IBM 2005 Annual Report Download - page 38
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Please find page 38 of the 2005 IBM annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
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Fromaclient-setperspective,the momentumin2005 with
respecttotheSmall&MediumBusinesssectorshouldcontinue.
The company anticipates improved growthin its industry sec-
torsin2006.
Thecompanyalsowillcontinuetoselectivelypursueacqui-
sitions,primarilyintheGlobalServicesandSoftwaresegments,
whereit believesthese acquisitions will expand its portfolio to
meetclients’ needs.
In2005,totalGlobalServicessigningsincreased9percent
yeartoyear,drivenbya19percentincreaseinlonger-termsign-
ings,whileshorter-termsigningswereessentiallyflat.Backlogwas
flatversusDecember31,2004,at anestimated $111 billion.The
companyimplementedseveralbroadinitiativesintheservices
businessin2005includingarestructuringaction toimprovecost
competitiveness,implementationofProfessionalMarketplaceto
improveconsultingresourceutilization,additionofover15,000
resourcestotheGlobalResourceDeliveryCentersandrebalanc-
ingtheIntegratedTechnologyServicesportfoliotofocusonfaster
growingopportunities.GlobalServicespre-taxmarginimproved
in2005.Thecompanyexpectstoleveragetheseactionsforcon-
tinued improvement in 2006 in both revenue growth rates and
highermargins.
The company’s Systems & Technology Group develops
leading and often pioneering technologies that can be inte-
grated with software and services to provide client solutions.
IBM’s BlueGene supercomputer at the Lawrence Livermore
NationalLaboratoryearneditsdesignationastheworld’sfastest
supercomputerwithanastonishing280-trillion-calculations-per-
secondperformance.In2005,IBMalso wontheU.S.National
MedalofTechnologyinrecognitionof40yearsofbroadlybased
semiconductorinnovation.Ourlatestinnovation,therevolution-
ary Cell microprocessor—developedincollaboration with Sony
and Toshiba—boasts a staggering advantage, performing up
to40timesfasterthanconventionalprocessorshandlinggraph-
ics-intensive applications in areas like gaming and consumer
electronics, andhaspotentialinadjacentmarketslikemedical
imagingoraerospaceanddefense.Movingforward,IBMtech-
nologiesthatadvantageIBMinthedatacentersystemsmarket
will be leveraged through the Systems & Technology Group’s
new Technology Collaboration Solutions unit to help clients
developtheirowninnovativeproductsandtocreateincremen-
talopportunityforIBM.
Thekeytothecompany’s continued growthinSoftwarewill
beclients’ continuedadoptionofitson demandsolutions.The
key differentiating factor for the company is the strength and
breadthofitsmiddlewareportfolio.Softwareisakeycomponent
ofondemandsolutions,andthecompanywillcontinuetoinvest
inthisstrategicareaandstrengthenitsportfoliothroughacqui-
sitions. An example is the company’s ability to respond to
clients’ increasinginterestinaSOA withitsWebSphereproduct
portfolioandkeyacquisitions,suchasDataPowerTechnology,
thatexpandthecompany’scapabilitiestoaddressthisopportu-
nity. In addition, the company will continue to build a strong
partnerecosystemtodrivegrowth.
Thecompanyexpects 2006pre-taxretirement-relatedplan
expense to increase approximately $100—$200 million when
comparedto2005. Thisexpectedincrease is drivenbyyear-end
2005 changes in key assumptions used to determine 2006
expense (approximately$600million)and incremental amortiza-
tion expense related to previously deferred losses (approxi-
mately$500million),offsetbyexpectedsavings generatedfrom
pension plan amendments (approximately $450-$500 million),
betterthanexpected2005returnonassetperformance(approx-
imately$100million),aswellastheeffectsofone-timecharges
incurred in 2005 for the fourth-quarter pension curtailment
charge($267million)andachargerelatedtothesecond-quarter
2005restructuringactions($65million).
Specifically, given the declining interest rate environment,
thecompanyreduceditsdiscountrateassumptionforthePPP
by25basispointsto5.5percenton December 31,2005.This
change,alongwithsimilarchangestothediscountratefornon-
U.S. pension plans are expected to contribute an additional
$400 million of expense in 2006. In addition, the company
increasedthe interestcreditingrate by190basispointsto5.0
percentwhichwillresultinananticipatedincreaseinexpenseof
$200 million. The company will keep the expected long-term
rateofreturnonPPPassetsat8percent.Theactualreturnon
PPPplanassetsin2005was11 percent.
Pre-taxstock-basedcompensationexpensedeclined$543
million in 2005, as compared to 2004. The company expects
stock-based compensation expense to continue to decline in
2006,whencomparedto2005,primarilyasaresultofchanges
in the company’s equity-based compensation programs. The
anticipateddecline,however,willnotbeatarateconsistentwith
thedeclinefrom2004to2005,giventheeffectchangesinthe
company’s employeestockpurchaseplanhadonthe2004to
2005expensedecrease.
TheamountofIPandcustomdevelopmentincomehasbeen
declininginrecentyears,down19percentin2005.A moderate
decliningtrendmaycontinueasthecompanydoesnotexpect IP
tobeacontributortogrowth.TheoveralllevelofIPisdependent
onseveralfactors:divestitures,industryconsolidation,economic
conditionsandthetimingofnewpatentdevelopment.
IncomeTaxes
Inthenormalcourseofbusiness,thecompanyexpectsthatits
effective tax rate will approximate 30 percent. The rate will
changeyeartoyearbasedonnonrecurringevents(suchasthe
third-quarter 2005 repatriation charge as described in note P,
“Taxes” onpage 80),aswellasrecurringfactorsincludingthe
geographicmixofincomebeforetaxes,thetimingandamount
offoreigndividends,stateandlocaltaxes andtheinteractionof
variousglobaltaxstrategies.
Duringtheperiod2003-2005,thecompany’scashtaxrate
declinedfrom18percentto16percent.Thecompany’scashtax
raterepresentstheamountofincometaxespaidduringtheyear
over Income from continuing operations before income taxes.