with the possible resolution of the
company’s U.S. income tax audit for 2006 and 2007, as well as
various non-U.S. audits. Specific positions that may be resolved,
Note Q.
and that may significantly reduce the related amount of unrecog- Research, Development
nized tax benefits, include transfer pricing matters, tax incentives and Engineering
and credits as well as various other foreign tax matters including
RD&E expense was $5,820 million in 2009, $6,337 million in
foreign tax loss utilization. The company estimates that the unrec-
2008 and $6,153 million in 2007.
ognized tax benefits at December 31, 2009 could be reduced by
The company incurred expense of $5,523 million in 2009,
approximately $1,100 million.
$6,015 million in 2008 and $5,754 million in 2007 for scien-
With limited exception, the company is no longer subject to
tific research and the application of scientific advances to the
U.S. federal, state and local or non-U.S. income tax audits by
development of new and improved products and their uses, as
taxing authorities for years through 2003. The years subsequent
well as services and their application. Within these amounts,
to 2003 contain matters that could be subject to differing inter-
software-related expense was $2,991 million, $3,359 million and
pretations of applicable tax laws and regulations as it relates to
$3,037 million in 2009, 2008 and 2007, respectively. In addition,
the amount and/or timing of income, deductions and tax credits.
included in the expense was a charge of $24 million in 2008 for
Although the outcome of tax audits is always uncertain, the
acquired IPR&D.
company believes that adequate amounts of tax and interest
Expense for product-related engineering was $297 million,
have been provided for any adjustments that are expected to
$322 million and $399 million in 2009, 2008 and 2007, respectively.
result for these years.

103


Note R.
Earnings Per Share of Common Stock
The following table presents the computation of basic and diluted earnings per share of common stock.


Weighted-average number of shares on which earnings per share calculations are based:
Basic: 1,327,157,410 1,369,367,069* 1,433,935,221*
Add — incremental shares under stock-based compensation plans 12,258,864 16,617,801* 18,145,715*
Add — incremental shares associated with Accelerated Share Repurchase agreements — — 1,891,095
Add — incremental shares associated with convertible notes — — 1,362,191
Add — incremental shares associated with contingently issuable shares 1,936,480 1,812,328 1,546,529
Assuming dilution 1,341,352,754 1,387,797,198* 1,456,880,751*

Basic:
Income from continuing operations $13,425 $12,334 $10,418
Income/(loss) from discontinued operations — — (00)
Net income from total operations on which basic
earnings per share is calculated $13,425 $12,334 $10,418
Assuming dilution:
Income from continuing operations $13,425 $12,334 $10,418
Less — net income applicable to contingently issuable shares — 1 —
Income/(loss) from discontinued operations — — (00)
Net income from total operations on which diluted
earnings per share is calculated $13,425 $12,333 $10,418
Assuming dilution:
Continuing operations $ 10.01 $ 8.89* $ 7.15*
Discontinued operations — — (0.00)
Total assuming dilution $ 10.01 $ 8.89* $ 7.15*
Basic:
Continuing operations $ 10.12 $ 9.02* $ 7.27*
Discontinued operations — — (0.00)
Total basic $ 10.12 $ 9.02* $ 7.27*

* Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B,
“Accounting Changes,” on pages 79 to 82 for additional information.

Stock options to purchase 612,272 common shares in 2009, Note S.
42,981,463 common shares in 2008 and 62,782,516 common
Rental Expense and Lease
shares in 2007 were outstanding, but were not included in the
computation of diluted earnings per share because the exercise
Commitments
price of the options was greater than the average market price Rental expense from continuing operations, including amounts
of the common shares for the applicable full year, and therefore, charged to inventories and fixed assets, and excluding amounts
the effect would have been antidilutive. previously reserved, was $1,677 million in 2009, $1,681 million in
2008 and $1,559 million in 2007. Rental expense in agreements

104


with rent holidays and scheduled rent increases is recorded on related to vacant space associated with infrastructure reductions
a straight-line basis over the lease term. Contingent rentals are and restructuring actions taken through 1994, and in 1999, 2002
included in the determination of rental expense as accruable. and 2005 (previously reserved), sublease income commitments
The table below depicts gross minimum rental commitments and capital lease commitments. These amounts reflect activities
from continuing operations under noncancelable leases, amounts primarily related to office space, as well as manufacturing facilities.

($ in millions)
2010 2011 2012 2013 2014 Beyond 2014

Operating lease commitments:
Gross minimum rental commitments
(including vacant space below) $1,504 $1,281 $982 $769 $626 $776
Vacant space $ 69 $ 37 $ 18 $ 9 $ 8 $ 9
Sublease income commitments $ 52 $ 27 $ 15 $ 8 $ 4 $ 2
Capital lease commitments $ 64 $ 25 $ 32 $ 31 $ 13 $ —

Note T. Incentive Awards
Stock-Based Compensation Stock-based incentive awards are provided to employees under
the terms of the company’s long-term performance plans (the
Stock-based compensation cost is measured at grant date, “Plans”). The Plans are administered by the Executive Compen-
based on the fair value of the award, and is recognized over sation and Management Resources Committee of the Board of
the employee requisite service period. See note A, “Significant Directors (the “Committee”). Awards available under the Plans
Accounting Policies,” on page 76 for additional information. principally include stock options, restricted stock units, perfor-
The following table presents total stock-based compensa- mance share units or any combination thereof. The nonmanage-
tion cost included in the Consolidated Statement of Earnings. ment members of the IBM Board of Directors also received stock
options under a director stock option plan through December 31,
($ in millions) 2006. The director stock option plan was terminated effective
For the year ended December 31: 2009 2008 2007 January 1, 2007.
Cost $ 94 $ 116 $ 166 The amount of shares originally authorized to be issued under
Selling, general and administrative 417 484 480 the company’s existing Plans was 274.1 million at December 31,
Research, development and engineering 47 58 68 2009 and 2008. In addition, certain incentive awards granted
Other (income) and expense* — — (1) under previous Plans, if and when those awards were canceled,
Pre-tax stock-based compensation cost 558 659 713 could be reissued under the company’s existing Plans. As such,
Income tax benefits (221) (224) (248)
66.4 million and 47.6 million additional awards were considered
authorized to be issued under the company’s existing Plans as
Total stock-based
compensation cost $ 337 $ 435 $ 464 of December 31, 2009 and 2008, respectively. There were 1.9
million and 23.8 million option awards outstanding (which were
* Reflects the one-time effects of the divestiture of the Printing Systems business
in the second quarter of 2007. included in the total options outstanding at December 31, 2009
and 2008, respectively) under previous Plans that, if and when
Total unrecognized compensation cost related to non-vested canceled, would increase the number of authorized shares.
awards at December 31, 2009 and 2008 was $1,082 million and There were 140.4 million and 130.1 million unused shares avail-
$1,076 million, respectively, and is expected to be recognized able to be granted under the Plans as of December 31, 2009
over a weighted-average period of approximately 2.5 years. and 2008, respectively.
There was no significant capitalized stock-based compensa- Under the company’s long-standing practices and policies,
tion cost at December 31, 2009, 2008 and 2007. all awards are approved prior to or on the date of grant. The
exercise price of at-the-money stock options is the average of
the high and low market price on the date of grant. The options

105


approval process specifies the individual receiving the grant, of ten years. The plan element permitting executives to defer
the number of options or the value of the award, the exercise annual incentive compensation into IBM equity and receive at-
price or formula for determining the exercise price and the date the-money stock options was terminated at December 31, 2006.
of grant. All awards for senior management are approved by The company estimates the fair value of stock options using
the Committee. All awards for employees other than senior the Black-Scholes valuation model. Key inputs and assumptions
management are approved by senior management pursuant to used to estimate the fair value of stock options include the grant
a series of delegations that were approved by the Committee, price of the award, the expected option term, volatility of the
and the grants made pursuant to these delegations are reviewed company’s stock, the risk-free rate and the company’s dividend
periodically with the Committee. Awards that are given as part yield. Estimates of fair value are not intended to predict actual
of annual total compensation for senior management and other future events or the value ultimately realized by employees who
employees are made on specific cycle dates scheduled in receive equity awards, and subsequent events are not indicative
advance. With respect to awards given in connection with pro- of the reasonableness of the original estimates of fair value made
motions or new hires, the company’s policy requires approval of by the company.
such awards prior to the grant date, which is typically the date The fair value of each stock option grant was estimated at
of the promotion or the date of hire. The exercise price of these the date of grant using a Black-Scholes option pricing model.
options is the average of the high and low market price on the The following table presents the weighted-average assumptions
date of grant. used in the valuation and the resulting weighted-average fair
value per option granted.
Stock Options
Stock options are awards which allow the employee to purchase For the year ended December 31: 2009* 2008* 2007
shares of the company’s stock at a fixed price. Stock options are Option term (years)** — — 5
granted at an exercise price equal to the company stock price on
Volatility + — — 23.1%
the date of grant. These awards, which generally vest 25 percent
Risk-free interest rate (zero
per year, are fully vested four years from the date of grant and coupon U.S. treasury note) — — 4.5%
have a contractual term of ten years. The company also had a
Dividend yield — — 1.4%
stock-based program under the Plans for its senior executives,
Weighted-average fair value
designed to drive improved performance and increase the own- per option granted — — $26
ership executives have in the company. These executives had the
* During the years ended December 31, 2009 and 2008, the company did not
opportunity to receive at-the-money stock options by agreeing to grant stock options.
defer a certain percentage of their annual incentive compensation
** The option term is the number of years that the company estimates, based upon
into IBM equity, where it is held for three years or until retirement. history, that options will be outstanding prior to exercise or forfeiture.
In 2005, this program was expanded to cover all executives of + The company’s estimates of expected volatility are principally based on daily
the company. Options under this program become fully vested price changes of the company’s stock over the expected option term, as
well as the additional requirements included in accounting guidance on share-
three years from the date of grant and have a contractual term based payments.

The following table summarizes option activity under the Plans during the years ended December 31, 2009, 2008 and 2007.

2009 2008 2007
Wtd. Avg. No. of Shares Wtd. Avg. No. of Shares Wtd. Avg. No. of Shares
Exercise Price Under Option Exercise Price Under Option Exercise Price Under Option

Balance at January 1 $102 119,307,170 $100 157,661,257 $ 95 207,663,223
Options granted — — — — 103 1,087,381
Options exercised 120 (28,100,192) 91 (36,282,000) 77 (46,961,380)
Options canceled/expired 127 (17,996,521) 109 (2,072,087) 106 (4,127,967)
Balance at December 31 $ 98 73,210,457 $102 119,307,170 $100 157,661,257
Exercisable at December 31 $ 98 72,217,126 $102 114,445,381 $100 144,092,169

106


The shares under option at December 31, 2009 were in the following exercise price ranges:

Options Outstanding
Wtd. Avg.
Wtg. Avg. Number Aggregate Remaining
Exercise of Shares Intrinsic Contractual
Exercise Price Range Price Under Option Value Life (in years)

$61– $85 $ 77 17,468,272 $ 940,917,103 3.2
$86 – $105 98 32,894,001 1,067,822,966 3.4
$106 and over 112 22,848,184 432,260,579 1.5
$ 98 73,210,457 $2,441,000,648 2.8

Options Exercisable
Wtd. Avg.
Wtd. Avg. Number Aggregate Remaining
Exercise of Shares Intrinsic Contractual
Exercise Price Range Price Under Option Value Life (in years)

$61– $85 $ 77 17,439,702 $ 939,529,901 3.2
$86 – $105 98 31,929,240 1,039,848,239 3.3
$106 and over 112 22,848,184 432,260,579 1.5
$ 98 72,217,126 $2,411,638,719 2.7

In connection with various acquisition transactions, there were Stock Awards
an additional 1.1 million options outstanding at December 31, In lieu of stock options, currently the company grants its
2009, as a result of the company’s assumption of options employees stock awards. These awards are made in the form
granted by the acquired entities. The weighted-average exercise of Restricted Stock Units (RSUs), including Retention Restricted
price of these options was $76 per share. Stock Units (RRSUs), or Performance Share Units (PSUs).
RSUs are stock awards granted to employees that entitle the
Exercises of Employee Stock Options holder to shares of common stock as the award vests, typically
The total intrinsic value of options exercised during the years over a one- to five-year period. The fair value of the awards is
ended December 31, 2009, 2008 and 2007 was $639 million, determined and fixed on the grant date based on the company’s
$1,073 million and $1,414 million, respectively. The total cash stock price. For RSUs awarded after December 31, 2007, divi-
received from employees as a result of employee stock option dend equivalents will not be paid. The fair value of such RSUs is
exercises for the years ended December 31, 2009, 2008 and determined and fixed on the grant date based on the company’s
2007 was approximately $2,744 million, $3,320 million and stock price adjusted for the exclusion of dividend equivalents.
$3,619 million, respectively. In connection with these exercises, The tables on page 108 summarize RSU and PSU activity
the tax benefits realized by the company for the years ended under the Plans during the years ended December 31, 2009,
December 31, 2009, 2008 and 2007 were $243 million, $356 2008 and 2007.
million and $481 million, respectively.
The company settles employee stock option exercises
primarily with newly issued common shares and, occasionally,
with treasury shares. Total treasury shares held at December 31,
2009 and 2008 were approximately 822 million and 758 million
shares, respectively.

107


RSUs

2009 2008 2007
Wtd. Avg. Number Wtd. Avg. Number Wtd. Avg. Number
Grant Price of Units Grant Price of Units Grant Price of Units

Balance at January 1 $100 12,397,515 $ 94 11,887,746 $ 84 10,217,258
RSUs granted 105 4,432,449 107 4,587,011 104 4,929,141
RSUs released 99 (2,748,613) 88 (3,526,580) 77 (2,747,110)
RSUs canceled/forfeited 101 (675,697) 98 (550,662) 88 (511,543)
Balance at December 31 $102 13,405,654 $100 12,397,515 $ 94 11,887,746

PSUs

2009 2008 2007
Wtd. Avg. Number Wtd. Avg. Number Wtd. Avg. Number
Grant Price of Units Grant Price of Units Grant Price of Units

Balance at January 1 $102 3,078,694 $ 93 2,783,823 $ 89 2,417,378
PSUs granted at target 101 1,568,129 119 1,058,381 103 1,156,708
Additional shares earned above target* 83 396,794 91 275,190 95 216,826
PSUs released 83 (1,440,099) 91 (860,705) 96 (926,386)
PSUs canceled/forfeited 111 (126,781) 102 (177,995) 90 (80,703)
Balance at December 31** $107 3,476,737 $102 3,078,694 $ 93 2,783,823

* Represents additional shares issued to employees after vesting of PSUs because final performance metrics exceeded specified targets.
** Represents the number of shares expected to be issued based on achievement of grant date performance targets. The actual number of shares issued depends on the
company’s performance against specified targets over the vesting period.

The remaining weighted-average contractual term of RSUs at of PSUs granted during the years ended December 31, 2009,
December 31, 2009, 2008 and 2007 is the same as the period 2008 and 2007 was $159 million, $126 million and $116 million,
over which the remaining cost of the awards will be recognized, respectively. Total fair value of PSUs vested and released during
which is approximately three years. The fair value of RSUs the years ended December 31, 2009, 2008 and 2007 was $120
granted during the years ended December 31, 2009, 2008 and million, $78 million and $88 million, respectively.
2007 was $467 million, $490 million and $513 million, respec- In connection with vesting and release of RSUs and PSUs,
tively. The total fair value of RSUs vested and released during the the tax benefits realized by the company for the years ended
years ended December 31, 2009, 2008 and 2007 was $272 mil- December 31, 2009, 2008 and 2007 were $156 million, $165
lion, $311 million and $213 million, respectively. As of December million and $133 million, respectively.
31, 2009, 2008 and 2007, there was $892 million, $863 million
and $740 million, respectively, of unrecognized compensation IBM Employees Stock Purchase Plan
cost related to non-vested RSUs. The company received no cash
The company maintains a non-compensatory Employees Stock
from employees as a result of employee vesting and release of
Purchase Plan (ESPP). The ESPP enables eligible participants
RSUs for the years ended December 31, 2009, 2008 and 2007.
to purchase full or fractional shares of IBM common stock at a
PSUs are stock awards where the number of shares ulti-
five-percent discount off the average market price on the day
mately received by the employee depends on the company’s
of purchase through payroll deductions of up to 10 percent
performance against specified targets and typically vest over
of eligible compensation. Eligible compensation includes any
a three-year period. The fair value of each PSU is determined
compensation received by the employee during the year. The
on the grant date, based on the company’s stock price, and
ESPP provides for offering periods during which shares may
assumes that performance targets will be achieved. Over the
be purchased and continues as long as shares remain available
performance period, the number of shares of stock that will
under the ESPP, unless terminated earlier at the discretion of the
be issued is adjusted upward or downward based upon the
Board of Directors. Individual ESPP participants are restricted
probability of achievement of performance targets. The ultimate
from purchasing more than $25,000 of common stock in one
number of shares issued and the related compensation cost
calendar year or 1,000 shares in an offering period.
recognized as expense will be based on a comparison of the
final performance metrics to the specified targets. The fair value

108


Employees purchased 3.2 million, 3.5 million and 4.0 million Benefit accruals under the IBM Personal Pension Plan
shares under the ESPP during the years ended December 31, ceased December 31, 2007 for all participants.
2009, 2008 and 2007, respectively. Cash dividends declared
and paid by the company on its common stock also include U.S. Supplemental Executive Retention Plan
cash dividends on the company stock purchased through the The company also sponsors a nonqualified U.S. Supplemental
ESPP. Dividends are paid on full and fractional shares and can Executive Retention Plan (Retention Plan). The Retention Plan,
be reinvested in the ESPP. The company stock purchased which is unfunded, provides benefits to eligible U.S. executives
through the ESPP is considered outstanding and is included in based on average earnings, years of service and age at termina-
the weighted-average outstanding shares for purposes of com- tion of employment. Effective July 1, 1999, the company replaced
puting basic and diluted earnings per share. the then effective Retention Plan with the current Retention
Approximately 9.6 million, 12.8 million and 16.3 million shares Plan. Some participants in the previous Retention Plan will still
were available for purchase under the ESPP at December 31, be eligible for benefits under that prior plan if those benefits are
2009, 2008 and 2007, respectively. greater than the benefits provided under the current plan.
Benefit accruals under the Retention Plan ceased December
31, 2007 for all participants.
Note U.
Retirement-Related Benefits DEFINED CONTRIBUTION PLANS
IBM 401(k) Plus Plan
Description of Plans U.S. regular, full-time and part-time employees are eligible to
IBM sponsors defined benefit pension plans and defined con- participate in the IBM 401(k) Plus Plan, which is a qualified
tribution plans that cover substantially all regular employees, a defined contribution plan under section 401(k) of the Internal
supplemental retention plan that covers certain U.S. executives Revenue Code. Effective January 1, 2008, under the IBM 401(k)
and nonpension postretirement benefit plans primarily consist- Plus Plan, eligible employees receive a dollar-for-dollar match of
ing of retiree medical and dental benefits for eligible retirees their contributions up to 6 percent of eligible compensation for
and dependents. those hired prior to January 1, 2005, and up to 5 percent of eli-
gible compensation for those hired on or after January 1, 2005.
U.S. Plans In addition, eligible employees receive automatic contributions
from the company equal to 1, 2 or 4 percent of eligible com-
DEFINED BENEFIT PENSION PLANS
pensation based on their eligibility to participate in the PPP as of
IBM Personal Pension Plan
December 31, 2007. Employees receive automatic contributions
IBM provides U.S. regular, full-time and part-time employees
and matching contributions after the completion of one year of
hired prior to January 1, 2005 with noncontributory defined
service. Further, through June 30, 2009, IBM contributed transi-
benefit pension benefits via the IBM Personal Pension Plan. Prior
tion credits to eligible participants’ 401(k) Plus Plan accounts.
to 2008, the IBM Personal Pension Plan consisted of a tax quali-
The amount of the transition credits was based on a partici-
fied (qualified) plan and a non-tax qualified (nonqualified) plan.
pant’s age and service as of June 30, 1999.
Effective January 1, 2008, the nonqualified plan was renamed
Prior to January 1, 2008, the company match equaled 50
the Excess Personal Pension Plan (Excess PPP) and the quali-
percent of the first 6 percent of eligible compensation that par-
fied plan is now referred to as the Qualified PPP. The combined
ticipants contributed to the plan for those hired before January
plan is now referred to as the PPP. The Qualified PPP is funded
1, 2005, and 100 percent of the first 6 percent contributed for
by company contributions to an irrevocable trust fund, which is
those hired after December 31, 2004.
held for the sole benefit of participants and beneficiaries. The
The company’s matching contributions vest immediately and
Excess PPP, which is unfunded, provides benefits in excess of
participants are always fully vested in their own contributions. All
IRS limitations for qualified plans.
contributions, including the company match, are made in cash
Benefits provided to the PPP participants are calculated using
and invested in accordance with participants’ investment elec-
benefit formulas that vary based on the participant. Pension
tions. There are no minimum amounts that must be invested
benefits are calculated using one of two methods based upon
in company stock, and there are no restrictions on transferring
specified criteria used to determine each participant’s eligibility.
amounts out of company stock to another investment choice,
The first method uses a five-year, final pay formula that deter-
other than excessive trading rules applicable to such investments.
mines benefits based on salary, years of service, mortality and
other participant-specific factors. The second method is a cash
balance formula that calculates benefits using a percentage of
employees’ annual salary, as well as an interest crediting rate.

109


IBM Excess 401(k) Plus Plan established a Future Health Account (FHA) for employees who
Effective January 1, 2008, the company replaced the IBM Exec- were more than five years from retirement eligibility. Employees
utive Deferred Compensation Plan, an unfunded, nonqualified, who were within five years of retirement eligibility are covered
defined contribution plan, with the IBM Excess 401(k) Plus Plan under the company’s prior retiree health benefits arrangements.
(Excess 401(k)), an unfunded, nonqualified defined contribution Under either the FHA or the prior retiree health benefit arrange-
plan. All employees whose eligible compensation is expected to ments, there is a maximum cost to the company for retiree
exceed the IRS compensation limit for qualified plans are eligible to health benefits.
participate in the Excess 401(k). The purpose of the Excess 401(k) Since January 1, 2004, new hires, as of that date or later, are
is to provide benefits that would be provided under the qualified not eligible for company subsidized postretirement benefits.
IBM 401(k) Plus Plan if the compensation limits did not apply.
Amounts deferred into the Excess 401(k) are recordkeeping Non-U.S. Plans
(notional) accounts and are not held in trust for the participants. Most subsidiaries and branches outside the United States spon-
Participants in the Excess 401(k) may invest their notional sor defined benefit and/or defined contribution plans that cover
accounts in the primary investment options available to all substantially all regular employees. The company deposits funds
employees through the 401(k) Plus Plan. Participants in the under various fiduciary-type arrangements, purchases annuities
Excess 401(k) are also eligible to receive company match and under group contracts or provides reserves for these plans.
automatic contributions on eligible compensation deferred into Benefits under the defined benefit plans are typically based
the Excess 401(k) and on compensation earned in excess of the either on years of service and the employee’s compensation
Internal Revenue Code pay limit once they have completed one (generally during a fixed number of years immediately before
year of service. Through June 30, 2009, eligible participants also retirement) or on annual credits. The range of assumptions that
received transition credits. Amounts deferred into the Excess are used for the non-U.S. defined benefit plans reflect the differ-
401(k), including company contributions are recorded as liabilities. ent economic environments within the various countries.
In addition, certain of the company’s non-U.S. subsidiar-
NONPENSION POSTRETIREMENT BENEFIT PLAN ies sponsor defined benefit nonpension postretirement benefit
U.S. Nonpension Postretirement Plan plans that provide medical and dental benefits to eligible non-
The company sponsors a defined benefit nonpension postretire- U.S. retirees and eligible dependents, as well as life insurance for
ment benefit plan that provides medical and dental benefits to certain eligible non-U.S. retirees. However, most of the non-U.S.
eligible U.S. retirees and eligible dependents, as well as life insur- retirees are covered by local government sponsored and admin-
ance for eligible U.S. retirees. Effective July 1, 1999, the company istered programs.

Plan Financial Information
Summary of Financial Information
The following table presents a summary of the total retirement-related benefits net periodic (income)/cost recorded in the Consolidated
Statement of Earnings.

($ in millions)
U.S. Plans Non-U.S. Plans Total
For the year ended December 31: 2009 2008 2007 2009 2008* 2007* 2009 2008* 2007*

Defined benefit pension plans $(919) $ (948) $ 473 $ 521 $402 $ 835 $ (398) $ (546) $1,308
Retention Plan 13 13 23 — — — 13 13 23
Total defined benefit pension plans
(income)/cost $(906) $ (936) $ 496 $ 521 $402 $ 835 $ (384) $ (534) $1,331
IBM 401(k) Plus Plan and Non-U.S. plans $ 946 $1,034 $ 390 $ 478 $540 $ 478 $1,424 $1,574 $ 868
Excess 401(k) 26 36 12 — — — 26 36 12
Total defined contribution plans cost $ 972 $1,069 $ 402 $ 478 $540 $ 478 $1,450 $1,609 $ 880
Nonpension postretirement benefit plans cost $ 292 $ 310 $ 342 $ 58 $ 53 $ 57 $ 350 $ 363 $ 399
Total retirement-related
benefits net periodic cost $ 358 $ 443 $1,240 $1,057 $996 $1,370 $1,415 $1,439 $2,610


110


The following table presents a summary of the total projected benefit obligation (PBO) for defined benefit plans, accumulated postre-
tirement benefit obligation (APBO) for nonpension postretirement benefit plans (benefit obligations), fair value of plan assets and the
associated funded status recorded in the Consolidated Statement of Financial Position.

($ in millions)
Benefit Obligations Fair Value of Plan Assets Funded Status*
At December 31: 2009 2008 2009 2008 2009 2008

U.S. Plans:
Overfunded plans:
Qualified PPP $46,910 $ — $47,269 $ — $ 359 $ —
Underfunded plans:
Qualified PPP $ — $47,297 $ — $45,918 $ — $ (1,379)
Excess PPP 1,195 1,224 — — (1,195) (1,224)
Retention Plan 249 235 — — (249) (235)
Nonpension postretirement benefit plan 5,100 5,224 33 113 (5,067) (5,111)
Total underfunded U.S. plans $ 6,545 $53,980 $ 33 $46,031 $ (6,512) $ (7,949)
Non-U.S. Plans:
Overfunded plans:
Qualified defined benefit pension plans $14,032 $12,586 $16,673 $14,183 $ 2,641 $ 1,598
Nonpension postretirement benefit plans 7 12 8 14 1 3
Total overfunded non-U.S. plans $14,039 $12,598 $16,681 $14,197 $ 2,642 $ 1,601
Underfunded plans:
Qualified defined benefit pension plans $21,521 $21,179 $17,633 $14,980 $ (3,888) $ (6,199)
Nonqualified defined benefit pension plans 5,755 5,406 — — (5,755) (5,406)
Nonpension postretirement benefit plans 760 596 96 65 (664) (532)
Total underfunded non-U.S. plans $28,036 $27,182 $17,729 $15,045 $(10,307) $(12,137)
Total overfunded plans $60,949 $12,598 $63,950 $14,197 $ 3,001 $ 1,601
Total underfunded plans $34,581 $81,162 $17,762 $61,076 $(16,819) $(20,086)

* Funded status is recognized in the Consolidated Statement of Financial Position as follows: Asset amounts as prepaid pension assets; (Liability) amounts as compensa-
tion and benefits (current liability) and retirement and nonpension postretirement benefit obligations (noncurrent liability).

At December 31, 2009, the company’s qualified defined benefit the Excess PPP and the Retention Plan. Defined benefit pen-
pension plans worldwide were 99 percent funded compared to the sion plans in the non-U.S. Plans consist of all plans sponsored
benefit obligations, with the U.S. qualified PPP 101 percent funded. by the company’s subsidiaries. The nonpension postretirement
Overall, including nonqualifed plans, the company’s defined ben- benefit plan in the U.S. Plan represents the U.S. Nonpension
efit pension plans were 91 percent funded, an improvement of 6 Postretirement Benefit Plan. Nonpension postretirement benefit
points from the year-end 2008 position. plans in the non-U.S. Plans consist of all plans sponsored by the
company’s subsidiaries.
Defined Benefit Pension and Nonpension The tables on page 112 present the components of net peri-
Postretirement Benefit Plan Financial Information odic (income)/cost of the company’s retirement-related benefit
The tables on pages 112 to 114 represent financial information plans recognized in Consolidated Statement of Earnings.
for the company’s retirement-related benefit plans. Defined ben-
efit pension plans in the U.S. Plans consist of the Qualified PPP,

111


($ in millions)
Defined Benefit Pension Plans
U.S. Plans Non-U.S. Plans
For the year ended December 31: 2009 2008 2007 2009 2008* 2007*

Service cost $ — $ — $ 773 $ 585 $ 660 $ 688
Interest cost 2,682 2,756 2,660 1,898 2,042 1,825
Expected return on plan assets (4,009) (3,978) (3,703) (2,534) (2,725) (2,528)
Amortization of transition assets — — — (0) (0) (3)
Amortization of prior service costs/(credits) 10 (7) 57 (126) (129) (125)
Recognized actuarial losses 411 291 703 624 612 934
Curtailments and settlements — 2 5 (126) (139) 2
Multi-employer plan/other costs — — — 200 82 40
Total net periodic (income)/cost $ (906) $ (936) $ 496 $ 521 $ 402 $ 835


($ in millions)
Nonpension Postretirement Benefit Plans
U.S. Plan Non-U.S. Plans
For the year ended December 31: 2009 2008 2007 2009 2008 2007

Service cost $ 41 $ 55 $ 69 $10 $ 10 $ 12
Interest cost 289 312 311 51 53 46
Expected return on plan assets — (8) — (8) (10) (11)
Amortization of transition assets — — — 0 0 1
Amortization of prior service costs/(credits) (39) (62) (62) (6) (7) (8)
Recognized actuarial losses — 9 24 11 14 17
Curtailments and settlements — 3 — — (6) —
Total net periodic cost $292 $310 $342 $58 $ 53 $ 57

112


The following table presents the changes in benefit obligations and plan assets of the company’s retirement-related benefit plans.

($ in millions)
Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans
U.S. Plans Non-U.S. Plans* U.S. Plan Non-U.S. Plans
2009 2008 2009 2008 2009 2008 2009 2008

Change in benefit obligation:
Benefit obligation at January 1 $48,756 $47,673 $39,171 $ 42,291 $ 5,224 $ 5,472 $ 608 $ 769
Service cost — — 585 660 41 55 10 10
Interest cost 2,682 2,756 1,898 2,042 289 312 51 53
Plan participants’ contributions — — 58 63 228 216 — —
Acquisitions/divestitures, net — — (58) (6) — — (2) (1)
Actuarial losses/(gains) 155 1,183 506 (64) (65) (191) 14 (12)
Benefits paid from trust (3,144) (2,999) (1,855) (1,814) (646) (656) (6) (31)
Direct benefit payments (94) (81) (464) (486) (25) (24) (23) (21)
Foreign exchange impact — — 1,920 (3,357) — — 111 (146)
Medicare subsidy — — — — 52 37 — —
Plan amendments/curtailments/settlements — 224 (454) (157) — 3 4 (13)
Benefit obligation at December 31 $48,354 $48,756 $41,308 $ 39,171 $ 5,100 $ 5,224 $ 767 $ 608
Change in plan assets:
Fair value of plan assets at January 1 $45,918 $57,191 $29,164 $ 41,696 $ 113 $ 504 $ 79 $ 121
Actual return on plan assets 4,496 (8,274) 4,030 (7,678) (1) 4 8 10
Employer contributions — — 1,195 858 338 45 1 10
Acquisitions/divestitures, net — — (29) 16 — — — —
Plan participants’ contributions — — 58 63 228 216 — —
Benefits paid from trust (3,144) (2,999) (1,855) (1,814) (646) (656) (6) (31)
Foreign exchange impact — — 1,710 (3,978) — — 23 (30)
Plan amendments/curtailments/settlements — — 33 2 — — (1) —
Fair value of plan assets at December 31 $47,269 $45,918 $34,305 $ 29,164 $ 33 $ 113 $ 104 $ 79
Funded status at December 31 $ (1,085) $ (2,838) $ (7,003) $(10,007) $(5,067) $(5,111) $(663) $(529)
Accumulated benefit obligation** $48,354 $48,756 $40,339 $ 37,759 N/A N/A N/A N/A

* Excludes a defined benefit pension plan in Brazil due to restrictions on the use of plan assets imposed by governmental regulations.
** Represents the benefit obligation assuming no future participant compensation increases.

The following table presents the net funded status recognized in the Consolidated Statement of Financial Position.

($ in millions)
U.S. Plans Non-U.S. Plans* U.S. Plan Non-U.S. Plans
At December 31: 2009 2008 2009 2008 2009 2008 2009 2008

Prepaid pension assets $ 359 $ — $ 2,641 $ 1,598 $ — $ — $ 1 $ 3
Current liabilities—Compensation and benefits (91) (86) (326) (283) (425) (255) (24) (9)
Noncurrent liabilities—Retirement and
nonpension postretirement benefit obligations (1,353) (2,752) (9,318) (11,322) (4,642) (4,856) (640) (523)
Funded status—net $(1,085) $(2,838) $(7,003) $(10,007) $(5,067) $(5,111) $(663) $(529)

The table on page 114 presents the pre-tax net loss and prior service costs/(credits) and transition (assets)/liabilities recognized in
other comprehensive income/(loss) and the changes in pre-tax net loss, prior service costs/(credits) and transition (assets)/liabilities
recognized in accumulated other comprehensive income/(loss) for the retirement-related benefit plans.

113


($ in millions)
U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans
For the year ended December 31: 2009 2008 2009 2008 2009 2008 2009 2008

Net loss at January 1 $15,623 $ 2,479 $18,898 $ 9,228 $454 $ 657 $155 $186
Current period loss/(gain) (332) 13,435 (1,107) 10,339 (57) (194) 24 (11)
Curtailments and settlements — — 6 (56) — — — (7)
Amortization of net loss included in net
periodic (income)/cost (411) (291) (624) (612) — (9) (11) (14)
Net loss at December 31 $14,880 $15,623 $17,172 $18,898 $397 $ 454 $167 $155
Prior service costs/(credits) at January 1 $ 168 $ (60) $ (980) $ (1,147) $ (53) $(115) $ (21) $ (28)
Current period prior service costs/(credits) — 222 (370) — — — (5) —
Curtailments and settlements — — 120 38 — — — —
Amortization of prior service (costs)/credits
included in net periodic (income)/cost (10) 7 126 129 39 62 6 7
Prior service costs/(credits) at December 31 $ 159 $ 168 $ (1,104) $ (980) $ (14) $ (53) $ (19) $ (21)
Transition (assets)/liabilities at January 1 $ — $ — $ (1) $ (1) $ — $ — $ 1 $ 1
Amortization of transition assets/(liabilities)
included in net periodic (income)/cost — — 0 0 — — 0 0
Transition (assets)/liabilities at December 31 $ — $ — $ (1) $ (1) $ — $ — $ 1 $ 1
Total loss recognized in Accumulated
other comprehensive income/(loss)* $15,038 $15,791 $16,067 $17,917 $382 $ 401 $148 $135

* See note N, “Equity Activity,” on page 98 for the total change in the accumulated other comprehensive income/(loss) and the Consolidated Statement of Changes in Equity
for components of net periodic (income)/cost, including the related tax effects, recognized in other comprehensive income/(loss) for the retirement-related benefit plans.

The following table presents the pre-tax estimated net loss, estimated prior service costs/(credits) and estimated transition (assets)/
liabilities of the retirement-related benefit plans that will be amortized from accumulated other comprehensive income/(loss) into net
periodic (income)/cost and recorded in the Consolidated Statement of Earnings in 2010.

Defined Nonpension Post-
Benefit Pension Plans retirement Benefit Plans
($ in millions) U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans

Net loss $476 $ 722 $ — $9
Prior service costs/(credits) 10 (165) (14) (5)
Transition (assets)/liabilities — 0 — —

During the year ended December 31, 2009, the company paid for future years of service. This amendment resulted in a
$140 million for mandatory pension insolvency insurance cover- decrease in the PBO of $359 million and had no impact on 2009
age premiums in certain non-U.S. countries (Germany, Canada, net periodic (income)/cost.
Luxembourg and the U.K.), an increase of $117 million from the During the year ended December 31, 2008, the IBM Board
year ended December 31, 2008, driven primarily by premiums of Directors approved a pension adjustment for certain U.S.
paid in Germany. These premiums relate to the rising level of retirees and beneficiaries in the PPP. This adjustment provided
plan insolvencies experienced by other companies. a pension increase to approximately 42,000 IBM retirees who
During the year ended December 31, 2009, the company retired before January 1, 1997. This adjustment resulted in an
approved changes to the United Kingdom Pension Plan which increase in the PBO of $222 million and had no impact on 2008
included the elimination of accrued benefits under this plan effec- net periodic (income)/cost.
tive April 2011. As a result of this action, the company recorded During the year ended December 31, 2008, the company
a curtailment gain of $124 million included in 2009 net periodic terminated one of its defined benefit pension plans in Japan that
(income)/cost and reduced the PBO by $85 million. The com- resulted in a settlement gain of $140 million recorded as part of
pany also amended its cash balance and defined contribution 2008 net periodic (income)/cost and resulted in a decrease in
plans in Japan to reduce overall benefits for active participants the PBO of $157 million.

114


No significant amendments of retirement-related benefit plans of service, as well as certain assumptions, the most significant
occurred during the year ended December 31, 2007 that had a of which include estimates of discount rates, expected return on
material effect on the Consolidated Statement of Earnings. plan assets, rate of compensation increases, interest crediting
rates and mortality rates. The company evaluates these assump-
Assumptions Used to Determine Plan tions, at a minimum, annually, and makes changes as necessary.
Financial Information The table below presents the assumptions used to measure
Underlying both the measurement of benefit obligations and net the net periodic (income)/cost and the year-end benefit obliga-
periodic (income)/cost are actuarial valuations. These valuations tions for retirement-related benefit plans.
use participant-specific information such as salary, age and years

Defined Benefit Pension Plans

Weighted-average assumptions used to measure net
periodic (income)/cost for the year ended December 31:
Discount rate 5.75% 6.00% 5.75% 4.89% 5.06% 4.40%
Expected long-term returns on plan assets 8.00% 8.00% 8.00% 6.73% 6.86% 6.95%
Rate of compensation increase* N/A N/A 4.00% 3.09% 3.23% 3.05%
Weighted-average assumptions used to measure
benefit obligations at December 31:
Discount rate 5.60% 5.75% 6.00% 4.84% 4.89% 5.06%
Rate of compensation increase* N/A N/A N/A 2.92% 3.09% 3.23%

* Rate of compensation increase is not applicable to the U.S. defined benefit pension plans as benefit accruals ceased December 31, 2007 for all participants.

Nonpension Postretirement Benefit Plans

net periodic cost for the year ended December 31:
Discount rate 5.75% 6.00% 5.75% 7.36% 7.13% 6.93%
Expected long-term returns on plan assets N/A 3.02% N/A 9.19% 9.04% 9.95%
benefit obligations at December 31:
Discount rate 5.40% 5.75% 6.00% 7.92% 7.36% 7.13%


DISCOUNT RATE are then matched to the yield curve to derive the discount rates.
The discount rate assumptions used for retirement-related ben- In the non-U.S., where markets for high-quality long-term bonds
efit plans accounting reflect the yields available on high-quality, are not generally as well developed, a portfolio of long-term
fixed income debt instruments at the measurement date. For government bonds is used as a base, to which a credit spread
the U.S. discount rate assumptions, a portfolio of high-quality is added to simulate corporate bond yields at these maturities
corporate bonds is used to construct a yield curve. The cash in the jurisdiction of each plan, as the benchmark for developing
flows from the company’s expected benefit obligation payments the respective discount rates.

115


For the U.S. defined benefit pension plans, the changes in For the nonpension postretirement benefit plans, the com-
discount rate assumptions impacted the net periodic (income)/ pany maintains a nominal, highly liquid trust fund balance to
cost and the PBO. The changes in discount rate assumptions ensure payments are made timely. As a result, for the years
resulted in a decrease in 2009 net periodic income of $70 mil- ended December 31, 2009, 2008 and 2007, the expected long-
lion, an increase in 2008 net periodic income of $67 million and term return on plan assets and the actual return on those assets
a decrease in 2007 net periodic cost of $92 million. The changes were not material.
in discount rate assumptions resulted in an increase in the PBO
of $703 million and $1,190 million at December 31, 2009 and RATE OF COMPENSATION INCREASES AND MORTALITY RATE
2008, respectively. The rate of compensation increases is determined by the com-
For the nonpension postretirement benefit plans, the changes pany, based upon its long-term plans for such increases. The
in discount rate assumptions had no material impact on net peri- rate of compensation increase is not applicable to the U.S.
odic cost for the years ended December 31, 2009, 2008 and defined benefit pension plans as benefit accruals ceased
2007 and on the APBO at December 31, 2009 and 2008. December 31, 2007 for all participants. Mortality rate assump-
tions are based on life expectancy and death rates for different
EXPECTED LONG-TERM RETURNS ON PLAN ASSETS types of participants. Mortality rates are periodically updated
Expected returns on plan assets, a component of net periodic based on actual experience.
(income)/cost, represent the expected long-term returns on plan
assets based on the calculated market-related value of plan INTEREST CREDITING RATE
assets. Expected long-term returns on plan assets take into Benefits for certain participants in the PPP are calculated using
account long-term expectations for future returns and invest- a cash balance formula. An assumption underlying this formula
ment policies and strategies as described on page 117. These is an interest crediting rate, which impacts both net periodic
rates of return are developed by the company, calculated using (income)/cost and the PBO. This assumption provides a basis
an arithmetic average and are tested for reasonableness against for projecting the expected interest rate that participants will
historical returns. The use of expected long-term returns on plan earn on the benefits that they are expected to receive in the
assets may result in recognized pension income that is greater following year and is based on the average from August to
or less than the actual returns of those plan assets in any given October of the one-year U.S. Treasury Constant Maturity yield
year. Over time, however, the expected long-term returns are plus one percent.
designed to approximate the actual long-term returns, and For the PPP, the change in the interest crediting rate to
therefore result in a pattern of income and cost recognition that 2.8 percent for the year ended December 31, 2009 from 5.2
more closely matches the pattern of the services provided by the percent for the year ended December 31, 2008 resulted in
employees. Differences between actual and expected returns an increase in 2009 net periodic income of $151 million. The
are recognized as a component of net loss or gain in accumu- change in the interest crediting rate to 5.2 percent for the year
lated other comprehensive income/(loss), which is amortized ended December 31, 2008 from 6.0 percent for the year ended
as a component of net periodic (income)/cost over the service December 31, 2007 resulted in an increase in 2008 net periodic
lives or life expectancy of the plan participants, depending on income of $65 million. The change in the interest crediting rate
the plan, provided such amounts exceed certain thresholds to 6.0 percent for the year ended December 31, 2007 from 5.0
provided by accounting standards. The market-related value of percent for the year ended December 31, 2006 resulted in an
plan assets recognizes changes in the fair value of plan assets increase in 2007 net periodic cost of $125 million.
systematically over a five-year period in the expected return on
plan assets line in net periodic (income)/cost.
For the U.S. defined benefit pension plan, Qualified PPP, the
expected long-term rate of return on plan assets of 8.00 percent
remained constant for the years ended December 31, 2009,
2008 and 2007 and, consequently, had no incremental impact
on net periodic (income)/cost.

116


HEALTHCARE COST TREND RATE The assets are managed by professional investment firms
For nonpension postretirement benefit plan accounting, the and investment professionals who are employees of the com-
company reviews external data and its own historical trends for pany. They are bound by investment mandates determined by
healthcare costs to determine the healthcare cost trend rates. the company’s management and are measured against specific
However, the healthcare cost trend rate has an insignificant benchmarks. Among these managers, consideration is given,
effect on plan costs and obligations as a result of the terms of but not limited to, balancing security concentration, issuer con-
the plan which limit the company’s obligation to the participants. centration, investment style and reliance on particular active and
The company assumes that the healthcare cost trend rate for passive investment strategies.
2010 will be 7 percent. In addition, the company assumes that Market liquidity risks are tightly controlled, with only a mod-
the same trend rate will decrease to 5 percent over the next est percentage of the Qualified PPP portfolio invested in private
three years. A one percentage point increase or decrease in the market assets consisting of private equities and private real
assumed healthcare cost trend rate would not have a material estate investments, which are less liquid than publicly traded
effect on 2009, 2008 and 2007 net periodic cost or the benefit securities. As of December 31, 2009, the Qualified PPP port-
obligations as of December 31, 2009 and 2008. folio had $3,618 million in commitments for future investments
in private markets to be made over a number of years. These
Plan Assets commitments are expected to be funded from plan assets.
Retirement-related benefit plan assets are recognized and mea- Derivatives are used on a limited basis as an effective means
sured at fair value as described in note A, “Significant Accounting to achieve investment objectives and/or as a component of
Policies,” on page 77. Because of the inherent uncertainty of the plan’s risk management strategy. The primary reasons for
valuations, these fair value measurements may not necessarily the use of derivatives are fixed income management, including
reflect the amounts the company could realize in current market duration, interest rate management and credit exposure, cash
transactions. equitization and as a means to gain exposure to the currency
and commodities markets.
INVESTMENT POLICIES AND STRATEGIES Outside the U.S., the investment objectives are similar to
The investment objectives of the Qualified PPP portfolio are those described above, subject to local regulations. The weighted-
designed to generate returns that will enable the plan to meet average target allocation for the non-U.S. plans is 47 percent
its future obligations. The precise amount for which these obli- equity securities, 46 percent fixed income securities, 2 percent
gations will be settled depends on future events, including the real estate and 5 percent other investments, which is consistent
retirement dates and life expectancy of the plans’ participants. with the allocation decisions made by the company’s manage-
The obligations are estimated using actuarial assumptions, based ment and is similar to the prior year weighted-average target
on the current economic environment and other pertinent factors allocation. The table on page 118 details the actual allocations
described on page 115. The Qualified PPP portfolio’s investment of equity, fixed income, real estate and all other types of invest-
strategy balances the requirement to generate returns, using ments for non-U.S. plans. In some countries, a higher percent-
potentially higher yielding assets such as equity securities, with age allocation to fixed income securities is required. In others,
the need to control risk in the portfolio with less volatile assets, the responsibility for managing the investments typically lies with
such as fixed-income securities. Risks include, among others, a board that may include up to 50 percent of members elected
inflation, volatility in equity values and changes in interest rates by employees and retirees. This can result in slight differences
that could cause the plan to become underfunded, thereby compared with the strategies previously described. Generally,
increasing its dependence on contributions from the company. these non-U.S. plans do not invest in illiquid assets and their
To mitigate any potential concentration risk, careful consider- use of derivatives is usually limited to currency hedging, adjust-
ation is given to balancing the portfolio among industry sectors, ing portfolio durations and reducing specific market risks. There
companies and geographies, taking into account interest rate was no significant change in the investment strategies of these
sensitivity, dependence on economic growth, currency and other plans during either 2009 or 2008.
factors that affect investment returns. As a result, the Qualified The company’s nonpension postretirement benefit plans are
PPP portfolio’s target allocation is 44 percent equity securities, underfunded or unfunded. For some plans, the company main-
46 percent fixed income securities, 5 percent real estate and 5 tains a nominal, highly liquid trust fund balance to ensure timely
percent other investments, which is consistent with the alloca- benefit payments.
tion decisions made by the company’s management and is
similar to the prior year target allocation. The table on page 118
details the actual allocation of equity, fixed income, real estate
and all other types of investments for the Qualified PPP portfolio.

117


DEFINED BENEFIT PENSION PLAN ASSETS
The following table presents the company’s defined benefit pension plans’ major asset categories and their associated fair value at
December 31, 2009. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the com-
pany’s subsidiaries.

($ in millions)
U.S. Plan Non-U.S. Plans
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Equity:
Equity securities(a) $15,205 $ 56 $ — $15,261 $7,012 $ — $ — $ 7,012
Equity commingled/mutual funds(b)(c) 303 1,085 26 1,413 386 8,923 — 9,309
Fixed income:
Government and related(d) — 10,880 — 10,880 — 6,231 — 6,231
Corporate bonds — 7,264 — 7,264 — 1,467 — 1,467
Mortgage and asset-backed securities — 1,403 37 1,440 — 21 — 21
Fixed income commingled/mutual funds(b)(e) 369 1,064 192 1,625 45 6,835 — 6,880
Insurance contracts — 1 — 1 — 1,143 — 1,143
Cash and short-term investments(f) 243 2,460 — 2,703 98 236 — 333
Hedge funds — 214 587 800 — — — —
Private equity (g) — — 3,877 3,877 — — 93 93
Private real estate(g) — — 2,247 2,247 — — 492 492
Derivatives(h) 18 (221) — (203) 62 (7) — 55
Other commingled/mutual funds(b)(i) — (0) — — — 1,190 — 1,190
Subtotal 16,138 24,205 6,964 47,308 7,602 26,038 585 34,226
Other (j) — — — (39) — — — 80
Fair value of plan assets $16,138 $24,205 $6,964 $47,269 $7,602 $26,038 $585 $34,305
(a)
Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $122 million, representing 0.3 percent of the U.S. Plan assets. Non-U.S. Plans
include IBM common stock of $45 million, representing 0.1 percent of the non-U.S. Plans assets.
(b)
Commingled funds represent pooled institutional investments.
(c)
Invests in predominantly equity securities.
(d)
Includes debt issued by national, state and local governments and agencies.
(e)
Invests in predominantly fixed income securities.
(f)
Includes cash and cash equivalents and short-term marketable securities.
(g)
Includes limited partnerships and venture capital partnerships.
(h)
Primarily includes interest rate derivatives and, to a lesser extent, forwards, exchange traded and other over-the-counter derivatives.
(i)
Invests in both equity and fixed income securities.
(j)
Represents net unsettled transactions, relating primarily to purchases and sales of plan assets.

The U.S. nonpension postretirement benefit plan assets of $33 The company’s asset allocations at December 31, 2008 were
million were invested in fixed income commingled/mutual funds, as follows:
categorized as Level 1 in the fair value hierarchy. The non-U.S.
nonpension postretirement benefit plan assets of $104 million, pri- U.S. Plan Non-U.S. Plans
marily in Brazil, and, to a lesser extent, in Mexico and South Africa, Asset Category:
were invested primarily in government and related fixed income Equity securities(a)(b) 37.1% 46.0%
securities, categorized as Level 2 in the fair value hierarchy. Debt securities 54.0 48.5
Real estate(a) 5.9 1.6
Other 3.0 4.0
Total 100.0% 100.0%
(a)
The Qualified PPP portfolio (U.S. Plan) included private market assets comprising
approximately 12.9 percent of total assets.
(b)
Equity securities included IBM common stock of $83 million, representing 0.2
percent of the Qualified PPP portfolio plan assets.

118


The following table presents the reconciliation of the beginning and ending balances of Level 3 assets for the year ended December
31, 2009 for the U.S. Plan:

($ in millions)
Equity Mortgage Fixed
Commingled/ And Income Private
Mutual Asset-Backed Commingled/ Hedge Private Real
Funds Securities Mutual Funds Funds Equity Estate Total

Balance at January 1 $— $47 $180 $513 $3,169 $2,698 $6,607
Return on assets held at end of year 1 11 11 80 575 (634) 44
Return on assets sold during the year — 1 — 2 14 (98) (81)
Purchases, sales and settlements, net 25 (7) — (8) 118 281 408
Transfers, net — (14) — — — — (14)
Balance at December 31 $26 $37 $192 $587 $3,877 $2,247 $6,964

The following table presents the reconciliation of the beginning and ending balances of Level 3 assets for the year ended December
31, 2009 for the non-U.S. Plans:

($ in millions)
Private Private
Equity Real Estate Total

Balance at January 1 $ 64 $429 $494
Return on assets held at end of year (10) (10) (19)
Return on assets sold during the year — — 1
Purchases, sales and settlements, net 32 27 59
Transfers, net — — —
Foreign exchange impact 6 46 51
Balance at December 31 $ 93 $492 $585

VALUATION TECHNIQUES Cash includes money market accounts that are valued at
The following is a description of the valuation techniques used their cost plus interest on a daily basis, which approximates fair
to measure plan assets at fair value. There were no changes in value. Short-term investments represent securities with original
valuation techniques during 2009 and 2008. maturities of one year or less. These assets are classified as Level
Equity securities are valued at the closing price reported on 1 or Level 2.
the stock exchange on which the individual securities are traded. Private equity and private real estate partnership valuations
IBM common stock is valued at the closing price reported on the require significant judgment due to the absence of quoted mar-
New York Stock Exchange. Equity commingled/mutual funds ket prices, the inherent lack of liquidity and the long-term nature
are typically valued using the net asset value (NAV) provided by of such assets. These assets are initially valued at cost and are
the administrator of the fund and reviewed by the company. The reviewed periodically utilizing available and relevant market data
NAV is based on the value of the underlying assets owned by to determine if the carrying value of these assets should be
the fund, minus liabilities and divided by the number of shares or adjusted. These investments are classified as Level 3. The valu-
units outstanding. These assets are classified as Level 1, Level 2 ation methodology is applied consistently from period to period.
or Level 3 depending on availability of quoted market prices.
The fair value of fixed income securities is typically estimated
using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows and are generally clas-
sified as Level 2. If available, they are valued using the closing
price reported on the major market on which the individual
securities are traded.

119


Exchange traded derivatives are valued at the closing price Act apply to plan years beginning after December 31, 2007. The
reported on the exchange on which the individual securities are Act was updated by the Worker, Retiree and Employer Recovery
traded, while forward contracts are valued using a mid-close Act of 2008, which revised the funding requirements in the Act
price. Over-the-counter derivatives are typically valued using by clarifying that the company may smooth the change in value
pricing models. The models require a variety of inputs, including, of pension plan assets over 24 months. At December 31, 2009,
for example, yield curves, credit curves, measures of volatility no mandatory contribution is required for 2010.
and foreign exchange rates. These assets are classified as Level In 2010, the company estimates contributions to its non-
1 or Level 2 depending on availability of quoted market prices. U.S. plans to be approximately $800 million, which will be
mainly contributed to defined benefit pension plans in Japan,
Expected Contributions the Netherlands, Switzerland and the United Kingdom. This
DEFINED BENEFIT PENSION PLANS amount represents the legally mandated minimum contributions.
It is the company’s general practice to fund amounts for pen- Financial market performance in 2010 could increase the legally
sions sufficient to meet the minimum requirements set forth in mandated minimum contribution in certain countries which
applicable employee benefits laws and local tax laws. From require monthly or daily remeasurement of the funded status.
time to time, the company contributes additional amounts as it The company could also elect to contribute more than the legally
deems appropriate. mandated amount based on market conditions or other factors.
The company contributed $1,252 million and $917 million
in cash to non-U.S. plans, including non-U.S. multi-employer NONPENSION POSTRETIREMENT BENEFIT PLANS

plans, during the years ended December 31, 2009 and 2008, The company contributed $293 million and $10 million to the
respectively. nonpension postretirement benefit plans during the years ended
In 2010, the company is not legally required to make any December 31, 2009 and 2008. These contribution amounts
contributions to the U.S. defined benefit pension plans. However, exclude the Medicare-related subsidy discussed below.
depending on market conditions, or other factors, the company
may elect to make discretionary contributions to the Qualified Expected Benefit Payments
PPP during the year. DEFINED BENEFIT PENSION PLAN EXPECTED PAYMENTS
The Pension Protection Act of 2006 (the Act), enacted into The following table presents the total expected benefit payments
law in 2006, is a comprehensive reform package that, among to defined benefit pension plan participants. These payments
other provisions, increases pension funding requirements for cer- have been estimated based on the same assumptions used to
tain U.S. defined benefit plans, provides guidelines for measuring measure the plans’ PBO at December 31, 2009 and include
pension plan assets and pension obligations for funding purposes benefits attributable to estimated future compensation increases,
and raises tax deduction limits for contributions to retirement- where applicable.
related benefit plans. The additional funding requirements by the

($ in millions)
Qualified Nonqualified Qualified Nonqualified Total Expected
U.S. Plan U.S. Plans Non-U.S. Plans Non-U.S. Plans Benefit
Payments Payments Payments Payments Payments

2010 $ 3,375 $ 91 $ 2,079 $ 314 $ 5,860
2011 3,262 91 1,951 315 5,620
2012 3,276 92 1,971 324 5,664
2013 3,291 95 1,989 333 5,709
2014 3,316 97 2,022 337 5,772
2015 – 2019 16,692 518 10,536 1,843 29,590

The 2010 expected benefit payments to defined benefit pension plan participants not covered by the respective plan assets (under-
funded plans) represent a component of compensation and benefits, within current liabilities, in the Consolidated Statement of
Financial Position.

120


NONPENSION POSTRETIREMENT BENEFIT PLAN
EXPECTED PAYMENTS
The following table reflects the total expected benefit payments to nonpension postretirement benefit plan participants, as well as the
expected receipt of the company’s share of the Medicare subsidy described below. These payments have been estimated based on
the same assumptions used to measure the plan’s APBO at December 31, 2009.

($ in millions)
Less: IBM Share Net Expected Qualified Nonqualified Total Expected
U.S. Plan of Expected U.S. Plan Non-U.S. Plans Non-U.S. Plans Benefit
Payments Medicare Subsidy Payments Payments Payments Payments

2010 $ 499 $(27) $ 472 $ 11 $ 24 $ 507
2011 492 (28) 464 15 25 503
2012 458 (28) 430 16 26 472
2013 440 (28) 412 18 27 457
2014 431 — 431 20 28 479
2015 – 2019 $2,113 — $2,113 135 154 2,402

The 2010 expected benefit payments to nonpension postretire- years ended December 31, 2009 and 2008, which was utilized
ment benefit plan participants not covered by the respective to reduce the company contributions to the U.S. nonpension
plan assets represent a component of compensation and ben- postretirement benefit plan.
efits, within current liabilities, in the Consolidated Statement of The company has included the impact of its portion of the
Financial Position. subsidy in the determination of net periodic cost and APBO for
the U.S. nonpension postretirement benefit plan at and for the
years ended December 31, 2009, 2008 and 2007. The impact
Medicare Prescription Drug Act
of the subsidy resulted in a reduction in APBO of $100 million
In connection with the Medicare Prescription Drug Improvement
and $127 million at December 31, 2009 and 2008, respectively.
and Modernization Act of 2003, the company is expected to
The impact of the subsidy resulted in a reduction in 2009, 2008
continue to receive a federal subsidy of approximately $229
and 2007 net periodic cost of $28 million, $40 million and $36
million to subsidize the prescription drug coverage provided
million, respectively.
by the U.S. nonpension postretirement benefit plan, which is
expected to extend until 2013. Approximately $111 million of
the subsidy will be used by the company to reduce its obligation Other Plan Information
and cost related to the U.S. nonpension postretirement benefit The following table presents information for defined benefit pen-
plan. The company will contribute the remaining subsidy of $118 sion plans with accumulated benefit obligations (ABO) in excess
million to the plan in order to reduce contributions required by of plan assets. For a more detailed presentation of the funded
the participants. The company received a total subsidy of $45 status of the company’s defined benefit pension plans, see the
million for prescription drug-related coverage during each of the table on page 113.

( $ in millions)
2009 2008
Benefit Benefit
At December 31: Obligation Plan Assets Obligation Plan Assets

Plans with PBO in excess of plan assets $28,720 $17,633 $75,341 $60,898
Plans with ABO in excess of plan assets 27,996 17,561 73,939 60,630
Plans with assets in excess of PBO 60,942 63,942 12,586 14,183

121


Note V. Technology Services and Global Business Services recover cost,
as well as a reasonable fee, reflecting the arm’s-length value of
Segment Information
providing the services. The Global Services segments enter into
The company creates business value for clients and solves arm’s-length leases and loans at prices equivalent to market rates
business problems through integrated solutions that leverage with the Global Financing segment to facilitate the acquisition of
information technology and deep knowledge of business pro- equipment used in services engagements. All internal transaction
cesses. IBM solutions typically create value by reducing a client’s prices are reviewed annually, and reset if appropriate.
operational costs or by enabling new capabilities that generate The company utilizes globally integrated support orga-
revenue. These solutions draw from an industry-leading portfolio nizations to realize economies of scale and efficient use of
of consulting, delivery and implementation services, enterprise resources. As a result, a considerable amount of expense is
software, systems and financing. shared by all of the segments. This shared expense includes
The company’s major operations comprise: a Global Tech- sales coverage, marketing and support functions such as
nology Services segment; a Global Business Services segment; Accounting, Treasury, Procurement, Legal, Human Resources
a Software segment; a Systems and Technology segment; and a and Billing and Collections. Where practical, shared expenses
Global Financing segment. The segments represent components are allocated based on measurable drivers of expense, e.g.,
of the company for which separate financial information is available headcount. When a clear and measurable driver cannot be
that is utilized on a regular basis by the chief executive officer in identified, shared expenses are allocated on a financial basis
determining how to allocate the company’s resources and evalu- that is consistent with the company’s management system; e.g.,
ate performance. The segments are determined based on several advertising expense is allocated based on the gross profits of
factors, including client base, homogeneity of products, technol- the segments. The unallocated corporate amounts arising from
ogy, delivery channels and similar economic characteristics. certain divestitures, indirect infrastructure reductions, miscella-
Information about each segment’s business and the products neous tax items and the unallocated corporate expense pool are
and services that generate each segment’s revenue is located recorded in net income but are not allocated to the segments.
in the “Description of Business” section of the Management The following tables reflect the results of continuing operations
Discussion on pages 20 to 25, and “Segment Details,” on pages of the segments consistent with the company’s management and
25 to 31. measurement system. These results are not necessarily a depic-
Segment revenue and pre-tax income include transactions tion that is in conformity with GAAP. Performance measurement
between the segments that are intended to reflect an arm’s-length is based on pre-tax income. These results are used, in part, by
transfer price. Systems and software that is used by the Global senior management, both in evaluating the performance of, and
Technology Services segment in outsourcing engagements is pri- in allocating resources to, each of the segments.
marily sourced internally from the Systems and Technology and
Software segments. For the internal use of IT services, Global

122


Management System Segment View
($ in millions)
Global Services Segments
Global Global
Technology Business Systems and Global Total
For the year ended December 31: Services Services Software Technology Financing Segments

2009:
External revenue $37,347 $17,653 $21,396 $ 16,190 $2,302 $ 94,889
Internal revenue 1,386 887 2,677 911 1,774 7,635
Total revenue $38,734 $18,540 $24,073 $17,102 $4,076 $102,524
Pre-tax income $ 5,537 $ 2,555 $ 8,095 $ 1,419 $1,730 $ 19,335
Revenue year-to-year change (5.1)% (10.3)% (3.1)% (15.2)% (8.4)% (7.6)%
Pre-tax income year-to-year change 20.2% (4.7)% 14.4% (8.5)% 7.0% 10.3%
Pre-tax income margin 14.3% 13.8% 33.6% 8.3% 42.4% 18.9%

2008:
External revenue $39,264 $19,628 $22,089 $ 19,287 $2,559 $102,827
Internal revenue 1,546 1,044 2,761 882 1,892 8,125
Total revenue $40,810 $20,671 $24,850 $20,169 $4,451 $110,951
Pre-tax income $ 4,607 $ 2,681 $ 7,075 $ 1,550 $1,617 $ 17,531
Revenue year-to-year change 8.1% 7.5% 10.9% (9.6)% 11.7% 5.0%
Pre-tax income year-to-year change 29.5% 29.9% 17.9% (28.0)% 16.7% 15.6%

2007:
External revenue $36,103 $18,041 $19,982 $21,317 $2,502 $ 97,944
Internal revenue 1,636 1,193 2,416 998 1,482 7,726
Total revenue $37,739 $19,234 $22,398 $22,315 $3,984 $105,670
Pre-tax income $ 3,557 $ 2,064 $ 6,002 $ 2,153 $1,386 $ 15,163
Revenue year-to-year change 10.7% 10.9% 9.7% (3.6)% 2.4% 6.9%
Pre-tax income year-to-year change 8.2% 21.0% 9.3% 23.8% (4.7)% 10.8%

123


Reconciliations of IBM as Reported Segment Assets and Other Items
($ in millions) Global Technology Services assets are primarily accounts receiv-
For the year ended December 31: 2009 2008 2007 able, plant, property and equipment including those associated
Revenue: with the segment’s outsourcing business, goodwill, acquired
Total reportable segments $102,524 $110,951 $105,670 intangible assets, deferred services arrangement transition costs
Other revenue and adjustments 869 803 842 and maintenance parts inventory. Global Business Services
Elimination of internal revenue (7,635) (8,125) (7,726) assets are primarily goodwill and accounts receivable. Software
Total IBM consolidated revenue $ 95,758 $103,630 $ 98,786 segment assets are mainly goodwill, acquired intangible assets
and accounts receivable. Systems and Technology assets are
primarily plant, property and equipment, manufacturing inven-
( $ in millions) tory and accounts receivable. The assets of the Global Financing
segment are primarily financing receivables and fixed assets
Pre-Tax Income: under operating leases.
Total reportable segments $19,335 $17,531 $15,163 To ensure the efficient use of the company’s space and
Elimination of internal transactions (744) (433) (194) equipment, it usually is necessary for several segments to share
Unallocated corporate amounts* (453) (382) (480) plant, property and equipment assets. Where assets are shared,
Total IBM consolidated pre-tax landlord ownership of the assets is assigned to one segment and
income from continuing is not allocated to each user segment. This is consistent with the
operations $18,138 $16,715 $14,489
company’s management system and is reflected accordingly in
* Includes a provision related to a joint venture investment (2009 only); gains the following table. In those cases, there will not be a precise cor-
related to the divestiture of the printing business (2007–2009), interest expense
associated with debt related to the 2007 accelerated share repurchase (2007–
relation between segment pre-tax income and segment assets.
2009); and gains related to the sale of Lenovo stock (2008 and 2007). Similarly, the depreciation amounts reported by each seg-
ment are based on the assigned landlord ownership and may
not be consistent with the amounts that are included in the
Immaterial Items
segments’ pre-tax income. The amounts that are included in
Investment in Equity Alliances and Equity Alliances pre-tax income reflect occupancy charges from the landlord
Gains/(Losses) segment and are not specifically identified by the management
The investments in equity alliances and the resulting gains and reporting system. Capital expenditures that are reported by
(losses) from these investments that are attributable to the seg- each segment also are consistent with the landlord ownership
ments did not have a material effect on the financial position or basis of asset assignment.
the financial results of the segments. The Global Financing segment amounts for interest income
and interest expense reflect the interest income and interest
expense associated with the Global Financing business, includ-
ing the intercompany financing activities discussed on page 24,
as well as the income from investment in cash and marketable
securities. The explanation of the difference between cost of
financing and interest expense for segment presentation ver-
sus presentation in the Consolidated Statement of Earnings is
included on page 60 of the Management Discussion.

124


Management System Segment View
($ in millions)
Global Services Segments
Global Global
Technology Business Systems and Global Total
For the year ended December 31: Services Services Software Technology Financing Segments

2009:
Assets $16,422 $6,885 $16,894 $6,907 $34,605 $81,714
Depreciation/amortization of intangibles 1,680 87 906 814 1,694 5,181
Capital expenditures/investments in intangibles 1,512 45 471 658 1,460 4,145
Interest income — — — — 2,265 2,265
Interest expense — — — — 674 674
2008:
Assets $15,456 $6,874 $15,336 $7,313 $36,119 $81,098
2007:
Assets $16,157 $7,226 $10,042 $7,338 $37,586 $78,348

Reconciliations of IBM as Reported Geographic Information
($ in millions) The following provides information for those countries that are
At December 31: 2009 2008 2007 10 percent or more of the specific category.
Assets:
Total reportable segments $ 81,714 $ 81,098 $ 78,348 Revenue*
Elimination of internal transactions (5,481) (5,594) (5,964) ($ in millions)
Unallocated amounts: For the year ended December 31: 2009 2008 2007

Cash and marketable securities 12,688 11,631 16,007 United States $34,150 $ 36,686 $36,511
Notes and accounts receivable 3,928 3,632 3,639 Japan 10,222 10,403 9,632
Deferred tax assets 5,545 8,341 2,664 Other countries 51,386 56,541 52,643
Plant, other property and equipment 2,971 3,172 3,098 Total $95,758 $103,630 $98,786
Pension assets 2,994 1,594 17,397 * Revenues are attributed to countries based on location of client.
Other 4,665 5,647 5,242
Total IBM consolidated $109,022 $109,524 $120,431 Net Plant, Property and Equipment
($ in millions)
At December 31: 2009 2008 2007
Major Clients
United States $ 6,313 $ 6,469 $ 6,592
No single client represents 10 percent or more of the company’s
total revenue. Japan 1,050 1,055 890
Other countries 5,092 4,797 5,365
Total $12,455 $12,321 $12,847

125


Revenue by Classes of Note W.
Similar Products or Services Subsequent Events
The table presents external revenue for similar classes of products
or services within the company’s reportable segments. Within On January 20, 2010, the company announced that it signed
Global Technology Services and Global Business Services, a definitive agreement to acquire National Interest Security
client solutions often include IBM software and systems and Company, LLC (NISC). NISC, a privately held company, will
other suppliers’ products if the client solution requires it. Within strengthen the company’s ability to deliver advanced analytics
Software, product license charges and ongoing subscription and IT solutions to the public sector. The transaction is subject
and support are reported as Software and consulting, educa- to customary closing conditions, including regulatory reviews,
tion, training and other product-related services are reported and is expected to be completed in the first quarter of 2010.
as Services. Within Systems and Technology, Microelectronics On January 26, 2010, the company announced that the
original equipment manufacturer (OEM) revenue is primarily from Board of Directors approved a quarterly dividend of $0.55 per
the sale of semiconductors. Microelectronics Services revenue common share. The dividend is payable March 10, 2010 to
includes circuit and component design services and technology shareholders of record on February 10, 2010.
and manufacturing consulting services. See “Description of the On January 26, 2010, the company announced that it com-
Business” beginning on page 20 for additional information. The pleted the acquisition of Lombardi, a privately held software
data is presented on a continuing operations basis. company based in Austin, Texas. Lombardi is a leading pro-
vider of business process management software and services.
($ in millions)
Lombardi will become a part of the company’s application inte-
For the year ended December 31: 2009 2008 2007 gration software portfolio. At the date of issuance of the financial
Global Technology Services: statements, the initial purchase accounting was not complete.
On February 3, 2010, the company announced that it
Services $28,762 $29,928 $27,482
signed a definitive agreement to acquire Initiate Systems. Initiate
Maintenance 6,956 7,250 6,670
Systems, a privately held company based in Chicago, Illinois
Systems 1,279 1,648 1,496
is a leading provider of data integrity software for information
Software 351 438 454
sharing among healthcare and government organizations. The
Global Business Services: transaction is subject to customary closing conditions, including
Services $17,213 $19,176 $17,579 regulatory reviews, and is expected to be completed in the first
Software 231 237 289 quarter of 2010.
Systems 208 215 173 On February 16, 2010, the company announced that it had
Software: completed the acquisition of Intelliden Inc., a privately held soft-
Software $20,094 $20,695 $18,992 ware company based in Menlo Park, California. Intelliden will
Services 1,302 1,394 990 extend the company’s network management offerings. At the
date of issuance of the financial statements, the initial purchase
Systems and Technology:
accounting was not complete.
Servers $10,627 $12,717 $13,348
Storage 3,177 3,612 3,738
Microelectronics OEM 1,550 1,862 2,589
Retail Store Solutions 551 741 872
Microelectronics Services 285 355 383
Printing Systems — — 386
Global Financing:
Financing $ 1,715 $ 1,946 $ 1,803
Remarketing 588 613 699

126

Five-year Comparison of Selected Financial Data

For the year ended December 31: 2009 2008 2007 2006 2005

Revenue $ 95,758 $103,630 $98,786 $91,424 $91,134
Income from continuing operations $ 13,425 $ 12,334 $10,418 $ 9,416 $ 7,994
Income/(loss) from discontinued operations — — (00) 76 (24)
Income before cumulative effect of change
in accounting principle 13,425 12,334 10,418 9,492 7,970
Cumulative effect of change in accounting principle** — — — — (36)
Net income $ 13,425 $ 12,334 $10,418 $ 9,492 $ 7,934
Assuming dilution:
Continuing operations $ 10.01 $ 8.89* $ 7.15* $ 6.05* $ 4.90*
Discontinued operations — — (0.00) 0.05 (0.01)
Before cumulative effect of change
in accounting principle 10.01 8.89* 7.15* 6.10* 4.89*
Cumulative effect of change in accounting principle** — — — — (0.02)
Total $ 10.01 $ 8.89* $ 7.15* $ 6.10* $ 4.86*
Basic:
Continuing operations $ 10.12 $ 9.02* $ 7.27* $ 6.13* $ 4.97*
Discontinued operations — — (0.00) 0.05 (0.02)
Before cumulative effect of change in
accounting principle 10.12 9.02* 7.27* 6.18* 4.96*
Cumulative effect of change in accounting principle** — — — — (0.02)
Total $ 10.12 $ 9.02* $ 7.27* $ 6.18* $ 4.94*
Cash dividends paid on common stock $ 2,860 $ 2,585 $ 2,147 $ 1,683 $ 1,250
Per share of common stock 2.15 1.90 1.50 1.10 0.78
Investment in plant, rental machines and other property $ 3,447 $ 4,171 $ 4,630 $ 4,362 $ 3,842
Return on IBM stockholders’ equity 80.4% 48.7%+ 42.6%+ 29.3%+ 25.8%+

At December 31: 2009 2008 2007 2006 2005

Total assets $109,022 $109,524 $120,431 $103,234 $105,748
Net investment in plant, rental machines and other property 14,165 14,305 15,081 14,440 13,756
Working capital 12,933 6,568 8,867 4,569 10,509
Total debt 26,099 33,926 35,274 22,682 22,641
Total equity 22,755 13,584+ 28,615+ 28,635+ 33,209+

* Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B,
** Reflects the adoption of the FASB guidance in accounting for conditional asset retirement obligations.
+ Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, “Accounting Changes,” on pages 79 to 82 for

127

Selected Quarterly Data

($ in millions except per share amounts and stock prices)
First Second Third Fourth Full
2009: Quarter Quarter Quarter Quarter Year

Revenue $21,711 $23,250 $23,566 $27,230 $ 95,758
Gross profit $ 9,431 $10,581 $10,627 $13,145 $ 43,785
Net income $ 2,295 $ 3,103 $ 3,214 $ 4,813 $ 13,425
Assuming dilution $ 1.70 $ 2.32 $ 2.40 $ 3.59 $ 10.01*
Basic $ 1.71 $ 2.34 $ 2.44 $ 3.65 $ 10.12*
Dividends per share of common stock $ 0.50 $ 0.55 $ 0.55 $ 0.55 $ 2.15
Stock prices:**
High $ 99.86 $110.62 $122.88 $132.85
Low 81.76 95.70 99.50 117.31

First Second Third Fourth Full
2008: Quarter Quarter Quarter Quarter Year

Revenue $24,502 $26,820 $25,302 $27,006 $103,630
Gross profit $10,166 $11,599 $10,959 $12,936 $ 45,661
Net income $ 2,319 $ 2,765 $ 2,824 $ 4,427 $ 12,334
Assuming dilution $ 1.64+ $ 1.97+ $ 2.04+ $ 3.27+ $ 8.89+
Basic $ 1.67+ $ 2.01+ $ 2.08+ $ 3.29+ $ 9.02+
Dividends per share of common stock $ 0.40 $ 0.50 $ 0.50 $ 0.50 $ 1.90
Stock prices:**
High $119.78 $129.99 $130.92 $116.80
Low 97.04 113.86 109.95 69.50

* 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 quarter’s EPS does not equal the full-year EPS.
** 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.
+ Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B,

128

Performance Graphs

150

Comparison of One-, Five- and Ten-year Cumulative Total Return for IBM,
S&P 500 Stock Index and S&P Information Technology Index
120

The following graphs compare the one-, five- and ten-year cumu-
90 business index. The S&P Information Technology Index is such
lative total returns for IBM common stock with the comparable an index. IBM is also included in this index.
cumulative return of certain Standard & Poor’s (S&P) indices. Each graph assumes $100 invested on December 31 (of the
60
Due to the fact that IBM is a company included in the S&P 500 initial year shown in the graph) in IBM common stock and $100
Stock Index, the SEC’s rules require the use of that index for the invested on the same date in each of the S&P indices. The com-
required five-year graph. Under those rules, the second index parisons assume that all dividends are reinvested.
30
used for comparison may be a published industry or line-of-

0

00
One-year
99
01 00
02 01
03 04
02 05
03
Five-year
04
06 05
07 06
08 07
09 08 09
($ usd) ($ usd)

180 160 160

140 140
160

120 120

140

100 100

120
80 80

100 60 60

08 09 09 04 05 06 04 07 05 08 06 09 07 08 09

One-year
2008 2009

• IBM Common Stock $100.00 $158.61
• S & P 500 Index 100.00 126.46
• S & P Information Technology Index 100.00 161.72

Five-year
2004 2005 2006 2007 2008 2009

• IBM Common Stock $100.00 $ 84.17 $100.81 $113.75 $90.13 $142.96
• S & P 500 Index 100.00 104.91 121.48 128.16 80.74 102.11
• S & P Information Technology Index 100.00 100.99 109.49 127.35 72.41 117.11

129

Performance Graphs

Ten-year
($ usd)

150

120

90

60

30

0

99 00 01 02 03 04 05 06 07 08 09

Ten-year
180 1999 2000 2001 2002 2003 2004 2005 1602006 2007 2008 2009

• IBM Common Stock $100.00 $79.16 $113.20 $73.04 $88.02 $94.34 $79.41 $ 95.11 $107.32 $85.03 $134.87
• S & P 500 Index 100.00 90.89 80.09 62.39 80.29 89.02 93.40 108.15 114.09 71.88 90.90
140
• S & P Information
160
Technology Index 100.00 59.10 43.81 27.42 40.37 41.40 41.81 45.33 52.72 29.98 48.48

120

140

100

120
80

100 60

08 09 04 05 06 07 0

130

Board of Directors and Senior Leadership

Board of Directors
Alain J.P. Belda Shirley Ann Jackson Samuel J. Palmisano
Chairman President Chairman, President and
Alcoa Inc. Rensselaer Polytechnic Institute Chief Executive Officer
and IBM
Managing Director Andrew N. Liveris
Warburg Pincus LLC Chairman, President and Joan E. Spero
Chief Executive Officer Visiting Fellow
Cathleen Black The Dow Chemical Company Foundation Center
President
Hearst Magazines W. James McNerney, Jr. Sidney Taurel
Chairman, President and Chairman Emeritus
William R. Brody Chief Executive Officer Eli Lilly and Company
President The Boeing Company
Salk Institute for Biological Studies Lorenzo H. Zambrano
Taizo Nishimuro Chairman and
Kenneth I. Chenault Chairman Chief Executive Officer
Chairman and Chief Executive Officer Tokyo Stock Exchange Group, Inc. CEMEX, S.A.B. de C.V.
American Express Company
James W. Owens
Michael L. Eskew Chairman and Chief Executive Officer
Retired Chairman and Caterpillar Inc.
Chief Executive Officer
United Parcel Service, Inc.

Senior Leadership
Rodney C. Adkins John E. Kelly III Michael D. Rhodin
Senior Vice President Senior Vice President Senior Vice President
Systems and Technology Group Research and Intellectual Property Software Solutions Group

Colleen F. Arnold R. Franklin Kern III Virginia M. Rometty
Senior Vice President Senior Vice President Senior Vice President
Application Management Services Global Business Services Global Sales and Distribution

Andrew Bonzani Robert J. LeBlanc Linda S. Sanford
Vice President, Assistant Senior Vice President Senior Vice President
General Counsel and Secretary Software Middleware Group Enterprise Transformation

Michael E. Daniels Mark Loughridge Martin J. Schroeter
Senior Vice President Senior Vice President and Treasurer
Global Technology Services Chief Financial Officer
Timothy S. Shaughnessy
Jesse J. Greene, Jr. J. Randall MacDonald Senior Vice President
Vice President Senior Vice President Services Delivery
Financial Management and Human Resources
Chief Financial Risk Officer Robert C. Weber
Steven A. Mills Senior Vice President
Jon C. Iwata Senior Vice President Legal and Regulatory Affairs, and
Senior Vice President Software Group General Counsel
Marketing and Communications
Samuel J. Palmisano
James J. Kavanaugh Chairman, President and
Vice President and Controller Chief Executive Officer

131

Stockholder Information

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Stockholders can also reach Computershare Trust Company, N.A.
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news on IBM products, services and other activities can also
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IBM files reports with the Securities and Exchange Commission (SEC),
released by early May, August and November.
including the annual report on Form 10-K, quarterly reports on
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on Form 10-K, quarterly reports on Form 10-Q, current reports on employees, communities, environment, supply chain, public policy
Form 8-K, and all amendments to those reports as soon as and governance. The report highlights IBM’s values-based leadership
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IBM Annual Report 2009

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IBM Annual Report 2009